income strategies with annuities
DESCRIPTION
Income Strategies with Annuities. Agenda. The environment for annuities Systematic withdrawal Annuitization Income hybrids of the future. The Environment. The avoidance of taxes is the only intellectual pursuit that still carries any reward. –John Maynard Keynes (1883–1946). THE IRS. - PowerPoint PPT PresentationTRANSCRIPT
Income Strategies
with Annuities
The environment for annuities
Systematic withdrawal
Annuitization
Income hybrids of the future
Agenda
The EnvironmentThe Environment
The avoidance of taxes isthe only intellectual pursuitthat still carries any reward.
– John Maynard Keynes (1883–1946)
THE IRS
THEIRS
Annuity sales rising
Increased popularity of variableproducts
Exploitation of annuity “pitfalls”
Investor concerns
Current Environment
People are living longer
Doubts about Social Security
Pension plans are less common
Costs are rising
Markets don’t grow to the sky
A Dose of Reality
Financial asset values have risenat rapid rates
Need for more efficient incomeand wealth transfer
Fund and stock assets seen as better wealth-transfer vehicles
Invincible or Vulnerable?
The focus has beenon accumulation
The focus should beon income
The focus should beon income
Inflation
Health care issues
Unexpected expenses
Outliving the income stream
Income Concerns
Systematic withdrawals
Bonds
CDs
Money markets
Annuities
Income Tools
Structuring Income
Capital Assets
Annuities
Qualified Assets
Intended for financial advisers only.
Annuities are meantto be spent!
Systematic withdrawals from annuities
Systematic withdrawals from annuities
Flexibility
Perceived liquidity
Remaining value appears each month on client statement
Assets stay on adviser’s book
Systematic Withdrawal
Advantages
No apparent tax benefits
No income guarantees
Over-aggressive increases in income could deplete principal
Potential of outliving your income
Limitations
Systematic Withdrawal
The method of choicefor annuity income
Systematic Withdrawal
The “A” WordThe “A” Word
Annuitization
Income never changes
You cannot stop or adjust it
Insurance company keeps the money at death
“Dead” money on adviser’s books
Perception or Reality?
Tax-advantaged withdrawals
Income a client cannot outlive
Client “customization” of their income stream
Fixed or variable payments
Annuitization
Advantages
Difficult to understand
Loss of control
Loss of liquidity
Statements are replaced by checks
Adviser discomfort
Annuitization
Limitations
Insurance Company
Guarantees
Income
Single-life options
Joint-life options
Non-life options
Annuitization
Single life only
Single life with period certain
Single life with refund feature
Single-Life Options
Annuitization
Joint life only
Joint life with period certain
Joint life with reduced payment to survivor
Joint life with “pop-up” provision
Joint-Life Options
Annuitization
Designated period certain Designated amount
– Fixed payout only 3 to 30 years
Non-Life Options
Annuitization
Fixed, variable or combination
Monthly, quarterly, semi-annual or annual payments
Made by check or electronic funds transfer (EFT)
Flexibility
Annuitization
• Male, age 70• Single-life only option and 10 years period certain• American Legacy Growth-Income Fund• $200,000 account value and
cost basis
Case Study #1
American Legacy III Growth-Income Fund Historical Variable Payout$200,000 cost basis with variable annuitization payments beginning 03/84
$5,578
$1,292
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
03/84 03/85 03/86 03/87 03/88 03/89 03/90 03/91 03/92 03/93 03/94 03/95 03/96 03/97 03/98 03/99 03/00 03/01 03/02
Date
Mo
nth
ly B
en
efi
t
Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.
Tax Efficiency
Cumulative Tax Excludable
Cumulative Income
Tax Excludable
Monthly IncomeDate
Mar ’84 $1,292 $927 $1,292 $927Mar ’89 $2,153 $927 $112,870 $56,551Mar ’94 $2,903 $927 $268,367 $112,176Mar ‘02 $5,578 $0 $713,890 $200,000
Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.
Female, age 65
Concerns:– Spending assets efficiently– Not outliving income– Leaving something to heirs
Case Study #2
Jan ’97 $2,129 $2,129 $427,909Jan ’99 $2,846 $62,690 $503,723Jan ’00 $3,005 $98,327 $495,883Jan ’02 $3,000 $170,721 $423,009
A Story of Growing Income
Value of Unit Refund
Cumulative Income
Monthly IncomeDate
$200,000 invested in 1987in American Legacy Growth-Income Fund. Systematic withdrawals begin 1992. Account value is $430,038 inJanuary 1997 when annuitization life with refund option payments begin.
Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.
• Husband and wife, age 60• Newly retired, no pension plan, rollover assets• $200,000 joint with pop-up,
American Legacy Growth-Income Fund• Concerns:
– Outliving income
Case Study #3
Joint and survivor with pop-up provision
Mar ‘84 $9,908 $9,908Mar ‘89 $16,439 $16,439Mar ‘94 $22,121 $26,926Mar ‘95 $22,497 $27,384Mar ‘02 $41,375 $50,361
Annual Incomewith Pop-upAnnual IncomeYear
$200,000 American Legacy Growth-Income Fund. Annuitization begins in 3/84.
Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.
Income HybridsIncome Hybrids
New enhancements and product innovations in development
Geared for annuity owners needing more income flexibility
Combines the best features of annuity-income alternatives
Income Hybrids
• Tax-advantaged withdrawals• Payments guaranteed for life • Increased liquidity and flexibility• Access to additional cash• Monthly statement reporting and daily account values
The Benefits
Automatic portfolio re-balancing
Ongoing re-allocation of assets
Dollar cost averaging*
Performance reporting
Assets under management
*This investment method involves continuous investment in securities and does not guarantee a profit. Investors should consider their financial ability to continue purchasing through all price levels.
The Benefits
• Male, age 60• Concerns:
– Wants to spend assets efficiently
– Access to additional income
– Keeping pace with inflation and participating in market performance
Case Study #4
1984 $0 $10,3031987 $0 $18,1761988 $50,000 $15,8381989 $0 $14,0581991 $0 $15,8912001 $0 $34,052
Customized Income Solution
Avg. Annual IncomeWithdrawalYear
$200,000 American Legacy Growth-Income Fund. Annuitization begins 4/84.
Figures shown are past results and are not predictive of future results. Unit price and return will vary, so investors may lose money. Withdrawals are taxed subject to annuitization guidelines.
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Summary
Annuities are meantto be spent!
What should you do?
• Talk to your clients• Explore their income needs and wealth-transfer
concerns• Consider the many ways annuities can help them meet
those needs
American Legacy III Growth-Income Fund
10 years 5 years 12 months
+12.11% +11.38% +5.82%
Average annual compound returns through March 31, 2002, with all distributions reinvested
Results reflect payment of the appropriate contingent deferred sales charge (CDSC), which starts at 6% for the first two years and declines to 0% after the seventh year.The CDSC is waived for certain withdrawals as described in the prospectus. Results also reflect deduction of all fund and contract expenses, including a 0.25% distribution fee, a 0.10% administrative fee and a 1.30% mortality and expense risk charge, which includes the 0.15% charge for the optional enhanced guarantee minimum death benefit (EGMDB), If the EGMDB was not in effect, the results would be higher. Figures shown are past results and are not predictive of future results. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Unit price and return will vary, so investors may lose money.
This presentation is intended for financial advisers. Investors seeking more information about any of the American Legacy variable annuities or American Funds Insurance Series, including risks, charges and expenses, should obtain the applicable prospectuses from their financial adviser and read them carefully before investing or sending money.
If income results are presented, this presentation is authorized for use with prospective investors only when preceded or accompanied by the current prospectus for the fund(s) being offered.
If investment results are presented, this presentation must be accompanied by the most recent American Funds Group and American Legacy Variable Annuities Quarterly Statistical Update.
All results reflect appropriate charges and expenses for American Legacy III.
Securities offered through and annuities issued by The Lincoln National Life Insurance Company, Fort Wayne, IN.