Retirement Income “Backstop” CONTINUING EDUCATION Retirement Income “Backstop” Help Eliminate the Risk of Outliving Assets in Retirement Bruce McGuirk CLU CFP ChFC Regional Director 336-312-2321 Today we are going to discuss a topic that is not always focused on when planning for a client’s retirement income, and how we can provide a “backstop” to that income. Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. Insurance policies and/or associated riders and features may not be available in all states. © 2014 John Hancock. All rights reserved MOVING YOU FORWARD MLINY011415056 For Agent Use Only. Not For Use With The Public.

Retirement Income Backstop Backstop is defined as “providing (someone) with what is useful or necessary to achieve an end.” In this case, the act of providing last-resort support and/or security during retirement Let’s first define what a “backstop” is. It can be defined as “providing someone with what is useful or necessary to achieve an end.” In this case, we are providing necessary protection to provide the client greater security that they will not outlive their income. For Agent Use Only. This Material May Not Be Used With The Public

Retirement Income Planning Process An “imperfect science” When do I want to retire? How much will I need? How much can my savings earn? How long will I need it to last? Life Expectancy: Defined as the average period that a person may expect to live Put another way, 50% of people will not live to that age, and 50% will live beyond that age Preparing a plan for a client’s retirement income is an imperfect science. You have many factors to consider, and these factors may be in constant motion, including: When does the client want to retire? How much income will they need? What return can the client get on their savings? How long does the income need to last? This last point is sometimes the most challenging. People are living longer but we need to have a starting point for discussing how long the income should last. We often use a client’s life expectancy as a starting point, which is simply defined as the average period of time that a person may expect to live. Said another way, for any given age and gender group half of the population will not obtain life expectancy. The important piece here is that the other half will live beyond life expectancy. So we need to ensure any retirement income plan takes that into account. For Agent Use Only. This Material May Not Be Used With The Public

Accumulating for Retirement During working years, or the accumulation period, individuals save for retirement based on analysis of current and projected future worth of: Qualified Plans (IRA’s – 401(k) etc..) Roth IRA’s Annuities Other Savings/ Investment Accounts Life Insurance Let’s start with how client’s accumulate wealth for their retirement. They have many different ways to invest for the future and many take advantage of multiple savings vehicles. They may contribute to their 401(k), invest in a Roth IRA, have rolled money from a previous employer into an annuity, overfunded a life insurance policy, or simply invested in stocks, bonds, and mutual funds. However, the way a client expects this money to perform over time while investing is different than how it may perform when taking income. For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

Sequence of Returns: A Hidden Risk The Problem: The order when good and poor market returns occur impacts on Accumulation and Distribution Phases differently Accumulation Phase – The Working and Savings Years Risk is minimized over an extended accumulation period We are looking to AVERAGE the assumed return rate Distribution Phase – The Income Years The sequence of returns can have a significant impact on how long your retirement savings will last. Since we can’t predict future markets and we don’t want to delay retirement, Sequence of Return is a risk we assume in retirement. The problem comes down to the sequence of returns a client will realize. During the client’s accumulation phase, they can weather the storm of markets going up and down by staying in the market and dollar cost averaging. By having a long-term objective, the clients risk of losing money can be minimized. What’s most important to the client is that their objective average rate of return is realized so they can hit their retirement goal. Conversely, during the distribution phase, an ill timed withdrawal or market downswing can have a significant impact on how long the retirement savings can last. Since nobody has a crystal ball and we can’t predict the future, this “Sequence of Return” risk is very real and needs to be addressed. For Agent Use Only. This Material May Not Be Used With The Public

Sequence of Returns During the Distribution Phase This risk is often ignored Losses due to underperformance during the distribution phase are difficult to make up Combined with withdrawal rate risk, it is unlikely accounts will last as long as expected During the distribution period, this sequence of returns risk is often ignored. Unlike the accumulation period, if a client’s account underperforms the expected return it is very difficult to make up that return. Further, when you combine this underperformance with withdrawal rate risk (taking out too much), the length of time a client’s savings (and therefore income) will last is negatively impacted. For Agent Use Only. This Material May Not Be Used With The Public

Sequence of Returns Does it matter when you retire? Maybe… Both Mr. Smith and Ms. Jones retire with $100,000 and amortize their investment over 30 years, taking $8,000 out annually Mr. Smith retires in 1979, while Ms. Jones retired 10 years earlier Mr. Smith’s 30 year average ROR is less than Ms. Jones, yet his investment is 5 times greater than his initial investment Ms. Jones ran out of money after only 20 years Let’s take a closer look at this sequence of returns risk. This example was taken from: http://www.jhrollover.com/gifl/sequence_of_returns.html. In both situations the client retires with $100,000 and starts an income stream of $8,000 for retirement. Mr. Smith retired in 1979 while Ms. Jones retired 10 years earlier in 1969. Even though this 30 year outlook has many years that overlap, Ms. Jones savings is exhausted long before the targeted 30 years. Conversely, Mr. Smith’s account is not only has value left over, it is more than 5 times greater than his initial amount. This, despite the fact that Ms. Jones’ 30-year average rate of return is higher than Mr. Smith’s. This is a hypothetical example provided for illustrative purposes only. For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

Risks During the Distribution Phase The “Imperfect Science” has many risks What happens if one of the many risks associated with retirement planning occur that was not considered or planned for in the initial plan? The sequence of returns is only one risk you and the client need to be aware of when developing a retirement income plan. There are other risks that may also negatively impact a client’s retirement income plan. While we review the next couple of slides, consider what would happen if these risk were not addressed in the client’s retirement income plan. For Agent Use Only. This Material May Not Be Used With The Public

Longevity & Illness Risks What if the client lives beyond the years they expected? What is the probability that one of the spouses living 30 years (to age 95)or longer in retirement? Consider this risk “squared” if married. Illness A sudden illness can erode assets very quickly It is estimated that approximately 70% of people over age 65 will require long-term care services at some point in their lives* Longevity risk: What if the client lives longer than life expectancy? What is the probability that one spouse lives beyond life expectancy and beyond a 30 year income project that may be used. If both clients live beyond their life expectancy this risk is significantly enhanced. Illness risk: A sudden illness can quickly and dramatically erode a clients savings, putting themselves and their spouse in a precarious position. This is a real concern as 70% of people over age 65 will require some sort of long term care services in their lifetime. *Source: US Department of Health and Human Services longtermcare.gov 2014 For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

Taxes & Inflation Risks Can anyone predict with accuracy what taxes (in all forms) might look like in 20 years or more? Do your clients believe that tax rates will go up? Will they be able to control taxation? Inflation Was this aspect factored into the retirement needs analysis accurately? How erosive is inflation over a long duration of time? What is the effect of inflation on the cost of health care for the elderly? Tax risk: What will tax rates be during the client’s retirement? Will they go up or down? Has your client taken advantage of different ways to control the amount they are taxed? Inflation risk: What inflation accurately factored into a retirement income plan? We know inflation erodes our purchasing power, but what rate should be used? Is there a different rate we should consider for the cost of health care and long term care services in retirement.? For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

Withdrawal Rate Risk What happens to accounts if the amount needed exceeds the planned amount due to one of the mentioned risks? What if an unexpected cash need occurs? Lastly, there’s withdrawal rate risk. There may be an unexpected need for a withdrawal. Perhaps an illness occurs, large home repairs such as a new roof is required, or some other life occurrence happens where the client needs additional funds. If the savings have not performed as expected due to some of the other risks we discussed, the needed cash may exceed the planned amount. This may further erode savings, causing another unexpected cash need, and the circle continues. So, what can we do to help our clients manage these risks? For Agent Use Only. This Material May Not Be Used With The Public

Introducing the Retirement Income “Backstop” A cash value life insurance policy with a Long Term Care rider can be a very useful backstop against these risks: Longevity Taxes Inflation Illness Withdrawal Rate Sequence of Return The answer can be the “Retirement Income Backstop”. This backstop is created when your client purchases a cash value life insurance policy with a long-term care rider on it. It can provide added protection for your client in each of these risks… For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

Benefits of Cash Value Life Risk Offset Longevity Death benefits can help replenish diminished retirement assets for surviving spouse Taxes Eliminated as life insurance policy loans are free of taxation and not reportable as income (unlike 401(k)s or IRAs) Inflation Indexed UL or Variable UL can help offset the risk of inflation as accounts are indexed to (or participate in) market performance Illness LTC riders help protect other investment accounts from unexpected costs due to illness risk Withdrawal Rate Minimized by being able to vary the loan amounts (unlike IRA’s where RMD’s must be taken) Sequence of Return Minimized in Indexed UL as the indexed account cash values are protected from market losses. In addition, the fixed account of all cash value products provides a stable yield to minimize risk. Read slide Loans and withdrawals will reduce the death benefit and the cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Withdrawals in excess of the cost basis (premiums paid) will be subject to tax and certain withdrawals within the first 15 years may be subject to recapture tax. Additionally, policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2. Cash value available for loans and withdrawals may be more or less than originally invested. Withdrawals are available after the first policy year. For Agent Use Only. This Material May Not Be Used With The Public

Case Study: Mr. Quigley & Mrs. Quigley Both 55, Preferred, Non-Smokers Quigley Financial Plan Save for retirement Paid off mortgage and children’s college expenses Have enough money to last their entire retirement When they review their retirement plan, they realize that there is a real possibility that one or both of them could live past age 85, which was the estimated “end date” for their retirement income Let’s take a look at a case study to further understand how this backstop would work. Mr. Quigley and his wife have established a variety of retirement accounts during their working years. They have saved regularly and are now in their peak earning years. The Quigley’s have reached the point in their lives that many of their large expenses are behind them (kids are out of college, mortgage has been paid, etc…). Their attention is now focused on their future retirement needs. When they reviewed their retirement plan they realized their original estimated “end date” for their retirement income was age 85. They are both in good health and are concerned that one or both of them could live past age 85. For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance

How Long Will Retirement Last? The Quigley’s joint life expectancy is 93, meaning there is a 50% chance that one of them will live longer than that! At age 85, there is less than a 15% chance that both Mr. and Mrs. Quigley will have died. So, there is better than an 85% chance that either Mr. or Mrs. Quigley will need income after age 85. They are correct to be concerned about outliving their income. Their joint life expectany is 93, which is 8 years after their retirement income is planned to end. Further, there is less that a 15% chance that both Mr. and Mrs. Quigley will have died before reaching age 85. This means that there is better than an 85% chance that their current retirement income plan will not provide income for their entire lives. Based on 2008 VBT Primary Table. Life Expectancy (LE) tables are based on actual mortality experience collected from sources such as the life insurance companies and the Social Security Administration. LE tables show the average probability of death by a certain age. The LE data provided is not necessarily indicative of life expectancy, and the insured may live longer than indicated by the table. The LE tables used are not tailored to a particular situation or risk class; rather, they are based on population averages and are presented to help form a generalized idea of potential ages at death. For Agent Use Only. This Material May Not Be Used With The Public

The Solution: Retirement Income Backstop Concerns Need retirement income from age 85 to 100 Need Long Term Care protection Solution The Quigleys commit to a monthly additional savings of $2,000 per month for 10 years Purchase Accumulation IUL on each at assumed 6% rate of return, with a 4% Long Term Care rider Benefit Roughly $330K of death benefit on each life, with each of them being able to access over $13,000 per month for their for LTC expenses Combined tax-free income over $47,000 per year from ages 85 through 100 via loans. So the Quigleys are concerned that they need retirement income beyond age 85, and would like that income to last until their age 100. There is still a chance one of them will live beyond 100, but it is less than 15%. They are also concerned that a long-term care event would put their entire income plan in jeopardy. The solution: both Mr. and Mrs. Quigley commit to an additional savings of $2,000 per month for 10 years, to their retirement age of 65. Each purchase a John Hancock Accumulation IUL at an assumed return rate of 6%, and they elect to add the 4% Long Term Care rider to their policy to access the death benefit should a long term care even occur. What does this yield the Quigleys? A combined death benefit of over $660,000, with each of them able to access over $13,000 per month to pay for their individual long term care needs. It could also provide them with a combined tax free income of over $47,000 between the ages of 85 and 100… their Retirement Income Backstop. This is a supplemental illustration. Not all benefits and values are guaranteed. The assumptions on which the non-guaranteed elements are based are subject to change by the insurer. Actual results may be more or less favorable. For Agent Use Only. This Material May Not Be Used With The Public

Case Study: One Product Providing Multiple Benefits While retirement income planning is an “imperfect science”, the Quigleys were able to continue on their original retirement plan while also proving a “backstop” through a life insurance policy that provides tremendous value with multiple benefits: A death benefit Long term care benefits Discretionary tax-free income through distributions Read slide For Agent Use Only. This Material May Not Be Used With The Public

Disclosures Insurance policies and/or associated riders and features may not be available in all states. Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration. The Long-Term Care (LTC) rider is an accelerated death benefit rider and may not be considered long-term care insurance in some states. There are additional costs associated with this rider. The Maximum Monthly Benefit Amount is $50,000. When the death benefit is accelerated for long-term care expenses it is reduced dollar for dollar, and the cash value is reduced proportionately. Please go to www.jhsalesnet.com to verify state availability. This rider has exclusions and limitations, reductions of benefits, and terms under which it may be continued in force or discontinued. Please contact the licensed agent or John Hancock for more information, cost, and complete details on coverage. This material was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based on their particular circumstances from independent professional advisors. Thank you for your time and business. For Agent Use Only. This Material May Not Be Used With The Public John Hancock USA - Insurance