Nearing Retirement: How to Use Your 401k/457 to Prepare for Retirement 5/9/14

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1 Nearing Retirement: How to Use Your 401k/457 to Prepare for Retirement 5/9/14

2 Disclaimers The content of this presentation is for informational purposes only. This information does not constitute investment advice or an offer to invest or to provide management services. The information in this document does not constitute tax advice. Please see your tax advisor to determine how this information may apply to your own situation. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned may not be suitable for everyone. Each investor needs to pursue a particular investment strategy based on his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Proprietary & Confidential 1

3 Today We Will Help You: Examine Retirement Determine your goal Understand Asset Allocation Learn about income strategies Proprietary & Confidential 2

4 This is Not Your Parent s Retirement Good Old Days 21st-Century Realities Proprietary & Confidential 3

5 Retirement Then... Job longevity meant retirement security On average, people had shorter life expectancies Shorter life expectancies may have meant lower health care costs and lower retirement income needs Proprietary & Confidential 4

6 Retirement Now... Changing jobs is more common Medicare and Social Security have an uncertain future Health care and long-term care cost more People live longer Proprietary & Confidential 5

7 New Retirement Risks Outliving Your Assets Social Security Uncertainty Effects of Inflation Rising Elder Care Costs Proprietary & Confidential 6

8 Why is planning important? The Good News The average life expectancy has been increasing over the past several decades Women = 86.4 years Men = 84.1 years Individuals who reach age 65 today can expect to live nearly 20 more years Source: Social Security Administration March 2014; Confidential and Proprietary 7

9 Why is Planning Important? The Bad News You may outlive your retirement savings Retirement Income Gap This example is for illustrative purposes only. Assumes a 4% inflation rate. Assumes a 6% annual rate of return, a 4% inflation rate, and an $50,000 annual withdrawal rate. Your results will vary. Proprietary & Confidential 8

10 Social Security The ratio of workers to beneficiaries is declining The number of people reaching age 65 is increasing What could this mean for you? Less government support as you grow older Proprietary & Confidential 9

11 Inflation and Your Time Horizon How $50,000 of living expenses can grow at a 4% inflation rate $240,051 $50,000 $74,012 $109,556 $162,170 Today 10 Years 20 Years 30 Years 40 years The further away from retirement you are, the more inflation can potentially impact your future living expenses. Proprietary & Confidential 10

12 How Much Will You Need? 60% to 80% of your final working year s salary each year during retirement should be considered Social Security benefits may be reduced or nonexistent when you retire You must be responsible for planning for your financial future Proprietary & Confidential 11

13 Elder Care - A Wild Card The chances of disability during retirement are real It s on your tab Proprietary & Confidential 12

14 Strategies to Reduce Risk Conservative withdrawal rates Stocks for growth 401(k)s and 457(b)s for tax-deferred asset accumulation Understanding annuities Proprietary & Confidential 13

15 Withdrawing From Your Portfolio Source: Standard & Poor s. This example is for illustrative purposes only. Assumes a 6% annual rate of return and a 3% inflation rate. The hypothetical rate of return does not reflect the deduction of fees and charges inherent to investing. Your results will vary. Proprietary & Confidential 14

16 Asset Allocation Over Time Investment of $100; 30 years ended December 31, 2013 This chart shows the value of $100 invested in three different asset allocations vs. inflation, over the 30-year period ended December 31, Past performance is not a guarantee of future results. Source: Wealth Management Systems Inc. Assumes portfolios are rebalanced at the end of each year. Stocks are represented by the total returns of Standard & Poor's 500 index, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays U.S. Aggregate index. Cash is represented by a composite of the yields on 3-month Treasury bills, as published by the Federal Reserve, and the total return of the Barclays 3-Month Treasury Bellwethers index. Inflation is represented by the change in the Consumer Price Index. This illustration does not represent the performance of any particular investment. It is not possible to invest in an index. Index performance does not reflect fees, charges, and taxes that may apply to an actual investment. 15 Confidential and Proprietary

17 and Avoid Running Out of Money During Retirement Percentage of Positive/Negative Returns of Stocks for Different Holding Periods (1926 to 2012) Holding Period 1 year 10 years 15 years Positive Returns 74% 95% 100% Negative Returns 26% 5% 0% Source: Standard & Poor s. For the period January 1, 1926, to December 31, Past performance does not guarantee future results. Based on all 1-, 10-, and 15- year holding periods of the S&P 500, an unmanaged index of stocks considered to be representative of the U.S. stock market. Investors may not invest directly in any index. Stock investing involves risk, including loss of principal. Index performance does not reflect fees, charges and taxes that may apply to an actual investment. 16 Proprietary & Confidential

18 Staying Invested may be the Key 150% 100% 50% 0% -50% -100% -150% A significant portion of the return after an extended bear market may come within the first year -86% 121% -48% 38% -34% 23% 34% -49% -57% 69% Sept '29 Jan '73 Aug '87 Mar '00 Oct '07 (2.6 years) (1.7 years) (3 months) (2.5 years) (Length of Bear Market) Source: Wealth Management Systems Inc. For the period from January 1, 1926, to December 31, The most recent bear market ended on March 9, Stocks are represented by the daily closing price of Standard & Poor s Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Confidential and Proprietary 17 (1.4 years) Decline 1 Year Avg

19 How Your 401(k) Plan Works You determine how much to deduct from each paycheck Can contribute up to $17,500 for 2014, in addition to the $17,500 for 2014 in the 457 Plan If over 50 years old, can contribute up to $23,000 You decide where to invest the money from your plan s options Proprietary & Confidential 18

20 How Your 401(k) Plan Works 401(k) Contributions (before-tax) are deducted before income taxes are taken out and assets grow and compound, tax deferred Roth 401(k) Contributions (if available) are after tax, but qualifying withdrawals are tax free Distributions can be taken at age 55 if separated from service; for all others, distributions can begin without penalty at 59 ½ regardless of employment status Proprietary & Confidential 19

21 How Your 457(b) Plan Works You determine how much to deduct from each paycheck Can contribute up to $17,500 for 2014, in addition to the $17,500 for 2014 in the 401(k) Plans If over 50 years old, can contribute up to $23,000 If within 3 years of the normal retirement date, can contribute up to a max of $35,000 in 2014 (difference of what you were eligible to contribute and what you actually contributed over your career with State of California) Proprietary & Confidential 20

22 How Your 457(b) Plan Works You decide where to invest the money from the plan s options 457 Contributions (before-tax) are deducted before income taxes are taken out and assets grow and compound, tax deferred 457 Roth Contributions (if available) are after tax, but qualifying withdrawals are tax free Proprietary & Confidential 21

23 How Your 457(b) Plan Works No penalty for taking a withdrawal early, unless you have rolled over qualified 401(k) money to your 457 Plan Withdrawals can be made without penalty if separated from employment, regardless of age for before-tax only Proprietary & Confidential 22

24 Roth Contributions: More Details Can contribute up to the same limits as before-tax contributions: $17,500 for 2014 to the 457 and $17,500 for 2014 in the 401(k) Plans If over 50 years old, can contribute up to $23,000 in each account Earnings from Roth accounts that are at least 5 years old can be withdrawn tax free, if monies are withdrawn after attainment of age 59 ½, or due to death or disability Roth Contributions (after-tax) are deducted after income taxes are taken out 23 Proprietary and Confidential

25 Roth Contributions: More Details Roth money can be included in loans Upon termination, Roth dollars are rollover-eligible Roth contributions are subject to required minimum distributions Roth IRAs cannot be rolled into the plan No additional Plan Administrative fee of $1.50 per month for choosing to make Roth and Traditional contributions within the same plan 24 Proprietary and Confidential

26 Use Both Plans to Your Advantage Could reduce costs Lump sum separation pay can be contributed to either plan (if available) You do not need to move your money out of the plan once you separate from service Proprietary & Confidential 25

27 Understanding Lump Sum Ability to defer unused leave credits into 401k/457 Taxed at regular pay rate but may raise your income and cause you to pay more taxes Good way to substantially increase assets in your retirement plan right before retirement Amount eligible to defer may vary Proprietary and Confidential 26

28 Lump Sum: More Details Not required to start drawing on money right away Maximum lump sum eligible to defer is $46,000 unless you retire on or after November 2 nd If you retire on or after November 2 nd, maximum available is $92, Plan Type Normal Contribution Maximum Age-Based 50+ Contribution Total Contribution Allowable 457 $17,500 $5,500 $23, (k) $17,500 $5,500 $23,000 Total $35,000 $11,000 $46,000 Proprietary & Confidential

29 Traditional Catch-Up Explained Ability to increase maximum contributions in 457 Eligible if you have not maximized your contribution in previous years Must be active employee Eligible within 3 years of normal retirement age (Age ) Requires proof of underutilization (W-2) Proprietary and Confidential 28

30 Traditional Catch-Up: More Details Only eligible for Traditional Catch-Up once Eligible for either Traditional or Age Based Catch-Up - not both Maximum Catch-Up this year is $58,000 unless you retire on or after November 2 nd Calendar Tax Year Normal Maximum Allowable Catch-Up Maximum Allowable Total Maximum Allowable 2014, 457 Plan $17,500 $17,500 $35, , 401k $17,500 $5,500 $23,000 TOTALS $35,000 $23,000 $58,000 Proprietary & Confidential

31 Traditional Catch-Up: More Details If you retire on or after November 2 nd,then maximum increases to $116,000 Lump Sum can be used to fund Traditional Catch-Up Calendar Tax Year Normal Maximum Allowable Catch-Up Maximum Allowable Total Maximum Allowable 2014, 457 Plan $17,500 $17,500 $35, , 401k $17,500 $5,500 $23,000 TOTALS $35,000 $23,000 $58,000 Proprietary & Confidential

32 What is an Annuity and How Do I Determine if I Need One? A contract between an individual and an insurance company designed to provide retirement income Tax-deferred investment growth Guaranteed lifetime income potential Consider your CalPERS pension when deciding what is best for you Proprietary & Confidential 31

33 Questions? Proprietary & Confidential 32

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