Annuities

For millions of Americans, a life annuity can provide safety of principal and tax deferral. However, one disadvantage inherent in most life annuities is their inability to keep up with inflation over the long-term.

For example, assume that you invest $100,000 into a single premium immediate life annuity. as an example, a current contract from a major annuity company would then pay out $658.59 per month, for a total of $7,903.08 for the year.  The problem is if the rate of inflation is 3%, then the purchasing power of these payments will decline from one year to the next. Obviously, $7,903 will not buy in a future year what it can now. Imagine how you feel twenty years from now when the purchasing power of your life annuity is reduced by 47%!

One way that life annuity buyers can deal with this problem is to purchase a cost-of-living rider in the contract. This rider is designed to ensure that the income from the annuity stays abreast of the rate of inflation over time.
However, these will be a trade off in that less income may be received today.

For example, the same immediate life annuity contract with a 3% inflation protection rider will only pay $499.06 per month initially.  But this amount will increase by 3% each year for the duration of the payout, thus providing some protection from inflation. Of course, it is plain to see that there is a cost to this rider, as the initial monthly payment is $159.53 less than the contract without the COLA rider. However, if the annuitant should live long enough to receive payments for the next 20 years, then the payment by year 20 would be $901.36 per month or $242.77 per month more than the straight-life annuity contract payout. The longer you live, the more value the inflation rider becomes in your life annuity.

COLA riders can come in different forms, with some riders having a specific cost, while others (such as the one shown previously) merely affect the dollar amount of the monthly payout (i.e. less today and more later). Different rates of increase are also generally available, depending upon how much inflation protection the life annuity contract holder desires. For example, the contract as shown previously also has a 6% inflation protection rider option, which would result in the contract holder receiving a proportionately lower payment each month to begin with, and a higher payment at the end of the term.

Financial Professionals–annuity lead program

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An investment’s return is what most people analyze each year. However, what really counts is how much you hold on to after taxes. After all, that’s what you get to spend. If you’re shopping around for CDs, you may want to look at an alternative idea that will let you keep more of what you earn.

Suppose that you are considering a five-year jumbo CD. The certificate’s earnings may push your provisional income over the government’s threshold (provisional income is the income calculated by IRS to determine if and how much of your Social Security income becomes taxable). The result is that more of your Social Security check will become taxable when you add interest from CDs.

The solution could be an immediate annuity that will pay you an income for five years (five-year certain). Part of that income will be taxable, while the rest considered a tax-free return of your investment. At the end of five years, the payments stop. To replace the funds you put into the immediate annuity, you would invest in a five-year fixed annuity. Interest earnings on the fixed annuity are tax-deferred, and not counted towards the government’s threshold of taxation of Social Security income.

The result is that you would have one investment that is partially taxable and another that is tax-deferred, therefore your provisional income should go down. With the right planning, you may possibly reduce it to the point that you would not have to pay income taxes on any of your Social Security benefits. Additionally, a decline in your adjusted gross income will lower the floor on medical expense deductions, and miscellaneous itemized deductions.

When the five years are up, you could remove funds from the fixed annuity, pay the income annuity tax, and purchase another immediate annuity. Or you could annuitize the fixed annuity for lifetime payments.
Much of this strategy depends on your current tax bracket, itemized deductions, exemptions, and income requirements. Therefore, in order to make sure this is an appropriate solution for you, we would need to include these factors in your analysis.

Ask your retirement advisor to give you an analysis of a split annuity.

Prospecting system for advisors who seek to meet annuity prospects

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