Shifting Gears
Shifting Gears
Considerations and Strategies for Pre-Retirees
1
Shifting Gears
What’s ahead?
2
Shifting Gears
Think about: • Your retirement • Savings
• Social Security • Retirement income strategies
3
Shifting Gears
Navigate the road ahead 1
Longevity
2
Inflation
3
Health care costs
4
Investment risks
5
Public policy 4
Time To Shift Gears Shifting Gears
Road bumps Longevity and Inflation • Average life expectancy 78+ years1. • 55 percent chance one spouse will live to 922. • 30 years of income = $1.5M without inflation!3 • Income needs may double in 30 years4.
1
Centers for Disease Control, Deaths, Preliminary Data for 2011. For couple at age 65. 2012 IAM Basic Mortality table. 3 Assuming an 85 percent replacement ratio for a current salary of $40,000 over 30 years. Does not account for inflation or investment return. 4 Assuming inflation averages 2.5 percent a year. 2
Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only. 5
Time To Shift Gears Shifting Gears
Road bumps Health care costs • Couple may need $207,000 for out-of-pocket healthcare costs1. • Additional costs for long-term care, assisted living.
• Keep in mind Medicare eligibility at age 65.
1
Savings needed for Medigap premiums, Medicare Part B and Part D premiums and out-of-pocket prescription drug expenses. Assumes median drug expenses and excludes long-term care. Employee Benefit Research Institute, October 2013, http://www.ebri.org/pdf/notespdf/ebri.notes.oct13.retsvgs1.pdf.
.
6
Time To Shift Gears Shifting Gears
Road bumps Investment risks and public policy • Ups and downs are inevitable. • Diversify investments to balance risk and return. • Changes to taxes and public programs are out of your control. • Create a strategy for your personal situation.
No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only.
7
Plan Your Retirement • Wants • Needs • Sources of income
8
Plan Your Retirement
What are your retirement dreams? • Travel? • Volunteer? • Start a business? • Pursue a hobby?
• School?
9
Plan Your Retirement
What do you NEED in your retirement? • Mortgage or rent? • Doctor and medical bills? • Groceries and eating out? • Insurance?
• Car payments? • Entertainment? • Credit card payments? 10
Plan Your Retirement
RETIREMENT PLANS
SAVINGS
PENSIONS
SOURCES OF INCOME
RENTAL PROPERTIES
OTHER?
SOCIAL SECURITY
11
Plan Your Retirement
Shift savings strategy into high gear • Consolidate retirement accounts • Multiple types of savings • Save more
12
Plan Your Retirement
The impact of catch-up contributions CATCH-UP CONTRIBUTIONS
These examples are for illustrative purposes only. They assume a $100,000 starting balance contributions made for eight years from age 57 to 65 and a 7 percent annual rate of return. The $24,000 contribution, including the IRS maximum contribution of $18,000 plus a catch-up contribution of $6,000, is for illustrative purposes. The IRS contribution limits are indexed and may be adjusted annually. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment options. 13
Social Security Benefits • Impact on income
• Timing • Working while collecting • Taxation of benefits • Options for married couples
14
Social Time Security To ShiftBenefits Gears
Impact of Social Security Sources of retirement income for average income earners to replace 85% – 100% of pre-retirement income.
Employer-Sponsored Retirement Plan, Personal Savings and Other Sources Social Security
40% 45-60%
Assumes 85 to 100 percent replacement ratio with 40 percent replacement from Social Security for worker earning $40,000 a year prior to retirement. 15
Social Time Security To ShiftBenefits Gears
When to retire? YOUR AGE AND YOUR BENEFIT PROS Receive benefits earlier AGE
62
Smallest monthly check CONS
Higher monthly check
Highest monthly paycheck
No penalty for employment
No penalty for employment
66-67
70
No interim benefits
Receive benefits later
Potential reduction penalty for employment
Source: Social Security Administration, www.ssa.gov.
16
Social Time Security To ShiftBenefits Gears
Working while collecting 2015 EMPLOYMENT INCOME LIMITS
CONSIDERATIONS
$15,720
For every $2 you earn over the limit, $1 is withheld from your Social Security benefits until the month in which FRA is reached.
In the year FRA is reached
$41,880
For every $3 you earn over the limit, $1 is withheld from your Social Security befits until the month in which FRA is reached.
At FRA or older1
No limits on earnings
None
AGE
Under Full Retirement Age (FRA)
1
At FRA, your benefit amount is adjusted to accommodate for the earlier reduction. Source: Social Security Administration, www.socialsecurity.gov/hlp/isba/10/hlp-isba061-aet4.htm.
17
Social Time Security To ShiftBenefits Gears
Social Security and taxes SINGLE
MARRIED FILING JOINTLY
Provisional Income
Benefit Subject to Tax
Provisional Income
Benefit Subject to Tax
Under $25,000
0%
Under $32,000
0%
$25,000 – $34,000
Up to 50%
$32,000 – $44,000
Up to 50%
Over $34,000
Up to 85%
Over $44,000
Up to 85%
Note: State and local taxes may differ. Source: SSA Publication No. 05-10035, September 2011, Your Benefits May Be Taxable, http://www.ssa.gov/pubs/10035.html.
18
Social Time Security To ShiftBenefits Gears
Considerations for married couples • When should each spouse claim? • Personal benefit or spousal benefit? • Will survivor’s benefit be enough? • Other strategies? Source: SSA Publication No. 05-10035, September 2011, Family Benefits, http://www.ssa.gov/pubs/10035.html.
19
Social Time Security To ShiftBenefits Gears
Other strategies SOCIAL SECURITY STRATEGY
DEFINITION
BENEFIT
Claim and Suspend
Individual at FRA (typically higher wage earner) claims then suspends personal benefit, allowing spouse, also at FRA, to claim Spousal Benefit.
Allows spouse to claim Spousal Benefit, while the higher wage earner can continue to accrue benefits. Can increase the overall lifetime benefits.
Claim Now, Claim More Later
An individual at FRA may claim a Spousal Benefit, delay taking their own benefit.1
Can earn delayed credits to claim higher personal benefit at a later age, which may also help spouse receive greater survivor benefit.
1
Benefit will be reduced if not at Full Retirement Age. Both individuals must have filed for Social Security benefits. Source: Social Security Administration, http://www.socialsecurity.gov/retire2/applying6.htm#options. .
20
Social Time Security To ShiftBenefits Gears
Request an estimate
WWW.SSA.GOV/ESTIMATOR 21
Social Security Benefits
Chart your Social Security strategy • Obtain your benefit estimate at www.ssa.gov/estimator. • Plan to apply for benefit three months prior to needing Social Security income. • Visit with your financial professional.
22
Shift From Savings Strategies to Retirement Income Strategies
• How to cover expenses? • What to do with savings? • Consider types of income. • Take action to create income.
23
Retirement Income
NEEDS
GUARANTEED INCOME • • • •
Social Security Company pensions Annuities Any wages earned in retirement
COVER NEEDS
• • • • • •
VARIABLE INCOME SOURCES
WANTS
• Retirement plans [401(k), 403(b), ESOP] and IRAs • Personal savings (CDs, bank accounts, money market accounts)
Food Clothing Shelter Health care Transportation Income taxes
COVER WANTS
• Investments (stocks, bonds, mutual funds, real estate)
24
• • • • •
Hobbies/leisure Travel Entertainment Club memberships Gifts/charitable donations
Retirement Income
What to do with retirement plan savings? • Keep savings in retirement plan. • Roll all or part to an IRA. • Consider other savings or investment options. • Cash out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 25
Retirement Income
Benefits of the plan • Simplicity.
• Consolidation of multiple accounts. • Continued access to plan’s investment options and services. • No early withdrawal penalty after age 55, if separated from service at age 55 or older. • Allows you to defer tax burden of cash-out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 26
Retirement Income
IRA considerations • Investment choice and flexible access to retirement funds. • Consolidation of multiple retirement accounts. • No early withdrawal penalty after age 59½. • Allows you to defer the tax burden of cash-out.
You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 27
Retirement Income
Other types of savings/ investment options • Mutual funds • Annuities • Bank products
You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 28
Retirement Income
Why not cash out? • Large tax burden. • There are other options.
29
Retirement Income
Types of income GUARANTEED INCOME
VARIABLE INCOME
Products can supplement guaranteed income from Social Security, other sources
Also a supplement to guaranteed income sources Variable instead of “guaranteed” because amounts may vary
Predictable income over time – even a long period of time
Investment control and options
Protection from market volatility
Flexibility in amounts you withdraw
Investment options/choice not the focus
30
Retirement Income
Guaranteed income sources • Income annuity (single premium immediate annuity). • Deferred annuity with guaranteed living benefits.
Guarantees are based on the claims-paying ability of the issuing insurance company.
31
Retirement Income
Variable income sources • Withdrawals from retirement accounts. • Dividends from income generating mutual funds. • Interest from bank products like CDs.
• Deferred annuities without guaranteed living benefits.
32
Retirement Income
Next steps in creating income Maximize Savings Potential
MUTUAL FUNDS
Help Reduce Volatility
Equity funds
Short-term fixed-income funds
Equity focused targetdate/risk funds
Money market funds*
Optimize Income Potential
Fixed-income funds Short-term fixed-income funds Income annuities
ANNUITIES
Variable annuities
BANK SOLUTIONS (FDIC Insured)
Long-term certificates of deposit (CDs)
Fixed annuities
Variable annuities with guaranteed living benefits
Money market accounts Savings accounts
CD laddering
CDs
* An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
33
Q
Retirement Income
Shift into a retirement income strategy • Call your financial professional to schedule a personal visit.
34
What’s Next? • Consider increasing retirement plan contribution, consolidating retirement savings. • Get an estimate of Social Security benefits. • Think about options for retirement income. • Schedule a 1 on 1 meeting with your financial professional.
35
These are only general guidelines, which may be helpful in making personal financial decisions. Responsibility for these decisions is assumed by you, not the Principal Financial Group or any of its member companies. The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Investing involves risk, including possible loss of principal. Principal Funds are distributed by Principal Funds Distributor, Inc.
MM7804 | 05/2015 | t1505080450 ©2015 Principal Financial Services, Inc.
36
Considerations and Strategies for Pre-Retirees
1
Shifting Gears
What’s ahead?
2
Shifting Gears
Think about: • Your retirement • Savings
• Social Security • Retirement income strategies
3
Shifting Gears
Navigate the road ahead 1
Longevity
2
Inflation
3
Health care costs
4
Investment risks
5
Public policy 4
Time To Shift Gears Shifting Gears
Road bumps Longevity and Inflation • Average life expectancy 78+ years1. • 55 percent chance one spouse will live to 922. • 30 years of income = $1.5M without inflation!3 • Income needs may double in 30 years4.
1
Centers for Disease Control, Deaths, Preliminary Data for 2011. For couple at age 65. 2012 IAM Basic Mortality table. 3 Assuming an 85 percent replacement ratio for a current salary of $40,000 over 30 years. Does not account for inflation or investment return. 4 Assuming inflation averages 2.5 percent a year. 2
Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only. 5
Time To Shift Gears Shifting Gears
Road bumps Health care costs • Couple may need $207,000 for out-of-pocket healthcare costs1. • Additional costs for long-term care, assisted living.
• Keep in mind Medicare eligibility at age 65.
1
Savings needed for Medigap premiums, Medicare Part B and Part D premiums and out-of-pocket prescription drug expenses. Assumes median drug expenses and excludes long-term care. Employee Benefit Research Institute, October 2013, http://www.ebri.org/pdf/notespdf/ebri.notes.oct13.retsvgs1.pdf.
.
6
Time To Shift Gears Shifting Gears
Road bumps Investment risks and public policy • Ups and downs are inevitable. • Diversify investments to balance risk and return. • Changes to taxes and public programs are out of your control. • Create a strategy for your personal situation.
No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only.
7
Plan Your Retirement • Wants • Needs • Sources of income
8
Plan Your Retirement
What are your retirement dreams? • Travel? • Volunteer? • Start a business? • Pursue a hobby?
• School?
9
Plan Your Retirement
What do you NEED in your retirement? • Mortgage or rent? • Doctor and medical bills? • Groceries and eating out? • Insurance?
• Car payments? • Entertainment? • Credit card payments? 10
Plan Your Retirement
RETIREMENT PLANS
SAVINGS
PENSIONS
SOURCES OF INCOME
RENTAL PROPERTIES
OTHER?
SOCIAL SECURITY
11
Plan Your Retirement
Shift savings strategy into high gear • Consolidate retirement accounts • Multiple types of savings • Save more
12
Plan Your Retirement
The impact of catch-up contributions CATCH-UP CONTRIBUTIONS
These examples are for illustrative purposes only. They assume a $100,000 starting balance contributions made for eight years from age 57 to 65 and a 7 percent annual rate of return. The $24,000 contribution, including the IRS maximum contribution of $18,000 plus a catch-up contribution of $6,000, is for illustrative purposes. The IRS contribution limits are indexed and may be adjusted annually. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment options. 13
Social Security Benefits • Impact on income
• Timing • Working while collecting • Taxation of benefits • Options for married couples
14
Social Time Security To ShiftBenefits Gears
Impact of Social Security Sources of retirement income for average income earners to replace 85% – 100% of pre-retirement income.
Employer-Sponsored Retirement Plan, Personal Savings and Other Sources Social Security
40% 45-60%
Assumes 85 to 100 percent replacement ratio with 40 percent replacement from Social Security for worker earning $40,000 a year prior to retirement. 15
Social Time Security To ShiftBenefits Gears
When to retire? YOUR AGE AND YOUR BENEFIT PROS Receive benefits earlier AGE
62
Smallest monthly check CONS
Higher monthly check
Highest monthly paycheck
No penalty for employment
No penalty for employment
66-67
70
No interim benefits
Receive benefits later
Potential reduction penalty for employment
Source: Social Security Administration, www.ssa.gov.
16
Social Time Security To ShiftBenefits Gears
Working while collecting 2015 EMPLOYMENT INCOME LIMITS
CONSIDERATIONS
$15,720
For every $2 you earn over the limit, $1 is withheld from your Social Security benefits until the month in which FRA is reached.
In the year FRA is reached
$41,880
For every $3 you earn over the limit, $1 is withheld from your Social Security befits until the month in which FRA is reached.
At FRA or older1
No limits on earnings
None
AGE
Under Full Retirement Age (FRA)
1
At FRA, your benefit amount is adjusted to accommodate for the earlier reduction. Source: Social Security Administration, www.socialsecurity.gov/hlp/isba/10/hlp-isba061-aet4.htm.
17
Social Time Security To ShiftBenefits Gears
Social Security and taxes SINGLE
MARRIED FILING JOINTLY
Provisional Income
Benefit Subject to Tax
Provisional Income
Benefit Subject to Tax
Under $25,000
0%
Under $32,000
0%
$25,000 – $34,000
Up to 50%
$32,000 – $44,000
Up to 50%
Over $34,000
Up to 85%
Over $44,000
Up to 85%
Note: State and local taxes may differ. Source: SSA Publication No. 05-10035, September 2011, Your Benefits May Be Taxable, http://www.ssa.gov/pubs/10035.html.
18
Social Time Security To ShiftBenefits Gears
Considerations for married couples • When should each spouse claim? • Personal benefit or spousal benefit? • Will survivor’s benefit be enough? • Other strategies? Source: SSA Publication No. 05-10035, September 2011, Family Benefits, http://www.ssa.gov/pubs/10035.html.
19
Social Time Security To ShiftBenefits Gears
Other strategies SOCIAL SECURITY STRATEGY
DEFINITION
BENEFIT
Claim and Suspend
Individual at FRA (typically higher wage earner) claims then suspends personal benefit, allowing spouse, also at FRA, to claim Spousal Benefit.
Allows spouse to claim Spousal Benefit, while the higher wage earner can continue to accrue benefits. Can increase the overall lifetime benefits.
Claim Now, Claim More Later
An individual at FRA may claim a Spousal Benefit, delay taking their own benefit.1
Can earn delayed credits to claim higher personal benefit at a later age, which may also help spouse receive greater survivor benefit.
1
Benefit will be reduced if not at Full Retirement Age. Both individuals must have filed for Social Security benefits. Source: Social Security Administration, http://www.socialsecurity.gov/retire2/applying6.htm#options. .
20
Social Time Security To ShiftBenefits Gears
Request an estimate
WWW.SSA.GOV/ESTIMATOR 21
Social Security Benefits
Chart your Social Security strategy • Obtain your benefit estimate at www.ssa.gov/estimator. • Plan to apply for benefit three months prior to needing Social Security income. • Visit with your financial professional.
22
Shift From Savings Strategies to Retirement Income Strategies
• How to cover expenses? • What to do with savings? • Consider types of income. • Take action to create income.
23
Retirement Income
NEEDS
GUARANTEED INCOME • • • •
Social Security Company pensions Annuities Any wages earned in retirement
COVER NEEDS
• • • • • •
VARIABLE INCOME SOURCES
WANTS
• Retirement plans [401(k), 403(b), ESOP] and IRAs • Personal savings (CDs, bank accounts, money market accounts)
Food Clothing Shelter Health care Transportation Income taxes
COVER WANTS
• Investments (stocks, bonds, mutual funds, real estate)
24
• • • • •
Hobbies/leisure Travel Entertainment Club memberships Gifts/charitable donations
Retirement Income
What to do with retirement plan savings? • Keep savings in retirement plan. • Roll all or part to an IRA. • Consider other savings or investment options. • Cash out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 25
Retirement Income
Benefits of the plan • Simplicity.
• Consolidation of multiple accounts. • Continued access to plan’s investment options and services. • No early withdrawal penalty after age 55, if separated from service at age 55 or older. • Allows you to defer tax burden of cash-out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 26
Retirement Income
IRA considerations • Investment choice and flexible access to retirement funds. • Consolidation of multiple retirement accounts. • No early withdrawal penalty after age 59½. • Allows you to defer the tax burden of cash-out.
You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 27
Retirement Income
Other types of savings/ investment options • Mutual funds • Annuities • Bank products
You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 28
Retirement Income
Why not cash out? • Large tax burden. • There are other options.
29
Retirement Income
Types of income GUARANTEED INCOME
VARIABLE INCOME
Products can supplement guaranteed income from Social Security, other sources
Also a supplement to guaranteed income sources Variable instead of “guaranteed” because amounts may vary
Predictable income over time – even a long period of time
Investment control and options
Protection from market volatility
Flexibility in amounts you withdraw
Investment options/choice not the focus
30
Retirement Income
Guaranteed income sources • Income annuity (single premium immediate annuity). • Deferred annuity with guaranteed living benefits.
Guarantees are based on the claims-paying ability of the issuing insurance company.
31
Retirement Income
Variable income sources • Withdrawals from retirement accounts. • Dividends from income generating mutual funds. • Interest from bank products like CDs.
• Deferred annuities without guaranteed living benefits.
32
Retirement Income
Next steps in creating income Maximize Savings Potential
MUTUAL FUNDS
Help Reduce Volatility
Equity funds
Short-term fixed-income funds
Equity focused targetdate/risk funds
Money market funds*
Optimize Income Potential
Fixed-income funds Short-term fixed-income funds Income annuities
ANNUITIES
Variable annuities
BANK SOLUTIONS (FDIC Insured)
Long-term certificates of deposit (CDs)
Fixed annuities
Variable annuities with guaranteed living benefits
Money market accounts Savings accounts
CD laddering
CDs
* An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
33
Q
Retirement Income
Shift into a retirement income strategy • Call your financial professional to schedule a personal visit.
34
What’s Next? • Consider increasing retirement plan contribution, consolidating retirement savings. • Get an estimate of Social Security benefits. • Think about options for retirement income. • Schedule a 1 on 1 meeting with your financial professional.
35
These are only general guidelines, which may be helpful in making personal financial decisions. Responsibility for these decisions is assumed by you, not the Principal Financial Group or any of its member companies. The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Investing involves risk, including possible loss of principal. Principal Funds are distributed by Principal Funds Distributor, Inc.
MM7804 | 05/2015 | t1505080450 ©2015 Principal Financial Services, Inc.
36
