Retirement Distribution Challenges: Live on Less, Help Make It Last

1. Retirement Distribution Challenges: Live on Less, Help Make It Last BY HOLLY CARROCCIO, CFP® NEXUS ADVISORS, L.L.C. 972-348-6311 holly@nexusadvisorsllc.com Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC., Member SIPC. Supervisory Office: 10000 North Central Expressway, Suite 1200, Dallas, Texas 75231-2363 (972) 348-6300. Nexus Advisors LLC is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies.

2. 63% chance that one spouse of a couple who are both age 65 will live to age 90 • Close to 40% chance of one spouse living to age 95 • Difficult to budget and invest when planning for a 25 to 30 year retirement horizon Source: Annuity 2000 Mortality Table, Society of Actuaries Challenge #1: Living too Long

3. Develop a rate of withdrawal from savings that is sustainable over long time periods Solution #1: Develop a Spending Rule Source: Morningstar, Inc. 3/1/2011

4. “Next time the market starts down, I’m going to get out and move to bonds and cash.” • Most people feel they can abandon their allocation temporarily during market downturns • Average equity returns from 1991 to 2010: 9.14% • Average equity investor returns during same period: 3.83% Source: Debar Study 12/31/2010 Challenge #2: Should I move to bonds or cash?

5. Recency bias: What just happened will keep happening • Action bias: Desire to take action under stress • Some downturns are short term corrections, not economic reversals, how do you tell the difference? • 3% Pullback every 90 Days • 90% of these will be between 3 – 10% • Steepest = 15.99% Source: Morningstar Challenge #2: Should I move to bonds or cash?

6. Over 58 years since 1951, the S & P 500 delivered negative returns 14 of those years. • 50/50 portfolio lost 11 of 58 years • 2008: A perfect storm, S&P* down 37%, worst since 1951 • 50/50 portfolio, down 16.9% in 2008, only time since 1951 down more than 10% loss • In every 12 month period following a “bottom”, the market soars • 70% of the returns are earned in 50% of the time Sources: Morningstar *Indices are not available for direct investment. Solution #2: Don’t Discount History & Diversification There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.

7. S & P Rallies after recessions: 1951 to 2003

8. Why not just invest in all bonds to start with? • Assume the unrealistic assumption that inflation will remain 3.16% as it has for 30 years, through 12/31/2010. • Costs of living are 40% higher in 10 years, and have more than doubled in 20 years. • If using all bonds to manage risk, no increases to income • If average returns on bonds and CDs are 5%, for example, you would have to adjust the withdrawal rate down from 4% to 1.84% Source: Bureau of Labor Statistics, September 2011 Challenge #3: Inflation

9. Stocks returns have on average outpaced fixed income investments over long periods of time. • Keep 25% to 50% of the portfolio in “growth” mode Solution #3: Inflation Busters Investing in specific sectors may experience greater short-term price volatility than a more diversified. They are more suitable for use in an aggressive component of an investment program.

10. Most people spend more than they make, retirees are no exception • We like to avoid knowing where our money goes Challenge #4: “I spend more than a 4% withdrawal will cover”

11. Consider multiple portfolio buckets • Toggle income: During downturns, spend money from bonds not stocks • Rebalances portfolio back toward stocks • Avoid locking in stock losses • Carefully review spending: Need vs. discretionary • Spending could be phased: • Woo Hoo! Early retirement: The 1 – 2 years after • Normalizing: 8-15 years: travel, hobbies, etc. • Late retirement: Medical, aging issues • Use alternative sources of income: Real Estate, fixed annuities Solution #4: Consider various spending strategies

12. Solution #5: Tax diversification • Municipals • Roth (conversions) • Life Insurance Cash Values • Non-qualified investments • Annuitization (non-qualified) Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid in the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans &/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy terminates before the death of the insured. Challenge #5: Taxes are likely to go up

13. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Nexus Advisors, LLC, its employees or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel.