Certificate Course in
Retirement Income Management
Helping retirement professionals
convert retirement assets
into lifetime income
Sponsored by: The National Retirement Planning Coalition (NRPC)
Developed by:
The National Association of Variable Annuities (NAVA) and
The International Foundation for Retirement Education (InFRE)
Where Are We Today?
On the crest of an enormous change in
a retirement market that includes:
• More than $10 trillion in plan assets1
• Current retirees under age 70 with $3.3 trillion
in wealth, excluding homes2
• 38% of defined benefit plans allowing retirees
to choose a payout other than an annuity3
• Pension portability and proposed legislation
that dramatically increases the need for
advisor services.
Sources: 1EBRI; 2SRI Consulting Business Intelligence , 2003; 3GAO Report on Private Pensions, July, 2003
The Challenges We Face
• Retirement assets must last over a longer period
of time than in the past.
• Retirees need help aggregating and converting
assets into a lifetime income stream.
• There is no “one size fits all” solution to retirement
income management.
• Employers will demand qualifications.
• Most financial advisors and planners lack the
necessary retirement knowledge and expertise.
What Does All This Mean?
• Many retirees might experience a dramatic
decline in their standard of living.
• Demand will shift from accumulating assets
to converting assets into lifetime retirement
income streams.
• Advisors qualified in retirement income
management will meet with the greatest
success.
What We Need to Do:
Apply a Process
The Retirement Income Management Process
Retirement Income Plan
Optimization Process
(Lifetime Income)
(Tax Planning)
(Retirement Vehicles)
Client Needs
Client Resources
Retirement Risks
Even With a Process,
It Isn’t Easy!
“One of the most complex economic
calculations that most workers will ever
undertake is, without doubt, deciding
how much to save for retirement.”
– Alan Greenspan, 2002 National Summit on Retirement Savings
Determining the annual amount to
consume in retirement is even more
complex.
A Typical Case
Retirement Assets
Age
Health
Pension
401(k), 457, 403(b)
Bank IRA (CDs)
Taxable mutual funds
Vacation home
Def. fixed annuity
Long term care ins.
Retiree health insurance
Jim
67
average/poor
$24,000/yr
$148,000
$28,000
$75,000
$49,000 (1/2)
$25,000
None
None
Linda
64
good
none
$36,000
$5,600
$0
$49,000
$25,000
None
Yes
Workshop Overview
• Purpose: to help you know how to convert
retirement assets into an optimized lifetime
income stream.
• Goal: to learn a sound process to maximize a
retiree’s chance of establishing a sustainable
lifestyle from their retirement resources.
“Make sure I don’t run out of money before I run out
of life.”
The Retirement
Income Management Process
1.
2.
3.
4.
5.
6.
Assess retiree needs
Identify retirement income resources
Manage retirement risks
Identify distribution, tax and estate
issues and opportunities
Convert resources into income
Maintain and update the plan
Workshop Agenda—Day 1
• How to assess retiree needs
• How to determine resources available
• How to identify and manage risks faced
by retirees
• Explore income and estate tax rules and
planning opportunities for distributions
Workshop Agenda—Day 2
• How to identify appropriate withdrawal
options to convert savings into income
• How to maintain and update the plan
• Practice case studies
Step 1: Assess Retiree Needs
Lifestyle Stages
• Early retirement
– Ages 55 to 70½
– Phased retirement, including bridge jobs
• Mid retirement
– Ages 70½ to 85
– Required minimum distribution (RMD) rules apply
– Mandatory annuitization may begin
• Late retirement (85+)
Source: “A Stages Model for Planning Retirement Income Distribution” by
Michael Everett and Murray Anthony. Used with permission.
Age 65 and Older:
“Working” or “Retired”?
19%
Fully retired
Working & retired
Not retired
23%
Source: “American Perceptions of Aging in the 21st Century,” 2002
update, The National Council on Aging. Used with permission.
58%
Money Stages & Changing
Priorities
• Early retirement
– Increased spending (“go go”)
• Mid retirement
– Slower spending (“slow go”)
• Late retirement
– What spending (“no go”)
• Lifestyle spending
– Suits to casual wear
– World Travel to RVing in Arizona
Emotional Issues
• Deciding when to retire
–
–
–
–
–
–
–
Health insurance
Social Security
Enough money
Overall health status
Coordinating retirement dates with a spouse
Not everyone retires on January 1st
Peer actions and attitudes
Reasons to Retire
80
70
60
%
50
40
% Reason
30
20
10
0
Social
Security
Enough
Money
Certain
Age
Source: “American Perceptions of Aging in the 21st Century,” 2002
update, The National Council on Aging. Used with permission.
Declining
Health
What Are You Retiring To?
Are you ready for a month of Saturdays?
“Sooner or later I’m going to die, but I’m
not going to retire.”
- Margaret Mead
Retirement Income
Needs Analysis
Total Retirement Income Needs
Essential Needs
Guaranteed Income
Discretionary Needs
Supplemental Income
Social Security
Taxable Assets
Pensions
Personal Retirement Accounts
Immediate Annuities
Wages
Source: Adapted from Cerulli Associates
Expenses for a High-Income Retiree
Taxes
12%
Miscellaneous
3%
Food
11% Alcohol
1%
Cash
8%
Personal
Insurance
10%
Entertainment
4%
Health Care
7%
Source: Bureau of Labor Statistics
Housing
27%
Apparel
Transportation 4%
13%
Total expenses = $76,592
Expenses for a Middle-Income Retiree
Taxes
Misc.
Cash
4%
2%
Personal 6%
Insurance
6%
Food
13%
Alcohol
1%
Entertainment
4%
Health Care
12%
Transportation
19%
Source: Bureau of Labor Statistics
Housing
30%
Apparel
3%
Total expenses = $41,711
Calculating the Annual Income
Need: Two Approaches
• Build the budget based on need
“I want to spend X dollars per year for the rest of my
life. How can I do that?”
• Budget based on resources
“I have X dollars of assets and income; how much can I
afford to spend each year and not outlive my
income?”
Pitfalls of Money Projections
• Example: client age 60, has $1 million, will
earn earn 8% over a life expectancy of 25
years.
Q:
How much can he spend per year?
A:
$86,740 according to the calculator
• What are the problems with this approach?
– Dangerous assumptions
– Mortality
– Pattern of market returns
Carving Out the Income Need
• Segregate the expense amount each
year
– Annual lump sum
– Quarterly or monthly
• Flexibility to adjust annual expense
need
– Sleep at night money/emergency fund
How the Annual Income Need
May Change
• Replacement ratios: rules of thumb
– 70-100% of current income
– For survivor, 75% of couple retiree
income
• Real income
– Set $ amount increased annually for inflation
– Set % of assets (e.g. 4%)
Tools for Assessing Retiree
Needs
• Data gathering for a retiree
• Key documents checklist
– Location of key documents
– Questions an advisor should ask
Meet the Goldins
• Ages 72 (Mr.) and 68 (Mrs.) Both in good
health
• Expect $20,000 per year in combined Social
Security benefits; neither works now
• He receives a $10,000 per year pension
• His IRA is worth $600,000; hers is worth
$500,000; their home is worth $700,000
• They want an annual income of $95,000
including $57,000 in essential expenses.
Relating to Retirees
• Stereotypical language
– Defining “elderly”
– Defining “retirement”
• Stereotyping ages
• Counseling skills
• Generational clients
Changing Gears
• Retirees
– “Do I have enough to
live on for the rest of
my life?”
– “How should my
money be invested?”
– “What do I spend
first?”
• Advisors
– What are all the
factors to consider
for income planning?
– How is a retiree’s
situation different
from a client who is
still working?
– What products work
for a retiree?
A Lifetime of Learned
Behaviors
• May need to change some behaviors at
retirement:
– From accumulating to spending mindset
– Challenging conventional wisdom: “Never spend
your principal”
• Or not
– Continuing to save while in retirement
– Putting “spenders” on a budget via annuitization
Wants vs. Reality
• What retirees want
– Control and flexibility
for their money
– Asset allocation
advice for years
– Simple,
understandable
products and
processes
Source: Diversified Services Group, Inc.
• What the market
offers
– Products that lock them
into a lifetime decision
– Asset allocation advice
for accumulation years
– Very complex choices
with multiple options
The Retiree’s Perspective
• “I want to spend X dollars per month for
the rest of my life.”
• “I have Y dollars saved up.”
• “Tell me how I can get there.”
• “Keep me on track over time.”