the tax-smart strategies of successful women in retirement€¦ · ppt file · web view ·...

Not FDIC insured May lose valueNo bank guarantee

Strategies for a sustainable income in retirement

Using asset allocation and risk management strategies to meet retirement goals.

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Topics for today• Five key challenges to prepare for in retirement

• Achieving a successful retirement

• Putting an income plan into practice

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Five challenges we can prepare for• Longevity

• Inflation

• Health-care costs

• Public policy changes

• Investment risks and volatility

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65 70 75 80 85 90 95 100

Longevity: Plan on spending25 to 30 years in retirementYour lifespan probability after reaching age 65

Sources: National Center for Health Statistics, 2011; U.S. Life Tables, September 2015. Most recent data available.

Age

100% will live to age 65


82% will live to age 75 68%

will live to age 80 49%

will live to age 85 28%

will live to age 90



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Even low levels of inflation make a difference over timeAmount needed to maintain purchasing power based on:

• 30 years of saving

• $50,000 income

2% 4% 6%

Inflation rate

$90,568

$162,169

$287,174

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19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

20152016

Health insurance premiums

213%

Worker’s earnings

60%

Overall inflation

46%

Health-care costs have outpaced earnings and inflation over the past 15 years ...

• Source: Kaiser Family Foundation, September 2016.

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What about Social Security?

Source: Social Security Administration 2016 Annual Report.

1950 Today Today 2034

There were 16 U.S. workers for each Social Security beneficiary

2.8 workers for each beneficiary

Benefits owed currently exceed taxes collected

The Social Securitytrust fund willbe exhausted

$$ $0

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Total debt remains high based on historical normsFederal debt held by the public (% of GP), 1940–2016

Source: Congressional Budget Office, Updated Budget Projections: August 2014; does not include intra-governmental debt.

2016

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Achieving a successful retirement• Diversify to manage volatility and achieve growth

• Make sure you’re not withdrawing too much

• Consider adding guaranteed income

• Be smart about taxes

• Address other potential risks

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Choose the right withdrawal rate

This example assumes a 90% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2015 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

Stocks 60%

Bonds 30%Cash 10%

Percentage of your portfolio’s original balance withdrawn each year

Allocation

10%will last10 years

9%will last11 years

4%will last33 years

5%will last20 years

6%will last16 years

7%will last13 years

8%will last12 years

3%will last50 years

How long would your money have lasted?

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Address longevity risk

These illustrations are based on a rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical returns from 1926 to 2014 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

Historical success of three asset mixes(assumes 5% withdrawal rate, adjusted for inflation annually)

Portfolio type Allocation 20 years 30 years 40 years

Conservative20% stocks50% bonds30% cash

89% 30% 6%

Balanced60% stocks30% bonds10% cash

96% 77% 55%

Growth80% stocks20% bonds 0% cash

96% 79% 68%

80%–100% probability

60%–79% probability

0–59% probability

The information at left shows how various asset allocations affect a portfolio’s expected longevity. It assumes that 5% of the original account balance is withdrawn each year and that withdrawals were increased each year to account for inflation.

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Markets: When you retire can make a big differenceAssumptions

• $1 million nest egg

• 5% withdrawn annually and increased each year to keep up with inflation

• Invested in a portfolio of 60% stocks, 30% bonds, and 10% cash

• Results over a 10-year time frame

$1M

$1,731,989 $1,861,592

$472,238

Sequence-of-returns risk refers to the adverse effect that negative investment returns in the early stages of retirement can have on a nest egg.

Retirein 1980

Retirein 1990

Retirein 2000

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Consider diversifying more broadly in retirement

U.S. large-cap stocks

Commodities

U.S. small-cap stocks

U.S. high-yield bonds

Developed country international

stocks

Emerging-market stocks

U.S. Treasury bills

Global investment-grade bonds

Inflation-protected securities

Hedge funds

Real estate investment trusts

U.S. growth and value stocks

Floating-ratebank loans

U.S. investment-grade bonds

Emerging-market bonds

Traditional asset classes are defined as those included in traditional balanced portfolios, such as stocks, bonds, and cash, and that have been widely owned by individual investors since the post-war emergence of modern portfolio theory.

Modern asset classes are specialized investments that were created or have become more accessible since the advent of broader market participation by individual investors due to tax-advantaged retirement saving

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Income: Importance of guaranteed sources

Example• Balanced portfolio — 50% stocks,

40% bonds, 10% cash• 5% withdrawn annually• Guaranteed income based on

current immediate annuity rates

This example is based on rolling historical time period analysis and does not account for the effect of taxes, nor does it represent the performance of any Putnam fund or product, which will fluctuate. Assumes historical rolling periods from 1926 to 2015 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given a 5% withdrawal rate. A one-year rolling average is used to calculate performance of the 20-year bonds. Guaranteed income is based on a single premium, immediate annuity for a 65-year-old male assuming single life expectancy at current (August 2016) annuity rates. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

Probability of portfolio survival over 30 years

No guaranteed income

25% guaranteed income

70%93%

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Consider a bucket approachShort-term income bucket

Meet immediate cash-flow needs, emergency fund, etc.

• Cash

• CDs/money market

• Short-term bonds

• Immediate annuities

• Social Security, pension income

• Wages

Mid-term income bucket

Mix of growth and income, replenish short-term bucket, guard against market volatility

• Bonds

• Deferred annuities

• Absolute return funds

• Asset allocation funds, balanced funds

Long-term income bucket

Inflation hedge, address longevity risk

• Growth stocks/funds

• Real estate

• Commodities

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Pay attention to order

This is not intended as tax advice. Please consult your independent tax advisor regarding tax ramifications.

Dividend and capital gains rates reflect highest marginal tax rate (20%) plus the 3.8% net investment income surtax.

Type of income Taxability

Social Security May be partially taxable as ordinary income

Pension income Taxed as ordinary incomeIRA and 401(k) distributions Ordinary income rates Dividend income 23.8% rateLong-term capital gains 23.8% rateLiquidation of investment principal Not subject to taxation

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Use a Roth strategy to control your tax bill• Source of tax-free income in retirement– Access to tax-free source of income provides more options on where to

draw income from

• No mandatory withdrawals at age 70½

• Having a portion of retirement savings in a Roth IRA can provide a hedge against the threat of rising taxes in retirement

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Preserve your wealth in retirement through tax efficient withdrawals

Retirement situation Proposed course of action

Lower marginal tax rate Draw from traditional retirement accounts to maximize use of lower relative tax bracket, which may help to reduce RMDs at age 70½

Higher marginal tax rate Use tax-free or taxable assets to avoid higher income tax rates and potentially take advantage of lower capital gains rates

Significant appreciation in a taxable account

If leaving an inheritance, preserve taxable assets to take advantage of “stepped-up” cost basis at death

Working in retirement Avoid traditional retirement accounts, which will increase overall income (higher income could trigger taxes on Social Security benefits)

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Address other specific risksPost-retirement risk Risk management tool

Unexpected health-care costsMedigap supplemental coverage orhealth-care “emergency fund”

Loss of ability to live independently Long-term-care insurance or health-care “emergency fund”

Catastrophic medical orlong-term-care costs Life or long-term-care insurance

Lawsuits or creditors Trusts

Spending the children’s inheritance Life insurance/irrevocable lifeinsurance trust

Inability to fulfill charitable intentCharitable remainder trust orcharitable annuity

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Putting an income plan into practice

Expense approach:Matching income sources with expenses

Time-frame approach:Considering a bucket strategy

Expenses

Income

Short-term income bucket

Meet immediate cash-flow needs, emergency fund, etc.

Mid-term income bucket

Mix of growth and income, replenish short-term bucket, guard against market volatility

Long-term income bucket

Inflation hedge, address longevity risk

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Match potential sources of income to expenses in retirement

Expense Income source

Essential

AnnuitiesSocial SecurityDividendsPension incomeInterestRequired minimum distributions

DiscretionaryEmployment incomePortfolio withdrawalsPersonal savings

UnforeseenReal estateLife insuranceLong-term-care insurance

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Closing thoughtsThe retirement landscape will continue to evolve

It’s critical for investors to prepare for certain (and uncertain!) risks

A thoughtful income strategy can help you address these challenges and attain the lifestyle in retirement you desire

Meet with your financial advisor to assess your personal situation

✓✓

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Additional resourcesOn the web• AARP, www.aarp.org

• Social Security Administration, www.ssa.gov

• American Savings Education Council, www.asec.org

• ElderWeb, www.elderweb.com

• Medicare, www.medicare.gov

• National Association of Home Care Providers, www.nahc.org

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Putnam Retail Managementputnam.com

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

the tax-smart strategies of successful women in retirement€¦ · ppt file · web view ·...

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