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(a) Dividend taxed in year paid out(b) Capital gains taxed when realized(2) Tax-advantaged retirement accounte. Inflation hedge(a) Qualified distributions from tax-deferred retirement accounts aretaxed as ordinary income.(b) Qualified distributions from Roth IRA accounts are not taxed inretirement.(1) Stocks have historically been thought of as an investment that acts asa hedge against inflation. In periods of high inflation (more than 5%)stocks do not tend to keep pace with inflation. In the more typical 2–5%inflationary environment, they do tend to keep ahead of inflation. Resultsare mixed over recent years with the lost decade 1999–2009 having stocksearn a negative yield.f. Estate planning considerations(1) Investing in individual stocks in a taxable account allows the client to namebeneficiaries of the shares in his or her will. Those shares, depending onthe current tax law, may receive a step-up in basis as of the decedent’sdate of death (or alternative valuation date), eliminating the capital gainson the shares over the decedent’s holding period.g. Hedging stock returns(1) Using options, futures, and options on futures to provide portfolio insuranceagainst downside risk. Option collars can finance part of the portfolioinsurance but potentially limit the upside potential.(2) Using exchange-traded funds (ETFs) and exchange-traded notes (ETNs)to hedge stock portfolio performance(3) Deferred variable annuity with guaranteed lifetime riders(4) Equity-indexed annuityLO 7-1-3: Using bonds in retirement income planning1. Durationa. Duration refers to the weighted average length of time until an investor will receivecash inflows from a bond.b. Duration is an important concept for financial planners to understand becauseprices of bonds move inversely with yields and the magnitude of the movementincreases with the duration of the bond. Interestingly, duration approximatelydenotes the percentage change in the price of a bond per percentage pointchange in yield.(1) Example: The price of a bond with a 2-year duration will decrease by about2% if interest rates increase by 1%. However, the price of a bond with a10-year duration will decrease by about 10% if interest rates increase by1%. However, price risk is only one of the interest rate risks specific tobond investing.c. Another major risk is reinvestment risk, which refers to the risk that one will haveto reinvest their cash flows at a lower rate of interest.7.6