Retirement Income Strategies

Transcription

1 Retirement Income Strategies Ross Goldstein Corporate Vice President New York Life Insurance Company May 26, 2011 The Company You Keep cv 1 This seminar is for informational purposes only

2 Current Approaches 2 Systematic Withdrawal Program Income supported by one portfolio of assets Initial withdrawal rate is a percent of investment Used by 4 in 9 advisors* Bucketing Approach Segment retirement assets into multiple buckets with different risk profiles Each segment is designated to provide income for a specific period Used by 1 in 4 advisors* Income Floor Approach Basic income supported by guaranteed sources (e.g., Social Security, pension) Discretionary income supported by remaining assets Used by 1 in 3 advisors* Product Allocation Approach Optimize allocation between retirement assets based on retirement risk tolerance An emerging approach * Source: GDC Research and Practical Perspectives

3 Market Segmentation 3 For a 65-year-old retiree Income Need 0%-2% 3%-5% 6%-8% Market Segment Overfunded Constrained Underfunded Appropriate Approach SWP/Bucketing Product Allocation Income Floor Need for Mortality Credit Low Medium High

4 Systematic Withdrawal Plan (SWP) The Company You Keep 4

5 Improving SWP with SPIA Incorporating SPIA into portfolios takes the pressure off withdrawals, leading to greater certainty that retirees won t outlast their portfolios, and potentially higher legacies! Strategy Bond $500K Equity $500K Income Income Annuity Annuity $300K Equity $300K $500K 6 Bucket Bond Strategy $200K $700K Probability Assets >$0 at Age 92 83% 87% Legacy Potential* ($000s) 1,100 $1,364 Scenario: Male age 65, 4% withdrawal rate, adjusted annually for 2.5% inflation, Life-Only Income Annuity * The pre-tax median ending portfolio balance at age 92 Source: New York Life, Hypothetical value of assets held in an untaxed account of $1,000,000. The illustration is based on a Monte Carlo model of 1000 scenarios. Equity and bond returns were generated using an economic scenario generator, with correlations estimates using the historical monthly S&P 500 Index returns from and Barclay Capital U.S. Aggregate Index returns from Each withdrawal rate is adjusted annually for 2.5% inflation. The portfolios are rebalanced annually and assume an annual deduction of 150 basis points for management fees on non-annuity assets. Income payments from the income annuity are based upon the average Life-Only payout rates offered by A++ rated (A.M. Best, 01/01/2011) SPIA providers, effective 01/01/2010. This example is for illustrative purposes only and does not represent the performance of an actual investment. Past performance is no guarantee of future results. Note: an investor cannot invest directly in an index. 5

6 Time Segmentation (Bucketing) The Company You Keep 6

7 Time Segmentation 7 High Bucket 6 11% of assets High Legacy Bucket 5 Growth Income 13% of assets Risk of assets Bucket 4 15% of assets Growth Bucket 3 Growth 18% of assets Income Bucket 2 Growth Income 21% of assets Income Bucket 1 22% of assets Income Low Year 5 Year 10 Year 15 Year 20 Year 25 The following is a hypothetical example for illustrative purposes only and does not represent the results of any product There is no assurance that similar returns will be achieved.

8 Time Segmentation 8 increase in risk The following is a hypothetical example for illustrative purposes only and does not represent the results of any product.

9 Improving Time Segmentation with SPIA 9 Strategy 1: Pure Time Segmentation, 0% in SPIA Strategy 2: Time Segmentation + 30% SPIA

10 Improving Time Segmentation with SPIA The benefit of Income Annuities is also evident when added to a bucketing strategy. It reduces the withdrawal strain in all segments, leading to a greater probability that retirees won t outlive their assets while achieving higher legacy. Strategy 1 Strategy 2 Equity and Bond 6 Bucket $1M Strategy $1M Income Income Annuity Annuity $300K $300K Equity 6 and Bucket Bond Strategy $700K $700K Probability Assets >$0 at age 92 76% 87% Legacy Potential* ($000s) 1,006 $1,102 Scenario: Male age 65, 4% withdrawal rate, adjusted annually for 3% inflation, Life-Only Income Annuity *The pre-tax median ending portfolio balance at age 92 Source: New York Life, Hypothetical value of assets held in an untaxed account of $1,000,000. Details of Strategy 1 and Strategy 2 are described in the previous slide. The above represents a weighted average of the allocations in the 6 buckets that makes up each strategy. Equity and bond returns were generated using an economic scenario generator, with correlations estimates using the historical monthly S&P 500 Index returns from and Barclay Capital U.S. Aggregate Index returns from Each withdrawal rate is adjusted annually for 3% inflation. The portfolios are rebalanced annually and assume an annual deduction of 150 basis points for management fees. Income payments from the income annuity are based upon the average Life-Only payout rates offered by A++ rated (A.M. Best, 01/01/2011) SPIA providers, effective 01/01/2010. This example is for illustrative purposes only and does not represent the performance of an actual investment. Past performance is no guarantee of future results. Note: an investor cannot invest directly in an index. 10

11 Income Floor The Company You Keep 11

12 Income Floor 12 Step 1: Ensure that basic retirement income needs will be met Step 2: Optimize the remainder of assets to achieve growth and discretionary income objectives throughout retirement

13 Income Floor: Step One 13 Accumulation Phase Savings Distribution Phase Income Discretionary Expenses Income Annuities Pre-Retiree Income Gap Pension Social Security Retiree Basic Expenses The following discussion is a hypothetical example for illustrative purposes only.

14 Income Floor: Step Two 14 Accumulation Phase Savings Distribution Phase Income What should we do with the money not used to cover basic expenses? Asset Allocation Income Gap Discretionary Expenses Income Annuities Pension Social Security Basic Expenses Pre-Retiree Retiree The following discussion is a hypothetical example for illustrative purposes only.

15 Product Allocation The Company You Keep 15

16 Product Allocation Approach 16 An emerging approach that consolidates all retirement risks into one - Retirement Income Risk Draws parallels to the accumulation approach that advisors are familiar with Recommends the optimal portfolio through the use of an Efficient Income Frontier Maximizes Legacy Potential Minimizes Retirement Income Risk

17 Efficient Income Frontier 17 Efficient Income Frontier with traditional assets only HIGH 1,600,000 1,400,000 Legacy 1,200,000 1,000,000 Efficient Income Frontier traditional assets only 800, ,000 LOW0% 5% 10% 15% 20% HIGH25% Income Risk The following is a hypothetical example for illustrative purposes only and does not represent the results of any product.

18 Efficient Income Frontier 18 Efficient Income Frontier with traditional assets + annuitization HIGH 1,600,000 1,400,000 Efficient Income Frontier traditional assets + annuitization Legacy 1,200,000 1,000,000 Efficient Income Frontier traditional assets only 800, ,000 LOW 0% 5% 10% 15% 20% HIGH25% Income Risk The following is a hypothetical example for illustrative purposes only and does not represent the results of any product.

19 SPIA is a Fixed Income Asset SPIA is a fixed income asset class Provides guaranteed payout stream Payout does not fluctuate with the market Backed by high-grade bond portfolio* SPIA Unlike traditional investments, annuities are long-term insurance vehicles designed to provide a constant stream of income. Unlike traditional investments, annuity payouts are based in part on insurance factors. Annuities involve insurance charges and expenses. Traditional investments are more liquid investments than annuities. Unlike an annuity, if you hold a bond to maturity you receive your principal back. Annuity payouts are materially affected by the length of the payout period and number of persons annuitized. *Backed by the general account, which is composed of a high grade bond portfolio 19

20 Product Allocation Framework 20 The open architecture framework is customizable to any set of model portfolios. Model Portfolios Product Allocation Framework SPIA SPIA Model Portfolio Model Portfolios SPIA The following discussion is a hypothetical example for illustrative purposes only.

21 Client Questionnaire 21

22 Client Proposal 22

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24 24 Terms and Definitions An investor cannot invest directly in an index. The S&P 500 is an unmanaged index and is widely regarded as the standard for measuring Large Cap U.S. stock market performance. The Barclays Capital US Aggregate Bond Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues rated investment grade or higher.