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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”
[When presenting in AR, CA, OK, TX or IL, use the phrase “Insurance Sales Presentation.” In CA and AR, add License Number]
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[Hosted/Presented by:] [PFR Name] Personal Financial Representative [Allstate Financial Services, LLC or LSA Securities (in LA & PA)]
[For Allstate Financial Services only: This slide must be shown prior to the beginning of the customer presentation]
Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main Office: 2920 South 84th Street, Lincoln, NE 68506. (877) 525-5727.
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[REQUIRED SLIDE FOR MERRILL LYNCH EVENTS ONLY]
Bank of America Corporation (“Bank of America”) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and investment products and other financial services . Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation (BofA Corp). Merrill Lynch Life Agency is a licensed insurance agency and a wholly owned subsidiary of BofA Corp. Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.:
Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed
Are Not Insured by Any Federal Government Agency Are Not Deposits Are Not a Condition to Any
Banking Service or Activity
The views and opinions expressed in this presentation are not necessarily those of Bank of America Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated; or any affiliates. Nothing discussed or suggested in these materials should be construed as permission to supersede or circumvent any Bank of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated policies, procedures, rules, and guidelines.
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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
Bill's pension (single-life): $25,000 Bill's Social Security: $18,000
Sue's Social Security: $12,000 Subtotal: $55,000
Original Shortfall: Taxes:
Additional Shortfall:
$41,565
Distributions Taken – Amount and Rate
$35,000 3.96%
Anticipate Additional Dist. rate
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%.
Target Income: $90,000
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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
Bill's pension (single-life): $25,000 Bill's Social Security: $18,000
Sue's Social Security: $12,000 Subtotal: $55,000
Original Shortfall: Medicare:
Taxes: Additional Shortfall:
$51,565
Distributions Taken – Amount and Rate
$35,000 4.91%
Anticipate Additional Dist. rate
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%.
Target Income: $90,000
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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
Bill's pension (single-life): $13,000 Bill's Social Security: $18,000
Sue's Social Security: $12,000 Subtotal: $43,000
Original Shortfall: Medicare:
Taxes: Additional Shortfall:
$62,005
Distributions Taken – Amount and Rate
$35,000 5.96%
Anticipate Additional Dist. rate
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%.
Target Income: $90,000
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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
Bill's pension (single-life): $13,000 Bill's Social Security: $18,000
Sue's Social Security: $12,000 Subtotal: $43,000
$35,000 $10,000 $40,000 $20,247 $82,247
Original Shortfall: Medicare:
Long-term care: Taxes:
Additional Shortfall:
$117,247 Distributions Taken – Amount and Rate
$35,000 18.83%
Anticipate Additional Dist. rate
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%.
Target Income: $90,000
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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
Sue's Social Security: $19,800 Subtotal: $19,800
$35,000 $5,000 $13,752 $53,952
Sue Runs Out of Money at Age 84
Original Shortfall: Medicare:
Taxes: Additional Shortfall:
$88,952
Distributions Taken – Amount and Rate
$35,000
38.57%
Anticipate Additional Dist. rate
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%.
Target Income: $90,000
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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;
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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
Target Income: $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
Target Income: $97,685
Total Investment Balance After Distributions:
$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
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: $41,034 Subtotal : $120,580
Medicare Expense: ($10,000) Taxes: ($14,895)
Final: $95,685
Target Income: $95,685
Total Investment Balance After Distributions:
$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
Target Income: $92,000
Total Investment Balance After Distributions:
$890,328 This is a hypothetical example for illustrative purposes only. 13% effective tax rate. Distributions from non-qualified accounts are 50% return of principal, 25% long term gains and 25% short term gains. Long term capital gains taxed at 0%.
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$-
$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]