What Should I Do Now A Registered Investment Advisor Member FINRA/SIPC
The Current Environment
Common Investor Challenges
What to Do Now
Follow a Comprehensive Process
Investment Outlook: A Mix of Clouds and Sun
Strategies for Meeting Your Needs
A Snapshot of the Economy and Financial Markets 2009 Sources: FactSet; Dow Jones Industrial Average; S&P 500 Index; Home Values: Zillow Real Estate Market Reports; Bonds: Barclays Capital US Aggregate; Unemployment: Bureau of Labor Statistics Dow Jones 22.7% S&P 500 26.5% Home Values 5% US Bonds 5.9 Unemployment Rate 10% 2010 Dow Jones 15% S&P 500 14% Home Values 5% US Bonds 6.5 Unemployment Rate 9%
Investor Fears Are Tied to Recent Declines in the Markets
S&P 500 - Oct 2007 to March 2009
667 1565 57% decline Source: Yahoo Finance The S&P 500 Index is an unmanaged index which cannot be invested into directly. Past performance is not guarantee of future results.
Markets Have Rebounded, But … 667 1336 100% increase But have investors benefitted from these gains? S&P 500 - March 2009 to February 2011 The S&P 500 Index is an unmanaged index which cannot be invested into directly. Past performance is not guarantee of future results. Source: Yahoo Finance
The Headlines Aren’t Helping Danger! Falling middle-class incomes Home prices falling again Will Baby Boomers Bankrupt Social Security? Indices Tumble on Fears about Egypt Fear of Catastrophic Crash Despite Rising Bull Market
Historic View of Market Recoveries Source: First Trust
Where Are Investors Putting Their Money? Source: 2010 Spectrum Group
Source: 2010 Spectrum Group What Are Their Retirement Concerns?
Will You Have Sufficient Income in Retirement? Source: 2010 Spectrum Group
How Are Individual Investors Performing?
Consider the Impact of Emotions Common Behavioral Issues for Investors Fear and Greed Overconfidence Short-Term Perspective Familiarity Fallacy Chasing What's Hot
What to Do Now
Big picture outlook
Special family concerns
Sensitivity to market volatility
Comprehensive research recommendations and tools
Asset allocation strategy
Review reports and statements
Account opening process
Manager type selection
Investment manager selection
Designed For You 4. Review 1. Discover 2. Recommend 3. Implement Follow a Comprehensive Consulting Process
A Team Approach: You, Your Advisor and LPL Financial Research
LPL Financial Research – The Foundation
LPL Financial Research consists of seasoned and accomplished industry veterans, comprising one of the largest and most experienced research groups among independent brokerage firms.
They believe in:
Conflict-free, actionable investment guidance
Timely economic and market perspectives
Effective asset allocation positioning
An investment process based on fundamental, valuation, and technical analysis
Strong security-level due diligence
The importance of portfolio construction
Visibility into their process
A Mix of Clouds and Sun Outlook 2011
Investors will play it safe
Inflows to riskier market will be anemic, contributing to modest performance for both stocks and more aggressively postured bonds.
Single-digit gains for stocks as earnings growth slows and valuations remain under pressure
Single-digit gains for bonds and yields remain range-bound
The Year of Range-Bound Returns With 2011 looking like neither a screaming bull market nor a raging bear market, investment opportunities will be largely driven by key market themes that will likely emerge to drive various sector and asset class returns.
Reflation is one unmistakable theme that should define the early part of the year
Portfolio strategy is crucial to successfully navigating volatile financial markets in 2011
Asset Allocation: Making Tactical Decisions The LPL Financial Research team believes that fundamental, valuation, and technical factors form the basis of a sound investment-decision making process.
Weaker US Dollar and Higher Inflation:
Emerging Market Stocks and Bonds
Opportunities During Reflation: Asset Classes to Consider International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors The fast price swings of commodities will result in significant volatility in an investor’s holdings. High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors. Investing in Real Estate Investment Trusts (REITS) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Stock investing involves risk including loss of principal Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Seeking a Higher Yield
Emerging Market Bonds
Opportunities During Volatile Markets: Assets to Consider Investing in Real Estate Investment Trusts (REITS) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principal There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.
Strategies for Addressing Your Needs
Mr. & Mrs. Green – Age 60 and retiring in 5 years
Annual Income Sources at Retirement
Social Security Payment $ 14,400
Pension Payment $ 24,000
CD $ 50,000
Stock Account $ 75,000
Total Investment Accounts $1,525,000
Estimated Annual Expenses During Retirement
Fixed Expenses $ 84,000
Discretionary Expenses $ 18,000
Mr. & Mrs. Green – Age 60 and retiring in 5 years
Protected income investment accounts for their fixed expenses
Income with moderate growth investment accounts for discretionary expenses
Case Study – Income Needs Analysis Step 1: Determine average expenses and income needs This is a hypothetical example and is not representative of any specific situation. Your results will vary. Basic (Food, Clothing, Shelter) Lifestyle Total average expenses per year Basic (Food, Clothing, Shelter) Lifestyle Total annual guaranteed income goal $84,000 $84,000 $18,000 $102,000 $0 $84,000 5 Expected income goal per year at retirement Retirement income goal to be realized in (years)
Case Study – Income Needs Analysis Step 2: Analyze current income for shortfalls This is a hypothetical example and is not representative of any specific situation. Your results will vary. Qualified income (Pensions, Annuities, etc.) Non-qualified income (Social Security, etc.) Total income Current income Income goal Income shortfall $24,000 $14,400 $38,400 $84,000 $45,600 $38,400 Expected current income sources at retirement Expected income shortfall at retirement
Case Study – Income Needs Analysis Step 3: Inventory current assets Qualified assets (IRAs, SEPs, 403b plans, 401k plans) Non-qualified assets (Mutual Funds, Stocks, Bonds, CDs) Insurance-based assets (Variable Annuities, Insurance products)* *Can be qualified or non-qualified Total $950,000 $575,000 $0 $1,525,000
What is a variable annuity?
A variable annuity is an investment product with an insurance wrapper that offers tax-deferred growth, professionally managed investment portfolios, a death benefit and flexible withdrawal options that can help create a retirement income stream for life.
Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on claims paying ability of the issuer. They carry surrender charges, mortality and expense risk charges, administrative charges as well as investment fees and charges.
Variable annuities combine investing flexibility and a predictable income stream.
By employing a variable annuity as part of your overall retirement plan you can maintain your participation and flexibility in the equity market, and through the use of optional income features you can also secure a predictable income stream for the rest of your life.
Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Variable Annuity as an Option for Income
Variable annuities with living benefits:
A variable annuity with a living benefit may be a potential strategy for you to help meet your guaranteed income goal.
What is a living benefit?
Living benefits are optional insurance features available on annuity contracts for an additional cost . They can offer a guaranteed income stream, the return of your premium or both depending upon the benefit. Guarantees are subject to the claims paying ability of the issuing insurer. They have limitations and restrictions such as minimum holding periods and age requirements.
There are different types of living benefit riders available in the marketplace with varying features and benefits. Some specialize in providing income immediately while others can offer benefits for deferring withdrawals until a later date. Product availability may be a factor depending upon your needs.
All living benefit options have specific guidelines and restrictions. For example, if you withdraw more than is allowed under the rider you can run the risk of decreasing or losing your benefit. As a result, it is important to fully understand all of the features by reviewing the material and prospectuses carefully.
Variable Annuity Living Benefits as an Option for Guaranteed Income
With a variable annuity, an investment component exists in a managed pool of assets, called “subaccounts,” that comes with the insurance contract intended to offer various protection features, such as a death benefit, and other available options for an extra charge or fee, often called riders . As with a fixed annuity, earnings grow tax-deferred, meaning taxes won’t be due until you begin receiving payments. In exchange for your investment, the insurance company agrees to ay a stream of income over time, depending on the contract chosen. That stream can start immediately upon payment of a lump sum (with what’s called an immediate annuity) or start at some set point in the future (a deferred annuity), and the size of those payments is dependent on the performance of the underlying investment over time.
Benefits of owning a variable annuity:
Professional investment management
Variety of investment options
Flexibility to reallocate subaccount investment options without creating a taxable event
Optional living benefits provide insurance features that can provide either a guaranteed income stream or the return of your investment for an additional fee
Death benefits usually provide the return of your premiums adjusted for withdrawals
Tax-deferred growth of earnings until withdrawn (withdrawals prior to age 59½ may be subject to a10% IRS tax penalty)
No IRS annual limit to the amount invested
You might consider a variable annuity if:
You are willing to pay an additional premium to insure an income stream during your retirement
You would like a death benefit for your beneficiaries
You would feel more comfortable investing in the market if you had some predictable guarantees
Consider a Variable Annuity: Understanding the Strategy
Case Study – Income Needs Analysis Step 4: Reposition assets to pursue desired income goal Repositioning assets You could reposition a portion of your non-guaranteed assets into a product with optional insurance features that delivers guaranteed income. Such features carry additional cost and may be subject to restrictions and limitations. You have indicated that you plan on retiring in five years. By repositioning $983,374 of your non-guaranteed assets into an annuity strategy with a living benefit that offers a guaranteed 4% compounding interest growth rate and 3% for life at the time of your first withdrawal, you would generate an additional $45,600 in guaranteed income to cover your guaranteed income shortfall while still maintaining control of your assets. Income goal ($ per year) Income shortfall ($ per year) Assets Reposition $983,374 from non-guaranteed assets into assets to generate $45,600 in guaranteed income
Consider Sequence of Returns Risk Both scenarios average a 7% annualized return. Examples shown are hypothetical and are not representative of any specific situation and are not indicative of future predictions of the performance of any investments. Your results will vary. All income is assumed reinvested . This is a hypothetical example and is not representative of any specific situation or product. Your results will vary. The hypothetical rates of returns used do not reflect the deduction of the fees and charges inherent to investing.
Consider Sequence of Returns Risk Examples shown are hypothetical and are not representative of any specific situation and are not indicative of future predictions of the performance of any investments. Your results will vary. All income is assumed reinvested. Both scenarios average a 7% annualized return.
Case Study – Fixed Income Solution: Variable Annuity
Tax-deferred growth potential
Professionally managed investment portfolios
Flexible withdrawal options
Protected income stream
Step 5: Identify and understand the strategy
Your investment portfolio should reflect not only your financial needs but also your attitudes toward risk, savings, and wealth. Implementing an effective asset allocation potentially helps drive that balance between risk and reward. Your financial advisor has the tools and resources to help you decide which investment strategy can potentially meet your income needs. Case Study – Discretionary Income Solution
Economy and Financial Markets appear to be Improving
Uncertainty and Volatility Still Exist
Follow a plan and process
Re-assess your risk/reward positioning
Set appointment to review
Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus. Investors should consider the investment objectives, risks, charges and expenses of the investment company, variable annuity contracts and sub-accounts carefully before investing. The prospectus contains this and other information about the investment company, variable annuity contract and sub-accounts. You can obtain fund, contract and underlying sub-account prospectuses from your financial representative. Read the prospectuses carefully before investing. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. This material has been prepared by LPL Financial. Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Disclosures Neither LPL Financial nor any of its affiliates make a market in the investment being discusses nor has LPL Financial or its affiliates or its officers have a financial interest in any securities of the issuer whose investment is being recommended nor has LPL Financial or its affiliate managed or co-managed a public offering of any securities of the issuer in the past 12 months. Indexes: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. This material has been prepared by LPL Financial. Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
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