A Case Study in Retirement Training: Market-Linked CDs

Copyright (c) 2010 Cory Bowman

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

One example of a case study could be a retirement study of a certain type of certificate of deposit (CD). One such CD could be a market-linked certificate of deposit (MLCD). The case study would cover the basic elements of what a market-linked CD is, as well as how to apply it to retirement planning. In this case, MLCD's have many negative features, but one huge positive: no chance of a loss if held to maturity. This retirement study would likely give a retirement trainee the information needed to either recommend or advise against an MLCD.

An MLCD will generally have the following features: a term (for example: four years), a minimum cumulative return (a percentage), cap rates on gains or losses, and insurance. Some may have additional features. The advantage of having a 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 downsides: 1) MLCD's are not liquid (meaning it is difficult to buy or sell them during the initial term); 2) quarterly losses will stay on the books until they are offset by future quarterly gains; 3) unlike many indices, the returns on an MLCD do not include dividends; and 4) tax liabilities.

But there are more: 5) averaging (this could be quarterly, yearly, monthly) usually works against the investor; 6) the index that it is tied to often will not see tremendous growth during the term of the MLCD; 7) if the investor does eventually receive gains, they are taxed as ordinary income.

After listing out the negatives, it seems like MLCD's may be a bad choice. One must remember, however, that there is actually no chance of a loss if the investor retains the MLCD until its maturity. To compare and contrast performance we must put it side by side to a traditional CD or another type of asset with the same term (perhaps a type of annuity or bond).

In one study that compares a market-liked certificate of deposit to an equity-indexed annuity (meaning that it's an annuity that earns interest based on its link to a stock or index), the equity-indexed annuity comes out on top. However, there are some cases in which the market-linked certificate of deposit prevails. A well structured retirement training course will help a financial advisor (or potential financial advisor) gain the skills needed to determine which option is best for the client.

In retirement planning it is critical to have a solid knowledge base and to know enough about a variety of financial products so that you can properly advise your clients. Certificates in retirement planning may be a good option for those without a background in the field, or for those wishing to expand their understanding of this financial arena.

About The Author IBF has helped thousands of members of the financial services industry attain designations that have enhanced their credibility and professionalism. For more information about retirement training or retirement study visit http://www.icfs.com/