Annuities & Financial Life-Cycles

A successful retirement depends largely on the steps you take during different stages of your life. Retirement is a moving target that defies a singular definition because it will be different for each person. However, planning for this event occurs continuously throughout the financial life-cycle and usually has five phases.  Let?s take a look at each.

1.The savings phase: This starts as soon as possible after the person’s career begins. During that time, he/she will be preoccupied with other competing savings objectives, such as buying a home and dealing with family-building expenses.

Many need to be motivated to save for retirement, and educated about the importance of starting early. Establishing good retirement-savings habits despite the lure of short-term goals is essential to retirement security because of the miracle of compound interest.

During this period, an individual may change jobs, and everyone must make sure that retirement savings are not cannibalized for other uses.  In your 20s and 30s (Early Career) Contribute as much as you can to IRAs, 401(K), Keoghs and other retirement savings while meeting other goals, such as buying a home or starting a family.

Saving even if it is a bit at a time is the best way to make sure that down the line you will have enough to retire on. Even $10 per month can make a difference in 20 years so the amount doesn’t have to be a big one.

Setting money aside is one thing, however, having that money grow is another thing. Stock markets crash.  Careful monitoring of your investments is important because you don’t know where interest rates or the stock market will be in the year you retire, so you subject yourself to a lot of random outcomes if you stay in stocks for their appreciation. With this approach, you start building years before you need it–it’s like building a little business that yields cash flow down the line.

America’s so-called Generation Y, the twentysomethings who have entered the workforce in the past 10 years. Already saddled with student debts averaging almost $20,000 Gen Y is in a tougher financial position than previous generations. The average salary for 25- to 34-year-olds, for instance, fell 19 percent over the last 30 years, after adjusting for inflation, to $35,100.  That’s if they can get jobs:

Unemployment among 19- to 24-year-olds stands at 15.3 percent vs. the overall rate of 9.5 percent, according to the Bureau of Labor Statistics. While many of their parents have guaranteed retirement income from being in a company-funded pension for part of their careers, Gen Y is “the first do-it-yourself retirement generation,”  Yet this generation lacks confidence about making financial decisions.

2. The increased preparation and visualization phase: This phase cannot be identified with a particular age, but it involves a person kicking his retirement planning into high gear. Often, he/she sees his/her parents retirement and realizes he/she wants to emulate the positive and not repeat the negative.

In the increased-preparation part of this phase, it’s the person themselves who sees the need to increase 401(k) contributions or make paying off the house mortgage before retirement a priority. At this point, they should use retirement-income projections and expense calculators to identify the amount your client needs to save to fill the income gap during retirement.

In the visualization part of this phase, the individual becomes even more focused. The individual may begin to understand that limiting expenses can be just as important a goal as increasing savings. It is suggested that he/she save all the raises that he/she earns in the five or six years prior to retirement. By putting those salary increases into a 401(k), Roth IRA or a traditional IRA, he/she will not only save more for retirement, he/she will also lock in spending habits and learn not to grow his/her lifestyle and budget, an important lesson for retirement.

The four common types of retirement planning programs include 401(K) plans, Keough Plans, IRAs (individual retirement accounts), and qualifying pension or profit sharing plans offered by corporations. In most retirement planning programs, the contributions to those plans are tax deductible and taxes aren’t paid on these plans until the funds are received and retirement payment begins. You should be careful of your investments and guard them well as there are often hefty penalties involved when you take funds out of your retirement funds before you actually retire.

There are more traditional investment methods you may want to consider as well. Mutual funds and the stock market are great ways to invest your money, build a decent portfolio, and increase your net worth. But, remember this type of investing also carries some degree of risk and isn’t always considered financial retirement planning but more along the lines of simple financial planning.

Most investors share the same goal of long-term wealth accumulation. Some of us have no problem watching our investments bounce up and down from day to day, while risk-averse investors or those nearing retirement generally can’t withstand short-term volatility within their portfolios. If you are this type of investor - or one who has a moderate risk tolerance – annuities can be a valuable investment tool.

Annuities a more flexible, less expensive products provide a way for 401(k) plan investors to build their own pensions by purchasing a guaranteed income stream for life, either via monthly contributions or a lump sum.

3. The decision phase: This phase is often characterized by the imminent event of retirement. The year before, the year of and the year after retirement bring many planning choices and challenges. Pre-retirees may grow tired of his/her career, and may consider retiring because his/her children have completed college or he/she has received an inheritance, for example. On other occasions, age may drive the decision to retire. However, they need to understand that health and money are more accurate drivers of the retirement decision.

You have probably heard of the story of the hardworking ant and the well mannered grasshopper. The message of the story was that the ant worked hard all summer and arranged for the coming winter. While the grasshopper played all summer and had no food as soon as winter came. So the moral of the story was that you had to plan ahead and work on the plan. This moral is exactly the same when it comes to planning for ones retirement.

During the decision phase, individuals should seek counsel on a variety of issues such as pension distributions, when to start receiving Social Security retirement benefits and how to convert assets into retirement income.

4. The retirement transition and lifestyle phase: This phase follows immediately after retirement. It is often accompanied by increased spending on travel and other recreational pursuits and a focus on adapting to a changed environment. Travel, golf, gardening and volunteer work often occupy the retiree’s calendar.

Once the retiree has settled into retirement, and needs help for him/her adjust his/her spending accordingly. As time passes, the nature of the retiree’s environment also changes. Friends and family may die or move away. At this point, they may need help for him/her on whether or not to move near family members or to a continuing-care retirement community. From a financial perspective, retiree’s become more asset rich and income poor.

For most people, the ideal retirement involves getting a steady check without going to work.  The trend in retirement planning is for investors to “do it themselves”. Fixed deferred annuities provide a way for investors to build their own pensions.  The goal of any annuity is to provide a stable, long-term income supplement for the annuitant.

Upon annuitization of his or her account, the annuitant effectively converts the entire savings in the account into an income stream. If he or she chooses the life option, the income stream is guaranteed by the insurance company to last the rest of the annuitant’s life, even if he or she should live much longer than originally expected.

Equity Indexed annuities are currently one of the safest ways for a retiree to allocate their money to make sure they have retirement income.  With their guaranteed payouts and protection against market downturns, annuities have long enjoyed a reputation as a refuge in times of turmoil.

Most people use equity indexed annuities as deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment. An immediate annuity at retirement pays you money for the rest of your life in exchange for your investment of a certain lump sum. This is attractive as it, along with Social Security, represents money you cannot outlive.

Equity indexed annuities are relatively new products to the market and offer the best of all world’s to the investor. These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark.

Retiree’s must be ready to get help with the psychological and emotional needs that accompany these changes. The client-advisor relationship goes beyond financial solutions during the transition phase.

5. The frailty phase: Again, this phase does not depend on any specific age, but is marked by dealing with health issues, care-giving for a spouse and the loss of mobility. The Census Bureau predicts that more than 80 million Amercans will be 65 years of age or older by 2040.

A retiree in this phase tends to become lonelier and more dependent on others. Proximity to medical services and community services becomes more important.

Many Retirees need assistance by directing him/her to the appropriate social services. It is also rewarding to know that with proper planning has helped the senior retiree have sufficient resources during retirement. Financial independence can soften the loss of physical independence.

Do you ever worry about how your beneficiaries will manage their portion of their inheritance when you pass away? We all love our children, but there’s often one in the bunch who just can’t manage his or her money, and leaving that person a large sum could be a disaster.  You should consult with a financial professional who is well-versed in the rules and regulations of retirement plans. This is key to protecting and building your retirement nest egg.