Fundamentals. Retirement Income Planning

Transcription

1 Fundamentals Retirement Income Planning

2 Questions as you approach retirement When can I retire? Am I on track to retire? Can I retire now? Or should I wait? Will my money last? Will I be able to maintain my current lifestyle? Will I be able to meet all my expenses? How can I maximize my retirement income? How should my money be allocated among asset classes? Among products?

3 Retirement today: prevalence of pensions has declined dramatically Retirement Plan Trends: Participation by Plan Type Distribution of Private Sector Active Worker Participants, % 62% Defined Contribution (401(k)-type Only) Both DB and DC 63% 60% Defined Benefit (Pension Only) 50% 40% 30% 20% 22% 27% 10% 16% 10% 0% YEAR Source: EBRI tabulations of U.S. Department of Labor, Form 5500 Summary Report Summer 2004 ; EBRI estimates for 2000 to 2006.

4 Transition from accumulation to distribution Identify retirement expenses Plan for health care needs Plan for giving to family and charities Transition to Retirement Decide when to take Social Security payments Convert savings into Income Roll over your Workplace Retirement Plan Contribute to Workplace Retirement Plan and IRAs Distribution in Retirement Assets Saving for Retirement Age For illustrative purposes only.

5 The 5 key risks Living longer than your income Rising health care costs Spending too much, too soon Keeping up with inflation Market risk and asset allocation

6 Risk 1: Living longer than expected/planned for Life spans are increasing... Couple (both age 65) Age 100 At least one person has a 50% chance of living to At least one person has a 25% chance of living to 97 Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health. For illustrative purposes only.

7 Risk 2: Being able to afford to pay for health care... while health care costs are rising. Only 19% of companies with over 500 employees still offer retirees health coverage, down from 40% in A 65-year-old couple retiring in would need an estimated $430,000 for health care costs during retirement until age 92 (male) or age 94 (female). 3 One out of every two people over the age of 65 will spend some time in a nursing home. 4 1 Mercer Human Resources Consulting, 2006 National Survey of Employer-Sponsored Health Plans and Employee Benefit Research Institute, Issue Brief 279, March Fidelity Consulting Services Fidelity Investments, Benefits Consulting Fidelity Investments, Research Insights Report, Retirement Income Planning, p. 20, October 2009.

8 Risk 3: Spending too much, too soon Withdrawal rates can impact the life of a portfolio Inflation-Adjusted Withdrawal Rate 10% 10 Years 9% 11 Years 8% 13 Years 7% 15 Years 6% 18 Years 5% 24 Years 4% 36 Years Years Portfolio May Have Lasted in an Extended Down Market Source: Fidelity Investments. Hypothetical value of assets held in an untaxed portfolio of 50% stocks, 40% bonds, and 10% short-term investments with inflationadjusted withdrawal rates as specified. Average rates of return for stocks, bonds, short-term investments, and inflation are based on the risk premium approach. Actual rates of return may be more or less. The chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results. Volatility of the stocks (domestic and foreign), bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. See "Methodology and Information" at the conclusion of this presentation for further details about indexes and methodology used to produce the chart.

9 Risk 4: Not keeping up with inflation... while inflation can eat away at your purchasing power. All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% (historical average from 1926 to 2009 was 3%) to show the effects of inflation over time; actual inflation rates may be more or less and will vary. Source: Fidelity Investments.

10 Risk 5: Asset allocation The impact of asset allocation and long-term performance: which portfolio may have lasted longer STRATEGY Most Aggressive Aggressive Growth Growth Balanced Conservative Short-Term 5% 10% 15% 30% 20% 25% 100% 100% 85% 70% 40% 50% 50% PORTFOLIO LIFE with 6% withdrawal rate adjusted annually for inflation Average Market 49 years 46 years 39 years 32 years 24 years 17 years Down Market 14 years 16 years 17 years 18 years 19 years 16 years Stocks Bonds Short-Term Source: Fidelity Investments. Average rates of return for stocks, bonds, short-term investments and inflation are based on the risk premium approach and several hundred historical market return simulations. Average Market means the hypothetical portfolio lasted as long as indicated in 50% of the simulations run; Extended Down Markets in 90% of them. Actual rates of return may be more or less. The chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results. See Methodology and Information in the back for further details about indexes and methodology used to produce the chart, including definitions of Extended Down and "Average" markets.

11 1: Build a retirement income plan Build a Retirement Income Plan Create a Retirement Income Strategy Manage Your Plan

12 Preparing for retirement Envision the lifestyle you want Build a retirement income plan Estimate expenses essential versus discretionary Identify lifetime income sources and assess gaps Identify assets to cover income gaps Create a retirement income strategy Balance needs for guaranteed income, growth, flexibility, principal preservation Build a solution to meet those income needs

13 How to build a plan This is Sam and Sara... Profile Retired Ages 68 and 66 Conservative investors Sam has some health issues Sara s mother is age 90 Live a moderate lifestyle Hypothetical case studies are for illustrative purposes only and not based on actual people.

14 Retirement Income Planner helps you to visualize your situation Annual Income/Expenses Sam s Age The tool s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower. IMPORTANT: The projections or other information generated by Fidelity s Retirement Income Planner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

15 The longevity risk Annual Income/Expenses Sam s Age The tool s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower. IMPORTANT: The projections or other information generated by Fidelity s Retirement Income Planner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

16 A plan that works! Annual Income/Expenses Mortgage Ends Discretionary Expenses Decrease Sam s Health Care Ends Sam s Age The tool s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower. IMPORTANT: The projections or other information generated by Fidelity s Retirement Income Planner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

17 2: Create a retirement income strategy and choose investments Build a Retirement Income Plan Create a Retirement Income Strategy Manage Your Plan

18 A retirement income strategy balances four distinct needs For illustrative purposes only Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the insurer s claims-paying ability and financial strength.

19 Investment Portfolio Strategy How it works Scheduled withdrawals are made from a diversified mix of investments (stocks, bonds, and cash), which are managed for total return. Can also be used with an annuity.* Pros Generates income and, depending on asset allocation, may provide growth to help keep pace with inflation Can automate withdrawals from mutual funds More flexibility and access to your savings Cons May require hands-on attention over time Amount and longevity of income cannot be assured Portfolios of Mutual Funds Professionally Managed Portfolio Diversified Portfolio of Individual Securities Diversification does not ensure a profit or guarantee against a loss. *Annuities are long-term investments and may be limited by tax penalties. Surrender charges and income taxes may be due upon withdrawal of funds. Guarantees are subject to the claims-paying ability of the issuing insurance company. Portfolio illustrations are for illustrative purposes only. Proportions appropriate for this strategy will vary widely.

20 Interest & Dividends Only Strategy How it works Withdrawals made from the interest produced by a portfolio of investments such as bonds, bond funds, CDs, and/or dividend-yielding stocks. Typically requires sizeable savings to generate sufficient interest and provide the income desired. Pros Potentially lower credit risk, if invested in FDIC-insured CDs 1 or US government bonds. 2 Principal returned, if CD or bond held to maturity. 3 Cons Typically less growth potential Inflation, market, and interest-rate risk Credit and default risk Limited exposure to growth investments to help protect against inflation risk Products you might consider: Bonds or Bonds Ladders Bond Funds Diversified Portfolio of Dividend-Yielding Stocks CDs 1 The Federal Deposit Insurance Corporation (FDIC) insures CDs for principal and accrued interest up to $250,000 per issuer. Any account or deposits that you may maintain directly with a particular issuer are aggregated with the CDs for purposes of the $250,000 limit. Additional information can be found on the FDIC website. 2 Treasury securities are backed by the full faith and credit of the U.S. government for the prompt payment of interest and principal at maturity. 3 Assumes solvent issuer at maturity. Selling a security before maturity may result in a loss. Most bond funds do not have a maturity date, so holding until maturity to avoid losses is not an option for them.

21 Bridge Strategy How it works A portion of the portfolio is used to cover an income gap for a fixed period of time while the balance of the portfolio is invested in a diversified mix of assets that is managed for total return. Pros May provide regular monthly payments for a fixed period of time Growth of the portfolio may protect against inflation depending on the asset allocation strategy Cons You need to make sure that you have enough assets to cover your lifetime strategy following the bridge period Products you might consider: Period-Certain Annuity Bond Ladders CD Ladders Diversification does not ensure a profit or guarantee against loss.

22 3: Manage your plan Build a Retirement Income Plan Create a Retirement Income Strategy Manage Your Plan

23 Importance of managing your plan Revisit and update your plan on a regular basis Modify your plan as your personal situation changes Monitor and maintain your target asset mix Investments can shift out of balance over time Manage your money coming in and going out Stay on top of new rules and deadlines, such as required distribution rules and Roth IRA conversion eligibility

24 Monitor your target asset mix on Fidelity.com For illustrative purposes only.

25 Your next steps Commit to creating or revisiting your plan Make an appointment today to: Meet with a Fidelity Retirement Representative, or Visit a Fidelity Investor Center Visit Fidelity.com to: Try the Retirement Income Planner tool at Fidelity.com/incomeplanner Monitor your plan if you already have one at Fidelity.com/monitor Learn more about creating your income strategy for retirement at Fidelity.com/incomeanswers

26 Important Information Before investing, consider the investment objectives, risks, charges and expenses of the fund or annuity and its investment options. Call or write to Fidelity or visit Fidelity.com for a free prospectus or, if available, a summary prospectus containing this information. Read it carefully. Guidance provided by Fidelity is educational in nature, is not individualized and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. The retirement planning information contained herein is general in nature and should not be considered legal or tax advice. Fidelity does not provide legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect this information. You should consult your attorney or tax adviser regarding your specific legal or tax situation. Retirement Income Planner is an educational tool. The tool s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower. IMPORTANT: The projections or other information generated by Fidelity s Retirement Income Planning Tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time. Principal value and investment returns of a variable annuity will fluctuate and you may have a gain or loss when money is received or withdrawn. Fidelity Brokerage Services, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI

27 Methodology and Information Hypothetical charts illustrating withdrawal rate, inflation, and asset allocation risks on slides 9 and 11 are not intended to project or predict the present or future value of the actual holdings in a participant s portfolio or the performance of a given model portfolio of securities. For the hypothetical charts illustrating withdrawal rate and asset allocation risks on slides 9 and 11, several hundred financial market return scenarios were run to determine how the asset mixes may have performed. The Average Market and Extended Down Market results are based on 50% and 90% confidence levels, respectively. The results for the Average Market highlight the number of years the hypothetical portfolio would have lasted in 50% of the scenarios. The results for the Extended Down Market are based on a 90% confidence level highlighting the number of years the portfolio would have lasted in at least 90% of the scenarios generated. For the withdrawal rate chart, a 90% confidence level was utilized indicating that the percentage of assets withdrawn annually could have been supported for the number of years noted in 90% of the historical scenarios that were generated. For the hypothetical charts illustrating withdrawal rate and asset allocation risks on slides 9 and 11, the estimated returns for the stock and bond asset classes are based on a risk premium approach. The risk premium for these asset classes is defined as their historical returns relative to a 10-year Treasury bond. Risk premium estimates for stocks and bonds are each added to the 10-year Treasury yield. Short-term investment asset class returns are based on a historical risk premium added to an inflation rate, which is calculated by subtracting the TIPS (Treasury Inflation-Protected Securities) yield from the 10-year Treasury yield. This method results in what we believe to be an appropriate estimate of the market inflation rate for the next 10 years. Each year (or as necessary), these assumptions are updated, to reflect any movement in the actual inflation rate. Volatility of the stocks (domestic and foreign), bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks, bonds, and short-term investments are represented by the S&P 500 Index, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury bill, respectively. Annual returns assume the reinvestment of interest income and dividends, no transaction costs, no management or servicing fees, and the rebalancing of the portfolio every year. For the hypothetical charts illustrating withdrawal rate and asset allocation risks on slides 9 and 11, which highlight varying levels of stocks, bonds, and shortterm investments, the purpose of these hypothetical illustrations is to show how portfolios may be created with different risk and return characteristics to help meet a participant s goals. You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. You should also consider all of your investments when making your investment choices. For the health care costs on slide 8, these estimates assume a health care cost inflation rate of 7%. Underlying this assumption are cost of service increase rates that vary by type of service, ranging from 4% to 9%. The estimates are representative of the amount needed in a taxable account. A 5% after-tax rate of return is assumed on savings in retirement. Medical costs are assumed to be incurred uniformly in each year in retirement after age 65. Estimates are calculated for an "average" retiree. Actual costs will vary depending on actual health status, area, and longevity. Individuals who deviate from this average could require a smaller or larger amount of savings. These estimates assume that there is no employer-sponsored post-retirement health care coverage. These estimates assume that the retiree has traditional Medicare coverage, elects Medicare part D, and, by virtue of his or her income level, continues to receive the current government Part B subsidy. These savings amounts do not consider the expected costs of expenses related to over-the-counter drugs, dental care, or nursing home care. This information is for educational purposes only. Strategic Advisers, Inc., is a registered investment adviser and a Fidelity Investments company

28 Other Important Information Diversification does not ensure a profit or guarantee against a loss. U.S. stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are only slightly above the inflation rate. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. The MSCI EAFE Index is an unmanaged benchmark index composed of 21 MSCI country indexes representing the developed markets outside North America, including Europe, Australasia, and the Far East. The Ibbotson U.S. 30-Day T-bill data series is a total return series that is calculated using data from the Wall Street Journal from 1977 to present, and the CRSP U.S. Government Bond File from 1926 to The Ibbotson Intermediate-term Government Bond Index data series is a total return series that is calculated using data from the Wall Street Journal from 1987 to present, and from the CRSP Government Bond file from 1934 to From 1926 to 1933, data was obtained from Thomas S. Coleman, Lawrence Fisher, and Roger G. Ibbotson s Historical U.S. Treasury Yield Curves: with 1994 update (Ibbotson Associates, Chicago, 1994). The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks and includes reinvestment of dividends. It is not possible to invest directly in the index. The Consumer Price Index is a widely recognized measure of inflation calculated by the U.S. government that tracks changes in the prices paid by consumers for finished goods and services. Past performance does ensure a profit or guarantee against loss. All index returns include reinvestment of dividends and interest income. It is not possible to invest directly in any of the indexes described above. Investors may be charged fees when investing in an actual portfolio of securities, which are not reflected in illustrations utilizing returns of market indexes