Category - Annuity

Why More Americans Are Saving Their Retirement With Annuities – Part III

What Are The Different Types Of Annuities?

Annuities can be immediate or deferred. This is simply whether the income payments begin right away or later. Annuities can also be fixed or variable.

Fixed annuities guarantee your money will earn at least a minimum interest rate. Fixed annuities may earn interest at a rate higher than the minimum but the rate isn’t guaranteed until it is credited to your account. With a fixed annuity you are not investing directly in the market and insurance companies must promise that your money is protected from market losses for it to qualify as a fixed annuity.

Money in a variable annuity earns a return based on how the investments you choose perform. Your investments are called “subaccounts” which are investments in mutual funds or other investment products. Your investment choices likely will have different types of risk and will affect the return you earn on your annuity. You may also have a choice to put some money into a fixed account with a guaranteed minimum interest rate. If the value of the subaccounts goes down, you may have less money in your annuity than you paid into it.

Why More Americans Are Saving Their Retirement With Annuities – Part II

The country’s movement away from defined benefit plans (such as pensions) to defined contribution plans (such as a 401(k)) placed more responsibility on individuals to manage their own nest egg. Studies show Americans have done poorly at this task.

In fact, the federal government is promoting annuities as a retirement savings tool to address this problem. The administration changed the rules to allow employers to offer annuities within defined contribution plans, and to delay required minimum distributions (RMDs) to as late as 85 years old for deferred annuity holders.

Social Security benefits represent the largest source of income (40 percent) for retirees in every age group, according to the LIMRA study, The Retirement Income Reference Book 2015. In its annual report, the Social Security Administration predicted its old age and disability trust funds, combined, would be exhausted in 2033.

A Political fix might happen at some point, with most ideas pointing to a raise in the eligibility age for benefits. That could make it even harder for future retirees to remain independent and in charge of their retirement lifestyle.

The Center for Annuity Awareness is an independent resource to assist with retirement decisions and provides readers with unbiased information and tools. In addition, the Center gives consumers access to professional advisors who can help retirees in making important financial decisions about their future. It is more than just the money, it’s helping retirees to secure a lifestyle, peace of mind and maintain financial independence.

What Is An Annuity?

An annuity is insurance against living too long. Annuities insure your savings will last as long as you do – no matter how long that is. With an annuity you’re buying longevity income to insure your savings last your entire life.

People buy an annuity for peace of mind. Most of us have a parent, an uncle, or even multiple relatives, who have lived into their 90s. It takes a lot of money to live two and three decades in retirement. The No.1 fear among retirees is outliving their money. Annuities guarantee that won’t happen.

More information about Annuities will come next week. Stay tuned.

Why More Americans Are Saving Their Retirement With Annuities – Part I

No one has to tell you that it is a new, anxious world for retirees. Pensions are nearly non-existent. People have not been able to save as much money as they will need. The economy is far from stable. Social Security seems under constant strain.

What Will Tomorrow Bring?

No one can accurately answer that question. That is why more Americans are turning to annuities to control their destinies. Annuities are a guaranteed source of income that you own and no one can take away.

That stability in times of crisis and need is what attracted many former critics to embrace annuities as part of a firm foundation for a secure retirement.

Harold Evensky, professor of financial planning at Texas Tech University, is one such former critic. He was dubbed the “Dean of Financial Planning” by Don Phillips, CEO of Morningstar, and is viewed as one of the top fee-only financial planners in the country.

Evensky now says annuities can be the key to help solve retirement’s greatest riddle: How do 76 million baby boomers pay for retirement?

An analysis by the Government Accountability Office finds that among households with members aged 55 or older, nearly 29 percent have no retirement savings or a traditional pension plan.

Millions of others are woefully short of retirement funds. Annuities are a valuable resource to help stretch dollars, Evensky said.

“I think that (annuities) are going to be an extremely important part of the investment and planning portfolio over the next decade or so,” he said.

An annuity is an insurance contract and like any contract it can be confusing. Terms and fees vary from annuity to annuity. People looking to save for retirement have to determine if the terms of an annuity or any contract are what they need and if the expenses are reasonable.

The most important thing is to have all of the information to see if annuities fit in your plan. Because the simple reality is that the retirement formula has changed. The era of combining pensions with Social Security is over for many people.

More information about Annuities will come next week. Stay tuned.


Is An Annuity Right For Me?

What are the advantages and disadvantages of an annuity?

The very significant advantage of owning an annuity is peace of mind. The assurance that no matter how long you live, that check from the insurance company will arrive in the mailbox every month. This can alleviate a major source of stress for many seniors.

The main disadvantage is loss of liquidity. That’s why retirement planning experts recommend a diverse portfolio in which a portion is dedicated to an annuity, leaving the remaining funds available for emergencies and other types of investments.

Annuity critics say the products are too complex, and some annuities have fees and features that can drag down your interest earnings. That’s why it takes a commitment to shop around and ask the right questions. Talking with a professional can help answer your questions and assist in finding an annuity that is tailored to your needs.

How do I know an annuity is right for me?

Some questions to ask in determining if an annuity is right for you include: Am I in good health? Can I afford to remove some of my nest egg and put it into an annuity? What are my retirement goals? What is my risk tolerance?

Where does an annuity fit in my retirement plan?

Top financial planners recommend an annuity to address longevity risk and provide guaranteed income. The important part is to have a balanced retirement plan. Providing an income from an annuity enables you to take a little more risk with remaining money.

Many financial planners recommend rolling an IRA, or a percentage of it, into an annuity. In addition to providing income and longevity insurance, rolling into an annuity is a tax-free process.

Steps To Creating A Financial Plan

A financial plan will assist you in reaching your life long goals with investment strategies that will help aid in your retirement costs (or any other personal goals you wish to achieve).

  1. Determine your current financial situation. Make a list of all of your liabilities (including outstanding bills and debt) and a list of all your assets (cash, accounts, property, and any other investments). Take the total of your assets and subtract your total liabilities to come up with your Net Worth.
  2. Plan your financial goals. When working on your goals don’t only consider monthly savings and retirement investments, but also other life goals. Do you want to visit Australia for a month? Will you need a new computer in a couple years? Anticipate your future expenditures and include them in your plan. Below are things to think about when putting together your plan.
    • Goals: what goal is it that you are trying to reach?
    • Cost: what is the cost of reaching this goal?
    • Time: how much time do you have to reach the goal? Be sure to set an end date.
    • Monthly allowance: how much money a month can or will you contribute to reaching this goal?
  3. Determining your alternative action plan. Life can be full of uncertainty. You will want to be sure to have back up plans in order to reach your goals. What are some other ways of obtaining your goals? Can you invest in something different, sell some of your collection, or downsize your home. There are multiple ways of reaching your goals; you will want to be sure to have multiple strategies.
  4. Evaluate your strategies. Take a look at your different strategies and list the pros and cons to help you decide the route you are going to take. This will help you take the best course of action to reach your financial goals.
  5. Create and implement your plan. Once you have decided on which path you are going to take it is important to stay on that path. Be conscious of your decisions financially so that your goal stays in sight.
  6. Review your plan yearly. As we said before, life can be full of uncertainty. It is important to reevaluate your plan every year and make any alterations to your goals as needed. This will assure that you will stay on track, even if you have to turn a corner on the road to get there.

Beneficiary Form Faux Pas

When you have investments you are required to name a beneficiary for that investment. With the forms you fill out it is easy to make simple mistakes that could be devastating to your heirs. We have put together some things you should know when filling out those beneficiary forms.

  • 12-28-16-formsNaming minor children as beneficiaries. If you plan on naming anyone under the age of 18 or 21 (depending on the state laws) you must know that minors can only inherit limited amounts. Be sure to have a guardian set up through a Trust with detailed instructions on how to manage the distribution.
  • Don’t assume your Will or Trust is going to take care of everything. Beneficiary designations always override anything in a Will or Trust. You must make sure these forms are consistent with each other. With your investment you will want to name the Trust as the beneficiary, not the person you named in the trust to be the beneficiary. However, there are exceptions, please speak to your Estate Planner regarding who to name on each beneficiary form.
  • Don’t forget to update the forms. When life happens you may forget to update your beneficiaries. Be sure to update your forms if your heir marries, divorces, comes of age or just makes you mad. Forgetting to do this can have your ex or bitter sister-in-law end up with your investment.
  • Have a plan B. If you primary beneficiary is no longer around to collect their inheritance the court will decide who will receive your estate. Be sure to name an alternate or a few alternate beneficiaries for your estate to ensure it goes to those you want.
  • Don’t assume your wishes are on file. Be sure to have a copy of every beneficiary form with your Trust; don’t just assume that a bank or investment company has your beneficiary on file from 30 years ago.
  • Update the forms correctly. Making a change on the form and initialing it won’t hold up in court. Be sure that every change is made in writing and a dated copy is given to the bank or Investment Company as well as a copy for yourself.
  • Check name spellings. It is makes the distribution much easier if you check that the beneficiary names are spelled correctly, having their social security number along with their names helps too.

While making sure filling out the forms correctly is important it is equally important to be sure to let your Executor know your wishes and where the copies of the forms can be found. You will want to keep the documents in a place the executor can easily access them (a safety deposit box is a good example of where NOT to keep them).

Retirement Costs

retirementIn planning for retirement there are a few different costs that factor into what amount you can expect to save. Let’s take a look at the three most likely expenses you will face.

  1. Health Care. In a 2016 study by Fidelity the average cost for health care if retired at the age of 65 will approximately be $260,000 for Medicaid. Each year there seems to be a 3-6% increase in these costs. Don’t forget that Medicaid doesn’t cover everything. If you need hearing aids, glasses and eye exams or long term care you will need to have another $130,000 on top of the $260,000. Truthfully, it is not likely that you will over-save for health care costs.
  1. Travel & Leisure. The first years of retirement you are most likely to spend more on traveling, going out to eat and other leisurely activities. You have more free time to do more, see more, spend more. When accounting for retirement costs, don’t forget to include these exciting expenditures.
  1. Monthly Living. What is your monthly spending naturally? If you haven’t tracked this, you will want to spend at least a year figuring out how much you spend on a monthly basis. You will want to find the monthly or annual amount for the main categories. You can start with expenses for housing, transportation, food, entertainment, health, auto and home repairs, vacations, taxes, and any other personal expenses you have. Putting together this budget will help you estimate how much you will need for retirement.

We have a few helpful tips when saving for your retirement:

  • Consider a health savings account. If you are continuing to work you can have a portion of your income deposited tax-free into the health savings account and this can be saved for after retirement to help cover the medical costs.
  • Working longer can increase your retirement savings pocketbook and keeps you from drawing from it too soon.
  • It has been known that a supplement health care program will be beneficial to those who have already retired. Purchasing medigap insurance can alleviate some of the costs that Medicare doesn’t pay.
  • After retirement you may choose to live in a cheaper area, buy used, and eat simpler in order to stretch your saved dollars.

We all look forward to retirement. Early planning is the key to a stress-free living after you say goodbye to your career. Planning ahead, saving, and mapping out your expenses and then sticking to your plan is key to growing old successfully.

Benefits of Life Insurance

life-insurance-umbrellaWhen deciding on what types of investing to make there are a few important things to know about Life Insurance.

First, there are two types of Life Insurance:

  • Term Life, which is a policy for only a specific period of time.
  • Cash Value Life, which is a policy for as long as you live.

Second, benefits to investing in permanent (or cash value) life insurance and annuities include:

  • Safety – Life Insurance companies are required to keep a reserve in order to pay out life insurance policies, unlike a bank who can lend up to $10 million off of only $1 million in reserve. This makes life insurance companies more stable, especially in down economies.
  • Asset Protection – life insurance and annuities are favored assets in all states which may be beneficial with lawsuits or bankruptcy. These investments are also passed on to your beneficiaries without needing to go through probate.
  • Earnings – life insurance and annuities are a great way to save. Your money will remain liquid and is not at risk to be “lost” like a mutual fund or stock would be.
  • Tax Benefits – your investment would grow tax-deferred.

Finally, with a life insurance policy you can still access your funds in the following ways:

  • Withdrawals: You can withdrawal the money you have already put into the life insurance policy. This is the least favorite because once the money is withdrawn not only do you have to pay taxes on it, but your investment is a smaller amount creating less growth.
  • Dividends: Taking dividends from life insurance is similar to taking interest earned from other investments. Your account will remain the same leaving it with no growth. This is also not a recommended way to receive funds.
  • Policy Loans: You can borrow money from the actual death benefit. The cash value remains the same and continues to grow. This amount is reduced from the amount the insurance company will have to pay the beneficiary once you pass away. This is a win-win because you have money freed up for what you need and the life insurance company has less money they are required to keep on hand to pay the death benefit. This money received is also tax-free.

99% of financial and tax advisors are either unaware or have very little knowledge on borrowing against the policy loan. You will want to be sure to speak with someone who is knowledgeable in this process.

What is Tax Deferred Growth?

Tax DeferredTax deferred growth refers to the earnings that are accumulated through an investment, whether it be interest, capital gains or dividends. The most popular types of investments that use tax deferred growth are IRA’s and Annuities.

With tax free growth you do not pay yearly on the interest or any other type of income your investment acquires. This gives you the advantage of letting your investment grow unencumbered until you are ready to withdrawal your money. Keep in mind that you most likely will pay a higher tax as a working citizen than you would as a retired individual due to all the deductions available to seniors. This could come as a huge advantage to your retirement funds.

Another benefit of tax deferred growth is that the money that would normally be used to pay the tax on the interest is now remaining in the account to earn even more of a return. This can add up greatly after a period of time. When it comes time to pay the tax on your investment, you will only need to pay for the amount you withdrawal, the rest remains to grow tax deferred.

How can an Annuity benefit my financial plan?

Many people will choose an Annuity over a CD, Mutual Fund or Stocks. The benefits outweigh the risks. We have broken each of these down for you.

  • Annuity – These are tax deferred and offer better rates. You will receive income for life with an Annuity. The premiums and earnings will grow tax deferred (we will touch on what this means in a later blog). When you set up the annuity there are no upfront fees like there can be with other investments. You have the option to withdrawal small amounts of your money from the annuity if you need it.
  • CD – These may be backed by the FDIC while annuities are backed by the insurance company you purchase them through. However your rates will not be as good with a CD as they would an Annuity. With a CD you must pay tax on the interest yearly, but pay less of a penalty for early withdrawal.
  • Benefits of AnnuityMutual Fund or Stocks – Dividends are subject to income tax while the profits are subject to capital gains tax. Mutual fund companies will often charge you a sales commission. With these investments your income will depend entirely on the performance of the underlying securities. These funds have a high liquidity rate and can be sold at any time; you are not locked in to them for a specific period of time.

Stocks are considered Equity, the same as if you owned real estate whereas CD’s and Annuities are considered fixed income.  There is a lot to know about each of these types of investments. If you are undecided you should speak with an expert.