Strategies to Help You Plan Your Retirement AC: 0111-4483 This presentation may not be reproduced or redistributed in any manner. Tom Axline, CFP ® and.

Strategies to Help You Plan Your Retirement

AC: 0111-4483 This presentation may not be reproduced or redistributed in any manner.

Tom Axline, CFP® and Ross D. Emmer, CFP®

January 7th, 2011

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Disclosures

ICMA-RC does not offer specific tax, insurance, or legal advice

• It is recommended that individuals consult with a qualified financial professional prior to implementing any financial, tax, or insurance strategy.

Tax rules

• All tax rules referenced apply to federal taxes only, which are subject to change. Different state and local tax rules may apply.

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Average U.S. Life Expectancy at Birth 1900 – 2000

Source: Deaths: Final Data for 2000. National Vital Statistics Reports; Vol. 50, No. 15. Table 8, Estimated life expectancy at birth in years, by race and sex. National Center for Health Statistics, September 16, 2002.

45

50

55

60

65

70

75

80

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990

Year

Life

Exp

ecta

ncy

at B

irth

Retirement is a Recent PhenomenaIn 1900 U.S. Life Expectancy at Birth was 47; Only One in 25 Lived to Age 60

Life Expectancy at Age 65

1950

Women 78

Men 75

Today

Women 85

Men 82

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Why Save for Retirement? For Starters, It May Last a Long TimeNeed to Plan for Maintaining your Desired Standard of Living Throughout

Source: Morningstar, Inc., 2010© From Annuity 2000 Mortality Tables

Age

Prob

abili

ty

0%

25%

50%

75%

100%

70 75 80 85 90 95 100 105

Male

Female

At least one spouse

78 81 86

85 88 91

91 93 96

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Probability of a 65-year-old living to various ages

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Need more

incentive to save?

Will future Social Security

benefits be reduced?

Will Congress

raise future tax rates?

Will future employer

benefits be reduced?

Retirement Is Unpredictable

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#1 Save Regularly, “Pay Yourself First”

• Save before you spend: immediately set aside portions of each paycheck

• You’ll probably miss it less than you think!

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#2 Be Disciplined and Invest Regularly, Too: Dollar-Cost Average

Let’s say you invest $600/month…in a volatile market

MonthAmount Invested

Price/Share

Shares Purchased

January $ 600 $ 20 30

February $ 600 $ 30 20

March $ 600 $ 24 25

April $ 600 $ 40 15

TOTALS $ 2,400 90

Avg. Share Price = $28.50Your Avg. Cost Per Share = $26.67

More shares bought when prices lower and vice-versa

Dollar-cost averaging does not assure profit or protect against loss in a declining market. Since it involves continuous investment regardless of fluctuating prices, you must consider your ability to continue to invest during all price levels.

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#3 Start Sooner, Take Pressure Off Later…

* For illustrative purposes only. Assumes 7% rate of return and reinvestment of earnings. Balances shown are before reduction for taxes. Actual results will vary, based on the performance of your underlying investments during the time periods you own them.

$100,000

$80,000

$60,000

$40,000

$20,000

$0

$38 $82 $192 $578 $1,397

Monthly Savings Needed to Accumulate $100,000 by Age 65*

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…And Maximize Your Potential Savings

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Ms. Early Mr. Late

Potential Earnings on Original Contributions and on Any Subsequent Earnings!

Earnings$229,793

Earnings$59,224

Contributions$49,000

Contributions$49,000

Value at age 65$278,793

Value at age 65$108,224

$1,000 initial investment, then $100 per month ages 25-65

$1,000 initial investment, then $200 per month ages 45-65

By age 65, both individuals have contributed the same amount, but Early Starter benefits from

20 more years compounded growth

* For illustrative purposes only. Assumes 7% rate of return and reinvestment of earnings. Balances shown are before reduction for taxes. Actual results will vary, based on the performance of your underlying investments during the time periods you own them.

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#4 Look for Opportunities to Save More

InitialAccount

Value

InitialBiweekly

Contribution

Annual Increase, Biweekly

Contribution

Account Value:

10 Years Later

Account Value:20 Years Later

Account Value:30 Years Later

Jasper $0 $25 $0 $9,396 $28,299 $66,329

Violet $0 $25 $20 $38,921 $192,391 $576,319

The $20 Difference Additional Account Value for Violet $29,525 $164,092 $509,990

How? Raises, Bonuses, Tax Refunds, Gifts, Inheritances, Etc.

* For illustrative purposes only. Assumes 7% rate of return, reinvestment of earnings, and that both accounts are invested identically over time.

• Jasper and Violet each join their 457 deferred compensation plan and make $25 pre-tax contributions each biweekly pay period. Each year thereafter, Violet takes advantage of her cost-of-living (COLA) and increases her biweekly contribution by $20, meaning $45 biweekly in the second year, $65 biweekly in the third year and so on. Jasper does not make any changes.

• Violet’s ability to save money a little more each year, by taking advantage of raises and smartly managing her finances, gives her the advantage.

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$121,511

$162,014

Contributions You Make May Reduce Current Taxable Income, So You Can Save More

Each dollar contributed• Lowers that year’s federal taxes• May also lower state income taxes• May qualify for “Saver’s Credit”*• Receives tax-deferred earnings**

* Must have low income to qualify. Up to $1,000 tax credit per individual. ** 457 plan assets are not subject to tax until withdrawn. For illustrative purposes only.

#5 Consider Tax-Advantaged Accounts First

Regular, Taxable Account

Total to Invest Taxes taken out Total invested

$2,400 – $600 = $1,800

Taxes taken out are based on the 25 percent tax bracket

457 Plan

Total to Invest Taxes taken out Total invested

$2,400 – $0 = $2,400

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IRAs Can Complement Your Employer PlansTax-Deferred Earnings Also with More Choices, Withdrawal Flexibility

1 $5,000 limit per individual ($6,000 if age 50 or over), 2010 and 2011, each year. You and/or spouse must have earned equal amount, “taxable compensation.”2 Depends on Adjusted Gross Income (AGI) and participation in an employer retirement plan. 3 Contributions to all IRAs, including Roth, may qualify for further federal income tax savings via the “Saver’s Credit”. 4 Modified AGI limits apply.5 Non-deductible contributions are not subject to tax but must be withdrawn pro rata. See IRS Publication 590 for complete IRA rules.

Traditional IRAs Roth IRAs

Contributions1 May be tax-deductible2,3 No tax benefit3

Eligibility based on income4

Withdrawals Tax: ordinary income5

10% penalty if age < 59½?

Contributions first, always tax-freeEarnings may be tax-free or,

if age < 59½, 10% penaltyWhen to Consider

Eligible for tax-deduction &

Higher tax bracket now vs. later

Lower tax bracket now; or……Tax-diversification: tax-free income later?

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#6 Coordinate with Other Goals: Debt, Emergency Fund, Insurance

Goal Why These May be Higher Priorities*

Debt ReductionHave high interest debt (credit card):

Reducing, say, 12% debt is like earning 12%

Emergency FundTo minimize chance of incurring high interest credit

card debt and/or tapping retirement money

Insurance Coverage

Adequate insurance (health, renters, homeowners, auto, etc.) helps avoid potentially

major financial risk

* If possible, consider starting or continuing your retirement savings at the same time that you address these goals.

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GoalWhy Retirement Should

Generally be Higher Priority

House

• Mortgage rates often relatively low

• Mortgage interest may be tax-deductible

• House rich, cash poor = limited liquidity

Education

• Many ways and strategies to finance college; very few for retirement

• Could mean children have to end up supporting you

…and a House or EducationAim to Adequately Save Towards All, But Don’t Sacrifice Retirement Savings

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Max

imum

Con

trib

utio

n A

llow

ed (2

011)

$16,500

+$16,500 during each of three years prior to normal retirement age, based on extent to which maximum contributions not made in previous years1

$22,000

$33,000

+$1,000 age 50 catch-up

$6,000

$5,000

+$5,500 age 50 or over during the year

#7 If Behind on Retirement Savings… Save MoreUnlike Earnings, Tax Rules, and Inflation, It’s One Thing You Can Control

1”Normal retirement age,” as defined in the plan. If you elect the “pre-retirement” catch-up, you cannot also elect the “age 50” catch-up

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#8 Preserve What You’ve Saved; Caution: Loan and Pre-Retirement Withdrawals

• If loans available, use with caution Loan balance no longer invested Will you reduce new contributions? Interest you pay double-taxed If you default = taxable distribution If you leave = most plans require payoff

• Loans are better than a fully taxable hardship withdrawal

• Withdrawal pitfalls Pay taxes sooner than needed 10% penalty tax possible if < age 59½ Less future potential tax-advantaged growth

Have Potential to Derail Your Retirement Plan

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#9 Avoid Common Pitfalls: Are You in the Spending Caution Zone?

• Last 10 years before retirement Beware of spending creep

• First 10 years after retirement Beware of excessive celebration

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‘Typical’ Retirement Spending Change

1. Celebration in the “Go-Go Years” – costs rise Travel, leisure add to base costs How’s your debt load?

2. Reflection in the “Slow-Go Years” – costs moderate* Slowing down; may need a little help Debt gone?

3. Acceptance in the “Slowest-Go Years” – costs may rise again Health becomes limiting factor, expense You need some help Long-Term Care?

* Those older than 75, on average, spend about 30% less than those ages 65-74.Source: Department of Labor, Bureau of Labor Statistics, “Consumer Expenditure Survey, 2009”

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But How Much Can I Safely Withdraw?

IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010

Over a 25-30 Year Retirement, Generally start with 4% to have a high confidence

Adjustments are key: reduce withdrawals in years that portfolio performs poorly…

4% 85% 97% 96% 93% 90%

5% 34% 72% 81% 80% 78%

6% 4% 28% 54% 62% 64%

7% 0% 5% 28% 44% 50%

8% 0% 0% 12% 28% 38%

100%Bonds

75% B25% S

50% B50% S

25% B75% S

100% Stocks

With

draw

al ra

te

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#10 Plan Along the Way: Comprehensive Financial Plan

• Analysis of Liquidity Cash flow Financial goals Education spending Asset management Retirement Income Survivor needs Disability needs Long-term care Estate planning

• Alternative: targeted planning Retirement income College, and Others

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The Financial Planning Process

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• Goals are general “To retire rich and soon”

• Objectives are measurable

Retirement PlanningSet Your Objectives

“To retire on June 1st, 2014 with income of $48,000,

that will last for 30 years, protected from 3.0% inflation,

survivor income no less than 85% joint income.”

Your financial goals are in competition with one another!

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Plan, Because of What You Cannot Know

• Your and your partner’s life spans

• Changes in spending needs because of… Inflation Life changes, aging Housing needs & costs Health care, long term

care costs Your & partner’s health Partner’s death

• Investment returns

• Changes in Social Security, tax laws

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Almost half general population not counting on it as retirement income source.*

Are they right?

*Charles Schwab, Retirement Plus Survey, November 2010**2010 Social Security Trustees Report

Will Social Security be There?

After 2015: Deficit gap between what Social Security collects from payroll taxes vs. what it pays out projected to rapidly increase**

By 2037: Social Security Trust Fund projected to run out and then pay about 75% of benefits**

• When today’s 30-somethings will be thinking about retiring

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How Might Social Security Change to Survive

• Raise age at which can receive full benefits

• Freeze purchasing power of benefits at current levels

• Means-test: cut the benefits of high earners

• Higher payroll taxes for higher earners

Most common proposals

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Concentrate on What You Control

• Things you cannot control Markets Economy

• Things that influence you Time Costs Emotions

• Things you control Savings (contributions) Asset allocation

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Ask Yourself the Following…

1. What is my retirement vision?

2. Have I realistically estimated retirement expenses?

3. How will I pay for health care and long-term care costs?

4. What can I expect from my Defined Benefit pension?

5. What can I expect from Social Security?

6. Have I estimated how long my resources will last?

7. How should I draw income from my tax-advantaged retirement accounts?

8. How can I manage taxes?

9. How should I manage my investments during retirement?

10. Should I consult with professionals?

Recent Industry TrendsPublic Sector Retirement Plans

Rasch CousineauJanuary 7, 2011

AC: 0407-1336

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Trends – 2009/2010 RFP Survey

• Education

• Administration

• Investments

• Fees

Key areas for plan enhancement included...

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Education

• High touch/high tech

• Service versus sales

• Retirement readiness

• Personal not customized

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Administration

• How many providers?

• Plan committee

• Current contract(s) review

• Fiduciary training

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Investments

• Investment policy statement – IPS

• How many – less means more

• Fund transparency

• Fixed income

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Fees

• Factors that determine Plan assets Plan participation Plan cash flow Length of contract (if applicable)

• Full disclosure

• Economies of scale

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What Can You Do Now?

1. Check your contract

2. Consider developing a plan committee

3. Schedule an annual plan review

4. Offer investment education

5. Visit with retirees

Five easy steps to plan health...