retirement redefined: income planning for the modern...
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Not FDIC Insured May Lose Value No Bank Guarantee
Retirement Redefined:Income Planning for the Modern Retiree
Challenges and choices facing pre-retiree baby boomers
For participants.
2
• Modern retiree
• Critical factors
• Five key risks
• Retirement income planning
Retirement Income Planning Agenda
3
You Are Not Alone
1. Based on births (1946–1964), U.S. Department of Commerce, Bureau of Census.
2. Fidelity Advisor 2013 Survey of Investors at Retirement, July 2013. Conducted by Research Now on behalf of Fidelity Investments, this survey included 1,886
investors between the ages of 50 and 75 with investable assets of $100,000 or more. Fidelity Investments was not identified as the survey’s sponsor.
81% of pre-retirees consider it “important”
or “very important”
that they have a retirement
income plan2
78 million baby
boomers
In 2011, the first of
77% of pre-retirees have no retirement
income plan2
turned 651
81% 77%
Many issues face members of the largest generation in American history as they contemplate retirement.
As a result, most have put off planning.
MODERN RETIREE
4
A New Retirement Scenario
Traditional Retiree
Has a pension plan and
health care coverage
Self-funded personal assets
to cover lifetime income and
health care
Modern Retiree
Retirement Income Planning
MODERN RETIREE
5
Retirement Is Changing
Hypothetical examples.
Modern Retiree
Traditional Retiree
• Twice married
• Three grown children
and four grandchildren
from first marriage
• Two teenagers from
second marriage
MORE COMPLEX "SANDWICH GENERATION"
RELATIVELY UNCOMPLICATED
• Married 1973
• Two children
• Retired 2010
• Company pension
• Empty-nester
• No mortgage
• No college payments
• Facing college bills
• SEP-IRA
• Not sure when he will
retire
• Aging parents
• Mortgage
Born 1950
Born 1950
MODERN RETIREE
6
1 2 3 4
Planning Your RetirementCRITICAL FACTORS
When Where How What
Earlier retirement
lowers lifetime
Social Security
benefit, increasing
investment
income need.
Cost of living,
health and long-
term care,
and taxes vary
nationwide.
Income needs
impacted by
working part-time,
staying active,
travel plans, not
downsizing.
Source of income?
Social Security,
guaranteed pension,
annuities, 401(k)/IRA,
real estate financial
gain from downsizing?
8
Deciding “When” Affects Benefits CRITICAL FACTORS
Monthly benefit amounts differ based on the age you decide to start receiving benefits.
This hypothetical example assumes a benefit of $1,000 at a full retirement age of 66
AGE YOU CHOOSE TO START RECEIVING BENEFITS
MO
NT
HLY
BE
NE
FIT
AM
OU
NT
$800$866
$1,000$1,080
$1,160$1,240
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
62 63 64 65 66 67 68 69 70
$1,320
$750
$933
Source: “When To Start Receiving Retirement Benefits,” SSA Publication No. 05-10147 (socialsecurity.gov).
• Spousal benefits could be reduced in monthly income
and survival benefits
• Children under 18 may be eligible for survivor benefits
Decision impacts family
9
Impact When You Keep WorkingCRITICAL FACTORS
Social Security is complex.
Learn more at socialsecurity.gov/planners
Social Security benefits until
full retirement age
• You receive the maximum
amount due you
• Any continuing employment
earnings will not have an
adverse effect on your Social
Security benefits
Social Security benefits while
continuing to work
• You could experience a
50% reduction in your Social
Security benefits
If you don’t take If you take
10
Five Key Risks to Lifetime Income
You may live longer than you think. Plan accordingly.
Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume a person is in good health.
Male, age 65 Living to 85 Living to 92
Female, age 65 Living to 88 Living to 94
Couple, both age 65 One will live to 92 One will live to 97
Many people will exceed the
average life expectancy
for their age group.
Here are their odds:50% 25%
FIVE KEY RISKS
11
Inflation
The effect of inflation on purchasing power.
All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% (the historical average from 1926 to 2013 was 3%) to show the effects of
inflation over time. Actual inflation rates may be more or less and will vary.
FIVE KEY RISKS
Even at a low inflation rate of 2%, in 25 years $50,000 will buy as much as $30,477 buys today
$60,000
DO
LLA
RS
$50,000
$40,000
$30,000
$20,000
$10,000
$0
Today 5 Years 10 Years 15 Years 20 Years 25 Years
YEARS FROM RETIREMENT START DATE
$50,000
$18,756 at 4% inflation
$23,880 at 3% inflation
$30,477 at 2% inflation
12
Asset Allocation
Retirees may need stocks for the long haul.
This graph is for illustrative purposes only and does not represent actual or implied performance of any investment option. All indices are unmanaged and it is not
possible to invest directly in an index. The graph represents the average annual return percentage for the investment categories shown from 1926 to 2013 from
Ibbotson Associates. Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. Domestic stocks are
represented by the Standard & Poor’s 500 Index (S&P 500®). Foreign stocks (international equities) are represented by the MSCI® EAFE® Index for the period from
1970 to the last calendar year. Foreign stocks prior to 1970 are represented by the S&P 500. Bonds are represented by the U.S. Intermediate Government Bond
Index. Short-term investments are represented by U.S. Treasury bills. Inflation is represented by the Consumer Price Index. U.S. stock prices are more volatile than
those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuation than stocks but provide lower potential long-term
returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. See “Methodology and
information” on slide 25 for further details. Asset allocation does not ensure a profit or protect against a loss.
FIVE KEY RISKS
COMPARISON OF AVERAGE ANNUAL RISING COSTS VS. AVERAGE ANNUAL INVESTMENT RETURNS 1926–2013
EXAMPLES OF TARGET ASSET MIXES DESIGNED TO MEET VARIOUS GOALS
Conservative Balanced Growth Aggressive growth
14% Domestic stock
6% Foreign stock
50% Bonds
30% Short-term
35% Domestic stock
15% Foreign stock
40% Bonds
10% Short-term
49% Domestic stock
21% Foreign stock
25% Bonds
5% Short-term
60% Domestic stock
25% Foreign stock
15% Bonds
AVERAGE ANNUAL PORTFOLIO RETURNS (1926–2013)
Inflation
Healthcare costs*
3.0%
7.96%8.97% 9.64%
6.2%
RISING COSTS
* Data for health care costs is from the Centers
for Medicare and Medicaid Services, National
Health Expenditures Estimates 2012–2022.
6.1%
13
Rate of Withdrawal
Higher withdrawal rates can derail your plan no matter what your asset mix
Source: Fidelity Investments. Hypothetical value of assets held in an untaxed balanced portfolio and growth portfolio and inf lation-adjusted withdrawal rates as
specified. Stocks, bonds, and short-term investments are represented by the S&P 500, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury Bills,
respectively. Returns for stocks, bonds, short-term investments, and inflation are based on the risk premium approach. Actual rates of return may be more or less. The
chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results.
See “Methodology and information” on slides 25 and 26 for further details.
FIVE KEY RISKS
0
10
20
30
40
6% 8% 10%
10 yrs 9 yrs
32 yrs
36 yrs
13 yrs
19 yrs
12 yrs
17 yrs
GROWTH PORTFOLIO
70% Stocks
25% Bonds
5% Short-term
YE
AR
S P
OR
TF
OLIO
MA
Y L
AS
T IN
AN
EX
TE
ND
ED
PO
OR
MA
RK
ET
INFLATION-ADJUSTED WITHDRAWAL RATE
BALANCED PORTFOLIO
50% Stocks
40% Bonds
10% Short-term
4%
14
Health Care Costs
1. Fidelity Benefits Consulting, 2015. The estimate assumes no employer-provided retiree health care coverage and applies to retirees with traditional Medicare
insurance coverage with life expectancies in retirement of 17 years for men and 20 years for women.
2. Centers for Medicare and Medicaid Services, National Health Expenditures Projections 2012–2022.
FIVE KEY RISKS
$245,000 Lifetime out-of-pocket health
care expense estimate for a
65-year-old couple1
6.2%annually from 2015–20222
And costs are expected to rise
16
Understanding Health Care Costs
Out-of-pocket
prescription
drug expenses
Out-of-pocket
for Medicare,
Part B & D
premiums
People may underestimate these
costs by more than 50%2
$245,000Out-of-pocket health care expense
estimate for a 65-year-old couple2
23%
33%
1. Fidelity Benefits Consulting, 2015. Based on a hypothetical couple retiring in 2015, 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 employer-provided 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. 2. Fidelity-sponsored HSA Survey, conducted by
GfK Public Affairs & Corporate Communications, February 2013. The HSA survey was conducted by GfK Public Affairs & Corporate Communications from February
4 to 20, 2013. The study was conducted among a nationally representative sample of 1,836 U.S. adults ages 25–64 with a household income of $25,000 or more.
Respondents also have primary or shared responsibility for household financial decisions and receive health care benefits through their own or their spouse's
employer. Nearly half (48%) of the pre-retirees aged 55–64 surveyed estimated they would need only $50,000 for health care expenses in retirement.
FIVE KEY RISKS
Medicare
cost-sharing
provisions
44%
18
Pre-retirees Need Help
The Fidelity Advisor 2013 Retirement Income survey found that:
4 5of pre-retirees
have no retirement
income plan
of pre-retirees
don’t know how
long to plan for
pre-retirees know
it’s important to
have a plan
out of
Almost
5177%
Source: Fidelity Advisor 2013 Survey of Investors at Retirement, July 2013. Conducted by Research Now on behalf of Fidelity Investments, this survey included 1,886
investors between the ages of 50 and 75 with investable assets of $100,000 or more. Fidelity Investments was not identified as the survey's sponsor
RETIREMENT INCOME PLANNING
19
Getting Started
Emphasizes budget and expense projections
in the near term rather than 20 or 30 years out
Can be created quickly
Starts by focusing on the first three years of retirement
A Simplified Retirement Income Plan:
RETIREMENT INCOME PLANNING
20
Budgeting
The Fidelity budgeting discussion worksheet:
• Uncovers clients’ ongoing cash outflows on big-
ticket items and guaranteed income as they
enter retirement
• Allows you to project clients’ future expenses
based on gathered information
• Presents a near-term view of their financial future
RETIREMENT INCOME PLANNING
21
And inflows
Cash outflows today
Budgeting Information
Review with your advisor:
• HousingMortgages, equity lines, utilities and taxes, planned
upgrades or renovations
• Health careMedicare or employer-funded plan, life and long-term
care insurance
• Family and educationDependent children, existing and anticipated school and
college expenses
• Lifestyle and otherDo you plan to travel extensively or buy a big-ticket item
such as a boat or RV?
• AssetsSocial Security, defined benefit plans, 401(k), savings,
annuities, and real estate
RETIREMENT INCOME PLANNING
22
Taking Action
Generate a retirement income plan composed of
three separate pools of money:
RETIREMENT INCOME PLANNING
Liquidity Capital Preservation Long-term Growth
• Focuses on near-term needs
• Provides for short-term cash flow
• Invests for lower risk
• Provides for expenses and “unknowns” 4 to 7 years out
• Invests for growth without excessive risk
• Provides for financial needs 8+ years out
• Affords time to weather market volatility
• Invests in U.S. and international equities and fixed-income
23
Check your health care expense estimates
Bucket essential and discretionary expenses
Review your sources of income
Create a plan to ensure that your health care
and other essential expenses are covered
Your Advisor Can Help You:
Develop a financial strategy for discretionary spending
Develop a Written Plan With Your AdvisorRETIREMENT INCOME PLANNING
24
• Medicare.gov
• Eldercare.gov
• AARP.org
• State Health Insurance Programs (SHIPtalk.org)
• Benefitscheckup.org
• SocialSecurity.gov
Sources to Help Make Informed Decisions
Online resources:
For guidance, look to your experienced, dedicated financial advisor:
Stephen Karam
Karam Financial Group
Phone: 508-679-2704
Karam Financial Group and Fidelity Investments are independent entities.
25
Methodology and Information (Slides 12 & 13)IMPORTANT: Any projections and simulations are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Over time, results may vary with each use. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest
income. Although past performance does not guarantee future results, it may be useful in comparing alternate investment strategies over the long term.
Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical illustrations.
On slide 12: Generally, among asset classes, stocks may present more short-term risk and volatility than bonds or short-term instruments but may provide greater
potential return over the long term. Although bonds generally present less short-term risk and volatility than stocks, bonds contain interest rate risk (as interest rates
rise, bond prices usually fall); the risk of issuer default; and inflation risk. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only
slightly above the inflation rate. Foreign investments, especially those in emerging markets, involve greater risk but may offer greater potential return than U.S.
investments.
The target asset mixes are hypothetical models and illustrate certain examples of many possible combinations of investment al locations that could help an investor
pursue his or her goals; these target asset mixes do not constitute investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). You
should choose your own investments based on your particular objectives and situation.
On slide 13: Information is not intended to project or predict the present or future value of the actual holdings in a participant’s portfolio or the performance of a given
model portfolio of securities. The calculations and results generated for this chart are based on historical monthly performance from January 1972 through December
2012 from Ibbotson Associates. Stocks, bonds, and short-term investments are represented by the S&P 500, U.S. Intermediate-Term Government Bonds, and U.S.
30-day T-bills, respectively. The estimated returns for the stock and bond asset classes are based on a “risk premium” approach. The risk premium for these asset
classes is defined as their historical returns relative to a 10-year Treasury bond. Risk premium estimates for stocks and bonds are each added to the 10-year Treasury
yield. Short-term investment asset class returns are based on a historical risk premium added to an inflation rate, which is calculated by subtracting the TIPS (Treasury
Inflation-Protected Securities) yield from the 10-year Treasury yield. This method results in what we believe to be an appropriate estimate of the market inflation rate
for the next 10 years. Each year (or as necessary), these assumptions are updated to reflect any movement in the actual inflation rate. Volatility of the stocks
(domestic and foreign), bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from
Ibbotson Associates, Inc. Stocks, bonds, and short-term are represented by the S&P 500, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury bills,
respectively. Annual returns assume the reinvestment of interest income and dividends, no transaction costs, no management or servicing fees, and the rebalancing of
the portfolio every year.
The information highlights varying levels of stocks, bonds, and short-term investments. The purpose of these hypothetical illustrations is to show how portfolios may be
created with different risk and return characteristics to help meet a participant’s goals. You should choose your own investments based on your particular objectives
and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your
goals. You should also consider all of your investments when making your investment choices.
Index Definitions
The S&P 500 Index is a registered service mark of the McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its
affiliates. It 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.
U.S. Intermediate Government Bond Index is an unmanaged index that includes the reinvestment of interest income.
MSCI EAFE (Europe, Australasia, Far East) Index is an unmanaged market capitalization-weighted index that is designed to represent the performance of developed
stock markets outside the United States and Canada and assumes the highest possible withholding taxes are applicable.
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.
U.S. Treasury bills are backed by the full faith and credit of the U.S. government.
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