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Retirement reality: debunking common myths

Planning for health care costs in retirement

Spending in retirement may be different than the “default” assumption Summary

Today’s agenda

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The retirement equation

Source: The Importance of Being Earnest, J.P. Morgan Asset Management, 2013.

A sound retirement plan: Make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control.

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Life expectancy probabilities

Source: Social Security Administration and J.P. Morgan Asset Management.

Count on longevity: Life expectancy tells only half the story. Plan on the probability of living much longer, perhaps 30 plus years in retirement. ･ For example, there is a 47% chance that one spouse will live to age 90, 2% higher than last year.

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If you’re 65 today, the probability of living to a specific age

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Managing expectations of ability to work

Source: Employee Benefit Research Institute and Mathew Greenwald and Associates, Inc., 2013 Retirement Confidence Survey.

Early retirement: While more Americans are working past age 65, not everyone will be able to control their retirement timing.

Current expectations of retirement vs. actual experience of retirees

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Reasons cited for retiring earlier than planned

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Social Security timing tradeoffs

For illustrative purposes only. For 1955 - 1960, two months are added to the Full Retirement Age each year. Source: Social Security Administration, J.P. Morgan Asset Management.

Understand the tradeoffs: Deciding when to claim benefits will have a permanent impact on the benefit you receive. Claiming before full retirement age can significantly reduce your benefit while delaying increases it.

Born 1943 - 1954; Age 60-71

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Born 1960+; Age 54 or younger

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Retirement reality: debunking common myths

Planning for health care costs in retirement

Spending in retirement may be different than the “default” assumption Summary

Today’s agenda

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What is Medicare?

Traditional Medicare

Part A • Inpatient hospital

Fully Government provided

Part B • Doctors and tests

Government provided + premium

Part D • Prescription drugs

Sold by private companies with a government subsidy

Medicare Supplement Insurance • Co-pays & deductibles related to Parts A and B • Standardized plans

Sold by private companies

Medicare Advantage (Part C)

Alternative to Traditional Medicare

• Combines Part A and B • May provide additional benefits • Most plans cover prescription drugs

Part A

Part B

Sold by private companies with a government subsidy

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Rising annual health care costs

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For illustrative purposes only. Source: Employee Benefit Research Institute (EBRI), January 17, 2014. Based on national average cost estimates for Medicare Parts A, B, D and Medigap Plan F. EBRI derived inflation estimates from US CBO estimates. On average, health care costs are estimated to increase 5.0% for the 50th percentile, 4.8% for the 75th percentile and 3.5% for the 90th percentile. Vision, dental and long-term care expenses are not included. Assumes continued implementation of the Patient Protection and Affordable Care Act. The costs at 90th percentile actually dip down in 2019 due to the implementation of the Medicare prescription drug “donut hole” being filled in as applied to Medicare prescription drug costs.

A growing concern: Lifetime retirement health care cost estimates may be overwhelming, therefore annual health care costs may be easier to digest when planning for retirement expenses.

Estimated annual out-of-pocket health care costs for a 65-year-old retiring in 2014

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Medicare Advantage: out of pocket spending limits

Distribution of Medicare Advantage plans’ out-of-pocket spending limits

Note: Excludes SNPs, employer-sponsored (i.e., group) plans, demonstrations, HCPPs, PACE plans, MSAs, and plans for special populations (e.g., Mennonites). Percentages are unweighted by enrollment. All Medicare Advantage plans have been required to limit out-of-pocket expenses to no more than $6,700 since 2011. PFFS plans not shown because 98% of PFFS plans were missing limits. The total includes cost plans, which are not shown separately. Data may not add to 100% due to rounding. Source: “Medicare Advantage 2014 Spotlight: Plan Availability and Premiums,” Kaiser Family Foundation, Nov 25, 2013

90%

Average out-of-pocket limit, weighted by enrollment 2014: $4,900

Does not include spending on prescription drugs

4% 3%

44% 34%

27%

23%

25% 41%

2013 2014

$2500 or less $2501 - $3400 $3401 - $5000 $5001 - $6700

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Health care spending growth has been on a recent decline

Source: BLS

Year-over-year health care inflation change

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

5.7% Average (1960 -2013)

2.01%

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As Boomers age, per person costs are likely to increase

Source: Meara, White and Cutler, “Trends in Health Spending by Age”. Represents combination of household surveys and total spending data to analyze trends in medical spending from 1963 – 2000.

Relative per capita health spending, by age cohort Age 35-44 = 1 (baseline)

0

1

2

3

4

5

6

0-5 6-14 15-24 25-34 35-44 45-54 55-64 65-74 75+

Spen

ding

rela

tive

to a

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Age cohorts of Americans

0.5x 0.5x 0.6x 1.0x 1.0x

1.4x

2.0x

3.1x

5.7x

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Where are we headed?

Source: Containing the Growth of Spending in the U.S. Health System, Health Policy Center, Urban Institute, October 2011. Health care spending and the Medicare Program, Medicare Payment Advisory Commission, June 2013 Databook. Center for Medicare and Medicaid Services, Medicare and Medicaid Research Review, 2013, Vol 3, No 3. Kaiser Family Foundation, Medicare ‘s Role for Dual Beneficiaries, April 2012. J.P. Morgan Asset Management analysis.

New technology: innovation

Aging population Chronic disease

Dual Medicare/Medicaid eligibility Poor care coordination Poor health behaviors

Good economic conditions

Provider price increases

Good health behaviors

Drugs going off patent

Greater care efficiency & coordination

New technology: efficiencies

Lack of cost sharing

Increased cost sharing

Poor economic conditions

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Long-term care planning

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Source : American Association for Long-Term Care Insurance 2014 Sourcebook. www.aaltci.org. Lifetime chance of using benefits from a LTC policy purchased at age 60 with a 90-day waiting period before benefits start is 35%. There is approximately a 1 in 3 chance of filing a claim that will last less than 6 months; however, there is a 1 in 10 chance of filing a claim for 5 years or more. Annualized inflation 1994 - 2012: 3.81% nursing home care; 1.67% home health care.

Long-term vision: Many individuals will need long-term care. There may be a progression of care that starts with home care.

Likelihood of needing long-term care 2012 new LTC claims by type

All LTC claims by type

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Annual cost of nursing home care (private room)

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Source: New York Life Insurance 2014 Cost of Care Survey developed in partnership with Univita. Average daily costs annualized over 365 days and weighted by city population for each state.

The cost of care: Many people realize nursing home care is expensive, but there is significant cost variation depending on where care is utilized.

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Retirement reality: debunking common myths

Planning for health care costs in retirement

Spending in retirement may be different than the “default” assumption Summary

Today’s agenda

40% 30% 20% 10%

0%

50%

60%

70%

80%

90%

65

Active Phase “Go-Go”

Passive Phase “Slow-Go”

20%-30% Reduction in Spending

Final Phase “No-Go”

?

75 85

Percent of pre-retirement spending

100%

Healthcare / LTC

Source: The Prosperous Retirement: Guide to the New Reality, Michael K. Stein, CFP, 1998. pp. 16-18

“The Prosperous Retirement” – theoretical spending profile

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Changes in spending

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Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension contributions, BLS. Data as of September 2013. Average household size for age 45-54 is 2.7; age 55-64 is 2.1; age 65-74 is 1.8 and age 75+ is 1.5. Source: J.P. Morgan Asset Management.

What to expect: Household spending peaks at the age of 45, after which spending declines in all categories but health care.

Average household spending patterns by various age groups

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The empty nest: A decline in the average household size plays a role in spending changes over time

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

45-54 55-64 65-74 75+

Age

Average spending patterns by household size

One person HH size Average HH size Two person HH size

Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension contributions, BLS. Data as of September 2013. Average household size for age 45-54 is 2.7; age 55-64 is 2.1; age 65-74 is 1.8 and age 75+ is 1.5. Source: J.P. Morgan Asset Management.

2.7 persons

2.1 persons

1.8 persons

1.5 persons

Changes in spending by age and household size

0514

$0

$10,000

$20,000

$30,000

$40,406 $40,000

$50,000

$60,000

45-54 55-64 65-74

Age

Average spending patterns over seven 20-year rolling cohorts (1984 - 2010) of the Silent Generation adjusted for inflation to 2012 dollars

Health care

Transportation

Housing

Other

Education

Entertainment

Food & Beverage

Apparel and services

$56,805

$45,320 20%

29%

Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension and cash contributions, and including mortgage principal pay down in the housing category, BLS Data as of September 2013. Source: J.P. Morgan Asset Management

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70 - 74 75 - 79 80 - 84 85+Age

Average spending patterns of various age and asset groups - Chase data $2MM - $5MM in assets

Health care Housing Education Food & Beverage Transportation

Other Entertainment Apparel and services Travel

An affluent view: $2-5M in investable wealth

Based on Chase credit card, debit, and DDA mortgage payments from 9/2012 – 8/2013 Source: J.P. Morgan Chase

$137,047 $140,173

$128,271

$113,404

$101,592

$91,411 $86,481

$79,390 $76,063

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Estimates based on Consumer Expenditure Survey results from 1984 – 2012. Source: J.P. Morgan Asset Management

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

65 70 75 80 85 90Age

"Traditional" spending assumption vs. historical reality

Health care Housing Education Food & Beverage Transportation Other Entertainment Apparel and services Inflate by 2.5%

$43,092

$79,891

$49,366

Traditional vs. historical spending assumptions

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Retirement reality: debunking common myths

Planning for health care costs in retirement

Spending in retirement may be different than the “default” assumption Summary

Today’s agenda

24

The retirement equation

Source: The Importance of Being Earnest, J.P. Morgan Asset Management, 2013.

A sound retirement plan: Make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control.

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Appendix

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Will the Affordable Care Act encourage early retirement?

No pre-existing conditions limitations

Insurance is available with no increased cost for those with medical conditions

Subsidies for those with lower incomes

Example: 55 year old couple with MAGI of $60,000 may receive a $5,607 subsidy1

Younger individuals subsidize older individuals

Premiums can’t be more than 3X higher for older people than for younger people

Source: Kaiser Family Foundation focus on health reform summary of the Affordable Care Act, last modified April 23, 2013. 1. MAGI = Modified Adjusted Gross Income. Kaiser Family Foundation subsidy calculator US average for non-smokers in 2014 with no employer coverage for a Silver Plan subsidies would be different for a Bronze plan (less coverage) for a Gold plan (more coverage). Subsidies start at 400% of the Federal poverty level ($62,920 for a 2 person household) in the 48 contiguous states and the District of Columbia.

64 year old non-smoker Average premium for a silver plan: $7,606 Maximum out-of-pocket costs: $6,350

Example case:

Vs. 65 year old on Medicare Average total cost: $4,002 90th percentile prescription drug cost: $7,214

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J.P. Morgan Asset Management – index definitions

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J.P. Morgan Asset Management – disclosures