© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Retirement Income
Then and NowAsset allocation before and after retirement
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Before retirement Accumulation Long-term growth Current savings Time to recover Tax-deferred growth
After retirement Disbursement Long-term growth Current income Downturns immediately felt Minimum required distributions Taxes
Retirees Face Numerous Risks
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Withdrawals What rate is sustainable? Sequencing by tax bracket Managing RMDs
Retirementincome
Retiree spending Replacement ratio Essential versus lifestyle
expenses Medical expenses
Market volatility Uncertain returns and
income Impact of point in time Asset allocation and location
Longevity Long retirement horizons—
a couple aged 65 has 25%chance of a survivor livingto age 96
Solvency Pension plans and retiree
benefits—a thing of the past Social Security and Medicare
Savings Under-funded defined
contribution accounts Most Americans have an
enormous savings gap
Inflation Erodes the value of savings
and reduces returns Health care inflation 5%
Retirees Should Plan for a Long RetirementProbability of a 65-year-old living to various ages
0%
25%
50%
75%
100%
65 years 70 years 75 years 80 years 85 years 90 years 95 years 100 years 105 years
• Male
• Female
• At least one spouse78 86
85 91
91 96
81
88
93
Retirees Should Plan for a Long RetirementProbability of a 65-year-old living to various ages
Source: Annuity 2000 Mortality Tables. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
0
25
50
75
100%
65 years old 70 75 80 85 90 95 100 105
• Male
• Female
• At least one spouse
78 86
85 91
91 96
81
88
93
Personal Savings Expected to Play a Larger Role in RetirementSurvey of retirement income sources
Source: Employee Benefit Research Institute, 2008 Retirement Confidence Survey. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
0
20
60
100%
40
80 80%
94%
74%
36%
73%
48%
69%
34%
59%
53%
Social Security Employer-sponsored retirement savings
plan (ex. 401k)
Other personalsavings/investments
Individual RetirementAccount (IRA)
Employer-providedtraditional pension plan
• Workers (Expected)
• Retirees (Reported)
Social Security is Under Strain From Fewer Workers Per Retiree Ratio of workers to beneficiary
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
20501960 1970 1980 1990 2000 2010 2020 2030 2040
Historical Estimated
6.0
4.0
3.0
2.0
0.0
1.0
5.0
Social Security is Under Strain From Fewer Workers Per Retiree Ratio of workers to beneficiary
20501960 1970 1980 1990 2000 2010 2020 2030 2040
Historical Estimated
6.0
4.0
3.0
2.0
0.0
1.0
5.0
Inflation Significantly Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
$100k
80
60
40
20
0
0 Years 5 10 15 20 25 30
$73,742
$63,325
$54,379
$46,697
$40,101
$85,873
Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 1999–2008
•Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 10/1/2008Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
• Growth of $10,000• Cash flows
10-year fund total return = –0.50%10-year average investor return = –12.55%
$0
$5k
$10k
$15k
$20k
$25k
$30k
–$400m
$0
$400m
$600m
$800m
$1,000m
$1,200m
$1,400m
$1,600m
–$200m
$200m
20081999 2000 2001 2002 2003 2004 2005 2006 2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 10/1/2008
Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 1999–2008
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
• Growth of $10,000
• Cash flows10-year fund total return = –0.50%
10-year average investor return = –12.55%
0
5
10
15
20
25
$30k
–400
0
400
600
800
1,000
1,200
1,400
$1,600m
–200
200
20081999 2000 2001 2002 2003 2004 2005 2006 2007
Inflation and Taxes Reduce ReturnsCompound annual returns,1926–2008
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926–2008 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
CashBondsStocks
–2
0
2
4
6
8
10%
Return Afterinflation
After taxes& inflation
Return Afterinflation
After taxes& inflation
Return Afterinflation
After taxes& inflation
9.6%
6.4%
4.4%
5.7%
2.6%
0.5%
3.7%
0.7%
–0.7%
Sustainable Withdrawal Rates Vary Over TimeRolling 30-year periods 1926–2008
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
2
4
6
8
10
12%
Jan 1926Dec 1955
19762005
19311960
19361965
19411970
19461975
19511980
19561985
19611990
19661995
19712000
• 75% stocks/25% bonds• 50% stocks/50% bonds• 25% stocks/75% bonds
Withdrawal Rate You Can Sustain May Be Lower Than You ThinkAverage: 1926–2008
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
5.95%
5.11%
4.25%
0
1
2
3
4
5
6%
75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds
The Sequence of Returns Can Significantly Affect Your RetirementSequence of returns matters
Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and July 1994. Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
$500k
400
300
200
100
0 1973 1977 1981 1985 1989 1993 1993 1989Jul 94
1985 1981 1977 1973
0.5
1.0
1.5
2.0
$2.5 mil
Actual historical return sequence Reversed historical return sequence
Discussion of Simulation Criteria and Methodology
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Many of the following images were created using Monte Carlo parametric simulation. This model estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are the historical 1926–2008 figures. The risk and return of each asset class, cross-correlation, and annual average inflation over this time period follow. Stocks: risk 20.6%, return 11.7%; Bonds: risk 5.7%, return 5.6%; Correlation 0.00; Inflation: return 3.1%.
Note that other investments not considered may have characteristics similar or superior to those being analyzed. Each simulation produces 35 randomly selected return estimates consistent with the characteristics of the portfolio to estimate the return distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A limitation of the simulation model is that it assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary.
Interpreting Confidence Levels in Simulation
This table is intended to help interpret 50%, 75%, and 90% confidence levels illustrated in the following images. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009
50%
75%
90%(More conservative)
50%
75%
90%
25%
10%
50%
Confidence level Chance of exceeding Chance of falling short
Simulation Can Illustrate the Probability of Achieving OutcomesA visual interpretation of confidence levels in simulation
IMPORTANT: Projections generated by Morningstar 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 over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009
$10 mil
1 mil
100k
10k
65 Years old 70 75 80 85 90 95 100
• 50% confidence level• 75% confidence level• 90% confidence level
High Withdrawal Rates Will Quickly Deplete Your AssetsSimulated portfolio values (90% confidence level)
IMPORTANT: Projections generated by Morningstar 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 over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009
Withdrawal rate: 8% 7% 6% 5% 4%
$1 mil
500k
100
50
10
65 years old 100959085807570
Market Performance Affects Chance of Portfolio ShortfallSix percent inflation-adjusted withdrawal at three confidence levels
IMPORTANT: Projections generated by Morningstar 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 over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009
$1 mil
500k
100
50
10
65 years old 100959085807570
• 50% confidence level• 75% confidence level• 90% confidence level
Withdrawal Rates and Retirement Horizon Affect Ability to Meet GoalsProbability of meeting income needs throughout retirement
IMPORTANT: Projections generated by Morningstar 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 over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009
4%
Withdrawal rate:
5%
6%
7%
8%
3530252015 years into retirement
0
20
40
60
80
100%Prob.
Probability of Meeting Income NeedsVarious withdrawal rates and portfolio allocations over a 25-year retirement
IMPORTANT: Projections generated by Morningstar 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 over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009
86%
35%
4%
0%
0%
97%
71%
28%
5%
0%
95%
79%
52%
27%
11%
92%
79%
60%
42%
26%
88%
76%
62%
48%
36%
4% Withdrawal rate
5%
6%
7%
8%
100%Bonds
75% B25% S
50% B50% S
25% B75% S
100%Stocks
Providing for Retirement Income
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Retirement risks can be managed by intelligent combination of funds, stocks and bonds, and insurance products
How do you find the right asset mix for retirement? age and risk tolerance desire for consumption and bequest expenses and fees of product choices