Understanding the Key Retirement Issues that are Avoided and - - PowerPoint PPT Presentation

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Understanding the Key Retirement Issues that are Avoided and - - PowerPoint PPT Presentation

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Understanding the Key Retirement Issues that are Avoided and Misunderstood Bob Carlson AAII-DC Editor, Retirement Watch February 28, 2015 800-552-1152 www.RetirementWatch.com 1 Conflicts and Confusion Two issues: Secure lifetime

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Understanding the Key Retirement Issues that are Avoided and Misunderstood

Bob Carlson Editor, Retirement Watch AAII-DC February 28, 2015 800-552-1152 www.RetirementWatch.com

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Conflicts and Confusion

  • Two issues:

§ Secure lifetime income § Protection from unexpected expenses, especially long-term care

  • Obstacles:

§ Objective information sources § Resolving uncertainty § Trade offs

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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The Annuity Problem

  • $200+ billion sold each year
  • Lots of critics, but…
  • Economists: Not enough people own

annuities

  • Few people understand
  • People own the wrong annuities,

don’t know what they own

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Major Types of Annuities

  • Variable annuities
  • VAs with special riders
  • Immediate annuities
  • Deferred fixed annuities
  • QLACs/Longevity annuities
  • Fixed index annuities
  • Annuity combos

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Why to Buy Annuities

  • Most buy wrong way, for wrong reasons
  • Purposes:

§ Principal protection § Savings § Income § Other: legacy, long-term care

  • Core reason: Risk transfer

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Variable Annuities: Very Briefly

  • Reason: Growth investing
  • Disadvantages:

§ Fees. Some times very high fees § Capital gains to ordinary income

  • Terms can change at any time
  • Can lose value, but not deduct loss
  • Who should consider?

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Annuities for Savers

  • Fixed Deferred Annuities
  • Intermediate bond yield
  • Safety of principal
  • Income compounds tax-deferred
  • Alternatives to CDs, bonds
  • No separate fees, low commissions
  • Some access to account

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Who Should Consider

  • Conservative savers
  • Don’t need immediate liquidity
  • Two year or longer horizon
  • Fear rising interest rates
  • FDAs vs. bonds

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Annuities for Savers

  • Fixed Index Annuities (a.k.a. EIAs)
  • Potentially higher interest than FDAs
  • Interest determined by index returns
  • Principal Protection/Guaranteed

return

  • Liquidity?
  • Convert to income?

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Details of FIAs

  • Key factors in formulas

§ Indexes − can they be changed? § Index − At least 6 calculation methods § Participation rate § Annual ceiling/Index cap § Spread/fees

  • Very important: The Lock-In or Reset

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Who Should Consider

  • Conservative savers: Max 5%-10%
  • Seek higher yield than CDs
  • Can tolerate 0% years
  • Don’t need immediate liquidity
  • Five-year or longer horizon
  • Fear rising interest rates
  • FIAs vs. bonds or CDs

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Annuities for Income

  • Variable annuity with income rider
  • Immediate annuity
  • Fixed Index Annuity with income rider
  • QLACs/Longevity annuities
  • Charitable annuities

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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VA with Income Rider

  • Guaranteed lifetime withdrawal benefits
  • r guaranteed minimum withdrawal

benefits

  • Withdraw fixed percentage for life
  • Potential for increase
  • Full access to account before distributions
  • Potential legacy

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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VA with Income Rider

Disadvantages:

  • Expensive
  • Account value ≠ benefit base
  • Investment options limited
  • No inflation adjustment
  • Insurer can change terms

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Immediate Annuities

Simple and Classic − The Private Pension

  • Lump sum premium (SPIA)
  • Fixed payment for life or years
  • Can’t outlive your income
  • No additional fees/low commission
  • Usually better payout than income

riders

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Immediate Annuities

Disadvantages:

  • No inflation protection
  • No liquidity
  • No legacy

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Immediate Annuity Tips

Ÿ Shop around Ÿ Purchase age 70 or later to increase payout Ÿ Can ladder annuities Ÿ Consider inflation protection Ÿ Should you wait for higher yields? Ÿ Know tax rules on income payments

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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FIA with Income Rider

Ÿ Similar to VA with Income Rider Ÿ Investment period, then income period Ÿ Receive fixed percentage for life Disadvantages: Ÿ Extra costs Ÿ Account value vs. benefit base Ÿ No inflation protection

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Final Words

  • n Income Riders

Ÿ Occasionally some strong income

riders Ÿ General rule: Focus on growth and income separately Ÿ Work with experienced, independent agent

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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QLACs & Longevity Annuities

Ÿ Also called Deferred Income Annuity

Ÿ Introduced in 2004 Ÿ Defer 2-45 years, then guaranteed annual income Ÿ Payments must start by 85 Ÿ IRS made more attractive in 2014 Ÿ Longevity annuity ≠ QLAC

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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QLACs & Longevity Annuities

Ÿ No liquidity after purchase

Ÿ Legacy, spouse protection possible Ÿ Inflation protection possible Ÿ Principal protection, lifetime guarantee Ÿ No annual fees Ÿ No changes in policies

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

The Annuity Puzzle

Annuities are a trade off/risk transfer

  • Transfer risks of low returns, long life
  • Give up some control, flexibility
  • Certainty vs. potential
  • Compare annuities to systematic

withdrawals

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Prevailing in the Long-Term Care Crisis

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Prevailing in the Long-Term Care Crisis

  • Major worry of most Americans
  • Don’t want to talk about it
  • Insurance in upheaval
  • Misunderstandings and mistakes

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Will You Need LTC?

Battle of Statistics:

  • 70% of those 65 and over will need

some kind of LTC

  • Only 19% of men and 31% of

women should buy LTCI

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Low Probability, High Cost

  • Costs $200,000+ annually
  • Increases faster than CPI
  • Even home care is expensive

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Why to Plan

Ÿ Burden on family Ÿ Protect assets: Yours and family’s Ÿ Avoid dependence Should be part of every retirement plan

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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What Medicare Pays For

  • 100 days or less following hospital stay of

more than three consecutive days

  • Nursing home stays of 50% of men and

40% of women qualify

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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What Medicaid Pays For

Most costs if you qualify. But…

  • Must be “impoverished”
  • Rules tightened regularly
  • Must give away money five years before
  • State still can pursue your estate, family
  • Lower quality of care

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Other Tools

  • Self-insurance
  • Permanent life insurance
  • LTCI: Personal, employer, group policies
  • Combination policies

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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About 13% of 65-and-overs own LTCI.

  • Not likely to need. Expire unused.
  • Misunderstand costs of care
  • Think family will take care of them
  • Insurance is expensive, complicated
  • Premiums will rise

Long-Term Care Insurance

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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When Should You Buy?

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

Ÿ Ideally in your early 50s

Age Decline Percentage

55 to 59 37% 60 to 64 39% 65 to 69 46% 70 to 74 50% 75 to 79 63%

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Customizing LTCI

  • Daily benefit − don’t forget extras
  • Inflation protection
  • Elimination period/deductible
  • Maximum length of coverage
  • Coverage eligibility and scope
  • Hospital stay required?

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Enhancing LTCI

Ÿ Purchase joint policy Ÿ Shop around Ÿ Don’t jump at lowest premium Ÿ Check claims history Ÿ Long-term care partnership

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Combination Policies

  • Annuities or permanent life insurance
  • Might be easier to qualify
  • Consider same factors as for LTCI
  • Coverage might not be as robust
  • Avoids use-it-or-lose it
  • Usually uses non-LTCI portion first
  • Should need annuity or life insurance

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Annuity/LTCI Example

  • Lump sum deposit earns 3%, fixed yearly
  • LTC benefits up to three times deposit
  • No change in LTCI cost. Compounded

interest increases benefit

  • 90-day waiting period; 0 for home care
  • Withdraw up to 10% annually
  • Married couples can be jointly covered

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Annuity/LTCI Example

  • Insurer determines maximum monthly

benefit

  • Recently $4,200 or 72 months/$100,000
  • LTCI benefits reduce your account first
  • Might be tax-free under 2006 law
  • Penalty for early liquidation

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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Plan to Use All The Tools

  • Family
  • Medicare
  • Medicaid
  • Self-insurance
  • Permanent life insurance
  • LTCI: Personal, employer, group policies
  • Combination policies

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com