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
1.
Baby Boomers Ready to Retire
2.
Greater Importance Placed on Account Balance Benefits



3.
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
2
The Task
4.
Employees Need to Assess and Manage the Retirement Risk
 Limited Knowledge
 Psychological concerns
 Limited Access to Comprehensive Independent Advice
(Business Model Bias)
3
THE TOOL BOX
1.
Individual Employee Retirement Planning Advice



2.
Personal and Interactive
Comprehensive
Independent Fiduciary Relationship
IRC Sections 132(a)(7) and 132(m) Qualified Retirement Planning Services


Employer Funded or Subsidized

Beyond PPA Investment Advice
Three Levels of Service Needed
1. Basic
2. On Course Check-ups
3. Comprehensive
4
The Tool Box
3.
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?
5
The Tools
1.
Financial Market Risk Tools

Expanded Asset Categories and Vehicles
1.
ETFs/ ETNs
2.
Options/Futures
3.
Hedge Funds
4.
Infrastructure
5.
Natural Resources
6.
Real Estate
7.
Commodities
8.
Private Capital
9.
Foreign Debt and Currency
10. Insurance and Annuity Products
6
The Tools

2.
Smarter Portfolio Construction
Look for Beta not Alpha
Take Advantage of Low Correlation among Asset Classes
Longevity Risk Tools


Growth Oriented Asset Allocation


Reverse Mortgages
Annuities
1. Conventional
2. Nonconventional
3. Longevity Insurance (ALDA)
Phased and Delayed Retirement
7
The Tools
3.
Inflation Risk Tools
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

4.
Inflation Indexed Products
Overweighting Asset Allocation Sectors
Anticipate Inflation Increased Expenditures
Health Care Access and Cost Risk Tools
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

Personal Health Decisions
True Insurance
Long Term Care Insurance
8
Retirement Distribution Construction Worksite
1.
The Basics


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
2.
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
9
Retirement Risk Models
1.
Seven Daughters
2.
Build Income Portfolio to Generate Cash Flow
 Perpetuity Not Needed
 Ok to Consume Principal
 Bequest/Special Needs
Lifetime Payments
3.
4.
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
10
Retirement Risk Models
5.
Self Annuitization

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Keep All or Part of Longevity Risk

Purchase Insurance When Needed
Manage Longevity Risk
1. Spending Management
2. Portfolio Management
11
Retirement Distribution Models
1.
Select Appropriate Longevity Period
2.
Historically Based Safe Withdrawal Rates (SWR)
 Inflation Adjusted
 Asset Assumptions Key
3.
Compare SWRs
 Probabilities of Failure
 Asset Allocation Impact
 Ending Balance
4.
Fixed Period and Fixed Payment – Charts 1 and 2
5.
Explicit Mortality Assumption – Charts 3, 4, 5 and 6
6.
Modify Spending Rules- Charts 7 and 8
7.
Modify Assets- Charts 9 and 10
12
Chart 1: 30 Years Retirement Ruin Probabilities
80
70
5.5%
60
Ruin Probability
5.0%
50
40
4.5%
30
20
4.0%
10
●
3.0%
0
0
10
20
30
40
50
60
70
80
90
100
Stock Percentage
● marks a 4 percent real withdrawal rate with 50 percent stocks and 50 percent bonds
13
Chart 2: Average 30 Years Remaining Balance
$50
6
$100
$200
Withdrawal Rate
5
$300
●
4
$500
$700
3
$900
2
0
20
40
60
80
100
Stock Percentage
● indicates an average of $300 remains after 30 years with a 4% real withdrawal rate and 60% stock allocation
14
Chart 3: Male Lifetime Retirement Ruin Probabilities
Percentage Withdrawal Rates
4%
5%
6%
7%
8%
0% Eq.
8.30%
19.90%
33.30%
45.80%
56.00%
25% Eq.
4.20%
12.80%
24.80%
37.80%
49.30%
50% Eq.
3.80%
10.60%
20.40%
31.80%
42.90%
75% Eq.
5.00%
11.40%
19.80%
29.40%
39.00%
100% Eq.
7.30%
13.70%
21.30%
29.70%
37.90%
Male 65
Source: IFID Centre
15
Chart 4: Female Lifetime Retirement Ruin Probabilities
Percentage Withdrawal Rates
4%
5%
6%
7%
8%
0% Eq.
9.90%
23.10%
37.40%
50.30%
63.30%
25% Eq.
5.10%
15.00%
28.20%
41.90%
53.60%
50% Eq.
4.50%
12.30%
23.10%
35.30%
46.70%
75% Eq.
5.90%
13.00%
22.20%
32.40%
42.40%
100% Eq.
8.40%
15.40%
23.50%
32.30%
40.90%
Female 65
Source: IFID Centre
16
Chart 5: Probability of 60/40 Portfolio Failure for Various Real
Withdrawal Rates and Distribution Periods
Source: Journal of Financial Planning- December 2008
17
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
18
Chart 7: Probabilities of Failure Based on a Fixed Withdrawal
Rate
Source: Journal of Financial Planning- April 2009
19
Chart 8: Probabilities of Based on Adjusted Withdrawal Rate
Source: Journal of Financial Planning- April 2009
20
Chart 9: Portfolio Success Rate 1927-2008, Annual
Rolling 30-Year Periods
Source: Journal of Financial Planning- February 2010 ( Ibbotson)
21
Chart 10: Portfolio Success Rates 1927-2008, Annual
Rolling 40 Year Periods
Source: Journal of Financial Planning- February 2010 ( Ibbotson)
22
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 Distribution Equity 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)
23
Retirement Distribution Models


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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
24
QUESTIONS
25
THANK YOU!
Rudd and Wisdom, Inc.
Financial Services Division
www.ruddwisdomfinancial.com
26
APPENDIX A:
PORTFOLIO CONSTRUCTION CONCEPTS
27
Portfolio Construction Concepts
1. Understand your return needs/desires vs your risk capacity
2. Analyze your risk appetite and its potential consequences
3. Decide which asset categories to use in which amounts
4. Decide on passive or active managers for each asset category
5. Portfolio takes on characteristics different from its components
6. Portfolio characteristics should be consistent with its goal
7. Use available tools and resources
8. Monitor and modify portfolio as needed
28
Portfolio Construction Guidelines
1. Do not invest in any asset you do not understand
2. Do not assume more asset risk than is needed
3. Use diversification to reduce volatility not to increase return
4. Use the financial goal time frame as a guide to your risk capacity
5. Re-balance your portfolio according to pre-determined strategy
29
Portfolio Construction Guidelines
6. Never assume higher investment returns come without higher volatility
7. Understand psychological influences on investment decisions and the market
8. Change your portfolio construction only if consistent with your goals; never
panic into changes
9. Past results may or not may not be repeated in the future
10. Whom do you trust?
APPENDIX B:
ACKNOWLEDGEMENTS,CREDITS AND RESOURCES
31
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
32
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)
33
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)
34
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)
35
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)
36
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)
Gobind Daryanami, 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)
37
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)
38
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)
Zvi Bodie et al
Financial Analysts Journal- CFA Institute (Sept/Oct 2010)
39
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
40
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
41