Retirement Planning and Annuities Jerry Rhinehart, CIC, CLU, ChFC, RHU 4/20/2017 Retirement Planning and Annuities  Jerry Rhinehart, CIC, CLU, ChFC, RHU Panama City, FL JER RetPlan & Annuities - IIA - 010412

4/20/2017 Areas to be Covered 1 The “Retirement Dilemma” and normal products / concept that can assist in their retirement 2 Qualified vs. Non-Qualified Plans 3 Social Security; How it works; What about taxes; What about earned income? 4 Annuity overview; What about “risk”? 5 “Waivers” and Surrender Charges as typically found in an Annuity 1 JER RetPlan & Annuities - IIA - 010412

Please note the DISCLAIMER 4/20/2017 Please note the DISCLAIMER 2 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  How much money will you need in which to retire comfortably? 3 JER RetPlan & Annuities - IIA - 010412

How Much Money do You Need? 4/20/2017 How Much Money do You Need?  Check out the “Retirement Assistant” at CNN Money.  Just how much money will you need to retire “comfortably”? - 80% - inflation - a longer life expectancy 4 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  How much money will you need in which to retire comfortably?  What are the normal retirement funding vehicles? 3 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  How much money will you need in which to retire comfortably?  What are the normal retirement funding vehicles?  Qualified Plans (Pensions/ 401-k/ IRAs, SIMPLE, SEP, 403b, TSA, etc.)  Social Security 3 JER RetPlan & Annuities - IIA - 010412

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The Retirement Dilemma 4/20/2017 The Retirement Dilemma  How much money will you need in which to retire comfortably?  What are the normal retirement funding vehicles?  Qualified Plans (Pensions/ 401-k/ IRAs, SIMPLE, SEP, 403b, TSA, etc.)  Social Security  Non-Qualified Plans 3 JER RetPlan & Annuities - IIA - 010412

What are Non-Qualified Plans? 4/20/2017 What are Non-Qualified Plans?  Personal Savings (CDs, Money Market, Savings Account)  Investing (Stocks, bonds, mutual funds, real estate, collectibles, etc.)  Annuities, Life Insurance 3 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Tax issues  Qualified Plans (Pensions/ 401-k/ IRAs, SEP, etc.) 1. Tax deductible * Teste for not page 5 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Tax issues  Qualified Plans (Pensions/ 401-k/ IRAs, SEP, etc.) 1. Tax deductible * ROTH Teste for not page 5 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Tax issues  Qualified Plans (Pensions/ 401-k/ IRAs, SEP, etc.) 1. Tax deductible * 2. Grows tax-deferred 3. Withdrawals subject to tax * 4. May be subject to estate tax ROTH Teste for not page 5 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Diversification 6 JER RetPlan & Annuities - IIA - 010412

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The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Diversification  Check out YOUR “Investment Risk Tolerance”  Why do stock prices go up and down so much? 6 JER RetPlan & Annuities - IIA - 010412

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The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Tax issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.)  Social Security - Is SS $ subject to income tax (federal and state) tax? It depends. The specific answers can be found on the Social Security web-site. 7 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Pros – Cons of various investment vehicles  Tax issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.)  Social Security  Personal savings and investing 7 JER RetPlan & Annuities - IIA - 010412

Taxes on Non-Qualified Money 4/20/2017 Taxes on Non-Qualified Money  Ordinary Income Tax (Federal and State*)  Capital Gains (one year holding period – 15% tax {generally}) 7 JER RetPlan & Annuities - IIA - 010412

Taxes on Non-Qualified Money 4/20/2017 Taxes on Non-Qualified Money  Ordinary Income Tax (Federal and State)  Capital Gains (one year holding period – 15% tax {generally})  Federal Estate Tax 7 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Personal liability and diversifi-cation issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.) 9 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Personal liability and diversifi-cation issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.) - Generally Q-Plan assets are exempt from creditors in a bankruptcy / legal verdict - New laws in effect to prevent another “Enron-Employee” investment debacle 9 JER RetPlan & Annuities - IIA - 010412

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The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Personal liability and diversifi-cation issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.)  Social Security 9 JER RetPlan & Annuities - IIA - 010412

Can your Social Security check ever be taken away? 4/20/2017 Can your Social Security check ever be taken away? 9 JER RetPlan & Annuities - IIA - 010412

Can your Social Security check ever be taken away? 4/20/2017 Can your Social Security check ever be taken away?  Yes - Should you qualify for a Medicaid Nursing Home stay, your SS check will be kept by the Federal /State government - The Internet can provide additional information regarding your specific state and its rules (elderlawanswers.com) 9 JER RetPlan & Annuities - IIA - 010412

The Retirement Dilemma 4/20/2017 The Retirement Dilemma  Personal liability and diversifi-cation issues  Qualified Plans (Pensions/ 401-k/ IRAs, 403B, SEP, etc.)  Social Security  Personal savings and investing 9 JER RetPlan & Annuities - IIA - 010412

Personal Liability concerning your Personal Saving and Investments? 4/20/2017 Personal Liability concerning your Personal Saving and Investments?  Assets are subject to the claims of creditors - Certain exceptions (house, cash value in life insurance, annuities, etc.) - A Living Trust does NOT protect these assets from the claims of creditors - Certain advantages for a business 9 JER RetPlan & Annuities - IIA - 010412

- Run complicated and potentially risky ventures past your accountant. 4/20/2017 A Suggestion ... - Run complicated and potentially risky ventures past your accountant. - A good Financial Planner really makes a lot of sense! (Actually … Dollars and Cents!) 9 JER RetPlan & Annuities - IIA - 010412

Various Qualified Plan 4/20/2017 Various Qualified Plan  Individual Retirement Arrangement 11 JER RetPlan & Annuities - IIA - 010412

Individual Retirement Arrangement 4/20/2017 Individual Retirement Arrangement  Contributions  Earned Income  Maximum age for contribution and distributions (70½)  Distributions subject to ordinary tax and possible penalty 11 JER RetPlan & Annuities - IIA - 010412

IRA Contribution Rules and Limits Contributions as the smaller of: 4/20/2017 IRA Contribution Rules and Limits Contributions as the smaller of: - Taxable compensation for the tax year, or, - A limit stated by law (see table below) Contributions limits have been increased in stages by the Economic Growth & Tax Relief Reconciliation Act of 2001 ♦ 2013 - $5,500 plus $1,000 if 50 years of age or older ♦ 2014 - $5,500 plus $1,000 if 50 years of age or older ♦ 2015 - $5,500 plus $1,000 if 50 years of age or older 12 Note: PPA (08-17-06) makes contribution limits permanent JER RetPlan & Annuities - IIA - 010412

Various Qualified Plan 4/20/2017 Various Qualified Plan  Individual Retirement Arrangement  ROTH (same contribution limits as IRA) 11 JER RetPlan & Annuities - IIA - 010412

Roth IRA  Roth IRA rules 4/20/2017 Roth IRA  Roth IRA rules  Not tax-deductible when the Contribution is made  Compensation limits 11 JER RetPlan & Annuities - IIA - 010412

Roth IRA Compensation Rules - 2015 4/20/2017 Roth IRA Compensation Rules - 2015  Filing “Single and Head of Household” - Income / $116,000 - $131,000  Married Filing “Joint” - Income / $183,000 - $193,000 Note: PPA will index income limits after 2006 (nearest $1,000). Check IRS website for specific numbers JER RetPlan & Annuities - IIA - 010412

Roth IRA  Rules  Not tax-deductible when the Contribution is made 4/20/2017 Roth IRA  Rules  Not tax-deductible when the Contribution is made  Compensation rules  OK to be “active” in another “qualified plan”  What about $$ coming out? 11 JER RetPlan & Annuities - IIA - 010412

Roth IRA Distribution Rules 4/20/2017 Roth IRA Distribution Rules  A “qualified distribution” (TAX FREE) from a Roth IRA is one that:  meets the 5 year rule, and;  is after age 59½,  or disability,  or death,  or meets the 1st time home-buyer rule 11 JER RetPlan & Annuities - IIA - 010412

4/20/2017 A Few More Roth Rules  A Roth can be set on or before April 15, 2015 for 2014 tax filing.  Should a contributor be age 50 or older they can also contribute the “catch-up” amount ($1000 for 2015).  “Converting” to a Roth IRA must be accomplished by the end of the tax-year.  There is no age maximum nor minimum and contributions can be made past age 70½. (Must have Compensation) JER RetPlan & Annuities - IIA - 010412

Various Qualified Plan 4/20/2017 Various Qualified Plan  Individual Retirement Arrangement  ROTH (same contribution limits as IRA)  401-k (Limits = $18,000 / $6,000) 11 JER RetPlan & Annuities - IIA - 010412

401-k 11  Contributions  Earned Income 4/20/2017 401-k  Contributions  Earned Income  Maximum age for contribution and distributions (no limit if still employed; otherwise 70½)  Distributions subject to ordinary tax and possible penalty  Vesting 11 JER RetPlan & Annuities - IIA - 010412

Various Qualified Plan 4/20/2017 Various Qualified Plan  Individual Retirement Arrangement  ROTH (same contribution limits as IRA)  401-k (Limits = $18,000 / $6,000)  SIMPLE (Limits = $12,500 / $3,000) 11 JER RetPlan & Annuities - IIA - 010412

4/20/2017 SIMPLE  Similar to 401-k, but with lower contribution limits. Less initial cost to set- up and minimal annual “maintenance cost”. 11 JER RetPlan & Annuities - IIA - 010412

Various Qualified Plan 4/20/2017 Various Qualified Plan  Individual Retirement Arrangement  ROTH (same contribution limits as IRA)  401-k (Limits = $18,000 / $6,000)  SIMPLE (Limits = $12,500 / $3,000)  Simplified Employment Pension (53,000 / 25% of Income) 11 JER RetPlan & Annuities - IIA - 010412

Simplified Employment Pension (SEP) 4/20/2017 Simplified Employment Pension (SEP)  More suited for self-employed  High limits of contribution 11 JER RetPlan & Annuities - IIA - 010412

 Benefits to your heirs Just What is an Annuity?  Tax Deferral growth  Creditor protection  Investment options  Tax-free transfers  Lifetime income  Benefits to your heirs 14 JER RetPlan & Annuities - IIA - 010412

The Parties of an Annuity  Owner  Annuitant  Beneficiary  Insurance Company 13 JER RetPlan & Annuities - IIA - 010412

Classifications of an Annuity  Number of Lives Covered  Single  Joint Life, or Joint Live and Survivorship 13 JER RetPlan & Annuities - IIA - 010412

Classifications of an Annuity  Number of Lives Covered  Single  Joint Life, or Joint Live and Survivorship  Time When Benefits Begin  Immediate  Deferred 15 JER RetPlan & Annuities - IIA - 010412

Classifications of an Annuity  Method of Purchase  Lump Sum  Installment 15 JER RetPlan & Annuities - IIA - 010412

Classifications of an Annuity  Method of Purchase  Lump Sum  Installment  Tax Treatment  Qualified  Non-Qualified 15 JER RetPlan & Annuities - IIA - 010412

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Types of Annuities  Fixed Annuities  Variable Annuities  Equity Index Annuities 17 19 JER RetPlan & Annuities - IIA - 010412

Interest Rate  Fixed Annuities Key Words/ Phrases:  Insurance Company assumes risk;  Guarantees;  Low Risk - Low Return 17 JER RetPlan & Annuities - IIA - 010412

Interest Rate  Equity Index Annuities Key Words/ Phrases:  “Mutual Funds” with Guarantees;  Could be High or Low risk - Return 17 JER RetPlan & Annuities - IIA - 010412

Accumulation Phase and Regulation of Annuities Index Annuities  A form of Fixed Annuity  Values tied to S&P 500 (or similar)  The Principal is Guaranteed 17 JER RetPlan & Annuities - IIA - 010412

Two Methods of Calculation 1. RATE CAP (of an Index)  S&P 500 – 16% (sample 52 weeks)  10% Rate Cap = 10% gain If you are not sure how a Rate Cap or Participation Rate works, be sure and call one of your annuity writers and request they review it with you. 18 JER RetPlan & Annuities - IIA - 010412

Two Methods of Calculation 1. RATE CAP (of an Index)  S&P 500 – 16% (sample 52 weeks)  10% Rate Cap = 10% gain 2. PARTICIPATION RATE  55% Participation of the Index  16% X 55% = 8.8% gain If you are not sure how a Rate Cap or Participation Rate works, be sure and call one of your annuity writers and request they review it with you. 18 JER RetPlan & Annuities - IIA - 010412

An Overview of an Indexed Annuity Hypothetical 5 year total return $100,000 Initial Deposit Hypothetical 5 year total return Year Amount Yield Ending Balance 1 $100,000 7% 107,000 2 $107,000 11% 118,770 3 $118,770 -5% 118,770 4 $118,770 8% 128,271 5 $128,271 -2% 128,271 JER RetPlan & Annuities - IIA - 010412

Interest Rate  Variable Annuities Key Words/ Phrases:  “Mutual Funds” (you assume some risk);  No Guarantees;  Could be High or Low risk - Return 19 JER RetPlan & Annuities - IIA - 010412

Accumulation Phase and Regulation of Annuities Variable Annuities  There is NO GUARANTEED investment return  Think -- “similar to mutual funds”  The annuitant assumes the investment risk 19 JER RetPlan & Annuities - IIA - 010412

Accumulation Phase and Regulation of Annuities Variable Annuities  Single or Flexible Premium  Classified as “securities” - FINRA  To sell - Life/Annuity License and FINRA registered (Series 6 or 7) Be sure and discuss any state regs that might also apply reference the license procedure. 19 JER RetPlan & Annuities - IIA - 010412

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Selected Policy Provisions  “Waivers” 21 JER RetPlan & Annuities - IIA - 010412

Waives the Surrender Charge Common “Waivers” Waives the Surrender Charge  Death Benefit Waiver  Nursing Home Waiver  Terminal Illness Waiver  Disability Waiver 22 JER RetPlan & Annuities - IIA - 010412

Selected Policy Provisions  “Waivers”  Settlement Provision (Annuitization) 21 JER RetPlan & Annuities - IIA - 010412

 How Much Monthly Installment for Life?  $100,000 Payout - 65 year Male  How Much Monthly Installment for Life? This is the same chart as found in Life Concepts. Point out that carriers use a similar payout chart for both life and annuity. 21 JER RetPlan & Annuities - IIA - 010412

$697.00 Per Month  $100,000 Payout - 65 year Male  How Much Monthly Installment for Life? This is the same chart as found in Life Concepts. Point out that carriers use a similar payout chart for both life and annuity. $697.00 Per Month 21 JER RetPlan & Annuities - IIA - 010412

Selected Policy Provisions  “Waivers”  Cash Accumulations  Surrender Charge 23 JER RetPlan & Annuities - IIA - 010412

23 YEAR SURRENDER PENALTY 1 7% 2 6% 3 5% 4 4% 5 3% 6 2% 7 1% 8 -0- Note: Most annuities are sold as “back-end load” (deferred sales charges). In addition to the surrender penalty, variable annuities will have on-going fees, mortality charges and perhaps asset charges. All annuities must clearly disclose all charges. 23

4% of $100,000 = $4,000 * Surrender Charges 4/20/2017 Surrender Charges Mrs. X invest $100,000 in an annuity that has a Surrender Charge Provision shown on page 23. Four years later the annuity has grown to $126,247 (6% annual return). She then withdraws the entire amount. What is her Surrender Penalty? 4% of $100,000 = $4,000 * * Note: This assumes the carrier did NOT impose the Surrender Penalty to the entire $126,247 (the Accumulated Value). Review the contract to be certain. Additionally, there could be a federally imposed 10% penalty if she is under age 59½ (exceptions exist). 24 JER RetPlan & Annuities - IIA - 010412

Withdrawal Penalties that May Apply to an Annuity Surrender Charge – Insurance Company 10% Premature Distribution – IRS Income Tax - IRS Example: Mrs. X (previous slide) is under age 59½. Instead of a full withdrawal, she takes $10,000 from her annuity during the 4th contract year. What is the tax and penalty assuming the 4% surrender penalty applies (no “waiver” is applicable) and she is in a 28% federal income tax bracket for the year of distribution. $ ________ 4% Surrender Charge by Ins. Company 10% Premature Surrender Penalty by IRS 28% Federal Income Tax Due TOTAL 24

Withdrawal Penalties that May Apply to an Annuity Surrender Charge – Insurance Company 10% Premature Distribution – IRS Income Tax - IRS Example: Mrs. X (previous slide) is under age 59½. Instead of a full withdrawal, she takes $10,000 from her annuity during the 4th contract year. What is the tax and penalty assuming the 4% surrender penalty applies (no “waiver” is applicable) and she is in a 28% federal income tax bracket for the year of distribution. $ ________ 4% Surrender Charge by Ins. Company 10% Premature Surrender Penalty by IRS 28% Federal Income Tax Due TOTAL $400 $1,000 $2,800 $4,200 24

Thank You for Your Attendance 4/20/2017 Retirement Planning and Annuities Thank You for Your Attendance ABEN NHCR (Part 1) - JER 121312