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Planning for Retirement
Citation preview
TM
Heather Martin
The Northwestern Mutual Life Insurance Company (Northwestern Mutual) Milwaukee, WI
The Northwestern Mutual Life Insurance Company (Northwestern Mutual) Select Variable Annuity
Presented by
Preparing forRetirement
Disclosures• The Northwestern Mutual Financial Network is the sales and distribution arm of The
Northwestern Mutual Life Insurance Company (Northwestern Mutual), its subsidiaries and affiliates.
• Northwestern Mutual variable contracts are sold through individuals who, in addition to being licensed life insurance agents f Northwestern Mutual are Registered representatives of Northwestern Mutual Investment Services, LLC.
• Issuer: The Northwestern Mutual Life Insurance Company, 720 E. Wisconsin Ave., Milwaukee, WI 53202-4797
• Principal Underwriter: Northwestern Mutual Investment Services, LLC, a wholly-owned company of The Northwestern Mutual Life Insurance Company 611 E. Wisconsin Avenue, Suite 300, Milwaukee, WI 53202-4797, (866) 664-7737, member NASD and SIPC.
• No investment strategy can guarantee a profit or protect against loss.• Withdrawals taken from an annuity may be subject to ordinary income and a 10% IRS
early withdrawal penalty if taken before age 59 ½.• Income plans are backed solely by the claims-paying ability of the issuer.• Variable contracts have limitations. You should carefully consider the investment
objectives, risks, expenses and charges of the investment company before they invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a contract and fund prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money.
Preparing for Retirement
• Everyone’s vision of retirement is unique
• Most would agree on the need for a retirement paycheck
• Transitioning from ‘savings’ to ‘income’ mindset
• One way to address any concerns is become familiar with products that can provide income
Retirement Concerns
28% High health care costs
24% Running out of money
18% Inability to maintain standard of living
16% Decline in social security
9% Inflation
Source: National Association for Variable Annuities 2005 survey of 1,000 respondents.
In a 2005 poll, people identified the following retirement concerns:
High health care costs
Factor health care costs into your retirement income needs
Running out of money
Put a portion of assets into guaranteed lifetime income plans
Inability to maintain standard of living
Combine retirement income approaches to help match your standard of living to your income
Decline in social security
Increase personal savings in your pre-retirement years
InflationParticipating in variable investments can give your savings the potential to keep pace with inflation
Retirement Concerns
The performance of variable funds is not guaranteed. No investment strategy can guarantee a profit or protect against a loss.
What you can do to help address them
Source: Actuarial Tables—Life Expectancy - Treasury Regulations 1.72-9.
How long can you expect to live in retirement?
Life expectancy for men and women
Ye
ars
0
5
10
15
20
25
30
55 60 65 70 75 80 85Age
MenWomen
Where will retirement income come from? • Income generating investments
(stocks, bonds or mutual funds)
• Systematic Withdrawals(taking periodic withdrawals from an investment)
• Social Security (Will it or won’t it be available?)
• Qualified Plans (e.g., 401(k) and pension plans)
• Alternative investments(e.g., business income, real estate income)
• Annuities (e.g., immediate and fixed/variable deferred)
Source: 2005 Ibbotson Associates, Inc. All rights reserved. Used with permission Hypothetical value of $500,000 invested at year-end 1972. Portfolio: 50% large company stocks, 50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes. Each monthly withdrawal is adjusted for inflation. Each portfolio is rebalanced monthly. An investment cannot be made directly in an index. Past performance is no guarantee of future results.Source: Stocks – Standard 7 Poor’s 500; Bonds – 5 year US government bond; Inflation – Consumer Price Index.
Annual inflation-adjusted withdrawal as a % of initial portfolio wealth
5% withdrawal rate
$100,000
$300,000
$500,000
$600,000
$0
$400,000
$200,000
1976 1980 1984 19961988 19921972
6% withdrawal rate
7% withdrawal rate
8% withdrawal rate
9% withdrawal rate
Risk of Periods of High Inflation andDown Markets on Systematic Withdrawals
Deferred Variable AnnuityGeneral Information• Long-term investment• Security sold by prospectus• Issued by insurance companies• Expenses vary between issuers
– sales charge or withdrawal charge– mortality & expense fee– portfolio fee– Contract fee (may be waived at certain amounts)
• Tax-deferral
• Money taken out may be subject to ordinary income tax and a 10% IRS early withdrawal penalty if taken before age 59½
Deferred Variable AnnuityThe two phases• Accumulation phase, deferral phase, or
savings phase – the period of time that contract values accumulate before they are put into an income plan– During the ‘savings’ phase there may be a
lump-sum or a series of payments– Tax-deferral
• Annuitization or payout - putting the contract values into an income plan
Deferred Variable AnnuityWhat is guaranteed and what is not?• Performance of variable funds - not
guaranteed
• Death benefit - guaranteed
• Income plans - guaranteed
• All guarantees are backed solely by the claims-paying ability of the issuer
Key benefits of an annuity in a retirement portfolio• Can be used for both retirement savings
and income• Variable investment options• Tax-free transfers among investment
options• Tax-free, automatic rebalancing
($10,000 or more in value)
• Guaranteed death benefit*• Guaranteed income*
* All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.No investment strategy can guarantee a profit or protect against a loss.Withdrawals from an annuity may be subject to ordinary income tax and a 10% IRS early withdrawal penalty if taken before age 59½.
Variableannuity
Lump sum
Specified period Single
life
Life w/certain period
Joint life
Systematicwithdrawal
Annuitization
(Income)
Variableannuitizatio
n
Retirement Income PlansVariety of choices
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Retirement Income PlansExplained
• Specified period – receive income for the number of years you choose– Income stops at the end of the period– If the annuitant dies before the end of the
period, income continues to the direct beneficiary until the end of the specified period
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Retirement Income PlansExplained
• Single Life – income continues for as long as one person lives
• Joint & Survivor – income continues for as long as two people live
• What happens if the annuitant or annuitants dies only a few months after taking a lifetime income plan?
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Retirement Income PlansExplained
• Certain period – guarantees that paymentswill be made for a minimum number of years
• Example– Single life with a 10 year certain period– Annuitant dies in year two—income continues
to direct beneficiary for eight years to fulfill the10 years
– Annuitant dies in year eleven---income stops
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Retirement Income PlansExplained
• Can be fixed or variable– Fixed do not change– Variable payments fluctuate based on
performance of underlying funds
• Once an income plan has began, the remaining values are not accessible
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Retirement Income PlansExplained
• Mortality risk is shared among a large group
• Payout is based on the mortality of multiple lives
• Healthy survivors benefit from shared risk
• Shared risk produces higher individual payout
Retirement Income PlansThe importance of ratings
• Northwestern Mutual has been given the best possible insurance financial strength ratings from the industry’s third-party rating agencies:– A++ A.M. Best (May 2006)
– Aaa Moody’s Investor Service (March 2006)
– AAA Standard & Poor’s® (June 2006)
– AAA Fitch Ratings (August 2006)
• Third-party ratings are a measure of a company’s relative financial strength, but do not apply to the performance of the variable funds.
Establishing a Placeholder• Annuity contracts that have guaranteed
minimum income plan rates can establish a placeholder for future income
• These rates are carved into the contract
How does this benefit you?
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
Establishing a Placeholder• When you decide to take an income
plan, you are entitled to the higher of:– current deferred annuity settlement rates– guaranteed minimum payment rates
• Deferred annuity rates will generally be higher than immediate annuity rates
All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
1.2
1.921.83
2.41
1.16
1.91
Front-Load Back-load
MorningstarMutual Funds
MorningstarVariable Annuities
Northwestern Mutual RR series SelectTM
Variable Annuity
Source: Morningstar® Principia Pro for Mutual Funds and Morningstar® Principa Pro for Variable Annuities/Life, based on 12/31/05 review of all 3,381 A share class and 2,682 B share class mutual funds (excludes municipal bond funds), and all 497 front-load and 26,009 back-load variable annuity funds (excludes money market funds). The total annual expense % averages for Morningstar Mutual Funds reflect the cost to manage and distribute (12b-1) a mutual fund. The total annual expense % averages for Morningstar Variable Annuities and the Northwestern Mutual Select Variable Annuity reflect the cost to manage the funds and the mortality and expense charge, which includes the cost for distribution. Although a product’s expenses are one consideration, a client should give equal consideration to the features and benefits of mutual funds and annuities before making a product choice. The variable annuity prospectus explains and discloses other product features which include purchase options, a death benefit, tax-deferred growth, income options, and service options. Variable annuities are suitable for long-term investment purposes, typically retirement.
Total Annual Expense % Average
The Northwestern Mutual Select Variable Annuity
Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals.
Based on your individual risk tolerance, investment goals and time horizon
Cash
BondsStocks
Retirement SavingsWhat is asset allocation?
No investment strategy can guarantee a profit or protect against a loss.
Retirement SavingsRebalancing: 1984-2004
0%
Stock allocation Bond allocation
Po
rtfo
lio
we
igh
tin
gs
Target asset mix: 50% stocks/50% bonds
50%
72%
28%
75%
25%
42%
55%
45%50%
20%
40%
60%
80%
1984 1989 1994 1999 2004
Source: 2005 ibbotson Associates, Inc. All rights reserved. Used with permission. Assumes reinvestment of income and no transaction costs or taxes. Stocks: 50% large and 50% small company stocks. Bonds: intermediate-term government bonds. This index performance does not reflect the different fees and charges associated with variable annuities. If it did, the performance would be lower than cited above. Source: Small Company Stocks - Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; Large Company Stocks - Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general; Intermediate-Term Government Bonds - 5-year U.S. Government Bond. Past performance is no indication of future results.
58%
Retirement SavingsPortfolio Rebalancing
• The goal of rebalancing is to reduce portfolio risk
• Automatic Portfolio Rebalancing– Minimum $10,000 contract value to elect
– Transfers among investment accounts to match specified portfolio allocations
– Rebalancing may be elected monthly, quarterly, semi-annual or annual
– Rebalancing does not guarantee a profit or protect against a loss
No investment strategy can guarantee a profit or protect against a loss.
Retirement SavingsWhat if you don’t use it?
• For non-tax qualified contracts
• If the annuitant/owner dies before taking an income plan
• The direct beneficiary has the flexibility to:– Take the values as a lump-sum – Annuitize the values– Take the values in five years– Use the contingent annuitant feature to
become the annuitant, continue the tax-deferral• Additional deposits cannot be made
Owner-Annuitant
potential for many years of tax deferral
SpouseBeneficiary
Owner-Annuitant
Non-SpouseBeneficiary
Owner-Annuitant
Dies before
annuitizing
When transferring assets in a manner which skips one or more generation, be cautious of the generation skipping transfer tax. For example, this may apply when a grandparent names a grandchild as the annuity’s beneficiary. Additional deposits cannot be made after the primary annuitant’s death. Inflation and changes in tax law may adversely affect this arrangement. Due to market performance, variable annuities may provide more or less than the amount originally invested.
annuitize when wantedtax deferral ceases
Dies before
annuitizing
Retirement SavingsWhat if you don’t use it?
Preparing for RetirementSavings and Income: Select Variable Annuity• Variable investment options can permit
savings to keep pace with inflation• Tax-deferral permits savings to
compound• Tax-free transfers among investment
options for ease of asset allocation• Automatic portfolio rebalancing for ease
of maintaining asset allocation (for contracts of $10,000 or more)
• Guaranteed* Death Benefit protects beneficiary• Contingent Annuitant feature offers flexibility to
beneficiary (non tax-qualified contracts)
• Competitive cost
• Flip a switch to begin income plan for ease of use
• Guaranteed* lifetime options address risk of outliving assets
• Variety of income plans available for flexibility
Preparing for RetirementSavings and Income: Select Variable Annuity
*All guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
The Next Step…
Personal Needs Analysis…
Step 1: Understand & Analyze YourSpecific Needs
Step 2: Discuss Customized Solutions
Step 3: Annually Review & Adjust as Needed
Survivor/Disability Income Insurance/Long-Term Care
Education/Retirement Asset Allocation
Estate Analysis
Preparing for Retirement
Thank you for your time.