The Future Of Retirement

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Information about The Future Of Retirement
Business & Mgmt

Published on August 5, 2009

Author: SocietyofActuaries

Source: slideshare.net

The Future of Retirement Houston Forum January 27, 2009 by Steve Vernon, FSA President, Rest-of-Life Communications

 

 

The Future of Retirement… is Work!

Review current state of retirement adequacy What individuals should do What employers and plan sponsors should do Today’s Agenda

Review current state of retirement adequacy

What individuals should do

What employers and plan sponsors should do

Large numbers of baby boom workforce won’t have the traditional retirement, due to: Inadequate financial resources Poor financial management skills Lack of affordable medical insurance Possible broken promises But that needn’t be a source of despair, particularly if we act now Overview

Large numbers of baby boom workforce won’t have the traditional retirement, due to:

Inadequate financial resources

Poor financial management skills

Lack of affordable medical insurance

Possible broken promises

But that needn’t be a source of despair, particularly if we act now

Present value of Social Security deficit (OASDI only): $6,500,000,000,000 Over $20,000 per citizen Benefit cutbacks and tax increases are inevitable Current State Social Security and Medicare Funding in Jeopardy

Present value of Social Security deficit (OASDI only):

$6,500,000,000,000

Over $20,000 per citizen

Benefit cutbacks and tax increases are inevitable

Retirement plan participation among workers age 55-64 49% of all workers 47% of private sector age and salary workers 77% of public sector wage and salary workers Source: EBRI Issue Brief #311, November 2007 Current State Only Half of Working Americans Covered by Retirement Plan at Work

Retirement plan participation among workers age 55-64

49% of all workers

47% of private sector age and salary workers

77% of public sector wage and salary workers

Source: EBRI Issue Brief #311, November 2007

Wealth Holdings of Typical Household Prior to Retirement $42,914 financial assets $45,244 defined contribution $88,158 total liquid assets $125,208 primary house $96,705 value of DB plan $221,913 total nonliquid assets $36,772 business and nonfinancial assets $346,833 grand total Source: 2004 Survey of Consumer Finances, U.S. Board of Governors of Federal Reserve System. Values are mean of middle 10 percent of households headed by people aged 55-64. Current State Existing Assets May Be Inadequate

Wealth Holdings of Typical Household Prior to Retirement

$42,914 financial assets

$45,244 defined contribution

$88,158 total liquid assets

$125,208 primary house

$96,705 value of DB plan

$221,913 total nonliquid assets

$36,772 business and nonfinancial assets

$346,833 grand total

Source: 2004 Survey of Consumer Finances, U.S. Board of Governors of Federal Reserve System. Values are mean of middle 10 percent of households headed by people aged 55-64.

Current State Existing 401(k) Balances May Be Inadequate Source: Average 401(k) balances for 20 million 401(k) participants, 12/312006. EBRI Issue Brief #308 Tenure in Years $190,593 $157,069 $93,636 $51,268 $31,914 60s $167,806 $174,272 $99,794 $54,491 $32,532 50s 30+ 20 - 30 10 - 20 5 - 10 2 - 5 Age Group

Current State Defined Benefit Plan Participation Has Fallen Dramatically in Private Sector % of workforce participation by plan type Source: Center for Retirement Research at Boston College

Retiree Medical Coverage Drops in Private Sector Source: The Kaiser Family Foundation, 2006 Employer Health Benefits % Employers offering coverage

Many Americans Lack Necessary Financial Management Skills Some Scary Statistics 47% completed retirement needs calculation 33% of workers who have not saved for retirement nonetheless feel confident their retirement will be secure 63% confident about having enough money in retirement Source: EBRI 2008 Retirement Confidence Survey

47% completed retirement needs calculation

33% of workers who have not saved for retirement nonetheless feel confident their retirement will be secure

63% confident about having enough money in retirement

Source: EBRI 2008 Retirement Confidence Survey

More Scary Statistics Reported retirement savings age 55+ 28% less than $10,000 23% $10,000 - $99,000 18% $100,000 - $249,999 23% $250,000 + Source: EBRI 2008 Retirement Confidence Survey Annual retirement income generated by 5% withdrawal percentage $10,000 => $500 $100,000 => $5,000 $250,000 => $12,500

Reported retirement savings age 55+

28% less than $10,000

23% $10,000 - $99,000

18% $100,000 - $249,999

23% $250,000 +

Source: EBRI 2008 Retirement Confidence Survey

Annual retirement income generated by 5% withdrawal percentage

$10,000 => $500

$100,000 => $5,000

$250,000 => $12,500

Amount Respondents Say Needed for Comfortable Retirement source: EBRI 2008 Retirement Confidence Survey 18% $1 million or more 23% $500,000 - $999,999 16% $250,000 - $499,999 25% Under $250,000 12% Don’t know

Methods for Determining Savings Needed for Retirement source: EBRI 2008 Retirement Confidence Survey 4% Other 2% Desired lifestyle 4% Worksheet or form 7% Online calculator 9% Read or hear amount 19% Do own estimate 19% Ask advisor 43% Guess

More Scary Statistics People overestimate safe withdrawal percentage to make savings last a lifetime 31% say 4% is safe Odds of outliving assets about 1 out of 13 for age 65 retirement 26% say 7% is safe Odds of outliving assets about 1 out of 2 or worse 29% say 10% is safe Odds of outliving assets 4 out of 5 or higher 14% say 15% is safe Odds of outliving assets near certainty source: 2008 MetLife Retirement Income IQ Test

People overestimate safe withdrawal percentage to make savings last a lifetime

31% say 4% is safe

Odds of outliving assets about 1 out of 13 for age 65 retirement

26% say 7% is safe

Odds of outliving assets about 1 out of 2 or worse

29% say 10% is safe

Odds of outliving assets 4 out of 5 or higher

14% say 15% is safe

Odds of outliving assets near certainty

source: 2008 MetLife Retirement Income IQ Test

Inevitable Conclusions More older people working longer than planned Is this a bad thing?

More older people working

longer than planned

Is this a bad thing?

Life Expectancy at Age 65 Source: Society of Actuaries

Workforce Participation Men Age 65+ Source: Bureau of Labor Statistics

Workers have lower death rates than retirees! Death rates for males

Workers have lower death rates than retirees!

What Should Individuals Do?

What Should Individuals Do?

Top 10 Retirement Mistakes Not creating a realistic plan. Half of older workers have not calculated what they need for retirement or budgeted for retirement expenses. Retiring too early with insufficient financial resources. A natural consequence of not preparing a needs analysis. Increasing reliance on 401(k)/account-based plans presents a significant challenge. Starting pension benefits too early. Most workers retire before maximizing their retirement income (usually the Normal Retirement Date).

Not creating a realistic plan.

Half of older workers have not calculated what they need for retirement or budgeted for retirement expenses.

Retiring too early with insufficient financial resources.

A natural consequence of not preparing a needs analysis.

Increasing reliance on 401(k)/account-based plans presents a significant challenge.

Starting pension benefits too early.

Most workers retire before maximizing their retirement income (usually the Normal Retirement Date).

Top 10 Retirement Mistakes Starting Social Security benefits too early. Half of Americans start at age 62, the earliest possible age with the lowest amount of monthly income. Drawing down 401(k)/retirement savings too rapidly. 4% to 5% per year considered safe withdrawal percentage. Many withdraw at much higher rates. Uninformed/poor selection of financial advisors and/or products.

Starting Social Security benefits too early.

Half of Americans start at age 62, the earliest possible age with the lowest amount of monthly income.

Drawing down 401(k)/retirement savings too rapidly.

4% to 5% per year considered safe withdrawal percentage.

Many withdraw at much higher rates.

Uninformed/poor selection of financial advisors and/or products.

Top 10 Retirement Mistakes Tapping home equity too early through home equity loans or reverse mortgages. Continuing unhealthy lifestyle which increases chances of expensive, debilitating conditions. Not having a strategies in place for medical and long-term care expenses. Living expenditures that are unnecessary, unrealistic or unaffordable, given all the above mistakes.

Tapping home equity too early through home equity loans or reverse mortgages.

Continuing unhealthy lifestyle which increases chances of expensive, debilitating conditions.

Not having a strategies in place for medical and long-term care expenses.

Living expenditures that are unnecessary, unrealistic or unaffordable, given all the above mistakes.

Top 10 Retirement Mistakes Plus One! Not having a good idea of what you want to do in your retirement years

Not having a good idea of

what you want to do

in your retirement years

Top 10 Retirement Risks Living too long and running out of money Recession/deflation reducing value of retirement savings Inflation eroding value of fixed pensions and fixed investments Dropping Interest rates resulting in reduced income Poor health Potentially ruinous bills for long-term care expenses Drop in needed wage income during retirement years Bad advice, fraud or theft Death of a spouse Loneliness, boredom, lack of purpose Addressing these risks helps prevent the most common mistakes shown previously.

Living too long and running out of money

Recession/deflation reducing value of retirement savings

Inflation eroding value of fixed pensions and fixed investments

Dropping Interest rates resulting in reduced income

Poor health

Potentially ruinous bills for long-term care expenses

Drop in needed wage income during retirement years

Bad advice, fraud or theft

Death of a spouse

Loneliness, boredom, lack of purpose

Addressing these risks helps prevent the most common mistakes shown previously.

10 Steps to Recession-Proof Your Retirement Years Take care of your health Protect against the risk of catastrophic conditions Consider working as long as you can Maximize Social Security income by delaying benefits as long as possible Maximize pension income by delaying benefits as long as possible Be prudent when withdrawing retirement savings Use simple, effective investment strategies Adjust living expenses to match your retirement income Develop a robust social portfolio Become a student of retirement and build a professional team These steps address the retirement risks and help prevent the most common mistakes shown previously.

Take care of your health

Protect against the risk of catastrophic conditions

Consider working as long as you can

Maximize Social Security income by delaying benefits as long as possible

Maximize pension income by delaying benefits as long as possible

Be prudent when withdrawing retirement savings

Use simple, effective investment strategies

Adjust living expenses to match your retirement income

Develop a robust social portfolio

Become a student of retirement and build a professional team

These steps address the retirement risks and help prevent the most common mistakes shown previously.

Simple solutions for closing the gap How much savings you need to generate a target retirement income last for life increase with inflation Safest - 33 times your desired income assumes you live on investment income leaves money for children and charities Conservative - 25 times your desired income modest spend-down of principal use if retire in late 50’s or early 60’s More aggressive - 20 times your desired income more rapid spend-down of principal use if retire in mid 60’s or later

How much savings you need to generate a target retirement income

last for life

increase with inflation

Safest - 33 times your desired income

assumes you live on investment income

leaves money for children and charities

Conservative - 25 times your desired income

modest spend-down of principal

use if retire in late 50’s or early 60’s

More aggressive - 20 times your desired income

more rapid spend-down of principal

use if retire in mid 60’s or later

Simple solutions for closing the gap How much savings you need to generate a target retirement income 33 times your desired income (safest) 25 times your desired income (conservative) 20 times your desired income (more aggressive) Example: if you need $20,000 in annual retirement income, here are suggested assets to generate this income safest: $20,000 x 33 = $660,000 conservative: $20,000 x 25 = $500,000 aggressive: $20,000 x 20 = $400,000

How much savings you need to generate a target retirement income

33 times your desired income (safest)

25 times your desired income (conservative)

20 times your desired income (more aggressive)

Example: if you need $20,000 in annual retirement income, here are suggested assets to generate this income

safest: $20,000 x 33 = $660,000

conservative: $20,000 x 25 = $500,000

aggressive: $20,000 x 20 = $400,000

One example: can I retire at 62? married couple, same age, spouse doesn’t work current earnings $75,000/year no pension expenses = $60,000 per year (80% replacement) social security = $25,080/year (at age 62) gap = $34,920/year safest: $1,152,360 (33 times gap) conservative: $873,000 (25 times gap) more aggressive: $698,400 (20 times gap) note: may need more savings for inflation and emergencies

expenses = $60,000 per year (80% replacement)

social security = $25,080/year

(at age 62)

gap = $34,920/year

safest: $1,152,360 (33 times gap)

conservative: $873,000 (25 times gap)

more aggressive: $698,400 (20 times gap)

note: may need more savings for inflation and emergencies

One example: can I retire at 65? married couple, same age, spouse doesn’t work current earnings $75,000/year no pension expenses = $60,000 per year (80% replacement) social security = $32,400/year (at age 65) gap = $27,600/year safest: $910,800 (33 times gap) conservative: $690,000 (25 times gap) more aggressive: $552,000 (20 times gap) note: may need more savings for inflation and emergencies

expenses = $60,000 per year (80% replacement)

social security = $32,400/year

(at age 65)

gap = $27,600/year

safest: $910,800 (33 times gap)

conservative: $690,000 (25 times gap)

more aggressive: $552,000 (20 times gap)

note: may need more savings for inflation and emergencies

One example: can I retire at 70? married couple, same age, spouse doesn’t work current earnings $75,000/year no pension expenses = $60,000 per year (80% replacement) social security = $46,560/year (at age 70) gap = $13,440/year safest: $443,520 (33 times gap) conservative: $336,000 (25 times gap) more aggressive: $268,800 (20 times gap) note: may need more savings for inflation and emergencies

expenses = $60,000 per year (80% replacement)

social security = $46,560/year

(at age 70)

gap = $13,440/year

safest: $443,520 (33 times gap)

conservative: $336,000 (25 times gap)

more aggressive: $268,800 (20 times gap)

note: may need more savings for inflation and emergencies

Another example: can I retire at 62? married couple, same age, spouse doesn’t work current earnings $75,000/year 15 years pension service expenses = $60,000 per year (80% replacement) social security = $25,080/year (at age 62) pension = $9,000/year note: not reduced for joint & survivor annuity gap = $25,920/year safest: $855,360 (33 times gap) conservative: $648,000 (25 times gap) more aggressive: $518,400 (20 times gap) note: may need more savings for inflation and emergencies

expenses = $60,000 per year (80% replacement)

social security = $25,080/year

(at age 62)

pension = $9,000/year

note: not reduced for joint & survivor annuity

gap = $25,920/year

safest: $855,360 (33 times gap)

conservative: $648,000 (25 times gap)

more aggressive: $518,400 (20 times gap)

note: may need more savings for inflation and emergencies

Another example: can I retire at 65? married couple, same age, spouse doesn’t work current earnings $75,000/year 18 years pension service expenses = $60,000 per year (80% replacement) social security = $32,400/year (at age 65) pension = $13,500/year note: not reduced for joint & survivor annuity gap = $14,100/year safest: $465,300 (33 times gap) conservative: $352,500 (25 times gap) more aggressive: $282,000 (20 times gap) note: may need more savings for inflation and emergencies

expenses = $60,000 per year (80% replacement)

social security = $32,400/year

(at age 65)

pension = $13,500/year

note: not reduced for joint & survivor annuity

gap = $14,100/year

safest: $465,300 (33 times gap)

conservative: $352,500 (25 times gap)

more aggressive: $282,000 (20 times gap)

note: may need more savings for inflation and emergencies

Another example: can I retire at 70? married couple, same age, spouse doesn’t work current earnings $75,000/year 23 years pension service expenses = $60,000 per year (80% replacement) social security = $46,560/year (at age 70) pension = $17,250/year note: not reduced for joint & survivor annuity surplus = $3,810/year

expenses = $60,000 per year (80% replacement)

social security = $46,560/year

(at age 70)

pension = $17,250/year

note: not reduced for joint & survivor annuity

surplus = $3,810/year

If financial resources are inadequate for traditional retirement, inevitable solution some combination of: Working in retirement years Postponing retirement Reducing living expenses before retirement to enable higher saving Reducing living expenses during retirement Tough Choices for Individuals

If financial resources are inadequate for traditional retirement, inevitable solution some combination of:

Working in retirement years

Postponing retirement

Reducing living expenses before retirement to enable higher saving

Reducing living expenses during retirement

If traditional retirement isn’t feasible, how about: Long life, Health, and Prosperity… … which may include some work and fine tuning living expenses New Life Goals?

If traditional retirement isn’t feasible,

how about:

Long life, Health, and Prosperity…

… which may include some work and

fine tuning living expenses

What Can Employers and Plan Sponsors Do? Be prepared for more older workers working longer Flexible work hours and policies Part-time workers Keep skills up-to-date Maintain health of older workers Provide respect and safety Best use life experience of older workers

Be prepared for more older workers working longer

Flexible work hours and policies

Part-time workers

Keep skills up-to-date

Maintain health of older workers

Provide respect and safety

Best use life experience of older workers

What Can Employers and Plan Sponsors Do? Extend retirement and medical plans to part-time workers Provide “bridge” medical coverage until Medicare eligibility at age 65 Optimize retirement benefits Strategic tradeoff of pay vs. benefits?

Extend retirement and medical plans to part-time workers

Provide “bridge” medical coverage until Medicare eligibility at age 65

Optimize retirement benefits

Strategic tradeoff of pay vs. benefits?

What Can Employers and Plan Sponsors Do? Strong education program Enlist support of senior leadership Use simple, effective messages Use a marketing approach, appealing to emotions, but based on solid research and analysis Use multiple media, coordinated approach traditional print email newsletters posters videos online

Strong education program

Enlist support of senior leadership

Use simple, effective messages

Use a marketing approach, appealing to emotions, but based on solid research and analysis

Use multiple media, coordinated approach

traditional print

email newsletters

posters

videos

online

Employees and Participants Need Help (But Not Advice) with These Questions How much money do I need to retire? How do I draw down retirement savings? What are effective choices for DB benefits? When should I draw Social Security? How long might I live? How do I protect against the threat of large bills for medical and long-term care expenses? What are strategies for balancing income and expenses in my retirement years? What is the role of part-time or full-time work in retirement? How can I work with financial advisors? What are considerations for selecting financial products and services?

How much money do I need to retire?

How do I draw down retirement savings?

What are effective choices for DB benefits?

When should I draw Social Security?

How long might I live?

How do I protect against the threat of large bills for medical and long-term care expenses?

What are strategies for balancing income and expenses in my retirement years?

What is the role of part-time or full-time work in retirement?

How can I work with financial advisors?

What are considerations for selecting financial products and services?

Will these be your employees and plan participants in 10 years?

What is the desirable level of involvement in the health of our employees and participants? How much should we help employees and participants with retirement planning decisions? What role should we play in setting expectations for employees and participants? Should we still enable or encourage expectations for a traditional retirement, relying exclusively on financial resources and promises, for periods of 20, 30 or 40 years? Tough Questions Facing Employers and Plan Sponsors

What is the desirable level of involvement in the health of our employees and participants?

How much should we help employees and participants with retirement planning decisions?

What role should we play in setting expectations for employees and participants?

Should we still enable or encourage expectations for a traditional retirement, relying exclusively on financial resources and promises, for periods of 20, 30 or 40 years?

Learn more! www.restoflife.com [email_address]

www.restoflife.com

[email_address]

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