PAYING YOURSELF BACK IN RETIREMENT A Guide to Lifetime Income Planning

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1 PAYING YOURSELF BACK IN RETIREMENT A Guide to Lifetime Income Planning

2 Lifetime Income Planning in a New World of Investing Retirement. It s the ultimate good news/bad news scenario. First, the good news: Thanks to advances in medical science and better personal health habits, you will almost certainly spend more years enjoying the fruits of your labor than any generation prior. The bad news: Most Americans retirement nest eggs will fall woefully short of funding that longer life span. Consider this: While the average American spends roughly $8,000 per year on healthcare expenditures, 1 or $160,000 over a 20-year retirement, the average 401(k) balance is less than half of that at under $75, In an era where retiring comfortably on Social Security and a company pension is practically impossible, the importance of personal retirement savings cannot be overstated. Today and in the future, most retirees will need to withdraw from their investment portfolios to generate the income they require throughout their golden years. To achieve this end, retirement planning must be a lifelong vocation but many investors have interrupted that noble mission in these times of low interest rates and high market volatility, unwittingly jeopardizing their financial futures. Truth be told, it is a new world of investing, and it does require new ways of thinking about retirement investments. However, the chief tenet of retirement investing has not changed you are more likely to achieve the retirement you envision if you prepare in advance. This guide is designed to help you consider ways to prepare now to make your retirement income last. As always, we encourage you to work with your financial professional to develop a personal investment plan suited to your specific retirement goals. 1 OECD Health Data: Health expenditure and financing, OECD Health Statistics (database). 2 Fidelity Investments, as of June For more information ON BlackRock retirement income solutions, contact your financial professional. Not FDIC Insured May Lose Value No Bank Guarantee [ 2 ] PAYING YOURSELF BACK IN RETIREMENT

3 Assessing Your Income Needs Identify Your Retirement Goals The first step in determining how much income you will need in retirement is to pinpoint your goals. Your basic financial goals may include having the ability to pay your bills for the rest of your life, maintaining your lifestyle, establishing a cushion for unforeseen expenses, maximizing your estate or leaving a legacy to heirs and/or a charity. Also factor in other goals that come with financial costs, such as funding advanced education, starting a business or providing for extended family. Itemize Your Anticipated Expenses Once you determine what you want to do in retirement, you can begin estimating the income required to fund those ambitions. Of course, not all expenses are created equal. Categorizing your anticipated expenses can help you to prioritize and compartmentalize your retirement income planning. } Essential expenses include housing, utilities, food, clothing and basic healthcare. These are expenses that must be paid. } discretionary expenses include travel, entertainment and gifts. Discretionary expenses can usually be forgone or reduced if necessary. } One-time expenses are exactly as the name implies. These may include a child s wedding or a grandchild s college tuition or a multitude of other items. A recent survey of near and recent retirees found that just one in four had a formal written plan for managing income, assets and expenses in retirement. 3 3 LIMRA, Retirement Income Tradeoffs, Know which of your expenses you consider essential, even if someone else may not agree. Within these categories, your expenses can be defined even further. For example, you may have both ongoing essential expenses (e.g., property taxes, utilities) and fixed essential expenses that last only a certain number of years (e.g., a mortgage). Following are a few common considerations that may help you arrive at a more complete and accurate projection of expenses: } How many years are remaining on your mortgage? } Do you plan on moving or downsizing your primary residence? } How will your health insurance premiums change once you retire? } Do you have all the insurance you need or should you budget for additional premiums (e.g., long-term care insurance)? } Will you spend more on travel or hobbies once you have more time to devote to them? [ 3 ]

4 Identifying Your Income Sources Inventory Existing Income Sources Once you have determined your retirement income needs, take stock of the income sources you have now or anticipate having in the future. } Will you continue to work either full- or part-time? } do you have guaranteed income sources (e.g., Social Security, pensions, annuities)? } can you derive income from investment properties? Once you have identified your income sources, determine how long the income stream from each will last (e.g., a few years, your lifetime, your spouse s lifetime). You should also understand what type of income stream each will provide (e.g., fixed, inflation-adjusted). Identify Investment Assets Most people will find that their anticipated annual expenses are higher than their expected annual income. This income gap often can be closed by working with your financial professional to create a withdrawal plan for your investment portfolio. Before doing so, however, it is important to inventory all of your investment assets. These may include company retirement plans, individual retirement accounts (IRAs), taxable investments, deferred annuities, real estate and cash value life insurance. Your financial professional can help you consolidate these resources (where possible) and develop a plan that best employs them to fill your income gap. Your income gap is the additional income you need to fund your expenses above and beyond the income you will receive from existing sources. Determine Your Income Gap $ TOTAL EXPENSES ADDITIONAL INCOME NEEDED E X I S T I N G I N C O M E S O U R C E S 0 Years Into Retirement 30 The chart assumes existing income sources are adjusted for inflation each year. The income gap reflects inflationadjusted basic living expenses and an active lifestyle that becomes less active 10 to 15 years into retirement. [ 4 ] PAYING YOURSELF BACK IN RETIREMENT

5 Generate Income From Investment Assets Armed with an understanding of your income needs and the assets available to fulfill them, the next step is to develop a plan to best deploy your assets to fill your income gap. If your income gap looks something like the chart on the previous page, one method is to simply withdraw the gap amount you need each year. Another option is to withdraw the dollar amount of the gap in the first year and subsequently increase the amount withdrawn each year based on inflation. However, neither of these simple strategies is likely to be the most efficient way to generate ongoing income from your assets and may not be sustainable over the long term. The chart below illustrates the number of years your portfolio is likely to last assuming various investment returns and withdrawal rates. As you can see, a slightly higher rate of annual withdrawal can significantly decrease your years of retirement income. For example, withdrawing 6% instead of 5% annually, while earning a 7% investment return, cuts your portfolio s livelihood from 36 to 25 years. Years Your Portfolio Should Last Estimate Annual Investment Return Choose a Withdrawal Rate 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% % % % % % % % Embracing the New Retirement It s a new world of investing one where the traditional expectations about stocks, bonds and cash have been upended. This new world requires a new way of thinking about retirement investing: } Longer life. For a couple that has reached the age of 65, there s a 50% chance that at least one of the two will live to age 92. Many investors need to plan for 27+ years in retirement. 4 } Smaller yields. Government bond yields are at record lows and cash is providing zero interest. Investing exclusively or primarily in these traditional retirement assets means your nest egg will be quickly eroded by inflation. } Bigger thinking. Longer life means more time to ride out market cycles. As such, retirees can consider adding equities and alternative strategies to their retirement income portfolios. 4 Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume individuals in good health. 10% Source: BlackRock. Assumes that you increase the dollar amount of annual withdrawals by 3% to cover inflation. The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment. [ 5 ]

6 Consider combining inflationadjusted withdrawals for your essential expenses and fixedpercentage withdrawals or withdrawals of investment earnings for your discretionary expenses. Determine Appropriate Withdrawal Strategies Rather than using a single withdrawal strategy to fund all your retirement expenses, you might consider combining strategies and funding your various income needs (e.g., essential, discretionary) separately. Combining withdrawal strategies to target specific needs can often lead to a higher level of confidence that you will reach your retirement goals, because the assets supporting each income requirement are invested according to that need. Fixed-Dollar Withdrawals Withdraw a fixed dollar amount or for a specified period of time. $50,000 25,000 $40,000 $40,000 $40,000 $40,000 $40,000 Inflation-Adjusted Withdrawals Withdraw an appropriate amount in the first year. Increase the dollar amount by the rate of inflation in subsequent years. $50,000 25,000 $40,000 $41,200 $42,436 $43,709 $45,020 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Things to Consider } Simple to implement } does not grow with inflation } can erode principal if dollar amount is high Fixed-Percentage Withdrawals Withdraw a fixed percentage of the portfolio annually. The dollar amount withdrawn will vary with portfolio value. Things to Consider } Provides growing income stream } maintains your standard of living throughout retirement } Requires annual calculation } can erode principal and eventually become fully depleted Withdrawal of Investment Earnings Withdraw only the income (e.g., dividends, interest) created by the underlying investments. $50,000 $40,000 $43,200 $44,496 $39,156 $43,855 $50,000 $40,000 $48,600 $38,745 $39,188 $43,890 25,000 25,000 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Things to Consider } Account never fully depletes } can provide growth in income and account value if percentage chosen is below anticipated rate of return } Amount varies year to year } Assets could deplete over time if percentage is too high } Growth in income is not guaranteed Things to Consider } Prevents running out of money principal remains intact } Potential for investment to grow while providing income } Amount varies year to year } Withdrawals may not keep up with inflation The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment. Withdrawals occur at the end of each year and are calculated on the ending portfolio value for the previous year. Illustrations assume constant 3% annual return; total hypothetical portfolio returns of 12% (Year 1), 7% (Year 2), -8% (Year 3), 16% (Year 4) and 5% (Year 5); and hypothetical portfolio yields of 4% (Year 1), 4.5% (Year 2), 3.5% (Year 3), 4% (Year 4) and 4% (Year 5). [ 6 ] PAYING YOURSELF BACK IN RETIREMENT

7 Monitoring Your Retirement Income Plan Providing for a lasting income stream in retirement does not stop at the establishment of a plan. It is equally important to monitor your plan and make any necessary adjustments to ensure it continues to meet your needs throughout your retirement years. Talk to your financial professional today about creating an income and investment plan to help meet your specific retirement needs. Your income plan will likely need some fine-tuning as you transition into retirement, simply because it is often difficult to predict your retirement lifestyle and its costs until you have lived it. Realize also that your expenses will likely change over time, and your income plan may need to be adjusted to reflect these changes. Of course, all retirement plans are built on a variety of assumptions, and chances are one or more of these assumptions will not hold over the entire duration of your retirement. If investments underperform your expectations, inflation is high or you encounter unanticipated expenses, you may need to revisit and revise your plan. Likewise, adjustments may be required should your goals or priorities change over your lifetime. In many cases, certain aspects of a retirement plan may not require immediate implementation, such as planning your estate or funding your grandchildren s education, and these will need to be accounted for later. Whatever the scenario, meeting regularly with your financial professional throughout your retirement years can ensure your income and investment plans continue to meet your evolving needs. Long life is a blessing but a lack of planning can turn your longevity into a financial burden. Contact your financial professional today to ensure your retirement is a good news-only scenario. [ 7 ]

8 Why BlackRock As the world s largest investment manager, at BlackRock we believe it s our responsibility to help investors of all sizes succeed in the New World of Investing. We were built to provide the global market insight, breadth of capabilities, unbiased investment advice and deep risk management expertise these times require. The Resources You Need for a New World of Investing Investing with BlackRock gives you access to every asset class, geography and investment style, as well as extensive market intelligence and risk analysis, to help build the dynamic, diverse portfolios these times require. The Best Thinking You Need to Uncover Opportunity With deep roots in all corners of the globe, our 100 investment teams in 27 countries share their best thinking to translate local insight into actionable ideas that strive to deliver better, more consistent returns over time. The Risk Management You Need for Peace of Mind With more than 1,000 risk professionals and premier risk management technology, BlackRock digs deep into the data to understand the risk that has to be managed for the returns our clients need and bring clarity to the most daunting financial situations. BlackRock. Investing for a New World. This material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. FOR MORE INFORMATION: BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. Not FDIC Insured May Lose Value No Bank Guarantee Lit. No. RET-INC-BRO-0113 AC / USR-1326

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