How To Mitigate Retirement Income Risks

How To Mitigate Retirement
Income Risks
Jamie Hopkins, Esq., JD, MBA, LLM, RICP®
Associate Director of the New York Life
Center for Retirement Income, Associate
Professor of Taxation
[email protected]
Leadership
Jamie Hopkins, Esq, LLM, MBA
Dave Littell, JD, ChFC®, CFP®
Associate Director, Associate
Professor of Taxation
Director, Joseph E. Boettner
Chair in Research, Professor of
Taxation
Mission:
•  Elevate the retirement-income planning knowledge of
financial services professionals in order to improve
retirement security for all Americans
Current Priorities & Initiatives
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Video Library www.theamericancollege.edu/retirement
Retirement Income Certified Professional® (RICP®)
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RICP® Retirement Income Literacy Index
Retirement Income Certified Professional® (RICP®)
Practical.
Current.
Comprehensive.
http://retirement.theamericancollege.edu/
Free Just in Time Video Content On
ü  Making Retirement Income Last a Lifetime
ü  Using Annuities in Retirement Planning
ü  When to Start Social Security Benefits
ü  How Much to Save for Retirement
ü  Tax Strategies for Retirement Plan Withdrawals
ü  Health and Long-Term Care Strategies
RICP® Experts
Educators
•  Franklin
•  Hegna
•  Jordon
•  Rappaport
•  Timmermann
Researchers
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Ameriks
Babbel
Basu
Blanchett
Finke
Milevsky
Pfau
Reichenstein
Sass
Vanderhei
Warshawsky
Software
•  Freitag
•  Hegna
•  Malholtra
•  Meyer
•  Pechter
•  Huxley
Practitioner
Experts
•  Baldwin
•  Caudill
•  Cloake
•  Kitces
•  Guyton
•  Newman
•  Schiff
•  Rosen
What is Retirement Income Planning?
•  Meeting client’s financial goals
•  Income needs
•  Contingent expenses
•  Legacy goals
•  Address retirement risks
•  Longevity Risk
•  Long-Term Care Risk
•  Sequence of Withdrawal risk
•  Public Policy Risk
Retirement Income Process
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Evaluate the client’s current
situation
Identify and prioritize retirement
goals
Estimate retirement income needs
Identify sources of income and
assets available to generate
retirement income
Make a preliminary calculation of
the client’s preparedness for
retirement
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Develop strategies for addressing
a shortfall
7.  Consider legal and tax issues that
can derail plan
8.  Consider retirement risks in
developing solutions
9.  Determine an appropriate strategy
for converting assets into income
10.  Integrate all considerations,
present alternatives, and agree
upon a plan
Risks to Address
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Longevity Risk
Inflation Risk
Excess Withdrawal Risk
Health Expense Risk
Long-Term Care Risk
Frailty Risk
Elder Abuse Risk
Market Risk
Interest Rate Risk
10.  Liquidity
11.  Sequence of Returns Risk
12.  Forced Retirement Risk
13.  Reemployment Risk
14.  Employer Insolvency Risk
15.  Loss of Spouse Risk
16.  Unexpected Financial
Responsibility Risk
17.  Timing Risk
18.  Public Policy Risk
Four Focal Point Retirement Risks
1.  Longevity Risk
2.  Sequence of Returns Risk
3.  Long-Term Care Risk
4.  Public Policy Risk
Impact of Good Advice (Decisions)
Strategies
Social Security Claiming
Dynamic Withdrawal Strategy
Tax Efficiency
Total Wealth Asset Allocation
Annuity Allocation
Liability Relative Optimization
Total
*Blanchett, video discussing article
“Alpha, Beta and now Gamma”
Increase in income*
9.0%
8.5%
8.2%
6.1%
3.8%
2.2%
38%
Longevity Risk
Longevity Risk
No one can predict how long he will
live. This complicates planning
since a retiree has to secure an
adequate stream of income for an
unpredictable length of time.
Understanding Longevity Risk
•  Average Life Expectancy – Social Security –
Age 84 – males
– Age 86 – females
•  1 in 4 will live past age 90
•  1 in 10 will live past 95
•  Clients underestimate their life expectancies
•  Exacerbates many other risks!
Solutions
•  How to deal with longevity risk
–  Defer Social Security
–  Elect life annuity options from 401k
–  Purchase a life annuity
–  Purchase a deferred income annuity
–  Take lower withdrawals from accounts
–  HECM
–  Contingency Fund
–  Roth IRAs
QLAC
•  Qualified longevity annuity contract
•  Deferred income annuity
•  Pays lifetime income starting at a later age – such as 80 or 85
(latest)
•  Available in IRAs and 401(k)s
•  Allows you to defer your RMD past 70 ½
•  Best part is mortality credits!
•  Maximum premium – cannot be more than 25% of retirement
accounts and $125,000 total in premium
•  Can have a return of premium rider payable to heirs
•  Can have inflation protection
Sequence of Returns Risk
Sequence of Returns Risk
•  Investment returns are variable and unpredictable.
The order of returns has an impact on the how long
a portfolio will last if the portfolio is in the distribution
stage and if a fixed amount is being withdrawn from
the portfolio. Negative returns in the first few years
of retirement can significantly add to the possibility
of portfolio ruin.
Facts
•  Sequence of returns risk is tied in part to portfolio
volatility. Reducing volatility in the retirement
portfolio reduces sequence of return risk.
•  4% Safe withdrawal rate
–  Is it still safe in today’s low interest rate
environment?
Good Returns First Example
•  Peggy gets an average rate of return of 0%
•  Start with $10,000 and need $1,100 of income each year
•  5 years: 40%, 20%, 0%, –20%, –40%
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$12,900 at end of year 1
$14,380 at end of year 2
$13,280 at end of year 3
$9,524 at end of year 4
$4,614 at end of year 5
Example With Bad Returns First
•  Joe gets an average rate of return of 0%
•  Start with $10,000 and need $1,100 of income each
year
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5 years: –40%, –20%, 0%, 20%, 40%,
$4900 at end of year 1
$2820 at end of year 2
$1720 at end of year 3
$ 964 at end of year 4
$ 249 at end of year 5 (Peggy had $4,614 )
Home Equity Solutions
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Downsize (reduce expenses and withdrawals)
Home-sharing
Sale-Leaseback
Reverse Mortgage
Equity and Non-equity Assets for
Average Married Couple
32%
68%
Source: U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 10
Home Equity Income Options
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Age in Place
Downsize
Sale-Leaseback
Relocate
Live with family
Sale
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CCRC
Home Sharing
Special Purpose Loan
Traditional Line of Credit
or Home Equity Loan
•  Reverse Mortgage
HECM Basics
•  Loan – allows you to convert home equity into cash
•  Only available on primary residence
•  Payment not due as long as borrowers live in the home and
continue to meet HECM obligations – property taxes and
insurance
•  HECM is backed by FHA
•  Must meet eligibility requirements (stricter now)
•  Must be age 62+and own most of the home outright
•  There are upfront fees –insurance, closing costs, etc.
•  Payments – lump sum, tenure, period, line of credit
So What's The Issue
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Average age is 71
Historically used poorly – new rules can help
Home equity has not been part of the income discussion
Lots of misunderstandings
Compliance issues abundant
Reverse Mortgages
The Swiss Army Knife of Retirement Income
Multiple ways to strategically use home equity
to improve a client’s retirement income situation
Strategic Use
•  Sequence of Returns Risk
•  4% Safe Withdrawal Rule – might get average 8%
returns but can only withdrawal 4%
•  We don’t care about this until we withdrawal money
•  Its just bad luck - Home Equity can protect portfolio
•  Line of Credit – use when market drops!
•  Use Home Equity Early in Retirement!!!
When should I use home equity?
Use Home
Equity Early in
Retirement!!!
Public Policy Risk
Public Policy Risk
•  An unanticipated change in government
policy with regard to tax law and
government programs such as Medicare
and/or Social Security can have a
negative impact on retirement security.
Importance of Social Security
•  2/3 of retirees get more than 50%
of income from Social Security
•  1/3 of retirees its almost everything!
•  Defer and a higher percentage of income
replaced by Social Security
Social Security Planning
•  Singles
–  Focus on annuity value
–  Take early if life expectancy is short
–  Defer if life expectancy exceeds age 80
•  Married couples
–  Maximize the larger worker’s benefit as that pays for
the joint life expectancy
–  Take advantage of other benefits
–  Use a software program
Benefit of Deferring Social Security
•  Deferring past age 62 results in a 7-8%
increase for each year of deferral
•  Benefit at 70 is 176% of benefit at age 62
•  A couple’s largest benefit is payable for a
joint life time
Effect on a Retirement Income Plan
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Helps meet primary goal of meeting income needs
Builds a bigger income floor with a low-risk investment
Benefits payable for life—addressing longevity risk
Benefits receive COLA—addressing inflation risk
Regular payments addresses excess withdrawal risk
Couple deferring larger benefit—addressing loss of spouse risk
Retirees with greater amounts of guaranteed income are more
satisfied, worry less, and show fewer signs of depression
Trends in Claiming Behavior
Sex/Birth Cohort
Claim at 62 Claim at 63-64
Claim at 65+
Male 1930-34
55.3%
23.1%
21.5%
Male 1940-44
46.4%
16.4%
37.1%
Female 1930-34
57.3%
18.3%
24.9%
Female 1940-44
49%
17.2%
33.8%
SOCIAL SECURITY CLAIMING: TRENDS AND BUSINESS CYCLE EFFECTS
Owen Haaga and Richard W. Johnson: Center for Retirement Research WP 2012-5
Maximum Benefit 2015
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$1,981 a month ($23,788 a year) at 62
$2,642 ($31,704 a year) at age 66
$3,487 a month ($41,489 a year) at 70
Couple both earning maximum benefit
–  Age 66 $63,408
–  Age 70 $82,978
Social Security 2016 Changes
•  Removal of “Aggressive” Claiming Strategies
•  File-and-Suspend (Pre-2016 Bipartisan Budget Act)
–  When you turn your FRA (66 today) you could
voluntarily suspend your benefits
•  Why File-and-Suspend
1. File for Retroactive Benefits
2. Trigger Spousal Benefits
3. Start-Stop-Start Strategy
What Changed for Deemed Filing?
•  For anyone born 1954, January 2 or later
–  Deemed filing extended to age 70
–  What does this mean?
•  It means you Cannot Pick between the higher of
your spousal or workers benefit at FRA
•  You always are deemed to have filed for all
benefits that you are eligible for when you file.
•  You will get the higher payment of the two!
What about File and Suspend
•  Must file and suspend before May 1, 2016
•  Means you need to be born on May 1, 1950 or
earlier be 66 on April 30th
•  If you file and suspend before then, you can still
take advantage of the three strategies – trigger,
retroactive, stop-start
•  If not, you can no longer trigger benefits for a
family member or for retroactive
Start-Stop-Start Strategy Remains
•  If you claimed benefits at 62, and want to
change your mind
•  You have to wait until FRA
•  Can voluntarily suspend benefits
•  Will be reduced but not get 8% per year
Example
•  Start at 62, FRA was 66 – PIA was $2,000
–  Reduced by 25%
–  Received $1,500 at 62 until 66
•  At 66, can voluntarily file and suspend – don’t get
payments
•  Do get 8% increase per year
•  Multiply 1,500 by 132% increase –
–  Back at 1,980 (almost got all benefits back)
Long-Term Care Risk
The cost of health care heads the list of retirement concerns, followed
by cuts to Social Security and Medicare, running out of money is lowest
How concerned are you about each of the following in retirement? Total (n=1,019)
Net Top 2 Concerned
Retired
Not Retired
(n=775)
(n=244)
Extremelyconcerned(7)
Extremelyconcerned(7) (6)
Costofhealthcare
27%
CutstoSocialSecurity
orMedicare
26%
Payingforlong-term
careexpenses
21%
48%
15% 41%
16% 18% 34%
ImpactofInflaGon 15% 15% 30%
Costofhealthcare
CutstoSocialSecurityor
Medicare
VolaGlityininvestment
11% 17% 28%
returns
VolaGlityininvestment
returns
53%
16% 41%
ImpactofInflaGon 13% 18% 32%
Changesintaxrates
Runningoutofmoney 8%7% 16%
25%
20%
Payingforlong-termcare
14% 18% 32%
expenses
18% 12% 29%
Changesintaxrates
33%
16% 13% 29%
17% 14% 30%
Runningoutofmoney 9% 15% 24%
(6)
Need for Long-Term Care
•  Roughly 70% of those at age 65
will need some LTC
•  This will continue to grow as the
population ages (Alzheimer’s #1 reason)
•  Increased longevity – increased
need for long-term care
•  Men need roughly 2.2 years v. 3.7 for women
Lincoln Financial - Survey
•  73 percent of respondents significantly underestimated
the costs associated with long-term care
•  Less than 10% advisors implemented a long-term care
solution for the majority of their clients
•  Less than 40 percent of consumers discussed longterm care planning with advisor
•  Only 22 percent believe they will need long-term care
How Long-Term Care Affects Seniors
Duration of Expected LTC
Need for Persons Turning 65
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None – 31%
Under 1 year – 17%
1-2 years – 12 %
2-5 years – 20%
5+ years – 20%
Distribution of Future LTC
Cost for Persons Turning 65
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None – 50%
Under $10,000 – 25%
$10,000 - $25,000 – 7%
$25,000 -- $100,000 – 12%
$100,000 or more – 6%
Source: Federal Long-Term Commission report, page 24 and 25
Costs of Long-Term Care
•  Incredibly expensive – can be well over $100,000 a year!
•  Long-term care costs out-pacing average inflation
•  Genworth 2015 Study – Costs per Source
Home
Health Care
Adult Day
Care
Assisted
Living
Facility
Nursing
Home Care
(SemiP)
$44,616 YR
$17,904 YR
$43,200 YR
$80,300 YR
44 Hrs/ 52 W 5 Days/52W
12 m/private
365 Days
Financing of Long-Term Care
Source
%
Medicaid
62.2%
Comments
Low wealth individuals, most of nursing home
payments, some home care
Includes Medicare, VA, and others
Other public
4.6
Out-of-pocket
21.6
Many families spend down assets and then go
on Medicaid; does not include value of informal
care
Other private
11.6
Long-term care insurance is about 10%
Source: Federal Long-Term Commission report, page 31 and 23;
based on 2011 data for chart and 2005 data for average cost
RICP® Retirement Income
Literacy Survey
•  Long-term care - Just 1 in 4 understand that
70% of the population will need long-term care
at some point in their lives.
•  Less than 2 in 10 know that Medicaid pays for
the majority of long-term care expenses.
What are the Issues?
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Depleted retirement assets
Can’t control care
Survivor cant meet needs
Severe impact on family members
•  51% said it caused stress in the family
•  Not enough family caregivers
•  Do you have a financing plan in place?
Source: Long-Term Care in America: Expectations and Reality,
Survey from The Associated Press and NORC, May 2014
Family Caregivers
•  Provide 70-80% of all long-term care
•  Usually costs $5,000 out of pocket
•  Ratio for people in 80s
–  7 to 1 in 2010
–  4 to 1 in 2030
–  3 to 1 in 2050
•  Majority are full-time working women
Filial Laws
•  Long-term Care Planning is A family Decision
•  PA – HCRA v. Pittas
–  Son stuck with $93,000 nursing home bill
–  Legally responsible for family member’s
care in 20+ states
Changing Landscape
•  Persistency Rates
(More people kept policies)
•  Increased Premiums
•  Legal Changes (Filial Laws)
•  Product Developments
LTC Funding Solutions
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Medicare – Not Designed for LTC
Medicaid – Largest payer
Out of Pocket – Can you afford?
Family - $5,000 a year out of pocket
Long-term Care Insurance – best tax
benefits for employer provided
•  Annuities – Can provide income in future
•  Hybrid Products – LTC/LIFE/Annuity
Declining Mental Competencies
•  Can you manage your own life anymore?
•  Alzheimer's and Other Disease
–  Anxiety, obesity, stress, depression can all exaggerate
cognitive decline
•  Staying Active and keeping up Social Networks are important
to reducing the risk of cognitive decline
http://www.lifeextension.com/protocols/neurological/agerelated-cognitive-decline/page-03
Documents to Consider
•  Power of Attorney
–  A springing durable power of attorney
•  State Law Driven Documents
•  Can be very strict requirements
•  Allow someone else to make decisions for you
•  Cannot alter your will!
•  Should be a supplement to other estate planning
documents
•  Consider living will and other advanced directives
Additional Resources
Retirement Risks: How To Plan Around
Uncertainty For A Successful Retirement
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