1. Hierarchy of Income Planning™
The hierarchy of income planning™ is a methodology that mirrors Maslow‘s hierarchy of needs, where portfolio construction begins with the types of investments that provide predictable and probable streams of income to help meet the target income need. This presentation has been designed to create awareness, as to the various risks we are likely to face in retirement, while also introducing fiduciary-based methods and tools that will help to provide a clear path as to the types of investments that may need to be leveraged in an effort to maximize planning outcomes.

2. DISCLOSURE

3. Key discussion points Risks in Retirement
Matching Expenses to Income Sources
Hierarchy of Income Planning
Experience Retirement Plan Simulation
Today, we will discuss four key points, in an effort to help build the foundation of knowledge necessary to understand the what, why and how in retirement income planning. This includes risks in retirement, How to match expenses to various income sources, The methodology behind the hierarchy of income planning™ and finally, RPS (technology used by leading fiduciaries, that was built to help you optimize your planning outcome). 

4. RISKS IN RETIREMENT INFLATION SEQUENCE OF RETURNS TAXES LONGEVITY
Let’s start by introducing various risks he will face in retirement including inflation taxes longevity and sequence of returns.

5. Inflation Risk
$100k
$85,873 80
$73,742
$63,325 60
$54,379
$46,697
$40,101 40
Inflation Significantly Erodes Purchasing Power Over Time Effects of 3% inflation on purchasing power 20
0 Years
First, inflation risk is commonly defined as the rise in prices for goods and services over time. The average annual inflation rate since 1926 was around 3%, though currently, inflation is hovering around 2%. Investors often don’t understand the damage inflation can do over long periods of time. This may be because the annual average seems relatively low. Over a long-time horizons such as a 30-year retirement however an annual increase in prices of 3% can have a tremendous impact on investors financial situation. This graph demonstrates that $100,000 of income today will only be worth $85,873 in as little as five years, or roughly 14% less than today. Over the course of a typical 30-year retirement income will be reduced by nearly 60% to $40,101. To make matters worse, medical expenses which can be a considerable factor for retirees, are rising faster than the average inflation rate. A recent estimate from Aloith Foundation suggest that medical care experienced an average inflation rate of 3.38% per year from 2000 to 2019 compared to the overall inflation rate of 2.06 during that same period. 5 10 15 20 25 30
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2012 Morningstar. All Rights Reserved. 3/1/2012

6. $ TYPES OF TAXATION Ordinary Income Capital Gains Estate Taxes
Paycheck
Most investments
Inheritance $
Tax risk is another factor that erodes the dollar. There are three types of taxes we will be reviewing today. First, and most commonly, is ordinary income. This is the rate at which the majority of your income, including salaries, commissions, bonuses and certain interest income, is taxed. Your ordinary income tax rate is determined by a progressive scale where higher earners pay more. Second, is capital Gaines, which is the rate at that most investment income is taxed. Dividends and the profit from the sale of securities are taxed as capital gains. For securities held for more than 12 months before being sold and for qualified dividends, a preferential rate is applied. Securities sold prior to being held for 12 months and ordinary dividends, are taxed at the ordinary income rate. The preferential rate is based on your income level. For example, some individuals with lower income may pay no tax, where higher income earners may pay as much as 20%. Finally, estate taxes are levied on the assets of a deceased person. This tax is assessed when the deceased persons of state passes to his or her heirs. This typically only applies to large estates that exceed the annual estate tax exemption.

7. Inflation and Taxes Reduce Returns Compound annual returns 1926–2011
Stocks
10%
9.8%
Bonds 8
Cash
6.6% 6
5.7%
4.6% 4
3.6%
2.6% 2
0.7%
0.6%
– 0.7%
After
After taxes
Return
Return
After
After taxes
Return
After
After taxes
inflation
& inflation
inflation
& inflation
inflation
& inflation –2
The combination of Inflation and Taxes can significantly Reduce Returns
The next slide illustrates the adverse affect that inflation and taxation can have on investment returns over the long run.
Comparing the tax and inflation adjusted returns of different asset classes is helpful in understanding why it is so important consider allocating to investments that can help grow your portfolio ahead of these risks when making long-term investment decisions.
This image illustrates the compound annual returns of three asset classes before and after considering the effects of inflation and taxes. Over the past 86 years, inflation and taxes have dramatically reduced the returns of stocks, bonds, and cash.
Of the asset classes considered, stocks are the only asset class that provided significant growth. Government bonds, after factoring in both inflation and taxes, barely provided a positive return and Treasury bills fared the worst with a return of –0.7%.
To overcome the effects of inflation in taxes, we need to consider larger allocation to stocks or alternatives that allow for a degree of market participation, while providing principal or income protection, or both. Also, tax deferred investments or tax-free municipal bonds further help add tax efficiency within a portfolio.
About the data
Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $110,000 in 2010 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No state income taxes are included.
Stocks in this example are represented by the Standard & Poor’s 90 index from 1926 through February 1957 and the S&P 500® index thereafter, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general. Government bonds are represented by the 20-year U.S. government bond, cash by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for transaction costs.
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926–2011 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index © 2012 Morningstar. All Rights Reserved. 3/1/2012

8. Longevity risk 78 81 86 85 88 91 91 93 96 65 years old 70 75 80 85 90
100%
• Male
• Female
• At least one spouse 75 78 81 86 50 85 88 91 25 91 93 96
Retirees Should Plan for a Long Retirement Probability of a 65-year-old living to various ages
Longevity Risk is more common now than ever before due to longer life expectancies. Retirees should Plan for a long retirement.
Longevity risk is more common now than ever before due to longer life expectancy is. Retirees should plan for a long retirement. 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. Well living longer is a good thing, it compose 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 and retirement planning is more important than ever because people today living significantly longer than prior generations due to advances in medicine, diet, and technology. This risk is compounded by medical and healthcare expenses that are rising considerably faster than the rate of inflation, as previously discussed. 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 85 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 a 25% chance that a 65-year-old man will live most people underestimate how long they are likely to live. Too often, people based 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 85 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 a 25% chance that a 65-year-old man will Live to age 91, a 65-year-old woman to age 93, 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 the retirement savings. There are a couple additional reasons to use conservative mortality assumptions. 
65 years old 70 75 80 85 90 95
100
105
Source: Annuity 2000 Mortality Tables. © 2012 Morningstar. All Rights Reserved. 3/1/2012

9. Sequence of returns risk
Actual historical return sequence
Reversed historical return sequence
$500k
$2.5 mil
400
2.0
300
1.5
200
1.0
100
0.5
1973
1977
1981
1985
1989
1993
Aug 94
1993
1989
1985
1981
1977
1973
What if the market doesn’t work out your way. The obvious goal is to have your money live longer than you.
Well… the market’s Sequence of returns can significantly affect your retirement and presents one more layer of risk when it comes to retirement income planning.
Sequence of returns risk addresses the possibility of the market not working out your way while in retirement. The obvious goal is to have your money live longer than you. Well, the markets sequence of returns can significantly affect your retirement and presents one more layer of risk when it comes to income planning. The point in time that a person chooses to retire can affect the ability of his or her portfolio to last throughout retirement.
The image above demonstrates this by showing how the sequence of market returns affects how much a portfolio can grow while sustaining needed with drawls in retirement. Both images look at a hypothetical 50% stock /50% bond portfolio with an initial value of $500,000 and assumes an inflation adjusted annual withdrawal rate of 5%. 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 of 1993, etc., with returns from 1973 occurring last. By reversing the sequence of returns, the portfolio experienced higher returns in in the early years and low returns in the later 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 early years of retirement, portfolio values eroded by a bear market and withdrawals simultaneously, may not be able to rebuild well, 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 2000’s experienced large declines in portfolio values early in retirement. The same reasoning applies to the 2007 through 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 early years to manage this risk with technology that can determine the optimal asset allocation and withdrawal rates so your portfolio will last longer than you.
About the data
Stocks in this example are represented by the Standard & Poor’s 90 index from 1926 through February 1957 and the S&P 500® index thereafter, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general. 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. © 2012 Morningstar. All Rights Reserved. 3/1/2012

10. DISCRETIONARY EXPENSES
10/14/2019 7:23 AM
Match expenses with potential income sources
Mortgage
Travel
Legacy
Social
Security/
Pension
CDs/
Fixed
Annuities
Balanced
Mutual
Funds
Variable
Equity
Real Estate
Balanced
Mutual
Funds
FIXED EXPENSES
Mortgage
Life Insurance
Fixed Loans
RISING EXPENSES
Health Care
Food
Utilities
DISCRETIONARY EXPENSES
Travel
Hobbies
Legacy
Food
Equity
Mutual
Funds
Life
Utilities
Hobbies
Insurance
Fixed Loans
Hobbies
Social
Security/
Pension
Real Estate
Variable
Annuities
CDs/
Fixed
Annuities
Health Care
There are common characteristics between expenses and income sources.
The first step in constructing solutions that will help to build reliability in your retirement income plan, is to Match your expenses with potential income sources. Your retirement income and expenses each have unique characteristics. Where fixed expenses are less impacted by inflation, they need to be funded by two types on income sources: Protected income sources, such as: Social Security, pensions and guaranteed income annuities and Probable Income sources such as: cash, cash equivalents and fixed income investments. How about rising expenses? They are more impacted by inflation. They too need to be funded by relatively stable income sources; however these investments need to provide the potential for a growing income stream. Finally, discretionary expenses such as hobbies and travel are also impacted by inflation, but you have the flexibility to adjust your spending more easily than you can with your essential living expenses. For this reason, higher risk or longer-term investments such as stocks, alternatives or annuities without guaranteed income riders can be used as the primary funding source, since these expenses aren’t necessary to keep you retired. 
Transition: Now that we have learned about the building blocks of a retirement income strategy, let’s look at how we might develop your own strategy.
RTSI_CUPPT_0814

11. HIERARCHY OF INCOME PLANNING™
Expenses for my wishes in retirement
Discretionary
GROWTH
Long-Term/High Risk
Rising
Expenses for my comfortable retirement
SECURITY GAP
SECURITY GAP
GUARANTEED INCOME
Fixed
Expenses for my needs in retirement
LOW-RISK/SHORT-TERM
The hierarchy of income planning™ is a methodology that mirrors Maslow‘s hierarchy of needs, as it addresses the importance of matching protected and probable income sources to fixed and rising expenses essential to keeping your retired. (Click)Using this planning method simplifies and accurately aligns various asset values into three buckets, each of which plays a role in retirement income planning.
As mentioned previously, the lower two buckets cover fixed and rising expenses to meet your needs and to provide for a comfortable retirement. 
The bottom bucket represents low risk/short term investments such as cash, cash equivalents and fixed income investments. We refer to these types of investments as probable income sources, as they carry low to no risk and serve to provide a flexible income solution.
The middle bucket is perhaps the most important income source during retirement, as it represents pensions, Social Security and guaranteed income investments.
With the decrease in pension values historically provided by employers, there is commonly a security gap found in the guaranteed income section of many plans. However, today there are many guaranteed income producing tools that can close that gap, such as annuities that can provide level or rising guaranteed income over your lifetime.
Finally, once the lower two buckets have been fully funded, remaining assets can float to the top bucket that will help provide long-term growth that can be used as an inflation hedge or discretionary spending.  In summary, Investments that provide more stable and or flexible RETIREMENT INCOME are found at the bottom two sections of the pyramid of risk and include investments that provide probable or flexible lifetime income such as: cash, cash alternatives and fixed income, and predictable lifetime income sources such as pensions, Social Security, stable real estate and guaranteed income annuities.  Longer-term/high-risk investments such as: stocks, mutual funds, annuities without income riders and REIT’s are found at the top. Remaining values are then left to your heirs. 

12. HIERARCHY OF INCOME PLANNING™
Long Term/High Risk
LEGACY VALUE
Stocks, Mutual Funds,
Annuities Without
Income Riders, REITS
Growth
Long-Term/High Risk
Guaranteed Income
Pensions, Social Security
Stable Real estate &
Income Annuities
PREDICTABLE
LIFETIME INCOME
GUARANTEED INCOME
RETIREMENT INCOME
Short Term/Low Risk
Low to No Risk Assets
Cash/Cash Alternatives
Fixed Income (Bonds)
PROBABLE
LIFETIME INCOME
LOW-RISK/SHORT-TERM
Let’s recap. Each investment you have plays a distinct role in your retirement plan. Again, there are really only two sources of retirement income, Probable & Predictable.
Probable Lifetime Income is defined as non-guaranteed, low risk and flexible income derived from traditional investments such as cash and fixed income.
Predictable Lifetime Income is defied as guaranteed, with no risk of ever going down and may, in fact, rise over your lifetime. Today, there are investments such as annuities with guaranteed income annuities that will provide stable streams of income that can help you hit your personal goal for guaranteed lifetime income in retirement.
In short, Retirement Income is derived from the bottom two sections and remaining assets can be allocated at the top of the risk pyramid to grow for the long term.

13. Bring Your Retirement Reality To Life
Build The Current Plan
Build The Proposed Plan
Compare Side-By-Side (Monte Carlo)
Today, we have technology called Retirement Plan Simulation that will bring your retirement reality to life. RPS graphically displays your retirement story by walking you through three simple chapters in a step-by-step storyboard that is both simple and sophisticated:
Chapter one is an analysis of your current plan.
Chapter two will display ideas that will be statistically tested to support their ability to improve your overall retirement income plan.
The final chapter will summarize all recommendations against your current plan so you can truly understand the value in the proposal
Let me give you a picture of what this looks like.

14. Collect Basic & Financial Information
First, we collect information on assets, income sources and expenses. Also, we’ll determine your retirement income goal and specifically identify the amount of income you desire to have Protected (stable or guaranteed) over your lifetime. RPS will then target YOUR personal goal for Protected income throughout the planning process. Remember, there are only two sources of retirement income. Protected (or guaranteed) and Probable (or non-guaranteed income) derived from cash and fixed income. So, if your stated goal for Protected guaranteed income at retirement is 80%, the the remaining 20% will be derived from non-guaranteed or Probable low-risk investments.

15. Construct The Current Plan
All of the information collected will then display pictures, graphs, ledgers and simulation technology will illustrate the affect various risks we’ve discussed, will have on your retirement income goals.

16. Construct The Proposed Plan
The proposed plan will then prove how various investment recommendations will work to get you on track for maximizing retirement income and ending asset value.

17. Compare Side-By-Side
The final chapter includes a simplified summary of the current and proposed plans side-by-side, so as to support how each recommendation works to help optimize planning results. We will then stress test each portfolio using Monte Carlo.
(click)

18. Retirement Plan Simulator (RPS) Will Illustrate the probability of Achieving Outcomes
Monte Carlo Simulation Provides a Visual Interpretation of Confidence Levels in Simulation)
$10 mil
1 mil
100k
• 50% confidence level
• 75% confidence level
• 90% confidence level
10k
Currently, as well as in the past, we have used Mote-Carlo simulation to help determine proper asset allocation. Retirement Plan Simulator (RPS) runs 500 trials of your current portfolio v/s the proposed to illustrate the probability of achieving various planning outcomes.
Simulation is a tool that can be used to show the probability of achieving certain investment outcomes by performing multiple return scenarios. Simulation estimates this range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation, for a group of asset classes or portfolios.
Typically when simulation is used, thousands of simulations are run to produce thousands of possible outcomes. For simplicity’s sake, the image above presents a snapshot from a simulation that was run just 100 times and produced 100 possible 35-year scenarios for the performance of a sample portfolio. Each line represents one possible 35-year scenario. The values calculated and presented are potential outcomes for an investor's wealth level over a 35-year period and help determine whether or not the investor will be able to successfully fund his or her retirement goal. The values for each year are subsequently sorted from smallest to largest and can be presented according to various probabilities.
References are often made that there is a certain chance of a particular result. To understand what this means, the image highlights the results for the 50%, 75%, and 90% confidence levels. For example, the line highlighting the 90% confidence level indicates that in 10% of the possible 35-year scenarios (in this case, 10, because 100 scenarios were run) show an investor might experience a portfolio shortfall before the number of years shown, while in 90% of scenarios the portfolio might last longer. This could be an illustration of what could happen if the market experienced poor returns. The 50% level means that there is a 50% chance an investor would have a worse result and a 50% chance they’d have a better result.
Determining the appropriate confidence level to use can be a challenge. Everyone tolerates risk in different ways. For some, 50/50 is good enough, while others desire more conservative estimates that take into account a tougher view of market conditions and provide more of a worst-case scenario. Regardless, using simulation can help investors understand their chances of meeting income needs or experiencing income shortfalls in retirement.
Keep in mind that an investment cannot be made directly in an index.
65 Years old 70 75 80 85 90 95
100
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. © 2012 Morningstar. 3/1/2012

19. Execute The Plan
Once firm recommendations are made, you will be provided with a written plan that simply mirrors details of all planning facts experienced in each meeting.
Finally, when you feel comfortable with the proposed plan, we will do all the work to put it in place.