journeyguide retirement optimization - ash...
TRANSCRIPT
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Income as the Outcome
JourneyGuide™ Retirement Optimization
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JourneyGuide™ - Patent Pending
Why the Green Path to the Orange Number?
• Dr. Jeff Brown’s conclusion…“Income as the Outcome”
• Why do people save for retirement?
7
• Shift from defined benefit to defined contribution
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JourneyGuide™ - Patent Pending
Myth Reality
Contributions
Withdrawals
Lump Sum
Returns
Longevity
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions
Withdrawals
Lump Sum Average
Returns
Longevity
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
My rich uncle…
• Gives me a one-time gift of $108,726
• It’s the compound annual growth rate that matters when there’s a lump sum
Year S&P 500
1995 37.58%
1996 22.96%
1997 33.36%
1998 28.58%
1999 21.04%
2000 -9.11%
2001 -11.89%
2002 -22.10%
2003 28.68%
2004 10.88%
2005 4.91%
2006 15.79%
2007 5.49%
2008 -37.00%
2009 26.46%
2010 15.06%
2011 2.11%
2012 16.00%
2013 32.39%
2014 13.48%
Reality
$ 149,585
$ 183,929
$ 245,288
$ 315,391
$ 381,750
$ 346,972
$ 305,717
$ 238,154
$ 306,456
$ 339,799
$ 356,483
$ 412,772
$ 435,433
$ 274,323
$ 346,908
$ 399,153
$ 407,575
$ 472,787
$ 625,923
$ 710,297
CAGR
9.84%
Avg
11.73%
Using the Average
$ 121,483
$ 135,737
$ 151,664
$ 169,459
$ 189,343
$ 211,559
$ 236,383
$ 264,119
$ 295,109
$ 329,736
$ 368,425
$ 411,654
$ 459,956
$ 513,925
$ 574,226
$ 641,603
$ 716,885
$ 801,001
$ 894,986
$ 1,000,000
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JourneyGuide™ - Patent Pending
ActualS&P 500
Portfolio Value
37.58% $ 149,585
22.96% $ 183,929
33.36% $ 245,288
28.58% $ 315,392
21.04% $ 381,750
-9.11% $ 346,973
-11.89% $ 305,718
-22.10% $ 238,154
28.68% $ 306,457
10.88% $ 339,799
4.91% $ 356,483
15.79% $ 412,772
5.49% $ 435,433
-37.00% $ 274,323
26.46% $ 346,909
15.06% $ 399,153
2.11% $ 407,575
16.00% $ 472,787
32.39% $ 625,923
13.48% $ 710,297
Sorted Ascending
Portfolio Value
-37.00% $ 68,497
-22.10% $ 53,359
-11.89% $ 47,015
-9.11% $ 42,732
2.11% $ 43,633
4.91% $ 45,776
5.49% $ 48,289
10.88% $ 53,543
13.48% $ 60,760
15.06% $ 69,911
15.79% $ 80,950
16.00% $ 93,902
21.04% $ 113,659
22.96% $ 139,755
26.46% $ 176,734
28.58% $ 227,244
28.68% $ 292,418
32.39% $ 387,132
33.36% $ 516,280
37.58% $ 710,297
Sorted Descending
PortfolioValue
37.58% $ 149,585
33.36% $ 199,486
32.39% $ 264,100
28.68% $ 339,844
28.58% $ 436,971
26.46% $ 552,593
22.96% $ 679,469
21.04% $ 822,429
16.00% $ 954,018
15.79% $ 1,104,657
15.06% $ 1,271,019
13.48% $ 1,442,352
10.88% $ 1,599,280
5.49% $ 1,687,080
4.91% $ 1,769,916
2.11% $ 1,807,261
-9.11% $ 1,642,620
-11.89% $ 1,447,312
-22.10% $ 1,127,456
-37.00% $ 710,297
CAGR9.84%
For a Lump Sum… Sequence Doesn’t Matter
CAGR9.84%
CAGR9.84% 11
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JourneyGuide™ - Patent Pending
Contributions
Withdrawals
Lump Sum Average
Returns
Longevity
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions
Withdrawals
Lump Sum Average
Returns
Longevity
CAGR
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns
Longevity
CAGR
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
For Periodic Contributions … Sequence Really Does Matter!
• So, if I contribute $12,810 annually using the 11.73% average growth rate, I would have $1,000,000 in 20 years
• But let’s see what really could happen…
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JourneyGuide™ - Patent Pending
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns
Longevity
CAGR
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns
Longevity
CAGR
Path
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals “your number”
Lump Sum Average
Returns
Longevity
CAGR
Path
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
And, for Withdrawals … Sequence Matters Even More!
• Assuming I do accumulate $2,000,000 and continue to use the 11.73% average, I can withdraw $210,027 each year
• But let’s see what really could happen…
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JourneyGuide™ - Patent Pending
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals “your number”
Lump Sum Average
Returns
Longevity
CAGR
Path
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals “your number”
Lump Sum Average
Returns
Longevity
CAGR
Path
Income
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity
CAGR
Path
Income“your number”
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Net, Not Gross
• Invest Expenses: -0.55%
• Dividend Taxes: -0.90%
• Cap Gain Taxes: -0.63%
• Inflation: -2.88%
Source: “A Study of Real Real Returns,” Thornburg Investment Management, 2015
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity
CAGR
Path
Income“your number”
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity
CAGR
Path
Income“your number”
Net
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity Life Expectancy
CAGR
Path
Income“your number”
Net
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
• Life expectancy is increasing about 2.5 years per decade or 15 minutes per hour
• Harold Evensky“Annuities are poised to become the most important investment vehicle of the next decade since they are about the only way retirees can manage longevity risk”
53
Managing Longevity Risk
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity Life Expectancy
CAGR
Path
Income“your number”
Net
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR
Withdrawals
Lump Sum Average
Returns Gross
Longevity Life Expectancy
CAGR
Path
Income“your number”
Net
Hedge
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
Contributions CAGR Path
Withdrawals “your number” Income
Returns Gross Net
Longevity Hedge
Lump Sum Average CAGR
Life Expectancy
Myth Reality
Debunking Five Myths
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JourneyGuide™ - Patent Pending
If We’re Going to Model This, Do it Right!
• Expected qualified and non-qualified asset values based on Modern Portfolio Theory
• Immediate and deferred annuity payouts with exclusion ratio
• Tax consequences of rebalancing and turnover, maintaining basis for short vs. long G/L
• Path risk assessment using Monte Carlo simulations
57
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JourneyGuide™ - Patent Pending
Doing it Right With JourneyGuide™
Determine an income level that is…
• After tax
• After inflation
• Sustainable for life
58
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JourneyGuide™ - Patent Pending
JourneyGuide™ Case Study #1
Current Situation:
• Michael (65), average health, never married and no kids
59
• Has saved $922K (Non-Qual: $343K, Qual: $579K)
• Target a 95% confidence of having at least a dollar of assets when he is 95
• $21K of Social Security, no pension
• Moderate allocation, 60% FI / 40% Eq
• Already retired; wants to know safe income level
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JourneyGuide™ - Patent Pending
Generating Income – After Inflation, After Tax
Current Age: 65 (M) Income Date: Nov 2015 Balance: $922K Confidence: 95% at age 95
Current Strategy
Allocations:Annuity: 0%Fixed Income: 60%Equities: 40%
_________________
$55,000
_________________
$61,000
Allocations:Annuity: 24%Fixed Income: 46%Equities: 30%
_________________
$65,000
Allocations:Annuity: 35%Fixed Income: 52%Eq (mid-cap): 13%
10.9% increase
18.2% increase
Revised Allocation
Introduce Annuities
Including AnnuityIncreased Annuity,Revised Allocation
60
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JourneyGuide™ - Patent Pending
Generating Reserves
$55,000 Inflation Adjusted, After Tax Income
All $922K Needed
$762K Needed
$722K Needed
Current Strategy
$200KReserves
$160KReserves
Including AnnuityIncreased Annuity,Revised Allocation
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JourneyGuide™ - Patent Pending
Maximized Income
$65,000 Inflation Adjusted, After Tax Income
Current Strategy
Likelihood Of Having At Least $1 Of Assets...
Including Annuity
At Age 95 57% 91% 95%
At Age 100 39% 81% 93%
At Age 105 73% 90%
Worst Case Income At Age 100
$18,289* $32,607* $43,835*
* In today’s after-tax dollars
Increased Annuity,Revised Allocation
28%
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JourneyGuide™ - Patent Pending
Income Sources – Poor Market Scenario
$65,000 Inflation Adjusted, After Tax Income
Current Strategy
• With asset shortfall, the only source of income is social security
• Covers 38% of after-tax need at age 84
Revised Strategy
• With asset shortfall, social security is combined with guaranteed income from the annuities
• Covers 87% of after-tax need at age 84
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JourneyGuide™ - Patent Pending
Client Assumptions
Client:Male: 65
Spending Taper:1.5% increasing by .2% annually
From Age: 75To Age: 85
Income Strategy #1
SPIA Specs:Amount: $100KInflation Adj: 0%Account: QualifiedPurchase Date: Oct 2015
Income Strategy #2
SPIA Specs:Amount: $100KInflation Adj: 0%Account: QualifiedPurchase Date: Oct 2015
Current Portfolio:Non-Qualified: $343KQualified: $579KSocial Security: $21,768Pension: $0
Average Federal Tax Rates:Ordinary Income: 15%Capital Gains: 15%Filing Status: Individual
DIA Specs:Amount: $0Inflation Adj:Account: Purchase Date: Beginning Date:
DIA Specs:Amount: $100KInflation Adj: 3%Account: Non-QualifiedPurchase Date: Oct 2015Beginning Date: Jan 2025
Inflation: 2.0% increasing by .02% annually
State and Local Tax Rates:Ordinary Income: 3.8%Capital Gains: 3.8%
QLAC Specs:Amount: $125KInflation Adj: 3%Purchase Date: Oct 2015Beginning Date: Jan 2025
QLAC Specs:Amount: $125KInflation Adj: 3%Purchase Date: Oct 2015Beginning Date: Jan 2025
Beginning: Nov 1, 2015 Management Fees: .5%
(2,000 Monte Carlo Trials)
Simulation Modeling
64
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JourneyGuide™ - Patent Pending
JourneyGuide™ Case Study #2
Current Situation:
• Doug (59) and Sue (58), both relatively healthy
65
• Recently sold a business and have $12.3M in non-qualified assets
• Target a 95% confidence of having at least a dollar of assets when she is 95
• Expect $36K of Social Security, no pension, and no qualified assets
• Conservative allocation, 90% FI / 10% Eq
• Would like to retire asap and know how much they can safely spend
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JourneyGuide™ - Patent Pending
Generating Income – After Inflation, After Tax
Current Age: 59 (M), 58 (F) Income Date: 07/01/15 Balance: $12.3M Confidence: 95% at younger age 95
Current Strategy
Allocations:Annuity: 0%Fixed Income: 90%Equities: 10%
_________________
$357,000
Revised Allocation
Introduce Annuities
_________________
$397,000
Allocations:Annuity: 20%Fixed Income: 72%Equities: 8%
11.2% increase
Including Annuity
_________________
$415,000
Allocations:Annuity: 30%Fixed Income: 56%Equities: 14%
16.2% increase
Increased Annuity, Revised Allocation
66
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JourneyGuide™ - Patent Pending
Generating Reserves
$357,000 Inflation Adjusted, After Tax Income
All $12.3M Needed
$10.9M Needed
$10.2M Needed
Current Strategy
$2.1MReserves
$1.4MReserves
Including AnnuityAnnuity with
Revised Allocation
67
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JourneyGuide™ - Patent Pending
Maximizing Income
$415,000 Inflation Adjusted, After Tax Income
Current Strategy
Likelihood Of Having At Least $1 Of Assets...
Including Annuity
At Age 95 69% 85% 95%
At Age 100 40% 60% 85%
At Age 105 33% 66%
Worst Case Income At Age 100
$36,000* $84,000* $93,000*
* In today’s dollars
Annuity withRevised Allocation
18%
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JourneyGuide™ - Patent Pending
Client Assumptions
Clients:Male: 59Female: 58
Spending Taper:1.5% increasing by .1% annually
From Age: 75To Age: 87
Income Strategy #1
SPIA Specs:Amount: $0Purchase Date:
Income Strategy #2
SPIA Specs:Amount: $0Purchase Date:
Current Portfolio:Non-Qualified: $12.3MQualified: $0Social Security: $36,000Pension: $0
Average Federal Tax Rates:Ordinary Income: 20%Capital Gains: 15%Filing Status: Joint
DIA Specs:Amount: $2.3MPurchase Date: June 2015Beginning Date: June 2030
DIA Specs:Amount: $3.7MPurchase Date: June 2015Beginning Date: June 2030
After-Tax Income: Yes State and Local Tax Rates:Ordinary Income: 4.3%Capital Gains: 4.3%
QLAC Specs:Amount: $0Purchase Date: Beginning Date:
QLAC Specs:Amount: $0Purchase Date: Beginning Date:
Beginning: June 2015 Management Fees: .5%
Inflation: 2.0% increasing by .02% annually
(2,000 Monte Carlo Trials)
Simulation Modeling
69
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JourneyGuide™ - Patent Pending
JourneyGuide™ Case Study #3
70
Current Situation:
• Anne is 55 and has some health issues
• Has saved $382K (Non-Qual: $247K, Qual: $135K)
• $5,800 of Social Security, no pension
• Moderate allocation; 50% FI / 50% Eq
• Retiring now and wants to know safe income level
• Target a 95% confidence of having at least a dollar of assets when she is 95
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JourneyGuide™ - Patent Pending
Generating Income – After Inflation, After Tax
Current Age: 55 (F) Income Date: Nov 2015 Balance: $382K Confidence: 95% at her age 95
Current Strategy
Allocations:Annuity: 0%Fixed Income: 50%Equities: 50%
_________________
$18,000
_________________
$21,000
Allocations:Annuity: 31%Fixed Income: 48%Eq (mid-cap): 21%
_________________
$20,800
Allocations:Annuity: 31%Fixed Income: 48%Eq (mid-cap): 21%
16.7% increase15.6% increase
Bequest Protection
Introduce Annuities,
Revise Allocation
Maximized IncomeIncreased Income
with Bequest Protection
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JourneyGuide™ - Patent Pending
Client Assumptions
Client:Female: 55
Spending Taper:1.5% increasing by .2% annually
From Age: 75To Age: 85
Income Strategy A
DIA Specs:Amount: $100KInflation Adj: 3%Account: Non-QualifiedPurchase Date: Nov 2015Beginning Date: Jan 2026
Income Strategy B
Indexed w/ GMBR Specs:Amount: $100KAccount: Non-QualifiedPurchase Date: Oct 2015Beginning Date: Jan 2026
Current Portfolio:Non-Qualified: $247KQualified: $135KSocial Security: $5,800Pension: $0Capital Infusion: $80K (2017)
Average Federal Tax Rates:Ordinary Income: 10%Capital Gains: 0%Filing Status: Individual
QLAC Specs:Amount: $18KInflation Adj: 3%Purchase Date: Nov 2015Beginning Date: Jan 2039
QLAC Specs:Amount: $18KInflation Adj: 3%Purchase Date: Nov 2015Beginning Date: Jan 2039
Inflation: 2.0% increasing by 0% annually
State and Local Tax Rates:Ordinary Income: 4%Capital Gains: 4%
Beginning: Dec 2015 Management Fees: .9%
(2,000 Monte Carlo Trials)
Simulation Modeling
72
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JourneyGuide™ - Patent Pending
JourneyGuide™ Case Study #4
73
Current Situation:
• Todd (58) and Mary (49), both in average health
• They have saved $3M (Non-Qual: $140K, Qual: $2.9M)
• Todd is retiring in 2016 and Mary expects to work another 5 years
• They will begin taking withdrawals when Mary retires
• Expect $50K of Social Security and $52K in pension
• Allocation; 30% FI / 70% Eq
• Want to know how much they can safely spend
• Target a 95% confidence of having at least a dollar of assets when she is 95
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JourneyGuide™ - Patent Pending
Generating Income – After Inflation, After TaxCurrent Ages: 58 (M), 49 (F) Retirement Date: Jan 2021 Current Qual Balance: $2.9M Confidence: 95% at her age 95
Current Strategy
Allocations:Annuity: 0%Fixed Income: 30%Equities: 70%
_________________
$112,000
_________________
$117,000
Allocations:Annuity: 10%Fixed Income: 27%Equities: 63%
_________________
$129,000
Allocations:Annuity: 10%Fixed Income: 54%Eq (mid-cap): 36%
4.5% increase
15.2% increase
Revised Allocation
Introduce Annuities
Including AnnuityIncluding Annuity,Revised Allocation
74
Only qualified assets were used in the analysis. All $140K of non-qualified were set aside as reserves.
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JourneyGuide™ - Patent Pending
Generating Reserves
$112,000 Inflation Adjusted, After Tax Income
All $2.9Mof Qualified
Assets Needed $2.7Mof Qualified Assets
Needed
$2.1Mof Qualified Assets
Needed
Current Strategy
$800KReserves
$200KReserves
Including AnnuityIncluding Annuity,Revised Allocation
75
Note: $140K of non-qualified assets were set aside as additional reserves and not included in the figures above
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JourneyGuide™ - Patent Pending
Maximized Income
$129,000 Inflation Adjusted, After Tax Income
Current Strategy
Likelihood Of Having At Least $1 Of Assets...
Including Annuity
At Her Age 90 90% 92% 98%
At Her Age 95 85%
At Her Age 100
Worst Case Income At Her Age 95
$34,667* $45,193* $45,193*
* In today’s after-tax dollars
Including Annuity,Revised Allocation
76
81%
95%88%
84% 90%
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JourneyGuide™ - Patent Pending
Income Sources – Poor Market Scenario
77
$129,000 Inflation Adjusted, After Tax Income
Current Strategy
• With asset shortfall, the only source of income is social security and pension
• Covers 28% of after-tax need at her age 95
Revised Strategy
• With asset shortfall, social security is combined with guaranteed income from the annuity and pension
• Covers 37% of after-tax need at age 95
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JourneyGuide™ - Patent Pending
Client Assumptions
Client:Male: 58Female: 49
Spending Taper:1.5% increasing by .2% annually
From Age: 75To Age: 85
Income Strategy
DIA Specs:Amount: $300KInflation Adj: 3%Account: His QualifiedRefund: Return of premiumPurchase Date: Jan 2016Payout Begin Date: Jan 2021
*See accompanying illustration for additional details
Current Portfolio:Non-Qualified: $140KQualified: $2.9MSocial Security:
His at age 66: $30,000Her’s at age 62: $20,000
Pension: $52,000
Average Federal Tax Rates:Ordinary Income: 28%Capital Gains: 15%Filing Status: Joint
Inflation: 2.0% increasing by 0.02% annually
State and Local Tax Rates:Ordinary Income: 0%Capital Gains: 0%
Retirement: Jan 2021 Management Fees: .8%
(2,000 Monte Carlo Trials)
Simulation Modeling
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JourneyGuide™ - Patent Pending
Asset Class Assumptions
Inv Grade Fixed Income: US Small Cap: US REITs: US Large Cap Value: US Mid Cap:
Mean: 4.75% Mean: 9.75% Mean: 10.86% Mean: 8.73% Mean: 11.83%
Standard Deviation: 2.69%
Standard Deviation: 19.56%
Standard Deviation: 21.64%
Standard Deviation: 18.48%
Standard Deviation: 21.53%
Yield: 3% Dividend: 2% Dividend: 7% Dividend: 2% Dividend: 2%
Turnover: 75%S-T: 60%L-T: 40%
Turnover: 50%S-T: 60%L-T: 40%
Turnover: 50%S-T: 60%L-T: 40%
Turnover: 50%S-T: 60%L-T: 40%
Turnover: 50%S-T: 60%L-T: 40%
Municipal Fixed Income: US Small Cap Value: US Large Cap: US Large Cap Growth: Non-US Equity:
Mean: 4.85% Mean: 8.59% Mean: 9.49% Mean: 10.28% Mean: 7.03%
Standard Deviation:4.89%
Standard Deviation: 18.32%
Standard Deviation: 17.88%
Standard Deviation: 17.71%
Standard Deviation: 21.10%
Yield: 2.5% Dividend: 2% Dividend: 2% Dividend: 2% Dividend: 2%
Turnover: 75%S-T: 60%L-T: 40%
Turnover: 50%S-L: 60%L-T: 40%
Turnover: 50%S-L: 60%L-T: 40%
Turnover: 50%S-L: 60%L-T: 40%
Turnover: 50%S-L: 60%L-T: 40%
(2,000 Monte Carlo Trials)
Simulation Modeling
79
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JourneyGuide™ - Patent Pending
Why Does the Annuity Work in All These Cases?
80
• Investments provide necessary return
• Annuities provide duration and volatility protection
Because, when teamed with investments, it makes for a winning combination
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JourneyGuide Advisor Experience
Your Guide to Working With the Ash JourneyGuideTM Team
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Questions? Call 844-4ASHJRN (844-427-4576)Send completed Fact Finder to: [email protected]
We Start With the Fact Finder
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We’ll Make Sure We Get it Right…if we have any questions about the Fact Finder, we’ll ask
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Once We Have the JourneyGuide results… we’ll review them with you
JourneyGuide™-PatentPending
Genera ngIncome–A erInfla on,A erTax
CurrentAge:65(M) IncomeDate:Nov2015 Balance:$922K Confidence:95%atage95
CurrentStrategy
Alloca ons:
Annuity:0%
FixedIncome:60%Equi es:40%
_________________
$55,000
_________________
$61,000
Alloca ons:
Annuity:24%
FixedIncome:46%Equi es:30%
_________________
$65,000
Alloca ons:
Annuity:35%
FixedIncome:52%Eq(mid-cap):13%
10.9%increase
18.2%increase
RevisedAlloca on
IntroduceAnnui es
IncludingAnnuityIncreasedAnnuity,RevisedAlloca on
55
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Tell Us What Your Client Thought
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You May Be Wondering…
Q: When can I start using JourneyGuide?
A: Plans are to begin February 22
Q: How many can I get?
A: During the pilot run (ending this summer), we can provide one report per month, per advisor
Q: How long does it take?
A: Expectations are five days from submission of Fact Finder to completed report
Q: How much will it cost?
A: During the pilot, there will be no charge ... ultimately, there will be associated costs for JourneyGuide