Annuities – The Magic Bullet

There is no magic bullet to keep from running out of money, at the end of the day, a retiree’s success will be driven by his or her ability to maximize income and minimize expenses. In a survey, done by Allianz Life Insurance Company of North America in May 2010, two-thirds of Baby Boomers said they are more afraid of running out of money than of death.

Without money, we cannot enjoy the basic necessities of life that is food, clothing and shelter. 

Putting money into an old fashion savings account may seem like a good way to plan for retirement. However, it is not.

Therefore, wise use of money and saving it for future purposes becomes very important. 

One of the main problems in society today is the fact that people are living longer and creating the chance of outliving their assets. This will be an ongoing problem in the next 20+ years when it is believed that social security may dwindle away.

Making financial choices for your hard-earned money may be one of one of the most stressful things you do.  Retirement savings are a function of four variables: income, expenses, time and after-tax return. Those approaching or currently in retirement will usually do best with additional conservative investment strategies.  When the need of a steady source of income arises, this need can be fulfilled by way of annuities.

Another large problem is that companies are moving further away from pensions and moving more towards 401K’s and IRA’s. This is giving more of the retirement investing to the employee and taking the burden off of the employer.  The current US pension plans have taken a major hit especially after the 2008 credit crunch. A lot of people lost their pensions due to the collapse of several financial institutions.

For this reason alone, for the retirement aged crowd, one of the most popular investment types is annuities. Therefore a lot of people are looking at annuity solutions of their savings or finances for long term post-retirement benefits.

Social Security was never intended as a retirement plan, but as a supplement to savings. The key to a successful retirement is not to rely on any single income stream, but to build multiple income streams. These would include Social Security, 401(k), IRA (Roth and/or Traditional), pension plan, bonds, and of course, income annuities provide the most solid foundation to a good investment plan. 

An annuity is the best way to secure your retirement and to make sure you do not have to depend on anybody for your financial needs in your old age. Annuities are a good investment but it depends on if it is applicable to an investor’s situation and risk tolerance.  Annuities are legitimate securities that can be a very profitable long-term investment option for the right person. 

Fixed annuities are comparable to bank CD’s and offer a fixed percentage of return often much higher than interest rates of bank CD’s. Indexed annuities are designed to have a safety of principal similar to CD’s, money market funds, and savings accounts. They are often linked to an index and guarantee a minimum rate of return but put a ceiling on a maximum. 

Understanding the rules and features of an annuity can help you make the most of this retirement investment tool.

Accumulation or Payout Phase

  An annuity typically features two phases. During the accumulation phase, you make periodic deposits that are allocated to various investment options. The gains generated inside the annuity are tax-deferred until you begin receiving payments. The payments begin during the payout phase, and you are taxed on the earnings at ordinary income tax rates rather than lower capital gains tax rates.

 Fixed Annuity

  In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your investments are growing. The insurance company also guarantees that you will receive periodic payments guaranteed to equal a certain amount per dollar in your plan.

Payout Options

  At the beginning of the payout phase you may choose to receive your deposits and accumulated investment gains in a series of payments at regular intervals, generally monthly. Most annuity contracts offer you a choice of payment streams from a fixed period of no less than 20 years to an indefinite period such as the length of your lifetime or the lifetime of both you and your spouse. These latter options guarantee that neither you nor you and your spouse can outlive the retirement income paid from an annuity.

Death Benefit

  A common feature of an annuity is the death benefit. If you die, the person selected as your beneficiary may receive the greater of the accumulated value of your account and the total deposits made.

Surrender Charges

  Annuities also may incur charges if you make withdrawals in the early years of the contract. These surrender charges are usually applied as a percentage of the amount withdrawn and gradually decline over a certain period of time. The typical annuity contract has surrender charges declining over an average period of seven years.

With the right retirement planning tools you can make the right decisions today that will help you be happier and more financially secure when your retirement comes. It is important to remember to be flexible in your planning and make adjustments as circumstance in your life warrants.

Senior Health Care Problem

Health Care Reform is Now Law.  In all of the discussions about health care reform, everyone agrees that we need a method to rein in costs. 

Did this bill improve our health care system??? 

Seniors need to be concerned, The American Medical Association (AMA) does not like the 21% cut in Medicare payments. 

Such price controls have not worked in the past, and there is little evidence that those cuts will be beneficial.

Some seniors may lose Medicare benefits they now enjoy.

Many senior citizens worry about the effect that the health care reform bill may have on them. After all, they generally use the health care system more than do younger people. And those living on fixed incomes may have little leeway in their budgets to help if their health costs rise.

Why would anyone think they might lose benefits?

Could it be that the financing of the new Health Care law requires a $500 billion cut in Medicare over the next 10 years?

Could it be observers already see 21% cut in provider reimbursement this year alone? Only Congress stepping in with a 2.2% increase at the last minute stopped the pay cut in order to keep doctors in the program.

The enrollment in Medicare is set to sky rocket in the next 10 years. $500 billion is supposed to be cut from the program at the same time. The words rationing come to mind when asked to provide services to more people but with less money.

**One of the key points emphasized is better access to healthcare.  The opinion in the field is that you may have access, but the average wait to see your doctor will be 44 days.  Supporting this claim is a new trend that could have serious implications to access. 

The Mayo Clinic has announced a new program, (initially limited to 300 people) that guarantees access to their care facility.  The cost:  $5,000 per year for an individual and $8,000 for a couple. (Source:  National Underwriter By JACK BOBO  Pubished 6/21/2010)  A physician friend of Jack’s is instituting similar plans for immediate access to their services at costs around $1,500 dollars per year.  If this trend continues, then the wait time for those who cannot afford the access fee most certainly will be longer than 44 days. 

Can you imagine how this extra cost will affect retiree’s retirement plans???

The new Federal law requires insurers to accept anyone, regardless of insurability, now that is a good thing – but to suggest that can be done without increasing premiums or taxes is ludicrous.  The current proposals expand coverage, but do little to reduce cost, failing to heed any of health care’s management lessons from the last 25 years.

One challenge for seniors is when a patient’s drugs have reached the Medicare coverage limit, but don’t cost enough to qualify for catastrophic coverage. This problem is commonly referred to as a doughnut hole.  Right now, after a senior has spent $2,700 on drugs in a year, coverage stops until that same person has spent $6,154 on drugs, when it starts up again.

Beginning in 2010, people who fall into this hole will get $250 from the government to help.  WOW!  How much help is that?  It is obvious that the aim was misdirected insofar as improving our healthcare system.

More and more of your retirement dollars will have to be spent on health care than what most of us thought.  This places retirement income in jeopardy along with a lower standard of living in retirement. 

As with Seniors, Health care is also a huge concern for small businesses  — like the local diner, the hardware store down the street, the neighborhood repair shop –face special challenges in providing health care coverage for their employees. 

Health coverage is employers’ most unpredictable major cost, a threat to their businesses’ competitiveness, and they have increasingly offloaded costs onto employees. Small businesses typically pay more per worker for health care insurance, if they offer benefits at all. 

Premiums have jumped 15% per year on most small businesses.  Companies have been laying off people and/or cutting hours to make ends meet.  There is a tax credit for small businesses of up to 35% for small businesses with fewer than 25 employees, but with premiums at a level of $12,000 dollars a year per employee , the credit does not provide real help for a small business. 

This legislation did not deal at all with the real reasons access to healthcare is a struggle for so many – the astronomical costs.

When companies stopped providing pensions plans, people had to start do-it-yourself programs called 401k’s, IRA etc and it sure appears that now each one of us needs to set up a do-it-yourself health insurance program. You should be looking at a life annuity.

Annuities was and is a great product to help with the self-pension programs and we recommend that near retiree’s and retiree’s look at an annuity plan that will provide a guaranteed monthly income to be used to cover the extra costs of health insurance as you age.

You may be able to generate more income if you actively manage your income but this takes time and expertise. Or perhaps you are just fed up with worrying about the net return and want a life annuity to provide you with a guaranteed income.  The more risky is an investment, the more potential it holds to be profitable. It also has more potential for loss.

A fixed insurance annuity is an important piece of any retirement portfolio. It makes a small, guaranteed return, no matter what the rest of the economy is going through. It will never lose value (what is already earned, has become part of the asset).

It can reduce taxation problems either now or at time of withdrawal. It includes no purchase fees, management fees or termination fees. It provides quarterly statements, for confident knowledge of the plan’s status, with no continued study required to keep it current. Contributions can be one-time, whenever funds become available or regularly recurring.

An annuity allows the freedom to invest a portion of assets aggressively. It may be a great winner. If not, the annuity will still provide a secure future.

Social Security Embellishment With Annuities

Many folks who were inclined to pooh-pooh annuities during the bull market a few years back have reconsidered their position thanks to the market crash. It’s true that many stocks have regained lost ground since the market bottomed in early 2009, but the tremendous volatility in recent years has caused many retirement-minded investors to rethink their risk tolerance. 

Among the many risks retirees face is living too long and outliving their money. The average retirement lasts 30 years or more.  There is a solution in longevity insurance, better known as annuities or life annuities.

In recent years, prospects for retirement have seemed ever more frightening. Those who are close to retirement and have substantial assets set aside have seen their value plummet in the market’s meltdown.

Although the rally has restored some of those portfolios closer to full strength, the latest correction has everyone back on their toes again.

Baby Boomers weaned on stocks may view annuities as ultraconservative, but as they move from capital accumulation to drawing retirement incomes, they may want to rethink theses products.

A recent poll revealed that more than 81% of U.S. consumers in the annuity market wanted a lifetime guarantee of income and as the popularity of living benefit guarantees grows, we will likely continue to see consumers turning back to the only investment vehicle available that offers a protected income stream for life just like Social Security.

Here’s the good side of income annuities: In exchange for a sizable chunk of your money, they’ll provide you with an income — for life. This is attractive because we don’t know how long we’ll live. You might have a solid portfolio upon retiring at age 65, but what if you end up living to age 105? Will it be able to support you for 40 years, instead of the 20 or so years you might more reasonably be expected to live.

If you’re investing mainly in stocks, you simply don’t know how well they’ll do in the future. Your future nest egg is far from certain. With income annuities, your income might well be lower than what you’d be able to withdraw from your stock/bond portfolio, but at least it will be guaranteed to last your whole life. Just a pile of cash parked in a good plan.

Should you rush out and put all your eggs in this basket? I don’t think so. But it might make sense, to put a portion of your nest egg in one — or more. The humble retirement annuity is what gives you that fallback position.  Something that gives you a reasonable basic income through your golden years.

When properly understood and used, annuities can be a great addition to a retirement plan. In many respects, Social Security payments are like an annuity.  Individuals in retirement who are receiving the bulk of their income from stable, guaranteed sources are actually much happier,  As they age, those without Defined Benefit pensions (Annuities) get increasingly anxious about outliving their savings.

There is a type of fixed annuity known as an indexed equity annuity. It provides you performance guarantees that are linked to the gains in a common index, such as the S&P 500 index of stocks. You would be able to enjoy some of the upside of having your funds invested in the stock market but you wouldn’t need to actively manage these investments.

With the recent disruption market and uncertainty, equity indexed annuities can be a good option for someone nervous about having their retirement savings are exposed to market volatility values. “It’s a common misconception — that in order to have enough money to get through the rest of your life, you want a withdrawal rate of no more than 4% of your investment account(s), you can run out of money, with an annuity that can be a larger income benefit.”

Individuals who are long term savers and who have a low tolerance for risk when it comes to the loss of principle and are more comfortable with a constant rate of return on their investment are strong candidates to an index annuity.

If you are looking for possible rates of return higher than a savings account or certificate and has the “no loss” protection principles that an equity indexed annuity provides. Equity indexed annuities also have the advantage of tax deferral of earnings that make it a retirement savings vehicle large. Keep in mind, an annuity can only be a piece of your retirement plan’s overall portfolio. 

Pay Out Options

An insured may choose to receive he/she annuitization payout in one lump sum.

Straight life pays the insured an income guaranteed for the rest of his life. No refund of the principal is paid out if the insured does not live to receive it all.

Installment certain provides an income until the insured dies. If he dies before the end of a stipulated time period, his beneficiary would receive payments for the rest of the stipulated time.

Joint and last survivor life income pays two or more insured’s until the last one dies.

Joint and survivor life income with installment certain provides an income for two insured’s until both die. If both die before a stipulated time period, their beneficiaries will receive payment for the remainder of the time.

Fixed Indexed Annuities with an income rider are a great way to invest now, through a lump sum payment, for retirement later.  Think of your money as a pension fund with flexibility that is one of the most important parts of planning your “financial roadmap.

Build Nest Egg By Re-Investing Income From Annuities

During the past 50 years improved treatments for heart disease, stroke and other diseases expanded life spans and extended individuals’ ability to remain active.  Today, a man’s average life expectancy at 65 is 17.2 years (to age 82). A 65-year-old woman today can expect to live another 20 years, on average. 

People who are in good health can expect to live into their nineties and beyond.  But longevity has its price: Today retirees must confront and counter the threat of running out of money.  Some people are living past 90. Will your assets last that long? If you outlive your income, what then?  It’s a good idea to look and plan for a lifelong income.

Many of us either depend (or will depend) on Social Security to make up the foundation of our retirement income. Although this program will play an important role for many of us, it is important that we keep in mind the limits of what it can provide us and ensure we put in place elements to secure the rest of our retirement.

Many retirees or near retirees finances are a mess. Two stock markets crashes in 2000 and 2008 did their damage to retirement dreams. The 2008 market meltdown and the trauma it left in its wake, caused high anxiety among the elderly. If an investor retires when a bull market is taking off, he is in a good position, but not, if he retires at the onset of a bear market.

Consideration of your ability to take risk is necessary so you will invest your money carefully and wisely otherwise you may lose the savings of a lifetime. There have been numerous cases where people took voluntary retirement and then burned their hands by speculating in stocks or invested the same in some business ventures and lost the all the money.

Saving for retirement without an income distribution plan can be a mistake. How will you use that money once you have it?  The central questions are; how to turn a portfolio into an income stream-based on solid methodology?  How good is an investors’ understanding of how to convert their pot of retirement money into income with some measure of safety?

Most investors share the same goal of long-term wealth accumulation. Some of us have no problem watching our investments bounce up and down from day to day, while risk-averse investors or those nearing retirement generally can’t withstand short-term volatility within their portfolios. If you are this type of investor- or one who has a moderate risk tolerance – annuities can be a valuable investment tool.

Many individuals choose to invest in a deferred annuity because of the security that it can provide for their retirement plan.  The annuity provides a kind of retirement-income insurance: You contribute funds to the annuity in exchange for the guaranteed lifetime income stream of your choosing later in life. 

Before the 1980s, investors could still rely on company pensions and Social Security benefits to fund their retirements, and actuaries figured out how to make those funds last through retirement. As defined contribution plans, like 401(k) and 403(b), replaced traditional pensions, the burden of managing that money shifted to investors.

A good addition to your retirement program is an index annuity. Equity-indexed annuities combine certain aspects of fixed and variable annuities. They offer guaranteed minimum returns and your income is based on a stock index such as the S&P 500.  If you’re risk adverse and want a guaranteed return but still worry about the ravages of inflation, the index annuity is perfect for you.

Unlike a fixed annuity, you have the opportunity to increase your return in indexed annuities.  You have the advantage of participating in the growth of a specific market index with none of the risk. Insurance companies offer index annuities that provide a base interest rate. If the index selected increases, the owner participates in the growth at a specific percentage. If the market drops or remains flat, the owner of the policy receives the guaranteed interest rate. 

The ideal retirement involves getting a steady check without going to work. When most investors hear the word annuity, they automatically think of it in terms of an income stream for life. While that is certainly one option, it’s not the only way to take money out of an annuity.

Instead of entering a payout phase where a specific amount of money is sent to you on a regular basis, you can instead choose to withdraw money as needed.  There have been new trail-blazing products released, which are aimed at providing more retirement options.

The new income rider plans offer more flexibility in payout terms and the ages at which payouts can begin compared to traditional plans. These more flexible, less expensive products provide a way for investors to build their own pensions by purchasing a guaranteed income stream for life.

The income stream is guaranteed by the insurance company to last the rest of the annuitant’s life, even if he or she should live much longer than originally expected.

Best of All!!  The monthly payment of an annuity is not the only way to look at it, many people think that they have given up their principal. If that monthly income is not needed, you can take a portion of that money and put it back into the bank or reinvest in other funds.

You have the best of both worlds, a steady guaranteed income for life, and the ability to take large risks in the market and build a large investment fund.  If the market tanks, you still have the income.