WHAT WILL
YOUR
RETIREMENT
LOOK LIKE?
What do you imagine for your retirement? It may
include traveling to far-flung destinations, indulging
in your favorite hobbies, enjoying unhurried time
with friends and family, devoting more time to
volunteering, or maybe even starting your own
business — the one you’ve always dreamed about
but never had the time or money to launch. The
possibilities are almost endless.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Whether you are beginning a career, changing
jobs or preparing to retire, it is never a bad time
to start planning for your retirement.
LOOK INTO
YOUR FUTURE
What you probably
don’t imagine is
continuing to work
longer than you wish
or curtailing your
retirement activities
simply because you
don’t have enough
money to support the
lifestyle you envision.
Picture what you want to be doing when you retire...and write it down! The simple act of writing your goals down on paper is an effective way to refine and crystallize your retirement objectives. The worksheets found in this brochure can help you start thinking about exactly what you will need for retirement.
Your future you
Take a moment to imagine the perfect retirement — whatever “the perfect retirement” means to you. If you could look into your crystal ball and see the future, what would it look like? Imagine the sights, the sounds and the activities that bring fulfillment to your life: Time available to dedicate to family and friends? What will your finances look like? What energizes you the most about your vision? Try to be as specific as possible. This is your future. You write the script. Craft your perfect retirement exactly the way you want it to be.
Consider
Family
Education
Friends
Professional Life
Finances
Charitable Giving
Health Care
Spring
Visualize your retirement
Different people have different plans for what they would like to do once they stop working. But one thing they all need to consider is that full-time employment is a big part of anybody’s life. What will you do with all that time, energy and drive once you leave that full-time employment environment?
Think about what would make
a perfect week for you. Imagine what you would like to do during each season of your ideal year. The most rewarding things for you may not necessarily require the most money.
Visualize a day-to-day style of living that will motivate your mind, maintain your health, and build relationships within your community.
A successful retirement begins with envisioning a rewarding, healthy and responsible lifestyle
1
2
3
Favorite activities
Summer
Winter Fall
17
%
2007
Senior citizens spend an amount equal to 17%
of their Social Security benefits on health care.
2050
That amount is expected to almost double, to 31%.
31
%
1 Liqun Liu, Andrew J. Rettenmaier and Zijun Wang, “The Rising Burden of Health Spending on Seniors.” National Center for Policy Analysis, NCPA Policy Report No. 297, February 2007. Historical U.S. inflation rate 1914 to present.
2 Source: Society of Actuaries Annuity 2000 Mortality Tables. Health care costs are rising
An important concern for future retirees is the ability to afford quality health care, including long-term care. An estimated 4 out of every 10 people turning age 65 will use a nursing home at some point in their lives, and many will need home care and other related services. What’s more, according to the National Center for Policy Analysis (NCPA), older Americans currently spend an average of 17% of their income on health care. By 2030, that average is expected to rise to close to 24%.1
We’re living longer, so retirement lasts longer A growing focus on health and fitness, the availability of excellent medical care, and ongoing scientific advancements afford today’s retiree an opportunity to stay healthier and live longer than ever before. In fact, today’s retiree is likely to live 20 or more years after retiring.
That means your retirement savings will have to last longer than ever before. It also means that a greater portion of your accumulated savings may eventually be needed for long-term care or medical expenses.
Did you know that a 65-year-old man has a 50% chance of living beyond age 85? Also, if a husband and wife are both age 65, there’s a 50% chance that one spouse will live beyond age 92.2
CONSIDER
THE REALITIES
Many people underestimate how much it
will actually cost and the obstacles you may
face planning for and during retirement.
What senior citizens spend on health care from their Social Security benefits1
Inflation reduces your purchasing power
A dollar today will almost certainly be worth less at retirement because of inflation. Since everyday items get more expensive over time, you need to plan for future price increases when saving for retirement. While it is difficult to predict inflation rates, even a 3% rate of inflation (just below the historical average of 3.7%)3 can have a significant impact on purchasing power and
on your future standard of living.
The effects of inflation on everyday costs3
3 Sources: Median and Average Sale Prices of New Homes Sold in United States, www.census.gov/const/uspricemon.pdf; https://research.stlouisfed.org/fred2/data/ASPNHSUS.txt; http:// www.statista.com/statistics/183745/average-price-of-us-new-and-used-vehicle-sales-and-leases-since-1990; http://mediaroom.kbb.com/new-car-transaction-prices-jump-august-2015; U.S. Bureau of Labor Statistics, Consumer Price Index — Average Price Data as of November 2015.
4 Assumes a 3.2% annual rate of inflation.
1990
2015
2040
4New home
New car
Gallon of milk
$2.78
$16,350
$153,400
$3.39
$33,543
$364,100
$8.55
$73,704
$710,385
Use every life stage to build a future of wealth and security
Today’s generations are turning many previous assumptions upside down. For example, they may be caring for children again as they come back to the nest, or they may be going back to school later in life. Saving for retirement always takes planning, discipline and sound information, but every stage of life presents some unique challenges — and some unique opportunities.Roadblocks to retirement savings Opportunities that emerge during these stages of your life
20s
• Paying for your wedding • Repaying your student loans• Paying rent while saving for your first home
• Buying a new car and paying for its insurance • Income all goes to everyday expenses
• Graduate degree
This is the stage of life when many people are first introduced to an employer-sponsored, tax-advantaged retirement plan. Starting to save now can put the power of compounded growth to work for you and for your retirement.
Tip: Start contributing to your employer-sponsored retirement plan.
30s
• Making a down payment on a home • Monthly mortgage payments• Life and medical insurance • Child care expenses
• Summer camp for children • Saving for child’s college
• Procrastinating on a retirement plan
As your career advances and income rises, accumulating retirement funds becomes easier. Time is still on your side.
Tip:Contribute to your employer-sponsored retirement plan, as many employers offer matching funds for retirement plans. If your spouse takes time off from paid employment to care for children, that spouse can still open an IRA as long as the household had earned income.
40s
• Saving for child’s college • Adoption or fertility treatment • Health care costs• Vacations
• Piano lessons and karate classes
• Home repairs or renovations • Orthodontists
• Layoffs, company closures, career changes • Divorce
As children mature, child care expenses diminish. A spouse may return to work, adding another source of income. Promotions increase compensation. You may also be the recipient of an inheritance. Keep in mind, these are prime accumulation years.
Tip: Maximize all your retirement plan options, such as 401(k)s and IRAs. If you have your own business, you may be able to take advantage of the higher contribution limits offered through SIMPLE or SEP IRAs.
50s
• Paying for a child’s college expenses,wedding or home purchase
• Parents, sibling or adult child may
need financial support
• Health care costs • Disability
• Forced retirement
Sale of a small business, or equity from a home that has appreciated in value over the years, can provide extra cash for retirement. Salary rises with promotions and new jobs. This is a critical time to save.
Tip: Take advantage of catch-up contribution provisions to 401(k)s and IRAs. This can be an important way to compensate if you had not saved regularly before.
60s
• Retirement eliminates income• Loss of employer-provided health insurance
• Prescriptions and other health care expenses rise • Property taxes increase
Your mortgage is paid and you may consider moving to an area with a lower cost of living. You may also explore the possibility of downsizing your living space.
Tip: While it is possible to begin collecting Social Security retirement benefits at age 62, many people delay collecting benefits until they reach the “full retirement age” (anywhere from age 65 to age 67). Please keep in mind that collecting benefits early permanently reduces your monthly benefit, and those expecting a long retirement often wait in order to collect the highest possible monthly benefit. You are also permitted to begin drawing from your retirement savings plans at this time. Seek out good advice on these matters, given that withdrawing too much too soon can mean running out of assets in your later retirement years.
70s
and beyond
• Health care costs • Inability to work • Nursing home • Outliving your savings
• Death of a spouse
• Grandchildren need financial support
You may have lower living expenses, and children who are financially secure may be able to pitch in.
Tip: If you continue to work, seek out advice on how earned income may affect your retirement benefits. Get advice on estate planning and college savings plans, such as 529 plans, that can really help increase the amount of good you can do with your money.
Roadblocks to retirement savings Opportunities that emerge during these stages of your life
20s
• Paying for your wedding • Repaying your student loans• Paying rent while saving for your first home
• Buying a new car and paying for its insurance • Income all goes to everyday expenses
• Graduate degree
This is the stage of life when many people are first introduced to an employer-sponsored, tax-advantaged retirement plan. Starting to save now can put the power of compounded growth to work for you and for your retirement.
Tip: Start contributing to your employer-sponsored retirement plan.
30s
• Making a down payment on a home • Monthly mortgage payments• Life and medical insurance • Child care expenses
• Summer camp for children • Saving for child’s college
• Procrastinating on a retirement plan
As your career advances and income rises, accumulating retirement funds becomes easier. Time is still on your side.
Tip:Contribute to your employer-sponsored retirement plan, as many employers offer matching funds for retirement plans. If your spouse takes time off from paid employment to care for children, that spouse can still open an IRA as long as the household had earned income.
40s
• Saving for child’s college • Adoption or fertility treatment • Health care costs• Vacations
• Piano lessons and karate classes
• Home repairs or renovations • Orthodontists
• Layoffs, company closures, career changes • Divorce
As children mature, child care expenses diminish. A spouse may return to work, adding another source of income. Promotions increase compensation. You may also be the recipient of an inheritance. Keep in mind, these are prime accumulation years.
Tip: Maximize all your retirement plan options, such as 401(k)s and IRAs. If you have your own business, you may be able to take advantage of the higher contribution limits offered through SIMPLE or SEP IRAs.
50s
• Paying for a child’s college expenses,wedding or home purchase
• Parents, sibling or adult child may
need financial support
• Health care costs • Disability
• Forced retirement
Sale of a small business, or equity from a home that has appreciated in value over the years, can provide extra cash for retirement. Salary rises with promotions and new jobs. This is a critical time to save.
Tip: Take advantage of catch-up contribution provisions to 401(k)s and IRAs. This can be an important way to compensate if you had not saved regularly before.
60s
• Retirement eliminates income• Loss of employer-provided health insurance
• Prescriptions and other health care expenses rise • Property taxes increase
Your mortgage is paid and you may consider moving to an area with a lower cost of living. You may also explore the possibility of downsizing your living space.
Tip: While it is possible to begin collecting Social Security retirement benefits at age 62, many people delay collecting benefits until they reach the “full retirement age” (anywhere from age 65 to age 67). Please keep in mind that collecting benefits early permanently reduces your monthly benefit, and those expecting a long retirement often wait in order to collect the highest possible monthly benefit. You are also permitted to begin drawing from your retirement savings plans at this time. Seek out good advice on these matters, given that withdrawing too much too soon can mean running out of assets in your later retirement years.
70s
and beyond
• Health care costs • Inability to work • Nursing home • Outliving your savings
• Death of a spouse
• Grandchildren need financial support
You may have lower living expenses, and children who are financially secure may be able to pitch in.
Tip: If you continue to work, seek out advice on how earned income may affect your retirement benefits. Get advice on estate planning and college savings plans, such as 529 plans, that can really help increase the amount of good you can do with your money.
SAVING FOR
RETIREMENT
IS UP TO YOU
It is important to maximize your retirement and
personal accounts to help ensure you are saving
for the retirement lifestyle you envision.
Your future you
There are three main sources of retirement income: Social Security benefits, employer-provided retirement plan accounts, and personal savings. Social Security benefits are intended to cover just a portion of your post-retirement income needs. It is important to maximize your retirement plan savings and personal savings to help ensure you enjoy the retirement lifestyle you envision.
Remember, with retirement plan investments, such as a 401(k) and IRA plans, get time on your side as much as possible. The earlier you start saving, the more opportunity your account has to grow and accumulate in a tax-advantaged way (subject
to certain limitations). Whatever your age, make the most of these savings opportunities now to give yourself the best chance to reap the benefits later.
Social Security benefits are not enough
While Social Security benefits account for 45% of the average retiree’s monthly income, the current average monthly Social Security benefit payment is just $1,227.10,5
and this amount may decline in the future as the ratio of workers paying into the system to retirees collecting benefits continues to fall.
Everyday expenses in retirement take a bite out of your savings
5 Source: Social Security Administration. Monthly Statistical Snapshot, November 2015, www.ssa.gov/policy/docs/quickfacts/stat_snapshot/. 6 Disclaimer printed on annual Social Security statements.
"Social Security was never intended
to be your only source of income
when you retire. Social Security can’t
do it all. You will also need other
savings, investments, pensions or
retirement accounts to make sure
you have enough money to live
comfortably when you retire.”
6Expenses
Living expenses, elder
care, medical costs,
college tuition...
Savings
Social Security, IRA,
401(k), pension plans,
personal savings...
17%
60%
61%
11%
401(k)
Traditional
IRA
1980
2004
Making up the shortfall with retirement plans
You may be fortunate enough to have a traditional pension plan account, like a defined benefit plan, from a current or past employer. These plans are funded by the employer and pay a stated monthly amount during retirement. But increasingly, these employer-funded retirement plans are being replaced with plans that require employee contributions (defined contribution plans), such as 401(k) plans.
So, more and more Americans must rely on themselves to build retirement savings through tax-advantaged savings plans at work, such as 401(k)s, and personal retirement savings plans like Individual Retirement Accounts (IRAs). The good news is that you and your Financial Professional can create a comprehensive retirement savings strategy designed to help you meet your objectives and take into account the savings you may have already accumulated for the future.
Americans covered by traditional pension plans vs. defined contribution plans7
Planning for the unexpected
You may think you are right on target with your retirement savings plan. But what if the unexpected occurs? What if your elderly parents require financial assistance or your child’s education costs are more than anticipated? Your financial situation may be altered by these events or others, such as marriage, the birth of children, divorce, unanticipated medical expenses, or an unplanned period of unemployment.
If the unexpected happens, a well-constructed retirement savings plan can help you stay on track to meet your retirement income goals and allow for adjustments along the way as needed.
Create a savings strategy
Estimate how much you will need
The first step in creating your retirement savings strategy is to estimate how much money you will need to maintain your standard of living — and do the things you’d like to do — in retirement. Be sure to look at your total financial picture and to take into account all of your assets, including money already in 401(k) and pension plans, individual savings, your spouse’s retirement plan accounts and projected Social Security benefits. Your Financial Professional can help you assess all of these elements, plus potential risks such as inflation, and estimate the appropriate savings goal for you.
Start saving now
Whether you are well on your way to financial freedom or still have a long way to go, the best thing to do is to save as much as you can as soon as you can.
8 Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2006 Retirement Confidence Survey.
just to maintain your lifestyle in retirement.
The kind of retirement you will be able to
enjoy later depends largely on how you
save for retirement now.
8You may need at least
80
%
Income
Expenses
Savings
Consider your
of your
pre-retirement
income
PLAN FOR
YOUR FUTURE
Use the worksheets on the next few pages with your Financial
Professional as a starting point in formulating a personal
retirement strategy that works for your specific goals.
When you estimate your estimated current annual expense budget, include the expenses for your spouse or any other person who will be financially dependent on you during your retirement.
Estimate your retirement expense budget
1
2
Visualize the retirement lifestyle that you have planned and estimate the resulting increase/decrease from your current expenses as provided below.Although it may be difficult to estimate your future needs during retirement, a good starting point is your current annual budget for estimated living expenses. You may be surprised at how much or how little your estimated current expenses are.
† To get the net increase/decrease, subtract your estimated annual expenses at retirement from your estimated current annual expenses. Please note these numbers may be negative and it is important that you carry over any negative signs to the table to get the most accurate calculation.
Estimated current annual
expenses
Estimated annual expenses
at retirement Net increase/decrease†
Fixed expenses ($)
Housing (mortgage, rent, maintenance, property taxes, utilities) Transportation (car, maintenance, gas, parking)
Household (groceries, home consumer products)
Non-health insurance (auto, home, life, disability, long-term care) Health care (medical, dental, vision, medicine, out-of-pocket costs) Other (pets, special expenses)
Sum of fixed expenses 1
Discretionary expenses ($)
Travel (vacation, hotel, airfare)
Entertainment (theater, dining out, hobbies) Durable goods (clothing, appliances, electronics) Gifts, charitable contributions
Personal care (hair, dry cleaning, gym) Other
Sum of discretionary expenses 2
Estimated current annual expense budget ($)
Review your current financial situation
Before you can establish a person alized retirement strategy, you have to make an honest assessment of your financial situation. List the current assets and liabilities for yourself and any other person (such as a spouse) who will be financially dependent on you during your retirement. Calculate your household’s current net worth as provided here.
Estimated current financial assets ($)
Personal residence9
Work-related retirement account10 (401(k), 403(b)(7), SEP IRA)
Traditional IRA Roth IRA
Personal savings (bank account, CD)
Personal investments (mutual funds, securities) Other (commercial property, rental real estate)
Sum of financial assets 1
Estimated current financial liabilities ($)
Mortgage
Home equity loan 401(k) loan(s) Education loan(s)
Other (credit card debt, personal loans, car loans)
Sum of financial liabilities 2
Estimated current net worth for household ($)
Take item 1 and subtract item 2 3
9 Include the portion of the fair market value of your home that you anticipate being able to convert into income-producing assets, e.g., by moving into a smaller home. For example, if the value of your personal residence is $800,000 and you anticipate moving into a $500,000 home, you would put $300,000 on this line.
ESTIMATE THE
INCOME GAP
11 The annual income from current net assets is an estimate based on the earnings that would be produced by a hypothetical portfolio equal in value to your estimated current net worth. This estimate assumes a 7% pre-tax annual return that is reduced by 1% for transaction costs and further reduced by 2% for taxes (assuming a 25% blended tax rate for income and capital gains), resulting in a 4% net after-tax return for the hypothetical portfolio. Your actual investment will vary and may perform better or worse than the example, which is for illustrative purposes only and is not meant to depict the performance of a specific investment. All investments involve risk, including possible loss of principal.
How much do you need to save before your nest egg
is large enough to generate earnings that are comparable
to your estimated retirement needs?
The answer depends on many factors, including the rate of inflation for your
ongoing expenses, the long-term return on your financial assets, the life expectancy
of you and your spouse, and your effective tax rate before and after retirement.
To give yourself a sense of how you are doing currently with respect to your
retirement goals, complete the worksheet provided here.
Income gap analysis11
Estimated annual expense budget at retirement ($)
Use the figure from your completed “Retirement expense budget estimate worksheet” (Item 3 on pg. 11)
1
Estimated current net worth for household ($)
Use the figure from your completed “Financial situation summary” (Item 3 on pg. 12) 2
Estimated annual income from current net assets11 (assuming 4% hypothetical net after-tax return on current net worth) ($)
Take item 2 and multiply by .04 3
Estimated Social Security benefits ($)
If applicable, use the annual benefit from your most recent annual Social Security benefit statement 4 Estimated employer-provided pension ($)
If applicable, use an estimate of your annual benefit from your plan administrator 5
Estimated annual income gap if you retired today11 (assuming 4% hypothetical net after-tax return on current net worth) ($)
TAKE THE NEXT STEPS
FOR YOUR FUTURE
Visualize your retirement
• Envision a rewarding, healthy and responsible lifestyle. • Imagine what you would like to do during each season
of your ideal year.
• Visualize a day-to-day style of living that will motivate
your mind, maintain your health, and build relationships within your community.
Consider the realities
• Health care costs are rising.
• We’re living longer, so retirement lasts longer. • Inflation reduces your purchasing power.
12 Source: Legg Mason, 2015.
The above information is for illustrative purposes only. All three investors contributed $5,500 annually to an IRA. This illustration assumes a hypothetical pre-tax return of 7%, compounded annually. This example does not take into account any taxes, fees and expenses. It also does not reflect the impact of taxes. Withdrawals from a tax-deferred account are taxable as ordinary income in year made, and early withdrawals prior to age 59½ are generally subject to a 10% additional federal tax. Please note that Legg Mason, Inc. does not provide tax advice.
13 Diversification does not assure a profit or protect against market loss.
Start investing early and stay disciplined12
Started investing at age... Invested regularly for... Amount at age 65
Tom
Tom started investing early and stuck to it. The clear winner.
Bob waited seven years to start investing. While he invested $38,500 less than Tom ($181,500 vs. $220,000), his investment at retirement was almost $475,000 less.
Susan got sidetracked and started investing even later than the other investors, at age 45.
Bob
Susan
45
35
25
20
years
30
years
40
years
$241,258
$555,902
$1,174,853
Bridge the income gap
• Increase your annual savings rate, and if possible,
contribute to a tax-advantaged retirement account.
• Maintain a diversified investment portfolio with
an appropriate level of risk.13
• Defer, if possible, the date of your retirement. • Phase in your retirement. Consider whether you
would like spending a few days a week at your current workplace or perhaps at a different one.
• Consider all of your assets.
When planning for retirement, the earlier you
start, the better. The examples below illustrate
what a difference investing early can make.
Action steps
WORK WITH A TRUSTED
FINANCIAL PROFESSIONAL
A trusted Financial Professional works with you to identify
your goals, needs and aspirations, and helps you choose and
implement financial strategies that meet your particular
goals and needs, given your risk tolerance and time horizon.
Carefully consider the goals for your retirement.
Visualize how you would like your retirement lifestyle to be and write it down. Be as specific as possible.
Consider all the realities that may interfere with your retirement savings, such as rising health care costs.
Estimate your income gap.
Use the work-sheets within the brochure to help you estimate how much you may need to save to reach your retirement goal.
Be proactive. The earlier you invest, the better. Being consistent with your retire-ment savings will pay off for the long term.
Contact your Financial Professional. They are there to provide guidance with creating a strategy to help you realize your retirement goals.
The worksheets in this document are intended as a general guide to assist you in estimating your annual retirement income needs relative to your estimated retirement income. These worksheets are based on a variety of estimates and assumptions, and should not be the primary basis for your retirement planning. Please consult your Financial Professional or a financial planning professional for more information.
This document does not address state or local tax rules concerning IRAs or other accounts. Legg Mason, Inc., its affiliates and its employees are not in the business of providing estate planning, tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Information contained herein is current as of January 2015, is subject to legislative changes, and is not intended to be legal, tax or investment advice. Investments are not insured by the FDIC or any other government agency; are not a deposit or other obligation of Legg Mason, Inc., or any depository institution; and are subject to investment risks, including loss of principal amount invested.
Retirement Reimagined® is a registered trademark of Legg Mason Investor Services, LLC.
© 2016 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc. 647819 TAPX015455 8/16 FN1610006 Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates
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