RealityCheckâ„¢ Will Your Retirement Income Last?
ONE
WHY RETIREMENT INCOME PLANNING?
Retirement income planning is perhaps the most critical aspect of wealth management for the simple reason that with today’s lifespans, a retirement can last up to 30 years or more. That’s a lot of missed paychecks to make up for! In fact, there is considerable anxiety about retirement income today. A recent survey of CPAs found the #1 retirement fear among their clients was running out of money. The next biggest concerns were also income-related: ability to maintain current lifestyle, meet rising health care costs and choosing the right asset withdrawal rate.
WHAT’S THE BIGGEST RETIREMENT WORRY? 45%
1. Run out of money
40%
2. Maintain current lifestyle
35%
3. Rising healthcare costs 4. Right asset withdrawal rate
30%
5. When to file for Social Security
25%
6. Paying taxes
20%
7. Assisted living costs
15%
8. Social Security insolvency
10%
9. Other
5%
Source: 2016 Mid-Year AICPA Personal Financial Planning Survey
0%
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The #1 retirement fear among clients is running out of money.
Wealth Enhancement Group | wealthenhancement.com
So exactly what is retirement income planning? Simply put, it’s a process designed to:
1 Estimate the retirement income generated by investments and other sources
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Determine if that income will be sufficient to meet your expenses
Help assure that your retirement income is sustainable for as long as you live
With all the variables and risks involved, however, the process is anything but simple. Projecting future income and expenses is fraught with difficult decisions and complex calculations. Even when it’s all done properly, your situation will very likely change in the years ahead—so your plan needs to change as well. That’s why it’s so important not only to have a great financial advisor, but to build a great relationship with that advisor over the long term.
Whether or not you are looking for an advisor right now, we strongly recommend you read through this guidebook, and we invite you to request our free RealityCheck™ analysis of retirement income as part of a free, no-obligation meeting at Wealth Enhancement Group.
We are happy to provide this review and analysis without any strings attached—even if all you want is an impartial second opinion on your current advisor’s plan. We realize how important retirement is to you, and we believe it’s only sensible to get a second opinion when it comes to life’s biggest decisions.
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TWO
THE PLANNING PROCESS AT A GLANCE
We talked about decisions and calculations. Here are some of the things you and your advisor will need to do in the retirement income planning process:
1 Estimate how much your retirement will cost. In the past, workers were told to assume an arbitrary percentage—say 70%—of pre-retirement income for what they would need in retirement. Perhaps this might have worked in the past, when lifestyles were more basic, but today you need to make individualized assumptions based on your needs and wants. For example: ill you stay in your current W home or downsize/relocate?
How extensively, and expensively, do you plan to travel?
Will you need to provide support to other family members?
What is your agenda, and your partner’s, for what you really want to achieve in retirement?
2 Predict likely spending changes during retirement. The common perception is that your spending will start to decline when you retire, and continue declining in a straight line. After all, you no longer spend money commuting to work, buying work clothes, lunches and so on. In reality, however, your expenses may actually go up when you retire, and then down, and then up again, in roller-coaster fashion. Here’s why: •
Expenses may rise in early retirement to satisfy our “bucket lists” of things like travel, boats and motorcycles. Planners call these the “Go Go Years” and Baby Boomers, in particular, are avid participants.
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Once we’ve satisfied these whims, expenses do tend to go down below pre-retirement levels.
•
Finally, thanks to longer lifespans, our living expenses rise again in the late retirement years to cover health care and related costs like home accessibility modifications.
64 I 66 64 I 68 I 66 I 70I 68 I 72I 70 I 74I 72 I 76I 74 I 78I 76 I 80I 78 I 82 I 80 I 84I 82 I 86I 84 I 86
AGE
4
AGE
LIFESTYLE NEEDS
WHAT YOUR SPENDING MAY ACTUALLY LOOK LIKE IN RETIREMENT
LIFESTYLE NEEDS
LIFESTYLE NEEDS
LIFESTYLE NEEDS
WHAT YOU THINK YOUR SPENDING WILL LOOK LIKE IN RETIREMENT
64 I 66 64 I 68 I 66 I 70I 68 I 72I 70 I 74I 72 I 76I 74 I 78I 76 I 80I 78 I 82 I 80 I 84I 82 I 86I 84 I 86
AGE
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AGE
3 Forecast the investment growth of your retirement assets. In the past few years, just about everyone’s retirement portfolio has done well. But future market corrections are inevitable. That’s why your advisor needs to forecast how much you’ll accumulate by retirement date, based on the long-term history of the markets, not the rosy expectations of the moment. As a result of this forecast, your advisor may suggest you change your expectations, your investments and/or the amount of money you are putting way for retirement—all to increase the likelihood of generating income in line with your spending needs.
4 Predict the income your assets will generate. Assume you’ve accumulated ample assets in your investment accounts. Before retiring, you’ll need to make a major financial transformation—from a strategy primarily seeking growth to one emphasizing income. As you can imagine, this is trickier in an era of historically low interest rates, which has been the case for the past several years. HISTORICAL CD INTEREST RATES – 1984-2016
If the era of low rates continues,
14.00% 5-year CD yield
12.25%
you and your financial advisor face the reality of being more
10.50% 8.75%
conservative in your income
7.00%
projections, and working harder
5.25%
to find investments that can
3.50%
achieve them.
1.75%
Source: Bankrate.com
0.00%
1985
1990
1995
2000
2005
2010
2015
5 Assess your other income sources, including pensions and Social Security. A pension, if you’re fortunate enough to have one, may be a key source of retirement income. Nearly everyone can at least count on Social Security. Both pensions and Social Security, however, require more choices and planning than most people imagine. In the case of Social Security, you need to make some crucial decisions—most notably, at what age to file for benefits—that can have a dramatic and irreversible impact on the lifetime total income you’ll receive. Pensions, too, can require you to make choices to maximize your benefits. In addition, some pension plans today face potential insolvency. You need to know how safe your pension is, how much of it is guaranteed, and how much isn’t. Some people will also have additional income sources in retirement, from rental property, consulting or other parttime work. These need to be included in your plans, of course.
6 Plan an asset withdrawal rate in line with your probable lifespan. Your withdrawal rate is the percent of total assets you take out of investment accounts—including dividends, interest…and principal. Few are fortunate enough to accumulate enough in assets to live on the dividends and interest alone; most will have to take out some principal each year as well. That’s fine if you plan carefully to be confident your money lasts a lifetime, but otherwise it could be a retiree’s worst fear: running out of money. Call today to schedule a free, no obligation meeting | 1-888-229-6705
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THREE
THE REALITYCHECK™ PROGRAM — HOW IT WORKS
At Wealth Enhancement Group, we’ve built something special: a software-based tool we call RealityCheck. It translates abstract investment statistics into a real-world projection: how much retirement income you’ll have to live on. It’s also a bit of a play on words because your retirement income needs to replace that paycheck you currently rely on. In short, RealityCheck looks at multiple aspects of your specific financial situation, and projects—once you retire— how much income you might be able to draw, while seeking to assure the income is sustainable for life.
Here are the elements that go into the RealityCheck approach. ELEMENT 1 — Estimating Social Security & Pension Benefits RealityCheck begins with a calculation of benefits based on the age you file for Social Security. You become eligible for the standard benefit at your Full Retirement Age (FRA); it’s between age 66 and 67 depending on your year of birth. It’s possible to file sooner than your FRA—as early as age 62—but this will permanently reduce the monthly benefit you are eligible to receive. On the other hand, if you elect to delay benefits until after FRA—up to the maximum age of 70—you will receive a permanently increased monthly benefit.
EARLY VS. LATE SOCIAL SECURITY BENEFIT ELECTION $1,400 $1,200
Full Retirement Age
$1,000 $800 $600
75%
80%
87%
93%
100%
108%
66
67
116%
124%
132%
$400 $200 $0 62
63
64
65
68
Source: Social Security Administration. Assumes birth 1943-1954 with hypothetical $1000/month FRA benefit.
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70
We’ll also help you analyze your pension benefits, if you have one, and discuss the various issues and risks that might affect those benefits. Here are some of those issues: When will you become eligible, and how does retirement date affect your benefits? What are the benefit options you can choose (such as lump sum vs. annuity) and how should you decide, based on life expectancy, risk profile and other factors? How likely is it that your employer will default on pension obligations, and if so, how much of your benefit is guaranteed or insured?
ELEMENT 2 — Analyzing Financial Assets Beyond your choice of investments, we look at the taxation status of varying types of accounts in which they’re held. For example: Taxable — such as an ordinary bank or brokerage account with no tax benefits. Tax-Deferred — such as a 401(k) or IRA in which you receive a tax deduction for making eligible contributions, and pay that deferred tax when you take distributions during retirement. Tax-Advantaged — such as a Roth account in which there is no tax deduction upon contribution, but your money grows tax-free within the account, and distributions during retirement are tax-free. To make things more complicated, there are many types of accounts within these categories, as shown in the illustration below. Some of these might benefit you, others might not. We can help you understand all these options.
A FEW OF THE MANY TAX-SAVING PLANS TO CHOOSE FROM
Tax-Deferred Plans
Tax Treatment
Tax-Advantaged Plans
Tax Treatment
401(k)
Contributions are
Roth IRA
Contributions are
investment growth
Roth 401(k)
Investment growth
is tax-free within the
Roth 403(b)
within the account is
529 College Plan
are tax-free when
403(b) Profit Sharing Traditional IRA
tax-deductible and
account. Distributions are taxable and
SEP IRA
Required Minimum
SIMPLE IRA
begin at age 701/2.
Solo 401(k)
Distributions (RMDs)
Coverdell Education Savings Account Health Savings Account (HSA) Flexible Spending Account (FSA)
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not tax-deductible.
tax-free. Distributions used according to plan guidelines.
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Many advisors, including ours at Wealth Enhancement Group, also recommend allocating your retirement assets into different “buckets” based on time horizon; in other words, when you will need to access the money. For example, it’s usually prudent to keep short-term money in cash and cash-like instruments that don’t fluctuate in value, while moving to higher-risk, higher-return investments for assets you are putting away for the longer-term. Finally, we look at your projected withdrawal rate, something we mentioned earlier as being so crucial in helping to assure you won’t run out of money. To help with these kinds of calculations we tend to look at long periods of history, as your own retirement could possibly extend over 30 years. The chart below shows how long $1 million invested in 1972 in a balanced (50% stocks, 50% bonds) portfolio would have lasted, given various withdrawal rates. It illustrates that even a relatively minor change in withdrawal rate can have big consequences. This is where having a financial advisor with expertise in retirement income planning can really pay off. We believe you cannot rely on a fixed withdrawal rate based on past history alone. We suggest a plan designed for your situation—one that’s dynamic so it changes with your needs and market realities.
$3,500,000
7%
6%
4%
5%
$3,000,000 $2,500,000 $2,000,000
At 4% there is money to spare 45 years later
$1,500,000 $1,000,000 $500,000 At 7% the money is gone in 12 years
$0
1972
At 6% it lasts 17 years
1984
1989
At 5% it lasts 24 years
1996
2016
Assumes this portfolio: 1972-1987: 23% SPX 500, 12% Russell 2000, 15% MSCI EAFE, 50% Barclays US Agg Bond Index. 1988-2016: 23% SPX 500, 12% Russell 2000, 10% MSCI EAFE, 5% MSCI MXEF, 50% Barclays US Agg Bond Index. Before 1979, used Ibbotson Associates small company index methodology to approximate Russell 2000 by lowest quantile market size portfolio from Fama French website. Before 1976 used Barclays US Gov Bond instead of US Agg Bond index.
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ELEMENT 3 — Forecasting Potential Growth We discussed the rate at which you take money out of investments in retirement, but for RealityCheck we also project the rate at which your money grows while it’s invested. In addition to types of investments you own, and the movements of the markets, there are many personal factors that can influence your rate of return. See some examples below:
RISK TOLERANCE
AMOUNT SAVED
LIFESTYLE
HEALTH
RETIREMENT AGE
We also analyze how your investments are diversified, using a method we call Effective Diversification. Unlike traditional allocation models relying on asset class alone, Effective Diversification looks at four underlying risk factors. For example, it might reveal that a portfolio that looks well-diversified (figure 1) is, in fact, excessively exposed to risks posed by a single company (figure 2). If this company were to fail, there could be dire consequences for this investor.
FIGURE 1
FIGURE 2
ASSET ALLOCATION
RISK CONTRIBUTION U.S. Large Cap U.S. Small Cap International Equity
Company Risk
EM Equity
Interest Rate Risk
U.S. Fixed Income
Purchasing Power Risk
High Yield Bonds
Manager Skill Risk
EM Debt Alternatives
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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ELEMENT 4 — Projecting Taxes and Health Care Expenses As you’ve probably heard before, it’s not what you make, it’s what you get to keep. (After taxes, that is.) While everyone can benefit from professional tax planning, it’s especially important in the years immediately preceding retirement, and in retirement itself. That’s when you can make choices that can result in lower taxable income, lower tax brackets, and more after-tax money to keep. Element 4 includes an estimation of retirement health care expenses. And you better sit down for this topic, because they’re going to be a lot higher than most people expect. According to one projection, a healthy, fit couple retiring at age 65 may spend over $400,000 on out-of-pocket health care costs, including Medicare and Medigap premiums, co-pays, deductibles and costs not usually covered by insurance, like eyeglasses, dental and hearing aids. The cost of long-term care insurance—or long-term care itself—isn’t included in this figure. Should you need to be in a nursing home, for example, the average cost is over $80,000 per year!
AVERAGE LIFETIME RETIREMENT HEALTH CARE PREMIUMS FOR A FIT, 65 YEAR-OLD COUPLE RETIRING IN 2017
$321,994
I ncluding Medicare Parts B & D coverage, as well as supplemental insurance
+ $82,259
Including deductibles, dental, vision, co-pays, hearing
$404,253 Source: HealthView Services 2017 Retirement Health Care Cost Data Report
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A healthy, fit couple retiring at age 65 may spend over $400,000 on out-of-pocket health care costs.
Wealth Enhancement Group | wealthenhancement.com
FOUR
A REALITYCHECK CASE STUDY
Let’s consider a hypothetical couple named John and Jane. They’re nearing retirement, and quite naturally, they’ve already done a good deal of planning for it. They heard about our RealityCheck program, and decided to come in for a free second opinion.
aJohn is 65 and wants to retire at 66 aJane is 60 and wants to retire at 65 aThey have $1 million in combined savings
Let’s start with some of their fundamentals:
• $200,000 in taxable accounts • $750,000 in tax-deferred accounts • $50,000 in tax-advantaged accounts
ANNUAL CONTRIBUTIONS BEFORE RETIREMENT: JOHN $5,000 in taxable accounts $25,000 in tax-deferred accounts JANE $5,000 in taxable accounts $15,000 in tax-deferred accounts
Here are their retirement income assumptions:
a$4,500 in Social Security a$3,500 in pensions a$1,000 in other income
And here are their investment assumptions:
a6.5% rate of return a4% annual withdrawal rate a30 years of distributions a3% rate of inflation
(rental property)
(per month, combined for both spouses)
RealityCheck transforms raw statistics into something you can easily relate to—just as a paycheck shows where you stand during your working years. Remember, however, that RealityCheck is just a ballpark estimate of what you might have to work with several years into the future; it’s no guarantee that you’ll achieve any specific income level or goal. Further, RealityCheck is just one tool to put your retirement assumptions to the test. You still need to go through the full retirement income planning process as described in Section Two of this guidebook. And we strongly recommend you do that with the help of the best financial advisor you can find.
See pages 12 & 13 for a detailed look at John and Jane’s RealityCheck report. Call today to schedule a free, no obligation meeting | 1-888-229-6705
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RealityCheck™
Period Beginning Period Ending
1/1/2022 1/1/2023
John and Jane Investor 1234 Main Street Minneapolis, MN 55418
1
INCOME SUMMARY Monthly
Annual
John's Social Security Benefit
2,500
30,000
Jane's Social Security Benefit
2,000
24,000
John's Pension Income
2,500
30,000
Jane's Pension Income
1,000
12,000
Other Income (wages, rent, etc.)
1,000
12,000
Portfolio Withdrawals*
4,050
48,600
13,050
156,600
Total Income (est.)
3
DEDUCTIONS
Federal Taxes (est.) State Taxes (est.)
STABILITY OF INCOME
2
Portfolio Withdrawals 31%
Fixed Income Sources 69%
4 Monthly
Annual
1,855
22,258
705
IMPORTANT DATES John
Jane
Current Age
65
60
8,458
Retirement Age
66
65
Medicare Part B & D Premiums (est.)
268
3,216
Soc. Sec. FRA
66
66 & 6 mo
Medicare Supp. Policy Premiums (est.)
600
7,200
1st RMD Year
2022
2027
3,428
41,132
Total Deductions (est.)
5
$
9,622
What's your RealityCheck™? On Track
Needs Adjustment
Changes Imperative
Estimated Monthly Cashflow
(Total monthly income less deductions above)
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For Illustration Purposes Only; Amounts shown in today's dollars
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INCOME SUMMARY
This section provides an overview of retirement income sources and estimated gross income. In John and Jane’s case, they’ll collect a gross (before taxes and deductions) amount of $13,050 per month.
STABILITY OF INCOME
It’s important to understand which income sources are subject to market risk, as you may be less likely to count on those for stable income. A solid 69% of John and Jane’s income is derived from fixed income sources like Social Security and pensions.
DEDUCTIONS
Even in retirement, you’ll be subject to various withholdings such as taxes and health care premiums. John and Jane’s deductions total $3,428 a month. This will be deducted from the total in Section One to determine their actual projected monthly take-home.
4
IMPORTANT DATES
This section describes key milestones, such as your goal retirement age. As you go through the RealityCheck exercise, be sure to ask your advisor to demonstrate how different retirement ages affect your estimated monthly cash flow. For example, if Jane wanted to retire in the same year in which John does, their monthly cash flow would be significantly lower.
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YOUR REALITYCHECK
Finally, the RealityCheck describes your projected net monthly income (essentially, Section One minus Section Three). Your advisor will use the figure in this section to determine if you’re on track to achieve your desired retirement lifestyle and suggest any pertinent changes.
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REMEMBER: There is no “magic number” here. Everyone’s situation is unique. In John and Jane’s case, their advisor may have determined that $9,622 is quite sufficient to sustain their lifestyle. Their advisor may even recommend Jane retire earlier. On the other hand, if John and Jane are accustomed to a lavish lifestyle and want to pursue first-class international travel, luxury cars and country club memberships, then $9,622 a month may not be sufficient. Their advisor may recommend a more aggressive asset allocation or that John and Jane spend more time in the workforce. Your advisor’s recommendations will depend largely on your specific retirement objectives.
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FIVE
TAKING THE NEXT STEP
The fact that you requested this guide, and read it through, indicates a high level of interest and concern for assuring your income in retirement. If so, there is no better way to seek reassurance than by getting a second opinion on your retirement plans from experienced professionals. May we suggest that Wealth Enhancement Group is eminently qualified to do this for you—with a free, no-obligation meeting including our RealityCheck analysis.
Call us today at 1-888-229-6705 to schedule your free, no-obligation meeting.
When it comes to something as crucial as retirement income planning, you want to have a highly experienced financial team on your side. Wealth Enhancement Group is precisely that: a team, not just an advisor. Here’s a little more about our approach, and the thinking behind it. Life doesn’t get easier as you accumulate wealth. It gets more complicated. Bigger decisions. Higher stakes. Greater uncertainty. To address this added complexity, some people hire several specialists at different firms. But we believe it’s more convenient, cost-effective and stress-free to put that team of advisors working together for you all in one place, using a 3-step process we call UniFi™.
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ALL THE SPECIALISTS YOU NEED, ALL IN ONE PLACE. If you’re overwhelmed by the high-stakes decisions related to Social Security and retirement income planning, we can help. At Wealth Enhancement Group, we simplify your entire financial life through our 3-step UniFi™ process and our Roundtable™ team approach.
UniFi
TM
A 3-step process designed to simplify your financial life
Organize.
Collaborate.
Guide.
We collect your financial information and consolidate it into your UniFi Inventory™.
Our Roundtable™ team approach helps ensure your financial plan is covered from every angle.
We clarify your options and put your plan into action, supporting you every step of the way.
• • • • • •
Financial planning Retirement income planning Tax strategies Investment management Estate planning Insurance
Just call us today at 1-888-229-6705 to learn more.
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Give your retirement plan a RealityCheck™ now.
CALL US TODAY. 1-888-229-6705 Schedule a free, no-obligation meeting to learn how our 3-step UniFi™ process simplifies your financial life. (For best service, please call between 8 a.m. and 5 p.m. CT)
Advisory services offered through Wealth Enhancement Advisory Services, LLC (WEAS), a registered investment advisor. Certain, but not all, investment advisor representatives (IARs) of WEAS are also registered representatives of and offer securities through LPL Financial, member FINRA/SIPC. Wealth Enhancement Group and WEAS are separate entities from LPL. Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC. 1-643971 10/2017