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.

Since there are several options, you may want to consider them. You can get in touch with a local financial advisor by ordering the FREE booklet below as this will be sent to you by a local professional.

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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 want to be a dependent senior citizen?

You likely are according to this conclusion by the Economic Policy Institute, “For the typical person approaching retirement, the value of expected future Social Security retirement benefits represents the largest single source of wealth.”  While this may be true, it’s a situation you don’t want to be in–dependent on the government and its political whims to determine your level of senior citizen retirement income.  The more you can control and rely on your other sources of retirement income, the more independent you will be.

Let’s discuss the ways in which you become independent with respect to your senior citizen retirement income.

If you have a home, use a reverse mortgage when you need it. Most seniors are simply ignorant about how reverse mortgages work and then act out of ignorance.  The other option is to find out how they work.  A revrse mortgage simply allows you to tap the equity in your home as an income source.  Right now, your home equity earns nothing, 0%.  Would you keep money in the bank at 0%?  Of course, when you die with a reverse mortgage, the equity in your home will be reduced to heirs.  But so what?  Shouldn’t you live more comfortably and enjoy a higher level of  senior citizen retirement income?  Don’t get a reverse mortgage until you need it as the payments are larger at older ages.

Another option is to annuitize your assets.  Here again, the idea is that rather than leaving an inheritance, you get the money to enjoy during your lifetime by consuming principal.  The risk in spending principal is that the principal could run out before you do.  But what if you could enjoy more senior citizen retirement income and not worry about running our of principal?  That’s exactly what an immediate annuity allows.  An insurance company will guarantee a lifetime income in exchange for a single deposit. For example, a 72 year old woman, for a deposit of $200,000 would receive a lifetime monthly income of $1590 (11/25/08).  This is likely more than the social security check received.  While this is not recommended for all of your assets (the payment is fixed and will not adjust for inflation), it makes good sense for a portion of your assets to supply senior citizen retirement income that you cannot outlive.

If you worry about leaving funds to your favorite charity, a goal you may have had for some time, you can use the option above in the form of a Charitable Gift Annuity.  Rather than deposit finds with a commercial insurance company, you deposit the funds with a charity and the charity provides a lifetime income.  The amount may be less than the commercial annuity so check and compare.  Additionally, you get a tax deduction that could shelter your income and reduce your tax bill for up to 6 years.

These are but a few ideas to increase Senior Citizen Retirement Income.  Consult an experienced retirement advisor for additional recommendations.

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Do you own an IRA, hold a Keogh, or still have assets in a qualified retirement plan that was offered by a previous employer? Then perhaps now you have to think about the best way to withdraw the funds, as the IRS requires at age 70½, while making sure that you don’t outlive your income.

One choice is to remove the money all at once and pay the tax. That step, however, may put you in a higher tax bracket is is usually not wise. Another option is to go along with the government’s guidelines and calculate the Required Minimum Distribution that you must withdraw each year after you turn 70½. But what if there was a way to not have to do those calculations and also not worry about tax law changes and market fluctuations that could affect retirement accounts every year?
 
A tax-qualified, fixed immediate annuity will spread the tax liability over your projected lifetime and automatically satisfies the IRS requirements, so you will never have to calculate the required minimum distribution. A check will arrive every month, or whichever schedule you select, for the rest of your life—no matter how many years that might be (guarantee is based on the claims-paying ability of the annuity company). All you will have to do is pay the income tax and spend the balance of the money as you wish, or save it.

Note that even if you have several IRAs, you may want to add up the balances and then use a fixed immediate annuity in just one IRA to provide the required minimum distribution for all three.  Note that you must take a required minimum distribution form each type of retirement account you have.  You cannot for example just take a distribution form your IRA if you also have a 401k account.  You must make a required minimum distribution from both accounts.

Make sure you tell the immediate annuity company that you are using the payments to meet your required minimum distributions so that the payments are properly structured and will increase as you age.

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Do you find yourself worrying about your finances? While you may think of your situation as unique, you may in fact be among the majority of seniors wtih financial worries.

A recent survey by the publishers of Senior Market Advisor Magazine revealed several seniors’ responses to the question “How much do you worry about money?”

A little                           45%
More than I should        27%
A lot                              20%
Keeps me up at night      5%
Never                              3%
Source: Senior Market Advisor, Senior Survey 2005 (July 2005)

If the same poll were taken today, there would likely be many more who answer that financial worries are at the top of their worry list.

Notwithstanding these statistical findings, financial worries do not have to control you.  A more secure retirement is possible, with smart and prudent financial planning solutions to these common retirement worries:

Retirement Savings Shortfall
Upon reaching retirement, some seniors are surprised to discover that their retirement savings will come up short–an obvious source of financial worry. Instead of pursuing leisure activities, they find that they must curtail their spending habits in order to make their savings last. However even in retirement, you can put your savings to work for you with investment strategies that are designed to help you achieve your growth and income objectives. For example, do you find that your investments are heavily concentrated in CDs and bank account deposits?  Although these investments are often a very good source of liquidity and are insured by the FDIC, an over concentration in these safe investments could expose your portfolio to inflationary risks as they simply don’t pay enough interest. 

Loss of Investment Value
If you’ve owned stocks, recent problems do not get any worse to cause financial worry. Unfortunately, market corrections are a fact of life and can show up at any time. There are things that can be done to help you weather these storms: 
1) diversifying your portfolio,
2) rebalancing your holdings so that stocks never exceed a pre-determined percentage of your portfolio, and
3) following asset allocation strategies designed to reduce your exposure to market risk.  Although asset allocation does not guarantee against the risk of loss in a declining market, it can help reduce the overall volatility of your portfolio. Has your portfolio been reviewed lately? If not, now might be a very good time to do this.

Another key is divide your retirement savings into baskets.  Your most conservative pot, money market and CDs is money you will use in the next 3 years.  The next pot, maybe bonds and preferred shares are to be used in the next 3to 6 years. The next pot, say balanced mutual funds, in the next 6 to 9 years, and stocks or equity funds, to be used in 10 years or more.  Using this approach, even when the market does decline, your stocks have 10 years to recover and won’t destroy your retirement income planning.

Annuitize Your Savings
This is a common worry among many seniors, but one with practical solutions. For instance, buying a fixed deferred or immediate annuity with lifetime income guarantees could help to provide you with a reliable and steady source of cash flow for your retirement.

Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals can also be subject to surrender charges. Annuity guarantees are also backed by the claims-paying ability of the issuer.

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The word “annuity” brings to mind different meanings for many investors.  That’s because there are different types of annuities designed for different purposes.  One of these is the immediate fixed annuity, which can provide an immediate stream of cash payments over a lifetime or a defined period of time.

If the investor has chosen a lifetime payout retirement option, he or she typically pays a single premium to an annuity company. In return, the company agrees to pay the investor regular and ongoing cash payments for life, or for a lesser amount to continue over the life of both spouses. Although many investors choose to receive monthly payments, it is also possible to receive quarterly, semi-annual, or annual payments as well.
Assuming the payments are structured over a lifetime, the investor is provided with a lifetime income he or she cannot outlive. Such an investment is useful for investors requiring additional retirement income, for support of a community spouse in the event the other spouse is in need of nursing-home care and is seeking to qualify for Medicaid (immediate annuities can be treated as exempt asset in some states), for making lifetime payments to cover long term care needs, or for paying long term care insurance premiums.

A portion of each payment is considered a return of premium and therefore not taxable to the investor. The remainder is considered interest and will be subject to federal and state income taxes.  For example, for a male investor age 70, 68% of each payment is nontaxable to age 86 (then all amounts thereafter are taxable).

One drawback to these products is an early death. In such a case, the annuity company keeps the funds and the income ends. This early-death financial risk is sometimes perceived as a negative feature among some investors. However, there is a possible solution to this concern as some annuity companies will guarantee a return of the investment to heirs in the case of an early death.  The feature is referred to as a “refund” provision.  Other companies offer “commutation” which allows the investor to change his mind and recover his initial investment (usually with a surrender charge), for example, in the case of a terminal illness.  These features make the immediate annuity more flexible and remove the chance of having one’s investment disappear in the case of untimely death.

Please note, that annuities are long-term investments that are designed for retirement purposes. Annuities are also subject to administrative fees, mortality charges, and surrender charges that can apply to early withdrawals, and these fees tend to vary from company to company. Annuity premium payments and any other guarantees are subject to the claims-paying ability of the issuing company. For this reason, it is very important to consider the financial standing of the issuing company before you purchase an annuity.

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Stability and safety are important to many seniors, and these are only two of the reasons why immediate annuities are popular investments. A check arrives every month and part of the income is considered a tax-free return of your principal. As long as the annuity company is financially sound, the payments will continue for the life of the contract (annuities are guaranteed by the claims-paying ability of the issuing company).

However, consumers sometimes believe that immediate annuities are illiquid, irreversible investments, and cannot provide for future lifestyle changes. Nonetheless, there are some immediate annuities with options that may add flexibility to your financial plan.

Immediate annuities can possibly include an option that would allow you to receive extra cash at specific anniversary dates. For example, this might be at the 5th, 10th, or 15th anniversary of your investment. Exercising this option will reduce your future payments (the distribution may be fully taxable, so consult with your tax professional).

Suppose you needed money to cover an emergency, like paying for caregivers or a home repair. Some annuity companies will let you take up to six payments at once. You would not, however, receive checks for the following six months (payments may be fully taxable so consult with your tax professional).

You may also have the ability to provide a cash benefit from your immediate annuity to your heirs. This would be a pre-determined percentage, such as 25% or 50% of the amount of your initial investment. Selecting this option will reduce your monthly annuity checks, and may have tax consequences.

Annuities are so varied and there are so many different options provided, it’s essential to speak with a retirement advisorto see a range of products and solutions available.

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Could underestimating your longevity mean you’ll run out of retirement money?

At age 65, the average life expectancy is 81.8 years for a man and 84.8 years for a woman. At age 75, the average life expectancy is 85.5 years for a man and 87.6 years for a woman. Note that as you grow older, you’re expcted to live longer!  With recent advances in medical science, it’s no longer a stretch to think that you could live to be 100. In fact, the US Census Bureau projects that by 2050 there will be nearly one million centenarians.

No one wants to die sooner, so that’s great news. The problem: If your retirement plan doesn’t recognize the possibility of a long retirement, then you could potentially outlive your money. But read on for a solution.

Consider the following hypothetical example. Assume you’re 64 years old and earn $60,000 per year. You plan to retire next year at age 65. You’ve accumulated $1,000,000 in retirement savings, which you think will return a hypothetical six percent per year throughout your retirement. And, you have a $60,000 annual retirement need (excluding Social Security). If you have a 15-year retirement from ages 65 to 80, you’ll have no shortfall in retirement funds; in fact, you’ll end up with almost $696,000 to pass on to your heirs. On the other hand, if you have a 30-year retirement from ages 65 to 95, you’ll run out of money at age 83 as the table below illustrates. Of course, this example  is hypothetical and for illustrative purposes only. It is not meant to represent the performance of any particular product.