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Annuity Planning KitHow Annuities Can Solve Your Clients’ Retirement Challenges

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In the past, retirees could rely on Social Security, a company pension and personal savings to fund their retirement. But people retiring today, and in the coming years, have fewer sources of guaranteed income, as employer-funded pensions have given way to 401(k) plans and Social Security by itself simply is not enough for many people. Plus, people are living longer, and the wave of baby boomers has high aspirations for what they want to do in retirement. How can you help them achieve the retirement they want and deserve?

Annuities are gaining in popularity and are a great way to grow your business and help your clients get the most out of their retirement.

And studies indicate that retirees who own annuities are happier than those who do not.

You can reap the benefits of a perfect storm of demographic demand and new product innovations by simply cross-selling to your existing clients, but you also can gain new clients by adding annuities to your portfolio.

The SMS Annuity Planning Kit shows you how and where annuities fit in the retirement planning process and gives you the foundational information and framework you need to be successful in the annuity marketplace.

Introduction Introduction

Not for use in solicitation or advertising to the public. For Agent Information Only.

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4 The Social Security Gap

6 Navigating the Retirement Risks

• Longevity • Inflation • Market Volatility (Sequence of Returns)

10 Types of Annuities

• Income • Fixed Deferred • Fixed Indexed

19 Why SMS for Annuities?

20 Appendix

• Appendix A – Annuitization Options• Appendix B – Nonqualified vs. Qualified Annuities • Appendix C – Tax Treatment of Retirement Savings Options• Appendix D – Required Minimum Distributions (RMDs)

Table of Contents

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Social Security is the major source of income for many retirees and is often their only source of guaranteed, inflation-adjusted retirement income. But by itself, Social Security often doesn’t provide a meaningful amount of secure income. The average monthly benefit for a retired worker is $1,355, and the average monthly spousal benefit is $705.

If you asked clients how much their monthly income would need to be for their desired lifestyle in retirement, their answer often is much higher than the reality of their Social Security check. Seeing this gap can be a pivotal moment for many pre-retirees.

THE SOCIAL SECURITY GAP

HOW TO SHOW THE INCOME GAPSMS offers a program that gives you everything to easily show clients the income gap and identify claiming strategies that can help them extend their retirement income. You don’t have to be a Social Security expert. Total Social Security® gives you 100% of what you need to build Social Security planning into your practice, including patented Social Security analysis software, marketing resources, training and support.

$140,000

$100,000

$50,000

$02015 2020 2025 2030 2035 2040

Desired Widow Income Desired Income Social Security Income

Income Gap

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Annuities can be a great solution to fill this income gap, providing retirees peace of mind with guaranteed lifetime income. There also are decisions that pre-retirees can make about when to claim Social Security that can greatly influence the amount they receive in their monthly benefit.

The amount a person receives from Social Security is based on their earnings record and the age when they start receiving benefits. In general, the higher a worker’s income, the higher their retirement benefit will be. A large majority of workers claim Social Security before their Full Retirement Age (FRA) — a decision that results in a significant reduction in their benefit. Those who can wait will see their benefits increase 8% each year past full retirement age until age 70.

There are many Social Security claiming strategies available depending on marital status, so it is important to be careful before making a claiming decision.

WHEN YOU CLAIM SOCIAL SECURITY MATTERS

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Risk management is a key aspect of retirement income planning, and the financial risks people face during retirement are different than the working years. Longevity, inflation and market volatility are three major risks which people may encounter during retirement. Annuities can help people with all of these retirement challenges, providing peace of mind, whatever their risk tolerance level.

NAVIGATING THE RETIREMENT RISKS

LONGEVITY Longevity is the risk of living a long life and magnifies the impact of the other risks including the need for long-term care. This can lead to the risk of outliving one’s money — a top concern of many seniors.

$500,000 $0?

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INFLATION The lasting effects of long-term inflation increase the cost of goods and services, reduce purchasing power, erode the value of a portfolio and drive up the need for higher incomes.

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$200,000

$300,000

$400,000

$500,000

$238,805

$100,000

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SPENDING POWER OF A $500K PORTFOLIO WITH 3% INFLATION AND NO WITHDRAWALS

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The variability and uncertainty of market returns is a significant risk for retirees who are using their retirement savings for income. The times just before and after retirement are when people are the most vulnerable. If seniors have the misfortune of retiring into a flat or down market, the results could be devastating. This is called the sequence of returns risk.

The chart on the next page shows the historical indexed returns of the S&P 500 from 1989 through 2008 and demonstrates the impact of the order of returns on portfolio performance, especially when losses occur early on in retirement.

MARKET VOLATILITY ANDSEQUENCE OF RETURNS

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Year AgeAnnual Return

Portfolio A Year-End Value

Annual Return

Portfolio BYear-End Value

1989 66 31.69% $638,450 -37.00% $295,0001990 67 -3.11% $597,894 5.49% $290,4961991 68 30.47% $758,648 15.84% $315,0851992 69 7.62% $794,283 4.91% $308,3821993 70 10.08% $851,396 10.88% $318,9831994 71 1.32% $838,881 28.68% $386,7141995 72 37.58% $1,129547 -22.10% $276,6651996 73 22.96% $1,363,445 -11.88% $218,3521997 74 33.36% $1,791,954 -9.11% $172,1241998 75 28.58% $2,276,837 21.04% $181,0811999 76 21.04% $2,727,672 28.58% $204,6212000 77 -9.11% $2,449,981 33.36% $243,6842001 78 -11.88% $2,128,702 22.96% $269,4122002 79 -22.10% $1,626,980 37.58% $339,3782003 80 28.68% $2,061,224 1.32% $311,4842004 81 10.88% $2,251,978 10.08% $309,3752005 82 4.91% $2,327,870 7.62% $298,2692006 83 15.84% $2,660,711 30.47% $353,2582007 84 5.49% $2,769,635 -3.11% $305,1222008 85 -37.00% $1,706,420 31.69% $363,365

Average 8.43% Average 8.43%

Sequence of Returns During the Distribution Phase

Starting principal: $500,000Income: 4% of first-year principal plus inflationAssumed inflation: 3.5%Annual returns based on actual S&P from 1989-2008.

Both Portfolio A and Portfolio B have the same starting value ($500,000), take the same amount of inflation–adjusted income and get the same average return over a 20-year period (8.43%). The only difference is that the order of returns is reversed. In portfolio A we see a first-year return of 31.69% while Portfolio B starts off negatively with a first-year return of -37%. As a result, Portfolio A soars to $2.7 million at one point and ends up at $1.7 million, while Portfolio B ends up a $363,365 at the end of 20 years. So taking the exact same returns and simply changing the order results in a difference of over $1.3 million! Sequence of returns is real, and your clients had better be aware of it.

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TYPES OF ANNUITIES

The Annuity Risk / Return Spectrum

Lower RisksLower Returns

Higher Risks Higher Returns

Income Fixed VariableFixed Indexed

Here at SMS, we have an annuity solution for just about anyone needing help with their retirement.

Income annuities funded with a single premium (SPIAs) are often combined with other guaranteed income sources such as Social Security or a pension to provide an income floor to cover a retiree’s basic needs.

Designed for safety, fixed annuities are a good fit for retirees seeking tax-deferral and a guaranteed, fixed rate of interest — regardless of market volatility.

Fixed indexed annuities (FIAs) are unique risk management vehicles that combine the growth potential of index-linked interest, the protection from market downturns and the guarantees of lifetime income.

Variable annuities (VAs) are appropriate for those with longer time horizons, are interested in tax-deferred growth and are able to cope with market volatility. Earnings are tied to the performance of mutual fund-like subaccounts and have the highest variability of returns. Variable annuity owners assume the investment risk and fully participate in the both the gains and the losses of the market. VAs are usually offered through broker-dealer firms.

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The income annuity is one of the original annuities in the industry. Income annuity owners receive a regular, recurring paycheck from an insurance company in exchange for a lump sum of money. The insurance company manages both the investment and mortality risk, providing stable, pension-like income for life or a specified period of time — typically to people in or nearing retirement. The premium is held in the insurance company’s general account, which is comprised mostly of corporate and government bonds.

INCOME ANNUITIES

Annuities Can Provide Lifetime Income

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Fixed annuities offer a traditional, straightforward design, helping people save and grow their money on a tax-deferred basis. Considered a low-risk CD alternative, fixed annuities bring predictable outcomes by earning a stated rate of interest. They can also be structured to provide guaranteed income.

A Multi-Year Guaranteed Annuity (MYGA) is a type of fixed annuity. MYGAs guarantee a fixed interest rate for a specified time period — usually one to 10 years. They are intended for longer time horizons and are often subject to surrender charges; however, many carriers offer penalty-free withdrawal provisions. The insurance company takes on the investment risk, and the premium is held in the insurance company’s general account, which is comprised mainly of corporate and government bonds.

The Benefits of Tax DeferralAnnuities are tax-deferred, which means the taxes on the interest are postponed and not due until the money is withdrawn. This leaves more money in the annuity to grow and compound, which over time can be a tremendous benefit for the annuity owner.

FIXED DEFERRED ANNUITIES

2. Interest on your interest

1. Interest on your principal

3. Interest on the money you would normally pay in taxes

Triple Compounding With Tax Deferral

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Since their origin in February 1995, FIAs have enjoyed tremendous popularity and remarkable sales momentum. Over the past several years, FIAs have seen record growth and now make up more than a quarter of the total annuity market.

FIAs have the potential to earn interest based on the performance of a selected market index and are between fixed and variable annuities in terms of risk and return. They offer greater growth potential than traditional fixed annuities with less volatility than variable annuities. FIAs have a guaranteed floor (usually 0%) protecting the contract owner against a loss if the index decreases in value. Once the interest is earned and credited, the value of the contract cannot decline, even if the index returns were negative.

FIXED INDEXED ANNUITIES (FIAS)

Insurer guarantees

against a loss if the index

decreases in value

Owner receives an interest credit if

the index increases in value

Underlying index may increase or

decrease in value

Index Indexed Annuity

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Carriers use a few common approaches to calculate how much of the index-linked returns get credited to the contract as interest.

CAP The maximum interest rate that can be earned during the crediting period. If the underlying index exceeds the cap, the cap rate becomes the credited rate.

SPREAD The percentage that is deducted from the index return at the end of the crediting period. For example, if the annuity has a 4% spread and the index increased by 10% over the crediting period, the contract would receive a 6% interest credit.

PARTICIPATION RATE The percentage of the index increase used to determine the index-linked interest. For example, if the contract has a 70% participation rate and the index increased 10% over the crediting period, the contract would receive 7% of credited interest.

FEE Expressed as a percentage, this charge is deducted from the annuity value — typically on an annual basis.

• The index cap, spread and participation rate will always be declared and guaranteed over the crediting period but may be changed at the discretion of the insurance company at the start of the next crediting period.

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PERIOD RESET The period reset is an important aspect of FIAs and is beneficial if the index experiences a loss during the crediting period. The ending value of the index becomes the starting value of the index at the beginning of the next crediting period. FIA contract owners don’t have to regain their losses to get positive crediting during the next measurement period. This helps to protect the annuity value and smooth out market volatility.

Credited interest is locked in — accumulation value doesn’t decline when the index does

Accumulation Value Market Index Value

Start Period 1 Period 2 Period 3 Period 4

Hypothetical Example of the Period Reset

Contract owners don’t have to regain lossesto get positive crediting

Source: Allianz

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The money deposited into an FIA is not directly or actively invested in the market or the underlying index. Nor is the annuity premium going to buy shares of any stock or market index. Most of the annuity premium is invested by the insurance company and remains in its general account, which is made up of high-quality bonds, allowing them to offer a guaranteed floor. The remaining money is used to buy call options in the underlying index. When the index goes up, the option is sold for a profit, providing the excess interest to be credited to the contract. If the index goes down, the option expires with no value, and there is no interest to credit.

Here is a general example of how insurance companies invest the premium.

Allows insurance companies to offer a guaranteed floor

The option is sold for a profit and interest is credited to the

annuity contract

The option expires with no value, and there

is no interest to credit

HOW THE MONEY IS INVESTED

ANNUITY PREMIUM

GENERAL ACCOUNT OPTIONS BUDGETHigh-Quality Bonds

INDEX GOES UP

INDEX GOES DOWN

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Since their debut in 1995, FIAs have improved and evolved to meet the demands of the modern retirement and bring more value to the marketplace.

• Within the last decade, a number of riders increasing the competitiveness of FIAs have emerged. During this time, the first Guaranteed Minimum Death Benefit (GMDB) was approved for sale. This optional cost rider offers a guaranteed death benefit, which may be higher than the contract value on the date of death.

• Optional income riders called Guaranteed Lifetime Withdrawal Benefit (GLWB) riders have been introduced which provide a guaranteed income solution without having to annuitize the contract. The GLWB rider provides lifetime withdrawals regardless of the contract value, even if it is zero.

• Not too long after, nursing home multipliers were introduced offering additional benefits if the need for long-term care is required. Some carriers only cover confined care, while others increase benefits for both confined and at-home care.

FIA RIDERS

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Since 2011, another wave of product innovations has fueled the growth of FIAs and generated broader acceptance by consumers and financial professionals.

• The use of uncapped crediting strategies offering the opportunity to capture higher interest crediting has become more common. And we are also seeing reset periods extend beyond one year to two or three years, offering greater earnings potential by lowering the cost of the underlying options.

• Another significant innovation has been smart-beta indices which provide retail insurance customers access to index options from brand-name financial firms such as J.P. Morgan, Merrill Lynch or Barclays. Unlike traditional FIA indices, smart-beta indices apply rules-based triggers to routinely rebalance their positions to achieve their objectives through a variety of markets conditions.

• Many of these indices also employ volatility controls to offer stability during market cycles. These indices utilize predetermined volatility targets which act as guardrails to deliver steady and consistent returns over time. The volatility governor operates in both up and down markets, but offers a much smoother ride.

RECENT FIA PRODUCT DEVELOPMENTS

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When you partner with SMS for annuities, you get support and expertise that result in a solution for your clients and growth for your business. We take a consultative and team-based approach to helping you find the right solutions for your clients, whatever their retirement challenge.

Competition is fierce. Products are getting more complicated. Compliance is getting more stringent. You need a partner who can help you run your practice in today’s environment. You need a partner who offers real solutions that help you reach more prospects, get more referrals and, ultimately, grow your business.

Who would you rather partner with — the company that pioneered the patent-pending retirement planning tools and processes that now lead the industry, or the companies that are playing catch-up, trying to duplicate our innovations? Anyone can offer software or a seminar mailer, but only SMS has built an entire infrastructure based on developing and testing new income planning tools and processes, as well as training and support for the advisors who use them.

Put simply, we created these programs and tested them in the field, so we know how they work with real clients. That diverse experience is available to you through training and support that shows you how to integrate these programs into your practice.

WHY SMS FOR ANNUITIES?

To learn more about partnering with SMS, call us at 1-877-645-4939 or visit us at annuitiesforagents.com.

CONTACT

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Payout Options can be over the life or joint life of the annuitants.

APPENDIX A — ANNUITIZATION OPTIONS

Life Only

Joint and Survivor

Life WithPeriod Certain

Period Certain

Life With Installment Refund

Income is payable over the life of the annuitant. The payments will stop when the annuitant dies and has the highest risk of forfeiture upon death.

Income is payable as long as either annuitant is alive.

Income is payable over the life of the annuitant but is guaranteed for a predetermined period of time if the annuitant dies during the guaranteed period.

Income is payable over the life of the annuitant, but if there is any remaining principal upon the death of the annuitant, it will pass to the beneficiary.

Income is payable for a predetermined period of time.

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This chart compares the differences between nonqualified annuities, traditional and Roth IRAs.

APPENDIX B — NONQUALIFIED VS. QUALIFIED ANNUITIES (TRADITIONAL AND ROTH IRAS)

Nonqualified Annuities Traditional IRA Roth Accounts

AnnualContribution Limits

None $5,500 to age 49, $6,500 if 50 or older

$5,500 to age 49, $6,500 if 50 or older

Deductible Contributions

No, funded with “after-tax” dollars –

creates “basis” in the contract

Yes, “pre-tax” contributions

depending on income

No, funded with “after-tax” dollars

Income Limits to Contribute

No income limitsThere are no income limits

to contribute, but income is a factor to determine whether

the contributions are tax deductible

Single – Phaseout

starts at $118,000, ineligible at $133,000

Married filing joint – Phaseout

starts at $186,000, ineligible at $196,000

Tax Treatment

Tax-deferred earnings are taxed as ordinary

income when received. Contributions are not taxable when withdrawn. Earnings

come out first.

Tax-deferred earnings and deductible contributions are

taxed as ordinary income when received.

Earnings are tax-free if the Roth IRA is at least 5-years

old and:1. A first-time home pur-

chase ($10,000 lifetime limit) or

2. Age 59½ or 3. Disabled or4. Deceased

Penalty Tax for Early Withdrawals

Yes, under age 59½, penalty exceptions can be applied –

72(q)

Yes, under age 59½, penalty exceptions can be applied –

72(t)

Yes, under age 59½, penalty exceptions can be applied

Subject to Required Minimum Distributions

(RMDs)No Yes, beginning

at age 70½ No

Movement of Money 1035 ExchangeSubject to

portability rules – see IRS Publication 590

Subject to portability rules – see IRS

Publication 590

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Many people tend to focus on their gross income, but their after-tax spendable income is often more relevant. When people pay taxes on their retirement income, they lose purchasing power. For example, a $1 distribution from a tax-deferred vehicle at a 25% effective marginal tax rate yields 75 cents of purchasing power. To get $1 of buying power, you would need to take out $1.33 from a tax-deferred vehicle applying the same tax rate.

To help your clients make a more informed decision and determine what is in their best interest, it is important to understand the tax treatment of the retirement savings options available.

APPENDIX C — TAX TREATMENT OF RETIREMENT SAVINGS OPTIONS

JUST BECAUSE A PERSON QUITS WORKING DOESN’T MEAN THEY QUIT PAYING TAXES

PURCHASING POWER

MINUS TAXES (25%)=$1 25

CENTS25

CENTS25

CENTS

HOW TO SHOW THE IMPACT OF TAXES ON RETIREMENT INCOMEYou don’t need to understand the complexities of our tax system to show clients and prospects how uninformed retirement planning can cost them more in taxes. By using Tax Clarity™ software, you can create a “Tax Map” in less than five minutes that shows how their nontaxable income may become taxable. When you quickly and easily illustrate that what your clients think about how they’re taxed is quite different from reality, you build trust and provide added value.

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Nonqualified SavingsTax Now

Tax Deferred VehiclesTax Later

Roth Accounts Tax Advantaged

• After-tax contributions

• Purchase establishes “basis”

• Capital gains and dividend tax treatment

• Opportunity to harvest and recognize tax losses

• No withdrawal penalties

• Stepped-up basis at death

• Pre-taxed contributions (traditional IRAs and Qualified Retirement Plans)

• Nonqualified annuities have after-tax contributions and basis. Last-in, first-out (LIFO)

• Taxes are delayed until the income is received

• Earnings are treated as ordinary income when received

• Withdrawals before age 59½ are subject to penalties (exceptions may apply)

• No step-up in basis at death, tax liability is passed to the beneficiaries

• Exclusion ratio for nonqualified annuity income (see below)

• After-tax contributions

• Potential for tax-free withdrawals and tax-free wealth transfer

Here is a breakdown of the tax treatment of the various retirement savings options.

EXCLUSION RATIO Expressed as a percentage, it is the amount of each annuity payment from a nonqualified annuity that is considered a return of basis and is nontaxable until the basis has been recovered. For instance, if the exclusion ratio is 80%, only 20% of the annuity payment would be taxable until all the basis has been recovered. After that, the entire annuity payment would be taxable.

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APPENDIX D — REQUIRED MINIMUM DISTRIBUTIONS (RMDS)

THE LEADING EDGE OF BABY BOOMERS TURNED 70½ IN 2016

At age 70½ most people are required to start withdrawing funds from their IRAs and other tax-deferred retirement accounts. These withdrawals are called Required Minimum Distributions (RMDs) and are determined each year by an IRS formula.

RMDs are calculated each year by dividing the Dec. 31 account value from the previous year by the life expectancy factor based on the age attained in the current year. For most account owners, the factor is taken from the Uniform Lifetime Table (IRS Table III).

It can be costly if clients do not meet IRS requirements for taking RMDs. They could be subject to a 50% federal tax penalty on top of any income tax owed on amounts that they should have, but did not, receive.

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UNIFORM LIFETIME TABLE

Age Divisor % of Balance Age Divisor % of Balance

70 27.4 3.65% 90 11.4 8.77%

71 26.5 3.77% 91 10.8 9.26%

72 25.6 3.91% 92 10.2 9.80%

73 24.7 4.05% 93 9.6 10.42%

74 23.8 4.20% 94 9.1 10.99%

75 22.9 4.37% 95 8.6 11.63%

76 22.0 4.55% 96 8.1 12.35%

77 21.2 4.72% 97 7.6 13.16%

78 20.3 4.93% 98 7.1 14.08%

79 19.5 5.13% 99 6.7 14.93%

80 18.7 5.35% 100 6.3 15.87%

81 17.9 5.59% 101 5.9 16.95%

82 17.1 5.85% 102 5.5 18.18%

83 16.3 6.13% 103 5.2 19.23%

84 15.5 6.45% 104 4.9 20.41%

85 14.8 6.76% 105 4.5 22.22%

86 14.1 7.09% 106 4.2 23.81%

87 13.4 7.46% 107 3.9 25.64%

88 12.7 7.87% 108 3.7 27.03%

89 12.0 8.33% 109 3.4 29.41%

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Notes

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