Beyond The Uncertainty:Strategies to Secure your Retirement

Income for Life

Planning the Optimal Distribution Strategy for Retirement

Can I continue living in my accustomed comfort and enjoyment?

Will I be able to leave an estate to my heirs? If I’m fortunate to live a very long and

healthy life, will I have to worry about running out of money?

What this session is, and is not . . .This is not a session on determining retirement income needs

We will identify an approach to effectively determine a Sustainable Withdrawal Rate for your assets

And we will discuss strategies for maximizing the probability that your portfolio will last as long as you need it

Income Projection Models

Straight Line Model

Monte Carlo Model

Market Cycle Model

True Market Model

Straight Line ModelThe ‘internet calculator’ model

Inputs include: average rate of return, average inflation, initial withdrawal, etc.

Ignoring the pattern of the actual market returns results in failure of these projections to achieve their goal 85 – 90% of the time

Handles inflation well, but little else

Factors Affecting Longevity of Retirement Portfolio Inflation Market Factors

Random Fluctuation Market Cycles – cyclical bull/bear markets Megatrends – secular bull/bear markets

Timing of Retirement Reverse Dollar-Cost Averaging

Reverse Dollar-Cost Averaging

Money taken out during market declines is a permanent loss The average retiree will likely endure 3 or 4 cyclical bear

markets during retirement Even a sideways market operates like a bear market for a

retiree

Share Price Invested

$

Total

Cost

# Shares

Bought/Sold

Share

Balance

Total

Market Value

$10 $500 $500 50.0 50.0 500

7 -60 440 (8.6) 41.8 290

8 -60 380 (7.5) 33.9 271

9 -60 320 (6.7) 27.3 245

10 -60 260 (6.0) 21.3 213

Income Projection Models

Straight Line Model

Monte Carlo Model

Market Cycle Model

True Market Model

Typically runs a thousand or more iterations simulating random market fluctuation around an assumed rate of return

Determines probability of certain outcomes

Handles random fluctuations and inflation fairly well, but not market cycles

Probability of Depletion Assumptions:

Strategic Asset Allocation Mix: 40% Equity + 60% Fixed Income

5% Initial Withdrawal Rate

Years After Retirement Monte Carlo Simulation Actual Market, Since 1900

10 0% 0%

15 1% 3%

20 14% 36%

25 37% 68%

30 55% 86%

Market Cycle Model Divides straight-line model

into average historic bull and bear cycles

Applies random number generation to vary the strength and duration of each cycle

Runs projections for retirement at the beginning of either a bull or a bear cycle

Income Projection Models

Straight Line Model

Monte Carlo Model

Market Cycle Model

True Market Model

Handles consequences of market cycles and reverse dollar-cost averaging significantly better

Moves away from ‘guesses’ about future returns and inflation

Still does not allow for megatrends, skewness of market volatility, or significant variations in inflation

Income Projection Models Provides us with a

range of outcomes using actual historic market data since 1900, based on retirement starting at the beginning of each year

Straight Line Model

Monte Carlo Model

Market Cycle Model

True Market Model

Sustainable Withdrawal Rate Assuming:

The optimal asset mix of equities and bonds Actual market and inflation history from 1900 – 2003 Life expectancy to age 95

Retirement Age SWR60 3.1%65 3.6%70 4.1%75 4.7%

Strategy for Maximizing Portfolio Life Optimize the allocation mix for longevity Optimize the rebalancing strategy Optimize the Asset Allocation method

Strategic Age Based Tactical Trend Following

Optimal use of Guaranteed Components Calculation Methodologies

Optimize the Allocation Mix

Goal: Highest probability of desired portfolio life Highest minimum life Highest average life

Note: Unless there are significantly more assets than necessary to comfortably provide for retirement, optimizing the portfolio for longevity has nothing to do with the individual’s risk tolerance

Fixed Income vs. Equity

Determinants of OptimalAllocation Mix

Initial Withdrawal Rate (indexed for inflation) Asset mix: From 0% to 100% equity (DJIA) vs. fixed

income Margin of outperformance or underperformance of

equities relative to DJIA

Calculated probabilities of depletion based upon actual market history assuming retirement at the beginning of every year from 1900 through 1999

Probability of Portfolio Depletion Starting years 1900 to 1999 Initial portfolio $3,000,000 Initial withdrawal rate of $90,000 per year, (3%),

indexed to inflation

Worst 20 Years 30 Years 40 YearsMedian Estate ValueAt 40 Years

All Equities 15 yrs. 7% 39% 47% $317,000

40% Equities60% Bonds

37 yrs. 0% 0% 5% $7,500,000

Optimize the Rebalancing Strategy

When using only fixed income and domestic equities (DJIA), rebalancing every four years at the end of the presidential election year yielded the best historical results

Politics and the MarketAverage Performance of DJIA During Years of

Presidential Term, 1901 - 2000

Optimize the Asset Allocation Method

Strategic

Age Based

Tactical

Trend Following

Guaranteeing Your Income for Life When do annuities make sense and in what

proportion to your portfolio? Investing Only Buy Term Annuity and Invest the Difference [Grangaard] Buy Life Annuity and Invest the Difference

Comparing Guarantee Strategies Assumptions:

Retire at Age 65 with $1,000,000 to invest Initial Withdrawal of $50,000 (5%) 40% Equity + 60% Fixed Income Years from 1900 to 1999

Worst Age 85 Age 90 Age 95

Invest Only 19 yrs. 2% 13% 32%

Term Annuity1 & Invest 23 yrs. 0% 8% 32%

Life Annuity2 & Invest Perpetual 0% 0% 0%

1 Term annuity was 10 yr. annuity purchased for $411,500 providing income of $50,000 annually, indexed2 Life annuity income provided by annuities purchased annually for first 3 years. Average estate value at age 95 was

$1,318,000.

Buy Life and Invest the Difference

Build a life annuity ladder over time and invest the balance

Determining the Annuity Component

Min. (Required Withdrawal Rate – Sustainable Withdrawal Rate)

Annuity % = ------------------------------------------------------------------------ x 100

(Annuity Payout Rate – Sustainable Withdrawal Rate)

MA < 0 : Abundant savings; life annuity shouldn’t be necessary

MA of 0 – 100 : Sufficient savings; use life annuity to provide security

MA > 100 : Insufficient savings; best assurance of continued income is

100% life annuity

Calculation Methodologies No calculation methodology should escape

continual examination

Visit: http://www.jotar.com for more information on the concepts presented here

See handout illustration: A Case Study