Retirement Income Distribution Solutions

transcript

NAIFA Nebraska

For Professional Use Only

Dennis M. King, CFP®

Senior Vice President – Business DevelopmentSecurities America Advisors, Inc.

Zach Parker, CFPDirector Variable Annuities & Fixed Insurance

Securities America

Wealth Management

Overview

• Time Segmented Distribution Overview• Client Types and Retirement Behaviors• Identifying Negative Behavior Before it

Starts• Commonly Used Products for the Time

Segmented Strategy• Advanced Retirement Planning

Opportunities

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Time Segmented Distribution Overview

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Why Is Income Distribution So Important?

Opportunity

Liability

ADVISOR

CAREER

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Opportunity• The Aging Baby-Boomer Generation

– A total of 77 million baby boomers (26% of U.S. population)

– Boomers turning age 65 at the rate of 10,000 per day for the next 19 years

– 34 million turning age 65 in 2011

• Wealthy Population Segment– Boomers are the most influential investing group– 40% age 50+ control 75% of financial assets– Responsible for 50% of all consumer spending

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Income Distribution

The premise:

Distributing assets is a much more challenging planning task than accumulating assets.

Let’s take a look…

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For Professional Use OnlyBroker Dealer Use Onlye

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Income DistributionBased on this information, we would suggest that it is much more difficult to select a distribution path.

Even the investors that accumulated their assets on their own understand this and will be seeking your advice.

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A Commitment to Income Distribution

Many advisors needed to be convinced of the superiority of this strategy:

How did we know Time Segment Distribution was the best strategy?

Sorted through several other strategies for producing retirement income

Finalized the “Capturing the Income Distribution Opportunity” whitepaper outlining our findings

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White Paper

Capturing the Income Distribution Opportunity:

A historical analysis of distribution philosophies and a solution for today

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Income Distribution White Paper

The historical success rate of three strategies were examined:– Systematic Withdrawal

– Annuity with Guaranteed Minimum Withdrawal Benefit

– Time Segmented Model

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90% historic success rate of providing 25-years of inflation-adjusted income and return of principal

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Income Distribution White PaperVA’s GMWB

Emotional benefit

Withdrawal rate

Time SegmentedWithdrawal rate

Emotional benefit

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Recommendations:• A combination of a time segmented

allocation combined with a VA GMWB strategy– Guaranteed minimum income stream

provided by the VA’s– Time Segmented Allocation

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ROI Profile- Reliability of IncomeA truly unique 17 question tool

in which two scores are produced:

– The Guarantee Factor which measures the value a client places on a guaranteed income stream

– The Volatility Factor which measures the clients sensitivity to volatility in their portfolio

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Using the ROI Profile• We use the profile to determine what

percentage of a clients income should be guaranteed

• Based on how the client scores we may recommend anywhere from 0 to 50% of the income need be guaranteed

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Implementing the Income Solution

• The guaranteed and other income producing strategies should be implemented parallel to each other

• The Guaranteed income source can be achieved through a Variable Annuity or a Single Premium Immediate Annuity

• A time segmented model can be used as the other income producing strategy

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Structure of Securities America’s Time Segmented

Distribution Strategy

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1 2 3 45

Current Income1 to 5

Income Years6 to 10

Income Years

11 to 15

Income Years

16 to 20

Income Years

21 to 25

Income Years> 25

Initialretirementportfolio

2% cagr4% cagr

6% cagr

8% cagr10+% cagr

TSD Example:AT INCEPTION

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Income Years6 to 10

#2 HAS BECOME THE CURRENT INCOME

BUCKET

Income Years

11 to 15

Income Years

16 to 20

IncomeYears

21 to 25

IncomeYears> 25

2 3 45 6

2% cagr

4% cagr6% cagr

8% cagr10+% cagr

TSD Example:END OF YEAR 5

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1 2 3 45

Income Years6 to 10

Portfolio Years

11 to 15

Portfolio Years

16 to 20

Portfolio Years

21 to 25

Portfolio Years> 25

6Segment 6 Target:in 25 years, grow to the original portfolio

size, (inflation adjusted)

TSD Example:END OF YEAR 25

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1 2 3 45 6

2% cagr4% cagr

6% cagr

8% cagr10+% cagr

Enhanced TSD

Guaranteed Income

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1 2 3 45 6

Enhanced TSD:Product Solutions

GMWB: Variable Annuity or Insurance-Wrapped Product

SPIA, FA Traditional Managed AccountsFA, LBP

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Not Just the Numbers!– We need to focus on more than the

numbers because of our client’s emotional needs

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Implementing Guaranteed Benefits

Time Segmented Distribution

Guaranteed Income

Solution *

* Guarantees are based on the claims paying ability of the insurance company

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Creating a Time Segmented Plan

• Creating a time segmented plan can be done with a financial calculator– Three Steps for each segment

• Calculate Inflation Adjusted Income– FV Current Income Goal @ Inflation Rate

• Calculate Lump Sum Needed to Achieve Income

– PV Future Income Need @ Fixed Rate for Time Frame

• Discount PV of Future Income Stream– PV Future Income Stream @ Discount Rate

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Creating a Time Segmented Plan

• Example of Segment 2 Need of $2,000 in Today’s Dollars– Three Steps for each segment

• Calculate Inflation Adjusted Income– FV of $2,000 @ 3% for 5 Years = 2,318.55

• Calculate Lump Sum Needed to Achieve Income

– PV of $2,318.55 for 60 Months @ 3% = $129,032

• Discount PV of Future Income Stream– PV of $129,032 for 5 years @ 3% = $111,304

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Other Resources• Wealth2k www.wealth2k.com

– Income for Life• Nationwide Income Planning Desk

877-245-0763– Retire-Sense

• Microsoft Excel

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Foundations for Income Distribution Specialization

5 Key Components

For b/d use only

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Foundations for Income Distribution Specialization

Over the past 12 months, 91% of advisors surveyed have been able to use their retirement income background in acquiring clients.

6 in 10 said their expertise has helped them acquire four or more clients.

How many clients have you acquired?Source: Financial Planners expect retirement income chops to pay off. Investment News December 8, 2009

For b/d use only

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• Marketing Yourself as and Income Distribution Specialist Whitepaper (Coming Soon)

• Retirement Oriented Website• Client Approach Agenda

Marketing and Approach Tools

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“Specializing In…” Tag Lines• Your Retirement Wealth Advisors• The Retirement Wealth Advisors• Retirement Wealth Advisors• Your Retirement Planning Specialist• The Retirement Planning Specialists• Specializing in Retirement Income Planning• Specializing in Creating & Optimizing Retirement

Income

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Agenda

• Customize Your Current Agenda

– Accumulation Vs. Distribution– Strategy Outline– Retirement Goals– Your topic– Your topic

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Strategy Overview

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Behaviors to Identify Before Developing a Retirement Plan

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NextPhase™ Client Packet

Confidential Fact Finder

– Financial Data Gathering

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– Current Take Home Pay

– Additions & Subtractions to current income

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Appendix A– Expanded

Income Replacement Estimator-OPTIONAL

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Expanded ROI Profile

The Guarantee Factor which measures the value a client places on a guaranteed income stream

The Volatility Factor which measures a client’s sensitivity to volatility in their portfolio

The Cash Needs Factor which measures a client’s need to set aside money for future needs

The Legacy Needs Factor which measures a client’s desire to leave a legacy to heirs or charity.

Four Retirment Planning Factors

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Expanded ROI Profile

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Three Major Client Types

• Significant Saver• Delusional Spenders• Enthusiastic Retiree

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Significant Savers• Usually look to take between 2-4%

income from their portfolio.• Less than 20% of the Population• Lower risk to the advisors practice• Hard to find a specific niche these types

of clients will fall into• Focus on Estate Planning Needs

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Delusional Spenders• Looking to 6-10% or more from their

retirement assets• Potentially make up 43% of the

population• High risk clients to the advisors practice• Need to set sound expectations and

possibly release these clients

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Enthusiastic Retirees• Looking to withdrawal 4-6% of their

portfolio for income• Make up the majority of retirees• Need Distribution Planning Support

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Identifying Negative Behavior Before it Starts

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Negative Behavior #1Misidentifying Income Needs

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Solving for Income Needs• Use Custom Budget Worksheet

– Pro• Creates most accurate picture of income

– Con• Difficult to get clients to complete in full

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Appendix A– Expanded

Income Replacement Estimator-OPTIONAL

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Solving for Income Needs• Use Take Home Pay Method

– Pro• Easily identify what they are currently spending

– Con• Need to re-estimate based on changing tax rates

• Based on estimates that may change based on account performance

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– Current Take Home Pay

– Additions & Subtractions to current income

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How to Gross Up Current Take Home• Identify current take home pay needs

• Identify Income Sources– Pensions

– Social Security

– Other Guaranteed Income

• Identify which accounts additional income will come from– Qualified

– Non-Qualified

• Estimate Income and Gains from Non-Qualified Accounts

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How to Gross Up Current Take Home• Add all income sources including income from Non-

Qualified Accounts

• Use effective rate calculator to determine effective rate– http://www.dinkytown.com/java/TaxMargin.html– Add for additional state taxes

– Estimate taxes conservatively or “on the high side”

• Estimate total taxes and increase income by tax amount– Specific tax advice should not be given to the client

– Estimating taxes will assist with the planning phase

– Advisors should tell the client to seek tax advice for specific tax information

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Negative Behavior #2Creating a plan that makes

clients uncomfortable

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Solving for Client’s Emotional Needs

• Guarantee Factor– Emotional Needs

– Financial Needs

• Volatility Factor (Risk Comfort Level)

• Ask Questions to Uncover Needs

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Question #1

• The amount of investable assets we plan to commit to produce our retirement income is what percentage of our total assets?

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Question #2

• An individual’s total desired retirement income is made up of basic necessities and discretionary wants. When examining our total desired retirement income the percentage of the total made up of basic necessities is:

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Question #3

• Over the course of our retirement we expect our monthly income needs to:

(a) Decrease significantly(b) Stay the same(c) Increase at the rate of inflation(d) Increase significantly

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Question #4

• The income you will receive from guaranteed sources equals what percentage of your total income need:

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Question #5

• Is guaranteeing a lifetime income stream is more important than inflation-adjusting a lifetime income stream:

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Question #6

• Leaving a significant portion of this investment to your heirs (non-spouse) is important:

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Question #7

• Health permitting, how do you feel about work during retirement?

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Question #8

• Are you worried that you will outlive your income stream?

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Additional Questions

• Use your current risk profiling tools to access the clients ability to take on investment risk.

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Negative Behavior #3Not Accounting for Lump Sum

Needs or Emergency Expenses

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Solving for Client’s Cash Needs During Retirement

• Cash Needs Factor

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Question #1

• Do you expect to be free of credit card debt at your expected retirement date?

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Question #2

• Over the last five years have you needed an additional $5,000 or more for an unexpected expense?

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Question #3

• If your children or grandchildren needed $5,000 for an unexpected expense, would you help them with the full amount?

• If so, would you expect repayment?

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Question #4

• How often do you plan to purchase a new or used car?

• Have you included this expense in your monthly budget?

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Question #5

• During retirement would you plan to travel more or do you have plans for a “dream” trip?

• Have these expenses been accounted for in your monthly income needs?

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Question #6• The hobbies you plan to participate in during

retirement require what level of financial support?– Little to no money (Walking, Gym,

Reading…– Some additional money (Golf, Club

Memberships…– A major purchase to begin (Boating, RV’ing)– A substantial ongoing investment

(collectibles, flying, vacation home)

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Question #7

• Do you expect to be free of mortgage debt when you retire?

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Question #8• Do you expect to maintain only one

residence throughout retirement?

• How old is your current residence?

• Do you expect to downsize or upsize at some time?

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Negative Behavior #4Not considering the clients legacy

goals in their retirement plan

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Solving for Client’s Legacy Goals When Planning for Retirement

• Legacy Factor

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Question #1

• Do you plan to support the educational needs of your children or grandchildren?

• If so, what support would you like to provide?

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Question #2• What percentage of your current

estate in today’s dollars would you like to leave your family or favorite charity?

• Would you be willing to reduce your spending goals to leave your desired legacy?

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Question #3

• Do you currently maintain any permanent insurance policies throughout your retirement years?

• Have you thoroughly reviewed these policies to make sure they will be in force for your life?

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Question #4

• Do you currently have or do you have plans to purchase a Medicare Supplement Policy?

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Question #5

• Do you currently have or have you considered purchasing a Long Term Care Policy?

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Product Selection Strategies

Segment 1

Investment Time Horizon is Immediate

PayoutYears

Segment 2

Investment Time Horizon is

5 years

PayoutYears 6-10

Segment 6

Investment Time

Horizon 25 years

Hedge forPayout inYears 26+

Segment 4

Investment Time

Horizon is15 years

PayoutYears 16-20

Segment 3

Investment Time

Horizon is10 years

PayoutYears 11-15

Segment 5

Investment Time

Horizon is 20 years

PayoutYears 21-25

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Product Selection: Segment 1• SPIA 5 Year Period Certain

– Current IRR .5% on SPIA Products– Tax efficient for Non-Qualified Assets– Ease of doing business “High”

• Bond/CD Ladder– Current IRR 1.0-1.5%– Bonds Contain Default Risk– Ease of doing business “Medium”

All investments involve the risk of potential investment losses. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. The investor may receive less than the original invested amount and is advised to consider the investment objective and risks before investing. Please see risk disclosures at end of presentation.

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Product Strategy: Segment 1• Focus on Guarantees

– Little Benefit for Higher Rates• Change in income using lower rate throughout the model

(Based on $1,000,000 Starting and Ending Value)– 1% = $4,014 Per Month– 2% = $4,115 Per Month– 3% = $4,216 Per Month

• Change in income using the lower rate for segment 1 and the inflation rate through the model (Based on $1,000,000 Starting and Ending Value)

– 1% = $4,259 Per Month– 2% = $4,289 Per Month– 3% = $4,318 Per Month

• Focus on Business Efficiency

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Product Selection: Segment 2• Fixed Deferred Annuities

– Current Rates 2.5-3.25%– Tax efficient for Non-Qualified Assets– Ease of doing business

• True 5 Year Surrender Products “High”• 30 Day Window Products “Low”

• Equity Indexed Annuities– Potential Interest Credits Based On Market

Performance– Most Contracts Lock In Gains– Give Up Guaranteed Interest for Higher Potential– Ease of doing business “High”

• True 5 Year Surrender Products

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Product Selection: Segment 2• Principal Protect Structured CDs

– Potential Interest Credits Based On Market Performance

– Contracts are complicated “Make sure to know what you are selling”

– Give Up Guaranteed Interest for Higher Potential– Ease of doing business “Medium”

• 5 Year Product “Fee Based” HSBC Bank• 6 Year Product “Comp Based” HSBC Bank

• Managed Account– Current Income Portfolio up to 20% Equities 80%

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Product Selection: Segment 3• Equity Indexed Annuities

– Potential Interest Credits Based On Market Performance

– Multiple Crediting Options• Annual Point to Point• Annual Point to Point (Monthly Average)• Annual Point to Point (Spread)• Monthly Sum Cap• Fixed Interest Account

– Option to adjust Annually

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Product Selection: Segment 3• Variable Annuity with GMAB

– Potential to Lock In Market Gains– Reduces Impact of Market Downturn at the

End of the Segment– Lump Sum Walk Away Benefit

• Managed Account– Balanced or Growth and Income Portfolio

up to 60% Equities 40% Bonds

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Product Selection: Segment 4• Variable Annuity with GMAB

– Potential to Lock In Market Gains– Reduces Impact of Market Downturn at the

End of the Segment– Lump Sum Walk Away Benefit

• Managed Accounts– Growth and Income or Growth Portfolio Up

to 80% Equities and 20% Bonds

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Product Selection: Segments 5 & 6• Variable Annuity Products

– Tax Deferred Growth Potential– Death Benefit Options

• Standard• Highest Anniversary Value• Guaranteed Roll Up

• Managed Accounts – Growth or Aggressive Growth Portfolio up

to 100% Equities

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Implementing Guaranteed Benefits

Time Segmented Distribution

Guaranteed Income

Solution *

* Guarantees are based on the claims paying ability of the insurance company

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Product Selection: Lifetime Income• Lifetime Fixed SPIA

– Highest Potential Initial Income– No Inflation Adjustments – Give Up Control of Assets

• Variable Annuities with Lifetime Income Guarantees– Lower Initial Withdrawal Potential– Potential Inflation Hedge Through Step-Ups– Maintain Control of Assets– Complicated Products No “Best” Solution

• GMWB• GMIB

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• Confidential Fact Finder Review• Present the Retirement “Strategy”• Present Product Recommendations• Product/Transfer Applications

The Retirement Plan Presentation

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Present the “Plan”• Start with SIMPLE

– Present the Investment Strategy Proposal

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Executing the “Plan”

• Complete all necessary paperwork.• Tell the clients what to expect

– Set up 45 day meeting to review process.

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Advanced Retirement Planning Opportunities

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Multiple Registration Scenario• Client Details

– $1,350,000 Investable Assets• $400,000 Qualified Spouse 1

• $400,000 Qualified Spouse 2

• $400,000 Joint Account

• $75,000 Roth IRA Spouse 1

• $75,000 Roth IRA Spouse 2

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Funding the Segments• Pro Rata Method

• Invest each segment based on the pro rata percentage of assets in each registration

• Pros– Simple process for identifying segment assets

– Creates a balanced plan

– Should reduce need for additional withdrawals because of Required Minimum Distributions

– Provides flexibility for excess withdrawals from the program

• Cons– Could be oversimplified from a planning perspective

– Doesn’t consider taxation on Social Security

– Might be difficult to meet minimums in each segment

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Funding the Segments• Non-Qualified Book Ends Method

• Recall this client was only 55 using Non-qualified assets for the early segment and the last segment could reduce the need for 72(t) transactions

• Pros– Simple process for identifying segment assets

– Should reduce need for additional withdrawals because of Required Minimum Distributions

– Provides flexibility for excess withdrawals from the program

• Cons– Could be oversimplified from a planning perspective

– Doesn’t consider taxation on Social Security

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Funding the Segments• Non-Qualified then Qualified Method

• Take all of the Non-Qualified assets first and fund later segments with qualified assets

• Pros– Produces the lowest tax liability early in the plan allowing qualified assets to

continue to defer.

– Could reduce the amount tax the client pays on their social security benefits while pulling from the Non-Qualified Assets

• Cons– Provides Little flexibility for excess withdrawals once the Non-Qualified assets are

spend down

– Inefficient method in if tax rates are expected to increase

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Funding the Segments• Target Tax Bracket Method

• Identify a target tax bracket for the client during retirement and set asset up to be under the target tax bracket

• Pros– Can produce the most tax efficient plan for the client

– Could reduce the amount tax the client pays on their social security benefits

• Cons– Time consuming process to develop estimates of the clients cash flow

– It is usually difficult to estimate capital gains and dividends on Non-qualified assets

– Estimates can be made but need to be make sure you are not giving tax advice with the plan

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Creating a Plan with Uneven Segments

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Using Time Segmented Distribution for Estate and

Insurance Planning

Pursuant to IRS Circular 230, this information is not intended to (and can not) be used by anyone to avoid IRS penalties. Neither Securities America nor its representatives are permitted to give tax advice. Discussion of tax rules is for general informational purposes only and merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive; nor does it cover every situation. Consult a qualified professional for tax advice specific to your client's situation.

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Solving for Client’s Estate Planning Needs

• Is the ending balance significantly higher than the initial payment (Today’s Dollars)– Clients might have estate planning needs if the assets

double over 25 years.

• How do the assets pass to heirs?– Qualified

– Non-Qualified

– Other

• Access life insurance situation for the client

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For Professional Use OnlyFor Broker Dealer Use Only

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For Professional Use OnlyBroker Dealer Use OnlyeFor Broker Dealer Use Only

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Using Time Segmented Distribution to Plan for Long

Term Care Needs

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Other Resources• www.advisorpod.com

– Masters Series – Practice Builders

• Wealth2k www.wealth2k.com– Income for Life

• Nationwide Income Planning Desk 877-245-0763– Retire-Sense

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Questions?

Retirement Income Distribution Solutions

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