Not FDIC Insured Not FDIC Insured May Lose Value May Lose Value No Bank Guarantee No Bank Guarantee EO002 296692 9/15 |1 Topics for today • Five key challenges to prepare for in retirement • Achieving a successful retirement • Putting an income plan into practice EO002 296692 9/15 |2 Five challenges we can prepare for • • • • • Longevity Inflation Health-care costs Public policy changes Investment risks and volatility EO002 296692 9/15 |3 Longevity: Plan on spending 25 to 30 years in retirement Your lifespan probability after reaching age 65 Living to age 83 Probability: 56% Living to age 89 Probability: 31% Living to age 94 Probability: 14% 65 70 75 80 Age 85 90 95 100+ Source: National Center for Health Statistics, U.S. Life Tables, 2005. Most recent data available. EO002 296692 9/15 |4 Even low levels of inflation make a difference over time Amount needed to maintain purchasing power based on: • 30 years of saving • $50,000 income $287,174 $162,169 $90,568 2% 4% 6% Inflation rate EO002 296692 9/15 |5 Health-care costs outpacing inflation and earnings Health insurance premiums 191% Workers’ earnings 54% Overall inflation 40% Source: Kaiser Family Foundation, as of September 2014. EO002 296692 9/15 |6 What about Social Security? 1950 Today Today $ $ There were 16 U.S. workers for each Social Security beneficiary 2.8 workers for each beneficiary Benefits owed currently exceed taxes collected 2033 $0 The Social Security trust fund will be exhausted Source: Social Security Administration 2014 Annual Report. EO002 296692 9/15 |7 Where are tax rates headed? Federal debt held by the public (% of GDP), 1940–2014 Percentage of GDP 100% 80% 60% 40% 20% 0% 1940 1960 1980 2014 2000 Source: Congressional Budget Office, Updated Budget Projections: August 2014; does not include intra-governmental debt. EO002 296692 9/15 |8 Achieving a successful retirement • • • • • Diversify to manage volatility and achieve growth Make sure you’re not withdrawing too much Consider adding guaranteed income Be smart about taxes Address other potential risks EO002 296692 9/15 |9 Choose the right withdrawal rate How long would your money have lasted? Cash 10% 50 Bonds 30% Years 40 Stocks 60% 30 20 10 0 3% will last 50 years 4% will last 33 years 5% will last 20 years 6% will last 16 years 7% will last 13 years 8% will last 12 years 9% will last 11years 10% will last 10 years Percentage of your portfolio’s original balance withdrawn each year This example assumes a 90% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2014 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 296692 9/15 | 10 Address longevity risk Historical success of three asset mixes (assumes 5% withdrawal rate, adjusted for inflation annually) Mix 20 years 30 years 40 years Conservative 20% Stocks 50% Bonds 30% Cash 89% 30% 4% Balanced 60% Stocks 30% Bonds 10% Cash 96% 76% 54% Growth 80% Stocks 20% Bonds 0% Cash 96% 79% 68% 0–59% probability 60%–79% probability 80%–100% probability These illustrations are based on a rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical returns from 1926 to 2013 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 296692 9/15 | 11 When you retire can make a big difference Sequence of returns risk refers to adverse effect negative investment returns in the early stages of retirement can have on a nest egg • Assumptions – – – – $1 million nest egg 5% withdrawn annually and increased each year to keep up with inflation Invested in a portfolio of 60% stocks, 30% bonds, and 10% cash Results over a 10-year time frame $1,731,989 $1,861,592 $1M $472,238 Retire in 1980 Retire in 1990 Retire in 2000 EO002 296692 9/15 | 12 Consider diversifying more broadly in retirement U.S. large-cap stocks U.S. high-yield bonds U.S. Treasury bills Hedge funds Floating-rate bank loans Commodities Developed country international stocks Global investment-grade bonds Real estate investment trusts U.S. investmentgrade bonds U.S. small-cap stocks Emerging-market stocks Inflationprotected securities U.S. growth and value stocks Emerging-market bonds Traditional asset classes are defined as those included in traditional balanced portfolios, such as stocks, bonds, and cash, and that have been widely owned by individual investors since the post-war emergence of modern portfolio theory. Modern asset classes are specialized investments that were created or have become more accessible since the advent of broader market participation by individual investors due to tax-advantaged retirement saving EO002 296692 9/15 | 13 Consider adding guaranteed income Example • Balanced portfolio – 50% stocks, 40% bonds, 10% cash • 5% withdrawn annually • Guaranteed income based on current immediate annuity rates Probability of portfolio survival over 30 years 93% 69% No guaranteed 25% income guaranteed income This example is based on rolling historical time period analysis and does not account for the effect of taxes, nor does it represent the performance of any Putnam fund or product, which will fluctuate. Assumes historical rolling periods from 1926 to 2014 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Guaranteed income is based on a single premium, immediate annuity for a 65-year-old male assuming single life expectancy. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index. EO002 296692 9/15 | 14 Pay attention to taxes Type of income Taxability Social Security May be partially taxable as ordinary income Pension income Taxed as ordinary income IRA and 401(k) distributions Ordinary income rates Dividend income 23.8% maximum rate Long-term capital gains 23.8% maximum rate Roth IRAs Not subject to taxation Liquidation of investment principal Not subject to taxation EO002 296692 9/15 | 15 Use a Roth strategy to control your tax bill • Source of tax-free income in retirement – Access to tax-free source of income provides more options on where to draw income from • No mandatory withdrawals at age 70½ • Having a portion of retirement savings in a Roth IRA can provide a hedge against the threat of rising taxes in retirement EO002 296692 9/15 | 16 Preserve your wealth in retirement through tax efficient withdrawals Retirement situation Proposed course of action Lower marginal tax rate Draw from traditional retirement accounts to maximize use of lower relative tax bracket, which may help to reduce RMDs at age 70½ Higher marginal tax rate Use tax-free or taxable assets to avoid higher income tax rates and potentially take advantage of lower capital gains rates Significant appreciation in a taxable account If leaving an inheritance, preserve taxable assets to take advantage of “stepped-up” cost basis at death Working in retirement Avoid traditional retirement accounts, which will increase overall income (higher income could trigger taxes on Social Security benefits) EO002 296692 9/15 | 17 Address other specific risks Post-retirement risk Risk management tool Unexpected health-care costs Medigap supplemental coverage or health-care “emergency fund” Loss of ability to live independently Long-term-care insurance or health-care “emergency fund” Catastrophic medical or long-term-care costs Life or long-term-care insurance Lawsuits or creditors Trusts Spending the children’s inheritance Life insurance/irrevocable life insurance trust Inability to fulfill charitable intent Charitable remainder trust or charitable annuity EO002 296692 9/15 | 18 Putting an income plan into practice • Expense approach: Matching income sources with expenses • Time-frame approach: Considering a bucket strategy EO002 296692 9/15 | 19 Match potential sources of income to expenses in retirement Essential expenses • • • • • • Annuities Social Security Dividends Pension income Interest Required minimum distributions Discretionary expenses • Employment income • Portfolio withdrawals • Personal savings Unforeseen expenses • Real estate • Life insurance • Long-term-care insurance EO002 296692 9/15 | 20 Consider a bucket approach Short-term income (0–2 years) Mid-term income (2–10 years) Long-term income (10+ years) Meet immediate cash-flow needs, emergency fund, etc. Mix of growth and income, replenish short-term bucket, guard against market volatility Inflation hedge, address longevity risk • Cash • CDs/money market • Bonds • Deferred annuities • Growth stocks/funds • Real estate • • • • • Absolute return funds • Asset allocation funds, balanced funds • Commodities • Longevity insurance Short-term bonds Immediate annuities Social Security/pension income Wages EO002 296692 9/15 | 21 Closing thoughts • The retirement landscape will continue to evolve • It’s critical for investors to prepare for certain (and uncertain!) risks • A thoughtful income strategy can help you address these challenges and attain the lifestyle in retirement you desire • Meet with your financial advisor to assess your personal situation EO002 296692 9/15 | 22 Additional resources • • • • • Books Longevity Revolution: As Boomers Become Elders, Theodore Roszak AgeQuake, Paul Wallace Age Power: How the 21st Century Will Be Ruled by the New Old, Ken Dychtwald, Ph.D. We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World, Walter Updegrave How Not to Die Broke at 102, Adriane Berg • • • • • • On the web AARP, www.aarp.org Social Security Administration, www.ssa.gov American Savings Education Council, www.asec.org ElderWeb, www.elderweb.com Medicare, www.medicare.gov National Association of Home Care Providers, www.nahc.org EO002 296692 9/15 | 23 A BALANCED APPROACH A WORLD OF INVESTING A COMMITMENT TO EXCELLENCE EO002 280390 EO013 296692 3/13 9/15 | 24 Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing. Putnam Retail Management putnam.com EO002 296692 9/15 | 25 Not FDIC Insured May Lose Value No Bank Guarantee EO002 296692 9/15 | 26