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Rethinking Retirement

Learn how to navigate retirement risks and achieve financial success in retirement. Understand sequence risk, inflation, healthcare costs, and more.

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Rethinking Retirement

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  1. Rethinking Retirement Hal Ratner Global Head of Research Morningstar Investment Management

  2. Agenda Retirement Risks Retirement Success Today Gamma

  3. Retirement Risks

  4. Retiree Risks Drawdown Risk Longevity For illustration only.

  5. Sequence Risk Example For illustration only. 60% equity, 30% bond, 10% cash portfolio using Ibbotson’s 2012 Capital Market Assumptions, assumes a 1% investment management fee

  6. Sequence Risk Example: Sustainable Spending Rates % % Source: Morningstar

  7. Sequence Risk Example: Account Value 4% Rule Source: Morningstar

  8. Contributions are King Contrib 10% Contrib 1% Equity 100% Bond 0%

  9. Contributions are King Contrib 10% Contrib 1% Equity 100% Bond 0%

  10. Contributions are King Contrib 10% Contrib 1% Equity 100% Bond 0%

  11. Contributions are King Contrib 10% Contrib 1% Equity 100% Bond 0%

  12. Equity 100% Contributions are King: Market Effect Bond 0%

  13. What Affects Retiree Spending? What They Buy (Consumption Basket) Actual Spending For illustration only.

  14. Different Rates of Inflation Source: Bureau of Labor Statistics.

  15. General Inflation (CPI-U) vs. Medical Inflation Medical inflation has averaged +5.24% per year from 1948 through 2015, versus +3.44% for the CPI-U, therefore, medical inflation has been growing about 50% faster than general inflation Source: Bureau of Labor Statistics.

  16. Different Inflation Baskets for the Elderly From December 1982 to December 2012 the average annual change in the CPI-E (consumption basket for the elderly) has been 3.07% versus 2.92% for CPI-U (general population) Source: Bureau of Labor Statistics.

  17. Alternate Measures of Inflation: CPI-U, CPI-E, PCE Different measures Source: Bureau of Labor Statistics.

  18. The Three “Stages” of Retirement • Go-Go: Retirees maintain lifestyle, travel, the group that does not consider themselves "old". • Slow-Go: Between the ages of 70 and 84, brought on by the body saying “Slow Down,” 20%-30% budget decline. • No-Go: 85+, significant changes in retirement lifestyle is generally brought on by health issues. Source: "The Prosperous Retirement, Guide to the New Reality", Michael Stein

  19. Lifetime Real Income Need, Age 65 Retiree Source: “Estimating the True Cost of Retirement” by David Blanchett, Morningstar White Paper

  20. Life Expectancies for Your Clients are not “Average” Source: Barry Bosworth, Brookings Institution

  21. Source: Social Administration 2010 Periodic Life Table, Society of Actuaries 2012 Annuity Mortality Table Probability of 65 Year Old Living to Age 95 Male Female Both ≥1 7% 13% 1% 19% Average American 20% 29% 6% 43% Healthy American 25% 33% 8% 50% Healthy American in 15 Years

  22. Life Expectancy Keeps Increasing Source: Social Security Administration.

  23. Life Expectancy Keeps Increasing Source: Health Inequality Project

  24. Source: Bosworth and Burke (2014) ….and Now a Large Gap Exists in Life Expectancies by Income Level

  25. Male Female Joint 9.1% 6.6% 6.5% 5.7% 5.3% Withdrawal Rate Age “4%” for Various Retiree Households Source: Morningstar, calculations by David Blanchett

  26. Nursing Home Costs by Age For illustration only.

  27. Retiring Today

  28. The Past as a Guide For illustration only.

  29. Stocks, Bonds, Bills, and Inflation

  30. Stock & Bond Average Real Returns: 6.9% and 2.2% Source: Morningstar

  31. Stock & Bond Average Real Returns: 6.9% and 2.2% Source: Morningstar

  32. Stock & Bond Average Real Returns: 6.9% & 2.2% Source: Morningstar

  33. Efficient Frontiers by Decade Source: Ibbotson

  34. Efficient Portfolios by Decade Source: Ibbotson

  35. Real Returns: Bull Market, Bear Market, Average Source: Ibbotson. Dates from Yareni Research, Inc.

  36. Real Returns: How Bad Can it Get? Source: Morningstar.

  37. How Much Do I Have to Save for Retirement: The 4% Rule Inflation adjustments Initial income Source: Ibbotson

  38. Savings glut • Low interest rates • Aging population • Market integration—more systemic risk • Increasing impact of non-state actors on global politics and economy • Noise of the internet—targeted & biased information sets • UPSHOT: Aligning investor behavior, investor expectations, and investment strategies with retirement goals is more important than ever New Challenges for Advisors

  39. New Challenges: Structural Increase in Volatility

  40. New Challenges: Structural Increase in Correlations: More Limited Diversification Opportunities

  41. Three Key Unknowns Life Expectancy Real Returns Consumption

  42. Where the 4% Rule Comes From Source: Ibbotson

  43. An International Perspective on Real Historical Returns 0.25% -2.13% 4.32% -1.79% 3.84% 4.67% Average annual compounded real return for a 60% stock, 40% bond portfolio: 1900 – 2014. Source: Dimson, Marsh, and Staunton, Morningstar Direct.

  44. An International Perspective on Historical Returns Average annual compounded real return for a 60% stock, 40% bond portfolio: 1930 – 2015. Source: Dimson, Marsh, and Staunton, Morningstar Direct.

  45. An International Perspective on Historical Withdrawal Rates Source: Morningstar

  46. Valuation Matters Rho=..977 Source: Robert J. Shiller & Morningstar

  47. Valuation Matters Rho=.897 Source: Robert J. Shiller

  48. Return Assumptions and Failure For illustration only.

  49. The Safety of The 4% Rule, Past versus Future Source: “Low Bond Yields and Efficient Retirement Income Portfolios” by David Blanchett, Journal of Retirement

  50. Gamma

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