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Variable Annuities In Retirement
- 1. Heather Martin Preparingfor Retirement The Northwestern Mutual Life Insurance Company (Northwestern Mutual) Milwaukee, WI The Northwestern Mutual Life Insurance Company (Northwestern Mutual) Select Variable Annuity Presented by
- 2. Disclosures The NorthwesternMutual Financial Network is the sales and distribution arm of The Northwestern Mutual Life Insurance Company (Northwestern Mutual), its subsidiaries and affiliates. Northwestern Mutual variable contracts are sold through individuals who, in addition to being licensed life insurance agents f Northwestern Mutual are Registered representatives of Northwestern Mutual Investment Services, LLC. 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. Withdrawals taken from an annuity may be subject to ordinary income and a 10% IRS early withdrawal penalty if taken before age 59 ½. Income plans are backed solely by the claims-paying ability of the issuer. Variable contracts have limitations. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before they invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a contract and fund prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money.
- 3. Preparing for RetirementEveryone’s vision of retirement is unique Most would agree on the need for a retirement paycheck Transitioning from ‘savings’ to ‘income’ mindset One way to address any concerns is become familiar with products that can provide income
- 4. Retirement Concerns Source: National Association for Variable Annuities 2005 survey of 1,000 respondents. In a 2005 poll, people identified the following retirement concerns: 28% High health care costs 24% Running out of money 18% Inability to maintain standard of living 16% Decline in social security 9% Inflation
- 5. Retirement Concerns Theperformance of variable funds is not guaranteed. No investment strategy can guarantee a profit or protect against a loss. What you can do to help address them High health care costs Factor health care costs into your retirement income needs Running out of money Put a portion of assets into guaranteed lifetime income plans Inability to maintain standard of living Combine retirement income approaches to help match your standard of living to your income Decline in social security Increase personal savings in your pre-retirement years Inflation Participating in variable investments can give your savings the potential to keep pace with inflation
- 6. How long canyou expect to live in retirement? Source: Actuarial Tables—Life Expectancy - Treasury Regulations 1.72-9 . Life expectancy for men and women Years 0 5 10 15 20 25 30 55 60 65 70 75 80 85 Age Men Women
- 7. Where will retirementincome 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)
- 8. Risk of Periodsof High Inflation and Down Markets on Systematic Withdrawals Source: 2005 Ibbotson Associates, Inc. All rights reserved. Used with permission 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. Each monthly withdrawal is adjusted for inflation. Each portfolio is rebalanced monthly. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Source: Stocks – Standard 7 Poor’s 500; Bonds – 5 year US government bond; Inflation – Consumer Price Index. 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 6 % withdrawal rate 7 % withdrawal rate 8 % withdrawal rate 9 % withdrawal rate
- 9. Deferred Variable AnnuityGeneral Information Long-term investment Security sold by prospectus Issued by insurance companies Expenses vary between issuers sales charge or withdrawal charge mortality & expense fee portfolio fee Contract fee (may be waived at certain amounts) Tax-deferral Money taken out may be subject to ordinary income tax and a 10 % IRS early withdrawal penalty if taken before age 59½
- 10. Deferred Variable AnnuityThe two phases Accumulation phase, deferral phase, or savings phase – the period of time that contract values accumulate before they are put into an income plan During the ‘savings’ phase there may be a lump-sum or a series of payments Tax-deferral Annuitization or payout - putting the contract values into an income plan
- 11. Deferred Variable AnnuityWhat is guaranteed and what is not? Performance of variable funds - not guaranteed Death benefit - guaranteed Income plans - guaranteed All guarantees are backed solely by the claims-paying ability of the issuer
- 12. Key benefits ofan annuity in a retirement portfolio Can be used for both retirement savings and income Variable investment options Tax-free transfers among investment options Tax-free, automatic rebalancing ($10,000 or more in value) Guaranteed death benefit* Guaranteed income* * All guarantees in an annuity are backed solely by the claims-paying ability of the issuer. No investment strategy can guarantee a profit or protect against a loss. Withdrawals from an annuity may be subject to ordinary income tax and a 10% IRS early withdrawal penalty if taken before age 59½.
- 13. Retirement Income PlansVariety of choices Variable annuity Lump sum Specified period Single life Life w/certain period Joint life Systematic withdrawal Annuitization (Income) Variable annuitization All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 14. Retirement Income PlansExplained Specified period – receive income for the number of years you choose Income stops at the end of the period If the annuitant dies before the end of the period, income continues to the direct beneficiary until the end of the specified period All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 15. Retirement Income PlansExplained Single Life – income continues for as long as one person lives Joint & Survivor – income continues for as long as two people live What happens if the annuitant or annuitants dies only a few months after taking a lifetime income plan? All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 16. Retirement Income PlansExplained Certain period – guarantees that payments will be made for a minimum number of years Example Single life with a 10 year certain period Annuitant dies in year two—income continues to direct beneficiary for eight years to fulfill the 10 years Annuitant dies in year eleven---income stops All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 17. Retirement Income PlansExplained Can be fixed or variable Fixed do not change Variable payments fluctuate based on performance of underlying funds Once an income plan has began, the remaining values are not accessible All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 18. Retirement Income PlansExplained Mortality risk is shared among a large group Payout is based on the mortality of multiple lives Healthy survivors benefit from shared risk Shared risk produces higher individual payout
- 19. Retirement Income PlansThe importance of ratings Northwestern Mutual has been given the best possible insurance financial strength ratings from the industry’s third-party rating agencies: A++ A.M. Best (May 2006) Aaa Moody’s Investor Service (March 2006) AAA Standard & Poor’s ® (June 2006) AAA Fitch Ratings (August 2006) Third-party ratings are a measure of a company’s relative financial strength, but do not apply to the performance of the variable funds.
- 20. Establishing a PlaceholderAnnuity contracts that have guaranteed minimum income plan rates can establish a placeholder for future income These rates are carved into the contract How does this benefit you? All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 21. Establishing a PlaceholderWhen you decide to take an income plan, you are entitled to the higher of: current deferred annuity settlement rates guaranteed minimum payment rates Deferred annuity rates will generally be higher than immediate annuity rates All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 22. The Northwestern Mutual Select Variable Annuity Source: Morningstar® Principia Pro for Mutual Funds and Morningstar® Principa Pro for Variable Annuities/Life, based on 12/31/05 review of all 3,381 A share class and 2,682 B share class mutual funds (excludes municipal bond funds), and all 497 front-load and 26,009 back-load variable annuity funds (excludes money market funds). The total annual expense % averages for Morningstar Mutual Funds reflect the cost to manage and distribute (12b-1) a mutual fund. The total annual expense % averages for Morningstar Variable Annuities and the Northwestern Mutual Select Variable Annuity reflect the cost to manage the funds and the mortality and expense charge, which includes the cost for distribution. Although a product’s expenses are one consideration, a client should give equal consideration to the features and benefits of mutual funds and annuities before making a product choice. The variable annuity prospectus explains and discloses other product features which include purchase options, a death benefit, tax-deferred growth, income options, and service options. Variable annuities are suitable for long-term investment purposes, typically retirement. Total Annual Expense % Average Morningstar Mutual Funds Morningstar Variable Annuities Northwestern Mutual RR series Select TM Variable Annuity
- 23. Retirement Savings Whatis asset allocation? Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals. Based on your individual risk tolerance, investment goals and time horizon No investment strategy can guarantee a profit or protect against a loss. Cash Bonds Stocks
- 24. Retirement Savings Rebalancing: 1984-2004 0% Portfolio weightings Target asset mix: 50 % stocks/50 % bonds 50% 72% 28% 75% 25% 42% 55% 45% 50% 20% 40% 60% 80% 1984 1989 1994 1999 2004 Source: 2005 ibbotson Associates, Inc. All rights reserved. Used with permission. Assumes reinvestment of income and no transaction costs or taxes. Stocks: 50% large and 50% small company stocks. Bonds: intermediate-term government bonds. This index performance does not reflect the different fees and charges associated with variable annuities. If it did, the performance would be lower than cited above. Source: Small Company Stocks - Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; Large Company Stocks - Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Intermediate-Term Government Bonds - 5-year U.S. Government Bond. Past performance is no indication of future results. 58% Stock allocation Bond allocation
- 25. Retirement Savings PortfolioRebalancing The goal of rebalancing is to reduce portfolio risk Automatic Portfolio Rebalancing Minimum $10,000 contract value to elect Transfers among investment accounts to match specified portfolio allocations Rebalancing may be elected monthly, quarterly, semi-annual or annual Rebalancing does not guarantee a profit or protect against a loss No investment strategy can guarantee a profit or protect against a loss.
- 26. Retirement Savings Whatif you don’t use it? For non-tax qualified contracts If the annuitant/owner dies before taking an income plan The direct beneficiary has the flexibility to: Take the values as a lump-sum Annuitize the values Take the values in five years Use the contingent annuitant feature to become the annuitant, continue the tax-deferral Additional deposits cannot be made
- 27. Retirement Savings Whatif you don’t use it? Owner- Annuitant potential for many years of tax deferral Spouse Beneficiary Owner- Annuitant Non-Spouse Beneficiary Owner- Annuitant Dies before annuitizing When transferring assets in a manner which skips one or more generation, be cautious of the generation skipping transfer tax. For example, this may apply when a grandparent names a grandchild as the annuity’s beneficiary. Additional deposits cannot be made after the primary annuitant’s death. Inflation and changes in tax law may adversely affect this arrangement. Due to market performance, variable annuities may provide more or less than the amount originally invested. annuitize when wanted tax deferral ceases Dies before annuitizing
- 28. Preparing for RetirementSavings and Income: Select Variable Annuity Variable investment options can permit savings to keep pace with inflation Tax-deferral permits savings to compound Tax-free transfers among investment options for ease of asset allocation Automatic portfolio rebalancing for ease of maintaining asset allocation (for contracts of $10,000 or more)
- 29. Guaranteed* Death Benefitprotects beneficiary Contingent Annuitant feature offers flexibility to beneficiary (non tax-qualified contracts) Competitive cost Flip a switch to begin income plan for ease of use Guaranteed* lifetime options address risk of outliving assets Variety of income plans available for flexibility Preparing for Retirement Savings and Income: Select Variable Annuity *All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
- 30. The Next Step…Personal Needs Analysis… Step 1: Understand & Analyze Your Specific Needs Step 2: Discuss Customized Solutions Step 3: Annually Review & Adjust as Needed Survivor/Disability Income Insurance/Long-Term Care Education/Retirement Asset Allocation Estate Analysis
- 31. Preparing for RetirementThank you for your time.
Editor's Notes
- #2 Hi, my name is Firstname Lastname. I am a registered representative with Northwestern Mutual. This presentation, which takes about twenty five minutes, will highlight some common retirement concerns and the role a deferred, variable annuity can have in preparing for retirement.
- #3 Variable annuities are long-term investments that are suitable for retirement. They are also securities that are sold by prospectus. There a few things that are important to remember about any investment. One is that with any investment, the performance of variable funds is not guaranteed and can fluctuate. Another is that no investment strategy can guarantee a profit or protect against a loss.
- #4 What comes to mind when you think about retirement? 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 thinking from ‘savings’ to ‘income.’ One way to address any concern is to become familiar with products that can provide income. This next slide lists what some people have identified as their concerns about retirement….
- #5 In a 2005 poll of 1,100 people that was done by the National Association for Variable Annuities, people identified these as their greatest concerns about retirement. High health care costs – health care costs typically increase as people age Running out of money – the fact that people are living longer introduces the possibility of running out of money Inability to maintain standard of living – income needs can change during retirement, as lifestyles change Decline in Social Security - 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, according to the ssa.gov website. Inflation – Inflation can erode buying power over time. For example, a dollar in 1980 is worth 41 cents n 2006, according to the US bureau of labor statistics for all urban consumers.
- #6 This slide lists some of the things that you can do to address these concerns: For example you can factor health care costs into your retirement income needs. You can put a portion of assets into guaranteed lifetime income plans to address the risk of running out of money. The reason more and more people are concerned about running out of money is the fact that people are living longer, as I’ll show you in a moment. Combining retirement income approaches to help match your standard of living to your income. Increasing your personal savings in your pre-retirement years can address concerns you might have about a decline in Social Security.
- #7 ‘ How long can you expect to live in retirement?’ The fact that people are living longer is well known. Living longer means a longer retirement. The positive is that that gives people more years to enjoy family, friends, and dreams. A longer retirement also introduces the possibility of not having sufficient retirement income to support those dreams. People are living longer, making it more important that retirees have enough funds to last them through retirement. This image shows the average life expectancies of men and women at various ages. Life expectancies are stated as statistical averages, meaning people may live more or fewer years than those in your age group. It is impossible to predict exactly how long a person will live. Personal savings and investments are more important in helping to close the retirement income gap. By starting early, savings have time to grow, further ensuring that your retirement years will not be spent worrying about money. Source: Actuarial Tables— Life Expectancy - Treasury Regulations 1.72-9.
- #8 So where will the retirement income come from? Some or all of these will be the sources used by most people at some point to create their retirement paycheck.
- #9 One approach to retirement income is systematic withdrawals. A systematic withdrawal program refers to a method of creating a retirement paycheck by establishing regular withdrawals from a pool of your invested assets. The amount withdrawn is typically a percentage of the total pool. For example, a 4% withdrawal from a $500,000 pool would provide $20,000. A systematic withdrawal program is flexible because you can adjust the amount withdrawn according to your needs, keeping in mind the fact that too much dipping on the asset pool or withdrawing too high of a percentage can increase the risk of running out of money. A systematic withdrawal program is not a guaranteed lifetime income program. However, if used thoughtfully and if market return support it, this approach has the potential to meet your income needs. This image shows a hypothetical example of the impact of periods of high inflation and down markets on systematic withdrawals. Significant losses in the early years during which withdrawals are taken will have an impact because the losses cannot be recouped. 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. Taking withdrawals during a time period of low inflation and up markets would show different results. Income plans offered by annuities are another approach.
- #10 Before we explore the role of a deferred variable annuity in retirement, let’s clarify because there are a few different kinds of annuities. Deferred variable annuities are long-term investments that are sold by prospectus. They are typically suited for retirement. Annuities are issued by insurance companies. Any guarantees in an annuity are backed solely by the claims-paying ability of the issuing insurance company. The fees and expenses vary from issuer to issuer. We’ll talk in more detail about the fees and expenses of the Northwestern Mutual Select Variable Annuity in a few minutes. Some of the charges associated with variable annuities, as well as other investments are a sales charge or a withdrawal charge. Typically if there is a sales charge, then there is not a withdrawal charge, and vice versa. Sales charges are typically paid once. Withdrawal charges are typically paid if money is taken out within a few years of purchase. Sometimes, withdrawal charges expire. The mortality and expense fee, and portfolio fee are on-going, asset based charges. Some issuers have an annual contract fee. Some issuers waive the contract fee at a specific threshold. Savings grow tax deferred. The tax-deferral can permit savings to compound at a faster rate than if taxed. Keep in mind that money taken out of variable annuities may be subject to ordinary income tax and a10% IRS early withdrawal penalty if taken before age 59 ½. The tax deferral feature of VAs creates a lot of debate. The tax-deferral is provided by tax law and there is no charge for tax-deferral, nor is there double tax deferral. The tax treatment of IRAs or other qualified plans is substantially the same. You don’t need an annuity to get tax deferral.
- #11 Let’s talk about how they work. A deferred annuity has two phases. The first is accumulation. It’s the period of time that the contract values can accumulate before they are put into the income plan. During this ‘savings’ phase, there can be a lump sum deposit, or a series of deposits. During the savings phase, there is tax-deferral. The second phase is the annuitization or payout phase. This is when the values are put into an income plan. This is different than an immediate annuity. With an immediate annuity, a lump sum payment is converted into an income stream. Northwestern Mutual also issues Single Premium Immediate Annuities. For our talk today, we’ll focus on deferred, variable annuities.
- #12 In a deferred variable annuity, what is guaranteed and what is not? There is an element that is not guaranteed. That is the performance of the variable funds. For any investments, the performance of variable funds is not guaranteed. The guaranteed death benefit is in effect during the accumulation or savings phase. It assures that the beneficiaries will not lose principal if the annuitant dies prematurely. I’ll explain how it works: if the annuitant dies before taking an income plan, the direct beneficiary gets the higher of 1) what was put into the contract less any withdrawals, or 2) the current value. For example, if $100,000 is put into the contract, and market performance decreases that $100,000 to $90,000, the direct beneficiary is entitled to $100,000. If the market activity increased the $100,000 to $110,000, the direct beneficiary is entitled to $110,00. The income plans are guaranteed. Many people wonder, ‘if performance of the variable funds is not guaranteed, how can an income plan be guaranteed. To help clarify, while the deferred variable annuity is in the savings or accumulation phase, the values are invested in variable funds. The performance of those variable funds is not guaranteed. When the contract values are put into an income plan, the amount of your payment is based on the amount that went into the income plans. If someone invested $500,000 and it grew to $600,000, that person’s income plan would be based on $600,000. If someone invested $500,000 and it dropped to $400,000, that person’s income plan would be based on $400,000. The guarantees in any annuity are backed by the claims-paying ability of the issuing insurance company. The guarantees in the Northwestern Mutual Select Variable Annuity are backed by Northwestern Mutual.
- #13 We’ll explore where deferred variable annuities can fit into preparing for retirement. Deferred variable annuities can be used for both savings and income, as we’ve talked about. The variable investment options within a variable annuity, although not guaranteed, provide the potential for savings to keep pace with inflation. Tax-free transfers among investment options and automatic portfolio rebalancing offer ease-of-use for maintaining your asset allocation, or ease of keeping your allocation in alignment your risk tolerance and time horizon. The automatic portfolio rebalancing feature is available for contracts of $10,000 or more in value. There’s the guaranteed death benefit that I described earlier. In addition, the guaranteed income options that include lifetime income appeal to those that don’t have access to a pension, or those concerned about outliving their income. Remember that guarantees in an annuity are backed solely by the claims-paying ability of the issuer. The guarantees in our annuity contracts are backed by the financial strength of Northwestern Mutual. Let’s talk about income plans….
- #14 This chart summarizes some of the options when it’s time to create a retirement paycheck, and you don’t have to choose among these options until you require a distribution. Of course for tax-qualified contracts, there is an IRS requirement that you begin taking some money out as required minimum distributions at age 70 ½. The simplest distribution alternative is the lump sum payment, where the entire balance is withdrawn. This may be the least effective from a tax or income management standpoint. You bear a tax liability for your accumulated earnings, which may also include a federal penalty tax of 10% for withdrawals before age 59½. Systematic withdrawal, which we talked about earlier, can work well for those who want flexibility in their income stream. This type of payment may also be subject to certain charges and taxes. Annuitization is the process of putting the value of your annuity into an income plan. Annuitization can create a retirement paycheck or supplement other retirement income sources. With a specified period income plan, payments will continue for the number of years chosen. With the single life only option, payments will continue for as long as one person lives. With the life a certain period, payments are guaranteed for your life, but for no less than the stated number of years. The joint life and survivor option guarantees payments during the lifetime of two people, typically a husband and wife. With variable annuitization, your income amount is set at the time you annuitize but may be changed based on the market performance of the investment options you choose. This option offers the potential of rising income that may outpace inflation, but also the possibility that a declining or stagnant economy could affect or lower your monthly income. Any guarantees associated with an investment in variable annuities are subject to the claims-paying ability of the issuer. Read your prospectus carefully for all the fees and expenses that may apply to your variable annuity contract. I’ll explain these in more detail….
- #15 With a specified period income plans, income continues for the number of years you choose. Income stops at the end of the period. If the annuitant dies before the end of the period, income continues to the direct beneficiary until the end of the specified period.
- #16 For a single life income plan, income continues for as long as one person lives. With Joint & survivor income continues for a long as two people live. At the death of the first person, income continues uninterrupted to the second person. Income continues until the death of the second person. Both of these scenarios bring up a good question, ‘what happens if the annuitant or annuitants die only a few months after taking a lifetime income plan?’ Income would stop. Fortunately, a certain period can be included in the income plan. I’ll explain how that works…
- #17 A certain period included in a lifetime or joint lifetime income plan guarantees income for a minimum number of years, even if the annuitants die. Let’s use an example. For a single life with a 10 year certain period If the annuitant dies in year two, income continues to the direct beneficiary for eights years to fulfill the ten year certain period If the annuitant dies in year eleven, income stops. Generally certain periods can be up to 20 years.
- #18 When taking income plans from a deferred variable annuity, income plans can be either fixed or variable. With fixed, the income amount does not change. If a person had no other sources of retirement income, over time inflation could reduce their buying power. When a fixed income plan is taken, the portfolio and mortality and expense fees cease. With a variable income plan, payments fluctuate based on the performance of underlying funds. The portfolio fees and mortality and expense fees continue. A variable income plan has the potential to keep pace with inflation. A payment is guaranteed, but the amount of the payment is not guaranteed. Whether a fixed, variable, or combination of income plan is suitable for you depends on many factors, including your personal circumstances, and your risk tolerance. It’s important to remember that once an income plan has started, the remaining values are not accessible. How can insurance companies provide lifetime income?
- #19 Through a concept known as risk sharing. 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.
- #20 All guarantees in any annuity are backed solely by the claims-paying ability of the issuing company. What is an indicator of the issuing company’s financial strength? Their financial strength ratings. Here are Northwestern Mutual’s.
- #21 Northwestern Mutual deferred annuity contracts are issued with guaranteed minimum income plan rates. These can establish a placeholder for future income because they are carved into the contract and do not change. How does this benefit you?
- #22 When Northwestern Mutual clients put their deferred annuity values into an income plan to create a retirement paycheck, they will receive the higher of current deferred annuity settlement rates or guaranteed minimum payment rates. The significance of this is that if current rates are higher than the guaranteed minimum, you are entitled to receive the current rates. However, if the current rates happen to be lower than the current rates, you are entitled to the minimums. This establishes a placeholder for future income. What about the fees and expenses associated with variable annuities? The fees and expenses can vary from issuer to issuer. Here is some information about the Northwestern Mutual Select variable annuity…
- #23 This chart shows the annual expenses of our Select VA alongside the average Morningstar mutual fund and Morningstar VA. The chart shows that both the front-end and back-end designs of the Select VA are competitive. The assumption that all VAs are too expensive relative to other choices available in the marketplace simply does not apply to Northwestern’s variable annuity. The Northwestern Mutual Select Variable Annuity offers a variety of investment fund options across asset classes. Access to a variety of investment funds options is important to help maintain asset allocation….
- #24 What is asset allocation? The asset allocation decision is one of the most important factors in determining both the return and the risk of an investment portfolio. Asset allocation is the process of developing a diversified investment portfolio by combining different assets in varying proportions. An asset is anything that produces income or can be purchased and sold, such as stocks, bonds, or certificates of deposit (CDs). Asset classes are groupings of assets with similar characteristics and properties. Examples of asset classes are large company stocks, long-term government bonds, and Treasury bills. Every asset class has distinct characteristics and may perform differently in response to market changes. Therefore, careful consideration must be given to determine which assets you should hold and the amount you should allocate to each asset. Factors that greatly influence the asset allocation decision are your financial needs and goals, the length of your investment horizon, and your attitude toward risk. How do you maintain asset allocation?
- #25 Importance of rebalancing 1984–2004 Because asset classes grow at different rates of return, it is necessary to periodically rebalance a portfolio to maintain a target asset mix. This image illustrates the effect of different growth rates on a static (unbalanced) portfolio over a 20-year period. In 1984, the target asset mix began with a 50% allocation to stocks and a 50% allocation to bonds. The proportion of stocks in the portfolio grew modestly up through 1994 when it accounted for 58% of the portfolio. The bull market of the late 1990s helped propel the value of stocks, causing the portfolio to be overweighted. By 2004 stocks accounted for 72% of the portfolio. Asset classes associated with high degrees of risk tend to have higher rates of return than less volatile asset classes. For this reason, a portfolio that is not rebalanced periodically may become more volatile (riskier) over time. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. The data assumes reinvestment of income and does not account for taxes or transaction costs. Variable annuities are subject to certain insurance related fees and charges that are not associated with other investments. Source: Small Company Stocks—Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; Large Company Stocks—Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Intermediate-Term Government Bonds—5-year U.S. Government Bond.
- #26 Periodic rebalancing is important to help reduce portfolio risk. Because asset classes grow at different rates of return it is necessary to periodically rebalance a portfolio to maintain a target asset mix. For example a portfolio that is 50% bonds and 50% stocks could get out of balance if bonds outperform stocks. Transfers among funds in a VA are tax-free. What happens if you don’t use your savings? What if you don’t put the values into an income plan?
- #27 In the case of non tax-qualified contracts, if the annuitant/owner dies before taking an income plan the direct beneficiary has the flexibility to: Take the values as a lump sum Put the values into an income plan Take the values over five years Use the contingent annuitant feature to become the annuitant, continuing the tax deferral; once the contract is being continued in the manner, additional deposits cannot be made. This comes into play only if you do not use all of the values in your contract. Earlier we described what happens if the annuitant dies after an income plan in in effect.
- #28 This slide shows how the contingent annuitant feature could work. Tax deferral cannot continue indefinitely; applicable IRS rules will govern when the values must be used. Remember, this feature applies to non tax-qualified contracts. For tax qualified contracts, such as IRAs, the usual IRS guidelines apply.
- #29 As we wrap up, we can review the role of a deferred variable annuity in a retirement portfolio. Variable investment options can permit savings to keep pace with inflation Tax-deferred growth permits savings to compound Tax-free transfers among investment options for ease of asset allocation Automatic portfolio rebalancing for ease asset allocation (for contracts of $10,000 or more)
- #30 Guaranteed Death Benefit protects beneficiary Contingent Annuitant feature offers flexibility to beneficiary (non tax-qualified contracts) Competitive cost Flip a switch to begin income plan for ease of use Guaranteed lifetime options address risk of outliving assets Variety of income plans available for flexibility
- #31 As a Northwestern Mutual Financial Representative, our mission is to develop enduring relationships with clients by providing expert guidance for a lifetime of financial security. We want to help you increase financial security by increasing your knowledge and helping you coordinate actions in all three life stages that we have discussed. First, I will get to know you and find out about the personal, professional, and financial goals that are most important to you. Then, I will review the steps you have already taken toward these goals and determine if I might be able to provide some specific recommendations to further help you achieve them. Finally, if you choose to implement these recommendations, we will continue to work together by regularly reviewing the progress toward your goals.” This presentation has already begun the first step, and we can continue it in a personal meeting that I make available at no cost or obligation to all attendees. Please see me after the meeting or sign up for a personal meeting by… [GIVE INSTRUCTIONS]. Note: Optional slide