Retirement Education Case Study – Market Related Discs

Retirement Education Case Study – Market Related Discs

There are a number of retirement education programs available for those interested in financial planning as well as those already in the field. In these programs, retirement education is usually a focus. A comprehensive retirement education program should cover case studies as well as the basics of retirement planning.

An example of a case study might be researching the retirement of a particular type of certificate of deposit (CD). One such CD may be a Market Linked Certificate of Deposit (MLCD). The case study will cover the essentials of what a market-linked CD is, as well as how to apply it to retirement planning. In this case, MLCDs have many negative characteristics, but one huge positive: there is no chance of loss if held to maturity. This retirement study would likely give a retired intern the information needed to recommend or advise against MLCD.

An MLCD typically has the following characteristics: term (for example: four years), minimum cumulative return (percentage), compound interest on gains or losses, and insurance. Some may have additional features. The advantage of the minimum cumulative return is that the client is guaranteed to earn at least a certain percentage each year. However, there are also a number of disadvantages: 1) MLCDs are not liquid (meaning they are difficult to buy or sell during the initial term); 2) quarterly losses will remain on the books until offset by future quarterly profits; 3) unlike many indices, MLCD returns do not include dividends; and 4) tax obligations.

But there is more: 5) averaging (this can be quarterly, yearly, monthly) usually works against the investor; 6) the index to which it is linked will often not see huge growth during the life of the MLCD; 7) if the investor ultimately receives profits, they are taxed as ordinary income.

After listing the negatives, it appears that MLCDs may be a poor choice. However, it should be remembered that there is actually no chance of loss if the investor holds the MLCD until its maturity. To compare and contrast performance, we need to put it side by side with a traditional CD or another type of asset with the same term (perhaps a type of annuity or bond).

In one study that compared a market-like certificate of deposit with an equity-indexed annuity (meaning it’s an annuity that earns interest based on its relationship to a stock or index), the stock-indexed annuity came out on top. However, there are some cases where the market-linked certificate of deposit prevails. A well-structured retirement education course will help a financial advisor (or potential financial advisor) acquire the necessary skills to determine which option is best for the client.

When planning for retirement, it is extremely important that you have a solid knowledge base and know enough about different financial products so that you can properly advise your clients. Retirement planning certificates may be a good option for those without experience in the field or for those who wish to expand their understanding of this financial area.

Copyright (c) 2010 Cory Bowman

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