Module 3 - Income Resources and Budgeting -...

Module 3 Module 3 Income Resources and Budgeting Basics

Income Planning for Clients Nearing Retirement is a self-paced educational program for financial professionals. The overall program includes nine modules that cover the why, what and how of income planning. Each module also includes information on resources available to help you engage clients in the income planning process. The program is designed for you to review on demand and at your own pace.

You are about to begin Module 3, Income Resources and Budgeting Basics, which should take you approximately 15 minutes.

By reviewing modules 1 3 and successfully completing an online exam you can earn 1 5By reviewing modules 1-3 and successfully completing an online exam, you can earn 1.5 continuing education (CE) credits for the Certified Financial Planner Board of Standards (CFP® Board), Investment Management Consultants Association (IMCA®) and Cannon Financial’s Certified Wealth Strategist® (CWS). Simply read the program modules, click the CE link online, fill out your information and take the exam. Please be sure to print out your final score for your own records.

You must achieve a score of 70% on the online exam to qualify for CE credit. Please allow 30 45 d f CFP B d d IMCA CE dit t i di Y t lf30-45 days for CFP Board and IMCA CE credits to appear in your diary. You must self report the CE credit you earn for CWS. If you have any questions filling out this form, please contact [email protected].

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© 2012 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a subsidiary of The Bank of New York Mellon Corporation. Trademark(s) belong to their respective owners. For professional use only. Not for distribution to the public. The information contained herein, including any attachments, is proprietary to, and constitutes confidential information of Pershing. It may not be reproduced, retransmitted or redistributed in any manner without the express written consent of Pershing LLC.


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Before you can help clients create a retirement income plan, your clients first need to do some basic homework. For example, they need to create detailed lists of the financial resources at their disposal for generating retirement income. The good news is that the fundamental process of creating an asset inventory often leads naturally to a client-centric discussion of consolidating financial services relationships.

Clients also have to consider the expenses they expect to have in retirement. A written budget is a central requirement in the process of developing your client’s transition strategy. While the process of creating a budget for the next 20 or 30 years can seem like a daunting p g g y gtask, it is important for your clients to approximate the types of fixed and discretionary expenses they are likely to encounter during their retirement.

Once clients have developed preliminary budgets, you have a solid starting point as their transition strategies evolve.

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Module Module 3 3 Income Resources and Budgeting Basics

Clients need to take inventory of all financial resources for generating income before they create an income plan. First they should consider all fixed sources of income such as Social Security and pensions. Second, they need to consider discretionary income sources, which will likely include various types of tax-advantaged retirement accounts such as 401(k)s and IRAs, but also include any taxable discretionary savings and investments they have.

They may have other resources that should be taken into account as well, like real estate and life insurance. For many, home equity can be a potential resource, as well as incomey, q y p ,from working in retirement.

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The good news is that the fundamental process of creating an asset inventory often leads naturally to a client-centric discussion of consolidating financial services relationships. Having a holistic view of the resources an individual brings to bear sets the foundation for building a viable retirement income plan for a client. At this point, it is easier for clients to see the value of:

• Consolidating financial services relationships with a single financial professional

• Determining the optimal combination of taxable and tax-advantaged accounts, which will vary based on an individual client’s profilevary based on an individual client s profile

• Creating a more conservative investment strategy for their portfolios, if appropriate, by adding elements of current income and principal protection

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Every good retirement income plan starts with a budget. As you would expect, some clients will have a clear vision of what their desired budgets will look like in retirement, while others will come to you with little or no idea of what they anticipate their spending habits will be in retirement.

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When designing a budget, it is important to take into account inflation. For example, take a client with a current monthly budget of $5,000 for fixed expenses. As the chart shows, after 20 years that $5,000 monthly budget would grow to about $9,000 at an annual inflation rate of only 3%. If we were to experience above-average inflation rates of 5% during the same time period, the same $5,000 budget would balloon to over $13,000 over the course of the next 20 years.

As the 3% inflation projection demonstrates, even a modest amount of inflation will significantly impact a retirement budget over time—and the difference of just a couple of g y p g j ppercentage points can have a tremendous impact.

This example is for illustrative purposes only and is not intended to represent the performance of any investment.

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When thinking about a budget, your clients need to be wary of broad sweeping rules of thumb, such as “be sure to plan for at least 70% to 80% of your pre-retirement income.” According to the Employee Benefits Research Institute Retirement Confidence Survey, from 2007-2010, the majority of retirees reported spending about the same in retirement compared with pre-retirement.

Although that generalization may work for some, some clients will spend more in retirement due to health care costs or elaborate lifestyle plans filled with travel and activities.

Other clients will spend less due to reduced (or eliminated) work income mortgage childOther clients will spend less due to reduced (or eliminated) work income, mortgage, child-related or other expenses.

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It is difficult to ignore that medical care costs have soared over the past decade. So how will your clients cover the costs of health care during their retirements? Most will not be able to, nor do they want to, cover costs out-of-pocket. And the Employee Benefit Research Institute (ERBI) estimates that Medicare covers approximately 51% of retiree expenses related to health care services (EBRI Issue Brief No. 295, July 2006).

Where is the other 49% coming from? It is paid by supplemental insurance policies like employer-provided insurance or self-purchased insurance and directly by retirees in the form of out-of-pocket expenses.p p

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How does an individual go about covering long-term care expenses? Medicare does not pay for most long-term care. Medicaid covers some long-term care expenses but only if the individual is poor or one’s assets have been completely spent down. Long-term care insurance does cover long-term care but varies broadly in cost and coverage.

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The costs associated with long-term care should not be surprising to anyone, though they may seem a bit low if you live in a state with a cost of living that is above the national average.

The data point that deserves attention from your clients in the transition phase of retirement is the second bullet: 50% of long-term care consumers in 2008 had not yet reached the traditional retirement age of 65. This includes younger persons with serious life-long illnesses and disabilities but also aging Baby Boomers who are experiencing a growing number of health issues.

The odds of a disability that requires long-term care increases with each decade closer to retirement age, as shown in the upper right.

In addition, employer health insurance policies and Medicare generally will not pay the costs associated with the services listed above.

While many illnesses in the decade before retirement are not chronic, they can still involvemonths or years for care and recovery, including skilled nursing care or time in a facility and y y g g ysubstantial out-of-pocket costs. To the extent a client must use retirement funds and other savings to meet those costs, it can undermine their retirement income plan.

Long-term care insurance may help to protect current assets and future income. You may want to consider teaming up with an insurance professional in your area who can assist with these services.

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For all the reasons cited previously, long-term care coverage is an essential component of the retirement transition planning discussion. With the help of an insurance professional, choosing the right coverage could prevent erosion of client assets before they can be converted to retirement income. Also, depending upon the policy and policy terms, the total cost of coverage over a period of years could be more reasonable if the client purchases a policy at a younger age. Policy premiums usually are set when the policy is first purchased and increase considerably as the age of purchase rises.

Explore all the possibilities for coverage. For example, the Federal Long-Term Care p p g p , gInsurance Program covers most federal and U.S. Postal Service employees and annuitants, active and retired members of the uniformed services, and their qualified relatives. 60% of the 50 United States offer programs for public employees and retirees. And employers are increasingly offering coverage through elective programs in the worksite.

A client might be able to convert a life insurance policy to a life settlement to cover the costs of long-term care, if and when it is needed. But keep in mind that life settlements generally are not permitted until clients reach their 70s (age 74 for women age 70 for men) Betweenare not permitted until clients reach their 70s (age 74 for women, age 70 for men). Between now and then, other coverage may be warranted.

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As part of an income plan, clients also should consider both sides of the balance sheet and evaluate their debt, with the aim of reducing or eliminating it by retirement. One way to reduce debt is to help clients utilize the investments in their taxable brokerage accounts as collateral for a line of credit with an attractive interest rate. Because the line of credit is secured, the interest rate may be lower than rates on standard unsecured bank loans or credit cards. As a result, the client may be able to pay off debts sooner or carve out more disposable income for investment.

Clients with managed accounts may be strong candidates for this type of strategy. As a g y g yp gygeneral rule, managed account balances are $75,000 to $100,000 or more. The sizable account balance can provide collateral for a larger line of credit and a lower interest rate.

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© 2012 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a subsidiary of The Bank of New York Mellon Corporation. Trademark(s) belong to their respective owners. For professional use only. Not for distribution to the public. The information contained herein, including any attachments, is proprietary to, and constitutes confidential information of Pershing. It may not be reproduced, retransmitted or redistributed in any manner without the express written consent of Pershing LLC. 15

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