Annuities Lock in Income

The market’s ups and downs have prompted many investors to choose short-term investments like money market funds over riskier stocks.  Others are reluctant to return to stocks after the bear market of 2008 and 2009. 

With devastating declines in the financial markets, putting out the raging financial flames takes  top priority.  After periods of turbulence, it’s important to see how your investments have weathered the storm. 

I have to stress that while most people view bonds as your typical income investment, that I agree with many writers, and economists that we have seen the end of the bond market rally and that there are huge risks in going “long” in bonds at this time, or purchasing bond mutual funds.

There is a substantial risk that rates will, at some point in the near to medium future, have to increase as inflation and dollar concerns related to US debt begin to push upwards. Those holding long bonds and bond funds could potentially get hammered, not to mention the short term market risk of defaults or debt work outs on bonds of vulnerable companies, states and governments.

So the bottom line is that if after analyzing your income needs you find that your pensions and Social Security won’t provide sufficient guaranteed income, you might consider an immediate annuity.

Are you interested in a conservative investment that has a guaranteed return? Then annuities may be for you. Annuities are considered conservative, providing the ironclad guarantees and are the perfect investment for anyone who is interested in finding a low risk investment; particularly those who have just retired and are looking for a way to protect their retirement fund from the volatility of the market. 

The solution that I am advocating is the “25% income solution” which is based on the use of life income annuities, or period certain annuities. In it’s simplest form you take 25% of the available capital, dedicate it to a fixed, life income for the individual and then structure a savings plan for the other 75% dedicated to grow over time as interest rates or markets rise.

It is an orderly method of providing guaranteed, easily budgeted cash flow, is paid on schedule due to market conditions and allows for the longer view investment on the remaining 75% as well.

Everyday people and investors can protect their savings guaranteed and still achieve accumulation gains in an annuity despite uncertain economic conditions.  The sheltered value of guaranteed investments is at its peak.  Even the government is currently proposing that you evaluate the benefits of a guaranteed accumulation annuity, as Social Security benefits in the future could vary widely from what they are today.

Everyone from the Obama administration to AARP to a growing number of advisers is encouraging consumers to consider annuities as a way to lock in income in retirement.

A recent press release was announced by Labor Secretary Hilda Solis. She outlined her top regulatory goals for 2010, outlining plans to reduce the incidents of workers like you and me, outliving their retirement savings. She will be accelerating public awareness of acquiring annuities, and inspiring employers to offer annuities as a smart alternative choice.

I think the best use of an annuity is to provide guaranteed income for life. That’s something no other investment can do.  There’s no strict rule here, but for your own peace of mind you probably would want to have as much of your essential expenses as possible funded by assured income sources, starting with pensions and Social Security. If there’s a gap — i.e., your essential expenses will exceed your pension and Social Security payments — an annuity can bridge some or all of it.

A lot of people just don’t understand these products and there are many new untrained insurance agents calling themselves financial representatives.  They may represent a well-known insurance company seen on television or a company in business for 150 years. An annuity transaction involves the insurance company and the purchase. The licensed insurance agent who actually sells the annuity is a liaison between the two.

Unfortunately, many annuity agents do not know exactly what they are selling.  An insurance agent has a duty and responsibility to inform the consumer of all the details of the product they are purchasing. It’s part of the consumer’s due diligence responsibility to recognize and avoid them.

There are a few things you can do:

• Know what you want in an annuity
• Know what features are important to you
• Know what is important for your annuities not to have
• Tell your agent EXACTLY what you want and don’t want and document it for future purposes
• Be well educated PRIOR to making a purchase
• Assume you are going to be ripped off so you will act more carefully.
• Seek out an independent financial consultant with years of experience in guiding people toward the correct plan available.  Most importantly get one who will always tell you “like it is” even if it’s sometimes hard to listen to and even harder sometimes to act upon.

It is important for you to acknowledge that your financial future has shifted to your hands. Gone are the days of relying on Social Security, Medicare, and pensions to keep pace with your present standard of living. Do not expect the government to personally bail you out. Instead act on the proposed public awareness to investing in yourself.

An annuity is like any other other financial product in that you can only be sure of getting the best deal if you shop around between providers. Whilst we are adept at comparing prices for car insurance, mortgages, loans, credit cards etc we are woefully inadequate at comparing offers for retirement annuities.

To get the best retirement annuity you must compare offers from many providers. Many annuitants stick with the first offer made by their provider and therefore miss out on thousands of dollars worth of retirement income.

Annuities Ensure A Secure Lifestyle

Albert Einstein once described his theory of relativity by saying:  “When a man sits with a pretty girl for an hour, it seems like a minute.  But let him sit on a hot stove for a minute and it’s longer than an hour.”

Sit with an annuity for an hour, and a minute later you will see why they are worth every penny.  Sit with the market for a minute and you will soon feel the heat from the hot stove. 

It’s all relative.  Having an annuity is like having a life preserver thrown to you when drowning.

The stock market closed out a painful second quarter and left investors with heavy losses. The stock market’s performance for the first half of the year isn’t pretty.  The S&P 500 has fallen 7.6 percent and each of its 10 industries is down.  

Volatile categories, such as materials and energy, have posted the biggest declines.  Investors shouldn’t expect a quick turnaround either.  The third quarter is traditionally the weakest for the S&P 500.  Since 1990, stocks have fallen 1 percent on average from July through September.

Today’s retirees and pre-retirees face multiple challenges, including still-shrunken principal values following the 2008-09 bear market and rock-bottom interest rates.  There’s only so much you can do in terms of trying to predict the future.

Multiple retirement plans mean more complication and not necessarily more security for your old age. You could plan to receive a retirement income from many sources, pensions, retirement funds, registered and non-registered investments and other assets that comprise your full investment portfolio, but this, in itself, will not guarantee you a comfortable retirement.

Retirement doesn’t have to be about feeling paralyzed or about making uncomfortable compromises.  Saving and investments are necessary to safeguard our future from unexpected risks as well as to cushion ourselves from financial shocks. But at the same time, it is necessary to display an acute sense of financial prudence, especially, when it boils down to choosing investment tools. 

Money is what ensures a secure lifestyle, thus, people want to invest their money in ways that will ensure that it grows and assures them of savings and security in the future and especially for their retirement.

We can’t make people happy when things are crashing, but annuities can, at least get them to the point where they’re not scared. Having that cash enables investors to step back and look more realistically at the future. 

If you know you have a good solid income stream kicking in at retirement, it’s often possible to significantly increase the probability of success of your plan.

Burned once, shame on you. Burned twice, shame on me. So if there’s anything sort of new or special or different or clever, we’re extraordinarily skeptical and careful.  There is a phenomenal comfort factor in knowing that you can pay your bills from your annuity account and you can afford to wait for the world to get more rational. The point is, you can step back and think about what you really own, and you really won’t be worried that all those companies that you owned are going bankrupt.

Annuities are ideal for all types of investors, small and big. Whether you are a conservative investor or someone who also wants to benefit from the good performance of a stock market index, annuities can help you invest your savings accordingly and create a secure future for your retirement.  It means we can manage the portfolio much more tax efficiently because it means we have control over it, as opposed to the randomness of the market having control

Annuities can be set up literally to pay a check once a month to the local bank account so it meets with what [my wife and partner] refers to as the “paycheck syndrome.” People are used to getting a paycheck. So now with an annuity, they get a paycheck.

With annuities, investors are assured a pre-determined rate of return on their investment. Annuities are ideally used to create a retirement plan that ensures that the investors have a regular source of income after retirement. The annuity is perhaps one of the few financial tools that has such a long and rich history and yet has been reinvented and modified in order to satisfy the changing financial needs of people.

A fixed indexed annuity (FIA) is a type of deferred annuity contract that was developed several years ago in an attempt to maximize the growth rate of the contract while still guaranteeing the protection of your principal.

Remember, as you earn a higher interest rate on your money, the risk to your principal increases also. A FIA tries to provide both, a higher interest rate than a traditional fixed annuity and principal protection not found in the market.

The way that this is accomplished is that the contract is tied into one of the major stock market indexes like the S&P-500 or the NASDQ-100. As these indexes increase, the increases are added up, and as they decrease, the decreases are added up. At the end of the year, the total increases and decreases are all added up (subject to caps, see below), and if positive, that’s your interest rate for the year. If the total is negative, you’ll earn the minimum interest rate (e.g. 3%) that’s guaranteed in the contract.

The way a FIA does this is to cap your growth to a predetermined amount, usually around 2% per month. Any growth above this cap level goes to the company. This allows the company to guarantee that in the event of negative stock market growth (i.e. loss); your principal would still earn the guaranteed minimum rate of 3% or so. This allows you to partake in market growth while protecting your principal from market loss. FIA’s provide a great combination of growth and protection not found anywhere else.

The main benefit of lifetime income annuities is that no matter how long you live; your income stream would never end, thus protecting you from outliving your money. The longer you live, the more money you will be paid, even if the company ends up paying you more than you gave them originally. If you die before the company pays you what you originally gave them, you can arrange as part of the contract for your beneficiaries to receive at least the amount you originally paid the company plus interest. The real protection here is if you live a very long life!

Since the life expectancy rate is rising, some seniors are left with many years of retirement to fund. On the other hand, many people have not saved enough to cater for their needs as long as they will be privileged to live. Also, some people fear that as they grow older their expenses might rise. For example healthcare’s costs may differ at 80 as compared to what it may be at 60.  Having an annuity diminishes the worry that a person might outlive all his investments and savings as he grows older.

Annuities The Safe Money Product

Whatever your current financial situation, you must continue to strive for a viable retirement plan by finding the most effective ways to save, the best accounts to save in, and the right amount to save, as well as understanding how to insure against setbacks and handle the uncertainties of a shaky economy. 

Right now, about one-third of retirees receive income from a pension — a traditional defined- benefit plan — and annuities.  That’s all well and good, but we also know that the 77 million baby boomers who have yet to retire likely won’t have a traditional pension.

If you don’t have a pension, you don’t want to rely on Social Security and you don’t think you’ll work in retirement, that leaves your assets as your main source of retirement income.  But in the main, you’ll have to save enough and invest well enough to create a nest egg that will replace all the income that might have come from pensions, Social Security and work.

Investing in high risk ventures may be a poor idea as you may wind up losing what you have worked to save. It is important to allocate your assets in a wise, financially responsible.  Don’t rely on things that may not be a concrete source of income.

How would you like to own an annuity that locks in stock market gains when the market is rising, but also protects your investment against any losses when the market is falling? That’s right, your policy value is never reduced because of negative stock market performance.

Equity Index Annuity, Index Annuity, and Fixed Index Annuity are all generic names for this type of NO RISK Fixed Annuity.

Index Annuities allow you to Earn Interest Annually Based on a portion of the Upside movement in an Equity Stock Market Index such as the S&P 500, which is the most often used (other indexes are available even within the same annuity) with NO DOWNSIDE RISK and COMPLETE SAFETY.

The Key to Why Index Annuities Perform so Well is Simple: THEY NEVER SHOW A LOSS. 

An Equity Indexed Annuity (EIA) is a great financial tool. You get at least a minimum return, but a chance of greater returns according to participation in an index. For people who are afraid of losing money in the stock market, an EIA offers CD-ish safety but with the hopes of greater returns.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent (100 percent in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

Investment products include stocks, mutual funds, and bonds.  Investments are regulated by the Securities and Exchange Commission (SEC).  Annuities are regulated by the 50 state insurance commissioners of the United States. 

Annuities are “Safe Money Products” which preserve principal.  Investments, by contrast, can put all of  your money at risk and are therefore appropriately classified as “Risk Money Products”. Where you are subjected to the highs and lows of the market.  Investments do not preserve principal where annuity do.  

The annuity vendor company puts your indexed annuity payment in their general account, not in a separate pass-through subaccount.  In  a  general account, your purchase payment is never at risk due to market fluctuations as monies allocated to a separate pass-through subaccount would be.

Indexed annuities is a good way to invest your money in the stock market if you are looking to maximize gains while keeping risk to a minimum.  The product was developed recognizing that each consumer has a different risk tolerance and many are unwilling to accept the potential losses of the market in order to maximize their gains. 

Investing directly in the stock market in no way keeps risk to a minimum and by playing the market is like playing the lottery.  You may win big, but you are more likely to lose big with this strategy.

Annuities are in no way like playing the market.  Just look at the guarantees.

• An annuity is the only financial instrument that can guarantee an individual an income that they can never outlive.
• No indexed annuity purchaser has lost a single dollar as a result of the market declines. 
• All indexed annuities return investments paid plus interest at the end of the annuity.
• All annuities defer taxes.  You are not taxed until you start withdrawing income.
• Annuities allow you to accumulate additional interest above the premium you pay in.  Plus, you accumulate interest on your interest, and interest on the money you would have paid in taxes.  (Triple Compounding)
• All Annuities provide a death benefit to heirs as the full account value is paid to your beneficiaries upon death.
• All annuities provide access to your money if you need it.  Annuities allow annual penalty-free withdrawal of the account value, typically at 10% of the annuity value, and most annuities permit access to the annuities value without penalty, in the event of triggers such as nursing home confinement, terminal illness, disability, and even unemployment.
• Many annuities provide a up-front instant bonus on your annuity’s value.  This can increase the annuity’s value in addition to helping with the accumulation on the contract.

Some years the indexed annuity may return a double-digit gain and other years it may return only the minimum guarantee interest.  However, what is most likely to happen is something in between. 

Indexed annuities interest is limited through the use of cap, participation rate or spread.  Were the indexed interest not limited, the annuity company could not offer a minimum guarantee on the annuity. 

On the other hand, you are guaranteed to never receive less than 3 percent interest and will receive a return of no less than 117% at the worst case scenario on the average indexed annuity end.  ( a proposition that millions of Americans are wishing they had during this last economic downturn)

An Equity-Indexed Annuity is a great place to protect the money you’ve saved in your CDs, money market accounts, IRA accounts, etc. Or perhaps as an alternative for the money you currently have invested in stocks and mutual funds. Equity-Indexed Annuities can greatly improve your earnings potential, while at the same time keep your principal safe from market fluctuation.

Additionally, Equity-Indexed Annuities are a good option for people who already own annuities and have seen their interest rates drop substantially. Many people do not realize that you can easily trade-in an older, possibly under-performing annuity for one that better suits your needs. This exchange can be accomplished with no out-of-pocket expense or current taxes to pay!

Enhance Social Security With An Annuity

One of the biggest challenges faced by retired people and those on the verge of retirement is ensuring a safe, reliable and continuous flow of income after retirement. It is of utmost importance to ensure that the investments are safe, secure and offer a regular income so that you can maintain your lifestyle as it was before retirement.

You also will need to establish a realistic investment strategy that will not leave you feeling strapped for cash month after month.  We need to take advantage of every opportunity to maximize our money.

Workers used to just count on their employer to guarantee certain payment for the duration of their retirement. Now the responsibility is shifting to workers to manage their own money, either in 401(k) accounts through work or Individual Retirement Accounts on their own.

Despite the constant news coverage of impending doom, many, if not most Americans are still depending on their social security payments to support them through their retirement.

Another point to bear in mind also is longevity. Americans are living longer and longer. The good news is that life expectancy is going up and people are living much longer. Initially, most recipients of Social Security did not last all that far beyond 65. Now, people are routinely living well into their 80s or 90s. That is one reason why Social Security funding is a problem. But, it is also something you need to consider as part of your retirement plans. 

Social Security: Most people will have Social Security income during retirement and the Social Security Administration sends out a specific statement for your personal Social Security benefit at retirement. The only big decision for Social Security is whether or not to take it immediately or to wait until full retirement age or beyond.  Visit the Social Security website to view a chart from the Social Security administration that illustrates how your initial monthly benefit can change depending on your age when you start taking Social Security.

Source: Social Security Administration

As you will see, assuming a retiree has a full benefit of $1,000 per month at age 66, the actual benefit could be higher or lower depending on what age the retiree actually elects to start taking the benefit. Many articles I have seen recommend waiting until age 66 to get the full benefit.

That may not necessarily be the best choice for many people because you have to give up four years of Social Security benefits to get the higher amount. The reason it may not make sense for you to wait until full retirement age is that the crossover point could be about 12 years. That is, it takes 12 years at the higher benefit amount to make up the amount you missed by not taking benefits at 62.

For example, using the numbers in the chart, at age 62, you would get $750 per month for four years for a total of $36,000. On the other hand, if you wait until age 66 for full benefits, you would get an extra $3,000 per year ($250 per month). Without getting too fancy, in actual dollars it would take about 12 years to make up the money you missed by waiting.  However, if you are considering working part time you are limited by the amount you can make each year with sacrificing some social security benefits.

In addition, if you wait until age 66, this extra $250 per month may be what is needed to pay for precription drugs, in addition, inflation increases are determined by the payment amount so future increases may be larger.  If you plan to work until 66, it probably makes sense to wait to take benefits until that age. However, many people may want to take benefits at 62 just to bring in some income. That method will give you more money until the crossover point is reached in about 12 years.

Many folks will have some part-time or full-time employment income during the early years of retirement and that could impact your decision on when to take Social Security benefits among other things. For more on this issue, you can go to the Social Security Administration’s Retirement Benefit site.

Tough times in the markets are renewing interest in an old, reliable investment for retirement:  Annuities! Some important facts about today’s Annuities. Annuity insurers and investment fund companies are beginning to sell retirement plans with built-in annuities as a counter measure to the probability of Americans outliving their savings. People who stayed away from annuities and lost 40% to 50% of their life savings in 2008 should be upset.

An Equity-Indexed Annuity (EIA) has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The EIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to market growth – it will never decline due to market movement. 

Another very popular rider is called Lifetime Income Rider.  This rider locks in market gains yearly. It also guarantees a 7.2% compounded return for your retirement value . When you start your lifetime withdrawals they can never stop even if you run out of principle. Your income can also continue at your death for your spouse and double if you enter a nursing home or become disabled.

These insurance products convert your cash into a stream of income that can be guaranteed to last the rest of your life just like social security.  With many retirees staring at double-digit losses on their portfolios, that kind of reassurance is attractive.

Unlike some investments that are complicated and expensive, income annuities are usually fairly straightforward.  An income annuity can function just like a social security pension, producing a predictable payout.  As the “immediate” part of the name suggests, the distributions start shortly after the money is invested. 

The trade-off with annuity is that in exchange for the guarantee payout, an investor gives up some control of the money. However, by saving the additional income derived from an annuity over time, the original amount can be rebuilt, yet your inome continues.  A real plus. 

Payouts largely depend on the investor’s age – the older the investor, the larger the checks – and the level of interest rates.  These annuities are worth considering for retirees who tap their portfolios to pay day-to-day expenses and stand a chance of using up their savings.

Shifting the Risk “You’re shifting the risk that you’ll outlive your money over to the insurance company”.  If you’re relying on your portfolio for living expenses, financial planners typically suggest withdrawing no more than 4% a year, to limit the risk of outliving your funds; in contrast, with an annuity, you’ll get a bigger starting payout.

For example, an immediate annuity would convert a $100,000 investment from a 65 year old couple into $604.69 dollars a month for life.  This policy comes with 100% joint survivorship, which means when one spouse dies, the survivor continues to receive the full payout. It is possible to get higher payouts for a lower survivor percentage. (Illustration: depends on company!)

Your principal is 100% protected from loss as long as you don’t withdraw more than 10% per year and hold your annuity for 7 to 10 years, depending on company and policy.