How Much Money Do You Need To Retire? · How Much Money Do You Need To Retire? A NARFE Federal Benefits Institute Webinar Presented by Mark Keen, CFP This webinar provides general

1 Sponsored by National Active and Retired Federal Employees Association

How Much Money Do You Need To Retire?

A NARFE Federal Benefits Institute Webinar

Presented by Mark Keen, CFP

This webinar provides general information only.

For individual assistance, NARFE recommends you contact a financial planner who has a stated fiduciary responsibility to act solely in your interest.


How Much Money Do You Need To Retire?




62 Early Retirement

Framing the Conversation

75

Sequence Risk

Retiree Risks


Sequence of Returns

Annual Year-end Annual Year-end Annual Year-end Annual Year-end

Age Return Value Return Value Age Return Value Return Value

100,000$ 100,000$ 691,527$ 691,527$

41 29% 129,000$ -12% 88,000$ 66 29% 847,467$ -12% 578,117$

42 18% 152,220$ -21% 69,520$ 67 18% 957,987$ -21% 428,578$

43 25% 190,275$ -14% 59,787$ 68 25% 1,151,631$ -14% 337,030$

44 -6% 178,859$ 22% 72,940$ 69 -6% 1,047,018$ 22% 365,082$

45 15% 205,687$ 10% 80,234$ 70 15% 1,159,317$ 10% 358,783$

46 8% 222,142$ 4% 83,444$ 71 8% 1,208,772$ 4% 331,447$

47 27% 282,121$ 11% 92,623$ 72 27% 1,482,707$ 11% 322,079$

48 -2% 276,478$ 3% 95,401$ 73 -2% 1,411,379$ 3% 287,941$

49 15% 317,950$ -3% 92,539$ 74 15% 1,572,715$ -3% 236,816$

50 19% 378,360$ 21% 111,973$ 75 19% 1,817,845$ 21% 231,960$

51 33% 503,219$ 17% 131,008$ 76 33% 2,355,932$ 17% 217,025$

52 11% 558,574$ 5% 137,558$ 77 11% 2,561,958$ 5% 177,622$

53 -10% 502,716$ -10% 123,802$ 78 -10% 2,261,394$ -10% 115,492$

54 5% 527,852$ 11% 137,421$ 79 5% 2,321,149$ 11% 71,834$

55 17% 617,587$ 33% 182,769$ 80 17% 2,654,553$ 33% 25,980$

56 21% 747,280$ 19% 217,496$ 81 21% 3,146,828$ 19% -$

57 -3% 724,862$ 15% 250,120$ 82 -3% 2,998,603$ 15% -$

58 3% 746,608$ -2% 245,118$ 83 3% 3,029,697$ -2% -$

59 11% 828,734$ 27% 311,299$ 84 11% 3,297,624$ 27% -$

60 4% 861,884$ 8% 336,203$ 85 4% 3,366,474$ 8% -$

61 10% 948,072$ 15% 386,634$ 86 10% 3,634,428$ 15% -$

62 22% 1,156,648$ -6% 363,436$ 87 22% 4,355,529$ -6% -$

63 -14% 994,717$ 25% 454,295$ 88 -14% 3,688,778$ 25% -$

64 -21% 785,827$ 18% 536,068$ 89 -21% 2,860,226$ 18% -$

65 -12% 691,527$ 29% 691,527$ 90 -12% 2,455,146$ 29% -$

Average 8% 8% 8% 8%

Portfolio A Portfolio B

Accumulation Distribution

Portfolio A Portfolio BAccumulation: Both Portfolio A and B start with $100,000 and take no withdrawals. Portfolio A experienced strong performance in early years and poor performance later. Portfolio B experienced the exact same returns, but in reverse order. Sequence of returns doesn’t matter with you're accumulating assets. Distribution: Both Portfolio A and B start with a $691,527 next egg. Both withdrew 5% of the first year value and adjusted their withdrawals for 3% inflation each following year. Sequence of returns matters a great deal during distribution years This example is hypothetical. It is designed for illustrative purposes only and does not represent any actual investment.


62 Early Retirement

Mid Retirement


75 85

Sequence Risk

Inflation Risk

Retiree Risks


Inflation

The Inflation rate is calculated using the current Consumer Price Index (CPI-U) published monthly by the Bureau of Labor Statistics.

3.52%

0.79%

5.44%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Inlf

atio

n R

ate

30-Year Period Ending

Rolling 30-Year Inflation Averages


Inflation

The Inflation rate is calculated using the current Consumer Price Index (CPI-U) published monthly by the Bureau of Labor Statistics.

$-

$50,000

$100,000

$150,000

$200,000

$250,000

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

$48,000 Adjusted for Inflation Over a 30-Year Retirement

Min Average Max


62 Early Retirement

Mid Retirement

Late Retirement


75 85

Sequence Risk

Inflation Risk

Longevity Risk

Retiree Risks

95


Chart: Social Security Administration, Period Life Table, 2011 (published in 2015), J.P. Morgan Asset Management.

Table: Social Security Administration 2015 OASDI Trustees Report.

COUNT ON LONGEVITY

Average life expectancy

continues to increase

and is a mid-point not an

end-point. Plan on the

probability of living much

longer—perhaps 30 plus

years in retirement—and

invest a portion of your

portfolio for growth to

maintain your

purchasing power over

time.

Longevity Risk



COUNT ON LONGEVITY










maintain your


time.



COUNT ON LONGEVITY










maintain your


time.

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


Retirement Savings

Spending

Timing

Asset Allocation

Legacy Wishes


Factors under our control:


What’s Your Number?

How do you know how much you need to retire?

– Longevity

– Inflation

– Sequence Risk

– Retirement spending

– Portfolio composition

– Legacy Wishes


What’s Your Number?

Retirement spending – More specifically, depends on how much income you need

from your investment portfolio (Income Gap)

• Step 1: Estimate retirement income

• Step 2: Estimate retirement income needs

• Step 3: Calculate retirement income gap

• Step 4: Estimate how much money you need


Step 1: Estimating Retirement Income

Guaranteed Sources of Income

– CSRS Pension

– FERS Pension

– Social Security • Social Security Statement • Calculators available at www.SSA.gov

– Other Income Sources

Age Formula

- Under Age 62 at separation for retirement, OR age 62 or older with less than 20 years of service

1 percent of your high-3 average salary for each year of service

- Age 62 or older at separation with 20 or more years of service

1.1 percent of your high-3 average salary for each year of service


Example: Mr. and Mrs. FERS

Mr. and Mrs. FERS, both age 65

Mr. FERS is retiring at 66 with 25 years of service

– Current salary is $75,000 (also assume is high-3)

– Contributing 5% of salary to TSP

Mrs. FERS

– Worked in the past, but not currently working

– Earned her own Social Security benefit, but less than ½ of Mr. FERS’ SS benefit


Example: Mr. and Mrs. FERS

Mr. FERS’ Pension – Basic Benefit = $20,625

– With 50% Survivor Benefit = $18,563

– With 25% Survivor = $19,594

Mr. FERS’ SS Benefit – Full Retirement Age benefit = $21,132

Mrs. FERS’ SS Benefit – ½ of Mr. FERS’ Benefit = $10,566


Step 2: Estimating Retirement Income Needs

Replacement Ratio

Cash Flow Analysis

– Detailed Expense, or

– Current Lifestyle



Replacement Ratio – Gross post-retirement income divided by gross pre-retirement income

– Generally, a person needs less gross income in retirement, primarily

due to four factors 1. Taxes go down after retirement due to extra deductions and lower taxable

income 2. Social Security & Medicare taxes (FICA) end at retirement 3. Social Security benefits are partially or fully tax-free 4. Saving for retirement is no longer needed



Replacement Ratio

– Rule of Thumb = 70% - 85%

– Aon Consulting’s “Replacement Ratio Study”

• Replacement ratios vary by income

Total (%)

Private and Employer

Sources (%)

Baseline Replacement Ratios

38

42

94

90

85

81

78

77

77

78

46

42

39

36

25

31

31

30

32

35

60

70

80

90

Social Security (%)

69

59

54

51

Pre-Retirement Income

($000)

20

30

40

50

Source: Adapted from AON Consulting’s, 2008 “Replacement Ratio Study”



Factors varying from person to person – Savings rates

– Changes in medical expenses

– Other expenditure changes - College

- Mortgage

+ Paying for elderly parents

+ Travel



Cash Flow Analysis

– Detailed

• Breakdown of pre-retirement and post-retirement expenses by category

– Current Lifestyle • Assumes if your income isn’t going to taxes or savings… you’re

spending it.

• Adjust for post-retirement needs



A Replacement Ratio Example

Gross pre-retirement Income x Replacement Ratio

= Gross post-retirement income need

$75,000

x 77%

= $57,750



A Detailed Cash Flow Example

Pre-Retirement Post-Retirement

Expense Monthly Annual Monthly Annual

Housing $ 400 $ 4,800 $ 400 $ 4,800

Housing Mortgage $ 1,000 $ 12,000 $ - $ -

Food and Beverage $ 600 $ 7,200 $ 600 $ 7,200

Clothing $ 200 $ 2,400 $ 200 $ 2,400

Entertainment $ 400 $ 4,800 $ 400 $ 4,800

Transportation $ 400 $ 4,800 $ 400 $ 4,800

Healthcare $ 800 $ 9,600 $ 800 $ 9,600

Charitable Contributions $ 200 $ 2,400 $ 200 $ 2,400

Education $ 100 $ 1,200 $ 100 $ 1,200

Travel $ 300 $ 3,600 $ 300 $ 3,600

Other $ 200 $ 2,400 $ 200 $ 2,400

Retirement Savings $ 313 $ 3,750 $ - $ -

Taxes (FICA & Income) $ 1,315 $ 15,780 ?? ??

Total $ 6,228 $ 74,730 $ 3,600 $ 43,200



A Current Lifestyle Example

Household Income $75,000

- FICA Taxes @ 7.65% - $ 5,738

- TSP Contribution @ 5% - $ 3,750

= Pre-tax Income =$65,513

- Federal Taxes - $ 6,655

- State Taxes - $ 3,387

Current Lifestyle =$55,470

+ Taxes +$ ??

= Gross Income Need $ ??

Income Needs Using Current Lifestyle


Step 3: Calculate the Income Gap

Retirement Income Need - Retirement Income (Guaranteed Sources) = Income Gap (Funded with Investments)

But, do you assume taxes remain constant and use the pre-tax income – only deducting savings and FICA?

$65,513 (Pre-tax Income)

- $18,563 (FERS Pension) - $31,698 (Social Security) = $15,252 (Income Gap)


Understanding the Impact of Taxes

Pensions – Federally taxed as ordinary income – Many states offer tax breaks

Social Security – Max of 85% of SS benefit taxed federally – Many states don’t tax

TSP, Traditional IRA and other retirement plans – Withdrawals taxed as ordinary income – Many states offer tax breaks

Roth IRA – Qualified distributions are tax-free


Understanding the Impact of Taxes

Investment Income – Non-qualified dividends, interest, short-term capital gains

(investments held less than one year) all taxed as ordinary income • Tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%

– Qualified dividends & long-term capital gains • 20% for filers in the 39.6% bracket

• 15% for filers in the 25%, 28%, 33% and 35% brackets

• 0% for filers in the 10% and 15% brackets

**Additional 3.8% Medicare surtax may apply when income exceeds $200,000 for individuals and $250,000 for couples filing jointly



Using Pre-tax Income as Retirement Income Need

Household Income $75,000

- FICA Taxes @ 7.65% - $ 5,738






Income Needs Using Current Lifestyle Income Needs Using Replacement Ratio

FERS Pension $18,563

Social Security $31,698

TSP Withdrawal $15,252







Adjusting for taxes, TSP withdrawal = $7,000 versus $15,252

Household Income $ 75,000

- FICA Taxes @ 7.65% - $ 5,738


= Pre-tax Income = $ 65,513



Current Lifestyle = $ 55,470

Income Needs Using Current Lifestyle Income Needs Using Replacement Ratio

FERS Pension $ 18,563

Social Security $ 31,698

TSP Withdrawal $ 7,000

= Pre-tax Income = $ 57,261

- Federal Taxes - $ 957

- State Taxes - $ 760

Current Lifestyle = $ 55,544


Step 4: Estimating How Much Money You Need

How will you be raiding the piggy bank?

– 2 approaches

• Managing your own money & taking withdrawals

• Buying an annuity, which will provide income for life



Approach 1 – Withdrawal Strategy

– Use withdrawal rates to estimate how much money you need

• “4% Rule”

– The 4% rule states that retirees with a diversified portfolio split between stocks and bonds can safely withdraw 4% of their initial balance at retirement, adjusting the dollar amount for inflation each year thereafter





Source: T. Rowe Price’s “Help Sustain Your Assets: Be Bullish In Retirement” ** The likelihood of having at least $1 remaining in the portfolio at the end of the retirement period Likelihood base on hypothetical performance, does not reflect actual investment results, and is not a guarantee of future results. Simulations are based on a number of assumptions.



Approach 1 – Withdrawal Strategy

– Use withdrawal rates to estimate how much money you need

• Divide the annual income need by a withdrawal rate

$7,000 / 3% = $233,333


Factors to Consider

Asset allocation/investment return

Discretionary versus non-discretionary

Changes in income

Changes in expenses • Mortgage

• Education

• Entertainment & travel

Retirement Spending Smile


Factors to Consider

The Retirement Spending Smile

– Contrary to popular belief, a growing body of research indicates real (inflation-adjusted) spending declines during retirement

• Real spending declines – ~1% in first decade

– ~1% - 2% in second decade

– ~1% in third decade


Factors to Consider

Go-go Slow-go No-go

Source: David Blanchett, “Estimating the True Cost of Retirement; Michael Stein, “The Prosperous Retirement”

The Retirement Spending Smile



Approach 2 – Buying an Annuity – Get quotes based on income need to determine how

much you need to invest in annuity • https://www.immediateannuities.com/annuity-calculators

– Factors to consider • Single or Joint Life – 100% or 50% to survivor • Age(s) • Level payments or inflation adjusted • Period certain • Cash refund

https://www.immediateannuities.com/annuity-calculators





Approach 2 – Buying an Annuity

$584/month = $7,000/year 3% Cola 2% Cola 0% Cola

Joint Life W/100% Survivor (Male age 66, Female age 66)

$178,491 $158,104 $125,457

Single Life (Male age 66) $143,496 $128,997 $106,095

Single Life (Female age 66) $154,191 $138,055 $110,297

Source: Immediateannuities.com


Withdrawal Strategy Versus Annuity

Pros and Cons: Withdrawal Strategy

Advantages Immediate access to the money

Ability to withdraw more

Heirs may have a death benefit when you die

Maintain control

Disadvantages Initial income is typically lower than annuity payout

Bear risk of poor investment performance

May outlive your money

You have to manage the money


Withdrawal Strategy Versus Annuity

Pros and Cons: Buying an Annuity

Advantages Typically have higher initial income

Cannot outlive the income

No investment risk or decisions to make

Disadvantages Lose flexibility over timing of withdrawals

Lose potential upside of higher investment returns

Disinherit our heirs (unless you purchase option benefit)

Locked into one insurance company


Tools to Help You Plan

Calculators – TSP’s - How Much Will My Savings Grow?

• https://www.tsp.gov/PlanningTools/Calculators/howSavingsGrow.html

– Dinkytown’s – Investment Goal Calculator • Use to estimate how much you’ll accumulate and offers suggestions for

meeting accumulation goal • http://dinkytown.com/java/InvestmentVariables.html

– Dinkytown’s – Future Value Calculator • http://dinkytown.com/java/FutureValue.html

– Social Security’s Online Calculator • https://www.ssa.gov/planners/retire/AnypiaApplet.html • Use earnings history to estimate benefit in today’s dollars and future dollars

https://www.ssa.gov/planners/retire/AnypiaApplet.html


Thank You!



[email protected]

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (“SFA) – Member FINRA, SIPC. Mark Keen is a Registered

Principal and investment advisor representative of SFA, which is otherwise unaffiliated with Keen & Pocock.

Documents

How Much Money Do You Need To Retire? · How Much Money Do You Need To Retire? A NARFE Federal Benefits Institute Webinar Presented by Mark Keen, CFP This webinar provides general