Not guaranteed by any bank or savings association ... Traditional fixed-income investments, such as money market funds,
Wealth Protection Expertise SM
Understand the challenges White Paper
Not a deposit
Not FDIC-insured May go down in value
Not insured by any federal government agency Not guaranteed by any bank or savings association
Products issued by: The Lincoln National Life Insurance Company Lincoln Life & Annuity Company of New York 965027
Prepare to reach your goals The world has changed. Accumulating wealth isn’t enough anymore. Neither is return on investment. Individuals want more assurance, more protection and more from their investments. To understand the trends shaping the future of financial planning, Lincoln Financial Group conducted proprietary research in July 2013. Our study reveals that Americans have become increasingly risk averse, a revelation that is not surprising when you consider the S&P 500 Index experienced more volatile days from 2001 to 2011 than in the preceding 50 years.1 After being stung by the market, investors are looking for “flight-to-safety” investment options. They’re moving from asset accumulation to portfolio protection. Investors have become increasingly risk averse 100% 75 50 25 0
75% Equate risk with loss of capital
Source: Boathouse Group Inc. study, July 2013.
2
63% Paying more attention to risk than before
61% Choose safety over performance in their investments
Uncertainty and the need for assurance Today, individuals like you are apprehensive about the future because of changing external risk factors. Concerns about market volatility are compounded by uncertainties regarding longevity risk, inflation, health-related expenses, and taxes, which could stand in the way of achieving your financial goals. As you progress through your wealth lifecycle from accumulation to retirement spending and passing wealth to the next generation, you need strategies to help address the following risks.
1 Longevity
People are living longer, and that’s a good thing. To ensure you can enjoy living comfortably, you should anticipate having enough income to last for 20–30 years. As traditional pensions have become a thing of the past, you may be one of the many who self-fund their retirement. This leaves you more vulnerable to inflation and market volatility, which could impact your retirement income or cause your portfolio to underperform and not meet your needs. Further compounding longevity risk is the current low interest rate environment. Traditional fixed-income investments, such as money market funds, CDs and 10-year Treasury bonds, are not yielding the returns needed to generate the income you’ll need for a lifetime. Bond yields during recessions 1946–2013
Yield
18% 16 14 12 10 8 6 4 2 0
Short-term government bonds (4/53–12/13) Long-term government bonds Shaded bars denote economic recessions 2007–09 3.67% 0.13%
1946
1956
1966
1976
1986
1996
2006
2013
Source: Morningstar.
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
Interest rates have been on the decline since the recession in 1982, when the Federal Reserve pursued an aggressive strategy to lower inflation due to the oil crisis of the 1970s.2 Rates continue to remain low because the Federal Reserve has held its benchmark interest rate between 0% and 0.25% since December 2008, in response to the most serious financial crisis since the Great Depression. The Fed plans to keep interest rates low until the unemployment rate falls below 6.5%, but because the economy is still recovering, it’s not expected that the fed funds rate will rise to above 0.25% before early 2015.3
What you can do: Talk with your advisor about what a comfortable retirement means to you. You may find some ways to help overcome longevity risk and enjoy a guaranteed income stream for life.
3
Taxes 2
Because many individuals in retirement may have a higher tax rate, protecting your wealth from taxes is an important strategy as you plan for a longer retirement. Income and capital gains taxes have increased to pay for deficit reduction and expanded healthcare coverage. Even some folks who might consider themselves squarely middle class have been affected by these higher taxes.
Preretirees need strategies to help minimize tax risk. When surveyed about their assumptions regarding the top retirement expenses, preretirees answered “home/mortgage,” “healthcare” and “travel/leisure” — in that order. Yet, when retirees were asked the same question, 36% reported that taxes were a larger expense than they had anticipated. Approximately one-third of retirees acknowledged that, knowing what they know now, they would have done a better job of tax planning for retirement. The survey found that preretirees are seriously underestimating the impact taxes will have during their retirement, even though a majority of them (62%) were aware of new tax legislation.4 When you compare tax-deferred and taxable investments, the impact of tax deferral and compounding over time can make a significant difference in the value of your portfolio. Tax deferral for potential growth Tax deferral for potential growth $350k 300 Account value
$339,960
Tax deferred Tax deferred after taxes* Taxable
$250,970
250
$223,320
200
Assumptions Investment: $100,000 Annual gross rate of return: 6% Tax bracket: 35%
150 100
0
7
14
21
Years *Withdrawals of variable annuity earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. This example is hypothetical and for illustrative purposes only. The hypothetical rates of return shown in this example are not guaranteed and should not be viewed as indicative of the past or future performance of any particular investment. This example assumes taxable and tax-deferred growth of $100,000, a 6% annual rate of return, and a 35% tax rate over a 20-year period. Changes in tax rates and tax treatment of investment earnings may impact the hypothetical example. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown. Investors should consider their individual investment time horizon and income tax brackets, both current and anticipated, when making an investment decision, as these may further impact the results of the comparison.
1040
4
What you can do: Keep more of what you earn. Ask your advisor about tax-deferred assets, such as annuities and cash value life insurance. They offer tax-deferred growth opportunities and can be a tax-advantaged resource for your retirement.
3 Market volatility
This plays a significant role throughout your wealth lifecycle. During a prolonged market slump, you may feel compelled to move assets to lower-yielding investments. But over the long term, staying in the market may give you exposure to growth opportunities you’ll need to help provide sufficient retirement income. The following chart compares the effects of staying and exiting the market after the global financial crisis. As you can see, three different strategies yield dramatically different results for an initial investment of $100,000. The importance of staying invested Ending wealth values after a market decline
$150k
$151,671
Stay invested in the stock market Exit market and reinvest after 1 year Exit market and invest in cash Recession (Dec. 2007—June 2009)
130 110
$98,818
90 70 50
$54,560
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Source: Morningstar. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. The market is represented by the Standard & Poor’s 500®. An investment cannot be made directly in an index.
What you can do: Before you invest or reallocate assets, talk with your advisor about your short-term and long-term objectives. You’ll discover wealth protection strategies that are designed to help you capture market upside potential and protect your portfolio as you get ready to reach your goals.
4 Inflation risk
Inflation can reduce your investment returns and erode the value of your savings. Conservative investments that pay a fixed income can help decrease the impact of market volatility on your retirement portfolio, but you run the risk of being unable to keep pace with inflation. Low, single-digit inflation could outpace conservative investment returns as you near retirement and need greater portfolio stability. Even a modest annual inflation rate of 3% would bring a 45% decline in your purchasing power within 20 years. If you’re approaching or in retirement, this is concerning because healthcare inflation has averaged 3.7% annually from 1994 to 2013.5
What you can do: Talk with your advisor about how you can have sufficient income and financial protection from health-related expenses to keep pace with inflation.
5
5 Healthcare expenses
A health-related issue, such as a chronic illness, could affect you at any time. Health-related expenses may increase considerably, especially if you need long-term care. Just consider today’s national average costs of care:6
• A private room at a Medicare-certified nursing home: $95,630 per year • A private room in an assisted living facility: $44,328 per year • Assistance from a home healthcare aide: $19.36 per hour When you realize that 20% of people age 65 and older will need long-term care services for more than five years, this risk could make a significant impact on your retirement assets.7 Retirees revealed their growing concern about their health and the cost of healthcare in a recent survey conducted for Lincoln Financial Group by the Spectrem Group, a leading investor research firm. The survey, “2013 — Expense Challenges of Age 62–75 Retirees,” indicates that health and healthcare were their highest expected expenses prior to retirement. Individuals are concerned about health-related issues in retirement Male
Female
Total
80% 76% 65%
60 57%
66%
62%
55%
67%
65% 58%
60% 55% 50%
40
58%
54%
46%
20
0 My own health
The health of my spouse
The expenses associated with maintaining the health of our family
Having my full Social Security benefits through my retirement years
Having Medicare benefits through my retirement years
Source: The Spectrum Group, “2013 — Expense Challenges of Age 62–75 Retirees.”
Overall, females have a greater concern regarding health issues and receiving Medicare benefits throughout their retirement years. And healthcare was an important concern regardless of wealth, income, age or marital status. What you can do: Take the next step for your future. Your advisor can show you how to prepare for long-term care expenses with products that provide benefits to help protect your lifestyle and your portfolio should you need care.
6
All guarantees, including those for optional features, are subject to limitations and conditions. 1 Investment News and The American College. 2 Morningstar 2014. 3 R. Philip Giles, PhD, “The Outlook for the 10-Year Treasury Rate” white paper, June 2013. 4 The Spectrem Group, “2013 — Expense Challenges of Age 62–75 Retirees.” 5 Ibbotson Associates. 6 Univita, “2013 Cost of Care,” https://www.lfg.com/lfg/DOCS/pdf/rna/2013CostofCareSurvey.pdf. For a printed copy of the survey, call 877-ASK-LINCOLN. 7 U.S. Department of Health and Human Services, “How Much Care Will You Need?,” LongTermCare.gov, http://longtermcare.gov/the-basics/how-much-care-will-you-need/, March 31, 2014.
Talk to your advisor. Get ready to take on the challenges. Find out why Americans rely on Lincoln Financial for the financial strength, consistency and expertise they need to help them achieve their goals.
7
Not a deposit Not FDIC-insured Not insured by any federal government agency Not guaranteed by any bank or savings association May go down in value ©2014 Lincoln National Corporation LincolnFinancial.com Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations. LCN-965027-071014 MOS 8/14 Z01 Order code: LFD-WPCW-WPR001
This material was prepared to support the promotion and marketing of a variable annuity product. Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein. Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk, and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative, and advisory fees. Optional features are available for an additional charge. The annuity’s value fluctuates with the market value of the underlying investment options, and all assets accumulate tax-deferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Withdrawals will reduce the death benefit and cash surrender value. Investors are advised to consider the investment objectives, risks, and charges and expenses of the variable annuity and its underlying investment options carefully before investing. The applicable variable annuity prospectus contains
this and other important information about the variable annuity and its underlying investment options. Please call 888-868-2583 for a free prospectus. Read it carefully before investing or sending money. Products and features are subject to state availability. Lincoln variable annuities and American Legacy® variable annuities and life insurance are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, and distributed by Lincoln Financial Distributors, Inc., a brokerdealer. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Contracts and policies sold in New York are issued by Lincoln Life & Annuity Company of New York, Syracuse, NY, and distributed by Lincoln Financial Distributors, Inc., a broker-dealer. All contract and policies and rider guarantees, including those for optional benefits, fixed subaccount crediting rates, or annuity payout rates, are subject to the claims-paying ability of the issuing insurance company. They are not backed by the broker-dealer or insurance agency from which this annuity is purchased, or any affiliates of those entities other than the issuing company affiliates, and none makes any representations or guarantees regarding the claims-paying ability of the issuer. There is no additional tax-deferral benefit for an annuity contract purchased in an IRA or other tax-qualified plan.
