Your Home – A Retirement ATM

Most people – experts included – don’t have clear concept of the cost of retirement. Everybody is underestimating a number of things including longevity and the cost of living longer.  Of all the assumptions made in financial planning (inflation, rate of return, tax brackets, etc.), your life expectancy is probably one of the biggest of all. Using the wrong number can be detrimental.

Investors haven’t been too happy about employer sponsored retirement plans, such as 401(k) accounts. A combination of hidden fees, lousy investment choices, and bad returns have thrown retirement savers for a loop.  Many have tried to save and at one time invested in the stock market, but it’s all been depleted.

Job insecurities, layoffs, stock market losses and a trend among many companies last year to freeze 401K contribution matches.  Near retirees have downsized and cut expenses and are doing everything they can to set money aside, but every time they do something unforeseen comes up.”

The economic downturn is not entirely to blame. While declining home values and mounting job losses are part of the equation, many residents were cultivating bad financial habits well before the recession.

Many Baby Boomers are discovering that they will need to tap home equity, not bequeath it.  More and more Americans will need to use their home as a retirement ATM, wiping out a key component of many estate/inheritance plans.  Protecting home equity may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomes and people rely increasingly on meager 401(k) balances rather than on traditional pensions.

People have this incredible tendency to defer pain as long as possible. This is just another indication that if you give them the choice to procrastinate, they definitely do.

It is becoming abundantly clear that as individuals we have to take more responsibility for our own retirement planning. It will not be enough to rely on employer pension schemes (where many people are only making minimum contributions and most final salary schemes are closed to new entrants) or indeed government support.

Every investor would like to increase their income without compromising their stability. Maybe that’s why Equity Indexed Annuities (EIAs) have become so popular, because of their promise of providing a stable income stream. Only an insurance Annuity can guarantee to pay for a lifetime, no matter how long that lifetime lasts.

Indexed annuties meet 2 objectives: growth and stability, with the same investment. By combining the use of both, the risks balance each other and you get the rewards of both. 

An indexed annuity allows consumers to benefit from growth in the market without the risk of direct investment in the market. It guarantees that principal will be protected because the account value increases as a result of positive index performance, but never loses value due to market downturns.

An indexed annuity is particularly suited for retirement planning as it provides consumers with the potential for increased earnings while protecting against downside risk, something that may not be available with other fixed income investments. 

When the index shows a positive performance over the particular indexed account’s one-year segment duration, “index credits” that are based on that performance are added to the account value. Unlike direct investments, the account does not lose any value when the markets go down because the index credit can never be negative — keeping the account value intact.

An immediate annuity, however, does something that other investments can’t: it guarantees a lifetime stream of income that won’t run out as long as you live. As a way to handle longevity risk, therefore, immediate annuities do a great job.

There are safety choices available, but these guarantees do reduce the payments from the lifetime, no-period-certain choice.

• Period-certain – The annuitant collects for life, but a beneficiary would receive the balance of the chosen minimum number of payments.
• Cash-Back –The annuitant collects for life, but payments must continue to a beneficiary until the total contribution has been received.
• Joint-Life and Survivor Income – provides a level of income while a couple lives, then reduces after either death, for the lifetime of the survivor.

If you find that you need a steady stream of additional income.  An your savings and investments are not large enough to cover the shortage for the rest of a lifetime.  An annuity is a necessary consideration to help you achieve the desired income.

There are different types of annuities:

1. Immediate Annuity – the first income payment begins within 30-days of purchase
2. Deferred Annuity – the first income payment begins over 30-days from purchase
3. Tax Non-Qualified Annuity – contributions do not give a tax deduction
4. Tax-Qualified Annuity – may give a tax deduction for the year of contribution (see a tax professional). Tax-Qualifieds are further broken into
5. ROTH IRA (contributions were income taxed, but the interest will never be taxed. The account is allowed to accumulate past age 70½).
6. Traditional IRA (contributions are tax deferred, listed as a credit on line 32 of the IRS Form 1040. The account accumulates tax deferred but withdrawals are taxed. The hope is that the tax bracket is lower after retirement than when the contribution was made. Withdrawals must begin by age 70½.)
7. Fixed Annuity – The account earns investment results, like any interest-bearing account. Most fixed annuities pay at least a guaranteed minimum return (interest), no matter how bad the economy is. The value can never be less than the sum of the contributions.

All annuities use the same funding vehicle to accumulate contributions. Contributions can come from regular payments made each month over a lifetime. A large contribution can come from anywhere; a 401 (k) retirement, and IRA rollover, an inheritance, or a cashed-in a stock. Tax-Qualified annuities have maximum yearly contribution limits, so larger deposits may need to be split between them and a Tax Non-qualified annuity.

Some scary statistics from the Employee Benefit Research Institute study showed that a 65-year-old today would need to have socked away at least $122,000 to have a 90% chance of fully covering his or her future healthcare costs.  So check if you’ve saved and invested enough for your retirement. Make sure to factor additional costs in and try to become properly insured to cover the extras (long-term care, etc.) Otherwise, as you reach the century mark you may easily run out of money.

The bitter truth remains that the Twenty-First Century is undoubtedly an economically evil era. Times are perpetually changing for the worst and job security is virtually a thing of the past.  A stable nest egg in this day and age of global recession and heavy losses is critical.