Chartered Retirement Planning Counselor SM Professional Designation Program

Chartered Retirement Planning CounselorSM Professional Designation Program Module 12Retirement Cash Flow Considerations

Learning Objectives 12–1: Describe key factors impacting the decision to retire. 12–2: Describe issues impacting retirement needs analysis. 12–3: Analyze a situation to determine how much money will be needed for retirement. 12–4: Identify issues related to determining a safe initial withdrawal rate. 12–5: Evaluate an individual’s situation to determine a basic retirement cash flow portfolio.

Questions to Get Us Warmed Up

Factors Impacting the Decision to Retire The decision to retire involves much more than monetary issues. Additional considerations are: • Social • Cultural • Interpersonal/relational • Life fulfillment The planner needs to uncover what will make retirement meaningful to the client • May or may not be retirement in the traditional sense 12-5

Retirement Funding Decisions • Social Security: Does it make more sense to wait for full retirement age or to start benefits at age 62? • Health • Lifestyle choices • Financial differential • Additional sources of income • Medicare eligibility • Employer-sponsored retirement income plans 12-6

Behavioral Finance • Anchoring • Confirmation bias • Paralysis by analysis • Mental accounting • Herd mentality • Wealth effect 12-7

Retirement Needs Analysis Analyze expenses to determine a budget • Consider additional discretionary expenses, such as travel • Dream fulfillment costs money Inflation • At 3.5% inflation, purchasing power of $100 reduces to about half in 20 years Health care issues • 65-year-old couple may have $240,000 unreimbursed medical expenses throughout retirement

How Much Money Will Be Needed? After reviewing the underlying issues and areas of concern, two primary questions must be addressed • How much money will be needed to fund the retirement budget? • How much of the retirement nest egg can safely be withdrawn year-by-year?

Variability in Retirement Planning Assumptions • Traditional planning uses straight-line returns • i.e., the same rate continues throughout the retirement period • Two significant areas of variability • Inflation • Investment return • Monte Carlo analysis can help gauge variability of investment returns • Stress testing adds greater reality to the process

Stress Testing • Help the clients create a picture of their goals. • Create a base plan using average returns. • Stress test their plan for return-sequence risk and unsystematic risks. • Repeat steps 2 and 3 as required to create the plan that works for them. • Use Monte Carlo to compare relative results (if helpful for that client).

Safe Initial Withdrawal Rates—Bengen • Bengen’s original work = 4% initial withdrawal rate (IWR) • Bengen’s Layer Cake: • Withdrawal scheme (foundation layer) • Asset allocation • Success rate • Rebalancing interval • Super-investor (normally capable of better-than-average returns) • Desire to leave a legacy • Time horizon • Plus portfolio tax status

Safe Initial Withdrawal Rates—Guyton Safe IWR defined as • never requiring a reduction in withdrawals from any previous year. • allowing for systematic increases to offset inflation. • maintaining the portfolio for at least 40 years. Increasing portfolio equity percentages (to a point) has a significantly positive impact on • initial withdrawal rates. • subsequent withdrawals. • overall portfolio sustainability.

Guyton’s Results At the 99% Confidence Standard, Max IWR is: • 4.5%–4.6% with 50% equities • 5.2%–5.3% with 65% equities • 4.7%–5.6% with 80% equities At the 95% Confidence Standard, Max IWR is: • 4.8% with 50% equities • 5.5%–5.7% with 65% equities • 5.6%–6.2% with 80% equities

Income vs. Cash Flow • Cash flow involves structuring a total return portfolio to fund a retirement budget on a year-by-year basis. • Money for the budget may come from many sources • Cash flow portfolio • Tries to balance income generation • While maximizing growth • Within reasonable safety parameters • So as to provide the highest levels of inflation-adjusted funding for as long as needed • Income portfolios primarily invested in income-producing investments such as bonds • Biggest problem is maintaining purchasing power.

Retirement Income Pyramid Home Other Real Estate Roth IRA Illiquid Investments Rollover IRAs IRAs Life Insurance Social Security Company Pension Reverse Mortgage Annuity Job RMDs

Building a Cash Flow Portfolio • Start by allocating about a year’s worth of withdrawals to cash/cash equivalents • Do the same with an amount for an emergency fund • Initial allocation of 65% equities • Should be balanced at the lowest end of the risk spectrum, while still providing sufficient growth to meet long-term objectives • Initial allocation should change over time to reflect the result of getting older • Eventual allocation may be close to 100% cash • Building in a safety net will help deal with increased longevity

Question 1 Going along with the consensus is an area of behavioral finance known as: • anchoring. • herd mentality. • overconfidence. • mental accounting.

Question 2 An individual who wants to start receiving Social Security at age 62 instead of waiting until full retirement age should answer some questions relative to the decreased benefit. Which of the following are areas that should be considered? • Are they in good or poor health? • Will an eventual pension benefit make up any income deficit? • Do they need the income? • What is the frequency of Social Security benefit payments? • I and II only • III and IV only • I, II, and III only • II, III, and IV only

Question 3 Which sequence of returns would be most advantageous to a new retiree in a 4% inflationary environment with a $70,000 inflation adjusted annual withdrawal rate? • -15% the first five years of retirement, +6% the next five years, and +15% the next five years. • +15% the first five years of retirement, +6% the next five years, and -15% the next five years. • +15% the first five years of retirement, +6% the next five years, and -30% the next five years. • -30% the first five years of retirement, +6% the next five years, and -15% the next five years.

Question 4 In a 3.5% inflation-rate environment, approximately how many years will it take for the purchasing power of $5,000 to be cut in half? • 5 • 10 • 15 • 20

Question 5 Which of the following assets will typically be the last to supply income during retirement? • traditional IRA • qualified retirement plan • taxable brokerage account • home

Chartered Retirement Planning CounselorSM Professional Designation Program Module 12End of Slides

Chartered Retirement Planning Counselor SM Professional Designation Program