Certificate Course in Retirement Income Management

2. Certificate Course in Retirement Income Management Helping retirement professionals convert retirement assets into lifetime income Sponsored by: The National Retirement Planning Coalition (NRPC) Developed by: The National Association of Variable Annuities (NAVA) and The International Foundation for Retirement Education (InFRE)

3. Where Are We Today? On the crest of an enormous change in a retirement market that includes: • More than $10 trillion in plan assets1 • Current retirees under age 70 with $3.3 trillion in wealth, excluding homes2 • 38% of defined benefit plans allowing retirees to choose a payout other than an annuity3 • Pension portability and proposed legislation that dramatically increases the need for advisor services. Sources: 1EBRI; 2SRI Consulting Business Intelligence , 2003; 3GAO Report on Private Pensions, July, 2003

4. The Challenges We Face • Retirement assets must last over a longer period of time than in the past. • Retirees need help aggregating and converting assets into a lifetime income stream. • There is no “one size fits all” solution to retirement income management. • Employers will demand qualifications. • Most financial advisors and planners lack the necessary retirement knowledge and expertise.

5. What Does All This Mean? • Many retirees might experience a dramatic decline in their standard of living. • Demand will shift from accumulating assets to converting assets into lifetime retirement income streams. • Advisors qualified in retirement income management will meet with the greatest success.

6. What We Need to Do: Apply a Process The Retirement Income Management Process

7. Even With a Process, It Isn’t Easy! “One of the most complex economic calculations that most workers will ever undertake is, without doubt, deciding how much to save for retirement.” • Alan Greenspan, 2002 National Summit on Retirement Savings Determining the annual amount to consume in retirement is even more complex.

8. A Typical Case Retirement AssetsJimLinda Age 67 64 Health average/poor good Pension $24,000/yr none 401(k), 457, 403(b) $148,000 $36,000 Bank IRA (CDs) $28,000 $5,600 Taxable mutual funds $75,000 $0 Vacation home $49,000 (1/2) $49,000 Def. fixed annuity $25,000 $25,000 Long term care ins. None None Retiree health insurance None Yes

9. Workshop Overview • Purpose: to help you know how to convert retirement assets into an optimized lifetime income stream. • Goal: to learn a sound process to maximize a retiree’s chance of establishing a sustainable lifestyle from their retirement resources. “Make sure I don’t run out of money before I run out of life.”

10. The Retirement Income Management Process • Assess retiree needs • Identify retirement income resources • Manage retirement risks • Identify distribution, tax and estate issues and opportunities • Convert resources into income • Maintain and update the plan

11. Workshop Agenda—Day 1 • How to assess retiree needs • How to determine resources available • How to identify and manage risks faced by retirees • Explore income and estate tax rules and planning opportunities for distributions

12. Workshop Agenda—Day 2 • How to identify appropriate withdrawal options to convert savings into income • How to maintain and update the plan • Practice case studies

13. Step 1: Assess Retiree Needs

14. Lifestyle Stages • Early retirement • Ages 55 to 70½ • Phased retirement, including bridge jobs • Mid retirement • Ages 70½ to 85 • Required minimum distribution (RMD) rules apply • Mandatory annuitization may begin • Late retirement (85+) Source: “A Stages Model for Planning Retirement Income Distribution” by Michael Everett and Murray Anthony. Used with permission.

15. Age 65 and Older:“Working” or “Retired”? Source: “American Perceptions of Aging in the 21st Century,” 2002 update, The National Council on Aging. Used with permission.

16. Money Stages & Changing Priorities • Early retirement • Increased spending (“go go”) • Mid retirement • Slower spending (“slow go”) • Late retirement • What spending (“no go”) • Lifestyle spending • Suits to casual wear • World Travel to RVing in Arizona

17. Emotional Issues • Deciding when to retire • Health insurance • Social Security • Enough money • Overall health status • Coordinating retirement dates with a spouse • Not everyone retires on January 1st • Peer actions and attitudes

18. Reasons to Retire % Source: “American Perceptions of Aging in the 21st Century,” 2002 update, The National Council on Aging. Used with permission.

19. What Are You Retiring To? Are you ready for a month of Saturdays? “Sooner or later I’m going to die, but I’m not going to retire.” - Margaret Mead

20. Retirement Income Needs Analysis Total Retirement Income Needs Essential Needs Discretionary Needs Guaranteed Income Supplemental Income Social Security Pensions Immediate Annuities Taxable Assets Personal Retirement Accounts Wages Source: Adapted from Cerulli Associates

21. Expenses for a High-Income Retiree Source: Bureau of Labor Statistics Total expenses = $76,592

22. Expenses for a Middle-Income Retiree Source: Bureau of Labor Statistics Total expenses = $41,711

23. Calculating the Annual Income Need: Two Approaches • Build the budget based on need “I want to spend X dollars per year for the rest of my life. How can I do that?” • Budget based on resources “I have X dollars of assets and income; how much can I afford to spend each year and not outlive my income?”

24. Pitfalls of Money Projections • Example: client age 60, has $1 million, will earn earn 8% over a life expectancy of 25 years. Q: How much can he spend per year? A: $86,740 according to the calculator • What are the problems with this approach? • Dangerous assumptions • Mortality • Pattern of market returns

25. Carving Out the Income Need • Segregate the expense amount each year • Annual lump sum • Quarterly or monthly • Flexibility to adjust annual expense need • Sleep at night money/emergency fund

26. How the Annual Income Need May Change • Replacement ratios: rules of thumb • 70-100% of current income • For survivor, 75% of couple retiree income • Real income • Set $ amount increased annually for inflation • Set % of assets (e.g. 4%)

27. Tools for Assessing Retiree Needs • Data gathering for a retiree • Key documents checklist • Location of key documents • Questions an advisor should ask

28. Meet the Goldins • Ages 72 (Mr.) and 68 (Mrs.) Both in good health • Expect $20,000 per year in combined Social Security benefits; neither works now • He receives a $10,000 per year pension • His IRA is worth $600,000; hers is worth $500,000; their home is worth $700,000 • They want an annual income of $95,000 including $57,000 in essential expenses.

29. Relating to Retirees • Stereotypical language • Defining “elderly” • Defining “retirement” • Stereotyping ages • Counseling skills • Generational clients

30. Retirees “Do I have enough to live on for the rest of my life?” “How should my money be invested?” “What do I spend first?” Advisors What are all the factors to consider for income planning? How is a retiree’s situation different from a client who is still working? What products work for a retiree? Changing Gears

31. A Lifetime of Learned Behaviors • May need to change some behaviors at retirement: • From accumulating to spending mindset • Challenging conventional wisdom: “Never spend your principal” • Or not • Continuing to save while in retirement • Putting “spenders” on a budget via annuitization

32. What retirees want Control and flexibility for their money Asset allocation advice for years Simple, understandable products and processes What the market offers Products that lock them into a lifetime decision Asset allocation advice for accumulation years Very complex choices with multiple options Wants vs. Reality Source: Diversified Services Group, Inc.

33. The Retiree’s Perspective • “I want to spend X dollars per month for the rest of my life.” • “I have Y dollars saved up.” • “Tell me how I can get there.” • “Keep me on track over time.”