De-Risking Investments With Annuities

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There is no problem with the approach of building one’s own investment nest. We all know that there is a growing need in this country to take our retirements into our own hands if we want the funds necessary to have any quality of life upon retirement.

Personal pension plans (annuities) are among the most highly recommended investment options for you to stay happy and comfortable even during your days of retirement.  The personal pensions are for anyone and everyone who dreams of a financially hassle free life in the twilight years of their life when they will not be in a position to earn much.   

Annuities are precisely the instruments that help you transform the value of your investments into a periodic source of income. You also have an option to choose a plan that offers lifelong income or even a plan that provides you income for certain period of time.

Annuities, particularly fixed or indexed annuities, are a good way for people to go when looking for a conservative option to put money away to sit and grow particularly for folks planning on using this for retirement living.  The problem is that money is such a limited commodity in this world, we are living longer than ever before, and we are enjoying much more mobility in our golden years than in times long past

In the world of life-expectancy statistics, there’s a motto:  The longer you live, the longer you’re likely to live.  Many retirees misread the statistics for life expectancy.  Often, they focus on the life expectancy at birth, which for a man born in 1945 was about 72 years and for a woman, 77 years, according from data from the Social Security Administration.

But the averages are depressed by those who die retatively young.  Today, for a 65 year old couple, there’s a 50% chance that at least one spouse will live past age 92.  For a 70 year old couple, there’s a 50% chance that at least one spouse will live past age 93.  For a 70-year-old single man, odds are in favor of living past age 87 and a for a woman, past age 89.

Retirees have a tendency to overestimate the returns they can earn on their investments, especially once they start withdrawing money from their portfolio.  When approaching your retirement you may find that there’s no one-shoe-fits all answer to where and/or in what you should invest your money.

Many people who have taken their lump sums from their 401k’s or IRA’s didn’t manage it wisely.  Some weren’t prepared to receive large amounts of money. They got overwhelmed with the delusion of wealth and became careless and lost their retirement funds.  What a predictment to find yourself in after you retire.  What are the options?

For those retirees looking for exposure in equities, your retirement portfolio may be comprised of direct investment in stocks, mutual funds or equity indexed annuity plans:

• Leveraging the capital markets alone for building a retirement corpus is not advised as capital markets are subject to high volatility.  It is recommended to De-risk your portfolio from the volatility of the market by reversing the asset allocation you had in the initial years of savings.   One should slowly shift funds from riskier assets towards less-volatile assets is the goal of most retirees. .
• With Mutual Funds the liquid nature of these investment instruments could prove a deterrent to long-term planning as there might be a tendency to use the corpus for other life-stage needs, compromising retirement planning and lifestyle.
• Fixed annuities help you keep away from adversities of fluctuations of stock market rate;  Equity indexed annuities are good for those that want to keep up with inflation but still require safety. One of the main reasons for purchasing a life annuity is to receive a monthly income for life without the risk of losing money on investments.  

Most people use equity indexed annuities as a 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. On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.

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.

There is a price for the investor to pay when they use this type of retirement annuity . Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.

However, if you think that the ninety percent is always the best deal, think again. Often the contracts with the lowest percentage of market participation make up for the difference by offering a higher guaranteed interest rate. If your contract runs during periods of extended down markets, the lower participation rate may actually pay higher because of the number of years the product used the fixed rate to calculate the return.

A central issue with annuities is the way they are paid out. If you purchase, for example, a $100,000 annuity, that’s how much you pay. No additional fees or commissions are charged.  The monthly benefit you then receive is computed on a combination of factors, including your life expectancy, how big the purchase was and the interest rate index that determines the benefit amount. There is no middleman between you and the annuity provider.

The annuity pays you a portion of your own money every month which is partially tax free in that your basis is non-taxable. If you live long enough, you will receive more than you paid in. If you die early, you “lose,” in a sense — although you would have had the peace of mind of receiving a monthly check throughout your lifetime.  However, to address this issue, most take a period certain payout, 10 or 15 years are normal.

Annuities are ideal programs that may help you to accumulate money on tax-deferred basis. Personal annuity pensions are considered as a significant source of financial help for retired individuals as it provides a steady source of income after the event of retirement.  The first and foremost benefit is that it offers guaranteed income for a lifetime after retirement of the investor on low risk basis.

Annuities Offer Income Stability

We recognize that the current generation of retirees and baby boomers face a unique set of retirement income concerns.  If you are nearing the age of retirement, or if you have recently retired, you are faced with many decisions on how to continue to live your life without worrying about money. 

Most retirement plans significantly affect today’s changing market. This is one of the things that makes the asset allocation so much important for a successful retirement investment. Those of us who prefer to not run out of money before we die should consider additional factors. There is no escaping old age but those who plan for it financially could ease the process considerably.

•How much retirement income will come from guaranteed sources such as pensions, annuities or social security? The greater your percentage of overall guaranteed income, the better.  If the challenges faced by many present-day seniors is any indication, quality of life is likely to become even more directly tied to one’s ability to finance it.

•Will any guaranteed source of income keep pace with your inflation let alone someone else’s ever-changing definition? Your portfolio will have to do double time if not. It is important to divides costs into two other groups: Discretionary and Essential. 

Defined-benefit pensions, Social Security payments and annuity income would fall under lifetime income sources. They would be used to pay essential expenses, including food and housing.

Meanwhile, income from assets — a 401(k), an IRA or taxable income — would cover discretionary expenses.

•How long will you live? I would not want to bet my retirement lifestyle that living to age 100 was out of the question. Average lifespan means many people live a lot longer. The average 65-year-old man has a 50% chance of living to 85 years, and average 65-year-old woman likely to live for 88 years. This means that more than 20 years of retirement – or more than half the length of an average career.

•Are you able to adjust spending significantly enough to allow for any decreased portfolio values to recover? This assumes that you have a buffer in the size of your portfolio or that you have plenty of discretionary spending.  Key considerations for pre-retirees and retirees are to develop a financial plan based on the estimates of expenditure and resources, and develop a plan to extend the life of your assets.

•Are you able to consistently stay invested? A 3 percent certificate of deposit or bond coupon may be part of a prudent plan but may not allow you to consistently keep pace with your inflation.  Equity Indexed annuities offer consumers what could be described as the best of both worlds. A market based investment with potentially attractive returns plus a guaranteed minimum return.

Finally, I would be remiss if I did not point out the elephant in the room. Do you really know what your actual expenses are in retirement, and do your actual expenses take into account periodic large purchases, such as vehicles, vacations or a new roof?

Retirement Annuities are an investment, which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age, the fear of outliving one’s income. This is one option that makes sense because it is a “guaranteed annuity.” This is when a person is paid a guaranteed flow of money (based on an agreed investment) that provides a regular income for as long as they live. 

This option offers peace of mind. You know that whatever happens in the economy, you will continue to receive a steady income.

Annuities also provide a decent interest rate as well as tax deferral benefits which makes it a competitive alternative to banks. Additionally, remember it also provides a guaranteed income.  With an annuity, you have guaranteed stability.  

Annuities enable you to put away some funds while you guarantee your post retirement funds. These annuities will grant you another source of income.  Annuities do not require any upfront fees. Because of that, the insurance company will require a lengthy term of investment.

Death Benefit Payouts

Studies show that over that approximately three-quarters of us who have life insurance do not have adequate coverage levels for the stage of life we are in. It is important to review your policy as your life changes to ensure that your coverage is sufficient for your new needs.

Life insurance needs may not be as high as they are at other stages in life for those that are newly retired. But, it is also true that most new retirees do need to think about maintaining an adequate level of coverage.

Consider your children or spouse you may leave behind. Even though your children may be grown and on their own, and your spouse may be able to live comfortably on his or her retirement savings, there are many special circumstances in which they may find themselves in financial trouble if you were to pass, or vice versa, you if they were to.

If you are very ill before you pass away, you will incur many health costs, many of which may be passed on to your spouse or children if you pass away. Many seniors may have to live with a child if they are on their own and need help, and this may put a financial burden on the affected family members.

 There are also funeral costs to consider. It is important to ensure that your family members can recoup any financial losses after you pass away.

Term Life Insurance Policies vs. Whole Life Insurance Policies

There are two basic types of life insurance: term life insurance, where you choose the coverage amount and length of the policy, and whole or permanent life insurance, which combines an investment product with life insurance.

Term Life Insurance Policy Advantages

Term life insurance policies are easy to understand. You pay a low, fixed monthly premium based on the term life insurance policy term length and amount of coverage you choose. You can choose term lengths such as 10, 20 or 30 years, and life insurance coverage amounts anywhere from $100,000 to several million dollars.

Whole life insurance is often expensive, due mainly to its investment aspect, while a term life insurance policy is usually very affordable. Whole life insurance policies often cost thousands of dollars a year, as opposed to the mere hundreds of dollars a year that the majority of term life insurance policies run. 

However, term insurance is purchased with the “IF” you die concept, whereas whole life insurance is purchased for “WHEN” you die.  Should you live past the policy period of term insurance you could very well die without coverage.  Whole life insurance provides coverage until the day you die.  We always recommend having a enough permanent coverage to pay for the last expenses. 

The first step
When a loved one has expired and the funeral formalities are finished, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount.

These include:

1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method.

Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.

Annuities As Supplementary Income

Many people start a project by defining success, but few think about what should happen if it’s not successful, or has run its course after a period of time. What if funding runs out? The thought of retirement can scare the daylights out of many people, especially when they realize that by the time they stop working they will likely be in financial trouble. 

U.S. life expectancy reached nearly 78 years in 2007, more than half of babies born in rich nations today will live to 100 years if current life expectancy trends continue. That means your retirement savings and income will need to last 30 or 40 years after you leave work.

After last year’s stock market downturn, many retirees with overly aggressive portfolios are now finding they may never fully recoup.  For many it is to late to fix their financial situation and are starting to see why many of our grandparents who lived through the Great Depression became extremely tight fisted with their money.

We believe everyone can retire, no matter what you make today.  All you need is the right plan. Your plan. And the determination to stick to it.  The approach we recommend is to figure out your basic expenses—utilities, food, taxes, insurance and so on. Then purchase a guaranteed product that will cover those costs and provide an Income that will Last a Lifetime and being able to cover what Medicare and Social Security does not cover.

The problem is what product make sense in today’s world, for example yields on money markets last week were averaging less than 1 percent. There is a reason why a Fixed Annuity is the most popular and reliable source of supplementary income.  Recognizing that the returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns, however the nice thing about a fixed annuity is its there as long as you are.

There are many investments you can make out there that are only good for so many years and if you outlive them you take the loss. If you want a steady stream of payments when you retire then a fixed annuity is an excellent option.  Then you can invest the rest of your savings in more aggressive investment products. Additionally, Equity Index Annuities are insured by the State Guarantee Fund which is similar to the insurance provided by the FDIC. The guarantees in the contract are backed by the relative strength of the insurer.

Diversifying your investment portfolio is just one pointer that advisers recommend to ensure that you don’t outlive your savings.  However, despite the need to diversify your portfolio, you should limit your exposure to aggressive investments. An Indexed Annuity provides diversification as these annuities earn interest that is linked to a stock or other equity index.  One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed is a fixed annuity that credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

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.

Here’s how indexed annuities work. The products are designed to mirror, to varying degrees, a well-known index, such as the S&P 500. The products have floors, to ensure that the purchaser will never lose money on the investment – some even have a minimum return. But they also have a ceiling that will cap the potential gains a purchaser can realize. In effect, they straddle the line between insurance and securities products.

Fixed index annuity sales continue to climb, according to data just released by the Insured Retirement Institute (IRI) and Beacon Research. Fourth quarter sales totaled $7.6 billion, representing a 3.2% increase over the previous quarter, IRI and Beacon found, with total fixed index annuity sales for 2009 at $30.2 billion, posting a year-to-year increase of $3.5 billion. Total fixed annuity sales were $105.1 billion in 2009, the groups say, just 2% less than the record high in 2008.

The main difference between bank CDs and fixed annuities are that towards the end of the guarantee the annuity enables the investor to pocket a certain contractual minimum which is absent in the case of CDs.  Fixed annuities have good rates, almost always more than bank CDs in terms of percentages. Thus these annuities with their guaranteed rates are by far a better option in this era of constant decline in interest rates.

Fixed annuities also have a specific length of time you must hold them or pay a penalty, just like a CD. In the case of the fixed annuity, that time is the surrender period. Unlike a bank CD, once you pass the time in the surrender period, the annuity doesn’t roll over and begin a new surrender time. If you miss the surrender period or don’t cash in the annuity at that time, you can do it at any date after the end of the surrender period and never receive a penalty. CDs roll over and start a penalty period. Often missing the window of opportunity can cause hundreds of dollars in fees to the bank.

Taxation of the growth is also an important factor. Those preparing for retirement find that much of the growth on their CD goes to taxes, regardless of whether they roll it into the next CD or take the funds. People with fixed annuities don’t face this dilemma.

The settlement options in the policy mirrors an immediate annuity in that your lump sum can provide regular payments from an insurer for the rest of your life.  No wonder annuities are being hailed by everybody from financial planners to President Barack Obama as a way for Americans to stretch their retirement nest eggs