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(3) Mutual funds provide lower cost professional management.(a) Consider for bequest motives in flooring strategies(b) Utilize for liquid assetsLO 7-1-5: Using annuities in retirement income planning1. Objectivea. Summarize the wide range of available annuity products.b. Describe how they can be used in retirement income planning.2. Tax characteristicsa. Qualified annuities(1) Same tax treatment as other assets held in tax advantaged plans(2) Tax deferral on entire benefit or tax-exempt Roth treatmentb. Nonqualified annuities3. Immediate annuities(1) Tax deferral on earnings(2) Tax treatment of withdrawals depends upon whether benefit has beenannuitizeda. An immediate annuity is a contract that provides for periodic payouts that beginwithin one year of the contract date.b. Immediate annuities are purchased with a single premium. However, settlementoptions offered in a deferred annuity or even with a life insurance policy are otherways to access the immediate annuity form of payment.c. Most annuities provide for specified, fixed payments. However, variable immediateannuities are a hybrid product, providing payments for a guaranteed lengthof time, but with variable payments depending upon the performance of theunderlying assets.4. Immediate fixed annuitiesa. Immediate fixed annuities have a wide range of payment options.b. Life annuities can be on a single life or joint and survivor, providing either thesame payment to a surviving annuitant or a reduced amount. With life annuities,payments continue until the death of the annuitant.(1) This feature can be both the strength and limitation of a life annuity. Thestrength is that the benefit has a lower cost because of the insurancepooling.(2) However, clients may be squeamish about the possibility of dying youngand receiving a limited number of payments.c. Life annuities may be purchased for a term certain guaranteed period of time,such as 5 or 10 years, or offer a refund feature that pays out the remaining initialpremium to a beneficiary. These features, however do affect the cost of theannuity.d. Not all immediate annuities pay benefits for life. Term certain annuities that pay aspecified benefit for a limited period of time are quite common as well. These canbe used in retirement income planning in a number of ways.7.14
(1) Example: One approach is to cover expenses for a bridge period—such asfrom age 62 to 70 to support deferral of Social Security benefits.(2) With the bucket approach, a term certain annuity may be an appropriateproduct to provide income for the expenses over the most current incomebucket.(3) Term certain annuities are also used by some in a low interestenvironment—to defer the decision to purchase a life annuity.e. Immediate fixed annuities are a common approach for creating a reliable incomefloor under the flooring approach. The three issues involved in choosing anannuity for flooring purposes include:(1) Choosing the type of annuity—for example, single life or a joint andsurvivor annuity.(2) When to purchase the annuity as the amount of the payment dependsupon the underlying interest rates that change over time.(3) The reliability of the promise—which relates to the rating of the insurancecompany from which the annuity is being purchased.5. Immediate annuity innovationsa. Accessing principal(1) Some products today offer on a limited basis the ability to access a portionof the principal.(2) If a lump sum withdrawal is elected, future annuity payments will bereduced to reflect the withdrawal.b. Another limitation is the concern for the loss of purchasing power due to inflation.(1) Annuities today can be purchased with inflation protection.(2) Products that tie increases to the CPI will generally have a cap on theamount of potential increases.(3) Other products provide for a specified increase each year, such as 3percent.c. Creating an income floor(1) When creating an income floor a strong argument can be made that aninflation adjusted annuity providing for guaranteed lifetime income for thelife (lives) of the annuitant(s) is the appropriate product.(2) In the current low interest environment, laddering purchases of immediatelife annuities without inflation protection is another common approach.6. Immediate variable annuitiesa. Immediate variable annuities are a hybrid product that combines the guarantee ofcontinuing payments with the potential for increasing payments if the underlyinginvestments outperform the assumptions.(1) The client will generally have some options with regard to the choice ofinterest assumption.(2) Choosing a lower assumption will mean lower initial payments, but createsa better potential for increasing payments over time.(3) Assuming that the client chooses an investment portfolio that includes asignificant exposure to equities the product is also considered an indirect7.15
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Huebner School SeriesHS 353 STUDY O
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THEAMERICANCOLLEGE.EDUThrough The A
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c. But it is more comprehensive bec
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(3) Work part-time during retiremen
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SECTION 2: UNDERSTANDING RETIREMENT
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d. Solutions(1) The model considers
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. Other sources of retirement incom
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c. Another option for solving cash
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(b) Net worth statements that ident
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d. Be ready to reengage with the cl
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(b) In financial planning(c) In inv
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j. Planning Point: Planners can use
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e. We also need them to have a bett
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Assignment 2IDENTIFY RETIREMENT INC
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(2) Income4. Determining risk toler
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collaborative experience which focu
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6. Asset allocation and risk tolera
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c. How long will the income last?d.
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. Durationc. Reliabilityd. Other6.
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c. Supplemental Security Income (SS
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. An unused emergency fund can supp
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5. Inflation(2) The expense method
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Assignment 3CHOOSE APPROPRIATE STRA
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. Save as a percentage of income an
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(1) Note that 38% of second income
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(4) The AARP website has a national
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4. Contributions to IRAs and Roth I
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carve out the nondeductible contrib
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(2) Plus salary deferrals (for an i
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a. Example:(1) Save $10,000 in 25%
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(a) This requires knowing four fact
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. Solution(1) Li and Lin Lin are bo
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(1) The increase in dollar amounts
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9. In some circumstances, an indivi
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2. Reverse mortgage basicsa. Almost
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5. Planning considerations(b) Keep
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(2) Some funds that are promoted as
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(1) Berstresser, Chalmers, and Tufa
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RESOURCES FOR COMPETENCY 3: CHOOSE
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(2) From the previous employer(s) p
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8. IRA funded plans (IRAs, SEPs, SI
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. Does the distribution election fi
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6. Net unrealized appreciation rule
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a. Tax-exempt plans include Roth IR
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8. Calculating required distributio
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(2) Exception: If there are separat
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5. Impactc. Tax rates are low in ea
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(7) Based on ordering rules, identi
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7. A married couple who file jointl
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(1) Needed to provide the appropria
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13. Transfers at deatha. Wills(2) A
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(1) The Retirement Equity Act manda
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(2) Beneficiary designation of bene
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13. Overview14. Types(2) The donor
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(1) Charity needs only to payout in
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c. Access should be granted to an a
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nightmare of living probate might h
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(6) Powers to represent their princ
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c. If the policy is term coverage w
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e. Factoring personal and family he
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problem. On the other hand, we can
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d. Adding a cost of living adjustme
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g. Planning Point: Sometimes a high
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(2) Clients may not be able to “a
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c. Ensure that the client is receiv
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a. Example: Because of physical and
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options about where to get his/her
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(2) Facilities, monthly fees, and s
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8. Other strategies that help to co
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standard deviations of the returns
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a collapse in the real estate marke
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a. In a later competency we will di
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years of service with the employer)
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a. Planning Point: Planners should
Page 156 and 157: (2) If you have locked in food, ren
Page 158 and 159: (4) Loss-of-spouse risk—Deferred
Page 160 and 161: (1) Excess withdrawal risk—The us
Page 162 and 163: (5) Frailty risk—Managing assets
Page 164 and 165: 7. Practice good career management:
Page 166 and 167: Assignment 6CHOOSE APPROPRIATE STRA
Page 168 and 169: c. Example: Chuck and Sarah divide
Page 170 and 171: e. The bucket approach can be thoug
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Page 174 and 175: (1) The time horizon used in the ca
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Page 178 and 179: markets have declined by a specifie
Page 180 and 181: (2) Annuities and long-term care an
Page 182 and 183: anticipates ramping down her activi
Page 184 and 185: c. Each of the three portfolios wil
Page 186 and 187: SECTION 4: THE ESSENTIAL VERSUS DIS
Page 188 and 189: d. Clients give up investment contr
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Page 194 and 195: (1) Rate at which banks lend to the
Page 196 and 197: . Dollar-denominated liabilities of
Page 198 and 199: (a) Dividend taxed in year paid out
Page 200 and 201: 4. Taxationtheir return generating
Page 202 and 203: . Close ended(1) IPO style launch(2
Page 204 and 205: (3) Tax control17. Conversations in
Page 208 and 209: way to obtain increasing payments t
Page 210 and 211: protection from the downside risk w
Page 212 and 213: 6. Today’s annuitization rates ar
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Page 216 and 217: a. The client may not be clear abou
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Page 220 and 221: c. Product solutions work together
Page 222 and 223: (1) A problem is that if the client
Page 224 and 225: (b) A traditional fund company(c) A
Page 226 and 227: d. Evelyn is in great health and he
Page 228: RESOURCES FOR COMPETENCY 7: INTEGRA
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