simplebooklet thumbnail

The Roadmap to Retirement : simplebooklet.com

AE04159167
RETIREMENT
INCOME
T
HE ROLE ANNUITIES C AN PL AY
ROADMAP to
Prepared For
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
2
ROADMAP TO RETIREMENT INCOME
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
3
THE ROLE ANNUITIES CAN PLAY
Table of Contents
Performance and Guarantees
Annuity Models
Variable Annuity
Immediate Annuity
Fixed Annuity
Fixed Index Annuity
Insurance Coverage
Owner’s Manual
A 1035 Exchange
Conclusion
This document is designed to provide general information on
the subjects covered. Pursuant to IRS Circular 230, it is not,
however, intended to provide specific legal or tax advice and
cannot be used to avoid tax penalties or to promote, market
or recommend any tax plan or arrangement. Please note
that our firm, its representatives and employees do not give
legal or tax advice. You should consult your tax advisor or
attorney.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
1
ROADMAP TO RETIREMENT INCOME
Preface
First introduced in America back in 1759, the annuity concept of making
a one-time payment in exchange for a lifetime of payments is as old as
the concept of life insurance — only the annuity was developed to provide
payments while a person is still alive.
(Source: SaveWealth Financial Retirement. “History of Annuities.”
http://www.savewealth.com/retirement/annuities/history/. Accessed April 6, 2015.)
The annuity has undergone substantial changes since the 18th century,
as noted by the National Association for Fixed Annuities. According to
NAFA Executive Director Kim O’Brien, “The investment community
has historically used fixed annuities as a stable value component of an
integrated investment strategy...recent innovations within the fixed
annuity insurance industry are expanding the role of these products.
These innovations provide new opportunities for financial advisors to
diversify risk and complement the investment side of an individual’s
retirement plan with guarantees and insurance.”
(Source: Kim O’Brien. “Fixed Annuities Complement Investment Planning.” Society
of Actuaries’ Product Matters! February 2011. 24-25. https://www.soa.org/library/
newsletters/product-development-news/2011/february/pro-2011-iss79-obrien.aspx.
Accessed April 6, 2015.)
Retirees today are finding that annuities can play an important role in
their retirement income strategies. When considering an annuity, you
should choose one that is suitable for your personal financial situation
to help ensure that it works in concert with the rest of your overall
retirement income strategy. When utilized correctly, an annuity can be a
very eective retirement income vehicle.
The objective of this informational resource is to help you understand the
basics of annuities and how they can work within your overall retirement
income strategy.
More importantly, this manual is designed to help you assess your need
for retirement income down the road and construct a strategy to help
you reach your destination. In doing so, you will learn the role an annuity
can play in your retirement income strategy.
So buckle up, start your engine and take this
manual out for a spin.
“The Treasury and the
IRS are announcing steps
that will ease regulatory
barriers in the market for
annuities and other forms
of lifetime income.”
(Source: Alan Krueger.
Council of Economic Advisers,
WhiteHouse.gov. Feb. 15,
2012. “An America Built to Last:
Strengthening Economic Security
in Retirement.” https://www.
whitehouse.gov/blog/2012/02/15/
america-built-last-strengthening-
economic-security-retirement.
Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
2
THE ROLE ANNUITIES CAN PLAY
The Basics
Before we go much further, it’s important to have a basic understanding of just what an annuity is. Put
simply, an annuity is a contract you purchase from an insurance company. In exchange for the premium
you pay, you receive certain fixed and/or variable interest crediting options that compound tax-deferred
interest until withdrawn. When you’re ready to receive income, an annuity oers a variety of guaranteed
payout options through a process known as “annuitization.”
There are an array of annuity contracts on the market today, and each one will be examined more
closely later in this manual. The options include variable, immediate, fixed and fixed index annuities.
These choices can allow you to match very specific individual needs with a suitable product. Within
each contract, you have the flexibility to select from a range of payout terms and death benefits, and you
may have the possibility of purchasing optional riders for additional benefits. An annuity purchase can
be strategically positioned within your overall retirement savings strategy for any number of personal
objectives, such as income for your spouse should you die, a death benefit for your children or as
help addressing inflation concerns. Coverage is available for
two people within one contract, so you don’t have to purchase
a separate contract for your spouse. All annuity product
guarantees and protection benefits are backed by the financial
strength and claims-paying ability of the issuing insurance
company.
Annuities are designed to meet long-term needs for retirement
income. Interest on annuities is earned on a tax-deferred
basis, which means no taxes are paid on interest credited until
payments are received or withdrawals are taken. However,
withdrawals will reduce the contract value and the value of
any protection benefits. Withdrawals taken within the contract
surrender charge schedule will be subject to a surrender
charge. All withdrawals are subject to ordinary income tax
and, if taken prior to age 59 ½, may be subject to a 10 percent
federal additional tax.
It’s Personal: 3 Questions to Ask Yourself
There’s an old saying: “That’s why they make Chevys and Fords,” that is used to help explain the dierences
in people. The fact is, there are at least as many dierent types of financial vehicles as there are motor
vehicles from which to choose.
An annuity is not suitable for everyone: It all comes down to personal choice. Your circumstances,
income and financial resources, objectives, tolerance for market risk and retirement timeline are all
very unique to you. There is no one cookie-cutter financial product or strategy that is a perfect fit for
all retirees. That’s what makes preparing for retirement so dicult — trying to figure out an appropriate
strategy to meet your specific needs.
Retiree Spending
48% of today’s retirees report a
lower level of spending during
retirement
21% say that they spend more
(Source: Nevin Adams, Craig Copeland,
Mathew Greenwald and associates.
Employee Benefit Research Institute. March
2013. “The 2013 Retirement Confidence
Survey: Perceived Savings Needs Outpace
Reality for Many.” http://www.ebri.org/pdf/
surveys/rcs/2013/EBRI_IB_03-13.No384.RCS.
pdf. Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
3
ROADMAP TO RETIREMENT INCOME
It really comes down to the lifestyle you want and your retirement income goals. An annuity is just a
vehicle to help you on the road to your retirement income goals. Establishing your financial goals and
objectives can help shed some light on which vehicle(s) may be appropriate to help you accomplish them.
In the context of the manual, it comes down to three simple questions:
How much income do I need in retirement?
How much income do I want in retirement?
What roadblocks may aect my progress toward my financial goals?
Question #1: How much income do I need in
retirement?
Historically, the recommendation many financial professionals have
provided to retirees is to anticipate needing 70 percent to 80 percent
of their pre-retirement income during retirement.
(Source: Michael Kitces. Nerd’s Eye View. March 21, 2012. “In Defense of the 70%
Replacement Ratio in Retirement.” https://www.kitces.com/blog/in-defense-of-the-70-
replacement-ratio-in-retirement/. Accessed April 6, 2015.)
The following are four categories of expenses you should
consider when evaluating how much money you may need in
retirement.
Housing & Utilities
Regardless of any fluctuations in home equity you may have experienced in recent years, you should
be aware of whether your mortgage will be paid o by the time you retire. Also consider whether you
will be inclined to downsize to a smaller home, which may result in lower utility costs, or move into a
retirement community — many of which can be quite expensive.
From a health care perspective, living in your own home may not always be an option if you become
injured or infirmed and need assisted living or skilled nursing care. In any of these scenarios, you may
want to consider working with a qualified financial professional to help determine what residential
options make sense financially.
Food, Clothing, Travel, Entertainment & Gifts
You need to eat well and be clothed, but many retirees find they spend less money on these expenses
in retirement. Compared to the expenditures of a household headed by a 65 year old, spending falls
significantly by age 75, according to the Bureau of Labor Statistics Consumer Expenditure Survey.
(Source: Bureau of Labor Statistics. Sept. 12, 2014. “Consumer Expenditure Survey.”
http://www.bls.gov/cex/#tables. Accessed April 6, 2015.)
According to Warren Buet, the
perfect amount to leave children
is “enough money so that
they would feel they could do
anything, but not so much that
they could do nothing.”
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
4
THE ROLE ANNUITIES CAN PLAY
Transportation
Your transportation needs may change as you get older. If you get to
the point where driving is no longer comfortable or feasible, your
transportation options may become more expensive.
Health Care
Health care expenses will be discussed in more depth later in this
manual, which you should consider carefully when planning for your
retirement expenditures.
Question #2: How much income do I want in
retirement?
What do you want your money to do for you in retirement — to simply
provide a comfortable existence where your basic needs are met, or to
allow you to do more, like entertain and travel extensively? Do you wish to
leave a financial legacy for your loved ones and/or any charitable causes
you support, or are you inclined to spend more of your money now and
leave less to your loved ones? As for how much to leave as an inheritance,
consider Warren Buet’s philosophy that the perfect amount to leave
children is “enough money so that they feel they can do anything, but not
so much that they could do nothing.”
Most of us won’t face Buet’s dilemma with regard to the amount of
inheritance to leave our loved ones, but the sentiment is evident: Don’t
live your life as if its value is only worth as much as you leave your
children. Does it seem reasonable to not spend your money on housing,
health care, long-term care and your own quality of life just so that you
can leave a larger inheritance to your loved ones? If your goal is to both
live comfortably and leave an inheritance, now may be the time to begin
working toward that goal.
Question #3: What roadblocks may aect my
progress toward my financial goals?
Economic & Job Instability
As a nation, we’re just starting to come out of a dicult few years. Some
have suggested that the bailouts and economic stimulus distributions
that helped us out of the recent recession may lead to income tax hikes
and rising interest rates, which could potentially result in a slower-than-
usual economic recovery, a slow housing market recovery and continued
market volatility.
”The median net
worth of households
headed by someone
between age 65 and
74 declined from
$250,800 in 2007 to
$206,700 in 2010.”
(Source: Emily Brandon.
U.S. News. July 23,
2012. “Retiree Net
Worth Declines.” http://
money.usnews.com/
money/retirement/
articles/2012/07/23/
retiree-net-worth-
declines. Accessed April 6,
2015.)
“The future ain’t what it
used to be.”
-Yogi Berra, The Yogi Book:“I
Really Didn’t Say Everything I
Said” by Yogi Berra.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
5
ROADMAP TO RETIREMENT INCOME
Taxes
Taxes may cause a wrinkle in
retirement income strategies in part
because regulations can be changed,
repealed or back-dated depending
on the economy and who is in
oce. When it comes to retirement
income, it may be advantageous
to pursue tax-deferred growth for
potentially higher long-term interest
accumulation. Whatever current tax-
advantaged vehicles are available
should be considered for retirement
income strategies. You should
consult a financial professional and
your personal tax advisor before
adopting a specific tax strategy for
retirement.
Market Losses
If you’re like many retirees, your
investments lost money — at least on
paper — during the latest market
downturn. As you get closer to
retirement and have less time to
recover lost gains, you may want
to consider limiting your exposure
to market declines as you transition
away from asset accumulation and
into income distribution.
Please keep in mind that financial
professionals must hold the proper
securities registration and be
currently aliated with a broker-
dealer or Registered Investment
Advisor to recommend the
liquidation of funds held in securities
products, including those within an
individual retirement account (IRA)
or other retirement plan.
Perils of the Road
Inflation Pressure: Cost of Living
Maintenance Costs
High Mileage: Life Expectancy
Unstable Ride: Market Volatility
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
6
THE ROLE ANNUITIES CAN PLAY
Inflation Pressure: Cost of Living
When preparing for retirement you should take into
account the potential impact of long-term inflation on
income over a long lifespan.
Inflation can make a big dierence when estimating
how much you can spend in retirement. To help
maintain your desired lifestyle, you should prepare for
a level of income that can help you oset the eects
of inflation. For many years, a lot of retirees have relied
upon the so-called 4 percent rule. This generally
accepted “rule of thumb” in planning for retirement
income suggests that you should be able to withdraw
4 percent from your retirement savings in the first year
of retirement and then increase your withdrawal each
year to account for inflation without running a big risk
of running out of money.
This was generally a good rule of thumb, but as a
result of recent market volatility, historic market
volatility and longer life expectancies, even those
who follow the 4 percent rule oftentimes encounter
financial issues. It has become more common for
retirees to frequently adjust how much they withdraw,
based on changes in wealth, age and market conditions.
Retirees face a more unique type of inflation risk
than the rest of the population. So much so that
since 1987, the U.S. Department of Labor’s Bureau of
Labor Statistics began tracking a separate consumer
price index — one specifically weighted for elderly
Americans — called the CPI-E Index.
From December 1982 through December 2011, the
last time the CPI-E was calculated, the CPI-E increased
an average annual rate of 3.1 percent as compared to
2.9 percent for the Consumer Price Index for All Urban
Wage Earners and Clerical Workers (CPI-W). The CPI-W
and CPI-E are both subsets of the CPI-U, which is the
Consumer Price Index for All Urban Consumers.
(Source: Bureau of Labor Statistics. March 2, 2012. “Consumer
Price Index for the elderly.” http://www.bls.gov/opub/ted/2012/
ted_20120302.htm. Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
7
ROADMAP TO RETIREMENT INCOME
Housing
Having your house paid o prior to retirement is a good idea, but it may not provide the decrease in
overall expenses you anticipate. As you age, you may encounter health conditions that can impact your
monthly expenses. For instance, it may take longer to recover from an injury or illness and acute health
conditions may require home health assistance for recovery. In-home professional health services can
be costly. Additionally, you may find yourself in the situation where you or your spouse have medical
issues requiring full-time nursing care, while the other spouse continues to live in the family home. So
whether it’s in-home services or confinement in a senior living facility, it’s important to understand the
potential impact of these costs on your retirement savings.
Health Care
Today, retirees spend about 15 percent of their income on out-of-pocket expenses, according to the
Employee Benefit Research Institute’s February 2012 Issue Brief.
(Source: Sudipto Banerjee. Employee Benefit Research Institute. February 2012. “Expenditure Patterns of Older Americans,
2001-2009.” http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4992. Accessed April 6, 2015.)
As illustrated in the accompanying table, a couple both age 65 in 2013 could need up to $360,000 to
cover premiums for health insurance coverage and out-of-pocket expenses during retirement.
Savings needed for 90% chance of having enough
savings to cover health costs in retirement
(premiums and out-of-pocket expenses)
Maintenance Costs
Much like your car or home, many financial vehicles require “maintenance” fees or expenses. However,
what many retirees don’t realize is that even small dierences in fees from one product to the next can
translate into large dierences in your asset accumulation over time.
Retirement age No employer-based health care benefits
Medicare, Medigap & Part D; ranges based on
drug expenses
Man age 65 today $172,000
Woman age 65 today $195,000
Couple age 65 today $360,000
(Source: Employee Benefit Research Institute. October 2013. “Notes.”
http://www.ebri.org/pdf/notespdf/EBRI.Notes.Oct13.RetSvgs1.pdf. Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
8
THE ROLE ANNUITIES CAN PLAY
Cost vs. Benefit:
Finding the Right Balance
Annuities are commonly criticized for their administrative fees and surrender
charges, but the fact is many financial vehicles contain some sort of fee
or charge.
For example, mutual funds generally oer liquidity, diversification and are
professionally managed. In return for those benefits, there are a variety of
potential costs that could be incurred, including asset management costs,
transaction costs and marketing and distribution costs.
Regardless of the financial vehicles you choose for your retirement income
strategy, it’s important to consider not only the fees and charges you may
incur, but also the benefits you will receive in return.
Among the most common annuity fees are:
Mortality & Expense Charge (M&E) — These charges generally
pay for the sales commissions, administrative expenses and
insurance guarantees (including the death benefit and income
payouts for life) of the contract. In a variable annuity, M&E
charges will be deducted from the value of the investment.
With a fixed annuity, you generally won’t see a deduction for
these charges on your annual statement. Rather, these charges
are built into the pricing of the product and are reflected in
benefits and guarantees you receive.
Surrender Charges – When an insurance company issues an
annuity contract, it incurs costs in commissions to the selling
agent, in processing the application, etc. Therefore, most
insurance companies limit the amount of withdrawals you can
take during the early years of a contract and impose a surrender
charge on any withdrawals in excess of that preset limit to help
oset the costs incurred by the company. Surrender charges
are generally applied during the first 10 to 14 years of the
contract and can be significant, but over time the surrender
charges typically reduce to zero. The amount of the surrender
charges will vary by product and by state.
Ultimately, you need to make the determination whether the fees you’re
being charged are worth the benefits you’re receiving.
“Three in 10 retired
widows report that
they had not even
considered how
they would respond
following the loss of
their spouse.”
(Source: Mathew Greenwald
& Associates Inc. The Society
of Actuaries. December 2013.
“2013 Risks and Process of
Retirement Survey Report
Findings.” https://www.soa.
org/Files/Research/Projects/
research-2013-retirement-
survey.pdf. Accessed April 6,
2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
9
ROADMAP TO RETIREMENT INCOME
High Mileage: Life Expectancy
The longer you live, the greater your chance of running out of money. If you start
withdrawing retirement income too early, withdraw too high a percentage or don’t
allow opportunities for growth potential within your retirement income plan, you may
spend down your retirement assets too soon.
If you’re married, your ability to prepare adequately may be even more complex. You
may need long-term income not only for yourself but a spouse as well, and if you or
your spouse experience an illness or require long-term medical assistance your need
for income may be even greater.
Even more dicult to prepare for is the volatility of the market. The longer you live,
the more likely you are to experience additional market and economic ups and
downs. The accompanying table illustrates just how often dips, corrections and bear
markets may occur.
DJIA’s history of declines, 1900-2012
TYPE OF
DECLINE
AVERAGE
FREQUENCY
1
AVERAGE
LENGTH
2
LAST
OCCURRENCE
PREVIOUS
OCCURRENCE
-5% or more About 3 times a year 47 days October 2013 August 2013
-10% or more About once a year 115 days October 2011 July 2010
-15% or more About once every 2 years 216 days October 2011 March 2009
-20% or more About once every 3 ½
years
338 days March 2009 October 2002
The following examples demonstrate how retirement assets may be impacted both
before retirement — when you’re trying to accumulate assets — and after retirement
when you are actually withdrawing assets. These hypothetical examples are for
illustrative purposes only, should not be deemed a representation of past or future
results and are no guarantee of return or future performance. These examples do not
represent any specific product and/or service.
Value of $100,000 during a hypothetical 3-year market decline
YEAR MARKET RETURN YEAREND VALUE
2000 -6.2% $93,800
2001 -7.1% $87,140
2002 -16.8% $72,500
(Source: ForecastChart. “Dow Industrial Average Stock Market Historical Graph.”
http://www.forecast-chart.com/historical-dow-industrial.html. Accessed April 6, 2015.)
(Source: American Funds. “What Past Market Declines Can Teach Us.” https://www.americanfunds.com/
individual/planning/market-fluctuations/past-market-declines.html. Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
10
THE ROLE ANNUITIES CAN PLAY
Value of $100,000 with 5% annual withdrawals
during a hypothetical 3-year market decline
Not only does a market decline during retirement reduce your opportunity to reasonably earn back
the depreciated assets, but if you are withdrawing income from your assets at the same time, it can be
even more challenging to recover from any market losses.
Unstable Ride: Market Volatility
Historically, stock and bond markets have generally moved out of tandem, so that whenever one
market dropped, the other was typically performing well. This meant a diversified investment portfolio
still had the potential for growth, while also oering downside protection on a portion of the portfolio
through more conservative holdings. Globally, the same was true. When domestic markets faltered,
there was generally growth somewhere overseas and vice versa.
The domestic markets have largely recovered, and the economy should as well — it always has.
However, given a shorter investment timeframe and the fact that the new global economy has
investments moving in tandem can impact how long your retirement savings last.
One thing to consider is incorporating an annuity that can oer the potential for interest accumulation
to help meet the challenges of a long life and the impact of long-term inflation on cost-of-living
expenses and health care, and also provide a source of guaranteed income to help ensure that daily
essential living expenses will be met. Guarantees are backed by the financial strength and claims-
paying ability of the issuing insurance company.
YEAR MARKET RETURN 5% WITHDRAWAL AT YEAR
START
YEAREND VALUE
2000 -6.2% $5,000 $89,110
2001 -7.1% $4,456 $78,644
2002 -16.8% $3,932 $62,160
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
11
ROADMAP TO RETIREMENT INCOME
Your Three-Point Turn
As mentioned in the preface, an annuity can be an important part of your retirement income strategy,
however it’s not a good idea to put your entire nest egg into an annuity. That’s because annuities are
designed to be long-term income accumulation and/or distribution vehicles.
You have to live in the here and now, so you may want to have income for today, retirement income
for tomorrow and emergency income at any time. This means that throughout retirement, you should
not have all of your assets tied up in an annuity. You should have a financial resource that you may tap
immediately should you need to put your hands on cash in a hurry.
When considering your retirement income needs, here are a few of the many categories you may
consider:
Emergency Assistance | Standard Essentials | Discretionary Options
Emergency Assistance
An emergency constitutes an immediate financial need, ranging from out-of-pocket expenses for
medical care to losing your job. Many financial professionals suggest an emergency fund of three to
six months of expenses.
Standard Essentials
Essential expenses tend to be constant from month to month, such as food, clothing, rent or mortgage
payment, utilities, basic transportation, medical insurance and health care expenses. Retirees are
spending increasingly more on these essential categories.
(Source: Pamela Villarreal. National Center for Policy Analysis. Jan. 22, 2014. “How Are Senior Spending Their Money.” http://
www.ncpa.org/pub/ib135. Accessed April 6, 2015.)
Discretionary Options
The amount of discretionary income you have in retirement will depend upon how well you’ve
provided for your essentials. Discretionary income is generally used to pay for a new car, entertainment,
vacations and travel, hobbies and recreation.
But remember, no matter the amount of income you plan on having when you retire, you will inevitably
need more as time goes on. As a result of long-term inflation, if you had retired back in 1976 on
$30,000 a year, your annual income would need to be $123,755 today to support the same lifestyle.
(Source: Bureau of Labor Statistics. “CPI Inflation Calculator.” http://www.bls.gov/data/inflation_calculator.htm. Accessed
April 6, 2015.)
You may want to consider an annuity, in addition to Social Security and any pension you may receive,
to provide guaranteed income to help ensure that your essential living expenses in retirement will be
covered.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
12
THE ROLE ANNUITIES CAN PLAY
In its 2013 research paper titled, “Life Annuities: An Optimal Product for Retirement Income.” The
Research Foundation of CFA Institute quoted a 2007 Wharton Financial Institutions Center policy brief
by Davide Babbel and Craig Merrill as saying:
“By covering at least basic expenses with lifetime income annuities, retirees are able to
focus on discretionary funds as a source for enjoyment. Locking in basic expenses also
means that the retiree’s discretionary funds can remain invested in equities for a longer
period of time, bringing the benefits of historically higher returns that can stretch the
useful life of those funds even further. The key in all of this is to begin by covering all of
the basic living expenses with lifetime income annuities. Then, to provide for additional
desirable consumption levels, you will want to annuitize a portion of the remainder of
your assets, while making provisions for extra emergency expenses and, if desired, a
bequest.”
In other words, a guaranteed stream of income can provide you with a level of reassurance that your
basic expenses will be covered.
This strategy also helps protect a portion of your retirement income from the fluctuations in the stock
market and allows you to do what you want with the rest of your nest egg.
Performance & Guarantees
On one hand, the long-term rising cost of living can reduce the buying power of a fixed income,
but on the other hand, market volatility can dramatically impact the performance of your retirement
savings.
When it comes to safeguarding your retirement income, financial professionals often recommend
annuities because they can oer you both the potential for interest accumulation and the security of
guaranteed income payments. Annuity guarantees are backed by the financial strength and claims-
paying ability of the issuing company.
Ibbotson research has illustrated that over a 30-year timeline, incorporating a guaranteed income
component to conservative, moderately conservative and moderate portfolios can increase the
average sustainable income and decrease shortfall income risk.
(Source: Aite. NFP Advisor Services Group. August 2012. “The Missed Opportunity: Guaranteed Income as an Asset Class.”
http://www.fa-mag.com/userfiles/docs/whitepapers/2012/Income-white-paper-FINAL.pdf. Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
13
ROADMAP TO RETIREMENT INCOME
Annuity Models
In the past, retirees could typically count
on three sources of retirement income that
divided roughly into thirds: government
entitlement programs (i.e., Social Security
and Medicare), employer-sponsored plans
and personal retirement savings.
With this traditional scenario, both the
government entitlement programs and
employer-sponsored plans were considered
“fixed” — reliable income sources that may
be adjusted for inflation. Only one-third,
individual savings, was considered variable.
Today, however, the majority of the
responsibility for retirement income has
largely shifted to the individual. That’s
because Social Security is continually being
re-evaluated and benefits are being scaled
back. Employer-sponsored plans have
evolved from guaranteed pension payouts
to more defined contribution plans — which
result in a payout in retirement based upon
level of participation and long-term market
performance.
You may want to consider a guaranteed,
fixed-income component to your retirement
income. In short, adding an annuity to your
retirement income may be an opportunity
to help ensure a portion of your retirement
income will be guaranteed.
An annuity is a contract you purchase from
an insurance company. For the premium you
pay, you receive certain fixed and/or variable
interest crediting options able to compound
tax-deferred until withdrawn. When you
are ready to receive income distributions,
this vehicle oers a variety of guaranteed
payout options through a process known as
“annuitization.”
Most annuities have provisions that allow
you to withdraw a percentage of credited
interest each year up to a certain limit
without annuitizing the contract. However,
withdrawals can reduce the value of the
death benefit and excess withdrawals above
the restricted limit may incur surrender
charges, typically within the first 10 to 14
years of the contract.
Because annuities are designed as a long-
term retirement income vehicles, annuity
withdrawals made before age 59 ½ are
subject to a 10 percent federal additional
tax and all withdrawals may be subject to
ordinary income taxes.
The Annuity Inventory
Variable Annuity
Immediate Annuity
Fixed Annuity
Fixed Index Annuity
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
14
THE ROLE ANNUITIES CAN PLAY
Variable Annuity
A variable annuity is comprised of professionally managed
portfolios that vary in both investment objectives and
representative holdings. If you are working with a qualified
investment advisor or registered representative, you may
allocate your purchase payments across any number of these
portfolios in whatever percentage you choose, with regard for
your financial objectives and tolerance for market risk. Taxes on
earnings from these portfolios are not due until distributed, and
you may transfer assets between portfolios without having to
pay taxes on gains.
However, because these various portfolios are managed by
professional money managers, the fees you pay for each
portfolio, combined with the overall M&E and administrative
fees, have the potential to be quite high.
Many variable annuities also oer optional riders guaranteeing
minimum annual income for a specific number of years or even
for life, available for an additional fee. Annuities with optional
income riders tend to have fees commensurate with the
additional risks as underwritten by the issuing insurer.
Optional Variable Annuity Income Riders:
Guaranteed Minimum Income Benefit (GMIB) —
guarantees you a minimum income stream.
Guaranteed Minimum Accumulation Benefit
(GMAB) — guarantees that your account value will
accumulate to a certain amount at a specific date in
the future.
Guaranteed Minimum Withdrawal Benefit (GMWB)
guarantees you a minimum income stream
without having to annuitize the contract.
For-Life Benefits — This type of benefit allows you
to receive a percentage, usually 4 to 6 percent, of
your original investment for as long as you live.
Any transaction that involves a recommendation to purchase or
liquidate funds held in a securities product, including a variable annuity,
can be conducted only by individuals currently aliated with a properly
registered broker-dealer or Registered Investment Advisor. Please
consult with a broker-dealer representative or Registered Investment
Advisor for guidance on securities holdings.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
15
ROADMAP TO RETIREMENT INCOME
Immediate Annuity
With an immediate annuity, you use a lump sum of money to purchase a contract from an insurance
company in return for a guaranteed series of payouts. This stream of income is guaranteed for a specified
period of time or for the rest of your (and even your spouse’s) life — no matter how long you live. The
amount of the payout is based on several factors:
How much money you use to buy the contract
The interest rate environment at the time you purchase the contract
The payout option you select (typically at the time the contract is issued)
Your life expectancy — based on current age and gender
The date you select for your first payment (within one year of issue date)
Any additional features you choose
Immediate annuity income payouts may be either
level or increasing periodic payments for a fixed
term of years or until the end of your life, whichever
is longer.
Your income payouts will be taxed at ordinary
income tax rates rather than the lower capital gains
rates.
One thing to take into consideration with an immediate
annuity is, because there is no accumulation phase,
you must annuitize immediately to receive income
distributions. Once you annuitize with the life-only
option, the transaction is irreversible and you no
longer have access to your assets in a lump sum.
When you die, any remaining contract value that
could have been left to your beneficiaries is forfeited
to the insurance company.
Fixed Annuity
A traditional fixed annuity provides a guaranteed interest rate for a specific number of years. Fixed
annuities oer fixed interest rate periods, typically over one, three, five, seven or 10 years, as well as a
variety of annuitization payout options — including the option for guaranteed income for life.
With a fixed annuity, you defer paying taxes on the interest earned in the contract until you begin taking
withdrawals or receiving scheduled annuitization payments. Once you begin withdrawals, they will be
taxed as ordinary income and, if you take withdrawals prior to age 59 ½, a 10 percent federal additional
tax may apply. Tax deferral may allow your assets to grow faster than in an alternative financial vehicle
that is taxed annually.
The fixed annuity can help you conservatively accumulate assets to help cover fixed living expenses in
retirement.
“Consumers can benefit from these
products by having a steady stream
of income regardless of how their
investment assets perform or how
long they live, while at the same time
maintaining access to their assets
for unexpected or other expenses.”
(Source: U.S. Government Accountability Oce.
Dec. 10, 2012. “Retirement Security: Annuities
with Guaranteed Lifetime Withdrawals Have Both
Benefits and Risks, but Regulation Varies Across
States.” http://www.gao.gov/products/D03768.
Accessed April 6, 2015.)
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
16
THE ROLE ANNUITIES CAN PLAY
Fixed Index Annuity
The fixed index annuity combines tax deferral
and the potential for interest based on positive
changes of an external index without actual
participation in the market.
A fixed index annuity may oer a choice of
indexes. The insurance company uses a crediting
method to track the performance of the index(es)
during a specified time period, which is typically
one contract year but could be multiple contract
years. At the end of each time period, the
company calculates the indexed interest. If the
result is positive, the annuity is credited interest
up to a predetermined amount. If the result is
negative, nothing happens, and the annuity’s
value doesn’t decline. In addition to potential
indexed interest, you may also have the option to
receive fixed interest.
Like a traditional fixed annuity, under current
federal income tax law, any interest earned in
a fixed index annuity is tax-deferred until you
begin receiving money from your contract. If
you purchase a fixed index annuity with after-
tax dollars, you will only pay ordinary income
taxes on your interest earnings (not on premium
payments) when you begin withdrawing money.
Purchasing an annuity inside a qualified plan
(retirement plan) that provides a tax deferral
under the Internal Revenue Code provides no
additional tax benefits. An annuity used to fund
a tax qualified retirement plan should be selected
based on features other than the tax deferral. All
of the annuity’s features, risks, limitations and
costs should be considered prior to purchasing
an annuity inside a qualified retirement plan.
Some fixed index annuities allow you to withdraw
credited interest without penalty up to a certain
amount each year. However, withdrawals will
reduce the contract value and the value of any
protection benefits. Be aware that withdrawals in
excess of the “free” amount each year and during
the contract’s surrender charge period may incur
a surrender charge.
Most fixed index annuities have components
that help determine how much interest can be
credited in a given year. The most common are:
Participation Rate. A participation rate
determines what percentage of the index
increase is used to calculate your indexed
interest. For example, if the insurance
company sets the participation rate at 80
percent, your fixed index annuity will be
credited with interest based on 80 percent
of any increase in the value of the external
index.
Spread. The spread is a percentage that is
subtracted from any increase in the value
of the index during the term period. For
example, if the annuity has a 4 percent
spread and the index increases 10 percent,
then the annuity would be credited 6
percent.
Interest Rate Cap. Some fixed index
annuities set a maximum interest rate
(or cap) that the contract can earn in a
specified period. If the index increase
exceeds the cap, the cap is used to
calculate the credited interest.
A fixed index annuity is designed to provide
a combination of benefits that can give you
confidence in your retirement income strategy.
Whether the market is up, down or flat, the
fixed index annuity provides protection of your
principal and any credited interest from possible
market downturns and the potential for interest
linked to the performance of a market index. As
long as you abide by the terms of the contract,
your principal is protected against market loss
and any credited interest is locked in at the end
of each term period and cannot be taken away as
a result of a future market downturn.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
17
ROADMAP TO RETIREMENT INCOME
Insurance Coverage
Death Benefits
If you pass away before you begin to receive scheduled annuity
payouts, your beneficiary(ies) will receive a death benefit.
Even if you pass away after annuity payouts have begun, it’s
still possible your beneficiary(ies) will receive a death benefit.
The value and the manner in which your beneficiary(ies) can
receive the death benefit may vary based on the product
selected and insurance company through which it is issued.
Annuitization
Annuitization is the process of converting the account value
of an annuity into a series of guaranteed periodic income
payments, such as monthly or annual payments.
Guarantees
Because an annuity is issued by an insurance company, all
guarantees related to fixed account rates, annuitization
payouts and death benefits are backed by the financial
strength and claims-paying ability of the issuing company.
The interest credited on your
contract may be aected by
the performance of an external
index. However, your contract
does not directly participate in
the index or any equity or fixed
interest investments. You are not
buying shares in an index. The
index value does not include
the dividends paid on any equity
investments underlying any
equity index or any interest paid
on any fixed income investments
underlying any bond index.
These dividends and interest
are not reflected in the interest
credited to your contract.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
18
THE ROLE ANNUITIES CAN PLAY
Owner’s Manual
Contract Structure
How you structure your annuity will aect its income payouts and death benefits. The following are
all the participating entities involved in an annuity contract.
Insurance Company – issues the contract, provides contract information and is responsible for
all payout guarantees.
Owner – purchases the annuity and makes all decisions regarding allocations, income
distributions, annuitants and beneficiaries.
Annuitant – typically the same person as the owner; annuity income payouts are based upon
the life expectancy of the named annuitant (who generally must be younger than age 85 at the
time the contract is issued).
Beneficiary – the person who receives the contract’s death benefit. Naming a beneficiary
(person, charity or trust) is important to help the annuity potentially avoid probate.
Company Ratings
Because annuity product guarantees are backed solely by the insurance company that issues the annuity
contract, it is important to consider the strength of the issuing insurance company when purchasing
an annuity. Factors such as the size of the company, the length of time it has been in business and
its investment profile are all considerations that you should carefully discuss and research with your
financial professional. There are a number of independent agencies that rate the financial strength
of insurance companies. One of the most well-known of these companies is A.M. Best, which rates
companies on a 16-point scale from an A++ (superior) down to an S (suspended).
A 1035 Exchange
In recent years, annuities have evolved into more eective retirement income vehicles than in the past.
Therefore, you may currently own an annuity contract that may be less eective for accomplishing
your goals than newer annuity contracts on the market today.
If you and your financial professional determine you would be better suited to replace or exchange a
current annuity contract for a dierent one, you may be able to take advantage of what is called a “1035
Exchange,” named after Section 1035 of the Internal Revenue Code. The IRS allows you to exchange
an insurance contract that you own for a new life insurance or annuity contract without paying tax on
the income and interest earned on the original contract at the time of the exchange.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
19
ROADMAP TO RETIREMENT INCOME
However, you should be aware of the following requirements
involved with making a 1035 Exchange:
The current insurance contract must be directly
exchanged for a new contract — you may not receive a
check and apply the proceeds to the purchase of a new
insurance or annuity contract.
You may make a tax-free exchange, provided certain
requirements are met, in only the following situations:
From a life insurance contract to another life
insurance contract
From a life insurance contract to an annuity
contract
From one annuity contract to another annuity
contract.
A 1035 Exchange does not include the exchange of an
annuity contract for a life insurance contract.
Considerations Regarding a 1035 Exchange:
While surrender charges eventually expire on an
existing contract, be aware that a new surrender charge
period may be imposed when you trade in an old
contract for new a contract, or may increase the period
of time for which the surrender charge applies.
You may have to pay higher annual fees for the new
contract.
When exchanging one contract for another, the new
contract must be suitable for you and provide benefits
that, when compared to the existing contract, better
meet your financial goals and objectives.
Insurance professionals recommending an annuity 1035
Exchange are required to inform you of the pros and cons
of the exchange. Your insurance professional should make
a recommendation only if it is suitable for you and only
after evaluating your personal and financial situation, needs,
tolerance for risk and ability to pay for the new contract.
This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualified tax advisor or attorney regarding your personal circumstances.
20
THE ROLE ANNUITIES CAN PLAY
Conclusion
An annuity could play an important part in your overall retirement income strategy. So, how do you
know whether an annuity may be appropriate for you?
Are you retired or nearing retirement?
Do you currently have a retirement income strategy in place?
Do you have predictable, reliable income streams or are you working with defined
contribution plans, such as a 401(k) or IRA?
If you do not currently have predictable and reliable income streams to cover your basic expenses in
retirement, you may want to consider an annuity for a portion of your retirement income strategy to
provide supplemental income that can help oset the risk of outliving your money.
Together you and your insurance professional should have a thorough discussion about whether an
annuity is suitable for you.
All annuity contract and rider guarantees are backed by the financial strength and claims-paying ability of
the issuing insurance company. Annuities are not a deposit of, nor are they insured by any bank, the FDIC,
NCUA or by any federal government agency.
AE04159167
Prepared For
www.fullertonfp.com
Corporate Office:
14155 N. 83rd Ave.
Suite 144
Peoria, 85381
Tempe Office:
600 E. Rio Salado Pkwy.
Suite 102
Tempe, AZ 85281