Annuities

Fixed Immediate annuities can provide a steady income for a specified period of time that may even surpass your natural life. How long you choose to take these payments can depend on your present and future income needs, as well as your survivors’ requirements. But there is one more point that you may want to look at when reviewing the various payout options available, and that is the annuity tax implications to you and your beneficiaries.

A portion of the money you would receive each year is a tax-free return of your investment. The balance is taxable, and those amounts can vary among the different payment periods. For instance, suppose that you are a 65-year old male, the IRS gives you a life expectancy of 20 years, and you are offered the following choices for a $250,000 investment:

• A life only payout ceases when you die and will give you approximately $20,000 per year. Of this amount, $12,500 (1/20th of $250,000) would be tax-free and the balance ($7,500) taxable. If you live longer than 20 years, all $20,000 will be taxable.

• A life with 20-year certain pays for 20 years or your lifetime, whichever is longer. You would receive approximately $17,500 each year, $12,500 tax-free and $5,000 taxable. If you die before the 20 years has passed, your beneficiary will collect the remainder of the payments with the same annuity tax treatment as you had.

• A 10-year certain annuity will pay you approximately $28,500 per year for 10 years with $25,000 (1/10th of $250,000) tax-free and $3,500 taxable. If you die before the 10 years has passed, your beneficiary will receive the income for the balance of the term in a like manner.

The above numbers are strictly estimates and for illustrative purposes only. They do not imply any return on a specific investment, and do not include the impact of fees and charges on the growth or the payout. In addition, other payout options are available. However, they do show how your investment decisions could affect your annuity taxes.

For more information on investing with fixed immediate annuities, ask your retirement consultant.

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Even the best experts can’t predict how certain investments will perform or the income that you’ll see from them.

Nevertheless, you might need a set amount of money each month to pay non-discretionary expenses like mortgage payments, auto loans, and life insurance premiums. Frequently these monthly outlays are fixed for a number of years.

To pay these predictable expenses, you may want to consider a fixed, immediate annuity to provide a steady stream of income for your lifetime, your spouse’s lifetime, or the duration of the loan.  And if you don’t like paying taxes, you may like the idea that part of that regular check from an immediate annuity is a tax-free return of your investment.  If you find comfort from social security check, having the fixed income stream from a lifetime immediate annuity is quite similar.

But what about expenses that you will always have and most likely will go up each year, such as real estate taxes, auto insurance, or homeowner’s premiums? Some immediate annuities offer several options to meet your future needs too, including an inflation protection rider that will let your income rise annually.

Ability to make payments based on claims-paying ability of Annuity Company. Not government backed or FDIC insured.  Exact provisions of inflation rider may vary among annuity companies and may not be available on many annuities. Additional riders are subject to additional fees and charges.
For a free illustration of how a fixed, immediate annuity can provide that money you need to meet your monthly obligations, use the immediate annuity calculator.

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Do You Like Fixed Annuities But Don’t Like Short-Term Rates?

Fixed annuities can be popular among seniors. They are easy to buy, you know exactly how long you must tie up your money, and the IRS will let you defer the income tax on the earnings.  But one point that may have stopped you from investing in an annuity is that some traditional fixed annuities do not lock in the interest rate for the duration of the contract. This means that after the initial period, which is typically one year, the return that the annuity company pays could possibly go higher or lower each year thereafter. However, there is a type of annuity that fixes the return for the entire contract’s term. This way you will know exactly how much you’ll earn while you own the contract. 

CD-annuities (also known as multi-year annuities) provide level interest rates for the entire term so you won’t get any surprise notices during this time. You select the term, which generally ranges from three to 10 years when you make the investment. At the end of the term, you will usually have a 30-day window to withdraw all or part of your money, or renew the contract for another multi-year period. The withdraw charges expire when the term ends.

As with traditional annuities, there are no income taxes on the earning while they remain in the account. Therefore, you won’t get a 1099 form to file with the IRS each year. Nor will you have to worry about income taxes if you renew the contract at the end of the term, and you get to name a beneficiary. This means that if you die while you own the CD-annuity, your heirs will quickly receive the account’s value without going through probate. Then they’ll  have the option to take a lump sum payment, or a systematic payout.  I always recommend investors consult with their own qualified tax and retirement advisors prior to making any investment decisions.

Please note, however, that annuities are designed for long-term investing, and ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59½.  Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government insured. Additionally, one should remember that annuity surrender charges are often based upon the time the insured has been invested in the annuity and surrender schedules vary from company to company.

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Do You Want to Give Your Grandchild a Head Start on Retirement?

If you are already retired, there’s a good chance that you receive Social Security. The likelihood that this stream of income will continue for the rest of your life, at least in some form, is probably pretty good. But what about your grandchildren?

According to the government, Social Security’s financing problems are essentially long-term in their nature, and should not affect today’s retirees and near-retirees. However, people are living longer, and the first baby boomers are nearing retirement. The result is that the worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it could be 2-to-1. At this rate there may not be enough workers to pay scheduled benefits at current tax rates .  This could have an impact upon your grandchildren’s retirement lifestyle. For example, imagine that your grandchild is 26 years old. What will he/she face in the future? Based on today’s scheduled levels, his/her benefits could be reduced significantly when he or she reaches retirement.

As a practical matter, your grandchildren might have five or six decades before they retire. Based upon a 3% inflation rate, your grandchild might need as much as $219,195 a year to support a lifestyle that $50,000 covers today. On the other hand, it adds to attractiveness of putting money away sooner than later.
With the Social Security’s outlook, and the ever-increasing cost of living, our younger generation must become more self-sufficient in planning their retirement. This is where a variable annuity could be helpful.

Variable annuities are designed for long-term investors who are seeking a stream of additional cash-flow for their retirement. These investments also allow for systematic investments, and provide a variety of investment options. When you put it in your grandchild’s name, assuming he or she is old enough to own the contract, the earnings within the account can accumulate on a tax-deferred basis until he or she withdrawals the funds. If you should happen to put the account in your name, you will be able take advantage of the tax-deferral benefit too.

With the annuity in your name, you can name your grandchild the beneficiary. That way after you die, he or she will receive the money without going through probate. With a standard guaranteed death benefit, the money your beneficiary receives will usually be not less than the premiums that you paid into the annuity. As a practical matter, the cost of the standard death benefit is usually subsidized by the mortality and expense risk charges, which are mentioned below and run about 1.25% of the annuity account balance per year for many companies . Of course, these costs could run higher or lower than this amount, depending on the company involved.

Although variable annuities can be a good tool for accumulating retirement funds, there are a number of things you need to understand about these investments. As previously mentioned, variable annuities are designed for long-term investing and ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59 ½. Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government insured. Therefore, it’s important to consider the financial strength of the issuing company prior to investing.
One should also remember that early withdrawals from a variable annuity are subject to surrender charges, which are typically based upon the time the insured has been invested in the annuity. Additionally, variable annuities are subject to some other costs, including mortality charges, sub-account investment fees, and administrative expenses. These charges tend to vary from company to company. With this in mind, it is always a good idea to compare fees among the available companies.

As an investor you should carefully consider the investment objectives, risks, charges, and expenses of a variable annuity before investing. For this and other information about any variable annuity and its underlying sub-accounts you should contact your financial advisor to request a prospectus. You should also read the prospectus carefully prior to investing.

Do you want to know more about how variable annuities can help your younger family members with their retirement needs? Do you want to achieve a clearer understanding about the features of a variable annuity that you already own? For more information on variable annuities, ask your retirement advisor to fill you in.

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Safety is a relative term because what is safe to one person is risky to another.  For instance you may consider a U.S. Treasury bond one of the safest investments since it is backed by our government. But a true skeptic might say, “Suppose the U.S. government went belly-up? The bond could then be worthless.” Or he might argue that the government’s unabated printing of money will debase our currency making dollar investments worthless. Yes, he could have a valid point. However, putting the extremes aside, safety is one of the top reasons that people buy fixed annuities.

There are several independent rating agencies that regularly assess the financial strength of insurance and annuity companies. Included are A.M. Best, Duff & Phelps, Moody’s, Standard & Poor’s, and Weiss Research. These firms will give you an evaluation of a company’s balance sheet strength, operating performance, and ability to meet ongoing obligations. In addition, all companies must follow the “legal reserve system.” This is a set of rules on asset management, accounting, and reserve requirements.

The reserve requirements assure that funds are set aside specifically to protect against an insurance company’s portfolio losses. Furthermore, insurance companies are state regulated. And all 50 states, the District of Columbia, and Puerto Rico have guaranty associations to which licensed life and health insurers must belong. When states determine that an insurer is insolvent, a mechanism within the association protects the policyholders and can possibly help pay the claims against financially-troubled insurance companies.

This does not mean you should throw caution to the wind.  Weiss Ratings are the most conservative and rate the short term liquidity of the insurance company if they had a short term “run.”   Weiss Rating of B or better is strong.    AM Best ratings are the least useful as over the years, they have freely given out A ratings to companies that had not earned such.

When First Capital failed, an annuity company in Southern California that had a high percentage of junk bonds in its portfolio, it had an A rating form Best.  And although no investors lost any money because of the State’s efforts to have another insurance company assume First Capital’s, there was a moratorium on withdrawals and investors could not access their accounts for 5 years.

A good source of annuity safety ratings is to consult the “Comdex ratings” given by Vital Signs.  A Comdex rating of 80 or better is very good. An experienced retirement consultant will have access to Vital Signs reports.

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Rebates, longer-term financing, and other temptations are often used by automakers to get you to buy or lease a new car.  But these complications obfuscate how much you really pay in financing costs.  Along a similar line, fixed annuity companies frequently have incentives to reward you for investing. One of the most widely used is the “bonus rate.” But if you aren’t careful, you might not get what you bargained for.  Bonus rates look good at first buy may cloud your ability to see what you really earn.

The bonus annuity rate is generally given during the first year or few years that you own the fixed annuity and can significantly enhance the initial return. Furthermore, the bonus increases the annuity’s principal on which future interest will be credited. Therefore, a bonus could possibly boost the overall yield over the contract’s term.

However, the company may be offering this reward because you are expected to keep the contract for up to 10 years. If you remove your investment before that time is up, you may be hit with surrender charges that could more than wipe out the bonus you had received. Additionally, some annuities with high bonuses may not have features that might be valuable to you, such as waiver of surrender charges for terminal illness, or nursing home confinement.

The return on your investment is certainly important, and a bonus can be a valuable addition. But don’t overlook the financial safety of the annuity company, the other benefits that annuities can offer, and how well the advisor proposing the investment understands your complete financial situation. 

Since you are often locked in b y surrender charges, after the bonus period, the annuity company may drop your rate to an uncompetitive annuity rate for the remaining term.  Assume this worst case and calculate your return to maturity and compare the same calculation to an annuity that does not offer a bonus rate but may offer a multi year guarantee.

Note: Bonus annuities often have higher fees and charges than annuities that do not offer a bonus. Furthermore, the surrender period is usually longer, leading to higher surrender charges.

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