Exploring Portfolio Sustainability
Options in Retirement
For Producer or Broker/Dealer Use Only.
For Producer or Broker/Dealer Use Only.
Based on white paper by Moshe Milevsky, Ph.D. for MetLife
Based on white paper by Moshe Milevsky, Ph.D. for MetLife
1

Rates are forecasted to
which could adversely affect fixed income holdings
AT THE SAME TIME
Many boomers are advised to
portfolio risk by increasing bond allocations as they approach retirement
How can you untangle this catch-22 for clients?
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 2

• MetLife commissioned white paper:
“Bonding with Deferred Income Annuities”
• Author: Moshe A. Milevsky, Ph.D.
– Business School Professor at York University
– Executive Director of the (non-profit) IFID Centre
The Pi Longevity Extension Corporation, which is affiliated with the IFID Centre at the Fields Institute for Research in
Mathematical Sciences in Toronto, was paid a fee to prepare this report. The opinions expressed may or may not necessarily reflect the opinion of MetLife. The author is not affiliated with MetLife and is not an employee or representative of MetLife and is solely responsible for the content of this report.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 3

For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 4

• Before Bonds…There Were Annuities (2 min)
• Why Deferred Income Annuities? (2 min)
• The Yield Curve & Long-term Annuities (8 min)
• A New Asset Allocation Framework (5 min)
• Prepare Client Portfolios for Future Rate Environments (5 min)
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 5

• First life annuities appeared in England in 1693
• Funded war against France
• Investors were paid back in 7% coupons for as long as they lived
• First retirement pension!
• Payments continued until only a few survivors remained
• Extra cash flow above and beyond
7% coupon interest was really “other people’s money”
For Producer or Broker/Dealer Use Only.
• So-called ‘mortality credits’ formed part of the return or yield
• Longevity insurance!
Based on white paper by Moshe Milevsky, Ph.D. for MetLife 6

st
Life annuities and mortality credits are benefiting from a resurrection of sorts
There is an increase in the number of insurance carriers offering DIAs
DIAs take mortality credit concept to the next level by reaching farther out on the ‘time curve’

SPIAs (single premium immediate annuities) tend to cost more as lifetime income begins immediately
DIAs cost less as they are purchased earlier and begin later
DIA with no
Guarantees
(ALDA)
Hypothetical example. For illustrative purposes only.
Author’s note: The hypothetical graphs represent rank and order, i.e., that a DIA with no guarantees must have more mortality credits compared to a DIA with a refund. Likewise, a DIA with a 10-year guarantee must have more mortality credits compared to the 20-year guarantee, etc.
For Producer or Broker/Dealer Use Only.
Different DIA guarantees have the potential to water down mortality credits
Based on white paper by Moshe Milevsky, Ph.D. for MetLife 8

• Offer consistent income for as long as your client lives
(or your client and his/her spouse lives)
• Provide lifetime income without market risk
• Let your clients know − up front − how much their future income payments will be, and when they’ll begin receiving them
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 9

Interest rates are
than a single number
Extended curve with multiple points representing a different maturity date
How will today’s curve evolve and when should your clients purchase a DIA?
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 10

A Closer Look at
Annuity Payouts
Hypothetical Example.

Hypothetical example. For illustrative purposes only.
Does not represent returns on any actual investment.
Note: Exhibit #2 is a graphical representation of three hypothetical (corporate) yield curves. Curve A is the steepest of the three. It starts at 2% interest at the
‘short’ end and steadily increases to 6% interest at the ‘long’ end of the curve. Both Curve B and Curve D are flat at 4% and 5% respectively. Curve C is upward sloping, moving from 3% to 5% between both ends, but not as steep as Curve A. Under this hypothetical scenario the (30-year) long-term rate is 5%, the short-term rate is 3% and the 15-year rate is 4%.
Three corporate yield curve examples
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 12

Hypothetical example. For illustrative purposes only.
Does not represent returns on any actual investment.
Note: Pricing is based on Annuity 2000 Mortality Tables with AA projection to 2012 and G2 projection thereafter. Pricing assumes 5% commission load and pricing rates equal to the assumed yield curve and should be taken as indicative only.
Different initial ages, genders, benefit types and curves impact the value (price)
Only under Curve D
(flat 5% rate across the entire curve) does the DIA price drop
When the Fed does raise short-term rates, will the long end of the curve move up or down?
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 13

Pricing of DIAs is based on (current) long-term interest rates and expected mortality rates
Fed’s (short-term) actions are less important than you think – since prices depend more on long-term rates
Waiting for rates to rise – and DIA prices to get cheaper – can be risky
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 14

Hypothetical Allocation.
Hypothetical example. For illustrative purposes only.
Note: This chart, using forward-looking (stochastic) analysis, depicts a married couple who are both 65 years-old with $1.5 M in investable assets. If this couple allocates 50% of their investable assets to stocks, 40% to bonds and 10% to cash, the portfolio sustainability equals 88%. If the couple allocates (only) 15% of their nest egg to a DIA, which begins payments at age 80, with 5% to cash, 15% to bonds and the remaining 65% to stocks, the portfolio sustainability rises to 92% but the expected discounted legacy value is reduced as a result of the cost of the DIA.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 15

Hypothetical Allocation.
Hypothetical example. For illustrative purposes only.
Note: This chart, using forward-looking (stochastic) analysis, depicts a married couple who are both 65 years-old with $1.5 M in investable assets. If this couple allocates 50% of their investable assets to stocks, 40% to bonds and 10% to cash, the portfolio sustainability equals 88%. If the couple allocates (only) 15% of their nest egg to a DIA, which begins payments at age 80, with 5% to cash, 15% to bonds and the remaining 65% to stocks, the portfolio sustainability rises to 92% but the expected discounted legacy value is reduced as a result of the cost of the DIA.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 16

Hypothetical example. For illustrative purposes only.
Note: This chart depicts how a life cycle plan might work, but is not necessarily specific to a 401(k) plan. DIAs would form part of the fixed-income component of the life cycle portfolio in this example.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 17

Sourcing the Money to Buy DIAs:
Maturity
Hypothetical example. For illustrative purposes only.
Note: This chart depicts how the upper right hand corner in the credit/duration matrix could be used as the source of funds as they share similar pricing factors.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 18

Periodic DIA purchases may alleviate the timing risk associated with rising rates
The pricing of DIAs is based on (current) long-term interest rates and (expected) mortality credits
Talk to your clients about portfolio sustainability options in retirement
MetLife Sales Desk: 800-587-4979
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 19

SM
Guaranteed income for as long as your clients live.
Supplement their other retirement income sources to help cover everyday expenses.
Tailor their income payments to meet their needs.
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 20

MetLife deferred income annuities, like all annuities, are an insurance product and not insured by the FDIC, the NCUSIF or any other government agency, nor is it guaranteed by, or the obligation of, the financial institution that sells it. All contract guarantees and annuity payout rates are subject to the claims-paying ability and financial strength of the issuing insurance company. They are not backed by the broker/dealer from which this annuity is purchased, by the insurance agency from which this annuity is purchased or any affiliates of those entities and none makes any representations or guarantees regarding the claims-paying ability and financial strength of the issuing insurance company. Similarly, the issuing insurance company does not back the financial strength of the broker/dealer or any of its affiliates.
Like most annuity contracts, MetLife’s contracts contain charges, limitations, exclusions, holding periods, termination provisions and terms for keeping them in force.
The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance or other financial products and services. Clients should seek advice based on their particular circumstances from an independent tax advisor since any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation.
Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate
Distributions of taxable amounts are subject to ordinary income tax and, if made before age 59½, may be subject to a 10% Federal income tax penalty. Some broker/dealers and financial professionals may refer to the 10% Federal income tax penalty as an “additional tax” or “additional income tax,” or use the terms interchangeably when discussing withdrawals taken prior to age 59½. Distributions of taxable amounts from a non-qualified annuity may also be subject to the 3.8% Unearned Income Medicare Contribution tax if your modified adjusted gross income exceeds the applicable threshold amount.
MetLife Guaranteed Income Builder is issued by MetLife Insurance Company USA on Policy Form 6-1001-1 (05/14); 11225 North
Community House Road, Charlotte, NC 28277.
• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency
• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value
BDFA9077
L0515423450[0616]
Based on white paper by Moshe Milevsky, Ph.D. for MetLife 21

For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife

1
• Average purchase age: 59
• 57% for single-life;
43% for two lives
• Average deferral period:
7.2 years
• Consumers are selecting earlier income-start dates than ideal
• 48% are requesting a ‘cash refund’
• 55% are non-qualified;
45% are qualified
1 Source: CANNEX – Quote Survey (Jan – June 2014)
For Producer or Broker/Dealer Use Only. Based on white paper by Moshe Milevsky, Ph.D. for MetLife 23