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Strategies to Help You
Plan Your Retirement
Tom Axline, CFP® and Ross D. Emmer, CFP®
January 7th, 2011
AC: 0111-4483
This presentation may not be reproduced or redistributed in any manner.
Disclosures
ICMA-RC does not offer specific tax, insurance, or legal advice
• It is recommended that individuals consult with a qualified financial professional prior to implementing
any financial, tax, or insurance strategy.
Tax rules
• All tax rules referenced apply to federal taxes only, which are subject to change. Different state and
local tax rules may apply.
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Retirement is a Recent Phenomena
In 1900 U.S. Life Expectancy at Birth was 47; Only One in 25 Lived to Age 60
Average U.S. Life Expectancy at Birth
1900 – 2000
Life Expectancy at Birth
80
Life Expectancy at Age 65
75
1950
70
65
60
Women
78
Men
75
Today
55
50
45
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
Year
Source: Deaths: Final Data for 2000. National Vital Statistics Reports; Vol. 50, No. 15.
Table 8, Estimated life expectancy at birth in years, by race and sex.
National Center for Health Statistics, September 16, 2002.
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Women
85
Men
82
Why Save for Retirement?
For Starters, It May Last a Long Time
Need to Plan for Maintaining your Desired Standard of Living Throughout
100%
Probability of a 65-year-old
living to various ages
75%
78
81
86
Probability
Male
Female
50%
85
88
25%
0%
91
65
70
75
80
85
Age
Source: Morningstar, Inc., 2010©
From Annuity 2000 Mortality Tables
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At least one spouse
91
90
96
93
95
100
105
Retirement Is Unpredictable
Will future
Social Security
benefits be
reduced?
Will
Congress
raise future
tax rates?
Need
more
incentive
to save?
Will future
employer
benefits be
reduced?
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#1 Save Regularly, “Pay Yourself First”
• Save before you spend: immediately set aside
portions of each paycheck
• You’ll probably miss it less than you think!
6
#2 Be Disciplined and Invest Regularly,
Too: Dollar-Cost Average
Let’s say you invest $600/month…in a volatile market
Month
Amount
Invested
Price/
Share
Shares
Purchased
January
$ 600
$ 20
30
February
$ 600
$ 30
20
March
$ 600
$ 24
25
April
$ 600
$ 40
15
TOTALS
$ 2,400
90
Avg. Share Price = $28.50
Your Avg. Cost Per Share = $26.67
Dollar-cost averaging does not assure profit or protect against loss in a declining market. Since it involves
continuous investment regardless of fluctuating prices, you must consider your ability to continue to invest
during all price levels.
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More shares
bought when
prices lower
and vice-versa
#3 Start Sooner,
Take Pressure Off Later…
Monthly Savings Needed to Accumulate $100,000 by Age 65*
$38
$82
$192
$578
$100,000
$16,192
$30,670
$80,000
$60,000
$81,819
$70,491
$53,928
$40,000
Earnings
Contributions
$69,330
$20,000
$0
$1,397
$18,180
25
$29,509
35
$83,807
$46,072
45
55
60
Age You Start
* For illustrative purposes only. Assumes 7% rate of return and reinvestment of earnings. Balances shown are
before reduction for taxes. Actual results will vary, based on the performance of your underlying investments
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during the time periods you own them.
…And Maximize Your Potential Savings
Potential Earnings on Original Contributions and on Any Subsequent Earnings!
$300,000
Value at age 65
$278,793
$250,000
$200,000
$150,000
Earnings
$229,793
$100,000
$50,000
$0
By age 65, both individuals have
contributed the same amount,
but Early Starter benefits from
20 more years compounded growth
Value at age 65
$108,224
Earnings
$59,224
Contributions
$49,000
Contributions
$49,000
Ms. Early
Mr. Late
$1,000 initial investment, then
$100 per month ages 25-65
$1,000 initial investment, then
$200 per month ages 45-65
* For illustrative purposes only. Assumes 7% rate of return and reinvestment of earnings. Balances shown are
before reduction for taxes. Actual results will vary, based on the performance of your underlying investments
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during the time periods you own them.
#4 Look for Opportunities to Save More
How? Raises, Bonuses, Tax Refunds, Gifts, Inheritances, Etc.
Initial
Account
Value
Initial
Annual Increase,
Account Value: Account Value: Account Value:
Biweekly
Biweekly
10 Years Later 20 Years Later 30 Years Later
Contribution
Contribution
Jasper
$0
$25
$0
$9,396
$28,299
$66,329
Violet
$0
$25
$20
$38,921
$192,391
$576,319
$29,525
$164,092
$509,990
The $20 Difference Additional Account Value for Violet
•
Jasper and Violet each join their 457 deferred compensation plan and make $25 pre-tax
contributions each biweekly pay period. Each year thereafter, Violet takes advantage
of her cost-of-living (COLA) and increases her biweekly contribution by $20, meaning $45
biweekly in the second year, $65 biweekly in the third year and so on. Jasper does not make
any changes.
•
Violet’s ability to save money a little more each year, by taking advantage of raises and
smartly managing her finances, gives her the advantage.
* For illustrative purposes only. Assumes 7% rate of return, reinvestment of earnings, and that both accounts are
invested identically over time.
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#5 Consider Tax-Advantaged
Accounts First
Contributions You Make May Reduce Current Taxable Income,
So You Can Save More
Regular, Taxable Account
Total to Invest
$2,400
$162,014
Taxes taken out Total invested
–
$600
=
$1,800
Taxes taken out are based on the 25 percent tax bracket
457
$121,511
Total to Invest
$2,400
Plan
Taxes taken out Total invested
–
$0
=
$2,400
* Must have low income to qualify. Up to $1,000 tax credit per individual.
** 457 plan assets are not subject to tax until withdrawn.
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For illustrative purposes only.
Each dollar contributed
•
•
•
•
Lowers that year’s federal taxes
May also lower state income taxes
May qualify for “Saver’s Credit”*
Receives tax-deferred earnings**
IRAs Can Complement
Your Employer Plans
Tax-Deferred Earnings Also with More Choices, Withdrawal Flexibility
Traditional IRAs
Roth IRAs
Contributions1
May be tax-deductible2,3
Withdrawals
Tax: ordinary income5
10% penalty if age <
59½?
Eligible for tax-deduction
&
Higher tax bracket
now vs. later
No tax benefit3
Eligibility based on income4
Contributions first, always tax-free
Earnings may be tax-free or,
if age < 59½, 10% penalty
Lower tax bracket now; or…
…Tax-diversification:
tax-free income later?
When to
Consider
$5,000 limit per individual ($6,000 if age 50 or over), 2010 and 2011, each year. You and/or spouse must have
earned equal amount, “taxable compensation.”
2 Depends on Adjusted Gross Income (AGI) and participation in an employer retirement plan.
3 Contributions to all IRAs, including Roth, may qualify for further federal income tax savings via the “Saver’s Credit”.
4 Modified AGI limits apply.
5 Non-deductible contributions are not subject to tax but must be withdrawn pro rata.
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See IRS Publication 590 for complete IRA rules.
1
#6 Coordinate with Other Goals:
Debt, Emergency Fund, Insurance
Goal
Debt Reduction
Why These May be Higher Priorities*
Have high interest debt (credit card):
Reducing, say, 12% debt is like earning 12%
Emergency Fund
To minimize chance of incurring high interest credit
card debt and/or tapping retirement money
Insurance
Coverage
Adequate insurance (health, renters,
homeowners, auto, etc.) helps avoid potentially
major financial risk
* If possible, consider starting or continuing your retirement savings
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at the same time that you address these goals.
…and a House or Education
Aim to Adequately Save Towards All, But Don’t Sacrifice Retirement Savings
Goal
Why Retirement Should
Generally be Higher Priority
• Mortgage rates often relatively low
House
• Mortgage interest may be tax-deductible
• House rich, cash poor = limited liquidity
Education
• Many ways and strategies to finance
college; very few for retirement
• Could mean children have to end up
supporting you
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#7 If Behind on Retirement Savings…
Save More
Unlike Earnings, Tax Rules, and Inflation, It’s One Thing You Can Control
Maximum Contribution Allowed (2011)
$35,000
$30,000
$33,000
+$16,500 during each of three years prior to normal
retirement age, based on extent to which maximum
contributions not made in previous years1
$22,000
+$5,500 age 50 or over during the year
$25,000
$20,000
$15,000
$10,000
$16,500
$6,000
$5,000
$5,000
$0
457 Plan
1”Normal
retirement age,” as defined in the plan. If you elect the “pre-retirement” catch-up,
you cannot also elect the “age 50” catch-up
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IRA
+$1,000 age
50 catch-up
#8 Preserve What You’ve Saved; Caution:
Loan and Pre-Retirement Withdrawals
Have Potential to Derail Your Retirement Plan
• If loans available, use with caution

Loan balance no longer invested

Will you reduce new contributions?
Interest you pay double-taxed
If you default = taxable distribution
If you leave = most plans require payoff



• Loans are better than a fully taxable hardship withdrawal
• Withdrawal pitfalls

Pay taxes sooner than needed
10% penalty tax possible if < age 59½

Less future potential tax-advantaged growth

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#9 Avoid Common Pitfalls:
Are You in the Spending Caution Zone?
• Last 10 years before retirement
 Beware of spending creep
• First 10 years after retirement
 Beware of excessive celebration
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‘Typical’ Retirement Spending Change
1. Celebration in the “Go-Go Years” –
costs rise


Travel, leisure add to base costs
How’s your debt load?
2. Reflection in the “Slow-Go Years” –
costs moderate*


Slowing down; may need a little help
Debt gone?
3. Acceptance in the “Slowest-Go
Years” – costs may rise again



Health becomes limiting factor, expense
You need some help
Long-Term Care?
* Those older than 75, on average, spend about 30% less than those ages 65-74.
18 Expenditure Survey, 2009”
Source: Department of Labor, Bureau of Labor Statistics, “Consumer
But How Much Can I Safely Withdraw?
Withdrawal rate
Over a 25-30 Year Retirement, Generally start with 4% to have a high confidence
4%
85%
97%
96%
93%
90%
5%
34%
72%
81%
80%
78%
6%
4%
28%
54%
62%
64%
7%
0%
5%
28%
44%
50%
8%
0%
0%
12%
28%
38%
100%
Bonds
75% B
25% S
50% B
50% S
25% B
75% S
100%
Stocks
Adjustments are key:
reduce withdrawals in
years that portfolio
performs poorly…
IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are
hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may
vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment.
19 All Rights Reserved. 3/1/2010
An investment cannot be made directly in an index. © 2010 Morningstar.
#10 Plan Along the Way:
Comprehensive Financial Plan
• Analysis of











Liquidity
Cash flow
Financial goals
Education spending
Asset management
Retirement
Income
Survivor needs
Disability needs
Long-term care
Estate planning
• Alternative: targeted planning



Retirement income
College, and
Others
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The Financial Planning Process
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Retirement Planning
Set Your Objectives
Your financial goals are in competition with one another!
• Goals are general

“To retire rich and soon”
• Objectives are measurable
“To retire on June 1st, 2014
with income of $48,000,
that will last for 30 years,
protected from 3.0% inflation,
survivor income no less than 85% joint income.”
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Plan, Because of What You Cannot Know
• Your and your partner’s life spans
• Changes in spending needs
because of…






Inflation
Life changes, aging
Housing needs & costs
Health care, long term
care costs
Your & partner’s health
Partner’s death
• Investment returns
• Changes in Social Security, tax laws
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Will Social Security be There?
Almost half general population not counting on it as
retirement income source.*
Are they right?
After 2015: Deficit gap between
what Social Security collects from
payroll taxes vs. what it pays out
projected to rapidly increase**
By 2037: Social Security
Trust Fund projected to
run out and then pay
about 75% of benefits**
• When today’s 30-somethings
will be thinking about retiring
* Charles Schwab, Retirement Plus Survey, November 2010
** 2010 Social Security Trustees Report
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How Might Social Security
Change to Survive
Most common proposals
• Raise age at which can receive full benefits
• Freeze purchasing power of benefits at current levels
• Means-test: cut the benefits of high earners
• Higher payroll taxes for higher earners
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Concentrate on What You Control
• Things you cannot control


Markets
Economy
• Things that influence you



Time
Costs
Emotions
• Things you control


Savings (contributions)
Asset allocation
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Ask Yourself the Following…
1. What is my retirement vision?
2. Have I realistically estimated retirement expenses?
3. How will I pay for health care and long-term care costs?
4. What can I expect from my Defined Benefit pension?
5. What can I expect from Social Security?
6. Have I estimated how long my resources will last?
7. How should I draw income from my tax-advantaged
retirement accounts?
8. How can I manage taxes?
9. How should I manage my investments during retirement?
10. Should I consult with professionals?
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Recent Industry Trends
Public Sector Retirement Plans
Rasch Cousineau
January 7, 2011
AC: 0407-1336
Trends – 2009/2010 RFP Survey
Key areas for plan enhancement included...
• Education
• Administration
• Investments
• Fees
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Education
• High touch/high tech
• Service versus sales
• Retirement readiness
• Personal not customized
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Administration
• How many providers?
• Plan committee
• Current contract(s) review
• Fiduciary training
31
Investments
• Investment policy statement – IPS
• How many – less means more
• Fund transparency
• Fixed income
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Fees
• Factors that determine




Plan assets
Plan participation
Plan cash flow
Length of contract (if applicable)
• Full disclosure
• Economies of scale
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What Can You Do Now?
Five easy steps to plan health...
1. Check your contract
2. Consider developing a plan committee
3. Schedule an annual plan review
4. Offer investment education
5. Visit with retirees
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