Retirement Income Planning - ucnet.universityofcalifornia.edu...The retirement planning information contained herein is general in nature and should not be considered legal or tax
Focus topics: We’re going to spend the next 30 minutes talking about some of the benefits of building a Retirement income plan. You don’t want to tackle retirement on your own…you will be well-served to spend some time with your Fidelity representatives and UC benefits folks to help make sure your retirement is all that you want it to be. We’re going to give you some top-line information and resources about many parts of retirement income planning today. Think of this information as the tip of the iceberg. When you meet with Fidelity, we’ll dive much deeper and work on your own specific details.
A detailed path that helps you determine how to use your financial resources to generate incometo last the rest of your life.
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What exactly is a retirement income plan? Like a blueprint to a new house or a recipe for a new dish, a retirement income plan is designed specifically for you and is defined as: a detailed plan to help you determine how you might use your financial resources to generate income to meet your goals. You can create a plan by yourself or with one of our Fidelity Representatives. It can be simple or very detailed. The key thing is to get started—even if you are only 50 or 55. It will help you make some important decisions about your savings strategies, your work life and your time. Ask Audience: How many of you already have such a detailed plan? [Solicit feedback.] What did you find most surprising?
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Poll Title: How many of you already have a detailed retirement income plan?https://www.polleverywhere.com/multiple_choice_polls/Z99i19nPONB1ptaFPssFu
– Decide when you can retire
– Identify your sources of income
– Prioritize your financial needs vs. wants
– Understand and help minimize key risks
– Stay on track to live the retirement you want
Benefits of a Retirement Income Plan
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Today’s agenda: READ BULLETS
Decide when you can retire
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ASK AUDIENCE: How many of you know exactly when you will be retiring? {show of hands}�How many are not so sure, but are thinking about it? {show of hands} How many aren’t thinking about it at all? {show of hands} Deciding to take this huge step is a big deal. It’s like cliff-diving or bungie jumping! One day you’re working and the next, you aren’t. So making sure you have considered all the possibilities is a key benefit to developing a RIP.
When? Where? What?
• By choice?• By need?
• Downsizing?• Upsizing?
• Filling your days?
• Days of fulfillment?
Part 1: What you want
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There are 2 major decision-making areas around deciding when to retire. The first area is all about you and what you want. You’ like to be in control of when to retire, where to retire and what to do with your time. But, sometimes, retirement doesn’t happen that way and you can be surprised when life gets in the way. We address some what-if scenarios when building a retirement income plan so if you end up retiring earlier than planned, or moving away or staying in place, you’ll have a foundation. We’ll talk more about what you’ll do with your time in the next part of the workshop, but suffice it to say, that it makes for a better retirement when you are retiring to do something new and exciting - - not just trying to fill your days. It’s also important to consider who you are planning with. Are you planning by yourself, or with a spouse or partner? If you're planning with a spouse or partner, you'll also want to consider these important questions: Are you both retiring at the same time? How will your spouse or partner's savings, retirement benefits, and income sources affect your overall plan? Are the two of you on the same page - - and if not, what are you going to do about that?
Ensure your savings last
through retirement
Achieve the retirement goals and lifestyle you
want
Preserve your money for a
legacy or inheritance
Part 2: What you can afford
Maintain flexibility for opportunities
and emergencies
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The second major decision-making area around deciding when to retire is what will you be able to afford? Do you want the same lifestyle you have now, or are you planning to make some changes? When we develop your RIP together, we’ll talk about your big financial situations. We first want to make sure your savings last through retirement – and for both spouses or partners. We know you have retirement goals and a lifestyle you want – how much of that can you have in retirement? A plan is only a tool – it’s a starting place. You’ll want to know that you have some financial flexibility for things that come up. We make sure to address this reality of living in retirement. And, some of you will want to preserve your money for a legacy or inheritance – and others want to spend your hard-earned savings down to the last dime. You get to choose – we’ll help you see how you can make this happen. And there's one more invaluable benefit a retirement income plan can provide: freedom! The freedom of knowing you have a plan that helps you experience retirement in the way you envision it.
Identify your sources of income
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It’s funny how many people find that they have “hidden money”. They forgot about an old account or a pension from 1975. A key benefit to working on your RIP is that you’ll find if you (or your spouse!) has a long-forgotten bucket of money out there. And, you’ll finally get to see all in one place, all of the resources you’ll have to work with.
Traditional retirement income sources
Social Security
UCRP (pension)
Other Savings
UC Retirement
Savings Program
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Let’s start with some of the more traditional sources of retirement income. Talk about each one listed on slide. In other savings, mention military pensions, railroad retirement benefits, and any other common accounts that people forget they have or aren’t sure if they qualify.
Housing and Real Estate
Rental Income
Plans for your home
The gig economy opportunities
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Talk about the importance of their house and the decisions they’ll have to make about living in CA or moving out. How can they use their house as a source of income in retirement, if at all? Paying off mortgage HELOC (home equity line of credit) Reverse Mortgage Do they have reliable rental income that could be a source of monthly income? Will they be interested in becoming an Air B&B or hosting international students or families? We can talk about how you are thinking about your house when we start building a RIP. For reference: A gig economy is an environment in which temporary positions are common and organizations contract with independent workers for short-term engagements. The trend toward a gig economy has begun. A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors.
Talk about various other work options for retirement. You will have to fill your time, and often people would like to be paid for the time they have to give and the expertise they have to offer.
Prioritize your financial needs vs. wants
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An important part of retirement planning involves identifying all your expenses and then splitting them into categories.
3EssentialExpenses
EmergencyExpenses
DiscretionaryExpenses
Categories of expenses
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We can put expenses into three categories: Essential expenses This category includes "must-haves" such as groceries, utilities, transportation, health care, and housing. Discretionary expenses This category includes "nice-to-haves," such as travel, hobbies, and dining out. It may also include purchases like a vacation home or a new vehicle. And, importantly, here is where some of your “flexible” money comes into play. You’ll want to be able to drop everything and go when an unexpected opportunity arises. Plan that these extras may well happen. Emergency expenses This category includes unexpected events like a leaking roof or an unforeseen health issue. As you plan, you'll want to budget for these types of expenses. A common rule of thumb is to set aside 3–6 months' worth of living expenses to help cover emergencies.
Estimated income
Estimated expenses
Gap $5,000Estimated income per month
- $2,000Potential gap per month
- $7,000Estimated expenses per month
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Affording the retirement lifestyle you envision can be done. Once you have a realistic estimate of your expenses in retirement, you'll want to identify which income sources will be designated to cover these expenses. It will also be important to estimate your expenses in retirement as accurately as possible so you can plan for enough retirement income to cover these expenses for the rest of your life. Let's review a hypothetical example. Let’s say you’ve figured out that you’ll need about $7000/month in income. Part of his income will come from UCRP and Social Security, your reliable income sources. Those will give you $5,000/mo in income. But, you’re short $2,000. What options will you have to fill that gap? Well, you might be able to pull from your other savings. You might find that you’ll have to work longer or delay taking Social Security. Or, you might decide to downsize somewhat and live within your new means. Each person will take a different route. There is no right or wrong. But, it is important to build your RIP so you can see where you stand and make decisions that are right for you. That’s one of the biggest benefits to the plan.
Understand and help minimize key risks
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Now, let me share with you 5 of the most important risks we cover when building your RIP. Having a plan does not insulate you from financial and economic risks. It does give you a leg up on understanding that these risks are real and that there are specific you can take to address them.
Longevity Is the Game Changer
•1. Society of Actuaries Annuity 2000 Mortality Table, assumes a person is in good health and has reached age 65.•2. Society of Actuaries Annuity 2000 Mortality Table, updated to 2015 with Schedule G Adjustments. Figure assumes opposite-sex couple with both persons in good health.
999492
Men1 Women1 1 of a couple2
There’s a
25%chance that
you may live a long time1
yearsyears years
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The first and most important risk - - or opportunity! - - is longevity. It’s the game changer for us Baby Boomers. We are the generation who will live the longest. So, we need to plan for a very long retirement. Once you reach age 65, the odds of you living for a good long time are impressive. There is a 25% chance you’ll live well into your 90s. You’ll need income every one of those years!
Know How Much You Can Withdraw Each YearIt’s not as much as you might like
4% 5% 10%X
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And, to make sure you have sufficient income for 20, 25 or 30 years in retirement, you’ll have to manage your savings well. One of the ways we address this in your RIP, is to make sure you aren’t taking out too much too soon. By way of a guideline, you can expect that drawing down 4 to 5% in the first year is a good target. We’re assuming here that you’ll need income for 30 years. You might take a little higher percentage out if you retire late; or, you might need to take even less if you retire early and have say a 35 or 40 year retirement. Bottom line here is you need to think about how much you are taking out of your savings, after pension and Social Security, in terms of a percentage of your portfolio. And, it’s not 10%! At least not until you are about 90 years old!
$500,000
$20,000x 4%
$500,000
$19,531÷ 25.6
4% guideline when you need income for 30 years
Beginning at 72, you must take required minimum distributions
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Let me put a couple of numbers in perspective for you. Now let's review a hypothetical withdrawal example for someone who has saved $500,000 using a target withdrawal rate of 4%. By withdrawing at a rate of 4%, he would receive $20,000 in income this year. Each year after, we’d adjust that income draw for inflation, but you can see that we’ve set the base in the first year of retirement. And, you might be thinking: that isn’t as much as I was thinking I could take out. So, compare the amount to the IRS’s RMD draw down. The year you turn 72, you must take an annual required minimum distribution, or RMD. RMDs are established by the IRS to ensure anyone over the age of 72 pays taxes on their tax-deferred retirement savings each year. Examples of tax-deferred savings include traditional IRAs and workplace savings. So, if you will be 72 this year, you would need to withdrew enough to cover the amount of your annual RMD. We all use the IRS Uniform Lifetime Table to calculate annual RMDs, At age 72, use a divisor of 25.6 and apply it to your December 31 balance of the previous year, $500,000. This withdrawal rate is less than 4%! Bottom line, starting your withdraws at about 4% is a pretty good guideline for making sure you still have income well into your 80s and 90s and beyond.
Investing for the long-term
Preparing for inflation
Anticipating health care costs
Other investment and income risks
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In addition to longevity, which you don’t control, and withdrawal rates, that you do control, there are 3 other key factors we’ll include in your RIP: Inflation can reduce your purchasing power over time, meaning that the value of your money today could be worth less in the future. Investing your assets appropriately may help you deal with inflation while helping you generate enough income to last a lifetime. And last but not least, planning for your health care expenses throughout retirement is an important part of your budget. If you qualify for a UC health benefit in retirement that will certainly help rein in some costs. But, health care is increasingly more expensive and Medicare is not free. Planning for these costs is a critical part of preparing your RIP.
Stay on track to live the retirement you want
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I mentioned earlier that we’re just covering the tip of the iceberg in the workshop today when it comes to developing your individual RIP. Keep in mind that a RIP is not a single document that we do once like a will or an estate plan. It’s an active tool that we’ll use to plan for your retirement day, and every year after to make sure you are staying on tracks despite life’s bumps along the path.
Your initial plan pulls the pieces together
Risks Income Sources
Goals Distributions
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When we build your initial RIP, you’ll see first hand how we pull in all of your specific information. We’ll talk about your thoughts and ideas for retirement and lay out the financial realities. Ultimately, the strategy you choose will depend on your goals and financial situation. And, chances are, you won’t rely on any one strategy. Instead, you’ll probably want to mix and match key components to generate income appropriate for your lifestyle, needs and goals. We want you to know where your paycheck is coming from and how long it might last. That’s why you build a RIP.
%Reduce the impact of taxes
Help determine your investments
Adjust your investment mix
A distribution from a Roth 401(k) is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death.
Annual check-ins address current topics
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Every year up to your retirement, and all the years after, you can meet with a Retirement Planner to refine your plan and make adjustments based on your life the changes in your life. For example, as you move to create your own paycheck, taxes will be a consideration. Different sources of income may be taxed at different rates. As you receive benefits such as UCRP (pension), Social Security, and other reliable income, it's important to understand how they are taxed and where you will be within the tax brackets. Some accounts, such as Roth and Health Savings Accounts, can provide tax-free income if they are qualified distributions, while others, such as withdrawals from Traditional IRAs and retirement plans, may be taxed as regular income. And, again, once you reach age 72 , you are required to start liquidating your retirement accounts and paying tax on the distributions. We can help you get ready to talk with your tax professional. We’ll also review your current asset allocation and make sure it still works for your goals. And, we can help you select the right investments and make tactical shifts to adjust for risks, market conditions, your goals and time frame. And, make sure you have a strong portfolio to create your paycheck.
Specific Actions Needed at Specific Ages
• Write down best estimates
• “Super save”
• Set up an initial planning session with Fidelity
• Determine Social Security strategies
• Reassess risk and asset allocation
• Build a detailed financial assessment
• Sign up for Medicare
• Discuss retiree health insurance options with employer
• Prepare portfolio for required minimumdistributions
50s–Quick Plan 60s–Detailed Plan 65+ –Master Plan
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There are quite a few tasks that come with retiring. So, we break our planning into smaller to-do lists. It’s never too early to start your planning. Or too late. We’ll help you get your first RIP completed, or review the one you have to see if it is still best for you.
Read articles on income planning at
myUCretirement.com
Gather your UCRP estimate, UCRSP account balances
and Social Security Estimate
Attend classes available at
Next steps
Schedule a planning session in person or over
the phone800-558-9182
myUCretirement.com/classes
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Read next steps
The retirement planning information contained herein is general in nature and should not be considered legal or tax advice. Fidelity does not provide legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state, changes in Social Security rules, and your particular situation may affect this information. You should consult your attorney or tax advisor regarding your specific legal or tax situation.
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