retirement plan outline

Separate account

·        Money is invested in separate account during accumulation period

·        Either in mutual funds

·        Or in a managed account by an investment advisor

·        Unit investment trust-$ invested in mutual funds

·        Open end management company, investment advisors manage

General account

·        Managed by insurance company

 

accumulation units

·        % share of separate account

·        Value of separate account/# of units

·        Accumulation units based on a)dividends investors get b)interest investors get c)capital gains/losses

·        Dividends, interest, capital gains-used to buy more accumulation units

Accumulation unit value

·        Calculate every day

·        Similar to NAV calculation

·        Portfolio value=accumulation unit value x #units

·        # of AU increases with payments made in accumulation period

·        Increasing units, changing values

The accumulation units that are purchased during the accumulation period represent:

·        Increasing units

·        Changing values

·        Variable annuity doesn’t have fixed values for units

·        Capital gains, interest, dividends increase units during accumulation period because more units are bought with that extra $ stream

retirement plan outline

Annuity

·        Stream of payments

·        $ set aside for retirement

Fixed annuity

·        guaranteed interest rate in contract by insurance companies

·        pay interest when customer withdraws

·        pay out amount decided at beginning

·        annuity contract, between investor and insurance company

·        annuity period, when payments are paid to investor

·        NOT TESTED

Variable annuity

·        grows  by investment performance

·        NOT guaranteed by insurance company

·        More risky than fixed annuity

·        Securities

·        Agents need insurance license in customer state

·        Pay out based on performance

·        Investor can select investments

·        Separate account, where investments are held, managed by investment managers

·        Separate account NOT guaranteed

·        Need prospectus-is a security + not traded in secondary market

·        Similar to mutual funds

Fixed and variable

·        Insurance company holds capital gains, interest, dividends until holder withdraws

·        Annuitant, annuity holder

Which of the following is responsible for issuing a variable annuity policy?

·        An insurance company

·        Insurance company issue a)variable annuity

·        Insurance company issue b)fixed annuity

·        Only RR can sell variable annuity

Variable annuity suitability

·        Customer must need retirement product

·        Customer must have long term plan for $ not to be liquid-ok with not having access to $ for many years

·        Accumulation period: pay-in, buying, growth period a)accumulate tax deferred in pay-in period b)taxed as ordinary income during pay-out period c)pay out based on performance during pay-in period

·        Annuity period: pay-out period

What are the two periods of a variable annuity?

·        Accumulation period-pay in period

·        Annuity period-pay out period

 

Accumulation period

·        Customer buys annuity

Types of payment

·        Single payment, immediate payout contract-retirees take lump sum from unhappy-existing retirement plan and buy annuity. Pay large sum ASAP and can withdraw payments ASAP

·        Single payment, deferred payout contract-people who work in new jobs different from previous jobs, want to defer taxes on investment gains, don’t need investment income now, pay large sum ASAP, will withdraw later

·        Periodic payment, deferred payout contract-most popular, buy annuity over long time period, withdraw at retirement, accumulation period=entire time they are buying + time it is growing until annuity period

Separate account

·        Money is invested in separate account during accumulation period

·        Either in mutual funds

·        Or in a managed account by an investment advisor

·        Unit investment trust-$ invested in mutual funds

·        Open end management company, investment advisors manage

General account

·        Managed by insurance company

Investment companies outline

investment companies

• purpose: get many small investors to buy securities
• buy stocks, bonds, money market instruments

Investment company act of 1940,

• $100,000 capital minimum
•  100 shareholders minimum

Nonmanaged

•  many investors, 
• not actively managed

 Managed

•  actively managed by an adviser

 Unit Investment Trusts

• a)issue trust certificates with stake in muni bonds, corporate bonds, stock 
• b)sell units in specific investments 
• c)trust indenture-outlines obligations to manager of trust 
• d)have termination date-can be 50 years or more e)no Board of Directors, no managers f)have trustees

Exchange Traded Funds

• a)open end unit investment trusts aka SPDRs 
• b)open end investment companies 
• c)follow index like foreign companies or sectors 
• d)indexes-Dow Jones Industrial Average, Nasdaq 100 index, S&P 500 index
• shares bought on stock exchange floor-new issues and secondary issues
• no sales charge
• commission charge
• prospectus, with new shares
• secondary exchange, no prospectus
• can be bought on margin
• sell shares at net asset value
• sell shares at market price of ETF
• must buy 50,000 shares of stock
• index not changed much
• can be redeemed by institution that sponsored ETF
• can be sold short
• buying-weighted by index or weight by capitalization
• mutual funds have more turnover
• creation unit, inside SPDRs create in trust with 50,000 shares
• institutional investors may buy whole creation unit
• ETF owners can get dividends-small
• performance from ETF>dividend
• close trading at 4pm
• closing prices shown in newspapers

 Leveraged ETF

• leverages buying another fund that mirrors index
• use investor $ + borrowed money
• borrowed to investment 2:1 or 3:1 ratio
• hope investments>interest cost
• 2 or 3x returns as index
• requires borrowing-has its disadvantages 
• $ in short term securities and small amont of derivatives
• cash used to meet derivative obligations
• fees for management-managing securities
• interest costs on borrowed $
• transaction costs-borrowing and selling of securities
• for sophisticated investors
• for short term investments
• have a professional managing investments
• use leverage to try and make more
• not for a person who cannot tolerate large losses in a short time

Inverse ETF

• sell index fund shares short a)equity swaps b)buy/sell derivatives
• perform inverse from index
•  hedge portfolio against falling prices
• S&P 500 down 10%, ETF up 10%
• short sales, risky-sold stock must be bought again at a high price-could be a large loss
• short sale on a few stocks, loss spread amongst investors
• are managed
• buy and sell frequently
• fees can reduce profits
• bought in rising/increasing market
• sold in falling/decreasing market
• frequent buying/selling creates some volatility loss
• compounding error, losses cut into profits in volatile market
• not for a person who cannot handle large losses in s short time
• not long term investments