Deferred Income Annuities and QLACs Matthew Kelly, RICP Regional Vice President, Guardian Retirement Solutions October 20, 2016

What is a Deferred Income Annuity? Non Guaranteed Living Benefits Income Annuities Guaranteed Income Flexibility or Liquidity

What is a Deferred income annuity( DIA)? “Getting the most, from the least” A fixed Income Annuity, similar to a SPIA, but deferred from 2-40 years Flexible Premium Typically Offers Flexibility in changing your income start date Return of Premium Typically available prior to Income Start Date

What is a Deferred Income Annuity? A pure distribution vehicle Pure Annuitization No fees, no cash value Payments comprised of: Premium, Interest and Mortality Credits Available in qualified, NQ and QLAC markets Payments are taxed as ordinary income Non-qualified payments receive exclusion ratio

What is a Deferred Income Annuity? Settlement options include: Life only, Life with a Guaranteed Period, Life with Refund Joint Life Options COLAs Fixed or CPI Few Offer a Period Certain Only Option

Why are DIAs becoming so popular? Clients are living longer than ever Life expectancy is typically from birth Once you reach retirement age the chances of living longer (see next slide)

Why Are DIAs Becoming so popular?

Why are DIAs becoming so popular? Retirees are 6.6 Trillion Dollars Underfunded in the US Source: Boston College's Center for Retirement Research, 2010 – Retirement USA study

Why are DIAs becoming so popular? US pension crisis Fewer Defined Benefit Plans Increased Defined Contribution Plans 17% of Fortune 100 companies offer a DB plan, In 1998, 68% offered a DB plan Source: BLS: The last private industry pension plans: a visual essay http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

DIA Sales for 2014 Source: LIMRA Individual Annuity Yearbook 2014

Who is an ideal candidate? Clients who seek to generate the maximum income Pre-Retirees who look to convert savings/assets to a guaranteed income stream Conservative investors Clients not able to participate in Employer sponsored defined benefit plans Income on DIA products can start between two to 40 years from issue, but most DIAs are elected with an income start date between five to 15 years from issue.   The average DIA buyer profile resembles that of buyers of variable annuities and fixed-indexed annuities with living benefits. The average DIA buyer is in their late 50s, with most DIAs being purchased by buyers ranging from their early 50s to mid-60s. Across the industry, the average income deferral period for DIA products is eight years. *Souce: IRI: Deferred Income Annuities: Insuring against Longevity Risk

Qualifying Longevity Annuity Contract QLAC Qualifying Longevity Annuity Contract

What is a QLAC July 1, 2014 the US Department of the Treasury and the IRS issued their final regulation regarding longevity annuities/DIAs, making them accessible to DC plans and IRA markets. Section 401(a)(9) of the IRS code requires distributions from a DC or IRA account to begin by age 70.5, sooner than Longevity annuities normal start dates With the new regulations, QLACs are exempt from required minimum distributions within prescribed parameters BY using a QLAC registration on a DIA, clients can defer taxes, create longevity insurance Source: DCIIA: QLAC Frequently Asked Questions

QLAC Markets 401(a)- including 401(k) 403(b) Eligible governmental 457(b) Individual Retirement accounts (IRAs)

Limitations The lesser of $125,000 OR 25% of IRA balance Maximum deferral of the contract holder’s 85th birthday Can start before age 85 Payments are fully taxable when income begins Inherited IRAs, Roth IRAS are excluded from QLAC eligibility Settlement Options: Life only Life with Cash Refund Joint Life Joint Life with Cash Refund No Period Certain Options/ MUST have a life contingency Return of Premium during deferrals are optional

Reporting Clients must work with their financial professional and tax advisor to ensure compliance If over funded they will need to work with insurance carrier Reporting done via form 1098-Q

Important considerations regarding limits

Implementing a DIA or QLAC into a Client’s Retirement Plan

QLAC RMD Deferral strategy No QLAC Max QLAC (125k) Present Value of IRA $500,000 $375,000 Future Value* $823,505 $617,629 RMD Factor at 70.5 27.4 RMD at 70.5 $30,054.93 $22,541.2 By utilizing the QLAC and starting payments at 85, the client has reduced their taxable income at age 70.5 Great strategy for clients who do not need income from their IRA or who want to defer their taxable obligations *Assumes 10 year deferral at 5% growth

QLAC Creates a ‘backstop’ in retirement planning By having a high level of guaranteed income later in retirement and a known start date, you can more aggressively spend down your assets in retirement. For example. Knowing you have a fixed income starting at age 80 or 85, you can be confident in a withdrawal strategy knowing you can spend down your assets because a lifetime income stream will begin.

Create a ‘backstop’ in retirement planning Client has an IRA Balance of 500k $125k QLAC Purchase with income to start at age 85 Life with Refund Payout Generates $31,588.08 The remaining 375k can be spend aggressively over the next 15 years

Building a Personal Pension

Conclusion A DIA can be a valuable tool in a client’s retirement Plan by creating lifetime income and eliminating Longevity Risk A QLAC is powerful tool for clients who want do defer taxes and create lifetime income stream With the current Retirement Crisis, advisors can help clients maximize their retirement income by utilizing DIAs. Source: http://www.retirement-usa.org/retirement-income-deficit-0