Creating A Retirement Paycheck Client Use
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  • This presentation focuses on the different ways to generate a retirement paycheck. Everyone’s vision of retirement is unique. However, most people would agree on the need for a retirement paycheck. Thinking about a retirement paycheck means transitioning our mindset from ‘savings’ to ‘income.’
  • In 2005, the National Association of Variable Annuities did a poll to learn what people identify as their greatest concerns about retirement. This slide shows the results of that poll. ‘ High health care costs’ came at number one. That is not surprising. Health care expenditures typically increase as people age. Second is ‘Running out of money.’ The fact that people are living longer increases the potential to run out of money. ‘ Inability to maintain standard of living’ follows ‘running out of money.’ Retirees income needs can change during retirement, as their lifestyles change. Most people would like to live in the lifestyle they’ve become accustomed to. ‘ Decline in social security payment’ comes next. Although an important source of retirement income, Social Security was never designed to fully support retirement income needs. The average monthly benefit paid to a retired male worker in October 2006 was $1,137, based on the ssa.gov website. ‘ Inflation’ was also identified. Inflation erodes buying power over time. For example, one dollar in 1980 is worth 41 cents in 2007, based on the US bureau of labor statistics for all urban consumers. All of these relate to income.
  • It’s really nothing new that people are living longer. We need to think about how living longer impacts retirement—income and assets need to last longer. This chart includes possibilities. For example a 65 year old male has a 50% change of f living beyond age 85, and a 25% chance of living past age 92. For a 65 year old woman, there’s a 50% chance of living to age 88, and a 25% chance of living to age 94. For couples, there’s a 25% chance of one of them living to age 97. Let’s put some scope to that—for someone retiring at age 65, that means more than thirty years of income. For someone retiring at age 60, that’s 37 years of income. Most people don’t start saving at age 22. The relation ship between the number of years savings and number of years in retirement is changing.
  • This slide shows the impact of inflation. Assuming a 3.5% inflation rate, one thousand dollars of income in 2010 has about $200 of buying power in 2030.
  • The times have certainly changed. The landscape of retirement has changed dramatically over the last 20 years. Note: Each bullet point phases in. DB = Defined Benefit plans DC = Defined Contribution plans
  • Why are retiree’s anxious and concerned? There are several factors that retiree’s must deal with, and in most cases, for the first time. Retirement changes many things in one’s life and can create many challenges that retiree’s must face. No more paycheck - the regularity of a company paycheck no longer exists Identifying income sources - pensions and social security are the obvious one’s, but if it’s not enough, where else will retirement income come from? Transition from saving to spending – years of saving have created a nice nest egg, how do you turn this into a retirement income plan Drawing down investment assets – this is critical, clients should be somewhat cautious and have a strategy in plan so they do not exhaust their assets Possible tax law considerations - this may change the investments they choose to liquidate entering and throughout retirement Investment risk & inflation – these are two concerns that are consistently listed as a retiree’s concern during retirement. How should their investments be allocated to protect their principal but still create some growth? Are their portfolios and income streams prepared for the impact of inflation over a retirement that could potentially last 20 years or more? Health and long-term care concerns – how will they fund these ever-increasing expenses?
  • If you consider marriage, kids and retirement as three major life changing events, look where current retirees would rank retirement on the scale of the most difficult adjustment to make. Not only is this time in a person’s life complex, but it’s also one of the most anxious times in a person’s life.
  • In addition to all these challenges, most individuals don’t have a plan for how to take their income in retirement. 78% of consumers in LIMRA’s Consumer Preferences for Retirement Planning Advice study Recommendation by the advisor do not have a plan to transform their retirement savings into a steady stream of retirement income. People at a critical juncture need some education on some of the ways to create a retirement paycheck.
  • So where will the retirement income come from? Some or all of these will be the sources may be used at some point to create their retirement paycheck.
  • If a person plans on withdrawing from your retirement savings for a long period of time, it is important to examine the effect various withdrawal rates may have on a portfolio. Several factors need to be examined when determining an investor’s withdrawal rate. The answer may depend upon the portfolio mix, how long an investor expects to withdraw from the portfolio, and the investor’s risk aversion and consumption patterns. This image looks at a hypothetical 50% stock, 50% bond portfolio and the effect various inflation-adjusted withdrawal rates have on the end value of the portfolio over a long payout period. Each hypothetical portfolio has an initial starting value of $500,000. It is assumed that a person retires on December 31, 1972 and withdraws an inflation-adjusted percentage of the initial portfolio wealth ($500,000) each year beginning in 1973. As illustrated, the higher the withdrawal rate, the greater the chance of potential shortfall. The lower the rate, the less likely you are to outlive your portfolio. Therefore, early retirees who anticipate long payout periods may want to consider assuming lower withdrawal rates. Keep in mind that this slide shows taking withdrawals during a down market. If withdrawals were taken during an up market, the results would be different. Note: This is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of income and does not account for taxes or transaction costs. Each monthly withdrawal is adjusted for inflation. Each portfolio is rebalanced monthly. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. Bonds in a portfolio are typically intended to provide income and/or diversification. U.S. government bonds may be exempt from state taxes, and income is taxed as ordinary income in the year received. With government bonds, the investor is a creditor of the government. Stocks are not guaranteed and have been more volatile than the other asset classes. Stocks provide ownership in corporations that intend to provide growth and/or current income. Capital gains and dividends received may be taxed in the year received. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Source: Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and is considered to be representative of the stock market in general; Bonds—5-year U.S. Government Bond; Inflation—Consumer Price Index.
  • The word ‘annuity’ is used in most retirement income discussions. It’s important to clarify. Annuities are sold by life insurance companies An immediate annuity is a lump-sum used to buy an income stream. That income stream can be for a selected number of years, or for a lifetime. The income stream can be fixed or variable. In a few moments, I’ll describe the types of income plans available. The amount of the income stream is based on the amount of the lump sum, the type of income plan selected, and the age of the annuitant. The annuitant is the person on whose life expectancy the income plan is based. Annuities can provide guaranteed lifetime income. It’s important to remember that any guarantees in an annuity are backed solely by the claims paying ability of the issuer. Examples of when a person might buy an immediate annuity: At retirement, they might buy an immediate annuity with their 401(k), IRA or Roth IRA. Typically, once the lump sum is turned over to the insurance company, you cannot dip back into the unused portion.
  • While an immediate fixed annuity provides a consistent and steady income stream, the purchasing power of each payment can be reduced by inflation. The image above illustrates a hypothetical payment stream from an immediate fixed annuity. With an initial premium or purchase amount of $1,000,000, the annual income payments for a 65-year-old male in Illinois would be $78,588. The annual payments before inflation are represented by the straight line. People who enjoy the security of a steady and predictable stream of income may find a fixed annuity appealing. The drawback of a fixed annuity becomes evident over time. Since the payments are the same year after year, purchasing power is eroded. The second, curved line in the image represents the same payment stream after a hypothetical 3.1% inflation rate is factored in. This payment remains at a constant amount, it is no longer able to purchase as much due to inflation. The information presented herein is a hypothetical illustration and not indicative of any investment. The example assumes a male, age 65, living in Illinois, and a $1,000,000 premium payment. A quote for fixed annuity payments given these assumptions was obtained from WebAnnuities.com. The after-inflation results were calculated by Ibbotson Associates using the 1926–2003 annual inflation average of 3.1%. The annuity income guarantee is based on the claims-paying ability of the insurance company that issued the annuity product. Source: Fixed Annuity Payments—WebAnnuities.com; Inflation—Consumer Price Index.
  • Let’s contrast that with deferred annuities, which are also sold by life insurance companies.. A deferred annuity is a long-term investment. It can be funded with a lump sum or a series of deposits. Deferred annuities have two phases. The first is the deferral or savings phase. It’s the period of time when contract values accumulate. During the deferral phase, contract value grow tax-deferred. Withdrawals from a deferred annuity may be subject ordinary income and if taken before age 59 1/2 , a 10% IRS early withdrawal penalty. The second phase is the income phase. That is when the contract values are put into an income plan. The word ‘annuitization’ is also used to describe this phase. Like immediate annuities, these can be fixed or variable. Also, any guarantees are backed solely by the claims-paying ability of the issuer. Life insurance companies leverage risk sharing concepts…
  • This slide shows the fees that can be associated with deferred variable annuities. Recall, the fees and expenses associated with deferred variable annuities vary from issuer to issuer to issuer. The mortality and expense fee is an on-going asset based fee. Some contracts are structured so that the mortality and expense fees reduce over time. The portfolio fee is also an ongoing asset based fee. If applicable, a contract fee is typically a specific amount, charged once per year. Some issuers waive the contract fee at a specific contract value. Some contracts can be purchased with additional benefits or riders. These riders are typically on-going asset based fees. Some issuers offer purchase choices of a front-load or back-load design. A front-load design will have a one-time sales charge paid at purchase. If a sales load is paid, withdrawal charges do not apply. If a sales load is paid, the mortality and expense fee is lower than contracts that do not have a sales load. Withdrawal charges apply when money is taken out of the contract. They do not apply if a sales load is paid. On some contracts, the withdrawal charges expire after a certain number of years. Some contracts waive withdrawal charges in certain circumstances, such as a terminal illness. Some contracts offer a withdrawal charge free corridor, where a portion of the money can be taken out in a given year without having to pay withdrawal charges. Withdrawal charges are contractual, and are paid to the issuer. Any applicable taxes would also need to be paid on money taken out of an annuity.
  • Let’s contrast that with deferred annuities, which are also sold by life insurance companies.. A deferred annuity is a long-term investment. It can be funded with a lump sum or a series of deposits. Deferred annuities have two phases. The first is the deferral or savings phase. It’s the period of time when contract values accumulate. During the deferral phase, contract value grow tax-deferred. Withdrawals from a deferred annuity may be subject ordinary income and if taken before age 59 1/2 , a 10% IRS early withdrawal penalty. The second phase is the income phase. That is when the contract values are put into an income plan. The word ‘annuitization’ is also used to describe this phase. Like immediate annuities, these can be fixed or variable. Also, any guarantees are backed solely by the claims-paying ability of the issuer. Life insurance companies leverage risk sharing concepts…
  • In life insurance as well as annuities there is a concept known as risk sharing. Both products use a strategy of risk management or risk sharing. Life insurance protects against dying too soon. Annuities protect against outliving your income. How can life insurance companies offer annuities that guarantee lifetime payouts? Good question. The company doesn’t know how long you will live. How it works The concept of risk sharing makes the lifetime payout work . When you buy a lifetime payout annuity, you are sharing the longevity risk with others. The amount the annuity payment is determined by how much money each annuitant puts into the annuity, the type of payout chosen, interest rates, and his or her life expectancy. Some annuitants will die early, while others will live beyond their life expectancy. Annuitants who die sooner forego their future lifetime payouts, helping finance those members who live longer. Those who live a long time often benefit beyond the premiums they have paid.
  • The simplest distribution alternative is the lump sum payment, where the entire account balance is withdrawn. This may be the least effective from a tax or income management standpoint. There is a tax liability for the accumulated earnings, which may also include a federal penalty tax of 10% for withdrawals before age 59½. If the contract value is taken as a lump sum, all the taxes are due at once. Systematic withdrawal can appeal to those who require flexibility in their income stream. The value will continue to grow tax-deferred while allowing a person to draw income. The main drawback to this option is that there’s no guarantee a person won’t outlive their money. This type of payment may also be subject to certain charges and taxes. Annuitization is the process of exchanging the value of an annuity for the issuing company’s guarantee to provide income for a certain period, or for a lifetime. Annuitization is ideal for retirement income or to supplement other retirement income sources. Specified period—the income plan lasts the number of years selected. It is not tied to a lifetime. If the income plan is 20 years, and the annuitant dies in year 10, the income continues to the direct beneficiary until the end of the specified period. Life only--income continues as long as the annuitant lives. Joint & survivor life—income continues as long as two people life. At the death of the first person, income continues uninterrupted until the second individual dies. Life only with certain period—attaching a certain period to an income plan creates a minimum number of years for income to continue. That’s important. What if a person has a life only plan, and died the day after receiving the first payment. Income would cease, unless there is a certain period included. If there is a ten year certain period, and the annuitant died the day after receiving the first payment, the income would continue to the direct beneficiary for nine more years to fulfill the ten year certain period. The certain period is also available in the joint and survivor income plans. Although out talk does not include a full discussion of taxes, it is well established that annuity income is taxed as ordinary income. For tax qualified contracts, the entire amount received is taxable in the year received. Example—a person received $5,000 per month. Their taxable income for a given year is $60,000. For nontax-qualified contracts, the gain is taxed as ordinary income. The principal returned is not subject to taxation. The taxable gain is amortized over the life of the income plans. In a fixed income plans, each payment is a proportionate share of principal and gain. As I mentioned earlier, any guarantees are backed solely by the claims-paying ability of the issuer.
  • Annuities are an insurance product that can play an integral part in creating a retirement paycheck. Fixed income plans are typically intended to provide income for the life of the annuitant. In exchange for the insurance company’s guarantee of income, a lump sum amount is deposited into the annuity contract. Variable income plans in contrast, offer the annuitant the ability to receive payments that are pegged to a basket of stock and bond accounts that the client chooses. This type of plan offers the annuitant the potential for higher payments than those with a fixed income plan. It’s possible, however, that income payments could also fall below that of fixed annuities, so an annuitant must consider their ability to handle volatility in their income stream when purchasing a variable income plan. This option offers the potential of rising income that may outpace inflation, but also the possibility that a declining returns could affect or lower your monthly income. Fixed income streams offer certainty. However, inflation can erode buying power. Variable income plans offer the potential to keep pace with inflation. However, the payment amounts fluctuate. What happens when the two types of income streams are combined?
  • In this slide we have selected a time period that shows an increasing variable monthly benefit. There is more volatility with this option but over this time period selecting a 100% variable monthly benefit provided higher payouts than using the 25/75 mix or a straight fixed monthly benefit. As with all investing, no one really knows the “best” time to invest. Diversifying how you take your income stream is just as important as diversifying your portfolio in your accumulation years. But there is a level of risk with a variable income plan.
  • On the previous slide we’ve shown you the good. Now the bad. We consciously picked this time period just to show you that a potentially downward trend could also occur over a twenty year period. A variable income plan does not guarantee the payments will increase. The payments have the potential to go up and down. In this slide, you can see that variable income payments do not guarantee increased payments.
  • Through the combination of a fixed and variable income plans, a client may: Potentially increase payments over time – Possible inflation hedge Ease the volatility of overall income – A portion in a fixed plan may offset some of the volatility of the variable income plan Fluctuate monthly – Is the client comfortable? Mitigate interest rate risk – Variable income payments may be able to the effects of interest rate risk Additional notes: - Combining variable and fixed income plans allow for the potential increase in payments over time. - Client is not locked into one fixed plan, which may be purchased during a low interest rate environment and will not account for the effects of inflation. - There is no perfect time to purchase an immediate annuity and/or settle to a variable income plan, but diversifying the payments between income plans may limit the risks to the client’s overall retirement income need.
  • There are obviously a number of different solutions and mix that may be appropriate for the client. Work with the client to determine which mix of products are best for them in their situation.
  • There are obviously a number of different solutions and mix that may be appropriate for the client. Work with the client to determine which mix of products are best for them in their situation.
  • Between the immediate annuity and variable income plan, income plan Norm is at a starting point over $76,764. The immediate annuity income will remain fixed but the variable income plan provides the potential for increased payments. In this example the underlying variable investment is a multi-asset balanced fund. The immediate annuity income is based on Northwestern Mutual rates as of May 19, 2005. The variable income plan is based on the historical performance of a multi-asset balanced fund.
  • What if Norm had a spouse? One, he might need more income. Two, his spouse may have social security and pension income. Three, he might consider a joint and survivor lifetime income on the immediate annuity and the variable income plan. If Norm was more concerned about inflation that outliving his income, he might put a larger percentage into the variable income plan. If Norm was in poor health and not concerned about outliving his income, he might take a specified period annuity income plan, or not take an annuity income plan at all. If Norm was very uncomfortable with payments that fluctuate, he’d put less or nothing into a variable income plan. With the products available in the financial services marketplace today, it’s possible to create a retirement paycheck that is tailored to meet individual needs.
  • Today’s retirees face challenges previous retirees did not Many people do not have a retirement income plan Learning about some of the retirement income alternatives available can help people prepare for retirement.

Transcript

  • 1. Creating a Retirement Paycheck The Northwestern Mutual Life Insurance Company (Northwestern Mutual) Milwaukee, WI Firstname Lastname Title City, State Date Issuer: The Northwestern Mutual Life Insurance Company, 720 E. Wisconsin Ave., Milwaukee, WI 53202-4797 Principal Underwriter: Northwestern Mutual Investment Services, LLC, a wholly-owned company of The Northwestern Mutual Life Insurance Company 611 E. Wisconsin Avenue, Suite 300, Milwaukee, WI 53202-4797 (866) 664-7737, member NASD and SIPC. Not for use in NC, MS, OK, OR.
  • 2. Disclosures
    • The Northwestern Mutual Financial Network is the sales and distribution arm of The Northwestern Mutual Life Insurance Company, its subsidiaries and affiliates.
    • Issuer: The Northwestern Mutual Life Insurance Company, 720 E. Wisconsin Ave., Milwaukee, WI 53202-4797
    • Principal Underwriter: Northwestern Mutual Investment Services, LLC, a wholly-owned company of The Northwestern Mutual Life Insurance Company 611 E. Wisconsin Avenue, Suite 300, Milwaukee, WI 53202-4797, (866) 664-7737, member NASD and SIPC.
    • No investment strategy can guarantee a profit or protect against loss. The performance of variable funds is not guaranteed.
    • Withdrawals taken from an annuity before age 59 ½ may be subject to a 10% IRS early withdrawal penalty .
    • Income plans are backed solely by the claims-paying ability of the issuer.
    • Variable Annuities are sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before they invest. A Northwestern Mutual Investment Services Registered Representative can provide clients with a contract and fund prospectus that will contain the information noted above, and other important information that clients should read carefully before they invest or send money.
    • To be used with form number RR.V.A.FR.(0803), RR.V.B.FR.(0803), RR.V.A.BK.(0803), RR.V.B.BK.(0803), RR.V.A.BK.NGF.(0803), RR.V.B.BK.NGF.(0803), RR.V.B.MSNST.(0704), RR.V.A.FR.(0704), RR.V.B.FR.(0704), RR.V.A.BK.(0704), RR.V.B.BK.(0704), RR.V.B.MSNST.(0704), RR.V.A.FR.NGF.(0704), RR.V.B.FR.NGF.(0704), RR.V.A.BK.NGF.(0704), RR.V.B.BK.NGF.(0704), RR.V.B.MSNST.NGF.(0704), RR.V.A.BK.(0805), RR.V.B.BK.(0805), RR.V.A.FR.(0805), RR.V.B.FR.(0805), RR.V.B.MSNST.(0805), RR.V.A.BK.NGF.(0805), RR.V.B.BK.NGF.(0805), RR.V.A.FR.NGF.(0805), RR.V.B.FR.NGF.(0805), RR.V.B.MSNST.NGF.(0805), RR.V.C.NE.(1106), RR.V.A.FB.(1106), RR.V.A.FB.NGF.(1106), or state equivalent. Not all contracts available in all states.
  • 3. Retirement Concerns Source: National Association for Variable Annuities 2005 survey of 1001 respondents. Margin of error +/- 3%. 28% 24% 18% 16% 9% 5% High Health Care costs Inability to maintain standard of living Decline in Social Security payments Inflation Don't Know Running out of money
  • 4. Longevity Risk Retirees need to plan for longer life expectancies Age Couple (Both age 65) Source: Annuity 2000 Mortality Table; Ibbotson Associates 85 90 Female Age 65 Male Age 65 Lifespans 92 Age Age 85 85 88 90 92 100 90 100 100 95 94 95 95 97 50% chance 25% chance 50% chance 25 % chance 50% chance of one survivor 25% chance of one survivor
  • 5. The impact of inflation Rising prices eating away at your purchasing power Income 2010 Assumes 3.5% annual inflation rate. Actual results may vary. Source: Federal Reserve Banks, 2007. 2015 2020 2025 2030 $1,000 $800 $600 $400 $200 $0
  • 6. Changing Landscape
    • What was it like to retire in 1984?
    • Almost 65% of retirement income came from Social Security
    • Other retirement income was largely guaranteed by an employer
      • DB plans from high quality employers covered about 40% of households
      • DC plans covered only 22% of households
    • Healthcare expenses were largely covered by employee retirement health plans
    • Life expectancy at age 65 was 14.4 years for males and 18.6 years for females – longer longevity was not a major issue as most costs were covered by social security and DB plans
    Retirement income needs guaranteed for shorter life expectancies
    • What was it like to retire in 2005?
    • Social Security provides less than 40% of retirement income (and is likely to drop further)
    • Responsibility for other retirement income has shifted to individuals
      • DB plans only cover 19% of households - and many are under distress from under-funding and corporate bankruptcies
      • DC plans cover 55% of households - but 50% of households headed by a 45-55 year-old have saved less than $50K in retirement assets
    • Out-of pocket healthcare expenses are growing at 2-3x inflation, with growing shift toward individual risk sharing (e.g., HSAs)
    • 65 yr old female - 33% chance of living to 91 and a man 25% – most people don’t realize the impact of life expectancy on their retirement assets
    Increasing individual responsibility with an uncertain outcome Source: LIMRA International, 2005; SSA.gov
  • 7. Retiree Challenges
    • No more paycheck
    • Identifying income sources
    • Transition from saving to spending
    • Drawing down investment assets
    • Possible tax law considerations
    • Investment risk & inflation
    • Health and long-term care concerns
  • 8. Feeling of a difficult adjustment Marriage Parenting Retirement Source: LIMRA International, 2006 - based on an American demographics poll of men and women between ages 55-75. 14% 58% 28%
  • 9. Many people don’t have an income plan for retirement Source: LIMRA International, 2005. Sample: Consumers aged 50 to 75 with $50,000 or more in household investable assets.
  • 10. Where will retirement income come from?
    • Income generating investments (stocks, bonds or mutual funds)
    • Systematic Withdrawals (taking periodic withdrawals from an investment)
    • Social Security (Will it or won’t it be available?)
    • Qualified Plans (e.g. 401(k) and pension plans)
    • Alternative investments (e.g. business income, real estate income)
    • Annuities (e.g. immediate and fixed/variable deferred)
  • 11. Hypothetical value of $500,000 invested at year-end 1972. Portfolio: 50% large company stocks, 50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes. Annual inflation-adjusted withdrawal as a % of initial portfolio wealth 5 % withdrawal rate $100,000 $300,000 $500,000 $600,000 $0 $400,000 $200,000 1976 1980 1984 1996 1988 1992 1972 Systematic Withdrawals 6 % withdrawal rate 7 % withdrawal rate 8 % withdrawal rate 9 % withdrawal rate
  • 12. Immediate Annuity
    • Sold by life insurance companies
    • Lump sum buys an income stream
    • Any guarantees are backed solely by the claims-paying ability of the issuer
  • 13. Immediate fixed annuity payments Age Assumes a 65-year-old male living in Illinois and a $1,000,000 premium. Estimated annual payments are $78,588 adjusted for inflation of 3.1%. Quote obtained from WebAnnuities.com. Payment stream in real dollars from a $1,000,000 premium fixed annuity 65 70 75 80 85 90 95 100 Fixed annuity payments Fixed annuity payments (after inflation) Annual payment $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 This is a hypothetical example used for illustrative purposes and is not intended to represent the actual performance of a particular investment. The annuity income guarantee is based on the claims-paying ability of the insurance company that issued the annuity.
  • 14. Deferred Annuity (long-term investment)
    • Sold by life insurance companies
    • Lump sum or series of deposits
    • Fixed or variable
    • Any guarantees are backed solely by the claims-paying ability of the issuer
    • Fees and expenses vary from issuer to issuer
  • 15. Deferred Variable Annuity fees and expenses that can apply:
    • Mortality and expense fee (on-going asset-based)
    • Portfolio fee (on-going asset based)
    • Contract fee (can be ongoing or waived at a specific contract value)
    • Additional benefits and riders (ongoing asset based)
    • Sales load (one-time, asset-based)
      • if a sales load is paid withdrawal charges do not apply and mortality and expense fees are lower
    • Withdrawal charges (these apply if a sales load is not paid)
      • can expire after a number of years
      • some contracts waive these under certain circumstances
      • some contracts have a withdrawal charge free corridor
  • 16. Deferred Annuity (long-term investment)
    • Two phases
      • Deferral – (savings) period of time when contract values accumulate
        • Tax-deferred growth
      • Income – (annuitization) contract values are put into an income plan
    Withdrawals from an annuity may be subject to ordinary income tax and a 10% IRS early withdrawal penalty if taken before age 59 ½. All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
  • 17. Benefits of risk sharing
    • Mortality risk shared among large group
    • Payout based on mortality of multiple lives
    • Healthy survivors benefit from shared risk
    • Shared risk produces higher individual payout
  • 18. Annuity distribution options Specified period Life only Life with certain period Joint & Survivor Life Annuitization Income alternatives Lump sum Systematic withdrawal All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
  • 19. Types of annuity income streams
    • Fixed income plan
      • Guaranteed payment amount
      • Lifetime or specified period
    • Variable income plan
      • Payments fluctuate
      • Variable payments are based on the investment performance of separate account
      • Lifetime or specified period
    Any guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
  • 20. 20 Year Inflation Adjusted Payout Variable and Fixed Annuities: 1975-1995 Variable Monthly Benefit Fixed Monthly Benefit 25/75 Variable/Fixed Monthly Benefit Annuitizing $1,000,000 in 1975 at age 65 Immediate annuity rates are lifetime rates based on a 65 year old male with zero years certain. Past performance does not guarantee future results. No investment strategy can guarantee a profit or protect against a loss. Hypothetical example used for illustrative purposes only and does not represent the performance of any investment product or strategy. Does not reflect fees, expenses or taxes.
  • 21. Immediate annuity rates are lifetime rates based on a 65 year old male with zero years certain. Past performance does not guarantee future results. No investment strategy can guarantee a profit or protect against a loss. Hypothetical example used for illustrative purposes only and does not represent the performance of any investment product or strategy. Does not reflect fees, expenses or taxes. Variable Monthly Benefit Fixed Monthly Benefit 25/75 Variable/Fixed 20 Year Inflation Adjusted Payout Variable and Fixed Annuities: 1965-1985 Monthly Benefit Annuitizing $1,000,000 in 1965 at age 65
  • 22. Combining fixed and variable income plans can:
    • Potentially increase payments over time
    • Ease the volatility of overall income
    • Fluctuate monthly
    • Mitigate interest rate risk
    No single product was designed to meet all financial needs.  Evaluate a client's financial needs, goals and position, risk tolerance, and time horizon
  • 23. Norm Weston: A hypothetical case study
  • 24. Norm is age 70, widowed
    • Has $1.5 million of liquid assets
    • Goal of $75,000 of income in addition to his Social Security and defined benefit income
    • Norm’s is concerned about:
      • Inflation
      • outliving his income
    • Norm is a ‘balanced’ investor
    • Norm owns life, health, and long-term care insurance
    No single product was designed to meet all financial needs.  Evaluate your financial needs, goals and position, risk tolerance, and time horizon.
  • 25.
    • After careful consideration of Norm’s goals, time horizon, investment risk tolerance, and personal circumstances
    • Divide assets as follows:
      • 50% - $756,708 for immediate annuity
      • 17% - $250,000 variable income plan
      • 33% - $493,292 mutual funds
      • 100% - total
    This is a hypothetical example used for illustrative purposes and is not intended to represent the actual performance of a particular investment. Any guarantee in an annuity is backed solely on the claims-paying ability of the issuer. This is one possible solution. This solution may not be suitable for everyone. Evaluate your financial needs, goals, risk tolerance, and time horizon. One approach for Norm to consider
  • 26.
    • Immediate annuity generates $5,000 per month for life* (addresses longevity risk)
    • Variable income plan wi ll provide an initial monthly payment of $1,397 with the potential for increase and an inflation hedge** (addresses inflation risk)
    • Balanced portfolio of mutual funds provides flexibility (flexibility and liquidity)
    * Based on Northwestern Mutual Single Premium Immediate Annuity life income plan with 10 yr certain period, for interest rates in effect on 5/19/05. Rates change weekly. ** Based on rates as of 5/19/05 for a 3.5% AIR. Subsequent payments will be dependent on the sub-account performance. Any guarantee in an annuity is based solely on the claims-paying ability of the issuer . What does this do for Norm?
  • 27. No single product was designed to meet all financial needs.  Evaluate a client's financial needs, goals and position, risk tolerance, and time horizon. Single Premium Immediate Annuity payments are based on life income plan with 10 yr certain period, for interest rates in effect on 5/19/05. Rates change weekly. Variable Income Plan payments are based on rates as of 5/19/05 for a 3.5% AIR historical performance of the Balanced sub-account for the variable income plan illustration. The variable income plan data is not an illustration of future performance, but a representation of past performance. Variable Payments Fixed Payments A hypothetical case study A look at potential income
  • 28. ‘What if’ questions for Norm
    • Had a spouse?
    • Was more concerned about inflation than outliving his income?
    • Was in poor health and not concerned about outliving his income?
    • Was uncomfortable with a monthly income that fluctuates?
    • Did nothing?
  • 29. Summary
    • Today’s retirees face challenges previous retirees did not
    • Many people do not have a retirement income plan
    • Learning about retirement income alternatives available can help people prepare for retirement
  • 30. Thank you!
  • 31.