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Retirement Planning Strategies Amid Economic Uncertainties

International Society of CEBS Presentation October 14, 2010 Crowne Plaza Hotel, Austin Texas. Retirement Planning Strategies Amid Economic Uncertainties. Speaker: Toby Tobleman, FSA, CFA, CFP ® , ChFC , CASL, GPT toby@ruddwisdom.com. The Task. Baby Boomers Ready to Retire

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Retirement Planning Strategies Amid Economic Uncertainties

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  1. International Society of CEBS PresentationOctober 14, 2010 Crowne Plaza Hotel, Austin Texas Retirement Planning Strategies Amid Economic Uncertainties Speaker: Toby Tobleman, FSA, CFA, CFP®, ChFC, CASL, GPT toby@ruddwisdom.com

  2. The Task • Baby Boomers Ready to Retire • Greater Importance Placed on Account Balance Benefits • Decline in Employer Funded Promised Payments • Shift to Employee Funded and Investment Directed Accounts • Social Security Benefits under Demographic Pressure • Retirement Risks Not Diminished But Shifted • Financial Market Risk • Longevity Risk • Inflation Risk • Health Care Access and Cost Risk

  3. The Task • Employees Need to Assess and Manage the Retirement Risk • Limited Knowledge • Psychological concerns • Limited Access to Comprehensive Independent Advice • (Business Model Bias)

  4. The Tool Box • Individual Employee Retirement Planning Advice • Personal and Interactive • Comprehensive • Independent Fiduciary Relationship • IRC Sections 132(a)(7) and 132(m) Qualified Retirement Planning Services • Employer Funded or Subsidized • Three Levels of Service Needed • Basic • On Course Check-ups • Comprehensive • Beyond PPA Investment Advice

  5. The Tool Box • Comprehensive Assistance Needed in Many Areas • Basic Financial Planning and Investment Education • Budget Tools • Funding College Expenses • Maximization of Social Security Benefits • Roth Tax Planning • Credit Score Preservation • Identity Theft Protection • End of Life Directives • Estate Planning • Non- Retirement Financial Risk Evaluation • Long Term Care Risk Evaluation • Hey, Am I About to Do Something Really Stupid?

  6. The Tools • Financial Market Risk Tools • Expanded Asset Categories and Vehicles • ETFs/ ETNs • Options/Futures • Hedge Funds • Infrastructure • Natural Resources • Real Estate • Commodities • Private Capital • Foreign Debt and Currency • Insurance and Annuity Products

  7. The Tools • Smarter Portfolio Construction Look for Beta not Alpha Take Advantage of Low Correlation among Asset Classes • Longevity Risk Tools • Growth Oriented Asset Allocation • Annuities • Conventional • Nonconventional • Longevity Insurance (ALDA) • Reverse Mortgages • Phased and Delayed Retirement

  8. The Tools • Inflation Risk Tools • Inflation Indexed Products • Overweighting Asset Allocation Sectors • Anticipate Inflation Increased Expenditures • Health Care Access and Cost Risk Tools • Personal Health Decisions • True Insurance • Long Term Care Insurance

  9. Retirement Distribution Construction Worksite • The Basics • Consumption Amounts and Pattern • Balance Consumption and Bequest Goals • Portfolio Cash Flow Needs • Realistic and Flexible • Society of Actuaries 7-Step Process • Portfolio Construction Process • Address Longevity Risk • Address Market Risk

  10. Retirement Risk Models • Seven Daughters • Build Income Portfolio to Generate Cash Flow • Perpetuity Not Needed • Ok to Consume Principal • Bequest/Special Needs • Lifetime Payments • Insurer Annuitization • Transfer Risk to Insurer • Underutilized • Doesn’t Address Bequest Goals • Timing of Purchase • Complex Products (GMIB, GLWB, GMWB, GMAB, GPAF) • Non Transparent/ Expensive • Do Not Trade Dollars with Insurance Company

  11. Retirement Risk Models • Self Annuitization • Keep All or Part of Longevity Risk • Manage Longevity Risk • Spending Management • Portfolio Management • Purchase Insurance When Needed

  12. Retirement Distribution Models • Select Appropriate Longevity Period • Historically Based Safe Withdrawal Rates (SWR) • Inflation Adjusted • Asset Assumptions Key • Compare SWRs • Probabilities of Failure • Asset Allocation Impact • Ending Balance • Fixed Period and Fixed Payment – Charts 1 and 2 • Explicit Mortality Assumption – Charts 3, 4, 5 and 6 • Modify Spending Rules- Charts 7 and 8 • Modify Assets- Charts 9 and 10

  13. Chart 1: 30 Years Retirement Ruin Probabilities 5.5% 5.0% Ruin Probability 4.5% 4.0% ● 3.0% Stock Percentage ● marks a 4 percent real withdrawal rate with 50 percent stocks and 50 percent bonds

  14. Chart 2: Average 30 Years Remaining Balance Withdrawal Rate ● Stock Percentage ● indicates an average of $300 remains after 30 years with a 4% real withdrawal rate and 60% stock allocation

  15. Chart 3: Male Lifetime Retirement Ruin Probabilities Source: IFID Centre

  16. Chart 4: Female Lifetime Retirement Ruin Probabilities Source: IFID Centre

  17. Chart 5: Probability of 60/40 Portfolio Failure for Various Real Withdrawal Rates and Distribution Periods Source: Journal of Financial Planning- December 2008

  18. Chart 6: Probability of 60/40 Portfolio Failure While Either or Both Members of a Couple are Still Living Source: Journal of Financial Planning- December 2008

  19. Chart 7: Probabilities of Failure Based on a Fixed Withdrawal Rate Source: Journal of Financial Planning- April 2009

  20. Chart 8: Probabilities of Based on Adjusted Withdrawal Rate Source: Journal of Financial Planning- April 2009

  21. Chart 9: Portfolio Success Rate 1927-2008, Annual Rolling 30-Year Periods Source: Journal of Financial Planning- February 2010 ( Ibbotson)

  22. Chart 10: Portfolio Success Rates 1927-2008, Annual Rolling 40 Year Periods Source: Journal of Financial Planning- February 2010 ( Ibbotson)

  23. Retirement Distribution Models • 8-SWR Summary Observation/ Recommendations • Review Appendix A- Portfolio Concepts and Guidelines • Know Your Risk Tolerance (Milevsky Article) • Accumulation Period Equity Allocation 60% or Higher • Transition to DistributionEquity Allocation (Dolvin et al Article) • Diversity Equity Portfolio Extensively (Cooker Article) • Consider Passive over Active Management (Garrison et al Article) • Be Mindful of Sequence Risk (Blanchett and Frank Article) • Be Mindful of Market Cycles and Valuations (Harris Article) • Reflect Mortality Assumptions in SWR (Blanchett and Blanchett Article) • Adjust Withdrawals in SWR (Blanchett and Frank Article)

  24. Retirement Distribution Models • Strategically Rebalance Accumulation and Distribution Periods (Spitzer et al Article and Daryanani Article) • Be Mindful of Taxation Effect (Berna) • Consider Immediate Annuities Use for Part of Portfolio and ALDA Products

  25. QUESTIONS

  26. THANK YOU! Rudd and Wisdom, Inc. Financial Services Division www.ruddwisdomfinancial.com

  27. APPENDIX A: PORTFOLIO CONSTRUCTION CONCEPTS

  28. Portfolio Construction Concepts Understand your return needs/desires vs your risk capacity Analyze your risk appetite and its potential consequences Decide which asset categories to use in which amounts Decide on passive or active managers for each asset category Portfolio takes on characteristics different from its components Portfolio characteristics should be consistent with its goal Use available tools and resources Monitor and modify portfolio as needed

  29. Portfolio Construction Guidelines Do not invest in any asset you do not understand Do not assume more asset risk than is needed Use diversification to reduce volatility not to increase return Use the financial goal time frame as a guide to your risk capacity Re-balance your portfolio according to pre-determined strategy

  30. Portfolio Construction Guidelines • Never assume higher investment returns come without higher volatility • Understand psychological influences on investment decisions and the market • Change your portfolio construction only if consistent with your goals; never panic into changes • Past results may or not may not be repeated in the future • Whomdo you trust?

  31. APPENDIX B: ACKNOWLEDGEMENTS,CREDITS AND RESOURCES

  32. Acknowledgements, Credits And Resources • 1- Using Decision Rules to Create Retirement Withdrawal Profile (SWR) • William Klinger • Journal Financial Planning - August 2007 • 2- Guidelines for Withdrawal Rates and Portfolio Safety During Retirement (SWR) • Spitzer, Strieter, Singh • Journal of Financial Planning - October 2007 • 3- Evaluating Retirement Portfolio Withdrawal Rates (SWR) • Carl Hubbard • Journal of Retirement Planning - May/June 2006 • 4- Moshe Milevsky, • Professor, York University, Toronto • Executive Director- The IFID Centre, Toronto

  33. Acknowledgements, Credits And Resources 5- Retirement Ruin Analyzer (SWR) Society of Actuaries Website 6- Emphasizing Low-Correlated Assets (Diversification) The Volatility of Correlation by William Coaker Journal of Financial Planning – September 2007 7- CFA Institute www.cfainstitute.org 8- Pension Research Council www.pensionresearchcouncil.org 9- Gone in 60 Seconds( Flash Crash) Denis Dick, CFA CFA Institute Magazine (Sept/Oct 2010) 10- Upper-left Quadrant (Diversification) Craig L. Israelsen, Ph.D. Financial Planning (Sept 2009)

  34. Acknowledgements, Credits And Resources • 11- The Future of Retirement Investing (Use of Options) • William Ulivieri, AIFA • Journal of Financial Planning (Sept 2009) • 12- Market Cycles and Safe Withdrawal Rates (SWR) • John Harris Ph.D. , CFP, RFC • Journal of Financial Planning (Sept 2009) • 13- True Believer (Active vs. Passive) • Walter Updegrave interview of Roger Ibbotson • Money (Sept 2010) • 14- The Six Best Investing Ideas You’ve Never Heard (Risk) • George Mannes • Money (July 2010)

  35. Acknowledgements, Credits And Resources • 15- The Portfolio- Spice it Up (Commodities) • Craig L. Israelsen Ph.D. • Financial Planning (June 2008) • 16-The Portfolio- Heads I win, Tails I lose Less (Passive Fundamental Index) • Robert Arnott et al • Financial Planning (June 2008) • 17- Joint Life Expectancy and Retirement Distribution Period (SWR) • David Blanchett CFA, CFP and Brian Blanchett CFA, CFP • Journal of Financial Planning (December 2008) • 18- Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach (SWR) • Lemoine, Cordell, Gustafson • Journal of Financial Planning ( January 2010)

  36. Acknowledgements, Credits And Resources • 19- Retirement Income Sustainability: How to measure the Tail of a Black Swan (Risk) • Moshe Milevsky Ph.D. • Journal of Financial Planning (Oct 2010) • 20- Dynamic and Adaptive Approach to Distribution Planning and Monitoring (SWR) • David Blanchett CFA, CFP and Larry Frank, CFP • Journal of Financial Planning (April 2009) • 21- Beyond Monte Carlo Analysis: An Algorithmic Replacement for a Misunderstood Practice (Risk) • Shawn Braymen, BSc. MES • Journal of Financial Planning (Dec 2007) • 22- Determining the Proper Starting Balance for Taxable and Tax-Deferred Savings at Retirement (SWR) • Ben Bernacchi, CFP • Journal of Financial Planning (July 2008)

  37. Acknowledgements, Credits And Resources • 23- Asset Allocation for Retirement: Simple Heuristics and Target Date Funds (SWR) • Steven Dolvin. Ph.D., CFA; William Templeton Ph.D. • Journal of Financial Planning ( March 2010) • 24- Opportunistic Rebalancing (Portfolio) • GobindDaryanami, CFP, Ph.D. • Journal of Financial Planning (Jan 2008) • 25- Long-Term Approaches to Managing Retirement Healthcare Costs (Health) • David Armes, CFP • Journal of Financial Planning (Dec 2009) • 26- Is Rebalancing a Portfolio During Retirement Necessary? (Portfolio) • John Spitzer, Ph.D., and S.Singh Ph.D., CFA • Journal of Financial Planning (June 2007)

  38. Acknowledgements, Credits And Resources • 27- Creating Safe, Aggressive Retirement Income Profiles (SWR) • William J. Kingler, MBA, MS • Journal of Financial Planning (May 2010) • 28- Diversification Effect: Isolating the Effect of Correlation on Portfolio Risk Diversification • Gregory N. Hight • Journal of Financial Planning ( May 2010) • 29- Allocation to deferred Variable Annuities with GMWB for Life (Annualization) • James X. Xong, Ph.D., CFA, Thomas Idzorek, CFA and Peng Chen Ph.D., CFA • Journal of Financial Planning ( February 2010) • 30- Simple Dynamic Strategy for Portfolio Withdrawals: Using a 12 Month Simple Moving Average (Active Management) • Michael Garrison, CFP, Carlos Sera and Jeffrey Cribbs, CFP • Journal of Financial Planning (Feb 2010)

  39. Acknowledgements, Credits And Resources • 31- Strategic Option Protection Increases Return, Decreases Risk (Risk) • John Burke, CFP and Wei Xu • Journal of Financial Planning ( July 2010) • 32- Immediate Annuities: Beyond Interest Rate (Annualization) • Insight • Financial Planning (October 2010) • 33- Segmenting the Middle Market: Retirement Risks and Solutions (Education) • Noel Abkemeier, FSA • Society of Actuaries Publications (Sept 2010) • 34- TIPS Scorecard (Inflation) • ZviBodie et al • Financial Analysts Journal- CFA Institute (Sept/Oct 2010)

  40. Acknowledgements, Credits And Resources • 35- The Rat Without a Tail (Trust) • Susan J. Forray, FCAS • Contingencies; American Academy of Actuaries (Sept/Oct 2009) • 36- Shiller P/E’s and Predicting Returns (Active Management) • Joseph A. Tomlinson, FSA, CFP • Adviser perspective Web Publication • 37- Return Distributions and the Shiller P/E Ratio (Active Management) • Keith C. Goddard, CFA • Adviser perspective Web Publication • 38- Gambling: Happens in Vegas- And Should Stay in Vegas (SWR) • Scott Wittman, CFA, CAIA; Rich Weiss and Irina Torelli, CFA • American Century Investments

  41. Acknowledgements, Credits And Resources • 39- Not a Lost Decade for Diversified, Balanced Portfolios (Diversification) • Joni L Clark, CFA, CFP • Adviser Perspective Web Publication • 40-Financial Tips for Those Close to Retirement • Ameriprise Financial (March 2010) • 41- Three Market Valuation Indicators (Active Management) • Doug Short • Adviser Perspective Web Publication • 42- Texas State Securities Board • www.ssb.texas.tx.us

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