Here They Come!

All the big banks you have heard of like Bank of America, JP Morgan, Chase, and Wells Fargo are adding staff, creating easier-to-use technology, and competing on fees in an effort to win a bigger share of the trillions of dollars in 401(k) savings plans. JPMorgan almost doubled its sales force dedicated to selling retirement plan services to employers in 2010. This has become a top priority of JP Morgan.

Americans held $2.9 trillion in 401(k) plans as of September, and the total may reach $4 trillion by 2015, according to Cerulli Associates, a Boston research firm. Increased competition from banks may lead to lower costs and more choices for employers and savers, says Laura Pavlenko Lutton, an editorial director in the mutual fund research group at Morningstar.

Banks are scrambling for new ways to make money after losses on mortgages and increased regulations have curbed their revenue sources.

As all of these banks are upping the ante on the retirement market. What does this mean for you and your retirement? As a consumer you need to look at the bigger picture. In the last decade many uncertainties have come into play.

These big banks know everyone is scared and unsure of the future at this point. No one wants the fear of not being able to retire or the fear of running out of money at an old age. You do have many options to choose from when you are ready to get your retirement started, but not all will be a fit for you.

Due to the market volatility and the low interest rates at the bank, you have a few options to rule out right off the bat. When looking at fixed annuities the options are endless as well. But you have two added benefits, your principal is always safe and the rates are higher than the bank. Now you have found which vehicle to look at, you get to decide what options you need. this will depend on your current situation along with what you would like your future situation to be.

What type of Annuity is Right?

 

When people talk about annuities everyone either has an opinion good or bad, or the truth is most people do not have any idea what an annuity really is.

There are three main types of tax deferred annuity products, including the fixed annuity, equity indexed annuity and variable annuity. For the fixed and equity indexed annuity, your principal and a minimum rate of interest are guaranteed to ensure that you never experience a loss or reduction of your savings. They are designed to provide a higher rate of return over traditional CD and savings plan products, and come with many options you can customize depending on your retirement objectives and financial plan.

The variable annuity however is a form of securities, directly linked to the stock market in terms of growth potential and investment risk. While the variable is a form of tax deferred annuity, variables differ from the guaranteed nature of fixed and equity indexed annuities in that their value depends on the market performance of the investments held by the variable annuity you purchase. As a result, you can experience higher gains over other annuities, but your retirement savings could also be at risk of unforeseen market changes.

The tax deferred annuity is an extremely popular savings and investment plan for individuals who want to save on a tax deferred basis for many years. With a tax deferred annuity, you invest your money to earn interest on the total amount being built up, with all taxes deferred until you start taking the money out. The process of earning interest over a long period of time without any tax deductions compounds your wealth greatly compared to traditional CD and savings plans.

Investors that create a tax deferred annuity have several options in the way they fund the investment, depending on their personal objectives and circumstances. A tax deferred annuity can be funded with a single lump sum (known as “single premium”), while other options for installments are also available (known as “flexible”).

The tax deferred annuity is provided as a retirement vehicle by major insurance companies, who utilize financial planners, employers, and retirement specialists to introduce the benefits direct to individuals. The tax deferred annuity is safe, as an approved life insurance company is required to hold reserves that at all times equal the withdrawal value of your annuity policy. In addition, state law requires certain levels of surplus capital also be available to increase your protection. The legal reserve for a tax deferred annuity refers to the strict legal requirements that must be maintained by insurance companies to protect and safeguard your assets at all times.

For many working individuals, a tax deferred annuity makes up the cornerstone of a safety-first retirement plan, being the natural progression once 401k, SEP or IRA contributions are maximized. For individuals in retirement, the tax deferred annuity can be utilized to continue to defer taxes in preparation for the time when that money will be needed to supplement or provide a dedicated stream of lifetime retirement income.

Joint Life Income For Spouses

The goal of your retirement planning should be to make certain that you will be financially able to afford the material comforts and have the money to be sure that you will be taken care of in case you are stricken by illness or accident during old age not only for yourself but also your spouse.  

Rising life expectancy raises longevity risk, meaning a retired person may outlive his/her investments and the portfolio won’t have enough to sustain the desired lifestyle.

Many people don’t like to think about money. They may worry about it, complain about it…but they don’t really think about it.  As a result, they don’t make good decisions about money.

Since spouses may die at different times, it may be important to some couples to ensure that the surviving spouse has a guaranteed source of income that is not dependent on the other spouse.

A financially secure retirement requires making decisions based on a calculation of how much money you and your spouse will need to maintain a comfortable lifestyle during your years in retirement.

The most common question when retirement planning is, how much is enough? The question is really asking how much do I need to have or how much will I need to spend in retirement. 

No matter what your situation, it pays to diversify your investments. If you simply can’t tolerate the fluctuations of the stock market and find that type of diversification unsuitable for you, consider at least, diversifying within fixed products.

Any retirement portfolio should be one which earns the minimum income to sustain a basic lifestyle through annuity and monthly income plans and the other which gains from the upside through select equity exposure. The portfolio should be monitored at regular intervals and provisions for contingencies made.

The definition of the return rate can be abbreviated as ROI, coming from return derived from investments.  It represents the ratio between the amount of money that you lose or gain and the amount of money that you have initially invested. Otherwise, you can call it just the return.

The goal of an annuity is to provide you with a prearranged, dependable income stream. Annuities are very similar to bank CDs. Just like banks, insurance companies offer different rates and returns on annuity investments.

Both fixed annuities and CDs have a penalty period. In annuities, the period is a surrender period and you receive a surrender charge. In bank CDs, the time charge is a penalty for early withdrawal.

While the two are similar, there’s a huge difference. When the term on a CD ends, the bank sends you a statement letting you know. Some people don’t respond, either because they’re busy, they forget, they’re ill or simply out of the area. The CD then rolls over to another CD of the same term.

Many CD shoppers notice that the specials are odd numbers of months, such as 56 months instead of 60 months. That’s because if the CD rolls over automatically to another 56 months, the rate isn’t as high as a standard number of months, such as 60 months, 5 years.

If you find that your CD rolled to a much lower non-standard term, you’ll also notice that the interest is well below what the market conditions suggest. In order to remove it, and invest it at a higher rate, you have to face a new early withdrawal penalty.

There is no rollover for fixed annuities. While the interest rate changes according to market conditions, once the policy ends the surrender period, the company doesn’t set a new surrender period. This means it’s free from the worry of having your money stuck in a low interest bearing account. Any time you want, after the surrender period ends, the company allows you to withdraw funds.

If you are going to have the kind of retirement that you imagine yourself having, you need to have the right retirement savings plan in place today so that you will have the financial means to enjoy your retirement in the future.

Generally, annuities are purchased either with a large deposit or regularly scheduled payments over a period of several years. Once retirement is reached, a couple with a joint life annuity may begin receiving payments from the account, which may vary in size based on the amount paid in and the life expectancy of the account holders.

Annuities are offered through insurance companies, which use actuarial tables to determine how long an account holder is likely to live in order to determine a payment schedule. The idea of an annuity is to guarantee a fixed income for life; with a joint life annuity, the goal is to provide an income for both partners.

With a joint life annuity, if a wife dies 10 years after payments begin, the husband would continue to receive payouts until his death, even if it was many years later. Payments are usually somewhat smaller than single annuities, as the total life expectancy of both partners will generally be higher than that of one single person.

A joint life annuity can be invested at a fixed rate. to increase funds. Fixed rate annuities provide the comfort of knowing that the interest earned will never drop below the fixed rate.

Some joint annuities contain what is called a “certain” clause, that allows the annuity to provide for beneficiaries for a certain period of time should both account holders die. Certain periods are usually set in 10 year intervals, and can be useful for those who wish to ensure provision to children or heirs.

If a joint life annuity account has a certain period of 10 years, this means that payments will continue for 10 years, regardless of whether the account holders are alive. If a husband dies three years after beginning payouts, and a wife dies a year later, beneficiaries would receive payments for the remaining six years of the certain period.

Boomers Need Annuities

The baby boomers have done incredible things since 1946 to shape the economy, our culture and the country in different ways.  However, Retirement planning is the No.1 most difficult financial task for these same Americans.  

The aim of any retirement planning should be to ensure that your savings continue to provide the income you need to enjoy a comfortable retirement. 

This can only be achieved by choosing an investment strategy at retirement that minimizes the likelihood of a shortage in income during your retirement years.

How can you make sure you don’t outlive your nest egg?  Life expectancy is steadily increasing. The message is we are healthier and with the advances in science and technology, the trend for longer lives should continue. For most of us, that also means we have to make sure our money will last for a longer period of time.

In today’s uncertain economic environment, many people are worried about their future.  With the bulk of these boomers heading towards retirement, there is a fear that government will fall short of being able to provide lasting retirement income.

The three retirement income sources are made up of social security, pension, and savings, a “three legged stool”. The metaphor was intended to suggest that all three approaches were needed to provide a stable income and security in retirement. 

Most savings are composed of regular investments and bank accounts as well as what you have in your defined contribution plans like your 401(k) and IRA.  The stock market plummet has cut many Baby Boomer’s nest eggs by as much as 50% with no recovery in sight.  The principal home and additional real estate are 47% of the financial assets for the average Retiree.  Unfortunately, many Pre-Retirees and Post-Retirees are unsure what do with their real estate equity, leaving them with “frozen assets.” 

The three legged stool of retirement perhaps now only has one true leg for many as people’s personal savings have been decimated in the recession.

According to the Social Security Administration, more than 9 out of 10 individuals – age 65 and older – receive Social Security benefits, but most retirees must also rely on other sources of retirement income.

Social Security has been the basis of retirement security all along. Social Security benefits have remained the biggest piece of retiree income.  Last year, Social Security benefits made up 58% of total retiree income and more than 85% of income for retirees in the lowest 40%. Even for retirees in the highest income quintile, Social Security benefits represented more than one-third of income last year.

As baby boomers get to retirement, more people are going to be in the retirement phase, the draw-down phase. They have to convert their lifetime savings into an income stream. 

No matter where you are in the financial spectrum or in the socio-economic ladder, you can have access to the various retirement tools around. You’ll want to choose the best way to convert these savings into an annual income.   Purchasing an annuity would be one way through which you can successfully create a stable retirement fund that will pay you for as long as you live.

Boomers need to consider securing their futures by turning retirement savings into a monthly source of income through products such as annuities, rather than relying on traditional investment portfolios to pay off. An annuity is a type of insurance that protects you against outliving your money.

Think about annuities as a personal pension that can supplement other income streams.  For people who fear they’ll one day be living alone and broke, annuities can help them plan a dignified, independent retirement. 

Longevity risk can potentially ruin your retirement if you don’t have a true pension, and longevity insurance can protect you against longevity risk.  Paying for 30 to 40 years of retirement can create quite a burden on you, your portfolio, and perhaps even your children. The good news is that you can insure against this kind of risk.

If you live longer than expected, your personal pension (annuity) will be more like an insurance policy, which not only returns your money but adds more (possibly much more). Just like with your house insurance, if the risk against which you are insuring is realized (you live longer than expected), you receive value from the insurance company that may well exceed the total value of the premiums you paid. This is exactly the protection that personal annuity pensions provide.

A big factor in determining whether a retirement income annuity is right comes down to how much of a guarantee you want on the payments you receive. It also depends on what sort of income stream you have going into retirement.  Historically, retirees have looked to income annuities (also known as immediate annuities) to guarantee fundamental expenses such as mortgage payments and groceries.

Lots of volatility in the equities markets coupled with low credited rates and declining interest rate spreads on traditional fixed-rate products makes this is an ideal time for indexed annuities. 

Indexed annuities’ returns are tied to an index, often the Standard & Poor’s 500-stock index, with the upside typically capped in some fashion, while they are protected against losses.  Fixed Indexed Annuities are for consumers seeking to eliminate the risk of losing their principal or cumulative returns and [who] are focused on guaranteed income.

Indexed annuities come in many flavors. The annuity grows tax-free and generates a guaranteed minimum rate of return each year, often 2 or3%. If the stock market index (hence the name) to which it’s keyed goes up more than that, you get a share. If the market goes down–even way down–you still get the minimum for that period. At the end you get back your money and earnings and pay any applicable taxes.

The interest rate you receive from an index annuity varies because your investment is linked to the S&P 500, or a similar stock market index. The returns will also differ from product to product, because of different crediting methods. An index annuity balance is impossible to predict, but we can look back at how they would perform in past market conditions.

In a hypothetical comparison of an index annuity vs in a direct S&P 500 investment between 1999 and 2009.

The index annuity in this example has typical contract terms: 100% participation rate, 9% cap, and it resets annually.

A $100,000 investment directly into the S&P 500 in 1999 would have resulted in an approximate balance of $73,459 by 2009. The investment would have lost over $15,000 not to mention inflation. On the other hand, your index annuity would be worth over $150,000, a difference of over $77,000.

The index annuity never loses ground when the S & P has a negative year. The reason for this is that it ‘locks’ in pervious years’ returns, meaning it will never go lower than its highest point. Sound too good to be true?

The trade off is that in periods of substantial market growth, the annuity will only participate in a portion of it. However, there is comfort in safety. And, you can participate in the market, yet your money will always be safe with an index annuity. 

Indexed annuities with an annuity income riders are designed to provide safety of investment, predictable, guaranteed, lifetime income and peace of mind to people who are worried about running out of money in retirement. One attractive advantage of this rider is that you can present a dollar amount for the guaranteed payout for life.  You don’t have to speculate your income.  This gives you guaranteed numbers that will never go down or go away. Real Lifetime Income!