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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.
2 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
3 Sponsored by National Active and Retired Federal Employees Association
62 Early Retirement
Framing the Conversation
75
Sequence Risk
Retiree Risks
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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.
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62 Early Retirement
Mid Retirement
Framing the Conversation
75 85
Sequence Risk
Inflation Risk
Retiree Risks
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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
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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
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62 Early Retirement
Mid Retirement
Late Retirement
Framing the Conversation
75 85
Sequence Risk
Inflation Risk
Longevity Risk
Retiree Risks
95
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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
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.
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.
If you’re 65 today, the probability of living to a specific age or beyond
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Retirement Savings
Spending
Timing
Asset Allocation
Legacy Wishes
Framing the Conversation
Factors under our control:
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What’s Your Number?
How do you know how much you need to retire?
– Longevity
– Inflation
– Sequence Risk
– Retirement spending
– Portfolio composition
– Legacy Wishes
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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
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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
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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
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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
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Step 2: Estimating Retirement Income Needs
Replacement Ratio
Cash Flow Analysis
– Detailed Expense, or
– Current Lifestyle
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Step 2: Estimating Retirement Income Needs
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
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Step 2: Estimating Retirement Income Needs
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”
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Step 2: Estimating Retirement Income Needs
Factors varying from person to person – Savings rates
– Changes in medical expenses
– Other expenditure changes - College
- Mortgage
+ Paying for elderly parents
+ Travel
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Step 2: Estimating Retirement Income Needs
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
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Step 2: Estimating Retirement Income Needs
A Replacement Ratio Example
Gross pre-retirement Income x Replacement Ratio
= Gross post-retirement income need
$75,000
x 77%
= $57,750
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Step 2: Estimating Retirement Income Needs
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
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Step 2: Estimating Retirement Income Needs
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
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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)
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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
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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
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Step 3: Calculate the Income Gap
Using Pre-tax Income as Retirement Income Need
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
Income Needs Using Current Lifestyle Income Needs Using Replacement Ratio
FERS Pension $18,563
Social Security $31,698
TSP Withdrawal $15,252
= Pre-tax Income =$65,513
- Federal Taxes - $ 2,662
- State Taxes - $ 1,235
Current Lifestyle =$61,616
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Step 3: Calculate the Income Gap
Adjusting for taxes, TSP withdrawal = $7,000 versus $15,252
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
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
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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
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Step 4: Estimating How Much Money You Need
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
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Step 4: Estimating How Much Money You Need
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Step 4: Estimating How Much Money You Need
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.
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Step 4: Estimating How Much Money You Need
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
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Factors to Consider
Asset allocation/investment return
Discretionary versus non-discretionary
Changes in income
Changes in expenses • Mortgage
• Education
• Entertainment & travel
Retirement Spending Smile
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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
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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
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Step 4: Estimating How Much Money You Need
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
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Step 4: Estimating How Much Money You Need
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
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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
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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
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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
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Thank You!
A NARFE Federal Benefits Institute Webinar
Presented by Mark Keen, CFP
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.