1. Wealth Management in Retirement
Robert G. Topping, MBA, CFP®
COVENANT WEALTH ADVISORS
351 McLaws Circle, Ste. 1
Williamsburg, VA
(757) , (888) , fax (757)
This graph illustrates

2. Key Questions
How much can we spend without running out of money before we die?
If I want to spend X per year, how big does my nest egg need to be?

3. What are the Challenges?
Longevity Risk- We don’t know how long we will live (both spouses)
Don’t know what the economic environment will be during retirement years (inflation, etc.)
Investment Performance (valuations are somewhat rich PE albeit in low rate period- Int. rates low so bonds likely to underperform vis a vis historic returns)

4. Retirees Should Plan for a Long Retirement Probability of a 65-year-old living to various ages
Longevity risk is the possibility that a person will outlive his or her retirement savings. Chances are, people are going to live longer than they think.
While living longer is a good thing, it can pose some challenging financial issues in retirement. Longevity risk is perhaps one of the biggest risks that investors will face as they enter retirement.
Accounting for longevity risk in retirement planning is more important than ever because people today are living significantly longer than prior generations, due to advances in medicine, diet, and technology. This risk is compounded by medical and health-care expenses that are rising considerably faster than the rate of inflation.
Most people underestimate how long they are likely to live. Too often, people base their financial planning upon their life expectancy, which is the average age at which someone is expected to die. In the United States, the median life expectancy of a 65-year-old man and woman is 86 and 88, respectively. What people do not always realize is that this is the median. Half of the population will live longer, often much longer than their life expectancy.
The image above illustrates the probabilities of a 65-year-old living to various ages. For example, there is 25% chance that a 65-year-old man will live to age 92, a 65-year-old woman to age 94, or at least one spouse of a 65-year-old couple to age 96. Retirees should plan for a long retirement, perhaps as long as 30 years. If retirees’ financial plans assume they live only to the median life expectancy, they run a greater risk of depleting their retirement savings.
There are a couple additional reasons to use conservative mortality assumptions. First, the fact that your clients are working with a financial advisor means that their expected mortality is likely to be older than the population at large due to better health-care, nutrition, etc. Second, consider the downside risk—you would rather be conservative and have money left over than have your clients run out of money before they die.
Source: 2012 Individual Annuity Mortality Basic Tables—Society of Actuaries, 2000–2004 Reports.
Source: 2012 Individual Annuity Mortality Basic Tables, Society of Actuaries. © Morningstar. All Rights Reserved.

6. What are the odds of success – i.e. what is Safe Withdrawal Rate (SWR)?
How long might you live (statistically speaking)?
The Safe Withdrawal Rate (SWR) is initial withdrawal rate used (and then adjusted for future inflation- For ex. if SWR is 4% and portfolio is $1million, the SWR would be $40,000 the first year. If the Cost of living rises 3% the first year, the withdrawal would be 3% higher the next year ($41,200).
Probabilities of SWR using Statistical Forecasting (Monte Carlo Simulation)
Historic windows of success (SWR based on Historic Investment Performance – Various time periods and varying asset mixes)

7. Past performance is no guarantee of future results

8. Windows of Success
Historical Success Rate of Portfolio Lasting Full Period over Rolling Periods
Retirement Age
Length of Retirement in Years
Number of Rolling Periods
Historical Success of a 25/75 Portfolio
Lasting the Full Period 3%
Withdrawal Rate
3% COLA 4% 5% 6% 65 35
56 35-Year Periods
100%
92.9%
58.9%
33.9% 70 30
61 30-Year Periods
98.2%
73.2% 75 25
66 25-Year Periods
53.6% 80 20
71 20-Year Periods
91.1%
Retirement Age
Length of Retirement in Years
Number of Rolling Periods
Historical Success of a 65/35 Portfolio
Lasting the Full Period 3%
Withdrawal Rate
3% COLA 4% 5% 6% 65 35
56 35-Year Periods
100%
98.2%
91.1%
87.5% 70 30
61 30-Year Periods
94.6%
89.3% 75 25
66 25-Year Periods 80 20
71 20-Year Periods
Data source: Lipper data, Craig L. Israelsen, Financial Planning Magazine, September 2016
Past performance is no guarantee of future results

9. Relevant Factors
Understand that “Luck” plays a big part-i.e. when we retire (2007 vs for ex.)
Sequence of Investment Returns (same average return but different order of returns). Performance in Early Years more critical.
Unique Family Needs – genetic disposition, specific family needs -- special needs child for ex...
Our unique emotional risk tolerance – Can you tolerate more risk (volatility like or ) so that you can potentially obtain greater long-term investment returns?

10. The Sequence of Returns Can Significantly Affect Your Retirement
The point in time that a person chooses to retire can also affect the ability of his or her portfolio to last throughout retirement.
The images above demonstrate this by showing how the sequence of market returns affects how much a portfolio can grow while sustaining needed withdrawals in retirement. Both images look at a hypothetical 50% stock/50% bond portfolio with an initial value of $500,000 and assume a withdrawal rate of 5% annually, adjusted for inflation.
The image on the left assumes a person retired on January 1, 1973 (right before a bear market) and began making monthly withdrawals in January The result was that the portfolio ran out of money by August 1994.
The image on the right illustrates a hypothetical case where the historical returns occurred in reverse chronological order: The returns from 1994 occurred before the returns from 1993, etc., with the returns from 1973 occurring last. By reversing the sequence of returns, the portfolio experienced high returns in the early years and low returns in the latter years. As a result, the portfolio increased substantially over time, more than tripling in value, despite the ongoing 5% withdrawals.
This hypothetical example highlights that in the early years of retirement, a portfolio being eroded simultaneously by a bear market and withdrawals may not be able to rebuild wealth, even if good returns are experienced in later years. This is relevant because people who retired right before or during the bear market of the early 2000s experienced large declines in portfolio values early in retirement. The same reasoning applies to the 2007–2009 recession.
Unfortunately, no one can predict what the market might do in the critical years of their retirement. This is why it is particularly important in the early years to manage this risk through effective asset allocation, reducing withdrawal rates and spending, or deferring retirement.
Diversification does not eliminate the risk of experiencing investment losses. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
About the data
Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the five-year U.S. government bond, and inflation by the Consumer Price Index. Each monthly withdrawal is adjusted for inflation. An investment cannot be made directly in an index.
Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and August Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.

11. Forecasting Market Returns
P/E ratios strongly related to subsequent returns
Source: Michael Kitces, Nerd’s Eye View,
Past performance is no guarantee of future results

12. Forecasting Safe Withdrawal Rates
Using P/E ratios to predict safe withdrawal rates
Source: Michael Kitces, Nerd’s Eye View,
Past performance is no guarantee of future results

13. Managing your Retirement
Look at your overall finances not just your investment portfolio
Understand any survivor benefit options
Monitor your withdrawal rate (What is a SWR based on your time frame & asset mix?)
If 3%-4% is sufficient, you have ability to invest more conservatively
Diversify Portfolio based on portfolio size, time frame and emotional risk tolerance
Consider your cash flow sources and tax implications
Monitor your tax situation and look for opportunities to minimize impact over multiple years

15. Additional Insights Estate planning
Keep up-to-date wills, trusts, named beneficiaries
If you have A/B trust in place you may want to locate more growth oriented assets in the A Trust (take advantage of step up of basis at surviving spouse’s death).
Shop around for things like Medigap Plans- Part D costs for ex. vary significantly (get expert help if needed).

16. Questions?

17. Past performance is no guarantee of future results
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.

18. Retirees Face Numerous Risks
There are a number of risks that cause uncertainties for retirees.
Longevity risk: The risk of retirees outliving their portfolio is especially a concern for those taking advantage of early retirement or those who have a family history of longevity. Retirees need to consider how long they may possibly live. For a couple aged 65, there is a 25% chance that one of them will live to age 96: a 31-year retirement time horizon! (Source: 2012 Individual Annuity Mortality Basic Tables—Society of Actuaries, 2000–2004 Reports.)
Solvency risk: The problems with government and employer sources should be a concern for retirees. Social Security and Medicare are in a situation in which they may be forced to reduce benefits over time, while pension plans frequently default or reduce benefits to those already in retirement.
Savings risk: Most people simply aren’t saving enough for retirement. In the third quarter of 2005, the personal savings rate reached an all-time low of 2.2%. However, it rebounded significantly to 9.2% in the fourth quarter of 2012, as the credit crisis forced consumers to take a closer look at their spending habits and adjust accordingly, and is now at a reasonable 5.4% as of the fourth quarter of 2015 (Bureau of Economic Analysis).
Inflation risk: Inflation erodes the value of savings and reduces returns. In order to combat the sometimes extreme fluctuations of the stock market, retirement portfolios are often weighted more toward fixed-income investments. However, conservative investments that pay a fixed income run the risk of being unable to keep pace with inflation. Furthermore, inflation for certain expense categories can be higher than core inflation. For example, health-care inflation has averaged 3.5% annually over the time period 1996–2015 (Bureau of Labor Statistics).
Market volatility risk: Market volatility may cause portfolio values to fluctuate both up and down. If market drops or corrections occur early during retirement, the portfolio may not be able to cushion the added stress of systematic withdrawals. This may lead to the portfolio being unable to provide the necessary income for the lifestyle desired, or the portfolio may simply run out of money too soon. Retirees must consider how investments should be allocated in retirement.
Retiree spending risk: What level of pre-retirement income will people need in retirement? Some may be able to live on less, but others may need more. An assessment of essential versus lifestyle expenses in retirement is needed.
Withdrawal risk: Retirees will need guidance on what withdrawal rate may be sustainable over a long retirement, as well as the sequence of withdrawals and managing Required Minimum Distributions (RMDs). Retirees will have to pay income taxes as money is distributed from their portfolios. As retirees reach 70½ years of age, they have to start making required minimum distributions (RMDs) from their tax-deferred accounts. Depending on the size of the portfolio, this could mean retirees are pulling out more than they need in order to satisfy the RMD and paying unnecessary taxes on the larger amount.
© Morningstar. All Rights Reserved

19. Sustainable Withdrawal Rates Vary Over Time Rolling 30-year periods 1926–2015
When approaching retirement, the first question many investors ask is how much money they can safely take from their portfolio each year. A simplistic way of looking at this is a withdrawal rate, expressed as a percentage of your investment assets.
Since people are spending more years in retirement, it may be helpful to look at what previous retirees could have withdrawn over a long retirement.
This image shows the historical maximum sustainable inflation-adjusted withdrawal rate over rolling 30-year periods for three hypothetical stock and bond portfolios from 1926–2015. Initial starting values for the three portfolios are assumed to be $500,000. Rolling period returns are a series of overlapping, contiguous periods of returns. In this example, the first point represents the rolling period of January 1926–December 1955, the second is February 1926–January 1956, the third is March 1926–February 1956, and so on.
As shown, the amount that could have been withdrawn over each 30-year period varied greatly. For example, the 75% stock/25% bond portfolio was able to provide a higher maximum sustainable withdrawal rate for those who retired in the late 1930s to the mid–1950s. The same portfolio, however, provided a much lower maximum sustainable withdrawal rate to those who retired in the late 1960s and early 1970s. This is due to the negative stock market returns that occurred in the early years of retirement.
Stocks are not guaranteed and have been more volatile than other asset classes. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds.
About the data
Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the five-year U.S. government bond, and fees from Morningstar. All withdrawal rates are represented by an inflation-adjusted percentage of the starting portfolio balance that, if withdrawn in each of the 30 years of the hypothetical retirement horizon, would have resulted in an ending portfolio balance of $0. Inflation represented by the Consumer Price Index. Annual fees of 0.69% for stocks and 0.57% for bonds were assumed. An investment cannot be made directly in an index.
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.