Generating Guaranteed Retirement Income: Benefits and Trade-Offs of Using Annuities. Scott Dunn Vice President Prudential

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1 Generating Guaranteed Retirement Income: Benefits and Trade-Offs of Using Annuities Scott Dunn Vice President Prudential Judith Alexander Director of Marketing & CMO Beacon Research Frank O Connor Product Manager Morningstar, Inc.

2 In order to hear the presentation, please dial in to the audio portion of the webinar: Toll-Free: Toll/International: Conference Entry Code: If you experience technical issues at any point of the webinar, dial *0 to be connected to an operator. CE Information If you wish to receive CE credit from CFP Board toward CFP designation for this webinar you must: Attend the webinar for at least 50 minutes Sign into the webinar using your full name and company address the following information to Your full name Your CFP number The last 4 digits your SS#

3 Generating Guaranteed Retirement Income: Benefits and Trade-Offs of Using Annuities Scott Dunn Vice President Prudential

4 10,000 Baby Boomers Turn 65 Every Day The New Yorker Collection 2003 Barbara Smaller from cartoonbank.com All Rights Reserved

5 People Want Guaranteed Income Where else can they get it except from annuities? Life insurance companies have the regulatory ability, as well as the expertise and experience to pool risk and guarantee lifetime income. Expenses in retirement: Longevity Healthcare costs Income sources: Social Security Pension Plans

6 Life Insurance Industry: Financially Strong the life insurance industry is healthier than it has ever been. * we re highly regulated by the states, with strict investment laws, risk-based capital and reserving requirements, explicit accounting and underwriting requirements, and extensive consumer protections. ** *UBS analyst Andrew Kligerman, Ret. Income Journal, April 4, 2012 **Dirk Kempthorne, CEO of the ACLI, March 16, 2011

7 All Industries Naturally Evolve

8 Companies Refining Their Strategies Annuity Companies New risk management techniques Low interest rates Cost of capital Regulatory issues Company risk profile Growth of SPIAs and DIAs Indexed Annuities with living benefits Staying the course: though with lower guarantees VAs without living benefits

9 Income Guarantees Guaranteed Income Non-annuities VAs and Indexed Annuities SPIAs/DIAs Flexibility + Growth

10 Fewer Risks Transferred = Higher Income Income Risks

11 Annuity Income Spectrum Companies are innovating in each area Many companies are/will target each segment separately with different products for each segment Income Now Income Later Unknown Future Income Needs SPIAs VA LBs aimed at immediate income FIA living benefits CDAs DIAs VA and FIA living benefits In-plan guarantees CDAs VAs without benefits FIAs without benefits Deferred fixed rate Group VAs

12 Generating Guaranteed Retirement Income: Benefits and Trade-Offs of Using Annuities

13 Annuities for Immediate and Future Income Judith Alexander, Director of Marketing & CMO, Beacon Research The Annuity Authority

14 GENERATING IMMEDIATE INCOME Why use annuities? Provide predictable, guaranteed lifetime income (more than CD/bond interest, usually) Reduce/eliminate retirement shortfall risk Cover basic living expenses free up assets Provide tax advantages Spend more pre-rmd The Annuity Authority

15 GENERATING IMMEDIATE INCOME Annuity Options Fixed immediate (SPIA) Term/period certain Life contingent (1 or 2 lives) Straight life (biggest payout) Life + period certain Refund The Annuity Authority

16 GENERATING IMMEDIATE INCOME Annuity Options Fixed immediate (SPIA) Liquidity options (decrease payouts) Advance Commute Flexible timing Inflation protection (decrease earlier payouts) The Annuity Authority

17 GENERATING IMMEDIATE INCOME Annuity Options Fixed immediate (SPIA) Benefits Largest payouts (usually) Predictable, guaranteed retirement income Easy to understand Tax-advantaged payouts (non-qualified) Tradeoffs No asset growth Less/no control, flexibility, liquidity The Annuity Authority

18 GENERATING IMMEDIATE INCOME Annuity Options Variable immediate (IVA) Payouts can fluctuate up or down Payout/liquidity options about the same as SPIAs Tradeoffs same as SPIAs, plus Income (above minimum) not predictable The Annuity Authority

19 GENERATING IMMEDIATE INCOME Annuity Options Deferred annuity GLWBs (fixed indexed or variable) Payment amount equals guaranteed % withdrawal from benefit base (shadow account) 1 or 2 lives Usually an optional rider (w/annual % fee) The Annuity Authority

20 GENERATING IMMEDIATE INCOME Annuity Options Deferred annuity GLWBs (fixed indexed or variable) Inflation protection (usually increases fee and/or reduces earlier payments) LTC doubler/tripler (usually increases fee and/or reduces base payment) The Annuity Authority

21 GENERATING IMMEDIATE INCOME Annuity Options Deferred annuity GLWBs Benefits Predictable, guaranteed income Asset growth possible Control asset More flexibility/liquidity The Annuity Authority

22 GENERATING IMMEDIATE INCOME Annuity Options Deferred annuity GLWBs Tradeoffs Payments usually less than SPIAs Payments less than GLWBs utilized later GLWBs are complex The Annuity Authority

23 GENERATING IMMEDIATE INCOME Annuity Options Deferred annuity GLWBs Tradeoffs Fees can reduce accumulation (asset) value Payments taxed as ordinary income Limited selection (few GLWBs pay out right away) The Annuity Authority

24 PLANNING FOR FUTURE INCOME Why use annuities? As in immediate income cases Guaranteed, predictable retirement income Cover basic expenses free up assets And also Tax-deferred asset growth The Annuity Authority

25 PLANNING FOR FUTURE INCOME Annuity Options Fixed deferred income (DIA/ALDA) Work like SPIAs + deferral period (> 1 year) Payout/liquidity options about the same as SPIAs The Annuity Authority

26 PLANNING FOR FUTURE INCOME Annuity Options Fixed deferred income Deferred income annuity (DIA) example Payments age 65 The Annuity Authority age 55

27 PLANNING FOR FUTURE INCOME Annuity Options Fixed deferred income Advance life deferred annuity (ALDA) example Payments age 80 The Annuity Authority age 65

28 PLANNING FOR FUTURE INCOME Annuity Options Fixed deferred income (DIA/ALDA) Benefits Largest of all annuity payouts (usually) Guaranteed, predictable retirement income Easy to understand Tax-advantaged payouts (non-qualified) The Annuity Authority

29 PLANNING FOR FUTURE INCOME Annuity Options Fixed deferred income (DIA/ALDA) Benefits Back-stop systematic withdrawal plans Tradeoffs Less/no control, flexibility, liquidity The Annuity Authority

30 Generating Guaranteed Retirement Income: Benefits and Trade-Offs of Using Annuities

31 Variable Annuities: Income Now, Income Later, and Tax- Deferred Investing Frank O Connor Product Manager Morningstar, Inc Mornings tar, Inc. All rights res erved. <#>

32 Income Benefits Defined Guaranteed Lifetime Withdrawal Benefits Periodic withdrawals calculated as a percentage of a Benefit Base Benefit Base = notional value used solely as a means to calculate a withdrawal amount Withdrawals continue for the life of one or two individuals, generally spouses Guaranteed Minimum Income Benefits Annuitization of a Benefit Base Annuity payments based on one or two lives, with or without a guaranteed certain amount May permit withdrawal of roll-up amount coupled with annuitization as a no lapse feature Guaranteed Minimum Accumulation Benefits Guarantees a minimum value after a period of time, commonly 10 years If account value on xth policy anniversary < amount invested, issuer makes up the difference Does not address income needs

33 Guaranteed Income with Growth Potential Guaranteed Lifetime Withdrawal Benefits 3% - 5% lifetime annual withdrawals (or higher at older ages) Growth potential Cash value post income Guaranteed Income Benefits Income via life or life contingent annuity payments Growth potential prior to annuitization No cash value post income

34 How it Works: Step-Ups

35 How it Works: Deferral Bonuses

36 How it Works: Step-up + Stackable Bonus

37 How it Works: GMIB

38 The Evolving VA Guaranteed Income Market Benefit Type Percentage of Contracts Offering Any 71.3% 68.3% Guaranteed Minimum Accumulation Benefit (GMAB) 35.0% 17.4% Guaranteed Minimum Income Benefit (GMIB) 36.7% 22.0% Guaranteed Minimum Withdrawal Benefit (GMWB) 65.6% 6.1% Guaranteed Lifetime Withdrawal Benefit (GLWB) 47.2% 60.4% VA Market Statistics (in $Billions) Total Sales $179.6 $143.4 (-20%) Net Cash Flow $33.4 $14.0 (-58%) Assets Under Management $1,499.3 $1,639.9 (+9%)

39 Market Share of Top 3 VA Issuers 45% 40% 39% 43% 42% 35% 32% 30% 27% 25% 20% Market Share 15% 10% 5% 0%

40 How Benefits Have Changed Benefit Parameter Subaccount selection Withdrawal Percentages Deferral bonuses General Structure Open investment platform, though often % allocation to fixed required 6% lifetime withdrawals at age 65 6% annual compounding roll-up Conservative allocation funds, dynamic rebalancing, managed volatility 5%, moving toward 4% or less 4% simple Average GLWB cost 0.88% (Q1 2009) Fixed fees 1.25% (Q4 2012) Benchmarked fees

41 Subaccount Assets Under Management VA Subaccount Assets Under Management By Asset Class 60% 50% 40% 30% % 10% 0% Equity Fixed Allocation Bonds Money Market

42 Annual Withdrawal Percentage at age 65 80% 70% 60% 50% 40% % 20% 10% 0% Lifetime Withdrawal Percentage for a 65-Year Old

43 Beyond the Guarantees The Value of Tax Deferred Investing Assuming liquidation and average fees, mutual funds beat VAs Factors Complicating Analysis Advisory fees, level of service Tax-free vs. taxable transfers, portfolio turnover Timing of mutual fund buys and sells vs. taxable distributions

44 Beyond the Guarantees The Value of Tax Deferred Investing Liquidation and average fees, mutual funds beat VAs Fund withdrawals held equivalent to after-tax annuity income for age 65 male Exclusion ratio spreads tax liability over many years Ultimately fund portfolio is exhausted, annuity portfolio lasts as long as investor

45 Interesting Developments Contingent Deferred Annuities (CDAs) Essentially mimics a VA with GLWB Covered asset + CDA wrapper Payment from CDA contingent on fund underlying wrapper going to $0 value Primarily in qualified plan market today Longevity Insurance Cousin of the CDA Contingent on age rather than asset value Buy at a discount at 65, pays at 85 until annuitant s death Volatility Managed funds Percentage of fund allocated to short options purchases to dampen volatility Shift of risk to the investor Moves liability off issuer s balance sheet Enables issuers to continue to offer and support guarantees

46 QUESTIONS?

47 Please visit for additional resources and tools!..... CE Information If you wish to receive CE credit from CFP Board toward CFP designation for this webinar you must: Attend the webinar for at least 50 minutes Sign into the webinar using your full name and company address the following information to Your full name Your CFP number The last 4 digits your SS#

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