MARATHON RUNNING. the Retirement GOING THE DISTANCE WITH CONFIDENCE

RUNNING the Retirement MARATHON GOING THE DISTANCE WITH CONFIDENCE Mark Reynolds, CFP® Mark Reynolds and Associates 123 Main Street, Suite 100 San D...
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RUNNING the Retirement

MARATHON GOING THE DISTANCE WITH CONFIDENCE

Mark Reynolds, CFP® Mark Reynolds and Associates 123 Main Street, Suite 100 San Diego, CA 92128 Phone: 800-123-4567 Fax: 800-123-4567 www.markreynoldsandassociates.com

Five Steps to Running the Retirement Marathon PREPARE FOR THE EVENT 3 Focus on your end goal. Address timing issues.

DEVELOP CORE STRENGTHS 8 Build strength and endurance. Maintain realistic expectations.

ANTICIPATE SOME ROADBLOCKS 12

PREVIEW Acknowledge changes in the landscape. Pace yourself.

PREPARE FOR THE UNEXPECTED 14

Avoid injury. Maintain balance. Learn valuable lessons.

GO THE DISTANCE 17

Reach the finish line. Extend your legacy. Avoid mistakes.

This material was written and prepared by Emerald Connect. Copyright by Emerald Connect, LLC. All rights reserved. No part of this publication may be copied or distributed, transmitted, transcribed, stored in a retrieval system, transferred in any form or by any means — electronic, mechanical, magnetic, manual, or otherwise— or disclosed to third parties without the express written permission of Emerald Connect, LLC, 15050 Avenue of Science, Suite 200, San Diego, CA 92128, U.S.A. The information contained in this workbook is not written or intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Emerald Connect assumes no responsibility for statements made in this publication including, but not limited to, typographical errors or omissions, or statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should always be consulted before acting on any information concerning these fields.

Running the Retirement Marathon

EVT-090-07-000000

Prepare for the Event On Your Mark... If you were participating in a marathon, you undoubtedly would do some goal setting and strength building beforehand. The same holds true for retirement. With a marathon, at least you know that the length of your run will be 26.2 miles. However, you have a range of expectations for the number of years you might spend in retirement. Even so, it could easily last more than 26 years.

Length of marathon: Length of retirement:

26.2 miles 26+ years?

With an understanding of the obstacles you may face, a sound training program in place, and possibly even the help of a coach, you generally will have a better opportunity to reach the finish line.

PREVIEW If You Have No Goal, How Will You Be Able to Pursue It? It’s generally advisable to know where you are heading. After all, if you have no goal, how will you be able to pursue it?

Surprisingly, only 44 percent of American workers have tried to calculate how much they will need to save to live comfortably in retirement. Not as surprisingly, those who have done a retirementneeds calculation are more than twice as likely to be confident about having enough money for retirement compared with those who haven’t calculated their needs.

44%

Source: Employee Benefit Research Institute, 2014

Key Factors Affecting How Much You Will Need

1. 2. 3. 4.

Retirement age Length of retirement Health-care needs Lifestyle

How much will you need? It will depend on a number of key factors specific to your personal situation. For example: At what age do you plan to retire: 62? 65? Earlier or later? How many years do you expect to be retired? Will you need to pay for health care out of pocket, or will your former employer help cover that expense? What type of retirement lifestyle do you envision?

All these factors can influence how much you will need to accumulate. V15N2

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Retirement Age Knowing the age at which you plan to retire will help determine how much you need to save.

Retired for Life

Planned and actual retirement ages Expected (workers) Actual (retirees)

50%

Keep in mind that you may 35% 32% not be able to control this. As this chart shows, workers 23% 22% 18% generally expect to retire later 11% than retirees said they actually 9% do. Consider the possibility that you might be unable to continue Before 60 60–64 65 66 or older working because of poor health, Source: Employee Benefit Research Institute, 2014 the need to care for a family member, or changes at your company, such as downsizing and workplace closure.

PREVIEW

Jeanne-Louise Calment, the oldest person to have lived, died in 1997 in France at the age of 122! If Jeanne had retired at age 65, she would have spent nearly 60 years in retirement. How long will your retirement be? Source: Guinness World Records, 2015

The average worker today plans to retire at age 65, but today’s average retiree actually retired at age 62. Even though many workers still think that the age of retirement is 65, “full retirement age” — the age when you become eligible to receive full Social Security benefits — ranges from 66 to 67 for Americans born after 1942, depending on birth year. Currently, the age of Medicare eligibility is 65, but that could change in future years. Source: Employee Benefit Research Institute, 2014

Length of Retirement With life expectancies stretching considerably, chances are good that you’ll be spending a large portion of your life in retirement. In fact, a healthy 65-year-old is likely to live another 20 to 30 years in retirement. Will you accumulate enough money to last that long? Chance of living to age 85

Man

Woman

40%

20% 53%

Source: American Academy of Actuaries, 2014

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Chance of living to age 90

31%

How Much Could You Spend on Health Care in Retirement? Health-care costs have been increasing faster than the rate of general inflation in recent years, and the trend may well continue, despite passage of the Patient Protection and Affordable Care Act of 2010.1 Because of high insurance costs, fewer employers are offering health-care benefits to their retired workers, and many that do offer benefits are scaling back. Under the circumstances, it’s little wonder that paying for medical expenses has become one of the biggest worries that people face, not only during their working years but also in retirement. Man Woman

$116,000 $131,000

A man, woman, or married couple who retired at age 65 in 2014 might need these amounts to cover their health expenses in retirement 2

Higher Than Ever In 1950, medical care accounted for only 4% of U.S. consumer spending, compared with 38% for food and clothing. By 2014, medical care had grown to more than 16% of consumer spending, and food and clothing had fallen to about 17%. Source: U.S. Bureau of Economic Analysis, 2015

(assumes Medicare benefits remain at current levels)

PREVIEW Married couple

$241,000

Many people underestimate the potential cost of health care after they leave the workforce, forgetting the insurance premiums and out-of-pocket expenses (deductibles, copays, coinsurance, uncovered costs) they might have to cover — even with Medicare, which typically covers only a little more than half of the average subscriber’s health-care costs.

Beyond Medicare

Sources: 1) U.S. Bureau of Labor Statistics, 2015; 2) Employee Benefit Research Institute, 2014

Source: Employee Benefit Research Institute, 2014

Out-of-pocket medical costs could consume about 13% of a retiree’s income.

Lifestyle The kind of retirement lifestyle you envision will also have an impact on your savings needs. If you plan to travel extensively, purchase a vacation home, or maintain a membership at the local country club, you may need more income than someone who plans to live more frugally in retirement. Considering these and other potential retirement expenses, many experts suggest that you will need at least 70 to 80 percent of your pre-retirement income to live comfortably in retirement.

© 2015 Emerald Connect, LLC

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How Much Will You Need to Retire? Use the following worksheet to determine how much money you may need in order to fund the retirement lifestyle you have envisioned. Use the factors on the facing page to complete the calculations. EXAMPLE

YOU

65 1. Expected retirement age ____________ ____________ 20 2. Estimated length of retirement (years) ____________ ____________ 3. Current annual income

100,000 $ ____________ $ ____________

80 % ____________ % 4. Percentage of income desired in retirement ____________ Roughly calculating the cost of retirement is only a beginning. We recommend a more thorough cash-flow analysis considering all sources of income and expenses.

5. Annual income desired, in current dollars 80,000 (line 3 times line 4) $ _____________ $ _____________

PREVIEW 16,000 6. Expected annual Social Security income, in current dollars $ _____________ $ _____________

7. Expected annual pension plan income, in current dollars

10,000 $ _____________ $ _____________

8. Income needed from savings and investments, 54,000 in current dollars (line 5 minus lines 6 and 7) $ _____________ $ _____________ 9. Income needed from savings and investments, 97,529 in future dollars (line 8 times Factor A) $ _____________ $ _____________

10. Amount you must save by retirement, in future dollars 1,215,426 (line 9 times Factor B) $ _____________ $ _____________ 11. Amount you have saved already

150,000 $ _____________ $ _____________

12. What your savings might grow to by the time you retire 699,150 _____________ $ _____________ (line 11 times Factor C) $ 13. Amount you still need to save by the time you retire 516,276 (line 10 minus line 12) $ _____________ $ _____________ 14. Amount you need to save each year 11,306 (line 13 times Factor D) $ _____________ $ _____________

The hypothetical example shown assumes a 45-year-old who plans to retire at age 65. It is used for illustrative purposes only and does not represent any specific investment. Even though this example uses a hypothetical 8% rate of return, remember that rates of return will vary over time, particularly for long-term investments. Actual results will vary.

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EXPECTED YEARS LIFE SPAN UNTIL FACTOR FACTOR FACTOR AFTER RETIREMENT A C D RETIREMENT

FACTOR B



1

1.0300 1.0800 1.0000

1

0.9524



2

1.0609 1.1664 0.4808

2

1.8594



3

1.0927 1.2597 0.3080

3

2.7232



4

1.1255 1.3605 0.2219

4

3.5460



5

1.1593 1.4693 0.1705

5

4.3295



6

1.1941 1.5869 0.1363

6

5.0757



7

1.2299 1.7138 0.1121

7

5.7864

Assumptions:

PREVIEW

8

1.2668 1.8509 0.0940

8

6.4632



9

1.3048 1.9990 0.0801

9

7.1078

10

1.3439 2.1589 0.0690

10

7.7217

11

1.3842 2.3316 0.0601

11

8.3064

12

1.4258 2.5182 0.0527

12

8.8633

13

1.4685 2.7196 0.0465

13

9.3936

14

1.5126 2.9372 0.0413

14

9.8986

15

1.5580 3.1722 0.0368

15

10.3797

16

1.6047 3.4259 0.0330

16

10.8378

17

1.6528 3.7000 0.0296

17

11.2741

18

1.7024 3.9960 0.0267

18

11.6896

19

1.7535 4.3157 0.0241

19

12.0853

20

1.8061 4.6610 0.0219

20

12.4622

21

1.8603 5.0338 0.0198

21

12.8212

22

1.9161 5.4365 0.0180

22

13.1630

23

1.9736 5.8715 0.0164

23

13.4886

24

2.0328 6.3412 0.0150

24

13.7986

25

2.0938 6.8485 0.0137

25

14.0939

26

2.1566 7.3964 0.0125

26

14.3752

27

2.2213 7.9881 0.0114

27

14.6430

28

2.2879 8.6271 0.0105

28

14.8981

29

2.3566 9.3173 0.0096

29

15.1411

30

2.4273 10.0627 0.0088

30

15.3725

Factor A: 3% inflation rate

Factor B: 5% real rate of return Factor C: 8% return on investment Factor D: 8% discount factor

© 2015 Emerald Connect, LLC

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Develop Core Strengths What Income Sources Will You Have When You Retire? The most common sources of retirement income are Social Security, continued employment earnings, and personal savings and investments using both tax-deferred and taxable vehicles. Some people will be fortunate enough to have a traditional pension. The percentage of your income that will come from each of these income sources will depend on your personal situation and savings strategy.

Social Security’s Uncertain Future Anyone who has paid attention to the news over the past few years knows that Social Security’s financial future is on shaky ground. Since 2010, Social Security outlays have exceeded tax revenues. It’s estimated that the trust fund should have sufficient resources to pay 100 percent of scheduled benefits until 2033. This means that the current level of Social Security benefits may not be sustainable over the long term, and your benefit may be less than you might have expected.

PREVIEW

Intended as a Supplement

In one survey, almost 65% of retirees said Social Security is their single largest source of retirement income. However, Social Security provides more than 90% of income for about 22% of married couples and 47% of single people aged 65 and older. Source: Social Security Administration, 2014

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Source: Social Security Administration, 2014

Pensions

Pensions are a key source of income for about 36 percent of retirees. However, many companies have replaced traditional pensions with defined-contribution plans, which require workers to contribute their own money for retirement. Even so, about 29 percent of today’s workers expect a pension to be a significant source of income in retirement.1 This is somewhat surprising given the declining number of active participants in defined-benefit (traditional pension) plans.2

29%

Retirees (actual)

Sources: 1) Employee Benefit Research Institute, 2014; 2) Pension Benefit Guaranty Corporation, 2014

Continued Employment Earnings Continued employment earnings can also help provide income during retirement. Sixty-five percent of workers say they expect to continue working for pay after they reach 65% retirement age. Although it’s good to hope for the best when preparing for retirement, consider that about one-third of today’s retirees stopped working earlier than they had planned. The best way to prepare for the unexpected in retirement may be to save enough so that if you are unable to earn an income, you can still enjoy the lifestyle you have envisioned. Source: Employee Benefit Research Institute, 2014

© 2015 Emerald Connect, LLC

36%

Workers

(expected)

Personal Savings and Investments Personal savings and investments will make up the bulk of retirement income for many of today’s workers. Tax-deferred retirement savings vehicles include employer-sponsored retirement plans and individual retirement accounts (IRAs). Many investors supplement their savings with taxable financial vehicles such as stocks, bonds, cash alternatives, and mutual funds.

Tax Deferral Can Help Save Money Generally, deferring current taxes can help save you money. When you contribute to a tax-deferred account, you pay no current taxes on the contributions or any earnings until you start taking withdrawals, generally in retirement. This may enable your savings to accumulate faster over time because you have your full contribution working for you.

$100,000 invested at 6% for 20 years would yield...

$265,535 $241,171

PREVIEW Taxable Tax deferred (25% rate) (after taxes, 25%)

This hypothetical example is used for comparison purposes only and does not represent any specific investments. Rates of return will vary over time, especially for long-term investments. Actual results will vary. Investment fees and expenses are not considered and would reduce the results shown if included. Lower maximum tax rates for capital gains and dividends, as well as the tax treatment of investment losses, could make the taxable investment return more favorable, reducing the difference in performance between the accounts shown. Investors should consider their investment horizon and income tax brackets, both current and anticipated, when making investment decisions.

Employer-Sponsored Retirement Plans Section 401(k) and 403(b) plans offer a number of benefits. You can generally contribute a percentage of your salary using pre-tax funds, and you don’t have to pay current taxes on contributions or any earnings until you take withdrawals. In addition, making pre-tax contributions may help lower your current income tax liability and may enable you to contribute more each month. Defined-contribution plans are subject to federal contribution limits. In 2015, workers may contribute up to $18,000 to a 401(k) or 403(b) plan, and those aged 50 and older may save an additional $6,000 thanks to a special “catch-up” provision. Distributions from tax-deferred plans are taxed as ordinary income and may be subject to a 10 percent federal income tax penalty if taken prior to age 59½. Generally, required minimum distributions (RMDs) must begin for the year in which you reach age 70½. The required beginning date (deadline for the first RMD) is April 1 of the year after the year in which you reach age 70½.

Managing Your 401(k)

Watch your fund allocations, especially exposure to your company’s stock. You should never tie the value of your retirement portfolio to the fate of a single company, even if it is where you work. Also don’t overweight your portfolio in a single fund. By diversifying your assets, you help spread risk across a variety of investments. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. © 2015 Emerald Connect, LLC

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Wide Acceptance Twenty-nine percent of American households own at least one traditional IRA, and 16% own at least one Roth IRA.

Traditional IRA

Roth IRA

• Tax-deductible contributions* • Tax-deferred accumulation • Distributions taxed as ordinary income • Required minimum distributions after age 701/2

• After-tax contributions • Tax-deferred accumulation • Qualified tax-free distributions • Income eligibility phaseouts and five-year holding requirement** • No mandatory distributions***

Individual retirement accounts are popular vehicles to save for retirement on a tax-deferred basis. In 2015, individuals may contribute up to $5,500 to all IRAs combined; those who are age 50 and older can contribute up to $6,500. Tax-free distributions of earnings from a Roth IRA must meet the five-year holding requirement and take place after the owner reaches age 59½. IRA withdrawals prior to age 59½ may be subject to a 10 percent federal income tax penalty. Exceptions to the penalty include the owner’s death, disability, or a qualifying first-time home purchase ($10,000 lifetime maximum).

PREVIEW

Source: Investment Company Institute, 2014

*Workers who are not active participants in an employer-sponsored retirement plan can deduct all traditional IRA contributions. For active participants in an employer plan, all traditional IRA contributions are deductible for single filers whose adjusted gross incomes (AGIs) do not exceed $61,000 ($98,000 for married joint filers). Deductibility phases out with AGIs ranging from $61,000 to $71,000 for single filers ($98,000 to $118,000 for married joint filers), after which no contributions are deductible. **Eligibility to contribute to a Roth IRA begins phasing out at $116,000 AGI ($183,000 AGI for joint filers). Once AGI reaches $131,000 (single filers) or $193,000 (joint filers), no contributions can be made to a Roth IRA. ***Original Roth IRA owners do not have to take RMDs; IRA beneficiaries, however, do have to take them.

“Do-It-Yourself Pension” with an Annuity

Premiums

You

Unlike IRAs and employer-sponsored retirement plans, annuities are not subject to federal contribution limits. In addition, annuity owners are not required to take mandatory distributions due to age. Finally, some types Insurance company of annuities offer guaranteed returns and lifetime payments, which have the potential to enhance your income in retirement. Income

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Many people who don’t have a traditional pension like the idea of setting up one of their own. An annuity is a contract with an insurance company. In return for your payments, the company agrees to pay you regular income for a set number of years or for the length of your retirement. Contributions to annuities are made with after-tax dollars, but any earnings accumulate tax deferred.

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Generally, annuities have mortality and expense charges, account fees, investment management fees, and administrative fees. The earnings portion of annuity withdrawals is taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to a 10 percent federal income tax penalty. Surrender charges may also apply during the contract’s early years if the annuity is surrendered. The guarantees of fixed annuity contracts are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Types of Annuities Fixed annuities offer a guaranteed rate of return, so your investment pays a set yield regardless of how the market performs. Fixed annuities may be set up to pay you guaranteed income for a certain number of years or for the entire length of your retirement (similar to a pension). With variable annuities, you can invest in a variety of investment subaccounts whose value may fluctuate with market conditions. A variable annuity may outperform a fixed annuity, but there are no guarantees. If the markets experience hard times, variable annuity investors run the risk of losing accumulated earnings and even principal.

Taxable Investments Taxable investments most commonly take one of three forms: stocks, bonds, and cash alternatives. With mutual funds, investors can purchase a combination of all three types of securities. Mutual Bonds Stocks funds are generally subject to the same risks as the underlying securities in which they invest. Mutual fund share prices fluctuate with changes in market Mutual funds conditions. Shares, when redeemed, may be worth more or less than their original cost. Bond funds are subject to the interest-rate, inflation, and credit risks associated with the underlying bonds in the fund.

PREVIEW

Cash alternatives

Variable annuities and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the mutual fund or the variable annuity contract and the underlying investment options, is available from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Be Realistic About All Your Sources of Retirement Income 79%

89%

Workers (expected) Retirees (actual)

74%

71%

68%

65% 42%

41%

42%

56% 54%

25% Social Security

Employment

Employersponsored retirement savings plan

IRA

Other personal savings and investments

Employersponsored traditional pension

Expected Versus Actual The differences between workers’ expected and retirees’ actual sources of income can vary significantly. Ask yourself whether you might be overestimating the role that continued employment earnings or a pension might play in your retirement.

Source: Employee Benefit Research Institute, 2014 (percentages total more than 100% because respondents expect income from more than one source) © 2015 Emerald Connect, LLC

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Anticipate Some Roadblocks Sustainable or Unsustainable Course? Some people think the United States is on an unsustainable course. The country’s growing national debt, the aging of baby boomers and its impact on entitlement spending, tax changes, consumer debt and personal saving levels, and inflation/deflation fears are obstacles that could impede your progress. Consider the significance of these factors so you can be prepared to weather obstacles on the retirement course.

Gen Xers Turning 50 The oldest members of Generation X turn 50 in 2015, and Gen Xers will start reaching full retirement age (67) for Social Security in 2032, just a year before the Social Security trust fund is projected to run dry.

Growing National Debt At the end of December 2014, the U.S. national debt reached more than $18 trillion. Your family’s share of the national debt was $226,768, and it keeps growing every day. High federal debt levels could put the United States at higher risk for harmful consequences, including higher inflation and a slowdown in economic growth.

$18,141,444,135,563.30 As of December 31, 2014

The debt is growing by more than: $1.5 billion per day $63 million per hour $1,061,057 per minute

PREVIEW

Source: Social Security Administration, 2014

Any time you want to see an up-to-date count, visit www.treasurydirect.gov and click “Debt to the Penny.”

Your family’s share of the national debt: $226,768

Source: U.S. Bureau of the Public Debt, 2015. The family share is based on a family of four and a U.S. population of 320 million.

Aging Baby Boomers Did you know that about 10,000 baby boomers will become eligible for Medicare and Social Security every day over the next 15 years?1 As baby boomers enter retirement, they place an increasing strain on entitlement programs. The trustees for Social Security estimate that the present value of future Social Security expenditures (over the next 75 years) is more than $10.6 trillion over future revenues, and Medicare’s future expenditures will exceed future revenues by $3.6 trillion. This adds up to more than $14 trillion in unfunded liabilities just for these two programs alone.2 With the prospect of growing entitlement spending and lower revenues, the reality is that there could be future benefit reductions to Social Security and Medicare as well as higher taxes. Sources: 1) The Washington Post, July 24, 2014; 2) Social Security Administration, 2014

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Tax Changes Higher Taxes

The American Taxpayer Relief Act of 2012 increased the top federal income tax rate to 39.6 percent (in 2015, this affects single filers earning more than $413,200 and married joint filers earning more than $464,850), raised the dividend and long-term capital gains rate to 20 percent for taxpayers in the 39.6 percent tax bracket, and increased the federal estate tax on assets exceeding the applicable exemption ($5.43 million in 2015) to 40 percent.

As a result of the Affordable Care Act enacted in 2010, highincome individuals with earned incomes or modified AGIs exceeding $200,000 (single filers) or $250,000 (married joint filers) may be subject to higher Medicare payroll taxes and a 3.8% unearned income tax on net investment income.

Long-term capital gains and qualified corporate dividends are subject to a 15 percent tax rate for those in the 25, 28, 33, and 35 percent federal income tax brackets; individuals in the 10 and 15 percent brackets pay zero taxes on long-term capital gains and qualified dividends. Twelve months or less is considered a short-term gain. Net short-term capital gains are taxed as ordinary income and, as such, are subject to your highest marginal tax rate.

Consumer Debt and Personal Saving

PREVIEW An initial outcome of the deep 2008 recession was a change in consumer behaviors and attitudes toward thrift and debt reduction. Even though total indebtedness is still 6.7 percent below its 2008 peak of $12.68 trillion, overall debt levels rose in the fourth quarter of 2014.1 Americans have been increasing their credit-card balances, borrowing to purchase homes and autos, and taking on more student-loan debt. A 2015 survey found that 24 percent of Americans have more credit-card debt than they have money in a savings fund.2 Meanwhile, the personal savings rate fell to 4.9 percent in 2013 and remained at that rate in 2014 — the lowest it has been since 2007.3 Sources: 1) Federal Reserve Bank of New York, 2015; 2) Bankrate.com, 2015; 3) U.S. Bureau of Economic Analysis, 2015

Credit-card debt % change Personal saving rate

7.2%

6.0%

4.9%

0.2%

1.3%

0.6%

2011

4.9% 3.7%

2012

2013

2014

Sources: Federal Reserve, 2015; U.S. Bureau of Economic Analysis, 2015

Inflation/Deflation Fears Inflation — rising prices — is always a concern as the purchasing power of the dollar falls over time and investments have to work harder to keep pace and avoid a loss. Inflation can also lead to higher interest rates, which influences bond prices and affects consumers who borrow money to make purchases. Some people are concerned that economic conditions (lackluster job growth and the end of government stimulus programs) could result in deflation — falling prices. This could lead to anemic economic growth, which would make it harder for your portfolio to grow at the rate you may be expecting.

Value of a Dollar Inflation has been relatively low since 1985, averaging 2.71% a year. If inflation continued at this annual rate over the next 30 years (2015 to 2045), it would cost about $2.23 to buy what $1.00 will get you today — that’s more than twice as much!

© 2015 Emerald Connect, LLC

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Prepare for the Unexpected Risk Protection Even though there is a strong need to protect assets and preserve wealth using insurance protection, many Americans either don’t have insurance or they are inadequately covered.

You’ve been working hard to build your retirement savings. Don’t let an

unexpected tragedy rob you and your family of what you have rightfully earned. Types of Risk Protection

PREVIEW To be adequately insured, consider these five areas of risk protection:

Individual Health-Care Mandate

As a result of the Patient Protection and Affordable Care Act, most citizens must have “minimum essential” health coverage or pay an annual penalty. State and/or regional exchanges offer coverage to individuals and some small businesses.

• Medical

• Disability income

• Property and casualty (homeowners and auto) • Liability

• Life insurance

With the high odds of needing protection at some point in your life, it is important to assess your insurance needs to make sure that you are adequately covered.

Issues As We Age

Don’t overlook issues of aging and longevity that could affect your retirement assets, such as the potential need for custodial care. Did you know that one-third of married couples would exhaust their funds after just 13 weeks in a nursing home?1 Unfortunately, Medicare and most health insurance policies offer little or no relief for those who need extended custodial care. And sometimes it is impossible for families to provide this type of care for long periods. It would be wise to determine in advance how you would pay for these expenses if the Seventy percent of people over potential need were to arise. age 65 will need long-term-care Sources: 1) 2014 Field Guide, National Underwriter; services and support at some 2) Medicare & You 2015, Centers for Medicare & point in their lives.2 Medicaid Services

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© 2015 Emerald Connect, LLC

Financial Markets Can Be Volatile and Unpredictable Also consider the unpredictability of the financial markets. Look at these cumulative returns of the S&P 500 composite stock index over three different five-year periods. As you can see, these three five-year periods produced vastly different results. The way in which your portfolio will be affected by market volatility will depend on how your assets are allocated. 105.14%

51.74%

Keep Allocations on Track Asset balances tend to shift over time, especially during periods of market volatility. A shift toward stocks may lead to an overexposure to risk; a shift toward bonds might make your portfolio too conservative to accomplish your longterm goals. Changes in life might also trigger a need to rebalance your assets. For example, many people choose a more conservative asset allocation as they approach retirement. Rebalancing could result in a tax liability.

PREVIEW –10.98%

1990–1994

2000–2004

2010–2014

Source: Thomson Reuters, 2015, for the periods 1/1/1990 to 12/31/1994, 1/1/2000 to 12/31/2004, and 1/1/2010 to 12/31/2014. The S&P 500 composite total return is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.

Asset allocation does not guarantee a profit or protect against loss; it is a method used to help manage investment risk.

How to Help Lower Your Exposure to Market Risk One way to help lower your exposure to market risk is by investing for the long term, giving your money time to recover from periods of market fluctuations and loss. The chance of losing money in stocks over a one-year period was 17.5 percent. After five years, the odds of loss fell to 13.9 percent. And after 10 years, the chance of loss fell to 6.5 percent. Remember that past performance is not a guarantee of future results.

1975–2014 82.5%

86.1%

93.5%

Chance of a gain Chance of a loss

17.5%

13.9%

6.5%

1-year period

5-year period

10-year period

Source: Thomson Reuters, 2015, for the period 1/1/1975 to 12/31/2014. Ranges consider the 40 one-year periods, the 36 five-year periods, and the 31 10-year periods from 1975 through 2014. The S&P 500 is an unmanaged index that is considered representative of U.S. stocks. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Actual results will vary. © 2015 Emerald Connect, LLC

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A Tale of Two Portfolios

Keep Expectations in Check Because your financial strategy depends on the performance of your investments, it is important to be realistic about the return your portfolio may yield from one year to the next. Inflated expectations may cause you to overspend or fall short of your goals.

Robert and Karen began saving for retirement in 1995, making $20,000 annual investments. Both had a goal to retire Robert’s Approach in 2016 with a $1 million 1995–2014 portfolio, but they took $20,000 annual investments: 60% Treasury bonds, 30% corporate bonds, 10% CDs very different approaches to investing. Robert took a $1,000,000 Robert’s portfolio grew slowly $789,635 relatively “safer” approach $800,000 but steadily. On the verge of retirement, he was still about by investing 60 percent of his $600,000 $210,000 short of his portfolio in Treasury bonds, $400,000 $1 million goal. 30 percent in corporate bonds, $200,000 and 10 percent in one-month $0 CDs. Karen divided her 1995 1998 2002 2006 2010 2014 portfolio into a balanced mix of stocks (50%) and corporate Karen’s Approach bonds (50%). By the end of 1995–2014 2014, both were short of their $20,000 annual investments: 50% stocks, 50% corporate bonds goals, but Karen was ahead $932,922 $1,000,000 Karen’s balanced portfolio by about $140,000.

PREVIEW grew to more than $930,000 by

$800,000 Although some investors the end of 2014. She benefited $600,000 by having stock and bond may try to play it safe like investments. $400,000 Robert, others might consider allocating a portion of their $200,000 portfolios to investments that $0 1995 1998 2002 2006 2010 2014 have the potential to earn higher returns (such as stocks) in order to pursue their long-term goals. But as we’ve experienced, investing is unpredictable, and sometimes market events can deal investors a bad hand.

As you move closer to retirement like Robert and Karen, you might consider strategies that can help you weather extreme market fluctuations in order to help protect your wealth. Source: Thomson Reuters, 2015, for the period 1/1/1995 to 12/31/2014. This hypothetical example is used for illustrative purposes only and does not reflect any specific investments. The example assumes that Robert’s portfolio was invested 60% in Treasury bonds, 30% in corporate bonds, and 10% in onemonth CDs. The example also assumes that Karen’s portfolio was invested 50% in stocks and 50% in corporate bonds. Stocks are represented by the Standard & Poor’s 500 composite total return, which is generally considered representative of the U.S. stock market. Corporate bonds are represented by the Citigroup Corporate Bond Composite Index, which is generally considered representative of the U.S. corporate bond market. Treasury bonds are represented by the Citigroup Treasury 7–10 Year Index. Treasury bonds are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. If not held to maturity, they may be worth more or less than their original value. The FDIC currently insures CDs for up to $250,000 per depositor, per federally insured institution. The performance of an unmanaged index is not indicative of the p­ erformance of any ­specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

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Go the Distance Extending Your Legacy with Life Insurance Most people purchase life insurance to provide financially for their loved ones in the event of their death. A policy’s death benefit can be used to cover funeral expenses, settle debts, pay for a child’s education, pay off a mortgage, and/or replace a breadwinner’s income. Life insurance can provide your heirs with funds to help pay estate taxes and fees so they won’t have to liquidate inherited assets. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

How Much Insurance Protection Do People Have? The average life insurance policy death benefit is only about $165,000, which would not be sufficient for most American households.

PREVIEW How Whole Life Insurance Works

Whole life (also called permanent or cash value) insurance enables you to accumulate cash value that can be accessed during your lifetime while providing financial protection for your family in the event of your death. This type of insurance may be appropriate if you want to leave a financial legacy to family members and/or charities.

Fixed With a whole life policy, you traditionally premiums pay a fixed premium for as long as you live or for as long as you keep the policy in force. Part of your premium goes to the insurance company for the protection Insurance You company element of your policy; the other part builds cash value. You can access the cash value during your lifetime through withdrawals Cash value or loans. But remember that policy loans will reduce the cash value by the amount of any outstanding loan balance plus interest and will reduce the policy’s death benefit.

Consider Establishing a Trust A trust is a legal arrangement under which one person or institution controls property given by another person for the benefit of a third party. If properly structured, certain types of trusts can be used to help shield assets from estate tax liability. Some trusts can completely avoid probate. You should consider the counsel of an experienced estate planning professional before implementing a trust strategy.

Source: 2014 Life Insurers Fact Book, American Council of Life Insurers

Death benefit

Beneficiaries

Trusts incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. © 2015 Emerald Connect, LLC

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Hidden Value of IRAs as an Estate Planning Tool Not only do IRA assets go to whomever you have designated on the account beneficiary forms, bypassing probate and delays, but the tax advantages of both types of IRAs remain intact. The long-term value of your IRA legacy can be further extended if your beneficiaries stretch the account distributions over their lifetimes by taking only the minimum required distribution each year. The younger the beneficiary, the more years over which the distributions can be extended, allowing the balance of the IRA to remain tax advantaged for a longer period of time. Traditional IRA distributions are taxed as ordinary income. Qualified tax-free and penalty-free distributions of Roth IRA earnings must meet the five-year holding requirement and take place after the original owner reaches age 59½; exceptions include death, disability, or a qualified first-time home purchase ($10,000 lifetime cap). If the original owner of a Roth IRA dies less than five years after setting up the account, his or her beneficiaries may have to pay tax on any earnings they withdraw before the five-year holding requirement has been met. IRA beneficiaries are required to take RMDs, which generally must start within 12 months after the original owner’s death. Under current tax law, beneficiaries’ Roth IRA distributions are free of federal income tax, regardless of their incomes.

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Keep Your Beneficiary Forms Up-to-Date

When you purchase a life insurance policy, buy an annuity contract, participate in an employer-sponsored retirement plan, or open an IRA, you are given an opportunity to fill out an account beneficiary form, naming primary and secondary beneficiaries who will receive the death benefit and/or inherit the assets in the event of your death. These designations take precedence over a will. Failing to update the beneficiary designations when major life events occur may result in your assets going to someone you did not intend.

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How a “Stretch IRA” Works

Passing an IRA to your heirs could significantly increase the long-term value of your legacy if they stretch the distributions over their lifetimes. This example compares an inherited $500,000 traditional IRA with an inherited $500,000 Roth IRA. Net after-tax traditional IRA distributions Tax-free Roth IRA distributions Remaining asset value after 40 years

The difference between the two IRAs is $650,987!

$3,157,528 Assumptions:

$2,506,541

$1,673,969

45-year-old beneficiary of $500,000 traditional or Roth IRA

$2,324,957

28% tax bracket for traditional IRA distributions 7% annual rate of return

$832,572 Traditional IRA

$832,572

RMDs taken over 40-year time horizon

Roth IRA

This hypothetical example is used for illustrative purposes only and does not represent any specific investment. It assumes the IRAs were transferred to new “inherited” IRAs. Rates of return will vary over time, especially for long-term investments. Actual results will vary. Any fees and charges are not taken into account and would reduce the performance shown if they were included. Lower maximum tax rates for capital gains and dividends, as well as the tax treatment of investment losses, could make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown. An individual’s time frame and income tax bracket, both current and anticipated, should also be considered when making financial decisions.

Cashing Out of an Employer Plan When Changing Jobs

Cashing Out

A 25-year-old who cashes out $5,000 from an employer-sponsored retirement plan could potentially be losing almost $109,000 at retirement because he or she would lose out on four decades of tax-deferred compounding (this assumes an 8 percent average annual return through age 65). Be mindful that if you request a lump-sum distribution, employers that issue you a check are required to withhold 20 percent for federal income taxes. This means you would receive only 80 percent of your original vested account value and may still owe more taxes on the distribution amount than your employer withheld.

When changing jobs, about one-third of workers cash out of their employer-sponsored retirement plans. Instead, consider a direct rollover of assets to your new employer’s plan or to your own IRA.

Trying to Time the Market Moving in and out of stocks, bonds, and cash alternatives is usually a losing game and generally lowers your investment performance. If bad timing caused you to miss the 12 best-performing months over this 30-year period, your stocks would have earned a 7.03 percent average annual return. Had you remained fully invested at all times, your stocks would have earned an 11.34 percent average annual return.

1985–2014

11.34%

Source: Society for Human Resource Management, 2014

average annual return

7.03%

average annual return

PREVIEW Bad timing (missed 12 best months)

Buy and hold (fully invested at all times)

Source: Thomson Reuters, 2015, for the period 1/1/1985 to 12/31/2014. The S&P 500 composite total return is generally considered representative of large-cap U.S. stocks. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. This hypothetical example is used for illustrative purposes only. It does not include the impact of income taxes, capital gains taxes, or investment fees and expenses. Rates of return will vary over time, particularly for longterm investments. Actual results will vary. Past performance is no guarantee of future results.

Getting a Late Start by Procrastinating Acting now to pursue your retirement funding goals, rather than waiting, can definitely pay off later. In this example, Jim started saving early while Susan procrastinated. After 10 years, Jim and Susan each had invested a total of $25,000. But because of compounding, Jim earned $14,982, for a total accumulation of $39,982. Susan, on the other hand, earned only $4,877, for a total accumulation of $29,877. That’s a difference of nearly 30 percent, just because Jim started early!

Jim Year

Investment

1 2 3 4 5 6 7 8 9 10

$5,000 5,000 5,000 5,000 5,000 0 0 0 0 0

Susan Value

Investment

Value

$ 5,300 0 10,918 0 16,873 0 23,185 0 29,877 0 31,669 $5,000 $ 5,300 33,569 5,000 10,918 35,583 5,000 16,873 37,719 5,000 23,185 39,982 5,000 29,877

Contributions: $25,000 Contributions: $25,000 Earnings: $14,982 Earnings: $ 4,877 Total value: $39,982 Total value: $29,877

Assumes a 6% rate of return in both accounts. This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investments. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of investment risk. Actual results will vary. © Emerald Connect, LLC

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