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PAYING YOURSELF BACK IN RETIREMENT
A Guide to Lifetime Income Planning
Lifetime Income
Planning in a
New World of Investing
Retirement. It’s the ultimate good news/bad news scenario.
First, the good news: Thanks to advances in medical
science and better personal health habits, you will almost
certainly spend more years enjoying the fruits of your labor
than any generation prior.
The bad news: Most Americans’ retirement nest eggs
will fall woefully short of funding that longer life span.
Consider this: While the average American spends roughly $8,000 per year on
healthcare expenditures,1 or $160,000 over a 20-year retirement, the average
401(k) balance is less than half of that at under $75,000.2
In an era where retiring comfortably on Social Security and a company pension is
practically impossible, the importance of personal retirement savings cannot be
overstated. Today and in the future, most retirees will need to withdraw from their
investment portfolios to generate the income they require throughout their golden
years. To achieve this end, retirement planning must be a lifelong vocation—but
many investors have interrupted that noble mission in these times of low interest
rates and high market volatility, unwittingly jeopardizing their financial futures.
Truth be told, it is a new world of investing, and it does require new ways of
thinking about retirement investments. However, the chief tenet of retirement
investing has not changed—you are more likely to achieve the retirement you
envision if you prepare in advance. This guide is designed to help you consider
ways to prepare now to make your retirement income last. As always, we
encourage you to work with your financial professional to develop a personal
investment plan suited to your specific retirement goals.
1 OECD Health Data: Health expenditure and financing, OECD Health Statistics (database). 2 Fidelity Investments,
as of June 2012.
For more information
on BlackRock® retirement income solutions,
contact your financial professional.
Not FDIC Insured • May Lose Value • No Bank Guarantee
[2]
PAY I N G Y O U R S E L F B A C K I N R E T I R E M E N T
Assessing Your
Income Needs
Identify Your Retirement Goals
The first step in determining how much income you will need in retirement is to
pinpoint your goals. Your basic financial goals may include having the ability to pay
your bills for the rest of your life, maintaining your lifestyle, establishing a cushion
for unforeseen expenses, maximizing your estate or leaving a legacy to heirs and/or
a charity. Also factor in other goals that come with financial costs, such as funding
advanced education, starting a business or providing for extended family.
A recent survey of near and recent
retirees found that just one in four
had a formal written plan for
managing income, assets and
expenses in retirement.3
3 LIMRA, “Retirement Income Tradeoffs,” 2009.
Itemize Your Anticipated Expenses
Once you determine what you want to do in retirement, you can begin estimating
the income required to fund those ambitions. Of course, not all expenses are
created equal. Categorizing your anticipated expenses can help you to prioritize
and compartmentalize your retirement income planning.
} Essential expenses include housing, utilities, food, clothing and basic
healthcare. These are expenses that must be paid.
} Discretionary expenses include travel, entertainment and gifts. Discretionary
expenses can usually be forgone or reduced if necessary.
Know which of your expenses you
consider essential, even if someone
else may not agree.
}
One-time expenses are exactly as the name implies. These may include a child’s
wedding or a grandchild’s college tuition or a multitude of other items.
Within these categories, your expenses can be defined even further. For example,
you may have both ongoing essential expenses (e.g., property taxes, utilities) and
fixed essential expenses that last only a certain number of years (e.g., a mortgage).
Following are a few common considerations that may help you arrive at a more
complete and accurate projection of expenses:
} How many years are remaining on your mortgage?
} Do you plan on moving or downsizing your primary residence?
} How will your health insurance premiums change once you retire?
} D
o you have all the insurance you need or should you budget for additional
premiums (e.g., long-term care insurance)?
} W
ill you spend more on travel or hobbies once you have more time to
devote to them?
[3]
Identifying Your
Income Sources
Inventory Existing Income Sources
Once you have determined your retirement income needs, take stock of the
income sources you have now or anticipate having in the future.
} Will you continue to work either full- or part-time?
}Do you have guaranteed income sources (e.g., Social Security,
pensions, annuities)?
}Can you derive income from investment properties?
Once you have identified your income sources, determine how long the income
stream from each will last (e.g., a few years, your lifetime, your spouse’s
lifetime). You should also understand what type of income stream each will
provide (e.g., fixed, inflation-adjusted).
Identify Investment Assets
Most people will find that their anticipated annual expenses are higher than their
expected annual income. This income gap often can be closed by working with your
financial professional to create a withdrawal plan for your investment portfolio.
Before doing so, however, it is important to inventory all of your investment assets.
These may include company retirement plans, individual retirement accounts
(IRAs), taxable investments, deferred annuities, real estate and cash value life
insurance. Your financial professional can help you consolidate these resources
(where possible) and develop a plan that best employs them to fill your income gap.
Your income gap is the additional
income you need to fund your
expenses above and beyond the
income you will receive from
existing sources.
Determine Your Income Gap
$
ES
PENS
L EX
TOTA
A
ED
ME NEED
AL INCO
DDITION
ES
SOURC
COME
N
I
G
N
I
EXIST
0
Years Into Retirement
30
The chart assumes existing income sources are adjusted for inflation each year. The income gap reflects inflationadjusted basic living expenses and an active lifestyle that becomes less active 10 to 15 years into retirement.
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PAY I N G Y O U R S E L F B A C K I N R E T I R E M E N T
Generate Income From Investment Assets
Armed with an understanding of your income needs and the assets available to
fulfill them, the next step is to develop a plan to best deploy your assets to fill
your income gap. If your income gap looks something like the chart on the
previous page, one method is to simply withdraw the “gap” amount you need
each year. Another option is to withdraw the dollar amount of the gap in the first
year and subsequently increase the amount withdrawn each year based on
inflation. However, neither of these simple strategies is likely to be the most
efficient way to generate ongoing income from your assets and may not be
sustainable over the long term.
The chart below illustrates the number of years your portfolio is likely to last
assuming various investment returns and withdrawal rates. As you can see, a
slightly higher rate of annual withdrawal can significantly decrease your years of
retirement income. For example, withdrawing 6% instead of 5% annually, while
earning a 7% investment return, cuts your portfolio’s livelihood from 36 to 25 years.
Years Your Portfolio Should Last
Estimate Annual Investment Return
Choose a Withdrawal Rate
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
8
8
9
10
11
13
15
18
22
28
3%
8
9
9
11
12
14
16
19
24
33
4%
8
9
10
11
13
15
18
22
28
39
5%
8
9
10
12
14
16
19
24
33
50+
6%
9
10
11
13
15
18
22
26
42
50+
7%
9
10
12
14
16
20
25
36
50+
50+
8%
10
11
13
15
18
22
31
50+
50+
50+
9%
10
12
14
16
20
27
44
50+
50+
50+
10%
11
13
15
18
24
36
50+
50+
50+
50+
Embracing the
New Retirement
It’s a new world of investing—one
where the traditional expectations
about stocks, bonds and cash have
been upended. This new world
requires a new way of thinking
about retirement investing:
} Longer life. For a couple that has
reached the age of 65, there’s a
50% chance that at least one of
the two will live to age 92. Many
investors need to plan for 27+
years in retirement.4
}Smaller yields. Government bond
yields are at record lows and
cash is providing zero interest.
Investing exclusively or primarily
in these traditional retirement
assets means your nest egg will
be quickly eroded by inflation.
}Bigger thinking. Longer life
means more time to ride out
market cycles. As such, retirees
can consider adding equities and
alternative strategies to their
retirement income portfolios.
4 Source: Annuity 2000 Mortality Table, Society of
Actuaries. Figures assume individuals in good health.
Source: BlackRock. Assumes that you increase the dollar amount of annual withdrawals by 3% to cover inflation. The information
provided is for illustrative purposes only and is not meant to represent the performance of any particular investment.
[5]
Consider combining inflationadjusted withdrawals for your
essential expenses and fixedpercentage withdrawals or
withdrawals of investment earnings
for your discretionary expenses.
Determine Appropriate Withdrawal Strategies
Rather than using a single withdrawal strategy to fund all your retirement
expenses, you might consider combining strategies and funding your various
income needs (e.g., essential, discretionary) separately. Combining withdrawal
strategies to target specific needs can often lead to a higher level of confidence
that you will reach your retirement goals, because the assets supporting each
income requirement are invested according to that need.
Fixed-Dollar Withdrawals
Inflation-Adjusted Withdrawals
Withdraw a fixed dollar amount or for a specified period of time.
Withdraw an appropriate amount in the first year. Increase
the dollar amount by the rate of inflation in subsequent years.
$50,000
$50,000
$40,000
$40,000
$40,000
$40,000
$40,000
25,000
$40,000
$41,200
$42,436
$43,709
$45,020
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
25,000
0
0
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
Things to Consider
Things to Consider
} Simple to implement
} P
rovides growing income stream
} Does not grow with inflation
} Maintains your standard of living throughout retirement
} Can erode principal if dollar amount is high
} R
equires annual calculation
} Can erode principal and eventually become fully depleted
Fixed-Percentage Withdrawals
Withdrawal of Investment Earnings
Withdraw a fixed percentage of the portfolio annually.
The dollar amount withdrawn will vary with portfolio value.
Withdraw only the income (e.g., dividends, interest) created
by the underlying investments.
$50,000
$50,000
$40,000
$43,200
$44,496
$39,156
$48,600
$43,855
$40,000
$38,745
$39,188
YEAR 3
YEAR 4
$43,890
25,000
25,000
0
0
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
YEAR 1
YEAR 2
YEAR 5
Things to Consider
Things to Consider
} Account never fully depletes
} P
revents running out of money—principal remains intact
} Can provide growth in income and account value if percentage
chosen is below anticipated rate of return
} P
otential for investment to grow while providing income
} Amount varies year to year
} W
ithdrawals may not keep up with inflation
} A
mount varies year to year
} Assets could deplete over time if percentage is too high
} Growth in income is not guaranteed
The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment. Withdrawals occur at the end of each year and
are calculated on the ending portfolio value for the previous year. Illustrations assume constant 3% annual return; total hypothetical portfolio returns of 12% (Year 1), 7% (Year 2),
-8% (Year 3), 16% (Year 4) and 5% (Year 5); and hypothetical portfolio yields of 4% (Year 1), 4.5% (Year 2), 3.5% (Year 3), 4% (Year 4) and 4% (Year 5).
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PAY I N G Y O U R S E L F B A C K I N R E T I R E M E N T
Monitoring Your
Retirement Income Plan
Providing for a lasting income stream in retirement
does not stop at the establishment of a plan. It is
equally important to monitor your plan and make any
necessary adjustments to ensure it continues to meet
your needs throughout your retirement years.
Talk to your financial professional
today about creating an income
and investment plan to help meet
your specific retirement needs.
Your income plan will likely need some fine-tuning as you transition into
retirement, simply because it is often difficult to predict your retirement
lifestyle and its costs until you have lived it. Realize also that your expenses
will likely change over time, and your income plan may need to be adjusted
to reflect these changes.
Of course, all retirement plans are built on a variety of assumptions, and
chances are one or more of these assumptions will not hold over the entire
duration of your retirement. If investments underperform your expectations,
inflation is high or you encounter unanticipated expenses, you may need to
revisit and revise your plan. Likewise, adjustments may be required should
your goals or priorities change over your lifetime. In many cases, certain
aspects of a retirement plan may not require immediate implementation,
such as planning your estate or funding your grandchildren’s education, and
these will need to be accounted for later.
Whatever the scenario, meeting regularly with your financial professional
throughout your retirement years can ensure your income and investment
plans continue to meet your evolving needs. Long life is a blessing—but
a lack of planning can turn your longevity into a financial burden. Contact
your financial professional today to ensure your retirement is a “good
news-only” scenario.
[7]
Why BlackRock
As the world’s largest investment manager, at BlackRock we believe it’s
our responsibility to help investors of all sizes succeed in the New World
of Investing. We were built to provide the global market insight, breadth
of capabilities, unbiased investment advice and deep risk management
expertise these times require.
The Resources You Need for a New World of Investing
Investing with BlackRock gives you access to every asset class, geography
and investment style, as well as extensive market intelligence and risk
analysis, to help build the dynamic, diverse portfolios these times require.
The Best Thinking You Need to Uncover Opportunity
With deep roots in all corners of the globe, our 100 investment teams in 27
countries share their best thinking to translate local insight into actionable
ideas that strive to deliver better, more consistent returns over time.
The Risk Management You Need for Peace of Mind
With more than 1,000 risk professionals and premier risk management
technology, BlackRock digs deep into the data to understand the risk that
has to be managed for the returns our clients need and bring clarity to the
most daunting financial situations.
BlackRock. Investing for a New World.
This material is provided as an educational tool and should not be considered investment advice. BlackRock cannot be held
responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any
other source mentioned. BlackRock is not engaged in rendering any legal, tax or accounting advice. Please consult with a qualified
professional for this type of advice.
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Not FDIC Insured • May Lose Value • No Bank Guarantee
Lit. No. RET-INC-BRO-0113
AC6291-0113 / USR-1326