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Cornerstone of Retirement


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Social Security may be the cornerstone of income for retirees, but an annuity may be the next best thing.  Retiree satisfaction levels are eroding as many were forced to sell assets while prices were depressed during the recent financial crisis and they have been standing on the sidelines for much of the recovery. Investors are pulling money from equities at an unprecedented rate in addition, Interest rates have little room to drop further as they are less than 1%.

The S&P 500 briefly fell into negative territory for the year so far. Dodging and weaving through three 10 percent drops in the last 19 months the market is really showing signs of fatigue: for the first time its rolling 12-month return is negative, and companies in the Standard & Poor’s 500 Index are reporting their worst profits in six years.

Because it’s a mistrusted bull market no one wants to be the last person who puts their money in. Certainly we’re closer to the end than the beginning.  That means investors will have to save more, retire later or live less comfortably during retirement, which could further drag down economic growth.

The not-so-good first-quarter news is that while the S&P 500 index was close to flat, year over year, the average 401(k) account balance fell an average 5 percent. As an example, account balances suffered in the Great Recession because the stock market crashed and many people who lost jobs raided their 401(k) to pay the rent and buy the groceries.

For many working Americans, the tax break for saving for retirement just doesn’t add up to enough money to get them to forgo their current consumption. If you’re in the 10% or 15% tax bracket like most middle-class Americans, you won’t save much on your taxes by putting money in a 401(k) or IRA.

The introduction of 401(k) plans, IRAs and similar tax-sheltering savings plans was supposed to ensure that everyone would have adequate retirement resources. When American companies began switching from traditional pensions to self-directed 401(k)-like plans in the 1980s and 1990s, it was supposed to lead to a golden age of retirement security.

No longer would workers be at the mercy of the company’s generosity or of Social Security’s solvency; workers themselves would be responsible for saving enough for a comfortable retirement. The result is the do-it-yourself pension system is a disaster. The sad fact is that most Americans are less prepared for retirement than Americans were 30 years ago.

Most investors are better off sticking their money in a Fixed Indexed Annuity instead of trying to beat the market by employing professional stock-pickers who charge high fees and eat up capital like crazy. There have been a few of these managers who have actually succeeded but it’s a tiny group of people. It’s like looking for a needle in a haystack.

Many people live with historically low interest rates to get FDIC protection for their certificates of deposit. When you learn more about the guarantees an annuity can give you, with much higher interest, you may well be more comfortable. See, the issuing company (an insurance company or an annuity company) guarantees your principal. In a deferred fixed index annuity, the company also guarantees the interest you earn.

Is this guarantee worthwhile? There are at least a couple of reasons you can rely on the guarantee of a company that issues an annuity.

First, your State’s Insurance Commissioner regulates the companies that offer annuities. This includes audits and other oversight. They also regulate how annuities are sold to you. The Insurance Commissioners do not want long-term annuities sold to people for whom they are not suitable.

Second, Insurance Commissioners demand that an issuing company has enough reserves set aside to pay its obligations to you and other annuity and life insurance contract owners. That means if the company goes under in its general finances, your money is set aside and safe.

Third, if a company does go under, the tradition is that other companies come in and buy up the contracts that are still outstanding to contract owners. The benefits get paid one way or the other.

So, with all these protections, the contractual guarantee of a life insurance or annuity company is very strong. There are few instances of anyone losing their money in a fixed interest annuity.

In many states annuities that you own individually are protected from your creditors. The sheriff cannot “levy” on annuities when a judgment against you is collected. If the annuities are in an IRA or qualified plan, Federal rules give even extra protection.

This is important for several reasons. First, even though Certificates of Deposit have guarantees from loss by the FDIC if your bank goes bust, they are not protected from your creditors. You might set them up in “tenancies by the entirety” with your spouse. That works. But if your spouse dies before you; the protection goes away. Stock brokerage accounts are protected to a degree by SIPC. However, they are also subject to the claims of your creditors.

So, with all these protections, the contractual guarantee of a life insurance or annuity company is very strong. There are few instances of anyone losing their money in a fixed interest annuity.

This kind of contract is for the person with safety is chief on their mind. So, the guarantees of regulated companies provide comfort. Index interest can provide more than other interest bearing investments; a lot more than Certificates of Deposit under current rates.

They enjoy the protection from creditors. Most important, the deferred fixed index annuity offers growth without market risk, and lifelong income after the payment stream starts.  The deferred fixed index annuity is an important tool to guarantee we have a comfortable retirement; especially if we are fortunate to live a long time.

 

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Friday, May 6th, 2016 Wealth Management

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