North Star Focus With An Annuity

Any stage of life is unpredictable and it’s important to make sure you are invested in the right products to meet that uncertainty.  Correct and wise decisions with proper planning, taken at the right time, will promise many happy times at retirement.

The usual definition of safe money is money you cannot afford to lose. We define a safe money place as one where your principal is protected from loss as long as you follow the initial guidelines, and if you do decide to take your money and leave, you know pretty much what leaving early will cost.

The opposite is a risk money place where if you decide to take your money you don’t know what you will get back. It could be more than you put in – risk money places offer the potential for much higher returns than safe money places – but it could also be less than you started with or even zero.

The recession has been tough on America’s seniors. Fearful of the stock market, many retirees or near-retirees are shunning traditional investment vehicles like stocks, mutual funds, and real estate.

It is recommended that you look at your investment portfolio to make sure that you do not have all of your money in one place. In other words, make sure that you diversify your portfolio. First of all, remember there is no such thing as a “best” option for everyone, but flexibility is key to any plan.  

The most popular investments for retirees and the mix that many financial experts suggest are a mix of bonds and annuities. So what would be the best type of investment between Mutual Funds, CD’s, or annuities?

Annuities have long been one investment vehicle used by those putting together their retirement planning portfolios. Annuities may not be the only investment people use to plan for their golden years, but it is one the most popular, safe, and secure ways.

Interest in annuities is growing, reflecting a need for more financial self-reliance at a time when pensions are disappearing and there is increased anxiety about whether savings will survive a volatile stock market. The problem for retirees and near-retirees seeking financial safety is that it’s better to set your goals and then decide on which risks you’re willing to take and which you want to avoid.  Annuities can help seniors reduce risk

And now they have a new dilemma: what to do with the money they do have left. Many are turning to fixed and fixed indexed annuities because of their unique ability to provide a guaranteed income stream, as well as tax efficiency during both the accumulation and income distribution planning phases.

Many retirees who held immediate annuities enjoyed welcome security during the stock market meltdown that began in 2008.  They didn’t lose their savings — they continued to get their paychecks. Income annuities are the most efficient way of providing income in retirement and can pay as much as 6 percent to 8 percent of the purchase amount per year for life. 

Annuities can help meet several goals – First of all, they protect against the common worry of outliving your money.  Annuities allow you to receive income for life, no matter how long it is. Annuities could be helpful, especially if your biggest concern is outliving your assets, but they’re not a panacea. You still have to step back and make sure you have enough money overall to meet your retirement needs.”

Most annuities also insulate you from some or all market volatility which is a key reason for the change for the more conservative orientation of investors in the wake of the severe recession beginning in 2007 and a concurrent plunge in equity values that did great damage to clients’ portfolios and retirement plans.  It’s nice to know that at least a percentage of your portfolio is secure.

Once you begin receiving payments from the life annuity, you will have a steady income to depend on throughout your retirement to supplement the social security and assist in paying the medical expenses that Medicare does not cover.

Here’s an overview of the annuity world:

Immediate annuities. These are the traditional, plain vanilla annuities. You deposit an amount with the insurer, and the insurer begins making regular payments. Payments can be monthly, quarterly, or annually. Most immediate annuities make fixed payments, but some offer variable payments. The variable payments can be inflation indexed or be tied to the portfolio of investments selected by the annuity owner.

You can receive payments for your life, the joint life of you and a beneficiary (such as your spouse), a period of years, or life with a guarantee for a minimum period of years. The highest payout is for your life or a period of years shorter than your life expectancy. The other options result in lower initial payouts.

Studies show that having a portion of your retirement portfolio in immediate annuities reduces the risk of running out of money during retirement. “Annuities help stabilize a portfolio’s value and returns. They also can allow you to take more risk with the rest of your portfolio.

Equity index annuities. These are deferred annuities. The account compounds returns tax deferred until distributions begin. The returns of these annuities are tied to the performance of a stock market index. Popular annuities are tied to equity indexes like the S&P 500, and may offer returns that are close to the stock market. Usually there is an annual floor or guaranteed return of 2 percent to 3 percent. Many also have an annual cap or maximum return of around 10 percent.

EIAs usually guarantee the account against losses. “Sometimes 100 percent of the principal is guaranteed; sometimes only 90 percent or so is guaranteed. EIAs generally are for conservative investors who want a chance at higher returns than traditional conservative investments offer but can’t tolerate the risks of stock markets or other growth investments.

Hybrid policies. Some annuities can be used to pay for long-term care. A typical combo policy will pay up to two or three times the account’s value for long-term care over a period of about six years. For example, an annuity’s value is $150,000 when the owner needs long-term care. The policy will pay up to $300,000 to $450,000 after a long-term care claim is filed. The annuity does not earn income after a claim is filed, and the account’s value for other purposes is reduced.

There are many annuity features to choose from. “You need to remember that each of these features and protections costs money. They will reduce either your earnings or your payout. The reason to buy an annuity usually is to create a stream of guaranteed retirement income. However, inflation protection is the feature most likely to be worth the cost.

Another buying tip: The longer you wait to purchase an immediate annuity and begin income payouts, the higher your lifetime income will be.

The magnetic needle of a compass does not point in any and all directions to focus on many stars, it points to one central North Star. This single focus has directed countless beings to safety and security over many centuries. Knowing your own central focus will bring the same serenity to your life.