Beyond The Uncertainty:

1. Beyond The Uncertainty: Strategies to Secure your Retirement Income for Life

2. Planning the Optimal Distribution Strategy for Retirement • Can I continue living in my accustomed comfort and enjoyment? • Will I be able to leave an estate to my heirs? • If I’m fortunate to live a very long and healthy life, will I have to worry about running out of money?

3. What this session is, and is not . . . This is not a session on determining retirement income needs • We will identify an approach to effectively determine a SustainableWithdrawalRate for your assets • And we will discuss strategies for maximizing the probability that your portfolio will last as long as you need it

4. Income Projection Models • Straight Line Model • Monte Carlo Model • Market Cycle Model • True Market Model

5. Straight Line Model • The ‘internet calculator’ model • Inputs include: average rate of return, average inflation, initial withdrawal, etc. • Ignoring the pattern of the actual market returns results in failure of these projections to achieve their goal 85 – 90% of the time • Handles inflation well, but little else

6. Factors Affecting Longevity of Retirement Portfolio • Inflation • Market Factors • Random Fluctuation • Market Cycles – cyclical bull/bear markets • Megatrends – secular bull/bear markets • Timing of Retirement • Reverse Dollar-Cost Averaging

7. Reverse Dollar-Cost Averaging • Money taken out during market declines is a permanent loss • The average retiree will likely endure 3 or 4 cyclical bear markets during retirement • Even a sideways market operates like a bear market for a retiree

8. Straight Line Model Monte Carlo Model Market Cycle Model True Market Model Typically runs a thousand or more iterations simulating random market fluctuation around an assumed rate of return Determines probability of certain outcomes Handles random fluctuations and inflation fairly well, but not market cycles Income Projection Models

9. Probability of Depletion • Assumptions: • Strategic Asset Allocation Mix: • 40% Equity + 60% Fixed Income • 5% Initial Withdrawal Rate

10. Market Cycle Model • Divides straight-line model into average historic bull and bear cycles • Applies random number generation to vary the strength and duration of each cycle • Runs projections for retirement at the beginning of either a bull or a bear cycle

11. Straight Line Model Monte Carlo Model Market Cycle Model True Market Model Handles consequences of market cycles and reverse dollar-cost averaging significantly better Moves away from ‘guesses’ about future returns and inflation Still does not allow for megatrends, skewness of market volatility, or significant variations in inflation Income Projection Models

12. Income Projection Models • Provides us with a range of outcomes using actual historic market data since 1900, based on retirement starting at the beginning of each year • Straight Line Model • Monte Carlo Model • Market Cycle Model • True Market Model

13. Sustainable Withdrawal Rate • Assuming: • The optimal asset mix of equities and bonds • Actual market and inflation history from 1900 – 2003 • Life expectancy to age 95

14. Strategy for Maximizing Portfolio Life • Optimize the allocation mix for longevity • Optimize the rebalancing strategy • Optimize the Asset Allocation method • Strategic • Age Based • Tactical • Trend Following • Optimal use of Guaranteed Components • Calculation Methodologies

15. Optimize the Allocation Mix Fixed Income vs. Equity • Goal: Highest probability of desired portfolio life • Highest minimum life • Highest average life • Note: Unless there are significantly more assets than necessary to comfortably provide for retirement, optimizing the portfolio for longevity has nothing to do with the individual’s risk tolerance

16. Determinants of OptimalAllocation Mix • Initial Withdrawal Rate (indexed for inflation) • Asset mix: From 0% to 100% equity (DJIA) vs. fixed income • Margin of outperformance or underperformance of equities relative to DJIA Calculated probabilities of depletion based upon actual market history assuming retirement at the beginning of every year from 1900 through 1999

17. Probability of Portfolio Depletion • Starting years 1900 to 1999 • Initial portfolio $3,000,000 • Initial withdrawal rate of $90,000 per year, (3%), indexed to inflation

18. Optimize the Rebalancing Strategy When using only fixed income and domestic equities (DJIA), rebalancing every four years at the end of the presidential election year yielded the best historical results

19. Politics and the Market Average Performance of DJIA During Years of Presidential Term, 1901 - 2000

20. Optimize the Asset Allocation Method • Strategic • Age Based • Tactical • Trend Following

21. Guaranteeing Your Income for Life • When do annuities make sense and in what proportion to your portfolio? • Investing Only • Buy Term Annuity and Invest the Difference [Grangaard] • Buy Life Annuity and Invest the Difference

22. Comparing Guarantee Strategies • Assumptions: • Retire at Age 65 with $1,000,000 to invest • Initial Withdrawal of $50,000 (5%) • 40% Equity + 60% Fixed Income • Years from 1900 to 1999 1Term annuity was 10 yr. annuity purchased for $411,500 providing income of $50,000 annually, indexed 2 Life annuity income provided by annuities purchased annually for first 3 years. Average estate value at age 95 was $1,318,000.

23. Buy Life and Invest the Difference • Build a life annuity ladder over time and invest the balance

24. Determining the Annuity Component Min. (Required Withdrawal Rate – Sustainable Withdrawal Rate) Annuity % = ------------------------------------------------------------------------ x 100 (Annuity Payout Rate – Sustainable Withdrawal Rate) MA < 0 : Abundant savings; life annuity shouldn’t be necessary MA of 0 – 100 : Sufficient savings; use life annuity to provide security MA > 100 : Insufficient savings; best assurance of continued income is 100% life annuity

25. Calculation Methodologies • No calculation methodology should escape continual examination • Visit: http://www.jotar.com for more information on the concepts presented here • See handout illustration: A Case Study