Retirement Planning Strategies Amid Economic Uncertainties

Speaker:

Toby Tobleman, FSA, CFA, CFP®, ChFC, CASL, GPT

toby@ruddwisdom.com

International Society of CEBS PresentationOctober 14, 2010Crowne Plaza Hotel, Austin Texas

1. Baby Boomers Ready to Retire

2. Greater Importance Placed on Account Balance Benefits Decline in Employer Funded Promised Payments Shift to Employee Funded and Investment Directed Accounts Social Security Benefits under Demographic Pressure

3. Retirement Risks Not Diminished But Shifted Financial Market Risk Longevity Risk Inflation Risk Health Care Access and Cost Risk

The Task

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4. Employees Need to Assess and Manage the Retirement Risk Limited Knowledge Psychological concerns Limited Access to Comprehensive Independent Advice

(Business Model Bias)

The Task

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1. Individual Employee Retirement Planning Advice Personal and Interactive Comprehensive Independent Fiduciary Relationship

2. IRC Sections 132(a)(7) and 132(m) Qualified Retirement Planning Services Employer Funded or Subsidized Three Levels of Service Needed

1. Basic2. On Course Check-ups3. Comprehensive

Beyond PPA Investment Advice

THE TOOL BOX

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The Tool Box

3. Comprehensive Assistance Needed in Many Areas Basic Financial Planning and Investment Education Budget Tools Funding College Expenses Maximization of Social Security Benefits Roth Tax Planning Credit Score Preservation Identity Theft Protection End of Life Directives Estate Planning Non- Retirement Financial Risk Evaluation Long Term Care Risk Evaluation Hey, Am I About to Do Something Really Stupid?

1. Financial Market Risk Tools Expanded Asset Categories and Vehicles

1. ETFs/ ETNs2. Options/Futures3. Hedge Funds4. Infrastructure5. Natural Resources6. Real Estate7. Commodities8. Private Capital9. Foreign Debt and Currency10. Insurance and Annuity Products

The Tools

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Smarter Portfolio ConstructionLook for Beta not AlphaTake Advantage of Low Correlation among Asset Classes

2. Longevity Risk Tools Growth Oriented Asset Allocation Annuities

1. Conventional2. Nonconventional3. Longevity Insurance (ALDA)

Reverse Mortgages Phased and Delayed Retirement

The Tools

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3. Inflation Risk Tools Inflation Indexed Products Overweighting Asset Allocation Sectors Anticipate Inflation Increased Expenditures

4. Health Care Access and Cost Risk Tools Personal Health Decisions True Insurance Long Term Care Insurance

The Tools

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1. The Basics Consumption Amounts and Pattern Balance Consumption and Bequest Goals Portfolio Cash Flow Needs Realistic and Flexible Society of Actuaries 7-Step Process

2. Portfolio Construction Process Address Longevity Risk Address Market Risk

Retirement Distribution Construction Worksite

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1. Seven Daughters

2. Build Income Portfolio to Generate Cash Flow Perpetuity Not Needed Ok to Consume Principal Bequest/Special Needs

3. Lifetime Payments

4. Insurer Annuitization Transfer Risk to Insurer Underutilized Doesn’t Address Bequest Goals Timing of Purchase Complex Products (GMIB, GLWB, GMWB, GMAB, GPAF) Non Transparent/ Expensive Do Not Trade Dollars with Insurance Company

Retirement Risk Models

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5. Self Annuitization Keep All or Part of Longevity Risk Manage Longevity Risk

1. Spending Management2. Portfolio Management

Purchase Insurance When Needed

Retirement Risk Models

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1. Select Appropriate Longevity Period

2. Historically Based Safe Withdrawal Rates (SWR) Inflation Adjusted Asset Assumptions Key

3. Compare SWRs Probabilities of Failure Asset Allocation Impact Ending Balance

4. Fixed Period and Fixed Payment – Charts 1 and 2

5. Explicit Mortality Assumption – Charts 3, 4, 5 and 6

6. Modify Spending Rules- Charts 7 and 8

7. Modify Assets- Charts 9 and 10

Retirement Distribution Models

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0

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60

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0 10 20 30 40 50 60 70 80 90 100

Chart 1: 30 Years Retirement Ruin Probabilities

5.5%

4.0%

5.0%

4.5%

● marks a 4 percent real withdrawal rate with 50 percent stocks and 50 percent bonds

Stock Percentage

Rui

n Pr

obab

ility

●

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3.0%

2

3

4

5

6

0 20 40 60 80 100

$50

$100

$200

$300

$500

$700

$900

Chart 2: Average 30 Years Remaining Balance

● indicates an average of $300 remains after 30 years with a 4% real withdrawal rate and 60% stock allocation

Stock Percentage

With

draw

al R

ate

●

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Chart 3: Male Lifetime Retirement Ruin Probabilities

Male 65Percentage Withdrawal Rates

4% 5% 6% 7% 8%

0% Eq. 8.30% 19.90% 33.30% 45.80% 56.00%

25% Eq. 4.20% 12.80% 24.80% 37.80% 49.30%

50% Eq. 3.80% 10.60% 20.40% 31.80% 42.90%

75% Eq. 5.00% 11.40% 19.80% 29.40% 39.00%

100% Eq. 7.30% 13.70% 21.30% 29.70% 37.90%

Source: IFID Centre 15

Chart 4: Female Lifetime Retirement Ruin Probabilities

Female 65Percentage Withdrawal Rates

4% 5% 6% 7% 8%

0% Eq. 9.90% 23.10% 37.40% 50.30% 63.30%

25% Eq. 5.10% 15.00% 28.20% 41.90% 53.60%

50% Eq. 4.50% 12.30% 23.10% 35.30% 46.70%

75% Eq. 5.90% 13.00% 22.20% 32.40% 42.40%

100% Eq. 8.40% 15.40% 23.50% 32.30% 40.90%

Source: IFID Centre 16

Chart 5: Probability of 60/40 Portfolio Failure for Various Real Withdrawal Rates and Distribution Periods

Source: Journal of Financial Planning- December 200817

Source: Journal of Financial Planning- December 2008

Chart 6: Probability of 60/40 Portfolio Failure While Either or Both Members of a Couple are Still Living

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Chart 7: Probabilities of Failure Based on a Fixed Withdrawal Rate

Source: Journal of Financial Planning- April 200919

Source: Journal of Financial Planning- April 2009

Chart 8: Probabilities of Based on Adjusted Withdrawal Rate

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Chart 9: Portfolio Success Rate 1927-2008, Annual Rolling 30-Year Periods

Source: Journal of Financial Planning- February 2010 ( Ibbotson)21

Chart 10: Portfolio Success Rates 1927-2008, Annual Rolling 40 Year Periods

Source: Journal of Financial Planning- February 2010 ( Ibbotson)22

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Retirement Distribution Models

8- SWR Summary Observation/ Recommendations Review Appendix A- Portfolio Concepts and Guidelines Know Your Risk Tolerance (Milevsky Article) Accumulation Period Equity Allocation 60% or Higher

Transition to Distribution Equity Allocation (Dolvin et al Article) Diversity Equity Portfolio Extensively (Cooker Article) Consider Passive over Active Management (Garrison et al Article) Be Mindful of Sequence Risk (Blanchett and Frank Article) Be Mindful of Market Cycles and Valuations (Harris Article) Reflect Mortality Assumptions in SWR (Blanchett and Blanchett Article) Adjust Withdrawals in SWR (Blanchett and Frank Article)

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Retirement Distribution Models

Strategically Rebalance Accumulation and Distribution Periods (Spitzer et al Article and Daryanani Article)

Be Mindful of Taxation Effect (Berna) Consider Immediate Annuities Use for Part of Portfolio and ALDA Products

QUESTIONS

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THANK YOU!

Rudd and Wisdom, Inc.Financial Services Divisionwww.ruddwisdomfinancial.com

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APPENDIX A:

PORTFOLIO CONSTRUCTION CONCEPTS

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Portfolio Construction Concepts

1. Understand your return needs/desires vs your risk capacity

2. Analyze your risk appetite and its potential consequences

3. Decide which asset categories to use in which amounts

4. Decide on passive or active managers for each asset category

5. Portfolio takes on characteristics different from its components

6. Portfolio characteristics should be consistent with its goal

7. Use available tools and resources

8. Monitor and modify portfolio as needed

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Portfolio Construction Guidelines

1. Do not invest in any asset you do not understand

2. Do not assume more asset risk than is needed

3. Use diversification to reduce volatility not to increase return

4. Use the financial goal time frame as a guide to your risk capacity

5. Re-balance your portfolio according to pre-determined strategy

Portfolio Construction Guidelines

6. Never assume higher investment returns come without higher volatility

7. Understand psychological influences on investment decisions and the market

8. Change your portfolio construction only if consistent with your goals; never panic into changes

9. Past results may or not may not be repeated in the future

10.Whom do you trust?

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APPENDIX B:

ACKNOWLEDGEMENTS,CREDITS AND RESOURCES

1- Using Decision Rules to Create Retirement Withdrawal Profile (SWR)William KlingerJournal Financial Planning - August 2007

2- Guidelines for Withdrawal Rates and Portfolio Safety During Retirement (SWR)Spitzer, Strieter, SinghJournal of Financial Planning - October 2007

3- Evaluating Retirement Portfolio Withdrawal Rates (SWR)Carl HubbardJournal of Retirement Planning - May/June 2006

4- Moshe Milevsky, Professor, York University, TorontoExecutive Director- The IFID Centre, Toronto

Acknowledgements, Credits And Resources

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5- Retirement Ruin Analyzer (SWR)Society of Actuaries Website

6- Emphasizing Low-Correlated Assets (Diversification)The Volatility of Correlation by William CoakerJournal of Financial Planning – September 2007

7- CFA Institutewww.cfainstitute.org

8- Pension Research Councilwww.pensionresearchcouncil.org

9- Gone in 60 Seconds( Flash Crash)Denis Dick, CFACFA Institute Magazine (Sept/Oct 2010)

10- Upper-left Quadrant (Diversification)Craig L. Israelsen, Ph.D.Financial Planning (Sept 2009)

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Acknowledgements, Credits And Resources

11- The Future of Retirement Investing (Use of Options)William Ulivieri, AIFAJournal of Financial Planning (Sept 2009)

12- Market Cycles and Safe Withdrawal Rates (SWR)John Harris Ph.D. , CFP, RFCJournal of Financial Planning (Sept 2009)

13- True Believer (Active vs. Passive)Walter Updegrave interview of Roger IbbotsonMoney (Sept 2010)

14- The Six Best Investing Ideas You’ve Never Heard (Risk)George MannesMoney (July 2010)

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Acknowledgements, Credits And Resources

15- The Portfolio- Spice it Up (Commodities)Craig L. Israelsen Ph.D.Financial Planning (June 2008)

16-The Portfolio- Heads I win, Tails I lose Less (Passive Fundamental Index)Robert Arnott et alFinancial Planning (June 2008)

17- Joint Life Expectancy and Retirement Distribution Period (SWR)David Blanchett CFA, CFP and Brian Blanchett CFA, CFPJournal of Financial Planning (December 2008)

18- Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach (SWR)Lemoine, Cordell, GustafsonJournal of Financial Planning ( January 2010)

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Acknowledgements, Credits And Resources

19- Retirement Income Sustainability: How to measure the Tail of a Black Swan (Risk)Moshe Milevsky Ph.D.Journal of Financial Planning (Oct 2010)

20- Dynamic and Adaptive Approach to Distribution Planning and Monitoring (SWR)David Blanchett CFA, CFP and Larry Frank, CFPJournal of Financial Planning (April 2009)

21- Beyond Monte Carlo Analysis: An Algorithmic Replacement for a Misunderstood Practice (Risk)Shawn Braymen, BSc. MESJournal of Financial Planning (Dec 2007)

22- Determining the Proper Starting Balance for Taxable and Tax-Deferred Savings at Retirement (SWR)Ben Bernacchi, CFPJournal of Financial Planning (July 2008) 36

Acknowledgements, Credits And Resources

23- Asset Allocation for Retirement: Simple Heuristics and Target Date Funds (SWR)Steven Dolvin. Ph.D., CFA; William Templeton Ph.D.Journal of Financial Planning ( March 2010)

24- Opportunistic Rebalancing (Portfolio)Gobind Daryanami, CFP, Ph.D.Journal of Financial Planning (Jan 2008)

25- Long-Term Approaches to Managing Retirement Healthcare Costs (Health)David Armes, CFPJournal of Financial Planning (Dec 2009)

26- Is Rebalancing a Portfolio During Retirement Necessary? (Portfolio)John Spitzer, Ph.D., and S.Singh Ph.D., CFAJournal of Financial Planning (June 2007)

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Acknowledgements, Credits And Resources

27- Creating Safe, Aggressive Retirement Income Profiles (SWR)William J. Kingler, MBA, MSJournal of Financial Planning (May 2010)

28- Diversification Effect: Isolating the Effect of Correlation on Portfolio Risk DiversificationGregory N. HightJournal of Financial Planning ( May 2010)

29- Allocation to deferred Variable Annuities with GMWB for Life (Annualization)James X. Xong, Ph.D., CFA, Thomas Idzorek, CFA and Peng Chen Ph.D., CFAJournal of Financial Planning ( February 2010)

30- Simple Dynamic Strategy for Portfolio Withdrawals: Using a 12 Month Simple Moving Average (Active Management) Michael Garrison, CFP, Carlos Sera and Jeffrey Cribbs, CFPJournal of Financial Planning (Feb 2010)

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Acknowledgements, Credits And Resources

31- Strategic Option Protection Increases Return, Decreases Risk (Risk) John Burke, CFP and Wei Xu Journal of Financial Planning ( July 2010)

32- Immediate Annuities: Beyond Interest Rate (Annualization)InsightFinancial Planning (October 2010)

33- Segmenting the Middle Market: Retirement Risks and Solutions (Education)Noel Abkemeier, FSASociety of Actuaries Publications (Sept 2010)

34- TIPS Scorecard (Inflation)Zvi Bodie et alFinancial Analysts Journal- CFA Institute (Sept/Oct 2010)

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Acknowledgements, Credits And Resources

35- The Rat Without a Tail (Trust)Susan J. Forray, FCASContingencies; American Academy of Actuaries (Sept/Oct 2009)

36- Shiller P/E’s and Predicting Returns (Active Management)Joseph A. Tomlinson, FSA, CFPAdviser perspective Web Publication

37- Return Distributions and the Shiller P/E Ratio (Active Management)Keith C. Goddard, CFA Adviser perspective Web Publication

38- Gambling: Happens in Vegas- And Should Stay in Vegas (SWR)Scott Wittman, CFA, CAIA; Rich Weiss and Irina Torelli, CFAAmerican Century Investments

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Acknowledgements, Credits And Resources

39- Not a Lost Decade for Diversified, Balanced Portfolios (Diversification)Joni L Clark, CFA, CFP Adviser Perspective Web Publication

40- Financial Tips for Those Close to RetirementAmeriprise Financial (March 2010)

41- Three Market Valuation Indicators (Active Management) Doug Short Adviser Perspective Web Publication

42- Texas State Securities Boardwww.ssb.texas.tx.us

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Acknowledgements, Credits And Resources