Building Your Future - Strategies & Products for Retirement Income Planning

BUILDING YOUR FUTURESTRATEGIES & PRODUCTS FOR RETIREMENT INCOME PLANNING

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IRI proudly leads a national consumer coalition of more than 25 organizations and is the only association that represents the entire supply chain of insured retirement strategies. IRI members are the major insurers, asset managers, broker-dealers/distributors, and 150,000 financial professionals. As a not-for-profit organization, IRI provides an objective forum for communication and education, and advocates for the sustainable retirement solutions Americans need to help achieve a secure and dignified retirement.

We believe in the necessity of all Americans to strengthen their retirement security through the guarantees provided by insured retirement strategies. By educating yourself with the latest information and data on retirement income solutions, and discussing them with your financial advisor, you will be expertly poised to attain your retirement goals.

Please contact IRI at 1101 New York Avenue NW, Suite 825, Washington, DC 20005, by telephone at (202) 469-3000 or email us at [email protected].

Financial professionals can access additional retirement planning resources and tools at myIRIonline.org. Consumer retirement planning information and resources can be accessed at RetireOnYourTerms.com.

THE INSURED RETIREMENT INSTITUTE IS THE LEADING ASSOCIATION FOR THE RETIREMENT INCOME INDUSTRY.

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Table of Contents . 1Table of Contents . 1

TABLE OF CONTENTSINTRODUCTION Helping You Understand Your Retirement Income Options........................................... Getting Started on Your Retirement Income Strategy..................................................... Investing Basics.............................................................................................................. Preparing for Risks.......................................................................................................

INVESTMENT AND INCOME PLANNING STRATEGIES Systematic Withdrawal Plan.......................................................................................... The Bucket Approach..................................................................................................... Risk-Adjusted Income Approach.................................................................................... Income Floor/Hybrid Approach..................................................................................... Bond Ladders................................................................................................................ Laddering a CD Portfolio...............................................................................................

INSURED INCOME PRODUCTS OVERVIEW Variable Annuities with Guaranteed Lifetime Withdrawal Benefits................................ Fixed Index Annuities.................................................................................................... Single Premium Immediate Annuities........................................................................... Deferred Income Annuities............................................................................................ Long-Term Care Insurance............................................................................................. Stand-Alone Living Benefits...........................................................................................

INCOME-PRODUCING INVESTMENT PRODUCTS Income-Distributing Mutual Funds................................................................................ Maturity Date Managed Payout Funds................................................................. Endowment Managed Payout Funds.................................................................. Dividend-Paying Mutual Funds........................................................................... TIPS Mutual Funds.............................................................................................. Dividend-Paying Stocks................................................................................................. Preferred Stocks............................................................................................................. Real Estate Investment Trusts........................................................................................

PUTTING IT ALL TOGETHER

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2 . Building Your Future | Strategies and Products for Retirement Income Planning

» HELPING YOU UNDERSTAND YOUR RETIREMENT INCOME OPTIONSRetirement has changed over the generations - gone are the days Americans worked at the same company for 40 years and then retired with a gold watch and the confidence that their pension plan and Social security would provide adequate income for their remaining years.

With 79 million Baby Boomers in or nearing retirement, the United States is facing a potential retirement crisis as the number of retirees will increase significantly over the coming decades.

People retiring today face two core problems: Retirement has become more expensive due to increased longevity and higher health care costs. Traditional retirement income sources have diminished as the age to receive maximum Social Security benefits has increased while fewer Americans are covered by traditional pension plans and retiree health insurance.

The United States has seen a significant increase in the life expectancy of a 65-year-old over the past generation. In 1980, the average life expectancy of a 65-year-old male was 79.1 years. By 2010, this number had increased by over three years to age 82.7.1

1 National Vital Statistics Report, 2012, Volume 60, No. 4


Introduction . 3

As people live longer, the likelihood that they will incur significant health care costs in retirement increases, and health care costs continue to grow as a percentage of the economy. In 2011, health care costs accounted for nearly 18 percent of GDP, a figure expected to reach 20 percent within eight-to-10 years.2 While Medicare does provide medical coverage to most over age 65, it does not provide complete coverage. A healthy 65-year-old man can expect cumulative health care expenses, including premiums, to top $369,000 through the remainder of his lifetime, and the corresponding number for women is $417,000.3

Today, fewer Americans are covered by traditional pension plans, and the age to receive full Social Security benefits has increased. This requires Americans to take a more active role in preparing for their retirement.The number of traditional pension plans has decreased significantly over the past several decades. In 1985, there were over 114,000 private pension plans insured by the Pension Benefit Guaranty Corporation. Today that number has dropped to about 20,000, covering 40 million people.4 The percentage of retirement savings allocated to individual plans (includes annuities, IRAs, and employer-sponsored defined contribution plans such as 401(k), 403(b), and 457 plans) has increased steadily to 82 percent.5 Individual plans place the burden of responsibility for providing income in retirement on consumers.

2 Centers for Medicare & Medicaid Services, NHE Fact Sheet

3 Insured Retirement Institute, Health Care Expenses and Retirement Income, January 2012

4 Pension Benefit Guaranty Corporation, 2012

5 Investment Company Institute, Q3 2012

Social Security has long been considered a pillar of the retirement system. In fact 88 percent of married couples and 85 percent of non-married individuals receive Social Security benefits overall.6

However, the government program has been feeling the pressure of America’s on-setting wave of retirees. Historically, the age to receive full retirement benefits from Social Security was 65. Due to financial concerns, that age has been increased, varying by year of birth. For instance, for those born in 1960 or later full retirement age is 67. Individuals can still begin Social Security retirement benefits at age 62, but the annual amount they will receive will be reduced. So a person born in 1960 who starts collecting benefits at age 62 will only receive 70 percent of their full retirement age benefit.

There are a number of products that provide retirement income. However, many of these products are not insured, leading to the potential of one “running out” of money during one’s lifetime.

Insured retirement refers to products and solutions that guarantee income and protection during one’s retirement. For example, annuities and pension plans guarantee lifetime income while long-term care insurance provides financial protection against long-term care costs.

The Insured Retirement Institute (IRI) has created this guide to help explain some of the most common retirement income planning products and strategies available today. This guide was designed to provide a foundation of knowledge for retirement income planning, so that you can make well-informed decisions that will impact your financial future. Research shows that working with your financial advisor to craft a retirement plan, which determines which of these options to employ and how to allocate appropriately between them based on your specific goals, time horizon and risk tolerance, can significantly increase confidence in your retirement.

6 Fast Facts and Figures About Social Security, 2012

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In this guide, we help you decipher the following strategies and products, as well as the risks and benefits associated with each. We examine investment and income planning strategies, insured income products, and income-producing investment products.

INVESTMENT AND INCOME PLANNING STRATEGIESSystematic Withdrawal Plans Regular payments from your investment account at either a variable or

fixed amount until the account value is exhausted.The Bucket Approach Breaking up retirement into distinct time increments of three to ten years

and choosing investments that perform and deliver certain outcomes at different times throughout your retirement.

Risk-Adjusted Income Approach

Managing a broadly diversified portfolio to help optimize your total return within your individual risk characteristics. Cash flow is created through dividends, interest, or periodic withdrawals of a percentage of assets.

Income Floor/Hybrid Approach Distinguishing between your essential and non-essential needs in retirement, and creating a strategy to address both.

Bond Ladders Purchasing a portfolio of corporate, municipal or government bonds with different maturity dates. As each bond matures, the proceeds are reinvested into a new bond that will mature after the last bond has begun to generate payments.

Laddering a CD Portfolio Allocating a portion of retirement assets to certificates of deposit with varied maturity dates.

INSURED INCOME PRODUCTSVariable Annuities with Guaranteed Lifetime Withdrawal Benefits

Long-term, tax-deferred investment vehicles that contain both investment and insurance components to create an income stream for life. Optional guaranteed lifetime withdrawal benefits (GLWB) provide protected annual income.

Fixed Index Annuities Long-term, tax-deferred insurance vehicles which offer a guaranteed minimum interest rate and the opportunity for more interest growth based on changes in one or more market indices. Such products also offer optional lifetime income benefits.

Single Premium Immediate Annuities

Provide a guaranteed income for life or a specified period in exchange for a one-time lump sum payment.

Deferred Income Annuities Tax-deferred annuity which can provide a guaranteed income for life or a specified period in which the income stream does not begin until years into the future, such as age 65 or 70, or at older ages such as age 80 or 85.

Stand-Alone Living Benefits Provides guaranteed lifetime income in a manner similar to that provided under a guaranteed lifetime withdrawal benefit (GLWB), but without the need to purchase a variable annuity.

Long-Term Care Insurance Helps defray expenses associated with extended care in a variety of settings, including nursing homes, assisted living facilities, home health care, and adult day care.

Introduction . 5

INCOME-PRODUCING INVESTMENT PRODUCTSMaturity Date Managed Payout Funds Seek to convert your assets into systematic monthly income

payments over a defined period of time. Designed to self-liquidate.

Endowment Managed Payout Funds These funds generally combine a managed distribution policy with an endowment-like investment strategy to provide monthly income payments throughout retirement while seeking to preserve principal.

Dividend-Paying Mutual Funds Create dividend income by the fund’s investments in companies that have a history of generating high dividend yields and/or dividend payment security.

TIPS Mutual Funds Create a predictable income while offering a level of inflation protection. The funds invest exclusively in bonds issued by the U.S. Treasury that adjust to reflect changes in the Consumer Price Index.

Dividend-Paying Stocks Create dividend income by the individual’s investments in companies that have stable cash flows and predictable earnings, although dividends are not guaranteed.

Preferred Stocks Have the potential to generate greater income than comparable rated corporate bonds, and pay out dividends before common stocks of the same company.

Real Estate Investment Trusts (REITs) Real estate companies that invest in income-producing properties, real estate mortgages, or a combination of the two.

Introduction . 5


Everyone has different goals, expectations and needs when it comes to retirement. That is why your retirement income strategy should be tailored to your particular situation. Below are some suggested steps you can take toward developing your personal retirement income investment strategy.

» STEP 1 Review your assets and do a self-assessment of your retirement income situationStart gathering your account statements so you can begin identifying the assets that you have to work with. If you are like most people, you may have money in different places, so taking the time to identify and review the assets you plan to use for retirement income is an important first step. You should also do a self-assessment of your current and projected income sources, such as Social Security, pensions, and annuities to help provide you with a starting point for where you are today and help you set realistic goals for where you would like to be in the future.

» STEP 2 Take a two-pronged approach by identifying essential and non-essential expensesAs a next step we suggest breaking out your expected retirement income needs into two basic categories: essential expenses and non-essential expenses. This can have a significant impact on how you evaluate the different strategies and products described in this guide, as well as how you view and approach risk within your portfolio.

Oftentimes, investors will decide to cover essential expenses (such as food, shelter and utilities) with guaranteed income products* and invest their remaining assets for discretionary income in non-guaranteed products and strategies. This may provide some comfort in knowing that your basic needs are covered during times of volatility and may help take some of the anxiety and emotion out of investing.

» STEP 3 Seek the counsel of an experienced financial professionalPerhaps the most important decision an investor can make in building a retirement income plan is to seek the advice of a trusted, qualified advisor. For this important partnership, it is essential that you solicit the help of a trained financial professional capable of examining your total financial picture. A knowledgeable advisor will help you define life goals, teach you about the risks you may face, establish the right financial plan, provide strategies focused on your specific needs, and help you stay on track as you look to sustain income during an extended retirement.

These few simple steps will go a long way toward helping you choose investment solutions and strategies that are right for you.

*All guarantees are subject to the claims-paying ability of the issuing insurer.

» GETTING STARTED ON YOUR RETIREMENT INCOME STRATEGY

Introduction . 7

Organize your finances to help manage your money more efficiently. Remember, investing is just one component of your overall financial plan. Get a clear picture of where you are today.

HOW DO I CHOOSE MY INVESTMENT GOALS?Many individuals have more than one goal in mind, for example, a family vacation, a first time-home purchase, and/or a secure retirement. Part of setting investment goals is determining when you will need the money to pay for them. Most goals fit into one of three categories:

Short-term: Usually within a year or two. The closer you get to your goal, the less risk you generally want to take with the money you have already accumulated. This means you will be more inclined to put your money into federally insured bank accounts or cash equivalent investments. An example of a short-term goal is a family vacation.

Mid-term: Usually within two to 10 years. Mid-term goals are typically those for which you need time to accumulate the money. The more time you have, or the more flexible the timing, the more risk you can probably afford to take with your money. An example of a mid-term goal is the down payment for a home purchase.

Long-term: Usually more than 10 years. For many people, the number one long-term goal is a financially secure retirement. It is also a goal with a long-time horizon and you will need to manage that money for many years in retirement. When your goal is paying for college, for example, you think in terms of paying costs for four years, or perhaps a few more for a post-graduate or professional degree.

WHAT IS INVESTMENT RISK AND HOW CAN I DETERMINE MY RISK TOLERANCE?Because every investment carries some degree of risk, it is critical that you assess your tolerance for risk. If you are the sort of person who will lie awake at night worrying about your investments and you put most of your money in the stock market, then you might want to consider balancing your portfolio with lower-risk investments, such as Treasury bills, highly rated bonds or other lower risk investments.

Should you decide to adopt a low-risk investing strategy, traditionally low-risk investments tend to have lower rates of return that are commensurate with their risk level. As a result, while you might be able to protect your principal from loss, you run the risk that your investment returns will not keep pace with inflation.

HOW DO I CHOOSE THE APPROPRIATE INVESTMENT SOLUTIONS FOR MY GOALS?If you work with an investment professional to set your goals, he or she should be able to help you identify the types of investments that are most appropriate for different periods. An experienced investment professional ought to know the spectrum of investment options available to you, but ultimately you will need to know what you own and why. You cannot make an informed choice about an investment without asking probing questions about its features, risks and costs—and you should not invest in something you don’t understand, no matter who recommends it to you.

If you take the lead yourself, you should be prepared to spend time learning about various investments and the markets in which you buy and sell them. You should think about whether the investments you are considering are appropriate at this point in your life. The Securities and Exchange Commission provides descriptions of some investment products, explains how they are bought and sold, and details their benefits and risks. You will also find information on fees and tips to avoid fraud: www.investor.gov/investing-basics/investment-products

» INVESTING BASICS


In considering how to achieve your retirement goals, it is important to identify the right strategies and solutions that can help you manage the multiple risks that may arise at this phase of life. While not all people have equal exposure to these factors, individual investors and their financial advisors must keep these concerns in mind when planning for retirement.

Many of these risks are either not relevant when someone is building wealth or they may become even more pronounced during retirement. These risks to a successful retirement include:

Longevity risk which is the risk that someone will outlive their wealth and available income. Longevity risk can potentially be managed using insured solutions such as immediate or deferred annuities or variable annuities and fixed index annuities with living benefit riders to provide a guaranteed stream of income for life.

Entitlement risk which is the risk that government programs such as Social Security or Medicare will not offer sufficient protection for retirement. Entitlement risk can be managed by increased personal saving and investing and using insured solutions.

Excess withdrawal risk which is the risk that an individual will draw down assets too quickly and undermine their retirement plan. Excess withdrawal risk can be managed by developing a plan that balances retirement expenses and available sources of income.

Market risk which is the risk of losing invested wealth, either temporarily or permanently, because of a market downturn or poor investment performance. Market risk can be managed through diversification of savings and investments, including use of insured solutions to provide stability and assurance of income irrespective of market results.

Lifestyle risk which is the risk that there is not sufficient income to maintain the current or expected standard of living during retirement. Lifestyle risk can be managed through disciplined savings, sound budgeting and planning, and including sustainable income sources such as immediate or deferred income annuities as part of a diversified investment approach.

Asset allocation risk which is the risk of investing either too conservatively or too aggressively and not adequately diversifying assets to sustain a portfolio across market cycles. Asset allocation risk can be managed through the assistance of an experienced investment professional, by diversifying assets, and by including insured solutions as part of the investment mix.

» PREPARING FOR RISKS

Preparing for Risks . 9

Sequence of returns risk which is the risk of receiving low or negative returns in early years of drawing down a retirement portfolio and increasing the potential of running out of money prematurely. Sequence of returns risk can be managed by sound planning, through drawing down assets thoughtfully, and by including insured annuity products and other guaranteed solutions in your investment mix.

Inflation risk which is the risk that rising costs will undermine purchasing power over time. Inflation risk can be managed through investments and insured solutions that offer inflation adjustments, through portfolio diversification, and by proper financial planning.

Medical expense risk which is the risk of paying for the growing cost of health care related services in retirement. Medical expense risk can be managed through including risk protection solutions such as Long-Term Care insurance as part of a broad financial plan.

Tax risk which is the risk that rising taxes or unforeseen tax consequences can impact a portfolio or purchasing power. Tax risk can be managed using tax-deferred and tax-efficient investment solutions and by seeking guidance from a tax professional.

Personal or event risk which is the risk that an unexpected change in family circumstances (such as divorce, death, illness, or adult children returning home) may undermine anticipated retirement plans. Personal or event risk can be managed through preparation of a financial plan and by establishing reserve or rainy day funds that can be used for emergencies.

Incapacity risk which is the risk that as a result of deteriorating health or severe decline in cognitive abilities, a retiree may not be able to execute sound judgment in managing their financial affairs. Incapacity risk can be managed by having tools such as wills, trusts, and power of attorney provisions in place at the time of retirement, if not before.

To help address these various risks, talk with your financial professionals about doing a thorough assessment to discover the potential issues and challenges that you may encounter. While not all challenges can be easily foreseen, this discovery or pre-planning process is an excellent way for you to obtain a better picture of the totality of retirement, the specific risks you may face, and the decisions you must make to lessen the potential impact of these challenges.


» Systematic Withdrawal Plans

» The Bucket Approach

» Risk-Adjusted Income Approach

» Income Floor/Hybrid Approach

» Bond Ladders

» Laddering a CD Portfolio

Retirement income planning is about more than simply purchasing a product or investment. There are also several income producing strategies that can be used in combination with the underlying investments. This section will discuss some of the most common retirement income planning strategies available to you, including:

» INVESTMENT AND INCOME PLANNING STRATEGIES

Investment and Income Planning Strategies . 11

A systematic withdrawal plan (SWP) allows you to receive regular payments from your investment account. It is used to create steady cash flow, and is frequently employed during retirement to generate income.

Under a SWP, your retirement account is invested in securities (most commonly mutual funds) that are diversified over a number of asset classes and are managed for total return. You withdraw either a variable or fixed amount from the account on a regular basis, and the original investment will continue to grow so long as the underlying investments earn a higher rate of return than the rate of withdrawal.

HOW IT WORKSBelow is a simplified hypothetical example of how an SWP works:John Smith has $500,000 invested across a number of mutual funds, and would like to receive $6,000 at the beginning of each year. In this example, John Smith’s original investment of $500,000 grows because the return for this 10-year period allows the portfolio to sustain the withdrawals without invading principal.

Year Amount Invested Annual Withdrawal Annual Return Account Balance $500,000 1 $6,000 7% $528,580

2 $6,000 6% $553,935

3 $6,000 18% $646,563

4 $6,000 -5% $608,535

5 $6,000 8% $650,738

6 $6,000 -15% $548,027

7 $6,000 19% $645,012

8 $6,000 -4% $613,452

9 $6,000 -6% $571,005

10 $6,000 -10% $508,504

It is important to recognize, however, that when the investment portfolio is in withdrawal mode, losses make it harder to recover, particularly when they occur in the earlier years. The next example demonstrates this. It re-creates John Smith’s $500,000 portfolio and $6,000 annual withdrawals, but in this scenario the same returns are used in reverse order.

Year Amount Invested Annual Withdrawal Annual Return Account Balance $500,000 1 $6,000 -10% $444,600

2 $6,000 -6% $412,284

3 $6,000 -4% $390,033

4 $6,000 19% $456,999

5 $6,000 -15% $383,349

6 $6,000 8% $407,537

7 $6,000 -5% $381,460

8 $6,000 18% $443,043

9 $6,000 6% $463,265

10 $6,000 7% $489,274

» SYSTEMATIC WITHDRAWAL PLAN


The annualized return for the 10-year period is the same for both examples, but in the second example the portfolio is worth less than the initial investment due to the combination of withdrawals and consecutive negative returns in the first three years. In the first example, these negative returns did not occur until the end of the 10-year period. With the annual rates of return reversed, there is a completely different portfolio outcome.

This concept, commonly referred to as sequence of returns, constitutes a meaningful risk for investors entering retirement. As a result, it may be appropriate to make adjustments to your SWP to account for investment losses in the portfolio, particularly in the earlier years of retirement as these years have a greater impact on the portfolio’s long-term ability to sustain continuing withdrawals.

Since SWP’s are typically designed to draw from your investments periodically to supplement your income needs, they are only suitable for investors who are comfortable with market risk. You should also have enough investable assets to provide income that is sustainable for the desired duration of the SWP. In determining a withdrawal amount an average annual return assumption can be used, and this assumption should be based on realistic market performance expectations.

SYSTEMATIC WITHDRAWAL PLANS

BENEFITS:

» The ability to generate income with flexibility and control (you can change the withdrawal amount and the payment frequency as needed).

» The potential to protect against inflation and provide income growth, since the account may be fully invested while withdrawals are being taken.

» There can also be tax advantages. Rather than taking a lump sum payment, the income can be spread out across multiple intervals, potentially lowering your overall tax bill.

RISKS:

» Payments are not guaranteed, which means you could potentially exhaust your assets during retirement. Since your account may be fully invested, it is subject to market fluctuations.

» Your account must be managed and rebalanced on a regular basis to ensure it remains invested to support your average annual return assumptions and investment goals.

» Although a SWP is liquid and flexible, taking out large sums of money would require a higher rate of return to support ongoing withdrawals. If the higher rate of return is not achieved, this could impact how long your payments will last or may require you to decrease future withdrawal amounts.

A systematic withdrawal plan is a viable strategy to supplement your retirement income, provided you understand the risks involved. With proper financial planning, a systematic withdrawal plan can be an integral part of your retirement portfolio.


This approach to income planning involves breaking up retirement into distinct time increments ranging anywhere from three years to as many as ten, as opposed to treating each year of retirement as a single time period. Five- and seven-year time frames appear to be most common, although there is significant variation in how this strategy is applied.

At its core, this approach is about choosing investments that perform and deliver certain outcomes at different times throughout your retirement. In other words, the assets you need for income today should be invested differently than those you need for income in the future because the risks you face in retirement will impact them differently over time. For example, market downturns can have a much more devastating impact early in your retirement, while inflation will tend to be a bigger factor in the later years. Because a “one size fits all” approach may not account for these dynamics effectively, the bucket approach is considered by some to be a more comprehensive approach for delivering inflation-adjusted income that can last throughout your retirement.

Since the bucket approach involves assigning a specific investment to separate pools that have different terms and objectives, investment or product allocations can be different depending upon the corresponding “pool” and its characteristics. For example, a pool of assets can be set up and invested to generate low-risk income to be used within the first five years, or the assets can be invested for long-term growth for use in 20 to 25 years. Each pool will employ different investments and risk mitigation techniques that are dependent on your investment time horizon and risk tolerance.

THE BUCKET APPROACH

BENEFITS:

» Breaking up retirement into discrete time periods and solving for each period separately enables you to balance how you manage different risks and their potential impact over time.

» Losses are easier to recover from within an investment pool that is not yet in withdrawal mode.

RISKS:

» This is a more sophisticated approach and can be more difficult to monitor and maintain.

» Design is extremely important. For example, it could be difficult to make adjustments should there be a need for flexibility.

» Determining which risk mitigation tactic to employ for each time period can be daunting for the average investor, which is why working with a financial professional is so important.

» THE BUCKET APPROACH TO RETIREMENT INCOME PLANNING


The risk-adjusted total return approach involves managing a broadly diversified portfolio to help optimize your total return within your individual risk characteristics. Income is typically not a specific investment goal of this approach. Cash flow is created through dividends or interest generated by your investments and by periodic withdrawals of a targeted percentage of assets or dollar amount.

At its core, this approach is about constructing a diversified portfolio across different asset classes. Emphasis is placed on the overall performance and risk management of your entire portfolio. While your assets may be invested more conservatively given your risk profile, the basic approach is similar to how most portfolios are managed to build assets for retirement. The asset classes used may include equities, fixed income, alternatives and cash equivalents and can involve a wide variety of vehicles such as mutual funds, ETFs, individual securities and separately managed accounts.

THE RISK-ADJUSTED TOTAL RETURN APPROACH

BENEFITS:

» The approach allows you to focus on achieving the highest possible return over time with exposure to multiple asset classes and vehicles.

» There is great flexibility in how you can apply this approach to provide enhanced cash flow during periods when markets are performing well.

RISKS:

» The strategy increases exposure to market risk. Cash flow generated from this approach can be undermined by downturns in the capital markets or poor investment choices.

» Under-performance in the first several years post-retirement could provide significant risk to the long-term viability of your portfolio (sequence risk).

» During down periods, you may not generate sufficient cash flow to meet discretionary expenses without relying on drawdown of principal.

» THE RISK-ADJUSTED TOTAL RETURN APPROACH TO RETIREMENT INCOME PLANNING


This strategy involves distinguishing between your essential and non-essential needs in retirement. A minimum level of income or cash flow is typically targeted with guaranteed or low-risk investments to meet your ongoing essential day-to-day living expenses such as housing, food and energy costs. The remainder of the portfolio is managed on a risk-adjusted total return basis to meet your discretionary spending goals if performance is sufficient.

At its core, the income floor strategy is about finding the balance between your retirement needs and wants and creating a strategy to address both. The need to cover essential living expenses is typically addressed either by guaranteed sources of income like annuities, Social Security, pensions or low-risk investments such as laddered bonds or CDs. Discretionary items like vacations are addressed by investing the remainder of the portfolio in a broader range of investment vehicles depending on your risk parameters and preferences. The income floor/hybrid approach to retirement planning utilizes elements associated with other income planning methodologies. For example, it focuses on shielding investors from short-term market volatility, a key component of the bucket approach. Another goal is optimizing the performance of assets, which is inherent to the risk-adjusted total return strategy.

THE INCOME FLOOR/HYBRID APPROACHBENEFITS:

» This approach allows you to have some degree of assurance and protection against short-term market risk while allowing your portfolio to grow to meet your long-term needs.

» There is great flexibility in how this approach can be managed to provide enhanced cash flow during periods when markets are performing well.

RISKS:

» Outside of guaranteed solutions, your ability to generate sustainable income for essential needs may be challenged during periods of lower interest rates/yield performance.

» Exposure to market volatility can be reduced but not totally eliminated, which means you may not generate sufficient returns to meet your discretionary goals.

» THE INCOME FLOOR/HYBRID APPROACH TO RETIREMENT INCOME PLANNING


The fixed income markets can provide valuable strategies for investors who are seeking income. A popular fixed income investing strategy is called a bond ladder, and this may be appropriate if you desire a stable income stream and want to avoid the market volatility of equities.

A bond ladder involves purchasing a portfolio of corporate, municipal or government bonds with different maturity dates. The idea is to protect your principal and provide a steady income stream. For example, an investor looking to set up a ladder with $100,000 could purchase 10 different bonds, each worth $10,000 with maturities ranging from one to 10 years. The bonds purchased pay the investor a coupon rate, which is the annual interest rate of interest payable on the bond. Most bonds make interest payments semiannually; however, some bonds may offer monthly or quarterly payments to supplement retirement income needs. When the first bond matures, the proceeds are reinvested in a new bond that matures in 10 years, creating “a new rung” on the ladder.

It is important to understand that, during times of rising interest rates, investments in fixed income can expose investors to market risk and reinvestment risk. Market risk occurs when interest rates increase and bond market values fall. Reinvestment risk occurs when the interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment. The advantage of bond laddering is that it allows you to split your investment up into several different bonds with different maturities and durations rather than making a single investment into one bond. Though this strategy will not completely eliminate market risk and reinvestment risk, it can offer a way to help you better protect against them. Bond ladders also offer stability against “call risk,” since it is unlikely that all the bonds will be called at once. Call risk is the risk of the issuing company redeeming the bond prior to maturity, which in many cases may result in the investor reinvesting the proceeds in a less favorable environment.

BOND LADDERING APPROACHBENEFITS:

» Consistent returns since the bonds offer fixed payouts.

» Liquidity.

» Protection against short-term interest rate fluctuations.

» Stability against call risk, which often means reinvesting proceeds in a less favorable environment.

RISKS:

» Reinvestment risk, or the risk that proceeds from a maturing bond will need to be reinvested in a declining interest rate environment.

» Market risk, which occurs when interest rates increase and bond values fall.

» Credit risk, which is the risk of the bond issuer becoming unable to meet its obligations.

» Default risk, which is the risk that the issuing companies of the bonds held become unable to make their required debt payments.

» Call risk, although it is spread out across multiple bonds, is still present within this strategy.

A bond ladder may be a viable income strategy for a portion of your total retirement portfolio, as this strategy provides a stable income stream in addition to helping you manage both reinvestment and market risk.

» BOND LADDERS


A CD “ladder” utilizes Certificates of Deposit (CDs) to fund a portion of your retirement income. To create a CD ladder, an investment is split up and allocated to CDs with varied maturity dates.

For example, assume that an investor has $150,000 and purchases one CD for $50,000 with a one-year maturity, another CD for $50,000 with a two-year maturity, and a third for $50,000 with a three-year maturity. When the one-year $50,000 CD matures, it is reinvested into a three-year CD, which most likely will offer a higher interest rate than the current one-year CD. When the two-year CD matures, the investor can again choose a three-year CD. By following this pattern, the investor will have CDs that mature annually, each to be reinvested for a three-year term. Eventually, the investor will realize the goal of having all funds deposited at the longest term, possibly at a higher rate for income purposes, and this will assure that some of the investment matures annually with no early withdrawal penalty.

Since CDs are FDIC insured up to $250,000, CD laddering may be appealing if you are market risk averse and favor a more conservative investment strategy.

CD LADDERING APPROACH BENEFITS:

» Annual liquidity options without penalty for early withdrawal because a CD matures each year within this strategy.

» Greater stability of income can be achieved by reinvesting a portion of a maturing CD, rather than the full amount, each year, especially if interest rates are falling. This helps you manage reinvestment risk.

» CDs offer the added protection of FDIC insurance and insurance from NCUA. However, due to insurance limitations, it may be prudent to purchase CDs from a number of financial institutions, limiting your deposit amount to ensure coverage under the limits set forth by the FDIC or NCUA.

» The strategy is relatively easy to execute and understand.

RISKS:

» The income stream provided by this low risk investment may not be sufficient to cover your income requirements over the long term, and may not keep pace with inflation.

» The rates available at maturity of the CDs may have fallen below the original rate, causing your ongoing income stream to decrease.

» Although there is annual liquidity, emergency cash flow needs outside of the scheduled payments and in excess of the income may be withdrawn, but at a penalty.

A CD laddering strategy is one of many options you should consider to provide a stream of income. It may be practical for fully or partially funding your basic retirement income needs (e.g., food, utilities, housing, etc.). Because CDs are insured by the savings institutions that offer them (FDIC for banks, NCUA for credit unions), they are very low risk; however, if you lock in low CD rates, the income streams the CDs generate are unlikely to keep pace with inflation. Furthermore, this income strategy may be subject to substantial fluctuation, dependent on the CD renewal date and the level of CD rates available at the time of renewal.

» LADDERING A CD PORTFOLIO


Each of these products has the ability to provide you with guaranteed income or other financial protections, although the risks and income production may differ. It is also important to note that, as with all forms of insurance, the guarantees are subject to the claims-paying ability of the insurer.

» INSURED INCOME PRODUCTS OVERVIEW

» Variable Annuities with Guaranteed Lifetime Withdrawal Benefits

» Fixed Index Annuities

» Single Premium Immediate Annuities

» Deferred Income Annuities

» Stand-Alone Living Benefits

» Long-Term Care

Although there are several products and strategies investors can employ to generate retirement income, not all of them offer the predictability of a steady income stream, which is often absent in retirement. However, today there are products available that can offer guarantees and income predictability. Because the design of these products requires a comprehensive understanding of life spans and risk, these products are offered through insurance companies.

With insured income products, longevity risk and market risk (to some extent) are shifted away from you and onto the shoulders of an insurance company to manage. In exchange for assuming these risks, insurance companies typically charge a fee, depending on the product. The strategy is no different conceptually than other traditional forms of insurance. In this case, you are insuring your retirement assets for a fee.

This section will cover some of the most common types of insured income products:

Insured Income Products . 19


Variable annuities are long-term, tax-deferred investment vehicles designed to create a retirement income stream for life. They contain both an investment and insurance component and provide tax-deferred growth, access to professionally managed investment portfolios, death benefits and flexible withdrawal options. Variable annuities are sold only by prospectus and guarantees are based on the claims-paying ability of the issuer.

As a means for delivering retirement income, variable annuities provide a unique advantage: they allow you to invest in the equity markets with insurance features called living benefits. Living benefits are optional riders, available for an additional fee on annuity contracts, that can offer protected lifetime income. There are different types of living benefits available that can offer income, the return of principal or both. Some specialize in providing immediate income, while others are designed to provide you with distributions at a later date.

A type of living benefit that offers you protected annual lifetime withdrawals is called a Guaranteed Lifetime Withdrawal Benefit (GLWB). GLWBs can range in cost from 0.50 percent to 1.5 percent, depending upon the rider and the issuing insurance company. It is common for there to be a connection between the cost of the living benefit and the amount of insurance or guarantee that it provides, and it is important for you to identify how much protection you need.

When you purchase a variable annuity with a GLWB rider, you can participate in the equity markets and employ a systematic withdrawal plan (SWP) as discussed earlier. However, the added benefit in this case is that as long as the SWP remains within the annual withdrawal parameters of the GLWB rider, withdrawals will be guaranteed for your lifetime, even if the annuity were to run out of money due to a combination of poor market performance and/or withdrawals. If this were to occur, the insurance company would continue the payments pursuant to the provisions of your GLWB.

For example, a GLWB rider may offer withdrawals up to 5 percent of the initial investment for the rest of the investor’s life starting at age 65. In this example, if a 65-year-old investor were to invest $100,000 into a variable annuity contract with this GLWB rider, he or she would be entitled to withdraw up to 5 percent of $100,000 or $5,000 per year for the rest of their life, even if he or she were to run out of money due to poor market performance.

Although GLWBs offer downside protection, many riders also offer you the ability to account for investment performance and increase the protected annual lifetime income payments. This feature is referred to as a step-up, and riders commonly offer this feature on an annual basis.

» VARIABLE ANNUITIES WITH GUARANTEED LIFETIME WITHDRAWAL BENEFITS


VARIABLE ANNUITIES WITH GUARANTEED LIFETIME WITHDRAWAL BENEFITS

BENEFITS:

» Professional investment management with a variety of investment options.

» Flexibility to reallocate investment options without creating a taxable event.

» Optional living benefits provide insurance features that can provide you with either protected lifetime income or the return of your investment for an additional fee.

» Death benefits that typically provide the return of premiums adjusted for withdrawals.

» Tax-deferred growth on earnings until withdrawals begin.

» No IRS annual limit on the amount you can invest.

RISKS:

» Withdrawals made prior to age 59 1/2 are subject to a 10% IRS penalty tax and surrender charges may apply.

» Gains from tax-deferred annuity investments are taxable as ordinary income upon withdrawal.

» The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of your annuity, if redeemed, may be worth more or less than its original value.

» All guarantees are subject to the claims-paying ability of the issuing insurance company. If the insurance company becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage provided by your state’s insurance guarantee association.*

If you are currently in or nearing retirement and looking for protected lifetime income, a variable annuity with a GLWB living benefit rider may be appropriate for a portion of your retirement assets. This strategy allows you to stay invested in the equity markets while also providing a protected stream of income for the rest of your life.

* This risk extends specifically to the insurance features and not the investments. Variable annuity subaccounts are held in separate accounts and are not exposed to creditors in the event of insurer insolvency.


Fixed index annuities are long-term, tax-deferred insurance vehicles designed to create a retirement income stream for life. They offer a guaranteed minimum interest rate and the opportunity for more interest growth based on changes in one or more market indices. Fixed index annuities also offer flexible withdrawal options and a death benefit for beneficiaries. The guarantees provided by a fixed index annuity are backed by the claims-paying ability of the issuer.

Fixed index annuities offer more opportunity for accumulation than typical fixed interest rate alternatives while retaining 100 percent principal protection. This can provide more conservative investors a higher-potential alternative to current fixed rates while maintaining the guarantee that they cannot lose any principal or accumulated interest. Fixed index annuities also typically offer an annual reset feature. With annual reset, only the index change for the individual year factors into the interest earned. If index performance is negative the value remains the same. When the index performance is positive the contract will receive an interest credit, even if it has not recovered losses in the index from previous years. This unique feature allows index annuities to build value annually and avoid having to regain lost value in the index. When the index performance is positive the contract will receive an interest credit equal to the gain in the index, reduced by any spreads or caps as defined in the contract, even if the index value is lower than in previous years.

As a vehicle to provide lifetime income it can offer additional guarantees through living benefits similar to those available with variable annuities. Again, these living benefits are typically optional riders that can be added at an additional cost; however, some are included as a benefit of the annuity with no additional rider charge. Because fixed index annuities already guarantee principal if they are held to maturity, the typical living benefit is a GLWB, which can provide income either immediately or at a date in the future. Typical GLWBs can range in cost from 0.3 percent to 1.5 percent, depending upon the rider and the issuing insurance company. It is common for there to be a connection between the cost of the living benefit and the amount of guaranteed income that it provides, and it is important for you to identify how much income you need.

When you purchase a fixed index annuity with a GLWB rider, withdrawals will be guaranteed for your lifetime, even after the value of the annuity had been paid in full. If this were to occur, the insurance company would continue the payments pursuant to the provisions of your GLWB. Unlike traditional annuitization options included with annuities, lifetime withdrawal benefits typically allow you to withdrawal any remaining accumulated value while taking the withdrawals. However, if you were to withdrawal this value the payments would stop.

GLWB riders available on fixed index annuities typically offer similar withdrawal percentages to those available on variable annuities. Again, for example, if a 65-year-old investor were to purchase a fixed index annuity with $100,000 with a GLWB rider, he or she would be entitled to withdraw up to 5 percent of $100,000 or $5,000 per year for the rest of their life. Many GLWB riders also feature a specific guaranteed increase in the amount of withdrawal income available each year that you wait to begin taking the income. Some reflect this in an annual increase in the value payments are based on, while others increase the withdrawal percentage available each year.

» FIXED INDEX ANNUITIES


FIXED INDEX ANNUITIES

BENEFITS:

» If held to maturity, 100 percent protection of principal and accumulated interest.

» More potential for interest accumulation than typical fixed rate alternatives.

» Ability to annuitize the account value, creating a guaranteed lifetime stream of income.

» Optional living benefits that can provide you with flexible alternatives for a protected lifetime income.

» Death benefits that typically provide the return of premiums and credited interest adjusted for withdrawals.

» Tax-deferred growth on earnings until withdrawals begin.


RISKS:

» Withdrawals made prior to age 59 1/2 are subject to a 10 percent IRS penalty tax and surrender charges may apply.

» Because indexed annuities do not invest directly into the market, index gains only result from market price, excluding any gains from dividends.

» Gains from tax-deferred insurance contracts are taxable as ordinary income upon withdrawal.

» Although there is no risk of loss to principal or credited interest due to market index performance, surrender charges may be applied if you do not meet the terms of the contract. These charges may result in a loss of credited interest and principal.

» All guarantees are subject to the claims-paying ability of the issuing insurance company. If the insurance company becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage provided by your state’s insurance guarantee association.

If you are currently in or nearing retirement and looking for protected lifetime income, a fixed index annuity with a GLWB living benefit rider may be appropriate for a portion of your retirement assets. This strategy allows you to maintain the guarantees of a fixed product while also providing more potential for accumulation and a protected stream of income for the rest of your life.


A single premium immediate annuity (SPIA) is a fixed annuity that provides you with a guaranteed stream of income (for life, or a specified period) in exchange for a one-time lump sum payment. Income payments from a SPIA typically start shortly after your lump sum purchase payment is made to the insurance company. Your income payments can be received monthly, quarterly, semi-annually or annually. Your payment amounts depend on several factors, including initial investment, payment option selected, interest rate, age and gender.

Common lifetime payout options available:• Life Only – Payments are made until the death of the annuitant.• Life with Installment Refund – Payments are made for life of the annuitant, but upon death, the payments

can continue to a listed beneficiary, but only if the total payments received by the annuitant are less than the amount of premium paid. If this shortfall exists, then payments will continue to the listed beneficiary until the payments made from the SPIA equal the amount of premium paid.

• Life with a Cash Refund – Payments are made for the life of the annuitant, but upon death, the listed beneficiary receives the difference between total payments made and the premium amount paid.

• Life with Period Certain – Payments are made for life, and are guaranteed to be paid for a specified period from five to 30 years to either the annuitant or a beneficiary.

SINGLE PREMIUM IMMEDIATE ANNUITIESBENEFITS:

» Payments continue for your entire lifetime. They cannot be outlived.

» SPIAs typically provide greater income than self-insuring through a systematic withdrawal program.

» SPIA payments are not affected by fluctuations in the financial markets.

» Payments behave similar to Social Security and pensions, so they are easy to understand.

» Income payments can be structured to include automatic cost of living or inflation adjustments, increasing the payments over time.

RISKS:

» SPIAs are irrevocable and have limited liquidity, although certain newer contracts contain additional liquidity features.


» The risk of investing in a low interest rate environment and not having access to money if interest rates rise significantly.

» In cases where fixed payments have been elected, there may be inflation risk over time.

If you are looking for the maximum amount of guaranteed lifetime income, a SPIA may be one of the best choices available. The tradeoff in this case is flexibility. By purchasing a SPIA, investors convert an asset into a guaranteed income stream, and any additional access to that asset may be severely restricted.

» SINGLE PREMIUM IMMEDIATE ANNUITIES


A deferred income annuity (DIA) is a tax-deferred life annuity where payments do not begin until years into the future. A typical contract may start payments at age 80 or 85 for people who invest at age 60. Alternatively, contracts may starts payments at age 65 or 70 for people who invest at younger ages, such as 45 or 55. Once payments start, they continue for your lifetime. Depending on the contract, there may or may not be a death benefit if you die before the first scheduled payment. Either a single premium or multiple premiums can be used to fund a DIA contract.

Here’s an example: A 60-year-old man can obtain an advanced life deferred annuity today that pays $8,000 a month for life starting at age 85 for a single premium of about $100,000. If he lives to age 95 he will have received $960,000.

DIAs are highly efficient and require a relatively small initial investment because income will not begin until later in life. DIAs also provide a number of additional benefits, including reducing the financial risk of outliving your resources and simplifying financial planning. Financial planning is simplified because the purchase of a DIA can divide your retirement into two periods: from ages 60 to 80, and beyond age 80. It is generally easier to plan for your first 20 years of retirement (using current investments and Social Security) versus an uncertain lifespan. Also, DIAs can provide the client with a guaranteed income stream throughout their whole retirement, simulating the income provided by a traditional pension.

In determining how to invest, it is important to identify basic expenses and expected income from other sources. You should also factor in inflation to help determine the amount of income needed from the annuity. Since the annuity is a long-term investment, you will need to maintain sufficient liquidity to cover unexpected expenses.

DEFERRED INCOME ANNUITIES

BENEFITS:

» Requires a smaller initial investment due to later income start date.

» Provides protection against outliving your resources.

» Takes some of the guesswork out of long-term planning.

RISKS:

» Limited liquidity and flexibility.

» Loss of principal if the investor dies too soon (unless there is a death benefit feature).

» The risk of investing in a low interest rate environment and not having access to money if interest rates rise significantly.


DIAs should only be purchased by investors in good to excellent health since they stand to gain the most benefit.DIAs are generally a cost-efficient way of funding an extended retirement and protecting lifestyle. In addition, if you only have enough resources to fund the first two decades of retirement, but not enough to maintain your lifestyle over a longer period of time, you may greatly increase financial security through this product.

» DEFERRED INCOME ANNUITIES


Americans are living longer. From 1980 to 2010, life expectancy at age 65 improved by about three years on average and is projected to continue to improve by several additional years during the next few decades, according to the Social Security Administration. Longer lifespans increase the probability of outliving retirement savings. In addition, as life expectancies increase, the number of individuals being diagnosed with Alzheimer’s or other impairments that require some form of long-term care is also increasing. To help address this issue, long-term care insurance has become a valuable financial planning tool.

A big problem is that the cost of extended care during retirement is increasing much faster than inflation and can quickly erode your retirement assets. Below are the 2013 average costs of care in the United States7:

• $207/day for a semi-private room in a nursing home • $230/day for a private room in a nursing home • $3,450/month for care in an Assisted Living Facility (for a one-bedroom unit) • $19/hour for a Home Health Aide • $18/hour for Homemaker services • $65/day for care in an Adult Day Health Care Center

These costs can dramatically impact your financial situation during retirement. As a result, it is important to consider the possibility that you could need these types of services at some point in your life. A long-term care insurance policy may help cover expenses and provide peace of mind. Important to note is that long-term care is not just for 24-hour care in an extended care facility. It covers a broad range of services, including:

• Home Health Care • Alternative Care Services• Assisted Living• Adult Day Care • Caregiver Training • Homecare Services • Personal Care • Hospice Care • Care Planning

7 Genworth 2013 Costs of Care Survey

» LONG-TERM CARE INSURANCE


There are two types of payout options utilized in long-term care policies. The first is a “indemnity” policy type that will pay a certain dollar amount monthly no matter how small or large your claim. The second is an “expense reimbursement” policy, which is generally less expensive, but only covers the exact amount of your expense. There are also two ways an individual can purchase long-term care insurance:

• Standalone Policy: Provides the coverage amount that best suits your long-term needs along with an optional cost of living adjustment. A portion of the premiums is deductible for income tax purposes (generally the amount in excess of the Adjusted Gross Income). Money paid out for claims is not taxable; however, for a per diem policy, amounts in excess of the annual IRS cap are taxable.

• Combination Annuity: The Pension Protection Act of 2006 authorized new tax advantages for combination annuities. As of January 1, 2010, you can purchase a non-qualified deferred annuity with a qualified long-term care rider. Withdrawals from your annuity to pay your long-term care rider premiums, as well as payments (including any tax-deferred earnings) to pay covered long-term care expenses, may be income tax-free. The annual cap for an indemnity long-term care rider also applies. Any remaining cash value in the annuity will pass to beneficiaries upon death.

• 1035 Exchange: Rules may allow you to exchange a non-qualified deferred annuity for a standalone long-term care insurance policy or a combination annuity, which could convert tax-deferred annuity gains into tax-free payments for long-term care related expenses. Cash values from a life insurance policy may also be exchanged for a standalone long-term care insurance policy or a life insurance policy that offers a qualified long-term care rider.

LONG-TERM CARE INSURANCE

BENEFITS:

» Protection that will cover increases in health care costs that could potentially have an impact on your retirement income and your estate.

» Potential to ensure a higher quality of care and services versus making sacrifices down the road due to higher costs of care.

» Combination products offer the ability to hedge the financial risk of long-term care, while preserving assets in case long-term care benefits are not needed.

RISKS:

» Long-term care insurance can be expensive and premiums may increase.

» Traditional standalone long-term care policies provide no policy cash value.

» May be time consuming to set up with a relatively long underwriting process.



A Stand Alone Living Benefit (SALB), also known as a Contingent Deferred Annuity, provides guaranteed lifetime income in a manner similar to that provided under a guaranteed lifetime withdrawal benefit (GLWB), but without the need to purchase a variable annuity. Instead, the purchaser invests in a portfolio of mutual funds, Exchange-Traded Funds (ETF) or managed accounts holding them in a brokerage or custodial account owned by him or her. A separate guarantee of lifetime income, the SALB, provided by the insurance company provides protections similar to those under the GLWB, including comparable benefit payments, market participation and the opportunity for increases in annual income resulting from market performance of the portfolio, both before and after retirement. When retirement income is needed it is taken first in the form of allowable withdrawals from the investment portfolio, and only when and if the account is exhausted, because of longevity and/or poor investment performance, are payments made under the SALB by the insurer.

The tax treatment under a SALB can be significantly different than that of a variable annuity. The taxation of partial withdrawals as a capital gain or loss and other favorable tax attributes (qualified dividend treatment and step-up at death) of the investment portfolio is not affected by the presence of the SALB. In addition, because the withdrawals come from a portfolio of mutual funds or ETFs, the 10 percent tax penalty for distributions prior to age 59 1/2 does not apply. If and when payments are made by the insurance company under the SALB such payments receive “exclusion-ratio” treatment under the rules pertaining to the taxation of annuities. Of course, if the SALB is issued in connection with a qualified retirement arrangement (e.g. an IRA), the tax rules for the applicable qualified account would apply.

STAND ALONE LIVING BENEFITBENEFITS:

» Professional investment management with a variety of investment options.

» SALBs provide insurance features that can provide you with protected lifetime income.

» Retention of tax attributes on underlying investment portfolio (e.g. capital gains/losses and qualified dividends).

» Exclusion ratio treatment when payments, if any, are made by insurer issuing the SALB.


» Withdrawals made prior to age 59 1/2 are not subject to a 10 percent IRS penalty tax.

RISKS:

» The investment returns and principal value of the associated portfolio will fluctuate so that the value of your investments, if redeemed, may be worth more or less than their original value.

» All guarantees are subject to the claims-paying ability of the issuing insurance company. If the insurance company becomes insolvent, you could lose all or a portion of your future guarantees depending on coverage provided by your state’s insurance guarantee association.*

* This risk extends specifically to the insurance features and not the investments.

» STAND ALONE LIVING BENEFIT

Income-Producing Investment Products . 29

In this section we will cover some of the most common investment products that are designed to produce income. These products will differ from the insured income vehicles (covered in the previous section) in that resulting income levels may fluctuate due to the associated market risks. As you continue to explore the different options available for creating income it is important to recognize that no single product or strategy alone may be the right answer for retirement income. By diversifying among various income products and strategies you can help offset risk in addition to maximizing your income potential.

The income-producing investment products covered in this section include:

» INCOME-PRODUCING INVESTMENT PRODUCTS OVERVIEW

» Income-Distributing Mutual Funds

» Maturity Date Managed Payout Funds

» Endowment Managed Payout Funds

» Dividend-Paying Mutual Funds

» Treasury Inflation-Protected Securities Mutual Funds

» Dividend-Paying Stocks

» Preferred Stocks

» Real Estate Investment Trusts


Financial advisors and investors have long used mutual funds to generate income in retirement. Historically, two types of mutual funds – dividend-paying stock funds and bond funds – have created consistent non-guaranteed income* for investors. Additionally, other categories of mutual funds are commonly used to generate cash flow when linked with systematic withdrawal programs.

Within the past few years, a new fund category called managed payout funds has emerged that is designed to conveniently generate long-term sustainable income. Both types of managed payout funds – maturity date and endowment – can help provide you with a consistent income to meet your spending needs.

This section will describe in more detail this new category, as well as the more traditional dividend-paying stock funds and Treasury inflation-protected securities (TIPS) mutual funds.

MATURITY DATE MANAGED PAYOUT FUNDSMaturity date managed payout funds seek to convert your assets into systematic monthly income payments over a defined period of time. To preserve purchasing power, these funds generally adjust their distributions for inflation, either by adjusting their target payment or by automatically adjusting their distributions for changes in the Consumer Price Index. Here are some things to keep in mind when considering maturity date managed payout funds:

• Maturity date funds are designed to self-liquidate over time so that all fund assets are distributed by the maturity date.

• Some funds invest in stocks and bonds while other funds invest in Treasury Inflation-Protected Securities.• You can use the funds to meet ongoing essential day-to-day living expenses such as housing, food, and energy costs.

Maturity date managed payout funds are generally suitable if you:• Want a convenient way to seek a consistent monthly income from your savings for a specified period of time• Have higher spending needs and are willing to liquidate principal to create larger income payments• Desire liquidity

They may not be suitable if you have very specific legacy or estate planning goals for the portion of your assets invested in these funds, or if you desire guaranteed income.

BENEFITS:

» Seeks to turn savings into predictable monthly distributions for a defined period of time.

» Income is typically adjusted for inflation.

» Full liquidity.

RISKS:

» Income is non-guaranteed.

» Payments are not guaranteed to last for your lifetime.

» Potential for income volatility.

* Past performance does not guarantee future results

» INCOME-DISTRIBUTING MUTUAL FUNDS


ENDOWMENT MANAGED PAYOUT FUNDSEndowment managed payout funds are designed to provide you with monthly income payments throughout retirement. These funds generally combine a managed distribution policy with an endowment-like investment strategy to produce regular monthly distributions while seeking to preserve principal. The targeted income amount is expressed as an annual distribution percentage usually ranging from 3 percent to 7 percent. Here are some things to keep in mind when considering endowment managed payout funds:

• Each year the income amounts are recalculated to account for investment performance, but within a calendar year the monthly payments are consistent.

• Like maturity date managed payout funds, a portion of the principal may be liquidated to provide income if investment returns are poor. However, these funds have capital preservation or growth as underlying investment objectives and are not designed to be self-liquidating.

• The investment objectives and payout percentages are correlated. Higher payout funds will seek principal preservation while lower payout funds will seek growth of principal.

Managed payout funds are generally suitable if you:• Desire predictable cash flow• Prefer liquidity• Want to preserve principal for estate planning goals

Endowment managed payout funds may not be suitable for you if you have very specific fixed income needs, or if you have a low tolerance for income volatility.

BENEFITS:

» Has the potential to generate a predictable cash flow while preserving and growing principal.

» Full liquidity.

» Can choose different payout percentage levels based on underlying investment objectives.

RISKS:


» Payments are not guaranteed to last for your lifetime.



DIVIDEND-PAYING MUTUAL FUNDSDividend-paying mutual funds are common investments for retirees because they are designed to generate regular income. These funds generally invest in companies that have a history of generating high dividend yields and/or dividend payment stability. With these funds:

• Dividends are paid directly to you from the funds (often quarterly), or can be reinvested.• You can buy dividend-paying mutual funds in low or odd dollar amounts, and can automatically reinvest

income witout sales charges.• Funds provide you with income and investment diversification. Individual stock dividends can be reduced

or suspended by the company at any time. By investing in many different companies, the funds reduce volatility and risk.

• Some funds diversify even further by investing in bonds, money markets and real estate investment trusts (REITs).

Dividend-paying funds are generally suitable if you:• Need regular cash flow• Desire liquidity • Want to preserve principal for estate planning goals

These funds may not be suitable if you have very specific fixed income needs and have a low tolerance for income volatility.

BENEFITS:

» Seeks principal preservation with growth potential, but only if your income needs are equal to or less than the dividends paid.

» Full liquidity.

» Diversification of income sources among many companies.

RISKS:


» No longevity protection.


» INCOME-DISTRIBUTING MUTUAL FUNDS


TREASURY INFLATION-PROTECTED SECURITIES MUTUAL FUNDSTreasury inflation-protected securities (TIPS) funds are relatively new investment vehicles that are designed to provide predictable income while offering a level of inflation protection. These funds invest exclusively in bonds issued by the U.S. Treasury that adjust semi-annually to reflect changes in the Consumer Price Index.

• TIPS funds provide diversification by buying bonds of different durations and maturities.• You can buy TIPS funds in low or odd dollar amounts, and can automatically reinvest income without sales

charges.• The funds are liquid and can be redeemed at the daily market price, which may be higher or lower than the

invested amount.

TIPS funds are generally suitable if you:• Want inflation protection• Desire liquidity

The funds may not be suitable if you are seeking to maximize your income payout.

BENEFITS:

» Full liquidity.

» Provide a level of inflation protection.

RISKS:

» Stable, but non-guaranteed income.

» No longevity protection.

» Daily pricing means some exposure to pricing volatility.


If you are looking to generate a yield from your investment portfolio, you may want to consider buying dividend-paying equities. The issuing company pays a portion of their cash flow to you in the form of dividends on either a monthly or quarterly basis. From a total return perspective, you may also benefit from any appreciation in the stock’s price. As a result, dividend-paying stocks not only provide you with income, but they can also provide meaningful growth potential over the long-term.

Companies that pay dividends tend to be large-capitalization (large cap), well established firms with relatively stable cash flows and predictable earnings. Unlike interest paid by bonds, equity dividends can fluctuate either positively or negatively at the issuing company’s discretion. In some cases, companies increase their dividend depending upon company performance and business outlook.

Since dividends are not guaranteed, you should carefully evaluate each company’s investment merits, financial strength (balance sheet, income statement, etc.), management team, as well as their dividend track record. It may make sense to diversify across several companies in order to spread your risk.

DIVIDEND-PAYING STOCKS

BENEFITS:

» Dividends can potentially increase over time.

» Dividend stocks are highly liquid.

» Stocks that pay dividends tend to be less volatile than stocks that don’t.

RISKS:

» There is no guarantee that dividends will be paid each year.

» Dividends may be cut, which may result in a lower stock price.

» The stock may lose value.

» Lack of diversification can result in overexposure to a concentrated group of companies where negative market or business events can have a greater impact.

You should be cautious of high dividends since they may not be sustainable. Although the dividend may be attractive, the underlying financial health of the issuing company should be carefully considered, as there may be risks involved that may impact future dividend payments.

» DIVIDEND-PAYING STOCKS


If you are looking for the opportunity to generate greater income than you could with comparably rated corporate bonds, you may want to consider preferred stocks. When you purchase a preferred stock, you may benefit from appreciated value of the underlying security in addition to a set dividend payment. However, you must also recognize that the dividends paid are treated as ordinary income for tax purposes. Since preferred stocks are traditionally purchased for income, they are typically traded less frequently than common stocks, resulting in lower price volatility.

As the name implies, preferred stock takes priority over common stock in the capital structure (and also assets if for some reason the underlying company is liquidated). Many consider these securities to have both equity and debt properties since most issuing companies pay a fixed dividend on shares so long as funds are available. In addition, some preferred stock issuing companies may defer dividends to a later date if the company’s financial position prevents disbursing the dividend when promised.

PREFERRED STOCKS

BENEFITS:

» Dividends will pay out on preferred stocks before common stocks.

» Preferred stock shareholders have priority over common shareholders in the event of liquidation.

RISKS:

» Interest rate risk: preferred stocks typically depreciate in a rising interest rate environment.

» No voting rights.

» Increased credit risk due to preferred stock’s subordinated position in the capital structure versus bonds.

» Market risk as the price of the underlying security will fluctuate.

» PREFERRED STOCKS


Real estate investment trusts (REITs) are real estate companies that invest in income producing properties (equity REITs), real estate mortgages (mortgage REITs), or a combination of the two. In order to qualify as a REIT, they must distribute at least 90 percent of their taxable income to their shareholders each year in the form of dividends. As a result, REITs have the potential to deliver high yields for income purposes. Many REITs are registered with the SEC and are publicly traded on a stock exchange. Others, known as non-traded REITs, may be registered with the SEC but are not publicly traded.

By purchasing REITs, you can diversify your holdings among various geographic areas and property specializations with much less money that you would need to actually purchase properties. Additionally, unlike real estate you own, REITs are more liquid and can be sold fairly quickly to raise cash or take advantage of other investment opportunities (note: liquidity may differ between publicly traded and non-traded REITs and REITs may not offer the same liquidity as other investments). REITs may not offer the same liquidity as other investments, and non-traded REITs in particular generally have limited liquidity relative to publicly traded REITs.

REITs may be appropriate for you if are:• Interested in investing in real estate• Seeking cash flow • Seeking potential for capital appreciation• Looking for portfolio diversification besides stocks and bonds

REAL ESTATE INVESTMENT TRUSTS

BENEFITS:

» Offer generally high dividend payouts.

» Low correlation to stock market.

» Earnings are exempt from corporate taxes.

» Provide the potential for capital appreciation.

» Investment diversification by property and geography.

» Offer generally high dividend payouts (which may include non-income distributions such as return of capital or loan proceeds).

RISKS:

» Low occupancy of properties, thus reducing rents/income to company.

» No assurances that investors will receive distributions or return of capital.

» Shares may lose value.

» Failure to qualify as a REIT could have significant tax consequences.

» REAL ESTATE INVESTMENT TRUSTS

Putting It All Together . 37

» PUTTING IT ALL TOGETHER «

Planning for and making the transition to retirement is truly a once-in-a-lifetime experience. While the shift to living in retirement can be complex and demanding, it does not have to be unduly difficult or a time of high anxiety. Whether you are going it alone or working with an experienced financial professional, the keys to a successful retirement are to be prepared, adaptable, and open to a wide range of solutions that can help offset many of the risks that you may encounter. Insured retirement solutions and other guaranteed or risk management products can be valuable tools in helping assure that retirement goals can be met. The starting point is to recognize the risks associated with retirement and be aware of the solutions that can help mitigate these concerns. By working with a financial professional to build a holistic retirement plan, you can put yourself on a path to life-long financial security. Use the following checklist to start an informed conversation with your financial advisor about your retirement needs and goals.

Source: GDC Research and Practical Perspectives

VISIONING RETIREMENT

RISKTOLERANCE

FINANCIALREVIEW

CLIENT LEGACY

Travel

Retire When and Why

Most Important Goal

Short- and Long-Term Goals

What Do You Want To Do

Savings and Investments

Spending and Saving Habits

AnticipatedExpenses

Gifting, Wills, Grandchildren, Etc.

Career, Workingand Volunteering

Debt and LiabilitiesHealth Concerns

Housing/Relocation

Market RiskInvestment

PerformanceExpectations

Daily LivingExpenses

In�ation and Longevity Risk

INCOME NEEDS


Retirement is not a static point in time. It is a potentially decades-long period during which many factors can have a significant impact on your financial situation. To help prepare you to weather these situations, review IRI’s Retirement Realities Checklist with your financial professional, who can structure a long-term plan to meet your needs.

• Determine your Sources of Guaranteed Income Social Security and traditional pensions were long considered the backbone of a retirement income plan, as both provide guaranteed lifetime income. Yet, the roles of these two sources are diminishing over time. IRI data shows that less than 40 percent of Boomers currently younger than age 60 expect Social Security to comprise a major source of their retirement income. Additionally, the number of defined benefit plans in the marketplace dropped 66 percent between 1985 and 2010. Guaranteed income solutions can help cover your everyday, essential expenses during retirement, and help you lessen some of the common risks associated with an extended life in retirement. Source: 2011 IRI Fact Book, pg. 98

• Determine your Sources of Non-Guaranteed Income This includes stocks, mutual funds, bonds, commodities, inheritances, and payments from company savings plans such as a 401(k) plan. It may also include other income sources such as employment or starting a business. Interest, dividends, and other gains help grow your overall investment portfolio, yet offer no guarantees on principal or earnings. Knowing the sources of non-guaranteed retirement income available to you can help your advisor construct a plan that may offer principal and income protection to help preserve some of these gains. Note that non-guaranteed income is susceptible to sequence of returns risk—the risk of running out of money due to low performance in the early years of withdrawals—and asset allocation risk—the risk of investing too conservatively or aggressively to sustain your portfolio for the long-term.

• Prepare for Social Security The decision when to begin collecting Social Security benefits should not to be taken lightly. While many people are eligible to begin taking Social Security benefits at age 62, delaying benefits until future years can increase the amount of guaranteed income you will ultimately receive. It is important to keep in mind that if you elect to commence your Social Security retirement benefits at age 62, your benefit payment amounts will be reduced by 25 to 30 percent, severely curtailing one source of lifetime income. Sources: Social Security Administration

• Prepare for Longevity Risk None of us know how many years we will live. The longer one lives, the greater the need to make sure our assets are sufficient to last throughout our retirement years. In general, if both you and your spouse are now age 65, there is a 50 percent chance that one of you will live to age 92, and a 25 percent chance that one of you will live to age 97. Many investments you may own do not assure that funds will be available for as long as needed. Ask your financial advisor about supplementing your retirement investment portfolio with a guaranteed income product.

» TIPS FOR INVESTORS: IRI RETIREMENT REALITIES CHECKLIST

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IRI Retirement Realities Checklist . 39

• Prepare for Market Uncertainties The market downturn in 2008-2009 and the subsequent recession had a significant impact on both everyday living expenses and retirement savings. Nearly one-half of Baby Boomers found it more difficult to pay for essential items, such as food, gas, and medication, and one-quarter had difficulty paying their housing expenses. Many individuals made premature withdrawals from their retirement savings accounts, cutting into their nest eggs. Although no one can say if and when a market downturn of this magnitude will occur again, the ups and downs inherent in the financial markets must be considered when saving and living in retirement. Learn your risk tolerance so that you and your advisor can select the investments most appropriate for you, as some financial products are more susceptible to market swings than others. Source: Prudential Financial

• Prepare for Inflation The effects of inflation can easily erode your spending ability over time. According to the Bureau of Labor Statistics, the inflation-adjusted equivalent of $100 in 1991 is $166 in 2011. Although an annualized increase in prices of 3 percent does not seem like much, it can add up considerably over a retirement period that lasts several decades, requiring a greater source of cash flow just to meet basic expenses. Source: Bureau of Labor Statistics

• Prepare for Tax Risk It used to be conventional wisdom that tax rates would decrease upon retirement due to a reduction in personal income. That is no longer the case. The risk of rising tax rates must be considered when building a retirement strategy, as it can set back a long-term savings and income plan if left unchecked. Additionally, the risk of safety net programs, such as Social Security or Medicare, being modified in a deficit situation makes sound planning of even greater importance.

• Prepare for Health Care Costs As publicized over the past several years, health care costs continue to grow. While Medicare provides medical insurance to most Americans over age 65, it does not provide complete coverage. Out-of-pocket medical expenses for those covered by Medicare are expected to exceed $4,300 per person and $8,600 per couple per year—and these costs are expected to rise. Source: 2011 IRI Fact Book, pg. 9,11

• Prepare for Long-Term Care Costs Statistics show that two-thirds of individuals over age 65 will need long-term care services at some point in their lives. Costs for home health care are generally not covered by Medicare, and nursing home costs are generally covered by the government after an individual spends down his assets. Preparation for these contingencies is key. Long-term care insurance is one way of covering these costs, although premiums and benefits vary widely. Consult your financial advisor for your long-term care funding options. Source: 2011 IRI Fact Book

• Prepare for Leaving an Inheritance Leaving a legacy is highly important to many Boomers. IRI has found that 62 percent of Boomers believe that it is very important or somewhat important to them to leave an inheritance to their loved ones. The simultaneous planning for their personal security and for those to whom they wish to leave a bequest requires a carefully constructed strategy that is monitored regularly. Advisors who provide estate planning services can help guide you through this process.

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The Insured Retirement Institute (IRI) does not intend this publication to be a solicitation related to any particular company, nor does it intend to provide investment, legal or tax advice. Investors should consult with their own investment, legal or tax advisors regarding the appropriateness of investing in any of the securities or investment strategies discussed in this publication. Nothing herein should be construed to be an endorsement by the IRI of any specific company or as an offer to sell or a solicitation to buy any security or other financial instrument or engage in any investment strategy.

© 2014 Insured Retirement Institute (IRI). All rights reserved. No part of this publication may be reprinted or reproduced in any form for anyy purpose other than education without the express written consent of IRI.

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