2009 Morgan Stanley Smith Barney LLC. Member SIPC.

Transcription

1 Preparing for Retirement: What You Need to Know 2009 Morgan Stanley Smith Barney LLC. Member SIPC.

2 Preparing for Retirement Envision the Next Chapter Understand the Risks Develop a Plan 2

3 Envisioning the Next Chapter How You Want to Spend Your Retirement Years 2009 Morgan Stanley Smith Barney LLC. Member SIPC.

4 Your Idea of Retirement What does retirement mean to you? Picture collecting your last paycheck. How old will you be? What will you spend it on? What feelings do you have about possibly working in retirement? Do you feel healthy and are there any reasons you wouldn t assume normal life expectancy? Have you thought about long-term care arrangements and how you will pay for it? Are your parents currently alive? Do you expect you will need to help them out? Are there charities you would like to support? How would you like family and friends to remember you? 4

5 Target a Retirement Date But Stay Flexible The average retiree today retired at 62, but the average worker expects to retire at Delaying can have a big impact Higher Social Security benefits Ability to keep making retirement plan contributions Continued growth potential for existing savings Shortens the time retirement savings must last % Increase in Annual Retirement Income 2 60% 50% 40% 30% 20% 10% 0% 9% 56% Work one more year Work five more years 1 Data: Employee Benefit Research Institute, Will More of Us Work Forever? The 2006 Retirement Confidence Survey, EBRI Issue Brief No. 292, April Data: Urban Institute, Should People Work Longer, and Will They? December

6 It Can Pay to Delay Social Security Your monthly Social Security benefits can vary substantially depending on when you elect to start receiving benefits. The chart assumes a benefit of $1,000 at a full retirement age of 66. Monthly Benefit Amount Data: Social Security Administration 2009 Age You Choose to Start Receiving Benefits 6

7 How Long Will Your Retirement Last? Estimating how long retirement will last is a combination of guesswork, current health, family history and individual habits Use average life expectancy for your age as a starting point Adjust for personal health, habits (smoking, drinking, exercise, current fitness), family history and longevity Add 3+ years (the more years added, the more conservative your planning will be) Use individual life expectancy for the spouse expected to live the longest, or the life expectancy for a couple % Chance of Survival for a 65 year-old* To Age Male Female % 93.9% % 85.0% % 72.3% % 55.8% % 34.8% % 15.6% % 5.0% *Data: Annuity 2000 Mortality Table, Society of Actuaries 7

8 What Will You Be Paying For? Budget Worksheet Housing Mortgage/Rent/Condominium Fees Property Taxes Utilities Homeowner s Insurance Household Maintenance Food At Home (Groceries) Dining Out Transportation Vehicle Purchases or Lease Payments Auto Insurance & Taxes Fuel & Maintenance Public Transportation Health Care & Insurance Co-pays, Deductibles, Medical Services Medicare / Medigap Premiums Drugs & Medical Supplies Dental, Hearing, Vision Life Insurance Long-term Care Insurance Disability Insurance Personal Care Clothing Products & Services (haircuts & dry cleaning) Other Gifts/Charitable Contributions Entertainment/Recreation Travel/Hobbies Family Care (Parents & Children) Income Taxes Total Estimated Retirement Expenses Essential Discretionary 8

9 What Assets Will Be Available To Fund Your Retirement? Net Worth Worksheet Financial Assets Cash Taxable Fixed Income Tax-free Fixed Income Stocks Other Total $ Personal Assets Homes Vehicles Jewelry Other Property Total $ Retirement Assets 401(k) Pension Plans IRAs Insurance Policies Other Total $ Liabilities Mortgages Credit Card Other Loans Total $ Total Assets - Liabilities = Net Worth 9

10 How Will Your Spending Change Over Time? Will your spending stay the same for 30 years or more? Break your expected spending into three phases The active phase (First 8 12 years) Spontaneous desires requiring cash flow (uneven needs for income) Relatively healthy period The deceleration phase (Next 8 12 years) Spending may level out, usually lower income needs Becoming less active The maintenance phase (Last 8 12 years) Generally steady cash flow needs Income needs may rise as health care costs increase Possible long-term care expenses 10

11 Where Will Your Retirement Income Come From? Social Security Pension Working in retirement Rental income Inheritance Retirement plan distributions Investment Income Interest Dividends Appreciation Principal 19% Sources of Retirement Income 18% 2% 21% 40% Earned Income Pensions* Social Security Investment Income Other Data: Morningstar, 3/1/07 *Includes all defined benefit and defined contribution plans 11

12 Understanding the Risks Challenges to achieving a successful retirement 2009 Morgan Stanley Smith Barney LLC. Member SIPC.

13 Potential Pitfalls Longevity Risk Planning for a longer-than-expected life Inflation Risk Preserving purchasing power over time Market Risk Timing of a bear market Asset Allocation Risk Managing a portfolio with multiple objectives Spending Risk Funding your lifestyle without depleting your portfolio Health Care Costs Catastrophic illness or long-term care Family Responsibilities Aging parents and boomerang children Decline in Guaranteed Income Uncertainty of traditional retirement income sources 13

14 Longevity Risk (Risk of Outliving Your Money) Life expectancy numbers are an average, meaning some people will die prior to their life expectancy and some will live beyond it. Life expectancy is not static and increases steadily with age. Life Expectancy for a 65-year-old Source: Annuity 2000 Mortality Table, Society of Actuaries (Figure assumes a person is in good health) *Couple both age 65 14

15 Inflation Risk $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Purchasing Power of $100,000 $82,035 $74,409 $67,297 $67,556 $55,368 $55,207 $45,639 $41,199 $30,832 Year 5 Year 10 Year 15 Year 20 Year 25 Year 30 2% Inflation 3% Inflation 4% Inflation For illustrative purposes only. 15

16 Market Risk (Risk of Bad Timing) Portfolio A Portfolio Value (start at $1 million) Return Year 1 $736, % Year 2 $552, % Year 3 $525, % Year 4 $515, % Year 5 $406, % Year 6 $386, % Year 7 $334, % Year 8 $270, % Year 9 $201, % Year 10 $127, % Year 11 $44, % Year 12 $ % Year 13 $ % Year 14 $ % Year 15 $ % Portfolio B Portfolio Value (start at $1 million) Return Year 1 $1,133, % Year 2 $1,224, % Year 3 $1,353, % Year 4 $1,542, % Year 5 $1,686, % Year 6 $1,772, % Year 7 $1,812, % Year 8 $1,836, % Year 9 $1,889, % Year 10 $2,090, % Year 11 $1,825, % Year 12 $1,951, % Year 13 $2,001, % Year 14 $1,556, % Year 15 $1,139, % Average annual return = 6.12% Average annual return = 6.12% Data: Morgan Stanley Smith Barney. For illustrative purposes only. Assumes annual withdrawal of 6% (indexed for inflation at 4% per year). Assumes withdrawals are taken on first of every year. Portfolio value as of December 31 st. Past performance is no guarantee of future results. 16 Actual results may vary. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors.

17 Asset Allocation Risk Too much stock can expose portfolio to bear market risk and loss of capital and income Too much cash and fixed income can expose portfolio to inflation risk and limit upside potential Preservation of Purchasing Power (growth) Capital Preservation (principal protection) Retirement Portfolio Objectives Reliability of Income (income) 17

18 Spending Risk Excessive withdrawals can exhaust a portfolio too soon On the other hand, being too conservative may cause you to unnecessarily sacrifice a higher standard of living in retirement Withdrawal rate should be based on: Life expectancy Asset allocation Retirement date Portfolio value 18

19 Health Care Costs Retiree medical costs rising faster than general inflation Declining retiree medical coverage by employers Possible shortfall ahead for Medicare and Medicaid 60% of Americans who reach age 65 will need long-term care at some point 1 Saving Need for Health Care Expenses 2 Age at Death For an Individual For a Couple 80 $115,000 $230, $162,000 $324, $214,000 $428, $275,000 $550, $343,000 $686,000 1 Data: Centers for Medicare and Medicaid Services 2 Data: EBRI Issue Brief No.295 (July 2006). Assumes retirement at age 65. Savings needed for employment-based health premiums, Medicare part B premiums, and out-of-pocket costs assuming a 4% after-tax rate of return and 7% increase in health care costs. Couple costs assume they live to the same age. 19

20 Family Responsibilities - The Sandwich Generation Responsibilities for children and parents can be a burden. 20

21 Uncertainty of Traditional Retirement Income Sources Pension plans in decline Fate of Social Security uncertain The normal retirement age for Social Security has risen from 65 for those born in 1937 and before, to 67 if you were born in 1960 or later. Data: Employee Benefit Research Institute 21

22 Developing a Plan Don t Panic! 2009 Morgan Stanley Smith Barney LLC. Member SIPC.

23 It s Never Too Late to Develop a Financial Plan: Envision: the kind of lifestyle you enjoy, what you want to accomplish, what worries you, what you re passionate about Prepare: a written plan that addresses your retirement income and cash flow needs, investments, borrowing, asset protection and other areas of your financial life Implement: your plan with an objective approach, paying special attention to how the various parts of your plan affect, enhance and integrate with each other 23

24 Financial Planning: Withdrawal Rates How much can you withdraw from your nest-egg each year? 10 Years Annual Rate of Withdrawal Adjusted for 4% Inflation 13 Years 18 Years 32 Years Years Nest-egg May Last Source: Morgan Stanley Smith Barney. Hypothetical illustration of withdrawing varying percentages annually from a retirement account. Assumes a 6% annualized rate of growth in the account, a 4% rate of inflation applied to the withdrawal amounts and a distribution of the entire needed amount in the final year. Past performance is no guarantee of future results. Actual results may vary. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. 24

25 Financial Planning: Income Replacement How much will you need to support yourself (and any dependents) through the rest of your life? For example: Will a nest-egg of $400,000 generate enough income each year at a 4% withdrawal rate? 4% of $400,000 is $16,000 distributed in the first year. Would this amount (adjusted annually to keep up with inflation), combined with Social Security and any other sources of income be enough to replace about 75% of your current income? 25

26 Financial Planning: Sustaining Your Lifestyle How much money do you need to fund 75% of your current lifestyle? Assume a pre-retirement annual income of $50,000 and a retirement nest-egg of $400, % of $50,000 = $37,500 or $3,125 monthly Distribute 4% from retirement account annually = $1,333 monthly (first year) Social Security = $1,348 monthly (retiring at age 66) Monthly deficit = $444 Monthly Deficit $444 $1,348 from Social Security $1,333 from Retirement Account Source: Morgan Stanley Smith Barney. Hypothetical illustration of sources of income in retirement. Social Security Benefits estimated from Social Security Quick Calculator at Social Security website; calculated using $50,000 current earnings, age 66 in 2009 at retirement, using Today s Dollars. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. 26

27 Next Steps Pre-retirement Checklist Establish a retirement income plan Create a cushion for financial emergencies and bear markets Talk to your employer about your post-retirement benefits Check on your Social Security benefits Update and execute all beneficiary forms, estate documents and powers of attorney Budget for health care and long-term care needs Consider reducing debt Review life insurance policies 27

28 Important Disclosures Although statements of facts in this report have been obtained from and are based upon sources the Firm believes to be reliable, including the Internal Revenue Service, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All options and estimates included in this report constitute the Firm s judgment as of the date of the report and are subject to change without notice. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. This material, or any portion thereof, may be reproduced with prior written permission from Morgan Stanley Smith Barney Morgan Stanley Smith Barney LLC. Member SIPC. 28

29 Preparing for Retirement 2009 Morgan Stanley Smith Barney LLC. Member SIPC.