GUIDANCE Retirement Income Strategies Distribution Planning for Today s Retirement
Agenda 1 The new retirement realities 2 The five risks of retirement 3 Essential income planning 4 Next steps 2
The new retirement realities Reality is merely an illusion, albeit a very persistent one. Albert Einstein
The new retirement realities People face tough challenges when preparing for retirement in today s economy Social Security Benefits Higher Personal Debt Greater Responsibility To Save Longer Retirement 20-30 years 4
What are the risks of retirement? Longevity Withdrawal Healthcare Investment Inflation 6
Longevity I look to the future because that s where I ll be spending the rest of my life. George Burns, actor and comedian
People are living longer > Centenarians number 80,000 in the U.S. > Pre-retirees are concerned about outliving their money > More time for various factors to affect retirement savings Source: New England Centenarian Study. Retrieved August 18, 2010. 8
You have options when it comes to managing longevity risk > Work longer, retire later > Reduce living expenses, save more > Adjust investment allocation 9
Healthcare It is health that is real wealth and not pieces of gold and silver. Mahatma Gandhi
A married couple entering retirement today can expect to spend at least $250,000 for healthcare premiums and medical expenses in retirement Source: Funding Savings Needed for Health Expenses for Persons Eligible for Medicare. Issue Brief No. 351. EBRI. December 2010. 11
The most common ways to pay for healthcare 12
You have options when it comes to managing healthcare risk > Review your family medical history > Investigate costs of long-term care facilities > Research long-term care insurance policies > Understand Medicare and Medicaid > Address healthcare risk in overall financial plan > Maintain a healthy lifestyle 13
Inflation risk A nickel ain t worth a dime anymore. The future ain t what it used to be. Yogi Berra, baseball hall of famer
Even modest inflation over time can have a major impact on your retirement 276% increase Source: Consumer Price Index. Bureau of Labor Statistics. September 2010. 15
You have options when it comes to managing inflation risk > Use a financial plan to help protect against inflation > Monitor your investment portfolio and diversify > Develop a spending strategy > Ask for professional advice 16
Investment risk Put all your eggs in one basket and watch that basket! Mark Twain, author
Investment risk is the chance actual return will be different than expected Investor categories Conservative Less risk Low potential High risk High potential Aggressive Moderately Conservative Moderate Moderately Aggressive 18
Establish investment goals > Know what to expect and need from your investments Write down specific goals Set realistic goals Set measurable goals Prioritize your goals 19
Determine your risk tolerance level > Your risk tolerance depends on a variety of factors Emotional temperament Current financial status Time horizon Prior investment experience 20
Calculate your retirement time horizon > How long before you retire? Start early, time is on your side Time is short if nearing retirement Retirement may last 30+ years 21
Formulate your own investment strategy > Why are you investing? Long-term growth Current income Capital preservation Minimize tax burden 22
Investment risk Select investment options Stocks Growth Increasing risk of loss Possibly increasing return through appreciation Bonds Fixed income Decreasing risk of loss Possibly decreasing return through loss of purchasing power Cash Asset classes and indexes from which their historical returns are derived are not managed funds, have no identifiable objectives and cannot be purchased. They do not provide an indicator of how individual investments performed in the past or how they will perform in the future. Performance of indexes does not reflect the deduction of any fees and charges and past performance of asset 23 classes does not guarantee the future performance of any investment.
Strategic asset allocation > Modern Portfolio Theory Neither asset allocation nor diversification ensures a profit or protect against market loss. Source: Markowitz, H. The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 24
Diversification helps reduce investment risk by mixing a variety of asset classes in a portfolio While diversification is a proven investment tool, it doesn t guarantee a profit or protect against loss. These illustrations are hypothetical and only an example. They do not reflect the return of any specific investments and are not a guarantee of future income. 25
Plan snapshot > Asset allocation analysis 26
You have options when it comes to managing investment risk > Establish your investment goals > Determine your risk tolerance > Calculate your retirement time horizon > Formulate your own investment strategy > Select investment options 27
Withdrawal risk The question isn t at what age I want to retire, it s at what income. George Foreman, boxing champion
When do withdrawals begin? > For 403(b) Your plan was established to encourage long-term savings. Withdrawals prior to age 59½ might be subject to federal restrictions and a 10% federal tax penalty. Income taxes are due upon withdrawal. 29
Most common ways to withdraw funds from a tax-qualified retirement plan 30
Lump-sum distribution Lump-sum amount $200,000 Withholding, 20% -$40,000 Additional income tax, 8% -$16,000 Federal tax penalty, 10% (for early withdrawal if under age 59½) -$20,000 Total tax -$76,000 Total distribution $124,000 Assumes a 28% tax bracket. 31
Systematic withdrawal option > Payouts are at set intervals > Federal tax penalty of 10% applies if under 59½* > Ordinary income taxes are due on amount withdrawn > Amount taken is limited during low account value > No guaranteed lifetime income *Federal tax penalty does not apply to distributions when part of substantially equal periodic payments over an individual s life expectancy or the later of a period of 5 years or attainment of age 59½. 32
Rollover: assets moved from one tax-qualified plan to another 33
Annuitization option 5072680 Keep in mind that annuitization is generally an irrevocable decision. 34
Annuities offer the option to turn assets into income you ll never outlive > What is an annuity? Savings contract with an insurance company Long-term investment for future retirement income Income payments at regular intervals in return for premiums paid Payments and earnings grow tax deferred Income for life and to beneficiaries even after your death Backed by the insurance company s claims-paying ability 35
A guaranteed minimum withdrawal benefit could help protect your income from market downturns > Payment is never less than original principal > Range of features available include lifetime income at a set annual percentage > Available on some annuities for an additional fee > Guarantees backed by the claims-paying ability of the insurance company Keep in mind that payout choices may differ among companies and policies. Check policy for specific income payout options. Withdrawals in excess of permitted free amounts may be subject to early withdrawal charges. Withdrawals are also subject to taxation as ordinary income and if made prior to age 59½, to a federal income tax penalty. 36
Guaranteed minimum withdrawal benefit hypothetical Year Age Rate of return Acct value before withdrawal 5% withdrawal amount Acct value after withdrawal 1 64 0% $100,000 $0 $100,000 2 65-2.60% $96,750 $5,000 $91,750 3 66-6.00% $85,632 $5,000 $80,632 4 67-11.59% $70,701 $5,000 $65,701 5 68 20.81% $78,821 $5,000 $73,821 6 69 8.66% $79,690 $5,000 $74,690 7 70 4.07% $77,239 $5,000 $72,239 8 71 12.10% $80,525 $5,000 $75,525 9 72 5.82% $79,497 $5,000 $74,497 10 73-24.03% $56,202 $5,000 $51,202 11 74 24.21% $63,241 $5,000 $58,241 This illustration is hypothetical and assumes past performance of the S&P 500 Index. Calculations based on actual rate of return experienced from 2000 2009. This illustration is not intended to be indicative of the performance of any specific investment. Indexes are unmanaged and you cannot invest directly in them. The performance illustrated is not indicative of future results. Source: Acumen. September 2010. 37
The Year-by-year five risks of retirement expenses, income and assets Sample plan: Year-by-year expenses 1 Earned/additional income has been reduced to account for retirement contributions. 2 Withdrawals from non-retirement stocks and stock mutual funds are taxed at an effective rate of 15%. All other taxes reflect an estimated effective tax rate of 16%. Actual taxes are likely to differ dramatically from the projected taxes shown, based on individual s unique tax situation. 3 This is the couple s current retirement plan balance. Below are the projected values of their retirement savings plan balances and expected contributions to retirement savings plans. Savings are grown at an assumed annual rate of 8.3%. 4 Nancy s employer-sponsored retirement plan assets become available in this year.
You have options when it comes to managing withdrawal risk > Identify distribution options > Analyze financial benefits > Evaluate tax implications 39
Essential income planning Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese. Gene Perret, comedy writer
Essential income planning What are the sources of retirement income? Sources: Social Security Averages 40% of Income of Elderly in 2008. News from EBRI. June 3, 2010. Deciding when to retire. Social Security Administration. SSA Publication No.05-10035. January 2010. 41
Essential income planning Essential Income Planning > Three-step process Legacy3 Generational planning Non-essential income need Travel, leisure, hobbies 2 Variable income Mutual funds, annuities, MM, CDs, Managed accounts Essential income need Guaranteed lifetime income Food, Shelter, Clothing, Transportation, Healthcare Pension, Social Security, GMWB, Annuitization, Other 53
Essential income planning Filling the income gap case study > Objective Income for life > Retirement nest egg of $500,000 $300,000 Dave s 401(k) $100,000 Julie s 403(b) $ 75,000 IRAs $ 25,000 CDs > Monthly income of $2,500 $ 800 Pension $1,700 Social Security > Monthly expenses $3,000 > Income gap $500 monthly 43
Essential income planning A lifetime income annuity could fill the gap using the least amount of assets Monthly Essential Expenses $3,000 $500 Lifetime Income Annuity $800 Pension $1,700 Social Security $107,000 $393,000 Remaining $500,000 Total Financial Assets This hypothetical example is for illustrative purposes only, based on illustrative calculation rates as of 10/01/10 for a Joint Life Option with 10 years certain policy for male and female, both age 65, $107,000 single premium. Actual amounts are dependent on illustrative calculation rates in effect at the time of policy issue. Income amounts are after-tax. 44
Plan snapshot > Probability analysis This graph uses a statistical model (a Monte Carlo analysis) to simulate a range of investment returns, similar to what might happen in the market. From this, a percentage expresses how likely you are to meet 100% of your goal in any year, factoring in market uncertainty. The lowest yearly percentage is the probability of meeting your goal over the entire period. In this example, the current portfolio is estimated to have a 74% chance of meeting the investor s essential retirement needs. Some statisticians consider a probability of success of 70% or greater to be a reasonable target. 45
The key is to have a strategy for life
Where to go from here? You have to be careful if you don t know where you re going because you might not get there. Yogi Berra, baseball hall of famer
Where to go from here? Work with a Financial Advisor > Prioritize your investment goals > Determine the time horizon needed to your achieve goals > Determine a financial strategy toward meeting your goals > Comprehensive financial planning > Retirement income planning 48
Where to go from here? Financial 360 Plan > What are the five major risks in retirement? Inflation Longevity Investment Healthcare Withdrawal 49
The information in this presentation is general in nature and may be subject to change. Neither The Variable Annuity Life Insurance Company (VALIC) nor its financial advisors or other representatives give legal or tax advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For legal or tax advice concerning your situation, consult your attorney or professional tax advisor. Securities and investment advisory services are offered by VALIC Financial Advisors, Inc., member FINRA and an SEC-registered investment advisor. VALIC represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company. Copyright The Variable Annuity Life Insurance Company. All rights reserved. VALIC.com VC23799 (09/2011) J83868 EE
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