of 165
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.

Understanding Your Investment and Retirement Income Options. Lorraine Heseltine April 24, 2017 UBC Faculty Pension Plan

Category:

Research

Publish on:

Views: 94 | Pages: 165

Extension: PDF | Download: 0

Share
Description
Understanding Your Investment and Retirement Income Options Lorraine Heseltine April 24, 2017 UBC Faculty Pension Plan 1 Agenda Plan Overview Retirement Income Options Investment Choices Navigating the
Transcript
Understanding Your Investment and Retirement Income Options Lorraine Heseltine April 24, 2017 UBC Faculty Pension Plan 1 Agenda Plan Overview Retirement Income Options Investment Choices Navigating the Faculty Pension Plan Website / Sun Life Website Faculty Pension Plan 2 2 Money Accumulation Plan EE$ ER$ Investment Fund(s) EMPLOYMENT YEARS PRODUCES Stay invested Lump-sum $ amount Exchange RETIREMENT Flexible income payment Lifetime annuity 3 Board of Trustees Eight Trustees Four elected by members of the Plan Four appointed by the Board of Governors Faculty Members 4 Board of Trustees Mr. Joost Blom Chair Faculty of Law Dr. Robert Heinkel Vice Chair Sauder School of Business Dr. Joy Begley Member Sauder School of Business Dr. Joyce Boon (Professor Emeritus) Dr. R. Kenneth Carty (Professor Emeritus) Dr. Joanne Emerman (Professor Emeritus) Member Member Member Barber Arts & Sciences, UBCO Political Science Department of Cellular and Physiological Sciences Dr. Lorenzo Garlappi Member Sauder School of Business Mr. Vijay Verma (Researcher Emeritus) Member TRIUMF 5 Plan s Mission Statement The main purpose of the Plan is to provide a wellmanaged, cost-effective retirement plan, designed to assist members in meeting their financial responsibilities, both leading up to retirement and, if members choose, through retirement. 6 Membership Growth as at December 31, Plan Principles for Investment Management Maximize returns at a level of risk suitable for each Investment choice Risk should be managed through broad diversification Costs should be kept to a minimum 8 Cost of Investing Investment manager expertise in security selection, research Operating expenses (custodial charges, banking fees) How are these fees charged and what are they called? MER - Management Expense Ratio FMF Fund Management Fee 9 Management Expense Ratio 6% per year for 20 years MER 0% 0.50% 1.50% 2.50% First year cost $0 $500 $1,500 $2,500 Total cost over 20 years $0 $28,940 $79,545 $121,735 Net Asset Value after 20 years $320,715 $291,775 $241,170 $198,980 10 Growth of $10,000 over 50 years 8.0% Annual Return Less 2.5% Fees Gross Investment Return $196,974 Portion to Investor $135,420 Portion to Fees $61,554 (45% of what Investor receives) 11 Online Your Sun Life Account 12 Fees Matter 13 Fees: Things to Consider Fees have a major impact on your net return, so make sure you know what you are paying. MERs, Administrative Fees, Buy/Sell Transactions, Termination Fees, etc. Reduced MER for higher account value Fees are necessary and appropriate if they reflect the returns, advice, and service you receive 14 Registered Pension Plans Canada Revenue Agency - Income Tax Act Provincial Pension Legislation - BC Pension Benefits Standards Act 15 Account Balances Non-Locked-In funds (pre-1993) No restrictions on withdrawals after termination or retirement Includes RRSP, Voluntary Contributions Locked-In funds (post-1992) Must be used to provide an income for your lifetime 16 Why Provide Retirement Options? Trustees belief that their responsibilities to members do not end at the date of retirement Investment Objective of the Plan to earn a real return on the Balanced Fund such that a typical member would be able to achieve a reasonable income replacement ratio (i.e. 50% or higher) based on their final year s salary. 17 UBC Retirement Income Options FPP Account Applicable to all or part of your total account balance Defer Decision Variable Payment Life Annuity Flexible Income Options RRIF/LIF-Type Payments 18 Leave Funds in the Plan Defer Decision Applicable to all or part of account balance You continue to choose investment fund(s) Defer until the year you reach age 71 Elect any of the other options at anytime Full Account balance is paid on death Cash withdrawals from non-locked-in 19 Leave Funds in the Plan Things To Consider: Defer Decision Gives time to evaluate your retirement lifestyle and need for income A good way to defer taxes Continue to build your account balance by taking advantage of tax sheltered investment growth Enjoy the plan s low management and administration fees 20 Leave Funds in the Plan Defer Decision Things To Consider: Withdrawals do NOT qualify for: (a) $2,000 Pension Income Tax Deduction (b) Spousal Pension Income Splitting 21 UBC Retirement Income Options FPP Account Applicable to all or part of your total account balance Defer Decision Variable Payment Life Annuity Flexible Income Options RRIF/LIF-Type Payments 22 Understanding Annuities Fixed Payment Life Annuity vs. FPP Variable Payment Life Annuity 23 Understanding Annuities What determines the monthly payment? 1. The purchase amount $ (dollars exchanged) 2. An actuarial factor Mortality tables Your age (your spouse s age) at commencement Form of pension elected Future investment rate of return assumption Long term interest rate environment (insured annuities) 24 Illustration of the Relationship Between Market Interest Rates and the Annuity Amount Purchase Date Average Monthly Insured Annuity* January 1, 2011 $2,979 January 1, 2012 $2,770 January 1, 2014 $2,863 January 1, 2015 $2,526 January 1, 2016 $2,512 January 1, 2017 $2,578 * Average from 7 insurance companies, based on a single life annuity at age 65, and using a purchase amount of $500, Fixed Payment Life Annuity Monthly payment amount never changes Retiree risk purchasing power Interest rates at time of purchase impacts amount of monthly pension Insurance Company reaps the rewards of excess investment/interest earnings 26 Fixed Payment Life Annuity Fixed payment no opportunity for you to reap the rewards for excess investment earnings ******** FPP Variable Payment Life Annuity opportunity to reap the rewards for excess investment earnings 27 Variable Payment Life Annuity How It Works! 1. Your Purchase Amount is invested in the Balanced Fund for the Retiree Group 28 Variable Payment Life Annuity How It Works! 2. You choose: the future investment rate of return assumption used in determining the initial monthly amount (4% or 7%); and the form of pension payment 29 Variable Payment Life Annuity How It Works! 3. Your monthly pension amount will be adjusted once per year (each April 1 st ) by the difference between: the previous year s ACTUAL rate of return in the Balanced Fund*; and the ASSUMED rate of return (4% or 7%) *Note: there is also an adjustment to reflect the mortality experience of the group. 30 How do annual adjustments work? Compare 4% & 7% future annual growth rate assumption. Combined Investment + Mortality Experience Adjustment to 4% VPLA Adjustment to 7% VPLA 12% 8% 5% 9% 5% 2% 2% -2% -5% -2% -6% -9% 31 2016 Adjustment 4% Option 2015 ACTUAL Balanced Fund Return less adjustment for mortality experience 5.29% ASSUMED Return when pension started % Pension increase on April % Monthly pension at April 1, 2015 $1, Monthly pension at April 1, 2016 $1, 2017 Adjustment 4% Option with Mortality Assumption Change 2016 ACTUAL Balanced Fund Return less adjustment for mortality experience 4.79% ASSUMED Return when pension started % Mortality Assumption Change -4.96% Pension decrease on April % Monthly pension at April 1, 2015 $1, Monthly pension at April 1, 2016 $1, Monthly pension at April 1, 2017 $ Comparison of 4% & 7% VPLA - Payment History from $500,000 Purchase Price 4% Annuity 7% Annuity 1996 $3,207 $4, $4,536 $4, $4,162 $4, $4,476 $4, $4,646 $4, $4,958 $4, $5,397 $5, $5,277 $4, $4,355 $3, $4,607 $3, $4,794 $4, $4,682 $3, $4,904 $3, $5,290 $4, $5,609 $4, $5,681 $4, $5,444 $3,844 Total of Payments: $1,221,996 $1,163,364 # of Years payment decreased: VPLA 4% vs 7% ( ) 6,000 5,500 5,000 4,500 4,000 4% VPLA 7% VPLA 3,500 3,000 35 VPLA Blend of 4% & 7% 6,000 5,500 5,000 4,500 4,000 4% VPLA 7% VPLA 50%/50% BLEND 3,500 3,000 36 $4, Looking Forward Comparison of Monthly Annuity Payments $3,800 $3,400 $3,000 7% annuity 4% annuity Blended Insured $2,600 $2, Purchase Amount: $500,000 Form of Pension: Single Life Annuity Purchase Date: January 2017 VPLA Assumption: 5.5% combined investment and mortality experience Blended: 50/50 4%/7% Insured: Average annuity amount from 7 insurance companies 37 Decisions To Make When Choosing the VPLA Do I use all or a portion of my account balance to purchase the VPLA? Future Investment Return Assumption? (4% or 7% or a blend of both) Payable during your lifetime only or during your spouse s as well? 38 Choose An Annuity Option Options Initial Monthly Payment Single Life $2,848 Joint & Survivor 60% to Spouse on your death $2, % to Spouse on your death $2,456 Based on a 4% Annuity choice with a purchase amount of $500,000 at age 65 Spouse is same age 2017 mortality tables 39 What Happens When my Spouse and I die? An annuity is an insurance type of arrangement Normally payments cease on death - those who die early subsidize those who live longer 40 What Happens When my Spouse and I die? Mortality Forecast 5 YRS 30 YRS 41 What Happens When my Spouse and I die? You can take a reduced pension to guarantee that a minimum # of years of payments will be made. Options are a minimum guarantee of 5, 10, or 15 years of payments in event of early death Regardless, the pension would never cease while you are living 42 Choose An Annuity Option Adding a 15 Year Guarantee Period Options With No Guarantee 15 Year Guarantee Cost Single Life $2,848 $2,719 $129 Joint & Survivor Form 60% to spouse on your death $2,599 $2,593 $6 100% to spouse on your death $2,456 $2,447 $9 Based on a 4% Annuity choice with a purchase amount of $500,000 at age 65 Spouse is same age 2017 mortality tables 43 Probability of a healthy 65-year old living until Age Chance that at Least One Member of A Couple will survive until age: 80 91% 90 45% Source: Statistics Canada Catalogue No XIE 44 Planning your Retirement Income: Thinking Outside the Box Who is your Pension For? You? You and your Spouse? You, your spouse and your children? 45 VPLA: Things to Consider Security you know your income is for life Simplicity doesn t require active management on your part Allows you to participate in the performance of the Balanced Fund to gain inflation protection You can choose between a conservative or aggressive investment assumption *** No opportunity to make changes during severe market downturns Early death could result in less than your account value being paid 46 QUICKIE QUIZ If there are 3 apples and you take away 2, how many do you have? 47 UBC Retirement Income Options FPP Account Applicable to all or part of your total account balance Defer Decision Variable Payment Life Annuity Flexible Income Options RRIF/LIF-Type Payments 48 Flexible Income Options RRIF-Type Payment Accounts LIF-Type Payment Accounts Source of Funds Non-Locked In Locked-In Who makes Investment Decisions You You Minimum Withdrawal Yes Yes Maximum Withdrawal No Yes Death Benefit Remaining Account Balance Remaining Account Balance 49 Minimum/Maximum Withdrawal Age Minimum RRIF + LIF Maximum LIF % 7.38% % 8.22% % 8.45% % 9.71% % 12.82% % 22.40% % % % % 50 How Do RRIF/LIF-Type Payments Work? Think of a bank account - you have a balance in your account Investment/Interest earnings added, withdrawals deducted You determine the monthly income you want to draw You can change your monthly income payments (LIF has both yearly minimum and maximum) 51 How Do RRIF/LIF-Type Payments Work? You can use your spouse s younger age to calculate minimums You choose payment frequency monthly, quarterly, semi-annually or annually Special lump sum withdrawals are possible throughout the year (up to early December) You can convert all or part of your balance to annuity at any time 52 Features of FPP RRIF/LIF-Type Payments You can use all or a portion of your account balance Your funds remain in the UBC Faculty Pension Payments are by direct deposit you choose the 1st of the month the 15 th of the month the last day of the month 53 Features of FPP RRIF/LIF-Type Payments A spouse can continue payments from the plan after death Statements of Account are produced quarterly Ad hoc withdrawals* and changes to scheduled payments can be made * up to early December 54 RRIF/LIF-Type Payments: Things to Consider A way to lower taxes by taking only the minimum Gain flexibility to vary your income according to your changing needs Continued compound growth with you choosing the investment fund Full account balance is paid upon your death to your heirs 55 RRIF/LIF-Type Payments: Things to Consider Management and administrative fees are modest You can change to another option at any time Could exhaust your funds: Investment Risk plus Longevity Risk 56 Life Expectancy Continues to Rise At Birth Males Females At Age Males Females *Statistics Canada 57 RRIF/LIF-Type Payments: Things to Consider Investment Allocation You control investment of your funds and assume the risk What is your Investment Time Horizon? Lower risk tolerance as we get older Will my money last if I allocate to investments with no risk? 58 What is the best Asset Mix Strategy for making your assets last through retirement? Would people retiring in previous periods have run out of money? Which asset mix would have been the best strategy to fund retirement? From Study by Alliance Bernstein, December A 60/40 Portfolio Also Delivered Better Real Outcomes Than Bonds. Cash (Short Term) never lasted 30 Years Lasted 30 Years 74% 15% 60/40 Strategy Bond Strategy Based on a hypothetical portfolio; actual fund performance may differ. Assumed 5% withdrawal for 30 years. Not inflation adjusted. 60 Long-Term Risk LESS RISKY Equities combined with Long-term bonds MORE RISKY GIC S Treasury bills Does not meet retirement objectives (i.e., insufficient returns) 61 Think about your Investment Time Horizon and select your Investment Type Short Term Investment Time Horizon Money Market or Treasury Bills Medium Term Investment Time Horizon Government, Corporate Bonds or GICS Long Term Investment Time Horizon Mutual Funds Stocks and Bonds 62 Does It Matter? (How Long Will our Money Last?) Assumptions: Initial Investment: $500,000 Monthly Withdrawal: $3,000 Annual Rate of Return From Age 65 Until Age 7.25% % % % % 81 63 Using net returns from Initial Balance $500,000 Balanced Fund NET Returns Over 30 Years 5% withdrawal from and per minimum withdrawal schedule thereafter Total payments to age 94 = $1,702,651 Age Withdrawal Rate Annual Withdrawal Account Balance % $25,000 $486, % $31,539 $698, % $59,923 $791, % $78,442 $867, % $99,496 $459,779 64 Balanced Fund Annual Returns (Net) 30 Year Track Record 8.17% % 14.54% 2.66% 9.00% 6.79% % 14.62% 10.90% 11.93% -0.46% 4.77% 9.37% 16.29% 0.64% 2.62% 7.33% -3.07% 9.58% 22.19% 12.36% 13.18% -0.54% 8.09% 10.86% 17.03% 11.79% 6.09% 18.58% 13.58% 5.62% 65 Using net returns in reverse order from Initial Balance $500,000 Balanced Fund Net Returns Over 30 Years 5% withdrawal from and per minimum withdrawal schedule thereafter Total payments to age 94 = $1,447,428 Age Annual Withdrawal A Annual Withdrawal B Account Balance 65 $25,000 $25,000 $503, $31,539 $31,395 $618, $59,923 $39,327 $541, $78,442 $49,111 $635, $99,496 $104,745 $465,693 66 Using 5.5% returns forward Initial Balance $500,000 Projected 5.5% Net Returns Over 30 Years 5% withdrawal from and per minimum* withdrawal schedule thereafter Total payments to age 94 = $1,033,439 Age Annual Withdrawal A Annual Withdrawal B Annual Withdrawal C Account Balance 65 $25,000 $25,000 $25,000 $502, $32,787 $31,389 $27,202 $516, $66,752 $39,319 $33,994 $491, $76,736 $49,101 $38,509 $438, $79,673 $104,724 $48,276 $222,777 67 Strategy for Dealing with Market Downturn Early in Retirement A strategy to deal with having the stock market drop substantially just before or just after you start drawing your income. Take your cash flow requirements out of a fund that is not market related. i.e. Short Term or GIC funds Taking money out of a fund that is already decreasing in value due to a market correction can be distressing 68 Decumulation Phase RRIF Allocation your asset value ($500,000) Majority of asset ($425,000) 3 Years Income ($75,000) BALANCED FUND GUARANTEED FUNDS Using Guaranteed Investments in Your Investment Strategy 69 VPLA or RRIF/LIF-type? VPLA RRIF/LIF-type Capital exchanged Lifetime income Sense of security Enhancements No investment choice during economic tsunami Can t change Capital retained Growth potential Investment flexibility Flexible income Cash withdrawals (RRIF) Can convert to an annuity but not required Longevity risk (RRIF) 70 What Some Advisors Suggest Start with RRIF/LIF-Type ( Active Phase) Consider changing part to Life Annuity in mid to late 70 s (Passive Phase) Interest rates have less impact on annuity pricing than mortality at higher ages It is best to consult your financial planner who can develop a personalized plan for you 71 What Do Other Members Do? Income Option # Pensioners LIF only 130 RRIF only 162 VPLA only 381 RRIF & LIF 321 RRIF & VPLA 52 RRIF, LIF & VPLA 5 TOTAL 1,051 RRIF 540 LIF 456 VPLA 438 At December 31, Government-Administered Benefits Old Age Security at age 65 Minimum 10 years in Canada Max = $ per month Can defer to age years in Canada = Max Indexed quarterly Non-Resident rules at least 20 years in Canada Claw back on OAS - Net Income Starting at $74,788 Ending at $119,615 Canada Pension Plan Maximum $1, Monthly Indexed annually * new online application Special features Available from age 60 Defer until age 70 Split payment with your spouse (at source) *My Service Canada Account 73 It is NOT all about Income in Retirement! We need to have access to capital, too! Where is this money going to come from? 74 Sources of Retirement Income and Capital Home Non-RRSP Savings RRSP Savings Registered Pension Plan (RPP) CPP OAS 75 Accessing Capital Tax-Free Savings Accounts Non Registered Savings Plan RRSPs RRIFs Voluntary contributions to a Faculty Pension Plan Home Downsize, Home Equity, Credit Line Loan or Reverse Mortgage 76 Tax-Free Savings Accounts Investment earnings and withdrawals are never taxed Can invest in Stocks & Bonds, Mutual Funds, GIC s, etc. Could help eliminate or reduce claw backs Help pay medical expenses in retirement, fund vacations, have a rainy day fund A place to invest Age 71 RRIF/LIF minimums Years Annual Limit Cumulative Total $5,000 $20, $5,500 $31, $10,000 $41, $5,500 $52,000 77 Reverse Mortgages Access equity in our home without selling our home We can receive up to 40% of the value of our home Home must be fully paid for Take as a lump sum and/or a monthly income No tax implications Repayment is not required until the home is sold 78 Reverse Mortgages - Cautions High interest rate Amount owing compounds very quickly, and can significantly reduce your estate We may need capital from our home to fund nursing/ retirement care home later in life and it may not be there if we have taken a reverse mortgage Could be most beneficial where time frame is relatively short such as an elderly person/couple wanting to stay at home in later years but need capital to live on. 79 Accessing Capital A separate investment account for travel expenses can help budget for capital needs in retirement and to provide for laddering investments to mature when they are needed (CONTINGENCY SAVINGS) -NEW CARS -HEALTH CARE -UNPLANNED EXPENSES (TRAVEL SAVINGS) -TRAVEL EXPENSES 80 Planning Your Retirement Income What are the Risks? Longevity Market Volatility Insufficient Access to Capital for Contingencies Inflation When you pay $15 for the $10 haircut that you used to get for $5 when you had hair. - Sam Ewing 81 Inflation Reduces Purchasing Power Even at Only 2% Per Year Number of years retired Value in today s dollars 0 $38, $31, $25, $21,000 82 Do We Need 100% Inflation Protection? 100% is nice to have but is it necessary for retirees? (child care, rent, tuition fees, mortgage interest, furnishings, entertainment, dining) BUDGET = $4,000 $6,000 CPP/OAS = $2,000 $2,000 % Indexed = 50% 33% 83 How Much Income Do We Need at Retirement? The goal shoul
Similar documents
View more...
Search Related
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks