It’s a Numbers Game It’s about the “Cash Flow” not the ... · Slide 1 of 39 0246019-00012-00 Ed.05/2016 It’s a Numbers Game It’s about the “Cash Flow” not the “Cash

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0246019-00012-00 Ed.05/2016

It’s a Numbers Game It’s about the “Cash Flow” not the “Cash Pile”

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What’s the matter with “What’s Your Number”?

Threats to Cash Flow

Case Study: Bill and Sue Smith

Agenda

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Retirement Income – Then and Now

Source: Prudential Annuities, 2015

1985 2015

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On average, more than 10,000 Americans are turning 65 each day and will through 2029*

84% of Pre-retirees have no retirement income plan** 40% are confident or “somewhat” confident that they

will be able to live their desired retirement lifestyle**

The need for retirement income planning

Sources: Sources: * The Baby Boom Cohort in the United States: 2012 to 2060; Colby and Ortman; May 2014; United States Census Bureau; **LMRA Secure Retirement Institute, “The 2014 Consumer Study”

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Fewer years to accumulate More years in retirement Early pension elections Reduced Social Security

benefits

Threats to cash flow: Retiring too early

49% of Americans retire earlier than planned…

…of those, over 66% do so involuntarily. “Almost half of retirees retire earlier than planned. ..The majority of these early retirements are involuntarily — usually due to health, being laid off, an early retirement package from an employer, or negative working conditions." ("LIMRA Secure Retirement Institute – The Retirement Income Reference Book 2015)

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Full Retirement Age (FRA) Early retirement Delayed retirement credits

As low as

Up to

• 74% of men take reduced benefits* • 79% of women take reduced benefits*

Threats to cash flow: Early Social Security elections

*Source: The 2015 LIMRA Retirement Income Reference Book; LIMRA Secure Retirement Institute

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Social Security and longevity

Breakeven Points:

Age 66 vs. 62: Age 76

This is a hypothetical example for illustrative purposes only. This assumes a Full Retirement Age benefit of $24,000 a year, an annual cost of living adjustment of 3%, and the client living to age 95.

Age 70 vs. 62: Age 79

Age 70 vs. 66: Age 81

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What pension option did my client choose? Lump sum Life only Life with period certain Joint Life

Is the pension integrated with Social Security? More than 50% of pensions offer option with Social Security

Integration Pension payments could be reduced by 50% to 80% of Social

Security benefits when client becomes eligible for the benefits

Threats to cash flow: Early pension elections

Source: US Department of Labor, Bureau of Labor Statistics, 2015

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Threats to cash flow: Taxes

Sources: The American Taxpayer Relief Act of 2012 Pub. L. 112-240 (ATRA)

The Current Tax Environment The American Taxpayer Relief Act of 2012

Increases top tax rate to 39.6% New deduction and exemption phase-outs Higher payroll tax Increase Capital Gain/Dividend taxes for some

Patient Protection and Affordable Care Act (PPACA) Medicare Surtax

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What will the tax environment look like when your clients retire?

Source: Office of Management and Budget (Table 7.1—FEDERAL DEBT AT THE END OF YEAR: 1940–2020, www.whitehouse.gov/omb/budget/Historicals)

The American Taxpayer Relief Act is not sufficient to reduce national debt

0%

20%

40%

60%

80%

100%

120%

140%

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015estimate

2020estimate

▬Gross Federal Debt in Millions $ ▬Gross Federal Debt as a Percent of GDP

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• 2nd largest expense in retirement**

• 39% - the number of those “very confident” that they will have enough money to take care of medical expenses in retirement***

• 40% will require some nursing home careº

Threats to Cash Flow: Healthcare Costs

Healthcare can take a healthy bite out of retirement savings. It is estimated that an average, healthy 65-year-old couple will need

$245,000 to pay for medical expenses for the remainder of their lives This does not include long-term care costs*

*Fidelity Investments retiree health costs estimate, 2015. Healthcare and nursing home costs may vary by state. **Survey conducted via telephone to 376 respondents, March 4–14, 2010, by Infogroup/ORC of Princeton, N.J., ***Employee Benefits Research Institute (EBRI), 2015 Retirement Confidence Survey, April 2015 º Prudential’s Four Pillars of Retirement Series. “Planning for Retirement: The Distribution of Lifetime Healthcare Costs

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Threats to cash flow: Healthcare costs 70% of those turning 65 will need some

type of long-term care services during their lifetime*

Basic home care averages over $45,000 per year**

Nursing home care averages over $92,000 per year** • 40% will need care in a nursing home*** • Men require long-term care for 2.2 yearsº • Women require long-term care for 3.7 yearsº • 70% of nursing home residents are womenºº • 75.7% of assisted living communities are womenºº • 100 days – maximum Medicare coverage period*

Sources: * National Clearinghouse for Long Term Care Information, U.S. Department of Health & Human Services **Genworth 2016 Cost of Care Survey; Home Health Aide Services Median Annual Cost; Nursing Home (Private Room) Median Annual Cost *** US Department of Health and Human Services º ASPE Research Brief, U.S. Department of Health and Human Services, Office of the assistant secretary for planning and evaluation office of disability, aging and long-term care policy, June 2012, ººAmerican Association of Long Term Care Insurance, 2012

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Understanding Medicare

Medicare Part

- Hospital Insurance A - Medical Insurance B

- Medicare Advantage C - Prescription Drug Coverage D

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- Hospital Insurance A

BUT once in the hospital: • Days 1-60: $1,288 per hospital stay deductible • Days 61-90: $322 per day co-payment • Days 91-150: $644 per “lifetime reserve day” • Days 151+: All costs paid by patient

Medicare Part A

Source: U.S. Dept. of Health and Human Services, Notice CMS-8059-N, Nov. 10, 2015

• Provides hospital coverage

• No out-of-pocket premiums

90-day hospital stay could cost $10,948

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Medicare Part B

Source: U.S. Dept. of Health and Human Services, Notice CMS-8061-N, Nov. 10, 2015 * Those protected under the “hold harmless” provision of Social Security prior to January 1, 2016 will continue to pay $104.90 per month.

- Medical Insurance B • Provides non-hospital

medical coverage • Except routine vision, dental,

foot care, and hearing aids • Annual deductible $166 • 20% coinsurance on doctor’s

services and outpatient care • Monthly premium based

on Adjusted Gross Income (AGI)

If your Income in 2014 was Monthly Medicare Part B Premium

File Individual Tax Return

File Joint Tax Return

$85,000 or less $170,000 or less $121.80*

above $85,001 up to $107,000

above $170,001 up to $214,000 $170.50

above $107,001 up to $160,000

above $214,001 up to $320,000 $243.60

above $160,001 up to $214,000

above $320,001 up to $428,000 $316.70

above $214,000 above $428,000 $389.80

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Medicare Part D 2016

First $3,310 of Drug Costs

• Annual $360 deductible • Beneficiary pays 25%

of the rest or $737.50

Donut Hole Next $3,752.50 of Drug Costs

• Beneficiary pays 100% of out-of-pocket expenses

• ACA drug discounts: • Name brand 55% • Generic 42%

After $7,062.50 of Drug Costs ($4,850 total out-of-pocket)

• Beneficiary pays greater of 5% of costs $2.95/generic $7.40/brand name

• Medicare pays the balance of costs

- Prescription Drug Coverage* D Average Medicare Part D monthly premium is $41.46*

Source: CMS Announcement of CY 2016 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter, April 2015 * Source: Kaiser Family Foundation at http://kff.org/medicare/issue-brief/medicare-part-d-a-first-look-at-plan-offerings-in-2016

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Unbundled Coverage for Married Couple with AGI less than $170,000

Total Medicare Costs Example

Coverage Average Annual Cost *

Part A $0

Part B $1,462

Part D1 $498

Medigap2 $2,196

Out-of-pocket (prescriptions, vision, dental)3 $1,440

Total – Per Person $5,596 1. Kaiser Family Foundation, “Medicare Part D: A First Look at Plan Offerings in 2016”, October 2015; Hoadley, Cubanski, and Neuman 2. Average cost 2010; Kaiser Family Foundation. “Medigap Reform: Setting the Context for Understanding Recent Proposals”, January 2014; Jacobson, Huang, and Neuman 3. Kaiser Family Foundation; “How Much Is Enough? Out of Pocket Spending Among Medicare Beneficiaries”, July 2014; Cubanski, Swoope, Damico, and Neuman

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Expected life span of individuals and couples age 65*

Threats to cash flow: Longevity risks

Source: U.S. Annuity 2000 Mortality table, Society of Actuaries

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Threats to cash flow: Longevity - Withdrawal Rates

Source: The Wall Street Journal, “Say Goodbye to the 4% Rule”, March 1, 2013

4% Retire January 1, 2000 with a 4% withdrawal rate

55% Stock and 45% Bonds Withdrawal rate increased for inflation By 2010, portfolio reduced by 1/3 Only 29% chance of making account

last 30 years

Say Goodbye to the 4% Rule BY KELLEY GREENE

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Source: 2015 LIMRA Retirement Book

Threats to cash flow: Longevity - Sequence of Returns 30 years of retirement Value of portfolio for those retiring from April 1968 to April 1970

Investor’s Age Chart assumes retirement at age 62

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Target after-tax income at age 62 = $90,000 Bill will receive a pension of $25,000 (single-life,

integrated benefit) Bill will receive early Social Security benefits of $18,000 Sue will receive early Social Security benefits of $12,000

IRA balance $600,000, Non-qualified balance $200,000

By age 62, their Retirement Nest Egg will be $1,050,000

IRA balance at age 62 = $790,000* Non-qualified balance at 62 = $260,000*

Cash Flow Case Study: Meet the Smiths

Bill and Sue Smith, age 55, plan to retire at 62

This is a hypothetical example for illustrative purposes only. *Assumes real return of 4%

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Evaluating the Smiths’ plan: What Bill and Sue are expecting

Distributions Taken – Amount and Rate

$35,000 3.33%

Anticipate Additional Dist. rate

Target Income: $90,000

Bill's pension (single-life): $25,000 Bill's Social Security: $18,000

Sue's Social Security: $12,000

Shortfall: ($35,000) Subtotal: $55,000

Withdrawal Rate: 3.33% $35,000 Distribution taken from $1,050,000 Investment Portfolio.

This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 62, Non-qualified balance = $260,000; Qualified balance = $790,000

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Evaluating the Smiths’ plan: The effect of taxes

Withdrawal Rate: 3.96% $41,565 Distribution taken from $1,050,000 Investment Portfolio

$35,000 $6,565 $6,565


Sue's Social Security: $12,000 Subtotal: $55,000

Original Shortfall: Taxes:

Additional Shortfall:

$41,565


$35,000 3.96%


This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 62, Non-qualified balance = $260,000; Qualified balance = $790,000. 13% effective tax rate. Distribution from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.


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Evaluating the Smiths’ plan: Age 65 – Medicare costs

Withdrawal Rate: 4.91% $51,565 Distribution taken from $1,050,429 Investment Portfolio

$35,000 $10,000 $6,565 $16,565



Original Shortfall: Medicare:

Taxes: Additional Shortfall:

$51,565


$35,000 4.91%


This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 65, Non-qualified balance = $161,786; Qualified balance = $888,643. 13% effective tax rate. Distribution from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.


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Evaluating the Smiths’ plan: Age 66 – Pension leveling

Withdrawal Rate: 5.96% $62,005 Distribution taken from $1,040,671 Portfolio.

$35,000 $10,000 $5,005 $27,005





$62,005


$35,000 5.96%


This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 66, Non-qualified balance = $116,482; Qualified balance = $924,188 13% effective tax rate. Distribution from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.


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Evaluating the Smiths’ plan: Age 78 – Long-term care expenses

Withdrawal Rate: 18.83% $117,247 Distribution taken from $622,725 Investment Portfolio



$35,000 $10,000 $40,000 $20,247 $82,247


Long-term care: Taxes:

Additional Shortfall:

$117,247 Distributions Taken – Amount and Rate

$35,000 18.83%


This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 78, Non-qualified balance = $0; Qualified balance = $622,725 13% effective tax rate. Distribution from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.


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Evaluating the Smiths’ plan: Age 82 – Bill dies

Withdrawal Rate: 38.57% $88,952 Distribution taken from $230,614 Investment Portfolio

Bill's pension (single-life): $0 Bill's Social Security: $0


$35,000 $5,000 $13,752 $53,952

Sue Runs Out of Money at Age 84



$88,952


$35,000

38.57%


This is a hypothetical example for illustrative purposes only. All numbers in 2016 dollars, assumes 4% real return on investments; Age 82, Non-qualified balance = $0; Qualified balance = $230,614; 13% effective tax rate. Distribution from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.


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Postpone retirement until age 64 Take a non-integrated pension

payment Delay taking Social Security until

Full Retirement Age

Creating a retirement income plan

After meeting with their financial advisor they decide to:

This is a hypothetical example for illustrative purposes only. Remember, each client’s circumstances and financial situation are unique.

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Purchase Long-term Care Insurance • Coverage: $300,000 • Premium: $4,000 per year *

Purchase a $300,000 Life Insurance • Premium: $3,685 per year **

Invest $300k in an IRA Annuity at age 55 to begin income at age 66

• Use annuity for basic, non-discretionary expenses not covered by Social Security and pension

Invest remaining portfolio in another IRA and non-qualified accounts

• These assets will be used to supplement income until age 66 when guaranteed income begins

Creating a retirement income plan Product allocation

Sources:*Average cost for $300,000 of coverage LTC insurance for 55 year old couple is $2,400 per year for $150 daily benefit, American Long Term Care Insurance Association, 2013 http://www.aaltci.org/long-term-care-insurance/learning-center/how-much-does-long-term-care-insurance-cost.php,** Prudential Universal Life Policy, Face Amount $300,000; cost $3,685 per year for healthy 55 year old male, non-smoker;

http://www.aaltci.org/long-term-care-insurance/learning-center/how-much-does-long-term-care-insurance-cost.php























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AGE

The Smiths’ plan in action: Age 64 – Use investments to bridge gap

Bill's Pension (single-life): $20,000 From investments: $80,285

Subtotal : $100,285 Taxes: ($2,600)

Final: $97,685


Total Investment Balance After Distributions:

$1,099,727 This is a hypothetical example for illustrative purposes only . 13% effective tax rate. Distributions from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.

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AGE

The Smiths’ plan in action: Age 66 – Begin Social Security and annuity income

Bill's Pension (single-life): $20,000 Bill's Social Security: $24,000

Sue's Social Security: $16,000 From Annuity: $19,547

From other investments: $37,699 Subtotal : $117,246

Medicare expense: ($10,000) Taxes: ($9,561)

Final: $97,685



$1,037,869 This is a hypothetical example for illustrative purposes only. 13% effective tax rate. Distributions from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.

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AGE

The Smiths’ plan in action: Age 78 – Long-term care costs begin


Sue's Social Security: $16,000 From Annuity: $19,547

From other investments: $41,034 Subtotal : $120,580

Medicare Expense: ($10,000) Taxes: ($14,895)

Final: $95,685



$741,760 This is a hypothetical example for illustrative purposes only. 13% effective tax rate. Distributions from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.

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AGE

The Smiths’ plan in action: Age 82: Bill Dies

Bill's Pension (single-life): $0 Bill's Social Security: $0 Sue's Social Security: $24,000

From Annuity: $19,547 From other investments: $19,701

From Life Insurance: $41,507 Subtotal : $104,754

Medicare expense: ($5,000) Taxes: ($7,754) Final: $92,000



$890,328 This is a hypothetical example for illustrative purposes only. 13% effective tax rate. Distributions from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.

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$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

Total Investment Balances - End of Year

Plan No Plan

The Smiths’ plan in action: The Big Picture

No Plan: Plan: $0 $104,602 $0 $778,465 $530,387 $741,760 $0 $415,201

Age 84 Age 90

Age 95

Age 78

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Life events can cause gaps in retirement income

Larger income needs can reduce client assets

Variable annuities that provide guaranteed income can help clients achieve and maintain their retirement lifestyle

Summary

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Investors should consider the features of the contract and the underlying portfolios' investment objectives, policies, management, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectus, which can be obtained from your financial professional. Please read the prospectus carefully before investing. Variable annuities are issued by Pruco Life Insurance Company (in New York, by Pruco Life Insurance Company of New Jersey), Newark, NJ (main office) and distributed by Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies and each is solely responsible for its own financial condition and contractual obligations. Prudential Annuities is a business of Prudential Financial, Inc. Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your licensed financial professional can provide you with complete details. Prudential Annuities and its distributors and representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant. Variable annuities offered by Prudential companies have an annual cost of 0.55% to 1.95% for mortality expense and administration fees, with an additional fee related to the professional investment options. The fees will vary depending on the underlying annuity and investment options selected.

Disclosures

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All references to guarantees, including the benefit payment obligations arising under the annuity contract guarantees, rider guarantees, optional benefits, any fixed account crediting rates or annuity payout rates are backed by the claims-paying ability of Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey. Those payments and the responsibility to make them are not the obligations of the third party broker/dealer from which this annuity is purchased or any of its affiliates. All guarantees, including optional benefits, do not apply to the underlying investment options.

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Prudential Companies cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided or from any other source mentioned. The information does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.

A variable annuity is a long-term investment designed for retirement purposes. Investment returns and the principal value of an investment will fluctuate so that an investor’s units, when redeemed, may be worth more or less than the original investment. Withdrawals or surrenders may be subject to contingent deferred sales charges. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty, sometimes referred to as an additional income tax. Withdrawals reduce the account value and the living and death benefits.

Because qualified retirement plans, IRAs and variable annuities offer a tax-deferral feature, your clients should carefully consider the other features, benefits, risks, and costs associated with a variable annuity before purchasing one in either a qualified plan or an IRA. Before purchasing a variable annuity, your clients should take full advantage of their 401(k) and other qualified plans.

© 2016 Prudential Financial, Inc. and its related entities. Prudential Annuities, Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

Disclosures

ORD 207152 [WO# 627001]

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It’s a Numbers Game It’s about the “Cash Flow” not the ... · Slide 1 of 39 0246019-00012-00 Ed.05/2016 It’s a Numbers Game It’s about the “Cash Flow” not the “Cash