Turning Savings Into Retirement Income

Transcription

1 Turning Savings Into Retirement Income Inside: Determining Your Income Needs Funding Your Goals Monitoring Your Retirement Income Plan

2 For more information on BlackRock retirement income solutions, contact your financial professional. The days of retiring comfortably on Social Security and a company pension are gone. Today, most people entering retirement will need to withdraw from their investment portfolios to create the income they need. Although creating and implementing a retirement income plan can seem daunting, you are more likely to achieve the retirement you envision if you prepare in advance. The question individuals approaching and entering retirement should ask themselves is, Can I afford to do all the things I want to do in retirement? Throughout this guide, we will provide techniques and information to help you answer yes to that question with a focus on structuring your income in retirement to help you achieve your goals. While this guide can help you start thinking about ways to make your retirement income last, your financial professional can help you develop a personal investment plan to most effectively accomplish your retirement goals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

3 Determining Your Income Needs Set Your Retirement Goals The first step in determining how much income you will need is to establish your goals for retirement. Account for all of your financial goals, not only those that may require additional income. Your basic financial goals may include being able to pay your bills for the rest of your life, maintaining your lifestyle, being prepared for unforeseen expenses, maximizing your estate or leaving a legacy to heirs and/or a charity. You may have other goals that come with additional financial costs, such as obtaining a new college degree, starting a business or providing for your extended family. Itemize Your Anticipated Expenses The more time you spend determining what you want to do in retirement, the better estimate you will have of your future income needs. Therefore, it is important to itemize and categorize your anticipated expenses. Essential expenses: Spending on items such as housing, utilities, food, clothing and basic healthcare. In other words, expenses that must be paid. Discretionary expenses: Spending on things like travel, entertainment and gifts. Discretionary expenses can usually be forgone or reduced if necessary. One-time expenses: While the majority of your retirement income needs will be for ongoing expenses, many retirees will face one-time expenses such as a child s wedding or grandchild s college tuition. Essential or Discretionary Consider which of your anticipated expenses you consider essential, even if another person may consider them discretionary. Knowing how important funding specific categories of expenses is to you can help your financial professional develop an investment plan to ensure you can fund those goals you hold most dear. Even within these categories, it is important to accurately reflect the nature of your expenses. For example, you may have both ongoing essential expenses and a fixed essential expense that lasts only a certain number of years (such as a mortgage). Ask yourself the following questions as you determine the income you will need. The answers may help you develop a more complete and accurate set 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 Funding Your Retirement Goals The Value of Annuities Annuities offer investors guaranteed lifetime income. Different types of annuities can offer access to an account value, payments for a specific number of years or predetermined growth/growth potential. Inventory Existing Income Sources Once you have determined your retirement income need, take stock of the income sources you have now or know you will have 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, you should determine how long the income stream from each will last (e.g., a few years, your lifetime, your spouse s lifetime). You should also determine 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 the annual income they expect to receive from their existing income sources. This income gap can usually be closed by working with your financial professional to create a withdrawal plan from your investment portfolio. Before you can create this withdrawal plan, you must 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 $ Additional Income Needed Existing Income Sources Total Expenses Years Into Retirement 4 The chart above assumes existing income sources are adjusted for inflation each year. The income gap reflects inflation-adjusted basic living expenses and an active lifestyle that becomes less active 10 to 15 years into retirement.

5 Create Income From Investment Assets Once you have an understanding of how much income you need and what investment assets you have, you can develop a plan for how to best use 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 might be to withdraw the dollar amount of the gap in the first year and subsequently increase the amount withdrawn for inflation each year. However, neither of these simple strategies are 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, annually withdrawing 6% instead of 5% while earning a 7% investment return cuts the number of years your portfolio should last by 11, from 36 to 25. Plan for Longevity A 65 year-old man has a 50% chance of living to age 85 and a 25% chance of living to age 92. A 65 year-old woman has a 50% chance of living to age 88 and a 25% chance of living to age 94. Out of a couple, both age 65, at least one person has a 50% chance of living to 92 and a 25% chance of living to 97. Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume you are in good health. Years Your Portfolio Should Last Choose a Withdrawal Rate 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% Estimate Your Annual Investment Return 2% % % % % % % % % Source: BlackRock, Inc. Assumes that you increase the dollar amount of annual withdrawals by 3% to cover inflation. For illustrative purposes only. 5

6 Portfolio Withdrawal Strategies Fixed-Dollar Withdrawals Withdraw a fixed dollar amount one time or for a specified period of time. Inflation-Adjusted Withdrawals Withdraw an appropriate amount in the first year. Increase the dollar amount withdrawn by the rate of inflation in subsequent years. Fixed-Percentage Withdrawals Withdraw a fixed percentage of the portfolio annually. The dollar amount withdrawn will vary with portfolio value. Withdrawal of Investment Earnings Withdraw only the income (e.g., dividends, interest) created by the underlying investments. Determine Appropriate Withdrawal Strategies Instead of using one withdrawal strategy to fund all your retirement expenses, you might consider funding your various income needs (e.g., essential, discretionary) separately and combining different investment withdrawal strategies to meet your income needs as a whole. Combining strategies to meet your specific needs can often lead to a higher level of confidence that you will reach your retirement goals, especially when the assets supporting each income need are invested according to that need. Withdrawal Strategies for Investment Assets Strategy Advantages Disadvantages Fixed-Dollar Withdrawals Simple to implement Does not grow with inflation Can erode principal if dollar amount is high Inflation-Adjusted Withdrawals Fixed-Percentage Withdrawals Provides growing income stream Allows client to maintain standard of living throughout retirement The account is never fully depleted, increasing chances overall plan will be successful Can provide growth in income and account value if percentage chosen is below anticipated rate of return Requires annual calculation Can erode principal and eventually become fully depleted Amount varies year to year Assets could become depleted over time if percentage is too high Growth in income is not guaranteed Withdrawal of Investment Earnings Prevents running out of money since principal investment remains intact Potential for investment to grow while providing income Amount varies year to year Withdrawals may not keep up with inflation 6

7 Monitoring Your Retirement Income Plan As important as it is to create and follow a retirement income plan, it is equally important to monitor your plan, making any necessary adjustments, to ensure it continues to meet your needs over the years. Your retirement income plan will likely need some adjusting as you transition into retirement because it is often difficult to predict your actual lifestyle and its costs until you have lived in retirement for a while. Following your initial transition into retirement, your expenses will likely change over time and your retirement income plan may need to be adjusted to reflect these changes. Talk to your financial professional today about creating an income and investment plan to help meet your specific retirement needs. All retirement plans are built on a variety of assumptions. Chances are that one or more of these assumptions will not hold over the entire duration of your retirement. If investments perform worse than expected, inflation is high or you encounter unexpected expenses, you may need to revisit and adjust your plan. On the other hand, if your investments perform better than expected, you can consider enhancing your lifestyle or simply take comfort in being more confident that your plan will meet your long-term goals. Another potential reason to adjust your plan is that your goals may change over your lifetime. In addition, you may not plan to implement some aspects of your retirement goals for several years, such as planning your estate or funding your grandchildren s education. Meeting regularly with your financial professional during your retirement years can ensure your income and investment plans continue to meet your evolving needs over your lifetime. 7

8 EQUITIES FIXED INCOME REAL ESTATE LIQUIDITY ALTERNATIVES BLACKROCK SOLUTIONS About BlackRock BlackRock is a premier provider of global investment management, risk management and advisory services. The firm manages portfolios and provides investment solutions for a broad array of investors that includes corporate, public and union pension plans, insurance companies, mutual funds, endowments, foundations, charities, corporations, official institutions and individuals worldwide. We offer a unique blending of qualities that makes us a preferred choice among individual investors and financial professionals: Sharp investment minds Powerful investment technology Global perspective and connectivity Breadth of investment solutions Entrusted with billions by premier institutions 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. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners. FOR MORE INFORMATION Prepared by BlackRock Investments, LLC, member FINRA BlackRock, Inc. All Rights Reserved. AC /2009 RET-INC-BR-1209