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YOUR FUTURE
STRATEGIES & PRODUCTS FOR
RETIREMENT INCOME PLANNING
IRIONLINE.ORG
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TABLE OF CONTENTS
INTRODUCTION
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Table of Contents
Building Your Future | Strategies and Products for Retirement Income Planning
Introduction
In this guide, we help you decipher the following strategies and products, as well as the risks
and benefits associated with each. We examine investment and income planning strategies,
insured income products, and income-producing investment products.
Building Your Future | Strategies and Products for Retirement Income Planning
Dividend-Paying Stocks
Preferred Stocks
Real Estate Investment Trusts (REITs)
Introduction
STEP 1
STEP 2
STEP 3
Building Your Future | Strategies and Products for Retirement Income Planning
INVESTING BASICS
Organize your finances to help manage your money more efficiently. Remember, investing is just one component
of your overall financial plan. Get a clear picture of where you are today.
Many individuals have more than one goal in mind, for example, a family vacation, a first time-home purchase,
and/or a secure retirement. Part of setting investment goals is determining when you will need the money to pay
for them. Most goals fit into one of three categories:
Short-term: Usually within a year or two. The closer you get to your goal, the less risk you generally want to take with
the money you have already accumulated. This means you will be more inclined to put your money into federally
insured bank accounts or cash equivalent investments. An example of a short-term goal is a family vacation.
Mid-term: Usually within two to 10 years. Mid-term goals are typically those for which you need time to
accumulate the money. The more time you have, or the more flexible the timing, the more risk you can probably
afford to take with your money. An example of a mid-term goal is the down payment for a home purchase.
Long-term: Usually more than 10 years. For many people, the number one long-term goal is a financially secure
retirement. It is also a goal with a long-time horizon and you will need to manage that money for many years in
retirement. When your goal is paying for college, for example, you think in terms of paying costs for four years,
or perhaps a few more for a post-graduate or professional degree.
Because every investment carries some degree of risk, it is critical that you assess your tolerance for risk. If
you are the sort of person who will lie awake at night worrying about your investments and you put most of
your money in the stock market, then you might want to consider balancing your portfolio with lower-risk
investments, such as Treasury bills, highly rated bonds or other lower risk investments.
Should you decide to adopt a low-risk investing strategy, traditionally low-risk investments tend to have lower
rates of return that are commensurate with their risk level. As a result, while you might be able to protect your
principal from loss, you run the risk that your investment returns will not keep pace with inflation.
If you work with an investment professional to set your goals, he or she should be able to help you identify the types
of investments that are most appropriate for different periods. An experienced investment professional ought to know
the spectrum of investment options available to you, but ultimately you will need to know what you own and why.
You cannot make an informed choice about an investment without asking probing questions about its features, risks
and costsand you should not invest in something you dont understand, no matter who recommends it to you.
If you take the lead yourself, you should be prepared to spend time learning about various investments and the
markets in which you buy and sell them. You should think about whether the investments you are considering
are appropriate at this point in your life. The Securities and Exchange Commission provides descriptions of some
investment products, explains how they are bought and sold, and details their benefits and risks. You will also
find information on fees and tips to avoid fraud: www.investor.gov/investing-basics/investment-products
Introduction
Longevity risk which is the risk that someone will outlive their wealth and available income. Longevity risk can
potentially be managed using insured solutions such as immediate or deferred annuities or variable annuities and
fixed index annuities with living benefit riders to provide a guaranteed stream of income for life.
Entitlement risk which is the risk that government programs such as Social Security or Medicare will not offer
sufficient protection for retirement. Entitlement risk can be managed by increased personal saving and investing
and using insured solutions.
Excess withdrawal risk which is the risk that an individual will draw down assets too quickly and undermine their
retirement plan. Excess withdrawal risk can be managed by developing a plan that balances retirement expenses
and available sources of income.
Market risk which is the risk of losing invested wealth, either temporarily or permanently, because of a market
downturn or poor investment performance. Market risk can be managed through diversification of savings and
investments, including use of insured solutions to provide stability and assurance of income irrespective of market
results.
Lifestyle risk which is the risk that there is not sufficient income to maintain the current or expected standard
of living during retirement. Lifestyle risk can be managed through disciplined savings, sound budgeting and
planning, and including sustainable income sources such as immediate or deferred income annuities as part of a
diversified investment approach.
Asset allocation risk which is the risk of investing either too conservatively or too aggressively and not adequately
diversifying assets to sustain a portfolio across market cycles. Asset allocation risk can be managed through the
assistance of an experienced investment professional, by diversifying assets, and by including insured solutions as
part of the investment mix.
Building Your Future | Strategies and Products for Retirement Income Planning
Sequence of returns risk which is the risk of receiving low or negative returns in early years of drawing down a
retirement portfolio and increasing the potential of running out of money prematurely. Sequence of returns risk
can be managed by sound planning, through drawing down assets thoughtfully, and by including insured annuity
products and other guaranteed solutions in your investment mix.
Inflation risk which is the risk that rising costs will undermine purchasing power over time. Inflation risk can
be managed through investments and insured solutions that offer inflation adjustments, through portfolio
diversification, and by proper financial planning.
Medical expense risk which is the risk of paying for the growing cost of health care related services in retirement.
Medical expense risk can be managed through including risk protection solutions such as Long-Term Care
insurance as part of a broad financial plan.
Tax risk which is the risk that rising taxes or unforeseen tax consequences can impact a portfolio or purchasing
power. Tax risk can be managed using tax-deferred and tax-efficient investment solutions and by seeking guidance
from a tax professional.
Personal or event risk which is the risk that an unexpected change in family circumstances (such as divorce, death,
illness, or adult children returning home) may undermine anticipated retirement plans. Personal or event risk can
be managed through preparation of a financial plan and by establishing reserve or rainy day funds that can be used
for emergencies.
Incapacity risk which is the risk that as a result of deteriorating health or severe decline in cognitive abilities,
a retiree may not be able to execute sound judgment in managing their financial affairs. Incapacity risk can be
managed by having tools such as wills, trusts, and power of attorney provisions in place at the time of retirement,
if not before.
To help address these various risks, talk with your financial professionals about doing a thorough assessment
to discover the potential issues and challenges that you may encounter. While not all challenges can be easily
foreseen, this discovery or pre-planning process is an excellent way for you to obtain a better picture of the totality
of retirement, the specific risks you may face, and the decisions you must make to lessen the potential impact of
these challenges.
10
Building Your Future | Strategies and Products for Retirement Income Planning
11
A systematic withdrawal plan (SWP) allows you to receive regular payments from your investment account. It is
used to create steady cash flow, and is frequently employed during retirement to generate income.
Under a SWP, your retirement account is invested in securities (most commonly mutual funds) that are diversified
over a number of asset classes and are managed for total return. You withdraw either a variable or fixed amount
from the account on a regular basis, and the original investment will continue to grow so long as the underlying
investments earn a higher rate of return than the rate of withdrawal.
HOW IT WORKS
Annual Withdrawal
Annual Return
Account Balance
1 $6,000 7% $528,580
2 $6,000 6% $553,935
3 $6,000 18% $646,563
4 $6,000 -5% $608,535
5 $6,000 8% $650,738
6 $6,000 -15% $548,027
7 $6,000 19% $645,012
8 $6,000 -4% $613,452
9 $6,000 -6% $571,005
10
$6,000
-10%
$508,504
It is important to recognize, however, that when the investment portfolio is in withdrawal mode, losses make it harder to
recover, particularly when they occur in the earlier years. The next example demonstrates this. It re-creates John Smiths
$500,000 portfolio and $6,000 annual withdrawals, but in this scenario the same returns are used in reverse order.
Year Amount Invested
$500,000
Annual Withdrawal
Annual Return
Account Balance
10
$6,000
7%
Building Your Future | Strategies and Products for Retirement Income Planning
$489,274
The annualized return for the 10-year period is the same for both examples, but in the second example the portfolio
is worth less than the initial investment due to the combination of withdrawals and consecutive negative returns in
the first three years. In the first example, these negative returns did not occur until the end of the 10-year period.
With the annual rates of return reversed, there is a completely different portfolio outcome.
This concept, commonly referred to as sequence of returns, constitutes a meaningful risk for investors entering
retirement. As a result, it may be appropriate to make adjustments to your SWP to account for investment losses
in the portfolio, particularly in the earlier years of retirement as these years have a greater impact on the portfolios
long-term ability to sustain continuing withdrawals.
Since SWPs are typically designed to draw from your investments periodically to supplement your income needs,
they are only suitable for investors who are comfortable with market risk. You should also have enough investable
assets to provide income that is sustainable for the desired duration of the SWP. In determining a withdrawal
amount an average annual return assumption can be used, and this assumption should be based on realistic market
performance expectations.
to generate income with flexibility and control (you can change the withdrawal amount and the
Thpayment
e abilityfrequency
as needed).
to protect against inflation and provide income growth, since the account may be fully invested
Thwhile
e potential
withdrawals are being taken.
also be tax advantages. Rather than taking a lump sum payment, the income can be spread out across
Thmultiple
ere canintervals,
potentially lowering your overall tax bill.
RISKS:
are not guaranteed, which means you could potentially exhaust your assets during retirement. Since
Pyour
ayments
account may be fully invested, it is subject to market fluctuations.
must be managed and rebalanced on a regular basis to ensure it remains invested to support your
Yaverage
our account
annual return assumptions and investment goals.
a SWP is liquid and flexible, taking out large sums of money would require a higher rate of return
Ato lthough
support ongoing withdrawals. If the higher rate of return is not achieved, this could impact how long your
payments will last or may require you to decrease future withdrawal amounts.
A systematic withdrawal plan is a viable strategy to supplement your retirement income, provided you understand
the risks involved. With proper financial planning, a systematic withdrawal plan can be an integral part of your
retirement portfolio.
13
up retirement into discrete time periods and solving for each period separately enables you to balance
Bhow
reaking
you manage different risks and their potential impact over time.
Losses are easier to recover from within an investment pool that is not yet in withdrawal mode.
RISKS:
This is a more sophisticated approach and can be more difficult to monitor and maintain.
is extremely important. For example, it could be difficult to make adjustments should there be a need
Dfor
esign
flexibility.
which risk mitigation tactic to employ for each time period can be daunting for the average
Dinvestor,
etermining
which is why working with a financial professional is so important.
14
Building Your Future | Strategies and Products for Retirement Income Planning
The risk-adjusted total return approach involves managing a broadly diversified portfolio to help optimize your
total return within your individual risk characteristics. Income is typically not a specific investment goal of this
approach. Cash flow is created through dividends or interest generated by your investments and by periodic
withdrawals of a targeted percentage of assets or dollar amount.
At its core, this approach is about constructing a diversified portfolio across different asset classes. Emphasis
is placed on the overall performance and risk management of your entire portfolio. While your assets may be
invested more conservatively given your risk profile, the basic approach is similar to how most portfolios are
managed to build assets for retirement. The asset classes used may include equities, fixed income, alternatives and
cash equivalents and can involve a wide variety of vehicles such as mutual funds, ETFs, individual securities and
separately managed accounts.
allows you to focus on achieving the highest possible return over time with exposure to multiple
Thasset
e approach
classes and vehicles.
is great flexibility in how you can apply this approach to provide enhanced cash flow during periods
Thwhen
ere markets
are performing well.
RISKS:
exposure to market risk. Cash flow generated from this approach can be undermined by
Thdownturns
e strategyinincreases
the capital markets or poor investment choices.
in the first several years post-retirement could provide significant risk to the long-term
Uviability
nder-performance
of your portfolio (sequence risk).
periods, you may not generate sufficient cash flow to meet discretionary expenses without
Drelying
uringondowndrawdown
of principal.
15
allows you to have some degree of assurance and protection against short-term market risk
Thwhile
is approach
allowing your portfolio to grow to meet your long-term needs.
is great flexibility in how this approach can be managed to provide enhanced cash flow during periods
Thwhen
ere markets
are performing well.
RISKS:
solutions, your ability to generate sustainable income for essential needs may be
Ochallenged
utside of guaranteed
during periods of lower interest rates/yield performance.
to market volatility can be reduced but not totally eliminated, which means you may not generate
Esufficient
xposure returns
to meet your discretionary goals.
16
Building Your Future | Strategies and Products for Retirement Income Planning
BOND LADDERS
The fixed income markets can provide valuable strategies for investors who are seeking income. A popular fixed income
investing strategy is called a bond ladder, and this may be appropriate if you desire a stable income stream and want to
avoid the market volatility of equities.
A bond ladder involves purchasing a portfolio of corporate, municipal or government bonds with different maturity
dates. The idea is to protect your principal and provide a steady income stream. For example, an investor looking to set
up a ladder with $100,000 could purchase 10 different bonds, each worth $10,000 with maturities ranging from one to
10 years. The bonds purchased pay the investor a coupon rate, which is the annual interest rate of interest payable on the
bond. Most bonds make interest payments semiannually; however, some bonds may offer monthly or quarterly payments
to supplement retirement income needs. When the first bond matures, the proceeds are reinvested in a new bond that
matures in 10 years, creating a new rung on the ladder.
It is important to understand that, during times of rising interest rates, investments in fixed income can expose investors
to market risk and reinvestment risk. Market risk occurs when interest rates increase and bond market values fall.
Reinvestment risk occurs when the interest income or principal repayments will have to be reinvested at lower rates in a
declining interest rate environment. The advantage of bond laddering is that it allows you to split your investment up into
several different bonds with different maturities and durations rather than making a single investment into one bond.
Though this strategy will not completely eliminate market risk and reinvestment risk, it can offer a way to help you better
protect against them. Bond ladders also offer stability against call risk, since it is unlikely that all the bonds will be called
at once. Call risk is the risk of the issuing company redeeming the bond prior to maturity, which in many cases may result
in the investor reinvesting the proceeds in a less favorable environment.
risk, or the risk that proceeds from a maturing bond will need to be reinvested in a declining
Rinterest
einvestment
rate environment.
Market risk, which occurs when interest rates increase and bond values fall.
Credit risk, which is the risk of the bond issuer becoming unable to meet its obligations.
which is the risk that the issuing companies of the bonds held become unable to make their
Drequired
efault risk,
debt payments.
Call risk, although it is spread out across multiple bonds, is still present within this strategy.
A bond ladder may be a viable income strategy for a portion of your total retirement portfolio, as this strategy
provides a stable income stream in addition to helping you manage both reinvestment and market risk.
Investment and Income Planning Strategies
17
LADDERING A CD PORTFOLIO
A CD ladder utilizes Certificates of Deposit (CDs) to fund a portion of your retirement income. To create a CD ladder,
an investment is split up and allocated to CDs with varied maturity dates.
For example, assume that an investor has $150,000 and purchases one CD for $50,000 with a one-year maturity, another
CD for $50,000 with a two-year maturity, and a third for $50,000 with a three-year maturity. When the one-year $50,000
CD matures, it is reinvested into a three-year CD, which most likely will offer a higher interest rate than the current
one-year CD. When the two-year CD matures, the investor can again choose a three-year CD. By following this pattern,
the investor will have CDs that mature annually, each to be reinvested for a three-year term. Eventually, the investor will
realize the goal of having all funds deposited at the longest term, possibly at a higher rate for income purposes, and this
will assure that some of the investment matures annually with no early withdrawal penalty.
Since CDs are FDIC insured up to $250,000, CD laddering may be appealing if you are market risk averse and favor a
more conservative investment strategy.
CD LADDERING APPROACH
BENEFITS:
Astrategy.
nnual liquidity options without penalty for early withdrawal because a CD matures each year within this
of income can be achieved by reinvesting a portion of a maturing CD, rather than the full
Gamount,
reater stability
each year, especially if interest rates are falling. This helps you manage reinvestment risk.
added protection of FDIC insurance and insurance from NCUA. However, due to insurance
Climitations,
Ds offer theit may
be prudent to purchase CDs from a number of financial institutions, limiting your deposit
amount to ensure coverage under the limits set forth by the FDIC or NCUA.
stream provided by this low risk investment may not be sufficient to cover your income requirements
Thover
e income
the long term, and may not keep pace with inflation.
at maturity of the CDs may have fallen below the original rate, causing your ongoing income
Thstream
e ratestoavailable
decrease.
there is annual liquidity, emergency cash flow needs outside of the scheduled payments and in excess
Aof lthough
the income may be withdrawn, but at a penalty.
A CD laddering strategy is one of many options you should consider to provide a stream of income. It may be
practical for fully or partially funding your basic retirement income needs (e.g., food, utilities, housing, etc.).
Because CDs are insured by the savings institutions that offer them (FDIC for banks, NCUA for credit unions),
they are very low risk; however, if you lock in low CD rates, the income streams the CDs generate are unlikely to
keep pace with inflation. Furthermore, this income strategy may be subject to substantial fluctuation, dependent
on the CD renewal date and the level of CD rates available at the time of renewal.
18
Building Your Future | Strategies and Products for Retirement Income Planning
with Guaranteed
Deferred Income Annuities
VLifetime
ariable Annuities
Withdrawal Benefits
Stand-Alone Living Benefits
19
20
Building Your Future | Strategies and Products for Retirement Income Planning
Withdrawals made prior to age 59 1/2 are subject to a 10% IRS penalty tax and surrender charges may apply.
Gains from tax-deferred annuity investments are taxable as ordinary income upon withdrawal.
returns and principal value of the available subaccount portfolios will fluctuate so that the
Thvalue
e investment
of your annuity, if redeemed, may be worth more or less than its original value.
are subject to the claims-paying ability of the issuing insurance company. If the insurance
Acompany
ll guarantees
becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage
provided by your states insurance guarantee association.*
If you are currently in or nearing retirement and looking for protected lifetime income, a variable annuity with a
GLWB living benefit rider may be appropriate for a portion of your retirement assets. This strategy allows you to
stay invested in the equity markets while also providing a protected stream of income for the rest of your life.
* This risk extends specifically to the insurance features and not the investments. Variable annuity subaccounts are
held in separate accounts and are not exposed to creditors in the event of insurer insolvency.
Insured Income Products
21
Fixed index annuities are long-term, tax-deferred insurance vehicles designed to create a retirement income
stream for life. They offer a guaranteed minimum interest rate and the opportunity for more interest growth based
on changes in one or more market indices. Fixed index annuities also offer flexible withdrawal options and a death
benefit for beneficiaries. The guarantees provided by a fixed index annuity are backed by the claims-paying ability
of the issuer.
Fixed index annuities offer more opportunity for accumulation than typical fixed interest rate alternatives while
retaining 100 percent principal protection. This can provide more conservative investors a higher-potential
alternative to current fixed rates while maintaining the guarantee that they cannot lose any principal or accumulated
interest. Fixed index annuities also typically offer an annual reset feature. With annual reset, only the index change
for the individual year factors into the interest earned. If index performance is negative the value remains the same.
When the index performance is positive the contract will receive an interest credit, even if it has not recovered
losses in the index from previous years. This unique feature allows index annuities to build value annually and
avoid having to regain lost value in the index. When the index performance is positive the contract will receive an
interest credit equal to the gain in the index, reduced by any spreads or caps as defined in the contract, even if the
index value is lower than in previous years.
As a vehicle to provide lifetime income it can offer additional guarantees through living benefits similar to those
available with variable annuities. Again, these living benefits are typically optional riders that can be added at an
additional cost; however, some are included as a benefit of the annuity with no additional rider charge. Because
fixed index annuities already guarantee principal if they are held to maturity, the typical living benefit is a GLWB,
which can provide income either immediately or at a date in the future. Typical GLWBs can range in cost from 0.3
percent to 1.5 percent, depending upon the rider and the issuing insurance company. It is common for there to be
a connection between the cost of the living benefit and the amount of guaranteed income that it provides, and it is
important for you to identify how much income you need.
When you purchase a fixed index annuity with a GLWB rider, withdrawals will be guaranteed for your lifetime, even
after the value of the annuity had been paid in full. If this were to occur, the insurance company would continue
the payments pursuant to the provisions of your GLWB. Unlike traditional annuitization options included with
annuities, lifetime withdrawal benefits typically allow you to withdrawal any remaining accumulated value while
taking the withdrawals. However, if you were to withdrawal this value the payments would stop.
GLWB riders available on fixed index annuities typically offer similar withdrawal percentages to those available
on variable annuities. Again, for example, if a 65-year-old investor were to purchase a fixed index annuity with
$100,000 with a GLWB rider, he or she would be entitled to withdraw up to 5 percent of $100,000 or $5,000 per
year for the rest of their life. Many GLWB riders also feature a specific guaranteed increase in the amount of
withdrawal income available each year that you wait to begin taking the income. Some reflect this in an annual
increase in the value payments are based on, while others increase the withdrawal percentage available each year.
22
Building Your Future | Strategies and Products for Retirement Income Planning
Wapply.
ithdrawals made prior to age 59 1/2 are subject to a 10 percent IRS penalty tax and surrender charges may
annuities do not invest directly into the market, index gains only result from market price,
Bexcluding
ecause indexed
any gains from dividends.
Gains from tax-deferred insurance contracts are taxable as ordinary income upon withdrawal.
no risk of loss to principal or credited interest due to market index performance, surrender
Acharges
lthoughmaytherebeisapplied
if you do not meet the terms of the contract. These charges may result in a loss of
credited interest and principal.
are subject to the claims-paying ability of the issuing insurance company. If the insurance
Acompany
ll guarantees
becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage
provided by your states insurance guarantee association.
If you are currently in or nearing retirement and looking for protected lifetime income, a fixed index annuity with
a GLWB living benefit rider may be appropriate for a portion of your retirement assets. This strategy allows you to
maintain the guarantees of a fixed product while also providing more potential for accumulation and a protected
stream of income for the rest of your life.
23
A single premium immediate annuity (SPIA) is a fixed annuity that provides you with a guaranteed stream of
income (for life, or a specified period) in exchange for a one-time lump sum payment. Income payments from
a SPIA typically start shortly after your lump sum purchase payment is made to the insurance company. Your
income payments can be received monthly, quarterly, semi-annually or annually. Your payment amounts depend
on several factors, including initial investment, payment option selected, interest rate, age and gender.
Common lifetime payout options available:
Life Only Payments are made until the death of the annuitant.
Life with Installment Refund Payments are made for life of the annuitant, but upon death, the payments
can continue to a listed beneficiary, but only if the total payments received by the annuitant are less than the
amount of premium paid. If this shortfall exists, then payments will continue to the listed beneficiary until
the payments made from the SPIA equal the amount of premium paid.
Life with a Cash Refund Payments are made for the life of the annuitant, but upon death, the listed
beneficiary receives the difference between total payments made and the premium amount paid.
Life with Period Certain Payments are made for life, and are guaranteed to be paid for a specified period
from five to 30 years to either the annuitant or a beneficiary.
Sfeatures.
PIAs are irrevocable and have limited liquidity, although certain newer contracts contain additional liquidity
are subject to the claims-paying ability of the issuing insurance company. If the insurance
Acompany
ll guarantees
becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage
provided by your states insurance guarantee association.
Thsignificantly.
e risk of investing in a low interest rate environment and not having access to money if interest rates rise
In cases where fixed payments have been elected, there may be inflation risk over time.
If you are looking for the maximum amount of guaranteed lifetime income, a SPIA may be one of the best choices
available. The tradeoff in this case is flexibility. By purchasing a SPIA, investors convert an asset into a guaranteed
income stream, and any additional access to that asset may be severely restricted.
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Building Your Future | Strategies and Products for Retirement Income Planning
A deferred income annuity (DIA) is a tax-deferred life annuity where payments do not begin until years into
the future. A typical contract may start payments at age 80 or 85 for people who invest at age 60. Alternatively,
contracts may starts payments at age 65 or 70 for people who invest at younger ages, such as 45 or 55. Once
payments start, they continue for your lifetime. Depending on the contract, there may or may not be a death
benefit if you die before the first scheduled payment. Either a single premium or multiple premiums can be used
to fund a DIA contract.
Heres an example: A 60-year-old man can obtain an advanced life deferred annuity today that pays $8,000 a month
for life starting at age 85 for a single premium of about $100,000. If he lives to age 95 he will have received $960,000.
DIAs are highly efficient and require a relatively small initial investment because income will not begin until later
in life. DIAs also provide a number of additional benefits, including reducing the financial risk of outliving your
resources and simplifying financial planning. Financial planning is simplified because the purchase of a DIA can
divide your retirement into two periods: from ages 60 to 80, and beyond age 80. It is generally easier to plan for
your first 20 years of retirement (using current investments and Social Security) versus an uncertain lifespan. Also,
DIAs can provide the client with a guaranteed income stream throughout their whole retirement, simulating the
income provided by a traditional pension.
In determining how to invest, it is important to identify basic expenses and expected income from other sources.
You should also factor in inflation to help determine the amount of income needed from the annuity. Since the
annuity is a long-term investment, you will need to maintain sufficient liquidity to cover unexpected expenses.
DIAs should only be purchased by investors in good to excellent health since they stand to gain the most benefit.
DIAs are generally a cost-efficient way of funding an extended retirement and protecting lifestyle. In addition,
if you only have enough resources to fund the first two decades of retirement, but not enough to maintain your
lifestyle over a longer period of time, you may greatly increase financial security through this product.
Insured Income Products
25
Americans are living longer. From 1980 to 2010, life expectancy at age 65 improved by about three years on
average and is projected to continue to improve by several additional years during the next few decades, according
to the Social Security Administration. Longer lifespans increase the probability of outliving retirement savings.
In addition, as life expectancies increase, the number of individuals being diagnosed with Alzheimers or other
impairments that require some form of long-term care is also increasing. To help address this issue, long-term care
insurance has become a valuable financial planning tool.
A big problem is that the cost of extended care during retirement is increasing much faster than inflation and can
quickly erode your retirement assets. Below are the 2013 average costs of care in the United States7:
$207/day for a semi-private room in a nursing home
$230/day for a private room in a nursing home
$3,450/month for care in an Assisted Living Facility (for a one-bedroom unit)
$19/hour for a Home Health Aide
$18/hour for Homemaker services
$65/day for care in an Adult Day Health Care Center
These costs can dramatically impact your financial situation during retirement. As a result, it is important to
consider the possibility that you could need these types of services at some point in your life. A long-term care
insurance policy may help cover expenses and provide peace of mind. Important to note is that long-term care is
not just for 24-hour care in an extended care facility. It covers a broad range of services, including:
Home Health Care
Alternative Care Services
Assisted Living
Adult Day Care
Caregiver Training
Homecare Services
Personal Care
Hospice Care
Care Planning
7
26
Building Your Future | Strategies and Products for Retirement Income Planning
There are two types of payout options utilized in long-term care policies. The first is a indemnity policy type
that will pay a certain dollar amount monthly no matter how small or large your claim. The second is an expense
reimbursement policy, which is generally less expensive, but only covers the exact amount of your expense.
There are also two ways an individual can purchase long-term care insurance:
Standalone Policy: Provides the coverage amount that best suits your long-term needs along with an optional
cost of living adjustment. A portion of the premiums is deductible for income tax purposes (generally the
amount in excess of the Adjusted Gross Income). Money paid out for claims is not taxable; however, for a
per diem policy, amounts in excess of the annual IRS cap are taxable.
Combination Annuity: The Pension Protection Act of 2006 authorized new tax advantages for combination
annuities. As of January 1, 2010, you can purchase a non-qualified deferred annuity with a qualified longterm care rider. Withdrawals from your annuity to pay your long-term care rider premiums, as well as
payments (including any tax-deferred earnings) to pay covered long-term care expenses, may be income
tax-free. The annual cap for an indemnity long-term care rider also applies. Any remaining cash value in the
annuity will pass to beneficiaries upon death.
1035 Exchange: Rules may allow you to exchange a non-qualified deferred annuity for a standalone longterm care insurance policy or a combination annuity, which could convert tax-deferred annuity gains into
tax-free payments for long-term care related expenses. Cash values from a life insurance policy may also be
exchanged for a standalone long-term care insurance policy or a life insurance policy that offers a qualified
long-term care rider.
cover increases in health care costs that could potentially have an impact on your retirement
Pincome
rotectionandthatyourwillestate.
Pcosts
otentialof care.to ensure a higher quality of care and services versus making sacrifices down the road due to higher
products offer the ability to hedge the financial risk of long-term care, while preserving assets in
Ccase
ombination
long-term care benefits are not needed.
RISKS:
27
A Stand Alone Living Benefit (SALB), also known as a Contingent Deferred Annuity, provides guaranteed
lifetime income in a manner similar to that provided under a guaranteed lifetime withdrawal benefit (GLWB),
but without the need to purchase a variable annuity. Instead, the purchaser invests in a portfolio of mutual funds,
Exchange-Traded Funds (ETF) or managed accounts holding them in a brokerage or custodial account owned
by him or her. A separate guarantee of lifetime income, the SALB, provided by the insurance company provides
protections similar to those under the GLWB, including comparable benefit payments, market participation and
the opportunity for increases in annual income resulting from market performance of the portfolio, both before
and after retirement. When retirement income is needed it is taken first in the form of allowable withdrawals
from the investment portfolio, and only when and if the account is exhausted, because of longevity and/or poor
investment performance, are payments made under the SALB by the insurer.
Thetax treatment under a SALB can be significantly different than that of a variable annuity. The taxation of partial
withdrawals as a capital gain or loss and other favorabletax attributes (qualified dividend treatment and step-up at
death) of the investment portfolio is not affected by the presence of the SALB. In addition, because the withdrawals
come from a portfolio of mutual funds or ETFs, the 10 percent tax penalty for distributions prior to age 59 1/2
does not apply. If and when payments are made by the insurance company under the SALB such payments receive
exclusion-ratio treatment under the rules pertaining to the taxation of annuities.Of course, if the SALB is issued
in connection with a qualified retirement arrangement (e.g. an IRA), the tax rules for the applicable qualified
account would apply.
returns and principal value of the associated portfolio will fluctuate so that the value of your
Thinvestments,
e investmentif redeemed,
may be worth more or less than their original value.
are subject to the claims-paying ability of the issuing insurance company. If the insurance
Acompany
ll guarantees
becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage
provided by your states insurance guarantee association.*
* This risk extends specifically to the insurance features and not the investments.
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Building Your Future | Strategies and Products for Retirement Income Planning
INCOME-PRODUCING INVESTMENT
PRODUCTS
OVERVIEW
In this section we will cover some of the most common investment products that are designed
to produce income. These products will differ from the insured income vehicles (covered in the
previous section) in that resulting income levels may fluctuate due to the associated market risks.
As you continue to explore the different options available for creating income it is important to recognize that no
single product or strategy alone may be the right answer for retirement income. By diversifying among various
income products and strategies you can help offset risk in addition to maximizing your income potential.
The income-producing investment products covered in this section include:
29
Financial advisors and investors have long used mutual funds to generate income in retirement. Historically, two
types of mutual funds dividend-paying stock funds and bond funds have created consistent non-guaranteed
income* for investors. Additionally, other categories of mutual funds are commonly used to generate cash flow
when linked with systematic withdrawal programs.
Within the past few years, a new fund category called managed payout funds has emerged that is designed to
conveniently generate long-term sustainable income. Both types of managed payout funds maturity date and
endowment can help provide you with a consistent income to meet your spending needs.
This section will describe in more detail this new category, as well as the more traditional dividend-paying stock
funds and Treasury inflation-protected securities (TIPS) mutual funds.
BENEFITS:
Seeks to turn savings into predictable monthly distributions for a defined period of time.
Income is typically adjusted for inflation.
Full liquidity.
RISKS:
Income is non-guaranteed.
Payments are not guaranteed to last for your lifetime.
Potential for income volatility.
* Past performance does not guarantee future results
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Building Your Future | Strategies and Products for Retirement Income Planning
BENEFITS:
Has the potential to generate a predictable cash flow while preserving and growing principal.
Full liquidity.
Can choose different payout percentage levels based on underlying investment objectives.
RISKS:
Income is non-guaranteed.
Payments are not guaranteed to last for your lifetime.
Potential for income volatility.
31
Dividend-paying mutual funds are common investments for retirees because they are designed to generate regular
income. These funds generally invest in companies that have a history of generating high dividend yields and/or
dividend payment stability. With these funds:
Dividends are paid directly to you from the funds (often quarterly), or can be reinvested.
You can buy dividend-paying mutual funds in low or odd dollar amounts, and can automatically reinvest
income witout sales charges.
Funds provide you with income and investment diversification. Individual stock dividends can be reduced
or suspended by the company at any time. By investing in many different companies, the funds reduce
volatility and risk.
Some funds diversify even further by investing in bonds, money markets and real estate investment trusts
(REITs).
Dividend-paying funds are generally suitable if you:
Need regular cash flow
Desire liquidity
Want to preserve principal for estate planning goals
These funds may not be suitable if you have very specific fixed income needs and have a low tolerance for income
volatility.
BENEFITS:
preservation with growth potential, but only if your income needs are equal to or less than the
Sdividends
eeks principal
paid.
Full liquidity.
Diversification of income sources among many companies.
RISKS:
Income is non-guaranteed.
No longevity protection.
Potential for income volatility.
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Building Your Future | Strategies and Products for Retirement Income Planning
BENEFITS:
Full liquidity.
Provide a level of inflation protection.
RISKS:
33
DIVIDEND-PAYING STOCKS
If you are looking to generate a yield from your investment portfolio, you may want to consider buying dividendpaying equities. The issuing company pays a portion of their cash flow to you in the form of dividends on either
a monthly or quarterly basis. From a total return perspective, you may also benefit from any appreciation in the
stocks price. As a result, dividend-paying stocks not only provide you with income, but they can also provide
meaningful growth potential over the long-term.
Companies that pay dividends tend to be large-capitalization (large cap), well established firms with relatively
stable cash flows and predictable earnings. Unlike interest paid by bonds, equity dividends can fluctuate either
positively or negatively at the issuing companys discretion. In some cases, companies increase their dividend
depending upon company performance and business outlook.
Since dividends are not guaranteed, you should carefully evaluate each companys investment merits, financial
strength (balance sheet, income statement, etc.), management team, as well as their dividend track record. It may
make sense to diversify across several companies in order to spread your risk.
DIVIDEND-PAYING STOCKS
BENEFITS:
34
Building Your Future | Strategies and Products for Retirement Income Planning
PREFERRED STOCKS
If you are looking for the opportunity to generate greater income than you could with comparably rated corporate
bonds, you may want to consider preferred stocks. When you purchase a preferred stock, you may benefit from
appreciated value of the underlying security in addition to a set dividend payment. However, you must also
recognize that the dividends paid are treated as ordinary income for tax purposes. Since preferred stocks are
traditionally purchased for income, they are typically traded less frequently than common stocks, resulting in
lower price volatility.
As the name implies, preferred stock takes priority over common stock in the capital structure (and also assets if
for some reason the underlying company is liquidated). Many consider these securities to have both equity and
debt properties since most issuing companies pay a fixed dividend on shares so long as funds are available. In
addition, some preferred stock issuing companies may defer dividends to a later date if the companys financial
position prevents disbursing the dividend when promised.
PREFERRED STOCKS
BENEFITS:
Interest rate risk: preferred stocks typically depreciate in a rising interest rate environment.
No voting rights.
Increased credit risk due to preferred stocks subordinated position in the capital structure versus bonds.
Market risk as the price of the underlying security will fluctuate.
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Building Your Future | Strategies and Products for Retirement Income Planning
Inflation and
Longevity Risk
RISK
TOLERANCE
Market Risk
Most Important
Goal
What Do You
Want To Do
Daily Living
Expenses
Retire When
and Why
Investment
Performance
Expectations
INCOME
NEEDS
Health Concerns
Housing/Relocation
Anticipated
Expenses
FINANCIAL
REVIEW
Savings and
Investments
Career, Working
and Volunteering
Gifting, Wills,
Grandchildren, Etc.
CLIENT LEGACY
Planning for and making the transition to retirement is truly a once-in-a-lifetime experience. While the shift to
living in retirement can be complex and demanding, it does not have to be unduly difficult or a time of high anxiety.
Whether you are going it alone or working with an experienced financial professional, the keys to a successful
retirement are to be prepared, adaptable, and open to a wide range of solutions that can help offset many of the
risks that you may encounter. Insured retirement solutions and other guaranteed or risk management products
can be valuable tools in helping assure that retirement goals can be met. The starting point is to recognize the risks
associated with retirement and be aware of the solutions that can help mitigate these concerns. By working with
a financial professional to build a holistic retirement plan, you can put yourself on a path to life-long financial
security. Use the following checklist to start an informed conversation with your financial advisor about your
retirement needs and goals.
Source: GDC Research and Practical Perspectives
Putting It All Together
37
FOR INVESTORS:
IRI TIPS
RETIREMENT REALITIES CHECKLIST
Retirement is not a static point in time. It is a potentially decades-long period during which many factors can have a
significant impact on your financial situation. To help prepare you to weather these situations, review IRIs Retirement
Realities Checklist with your financial professional, who can structure a long-term plan to meet your needs.
Determine your Sources of Guaranteed Income
Done
To Do
Social Security and traditional pensions were long considered the backbone of a retirement income plan,
as both provide guaranteed lifetime income. Yet, the roles of these two sources are diminishing over time.
IRI data shows that less than 40 percent of Boomers currently younger than age 60 expect Social Security to
comprise a major source of their retirement income. Additionally, the number of defined benefit plans in the
marketplace dropped 66 percent between 1985 and 2010. Guaranteed income solutions can help cover your
everyday, essential expenses during retirement, and help you lessen some of the common risks associated
with an extended life in retirement. Source: 2011 IRI Fact Book, pg. 98
Determine your Sources of Non-Guaranteed Income
Done
To Do
This includes stocks, mutual funds, bonds, commodities, inheritances, and payments from company savings
plans such as a 401(k) plan. It may also include other income sources such as employment or starting a
business. Interest, dividends, and other gains help grow your overall investment portfolio, yet offer no
guarantees on principal or earnings. Knowing the sources of non-guaranteed retirement income available to
you can help your advisor construct a plan that may offer principal and income protection to help preserve
some of these gains. Note that non-guaranteed income is susceptible to sequence of returns riskthe risk of
running out of money due to low performance in the early years of withdrawalsand asset allocation risk
the risk of investing too conservatively or aggressively to sustain your portfolio for the long-term.
Prepare for Social Security
Done
To Do
The decision when to begin collecting Social Security benefits should not to be taken lightly. While many
people are eligible to begin taking Social Security benefits at age 62, delaying benefits until future years can
increase the amount of guaranteed income you will ultimately receive. It is important to keep in mind that
if you elect to commence your Social Security retirement benefits at age 62, your benefit payment amounts
will be reduced by 25 to 30 percent, severely curtailing one source of lifetime income. Sources: Social Security
Administration
Prepare for Longevity Risk
Done
To Do
None of us know how many years we will live. The longer one lives, the greater the need to make sure our
assets are sufficient to last throughout our retirement years. In general, if both you and your spouse are now
age 65, there is a 50 percent chance that one of you will live to age 92, and a 25 percent chance that one of
you will live to age 97. Many investments you may own do not assure that funds will be available for as long
as needed. Ask your financial advisor about supplementing your retirement investment portfolio with a
guaranteed income product.
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Building Your Future | Strategies and Products for Retirement Income Planning
Done
To Do
Prepare for Market Uncertainties
The market downturn in 2008-2009 and the subsequent recession had a significant impact on both everyday
living expenses and retirement savings. Nearly one-half of Baby Boomers found it more difficult to pay
for essential items, such as food, gas, and medication, and one-quarter had difficulty paying their housing
expenses. Many individuals made premature withdrawals from their retirement savings accounts, cutting
into their nest eggs. Although no one can say if and when a market downturn of this magnitude will occur
again, the ups and downs inherent in the financial markets must be considered when saving and living
in retirement. Learn your risk tolerance so that you and your advisor can select the investments most
appropriate for you, as some financial products are more susceptible to market swings than others. Source:
Prudential Financial
Prepare for Inflation
Done
To Do
The effects of inflation can easily erode your spending ability over time. According to the Bureau of Labor
Statistics, the inflation-adjusted equivalent of $100 in 1991 is $166 in 2011. Although an annualized increase
in prices of 3 percent does not seem like much, it can add up considerably over a retirement period that lasts
several decades, requiring a greater source of cash flow just to meet basic expenses. Source: Bureau of Labor
Statistics
Done
To Do
Prepare for Tax Risk
It used to be conventional wisdom that tax rates would decrease upon retirement due to a reduction in
personal income. That is no longer the case. The risk of rising tax rates must be considered when building a
retirement strategy, as it can set back a long-term savings and income plan if left unchecked. Additionally,
the risk of safety net programs, such as Social Security or Medicare, being modified in a deficit situation
makes sound planning of even greater importance.
Done
To Do
Prepare for Health Care Costs
As publicized over the past several years, health care costs continue to grow. While Medicare provides
medical insurance to most Americans over age 65, it does not provide complete coverage. Out-of-pocket
medical expenses for those covered by Medicare are expected to exceed $4,300 per person and $8,600 per
couple per yearand these costs are expected to rise. Source: 2011 IRI Fact Book, pg. 9,11
Done
To Do
Prepare for Long-Term Care Costs
Statistics show that two-thirds of individuals over age 65 will need long-term care services at some point
in their lives. Costs for home health care are generally not covered by Medicare, and nursing home costs
are generally covered by the government after an individual spends down his assets. Preparation for these
contingencies is key. Long-term care insurance is one way of covering these costs, although premiums and
benefits vary widely. Consult your financial advisor for your long-term care funding options. Source: 2011
IRI Fact Book
Done
To Do
Prepare for Leaving an Inheritance
Leaving a legacy is highly important to many Boomers. IRI has found that 62 percent of Boomers believe
that it is very important or somewhat important to them to leave an inheritance to their loved ones. The
simultaneous planning for their personal security and for those to whom they wish to leave a bequest requires
a carefully constructed strategy that is monitored regularly. Advisors who provide estate planning services can
help guide you through this process.
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The Insured Retirement Institute (IRI) does not intend this publication to be a solicitation related to any
particular company, nor does it intend to provide investment, legal or tax advice. Investors should consult with
their own investment, legal or tax advisors regarding the appropriateness of investing in any of the securities or
investment strategies discussed in this publication. Nothing herein should be construed to be an endorsement
by the IRI of any specific company or as an offer to sell or a solicitation to buy any security or other financial
instrument or engage in any investment strategy.
2014 Insured Retirement Institute (IRI). All rights reserved. No part of this publication may be reprinted or
reproduced in any form for anyy purpose other than education without the express written consent of IRI.
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Building Your Future | Strategies and Products for Retirement Income Planning