Boston Children s Hospital Retirement Planning Day Agenda Wednesday, March 11, 2015

Transcription

1 Boston Children s Hospital Retirement Planning Day Agenda Wednesday, March 11, :30 a.m. Registration 9:30 9:45 a.m. Welcome and Opening Remarks 9:45 10:45 a.m. Social Security and Retirement Planning: A Hit or Myth Proposition 10:45 11:45 a.m. Overview of the Boston Children s Hospital Cash Balance Pension Plan 11:45 12:45 p.m. Buffet Lunch 12:45 1:45 p.m. The Fundamentals of Retirement Income Planning 1:45 2:00 p.m. Q & A Session 03/24/2015 1

2 Social Security and Retirement Planning: A Hit or Myth Proposition Boston Children s Hospital Retirement Planning Day Event December 2, 2014 Kurt Czarnowski Czarnowski Consulting: Expert Answers to Your Social Security Questions 2

3 A Foundation for Planning Your Future 3

4 The Social Security Statement The Statement provides you with benefit estimates and allows you to check your earnings history for accuracy. You can now request a Statement anytime at 4

5 Use the Retirement Estimator Convenient, secure, and quick financial planning tool Immediate and accurate benefit estimates Lets you create What if scenarios based on different ages and earnings 5

6 Full Retirement Age Year of Birth Full Retirement Age 1937 or earlier & 2 months & 4 months & 6 months & 8 months & 10 months & 2 months & 4 months & 6 months & 8 months & 10 months 1960 or later 67 6

7 Your Age At The Time You Elect Retirement Benefits Affects the Amount If You re a Worker and Retire: Before your Full Retirement Age (FRA), you get a reduced monthly payment. 62 is the earliest age at which you can begin to collect benefits. At your FRA, you get your full benefit amount. Past your FRA, you get an even higher monthly payment. However, you can only earn these Delayed Retirement Credits (DRCs) until age 70. 7

8 Your Age At The Time You Elect Retirement Benefits Affects the Amount For example, if you were born from 1943 through 1954: Age 62 75% of benefit Age % of benefit Age % of benefit 8

9 How Social Security Determines Your Benefit Social Security benefits are based on earnings Step 1 -Your wages are adjusted for changes in wage levels over time Step 2 -Find the monthly average of your 35 highest earnings years Step 3 -Result is average indexed monthly earnings 9

10 What You Can Expect at Full Retirement Age 55% 41% 34% 10

11 Spouse s Benefit Computation Benefit is 50% of worker s FRA amount. DRCs have no impact. If spouse s own benefit is less than 50% of the worker s, the benefits are combined. Benefit amount is reduced if spouse is under FRA. Does not lower payment to worker. 11

12 Widow or Widower Benefit Computation At full retirement age, 100% of deceased worker s benefit At age 60, 71.5% of deceased worker s benefit Reduced benefits on one record at age 60, reduced or unreduced benefit on other record at age 62 or older Full benefits to both widow or widower and divorced widow or widower 12

13 Social Security Strategies File and Suspend Claim Some Now; Claim More Later Combined Strategies No Can Do Over 13

14 Social Security Strategies File and Suspend One member of the couple must be at or over Full Retirement Age; Files for own retirement benefits and immediately requests that benefit payments be suspended; Worker earns DRCs since no payments being made Spouse can begin to collect up to 50% of worker s FRA amount; Spouse must be at least age 62 Eligible children can begin to collect as well 14

15 Social Security Strategies Claim Some Now; Claim More Later One member of the couple must be at least age 62 and must have applied for own retirement benefits; Spouse restricts the scope of the application and files ONLY for a spouse s benefit; Spouse begins to collect up to 50% of other worker s FRA amount, while earning DRCs on own Spouse must be at or over Full Retirement Age; Prior to FRA, spouse cannot restrict scope of application and is deemed to file for own benefit first 15

16 Social Security Strategies Combined Strategies One member of couple files and suspends while the other member files for spouse s benefits only; Both must be at or over Full Retirement Age Allows some benefits to be paid while both members of the couple earn DRCs going forward; If couple still married, both CANNOT receive just spouse s benefits at the same time. However, divorced couples can do just that, if divorce was finalized at least two years previously 16

17 Social Security Strategies The Do Over Since December, 2010, more properly called The No Can Do Over; An individual may still withdraw an application, but only within 12 months of the first month of entitlement; Also limited to only one withdrawal in a lifetime; At FRA, can request benefit suspension in order to earn DRCs, even if payments had already started. 17

18 You Can Work & Still Receive Benefits You Can If You Make More, If You Are Make Up To Some Benefits Will Be Withheld Under Full Retirement Age $ 15,480/yr. ( $ 1,290/mo.) $ 1 for every $ 2 The Year Full Retirement Age is Reached $ 41,400/yr. ( $ 3,450/mo.) $ 1 for every $ 3 Month of Full Retirement Age and Above No Limit No Limit Note: If some of your retirement benefits are withheld because of your earnings, your benefits will be increased starting at your full retirement age to take into account those months in which benefits were withheld. 18

19 Your Benefits Can Be Taxable Applies to those with a Modified Adjusted Gross Income (MAGI) above $25,000 (individual) or $32,000 (couple filing jointly). Up to 85% of benefits received could be treated as ordinary income for federal tax purposes. Proceeds are transferred back to Social Security. At the end of each year, people receive a Social Security Benefit Statement (Form SSA-1099). About 1/3 of people who get Social Security pay income taxes on their benefits. 19

20 A Foundation for Planning Your Future 20

21 Understanding Your Pension Plan Benefits Department December 2, /24/

22 Overview Background on Defined Benefit and Defined Contribution plans Cash Balance plans a type of Defined Benefit How credits are earned Compensation crediting schedule Vesting Types of retirement and benefit options 03/24/

23 Background on the Defined Benefit Plan Risk is with the employer The employee s benefit can never decrease The assets for the plan reside in a trust controlled by the employer Upon retirement, the employee has the option of taking their benefit in the form of an annuity that guarantees income for life Essentially, the employer defines the benefit that the employee will receive upon retirement 03/24/

24 Background on Defined Contribution Plans Risk is with the employee Employees and/or employers make contributions to the employee s individual account The assets for the plan reside in the employee s individual account and may fluctuate depending on market conditions and chosen investment vehicles Upon retirement, the employee is given a single sum benefit which provides no guarantee for a lifelong benefit Essentially, the employer defines the contribution that is made to the employee s account 03/24/

25 Cash Balance Plans A Type of Defined Benefit The Hospital s Pension Plan is a Cash Balance Plan It defines a participant s benefit in terms of an account balance It credits each participant s account with a compensation credit and an interest credit each year Despite behaving like a defined contribution plan in certain ways, it is considered a defined benefit It provides a guaranteed return to employees each year regardless of how the plan s assets perform It provides annuity payment options that guarantee income for an employee s lifetime 03/24/

26 How Credits Are Earned Compensation Credits are earned by employees: Who are eligible Who are participants Who work 1,000 or more hours in the calendar year Interest credits are earned as a percentage of the cash balance on the first day of the plan year In 2013, the interest percentage was 3.20% In 2014, the interest percentage is 3.80% The interest percentage is determined in November of the prior year and based on average yield of the 30-year Treasury rate 03/24/

27 Compensation Credit Schedule Prior to January 1, 2011 Age Plus Completed Years of Service Compensation Credit Percentage less than 30 5% at least 30 but less than 40 6% at least 40 but less than 45 7% at least 45 but less than 50 8% at least 50 but less than 55 9% at least 55 but less than 65 10% at least 65 but less than 75 11% 75 or more 12% Following January 1, 2011 Age Plus Completed Years of Service Compensation Credit Percentage less than 40 5% at least 40 but less than 50 6% at least 50 but less than 60 7% at least 60 but less than 70 8% at least 70 but less than 80 9% at least 80 but less than 90 10% 90 or more 11% Employee Protection: to mitigate the impact to active employees as of December 31, 2010, the maximum reduction to the compensation credit was 1.0% of pay 03/24/

28 Vesting The Plan has a three-year cliff vesting rule After three years of service, employees become 100% vested but are 0% vested prior to three years Once vested, employees have permanent rights to the full balance of their benefit How breaks in service affect vesting Breaks under one calendar year are ignored for vesting purposes Any break after becoming vested will have no effect on vesting status If you are not vested and have a break of six or more years, the prior service will not count towards vesting 03/24/

29 Types of Retirement Normal Retirement Age 65 The latest age at which an inactive employee may start their benefit Early Retirement Age 55 with three years of service Benefit reductions of 0.25% per month for each month before normal retirement Late Retirement Any participant who remains active beyond Normal Retirement is entitled to the greater of The accrued benefit as of their retirement date The actuarial equivalent of the accrued benefit on their normal retirement date 03/24/

30 Forms of Pension Distributions Normal Forms of Pension Unmarried Participants Single Life Annuity Married Participants 100% Joint and Survivor Annuity Optional Forms of Pension Single Life Annuity 100% Joint and Survivor Annuity 50% Joint and Survivor Annuity 10-year Certain and Continuous Annuity Lump Sum Payment 03/24/

31 Review We discussed the Cash Balance Plan and it s place in the defined benefit-defined contribution space We examined how our benefit grows each year, through interest and compensation credits We covered a few other traits of the plan including vesting and distribution options 03/24/

32 Discussion The information contained herein has been provided by Boston Children s Hospital and is solely the responsibility of Boston Children s Hospital /24/

33 33 Fundamentals of Retirement Income Planning

34 Are you on track? Nurses: Saving, but not enough Physicians: On track to replace 56% of income 34 Sources: Physicians Savings Behaviors and Retirement Readiness, Points of View: Benefits and Policy Insights, Winter 2014, Fidelity Investments. Defining Excellence: Nurses Savings Behaviors and Retirement Readiness, Points of View: Benefits and Policy Insights, Spring 2014, Fidelity Investments.

35 How will you know you re ready to retire? A simple question without a simple answer 35

36 Let s talk. Agenda What might your retirement look like? Do you know your financial risks? How can you create a plan you ll use? See how the pieces fit together. Q&A 36

37 What might your retirement look like? 37

38 The good stuff Agenda Time Family and Friends Pursue Dreams You own it You control it You need to fill it Engage in more activities Reconnect with old friends Spend more time with grandchildren Make a difference Learn something new Start a new career 38

39 Agenda The not-so-good stuff (some drawbacks) The Club Sandwich 47% Middle-aged adults support a parent and a minor or adult child or grandchild 1 Debt Remains a Factor 105% Increase in seniors household debt 2 $26,000 $12,700 1 McKinsey & Company, U.S. Census Bureau, 2013.

40 Whatever you do in retirement, you ll need to pay for it. 64% (or more) may be your responsibility Investments Social Security Earned Income Other 18% 18% Pension Your own sources: 64% 44% 19% Outside sources: 37% 2% 40 Source: Social Security Administration, Income of the population 55 or older, 2008, April 2010, based on highest quintile of $55,889. For illustrative purposes only. May not add up to 100% due to rounding.

41 Do you know your financial risks? 41

42 The five key risks to your retirement Longevity Health care expenses Inflation Asset allocation Excess withdrawal 42

43 Risk 1 Longevity Current Age 65-Year-Old Man 65-Year-Old Woman 65-Year-Old Couple 50% Chance 25% Chance 85 yrs. 88 yrs. 92 yrs. 92 yrs. 94 yrs. 97 yrs. Life span for one survivor You may need income for longer than you think 43 Annuity 2000 Mortality Table, Society of Actuaries. Figures assume a person is in good health.

44 Risk 2 Health care expenses $220,000 Out-of-pocket health care expense estimate for a 65-year-old couple * Medicare is not free Supplemental health insurance is generally needed Rx costs may be significant Long-term care coverage is additional A sizeable amount of savings may be needed for health care in retirement 44 *Fidelity Benefits Consulting, Based on a hypothetical couple retiring at age 65 years or older, with average (82 male, 85 female) life expectancies. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Assumes individuals do not have employerprovided retiree health care coverage, but do qualify for Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.

45 Risk 3 Inflation Starting value $50,000 Purchasing power after 25 years of inflation $30,477 $23,880 $18,756 2% Inflation 3% Inflation 4% Inflation Even low inflation can erode purchasing power 45 All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% to show the effects of inflation over time; actual inflation rates may be more or less and will vary.

46 Risk 3 Inflation $3.04 $4.99 $8.19 2% Inflation $16,240 $30,000 $62,800 3% Inflation and increase the costs of goods and services 46 All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% to show the effects of inflation over time; actual inflation rates may be more or less and will vary.

47 Risk 4 Asset allocation 20s, 30s, 40s Investments geared to building Stocks Bonds Short Term 50s early 60s 60s, 70s, 80s+ Investments geared to pay out Stocks Bonds Cash Social Security Annuities How you invest changes as you move from accumulation goals to retirement income goals 47

48 Risk 5 Excess withdrawal Value of Portfolio $1,500,000 $1,000,000 $500,000 $0 WITHDRAWAL RATE* 4% 7% 5% 8% 6% 9% 10% Taking out too much from your savings may deplete your income too soon 48 *Hypothetical value of assets held in a tax-deferred account after adjusting for monthly withdrawals and performance. Initial investment of $500,000 invested in a portfolio of 50% stocks, 40% bonds, and 10% short-term investments. Hypothetical illustration uses historical monthly performance from January 1972 through December 2011 from Ibbotson Associates: stocks, bonds, and short-term investments are represented by the S&P 500 Index, U.S. intermediate-term government bond, and U.S. 30-day T-Bills, respectively. Initial withdrawal amount based on 1/12th of applicable withdrawal rate multiplied by $500,000. Subsequent withdrawal amounts based on prior month s amount adjusted by the actual monthly change in the Consumer Price Index for that month. This chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results. See slide 74 for Important Information and Methodology.

49 Why the 5 key risks are so important You do not control many elements Health Costs Asset Allocation Withdrawal Rate Inflation Longevity $ $ $ yet you ll need steady, reliable income to replace your paycheck 49

50 How can you create a plan you ll use? 50

51 Know what a retirement income plan is designed to do. A detailed plan can help you determine how to use your financial resources to generate income to last the rest of your life. 51

52 Understand how a retirement income plan can help you Decide when you can retire Understand and help to minimize the key risks Identify all your sources of income Prioritize your financial needs and wants Stay on track to live the retirement you want 52

53 and what it provides. A map may help you address uncontrollable elements, assess your financial situation, and align resources to create income in retirement. Protection 53 *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.

54 Know when to build your retirement income plan. If you plan to retire at 65: 50s Quick plan Make good plans Super save Set up an initial planning session with us 60s Detailed plan Determine Social Security strategies Reassess risk and asset allocation Build a detailed financial assessment 65+ Master plan Begin Medicare eligibility Make final work-life balance decisions Prepare your portfolio for required minimum distributions and tax strategies 54

55 4 steps to create your retirement income plan 55

56 Retirement income planning process Once you have a good idea of what you want to do in retirement, follow these steps to build your plan STEP 1 STEP 2 STEP 3 STEP 4 Inventory expenses vs. income Cover essential expenses Fund discretionary expenses Meet with us and review your plan regularly 56

57 STEP 1 Inventory expenses vs. income Categorize expenses essential vs. discretionary Identify expenses that may increase or decrease Consider your personal situation: Family needs Living arrangements as you age Debts Long-term care coverage Cost of retirement fun 57

58 Use tools to get organized. Choose an option that you will actually use Back of the Envelope Gives you a rough idea of your situation Budget Worksheet Helps you prepare to meet with your consultant Online Tool Integrates expense information with overall plan 58

59 STEP 2 Cover essential expenses. Identify sources of lifetime income Social Security Pension plans Fixed income annuities* and use assets to make up any gap and solve for health care expenses. Regular withdrawals from reliable asset sources Consider long term care and life insurance 59 *Guarantees are subject to the claims-paying ability of the issuing insurance company.

60 Make the most of Social Security. When you start taking distributions may significantly impact your retirement income Age 62 Lower monthly benefit as much as 30% less Full Retirement Age Calculated full benefit based on your earnings history Age 70 Maximum benefit amount as much as 32% more 60 Source: ssa.gov.

61 STEP 3 Fund discretionary expenses Use your remaining portfolio assets Mutual funds Brokerage accounts IRAs, 403(b)s, 401(k)s Savings accounts Guaranteed income products to pay your discretionary expenses 61 Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. For illustrative purposes only. Diversification does not ensure a profit or guarantee against loss.

62 Be careful to monitor your withdrawal rate. Discretionary expenses, by definition, need to be flexible Sustainable Withdrawal Rate Generally between 4% and 5%, based on your age Special Occasions One-time events that you ve been planning for Emergencies Because you never know 62

63 STEP 4 Monitor your plan each year Meet with Fidelity at least once a year to: Discusses changes in your situation Review retirement income goals Determine availability of new income sources Reassess expenses Rebalance portfolio in light of risks Update beneficiary designations 63

64 Count on Fidelity to ask questions you might not have considered What if When this How do I We ll ask you how you are thinking about retirement topics We ll have open discussions about changes to your personal and financial situation We ll be there to help you navigate the challenges of living in retirement 64

65 Let's see how all the pieces fit together... 65

66 If you are part of a couple PROFILE This is Betsy and Robert Retired Ages 68 and 66 Conservative investors Robert has some health issues Betsy s mother is age 90 Live a moderate lifestyle 66 Hypothetical case studies are for illustrative purposes only and are not based on actual people.

67 think about the following. How to enjoy years in retirement Pursuing hobbies Embracing new phase How to best combine resources His, hers, ours 10 or more accounts Implications of the 5 key risks Longevity Health care Investment and tax strategies Portfolio for income Tax-efficient withdrawals 67 Hypothetical case studies are for illustrative purposes only and are not based on actual people.

68 If you are single PROFILE This is Julia... Retired Age 67 Moderate investor Healthy and on-the-go Planning for a 30-year retirement Lives an active lifestyle within her means Did you know 80% of men will end life married, 80% of women will end life single?* 68 Hypothetical case studies are for illustrative purposes only and are not based on actual people. * Get Financially Naked by Manisha Thakor and Sharon Kedar, 2009.

69 think about the following. Define yourself in retirement Social connections New adventures Implications of the 5 key risks Longevity Inflation How to manage resources Maximizing Social Security Ensuring plenty of cushion Investment and tax strategies Portfolio for income Tax-efficient withdrawals 69 Hypothetical case studies are for illustrative purposes only and are not based on actual people.

70 Resources from Fidelity Knowledgeable Workplace Planning & Guidance Consultants provide one-on-one guidance and answer your questions Viewpoints and educational information keep you current 70 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. For illustrative purposes only.

71 Getting started today In your packets: 71 For illustrative purposes only.

72 Make an appointment today Fidelity Planning and Guidance Consultants Our service is free and offered as an employee benefit to you. Make an appointment today to meet in person Or meet over the phone: Empower yourself and build confidence to make the best decisions for your retirement 72

73 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 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. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. 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 not 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. The information is for educational purposes only. 73

74 Methodology and Information Before investing, consider the investment objectives, risks, charges, and expenses of the fund or annuity and its investment options. Contact Fidelity 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 advisor regarding your specific legal or tax situation. Retirement Income Planner is an educational tool. 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