Are you thinking about retirement? Understand your retirement income and estate planning options with this Roadmap to Retirement presentation by Greg Stevens, CFP, Senior Wealth Advisor, and Tom Vautin, Senior Financial Planner, of Cabot Wealth Management.

1. WELCOME TO CABOT’S
25TH ANNUAL INVESTMENT & WEALTH MANAGEMENT CONFERENCE
Your interests and goals always come first.

2. The Roadmap to
Retirement
UNDERSTANDING YOUR RETIREMENT
INCOME AND ESTATE PLANNING OPTIONS

3. Greg Stevens, CFP ®
Principal,
Senior Wealth Advisor
Tom Vautin, CPA, CFA, CFP ®
Senior Financial Planner,
Portfolio Manager
Cabot Wealth Management, Inc.
216 Essex Street
Salem, Massachusetts 01970
800-888-6468
eCabot.com

5. Common “Rules of Thumb”
• Save at least 10% of your income each year for
retirement
• Have savings equal to 8 times your final income for
retirement
• The percentage of bonds you should hold in your
investment portfolio should equal your age
• It is safe to withdraw 4% of your investments each
year during retirement
• Expect to get 7%-8% on a stock portfolio on average
each year
• Use caution with rules of thumb!

6. “When can I retire?”
• What will your standard of living be? How
much money do you plan to spend each
year?
•What are your current and future resources?
• Current value of investments
• Future value of other assets that will be used to fund your
retirement (real estate, business interests, etc.)
• Fixed-income sources (Social Security, pensions, etc.)

7. “When can I retire?”
• Systematically determine what is required to
bridge the gap between now and desired
retirement date/desired standard of living
• Calculate required saving rate – should 10% of income “rule
of thumb” apply?
• Asset allocation – growth (aggressive) vs. stability
(conservative). Rule of thumb – invest in bonds equal to
your age? Not always appropriate!
• Choose assumptions (taxes, inflation, rates of return and
volatility for various asset classes)
• Each of the above variables may impact each other – robust
computer programs exist that can run different scenarios
using multiple variables to project success or failure

8. “When can I retire?”
• Methods of calculating future investment
returns
• Linear (example: Rule of thumb says “expect 7%-
8% average return each year for a stock portfolio).
Does not factor in volatility!
• Monte Carlo simulation - runs simulated trials
based on both expected rates of return and
volatility.

10. “How Much can I Withdraw from
my Investment Portfolio?”
• 4% “rule of thumb”? Or…
• It depends!
• Your age
• Your expected longevity
• Your desired standard of living (equal across all years or
different from year to year?)
• Your sources of income and other assets
 Social security
 Pensions and annuities
 Rental income
 Sales of assets (businesses, real estate)

11. “How Much can I Withdraw from
my Investment Portfolio?”
• Methods of calculating future investment
returns
• Linear (example: Rule of thumb says “expect 7%-
8% average return each year for a stock portfolio).
Does not factor in volatility!
• Monte Carlo simulation - runs simulated trials
based on both expected rates of return and
volatility.

12. Generating Income
Most don’t have pensions (no more guaranteed income)
“Risk Free Rates” fluctuate
• Yield on money market accounts have dropped from approx. 5% in
2007 to under .10% today!)
Fixed Income yields are low
• 10-yr. treasury yields approx. 2.6% today vs. 4% historical average
Most investors need to be creative to provide a steady, inflation-adjusted
lifetime income.

13. Generating Income
Annuities
Immediate Annuity: Trade a lump sum for a stream of income
Fixed Annuity: Similar to a CD, only longer term (guaranteed
rate)
Variable Annuity: Looks and feels like a mutual fund portfolio
Equity Indexed Annuity: Fixed annuity offering gains pegged to
a specific market index (i.e. S&P 500)

14. Generating Income
Annuities
Pros
• Guaranteed income for life if you annuitize (and spouse’s life)
• You can buy “riders” to lock in values at specific intervals
• Downside and principal (some or all) protection
Cons
• Cost… insurance wrapper + sub account expenses + riders
• Low interest rates = low payouts (wait until rates rise)
• Distributions taxed at ordinary income rates vs. lower capital gains rate
• No basis step-up at death

15. Generating Income
Annuities
Do they belong in my portfolio?
The answer depends on what you want!
• “Sleep at night” factor
• Supplement to a diversified portfolio of global equities and bonds
• Insure a piece of your portfolio (and a portion of your income needs)
against a severe market drop
• Determine which type of annuity fits your needs based on your
particular situation
*Understand what you’re buying! Don’t buy something you don’t
need!*

16. Generating Income
Diversified portfolio
• Allocate funds to a mix that:
 Falls in line with your risk tolerance
 Provides a high probability of success that you’ll meet your income
needs
 Is nimble enough to rebalance as your needs change
 Contains asset classes that work together to balance risk in time of
market turmoil (allocate with standard deviation in mind)
Every asset class has a projected return and risk level
• Determine how much you need to live on
• Create a portfolio that can provide you with that return in exchange
for the lowest level of risk

17. Generating Income
Being “conservative” is not always as safe as you think
• Low bond yields = less income
• Inflation on the rise = need for growth to keep up
• Most retirees need their assets to last 25-30 years
• Equities are a critical piece of a long-term strategy

18. Generating Income
Asset allocation: Take short-term market movements in stride
Example:
10-yr. average annual return (6/30/2004-6/30/2014):
S&P 500: 7.78%
MSCI EAFE (foreign stocks): 7.42%
ML 1-10 yr. Bond index: 4.5%
2008 Return
S&P 500: -37%
MSCI EAFE (foreign stocks): -43%
ML 1-10 yr. Bond index: 7%

19. The Impact of Volatility
All else equal, lower volatility will result in a higher portfolio value at
the end of the plan.
Example: Assume two portfolios with value of $100,000 invested over
a 30-year period with an average rate of return of 8% but different
volatilities:
Portfolio: Higher Volatility Portfolio: Lower Volatility
Average Yearly Return 8% 8%
Standard Deviation 13% 8%
Ending Portfolio Value $819,319 $927,937
.

21. Social Security
Based on average earnings over the 35 years in which you
earned the most income
To be vested: work at least 10 years and earn 40 “credits” (pay in
to the SS system via payroll taxes)
Eligible to “non – working” spouses: 50% spousal benefit

22. Social Security is Powerful
• Backed by the full faith and credit of the U.S. government
• Social Security is annuity income adjusted for inflation
• Suppose:
• You have a $30,000 per year Social Security benefit
• Social Security benefits will receive a 3% inflation adjustment each year
• You will live for 20 years once your benefits begin
• This is similar to owning an asset worth approximately $450,000 that is
conservatively invested that you could use to fund your retirement spending
(two spouses = approximately $900,000 with same assumptions)
• Should this relatively conservative investment be factored into the risk
profile of your overall portfolio?
• The need for additional annuity income through insurance products might
not be necessary (annuities = insurance against outliving your money)

23. Social Security
• For two spouses, there are different combinations of
how you can take Social Security retirement benefits
• Early (age 62)
• Normal retirement age (age 65-67)
• Delayed (up to age 70)
• One spouse early, one spouse delayed, etc.
• File and suspend
• Restricted application

24. Social Security
Spousal Benefit
• Take yours or 50% of your spouse’s benefit
•At full retirement age (FRA) choose to take 50% of spouse’s and
delay your benefit (allows your credits to accrue)
•You cannot take spousal benefit until your spouse files
•Taking a spousal benefit before your FRA will reduce the amounts
paid to you over your lifetime

25. Social Security
Full Retirement Age: when eligible for full benefits
Born before 1937: FRA is 65
Born after 1960: FRA is 67
Taking benefits before FRA = reduced benefit
Earned income above the annual earnings limit ($15,480 for 2014)
= reduced benefit by $1 for every $2 of earnings over the limit.
This money is “paid back” when you reach FRA, so not really lost

26. Social Security
Should you take it early?
The answer is NO if:
• You plan to keep working
• You have longevity in your family
• You have a spouse that is still working and therefore are in a higher tax
bracket now than you will be in a few years
• Your spouse’s benefit is smaller than yours and he/she is younger
The answer is YES if:
• Your earned income is below the annual earnings limit ($15,480 for 2014)
• You have a shorter-than-normal life expectancy and your spouse is eligible
for a larger benefit

27. Social Security
Collecting benefits:
• Benefits Increase by 8% each year you defer collecting (up to age 70)
• File and Suspend: at FRA, one spouse files and delays benefits, other
spouse takes spousal benefit. Both then accrue credits and increase
benefit at age 70
• Restricted Application (i.e. file for “free” spousal benefit): FRA, one takes
own benefit now, the other takes spousal benefit now, then their own at
age 70
• Claiming spousal benefit prior to FRA locks you in to decreased benefit for
life (lose the ability to receive deferred credits on your benefit)

28. Social Security
Collecting Benefits: What’s best for you?
Depends on your situation
• Age
• AGI
• Longevity
Integrate social security expectations into your overall “plan”
• Tax implications
• Outside assets (i.e. rental income and investments)
• Earned income

29. Social Security
• Online calculators are available as resources, but
the results should not be viewed in isolation of your
overall financial plan:
• www.socialsecuritytiming.com (free and pay versions)
• www.ssincomeplanner.com
• AARP (www.aarp.org)
• Government Web sites (www.socialsecurity.gov)

30. Tax Planning During Retirement
• Determine what your marginal tax rate will be each
year. How much will your next dollar of taxable
income cost you?
• Tax brackets published by IRS
• Phaseouts of tax benefits
• Alternative Minimum Tax
• State income tax rate
• Changes in your individual marginal tax rate from year to year
will depend on 1) tax laws and 2) your individual income
situation.

31. Tax Planning During Retirement
• Depending on the type of investment account you
have, withdrawals may be taxable
• Traditional IRA, 401(k), or other “pre-tax” retirement plan:
Withdrawals are taxable
• Roth IRA: Withdrawals are tax-free
• Non-retirement account: Withdrawals are not taxable (interest,
dividends, and capital gains are taxable each year, however)
• Rule of thumb: Withdraw money from taxable accounts
first, then IRAs? It depends.

32. Tax Planning During Retirement
• Having different types of accounts available
for withdrawals provides opportunities for
income tax efficiency
• Each year, when possible, take withdrawals from “pre-tax”
accounts to fill up the lower tax brackets
• Then shift additional withdrawals to Roth or non-retirement
accounts, which are not taxable
• Keep in mind that assets in a non-retirement account will likely
receive a “step-up” in basis when you pass away
• In some cases it make be sensible to consider your beneficiary’s
tax situation as well

33. What Is Estate Planning?
An orderly and systematic transfer of one’s wealth at their death
Implement strategies to minimizes taxes owed at death
Provide for your beneficiaries and dictate the disposition of your
assets
Maintain control of your assets for as long as you can and have a
roadmap in place for when you can’t

34. Asset Transition
Intestacy: No written instructions or plan (i.e. leave it up to the
probate court to decide)
Will: Spells out “who gets what” and is approved by the Probate
court
Asset Titling: Pass assets by “contract” (beneficiary designations,
joint tenants with rights of survivorship, etc.)
Trusts: Asset in Trust can avoid the Probate process

35. What is Probate?
The process in which the State Probate court oversees the
disposition of your assets as spelled out in your will.
If you die intestate (no will), State law provides for how your
assets are to be distributed. This process is also overseen by the
Probate Court.

36. Why Try to Avoid Probate?
• Could take months to finalize
• Costs are unpredictable
• Probate is a Public Process (i.e. creditor claims, challenges to
your estate, etc.)
• Real property in multiple states = ancillary probate

37. How Your Assets are Titled is Important
Pay close attention to how you “own” your assets:
• Joint Tenants w/ Rights of Survivorship
• Tenants by the Entirety
• Individual
Beneficiary Designation
• IRA
• Annuities
• Transfer on Death
• Pensions
• Life Insurance
Proper beneficiary planning is critical to the success of your Estate Plan

38. Trusts as a Planning Vehicle
Why use Trusts?
• Manage estate taxes
• Provide for orderly distribution of your assets
• Maintain control of your assets after you’re gone
• Minor children
• Charitable Giving
• Asset Protection

39. Benefits of a Trust
• Terms can be changed during grantor’s life
• Can provide for assets to remain in Trust at death
• Most Rev Trusts contain provisions for “splitting” the
estate at death and preserving the deceased’s
estate tax exemption (married couples)
• Assets held in the Trust (i.e. real estate, investment
accounts, etc.) are exempt from probate

40. Benefits of a Trust
Can be created from a Rev Trust at death of Grantor or
on its own
Excellent way to transfer assets and remove future
appreciation from your estate
Examples
• Gift Trust
• Charitable Trust
• Grantor Retained Annuity Trust
• Credit Shelter Trust

41. Estate Taxes
• Taxes due at death if your assets exceed certain thresholds
• Federal threshold is $5.34 million for 2014 (indexed for inflation yearly)
• Gift tax exemption of $14,000 per year, per donee
• Each state has their own threshold (MA threshold is $1 million)
Federal tax rate: 40%

42. Estate Taxes
Some states impose their own Estate Tax:
Connecticut Minnesota
Delaware New York
DC Oregon
Hawaii Rhode Island
Illinois Vermont
Maine Washington
Massachusetts
Some states impose an Inheritance Tax:
Iowa Pennsylvania
Kentucky Tennessee
Nebraska

43. How is the tax calculated?
Calculated on your “gross estate” (total value of all property in
which you had an interest at your death)
real estate
investment accounts
bank accounts
life insurance
etc….
ALL TANGIBLE and INTANGIBLE ASSETS!
Portability between spouses (one dies, the other can choose to
take the unused portion of their exemption)

44. Other Important Documents
Durable Power of Attorney:
Who steps in to take care of your financial affairs if you
can’t?
Health Care Proxy:
Who makes medical decisions if you can’t?
Living Will:
Provides specific directives to health care providers about
the course of treatment to be followed if you can’t
communicate

45. APPENDIX: DISCLOSURES
Past performance is not indicative of future results. Investments are not
insured and may lose value.
No amount of asset or sector allocation or diversification can protect against
principal loss.
Individual security selection may result in returns that deviate from the
security’s corresponding benchmark.
Nothing contained in the presentation should be considered as tax or legal
advice.

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