Wealth Management
An Annuity is The Clear Choice
A secure retirement is a dream of everyone who worked hard for years. Approximately one third of your live will be devoted to retirement. Life expectancy now is close to 80. The scenario of the possibility that you could live to be 100 is closer than you think. That means we’ll need more money to enjoy those years.
During times of economic uncertainty or stock market corrections, people seek investments that they perceive to have little to no risk. The stock market’s volatility scares them, but conservative investments like money-market accounts or bank certificates of deposit yield almost nothing right now.
Out of concern that millions of Americans are not saving enough for retirement, President Obama has proposed increased tax credits for retirement savings, and he wants to require all employers to provide retirement savings plans to their employees. What’s on the table right now is the notion that workers who leave their job be given the option to invest some or all of their 401(k) money into an annuity that would provide income for life — just like a traditional defined benefit and Social Security.
Most folks invest the money in stocks, bonds, and mutual funds, none of which address the issue of longevity risk and none of which provide a guaranteed stream of income for life. Mutual Fund Investment vehicles are designed to accumulate capital. However, you will be responsible for drawing down your assets in retirement. Once the money’s gone, it’s gone.
The problem is, is that many Americans are not suited to setting up a plan for themselves to parcel out that money in little bits. With mutual funds, you are exposed to all the risks associated to the financial markets, and there are so many funds out there these days, and choosing the right one can be quite challenging at times, you almost need a financial engineering degree to make sense of it all.
Additionally, you must consider the expense fees charged. A mutual fund expense ratio is the ratio between what is invested and expenses that these companies take on in offering these investments to the general public. This charge is an “off the top” fee! That can be 6% or more on the high end and you will probably have annual fees as well. This means less of your money is working for you.
If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. One of the great benefits of a fixed annuity is that it’s guaranteed to last as long as you live. Besides pensions, annuities are practically the only vehicles available today designed to accomplish that objective. With advances in science that appear to be extending life expectancy, this option may make sense for some people – especially if longevity is in the family history.
Obama also believes annuities should be included as investment options in company retirement plans in order to provide plan participants with the potential to receive a guaranteed income stream for life after retirement. An annuity can guarantee you a set payout for life that doesn’t depend on how the stock market does, and it doesn’t depend on how the bond market does. The good thing about an annuity is that there is no risk of default like a bond and pays a person till she/he ‘leaves’. An annuity is an insurance company product but when you retire you can get an income for LIFE. You keep getting it as long as you live. You CANNOT outlive your money.
An equity index annuity is a tax-deferred annuity whose annual returns are based upon the performance of an equity market index. One can find equity index annuities in Dow Jones Industrial Average, S&P 500 and a variety of other common stock market indexes. These types of annuities are investment opportunities put on the market by insurance companies. Investors who like to play in the stock market but don’t want to risk their hard-earned money can utilize this option.
A fixed annuity still invests your deposit, but always guarantees you a set return. Your payout will be based on how much you contribute, your age, and the interest rate at the time of purchase – not the moods of the market. If you have a lower risk tolerance, this is the annuity for you. Ultimately you will need to have some of your assets in a form that you can’t outlive so you’ll eventually turn to an annuity provider. You just need to work out how long you need to be alive to make it worthwhile to buy one.
There are people who have done very well with mutual funds or stocks. But I believe the choice is very much determined by how much time and money a person has got left. (i.e. for a retiree who has lost almost all his money in the dot-com crash or the Enron scam, or the recent economic downturn, then an annuity would probably have been the best choice).
Take the Annuity Highway
Financial independence in later life does not come from how much is earned but from good money management. It is never too early or late to start a good retirement plan.
There is a big difference between “making a good living” and “enjoying a good life”. Making a good living refers to a person’s earning capacity – whether it is in a profession or business. Enjoying a good life on the other hand is how the money is spent. Money can be spent in various ways and the two most common ways are:
- Spending on luxuries with no savings, and
- Living comfortably and putting some aside for a “rainy day”.
Making conscious and deliberate choices about how the money is spent is the basis for a financially independent life in retirement. The four key elements of sensible money management are:
- Giving priority to savings. “Pay yourself first” is a common edict. Set aside a sum of money as savings to use to create wealth.
- Living within one’s means. That is buying only what one can easily afford.
- Invest wisely. Money in a bank account earning minimum interest will not help to create wealth. It has to be invested in assets that grow in value over time.
- Using some of the money to make a difference. Being grateful for what one has and showing that gratitude by helping those who are less fortunate.
Do you know what most small businesses do when times are bad? They hunker down and hope things will just get better. Even when the economy was thriving and banks were throwing money at people and businesses, there were companies going broke everyday, because they just carried on doing what didn’t work and hoped that things would magically, just get better.
Things didn’t just get better back then and they certainly won’t today…in one of the worst economic periods in living memory.
Financial Intelligence & Freedom can have a lot of different meanings, unique to each person. However, for most people the term suggests having no reliance on others when it comes to one’s financial wherewithal. There are two situations that can happen when you have financial intelligence & freedom. It is either you take control of your finances or you let your finances control you. You see the essence of managing your own finances.
The great depression of 09 was a searing experience, like inflation was in the 70’s it will affect the way people behave. In the 90’s there was a lot of articles about thriftiness and saving, and it didn’t happen. We rolled on. These days, you don’t talk to anyone that isn’t fearful of being unemployed in a way that’s different than it was even a couple of years ago.
Do you think you will ever build financial freedom if you keep doing the same things you have always done? If you do not do something different than you have done in your past you will have the same results in your future. You must make a decision right now that you are going to break out of that self-fulfilling cycle of limited results and frustration.
Recessions accelerate social change. A lot of people looked around their homes and said, “Why do I have all this stuff!” You start distinguishing between foolish debt and wise debt. This is where this past year experience we’ve been through starts to effect people. They’re going to make conscious tradeoffs. If you want a big, good looking car, you’re going to cut back someplace else as opposed to just keep borrowing, which is what was happening in the 2000’s it was almost as if we were avoiding trade-offs by borrowing.
Financial education- knowing how to make money, knowing what to do with money once you have it, knowing how to keep people from taking your money away from you, knowing how to keep your money for the long term, and knowing how to make your money work for you- is of vital importance in the quest to achieving financial freedom.
Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level – no matter how large the bucket. People are too focused on the short term ups and downs of the market. They want to hold the asset when it seems like the stock market is going up and the want to sell it when the stock market is going down. This is why the average investor is constantly behind the eight ball. People have a deer in the headlight looks because they don’t want to assume any risk. They need to recognize that in order to extract a better return, they need to tolerate some risk.
Becoming educated about your finances will play a major role in your financial future. Knowledge is a very powerful tool and therefore you should strive to enhance it to the best of your ability. Many people ignore or just think they know everything there is to know, and this is where failure begins, so the better your financial knowledge is, the easier it will be to get there.
Retailers are teaching their sales associates to not say, “May I help you?” to “Can I help you FIND something?” It’s a subtle method retailers employ to get consumers to consume. Retailers have done studies into the impulses that make us want to buy, and how they can exploit those impulses. It is remarkable the lengths retailers go to find our B-Spot, as we call it, our “Buy Impulse.” If there is a will to shop, there is a way to shop. The urge to splurge!!
We need a new frugalism, we need a more mindfulness, which is we needed to think more about the inherent value of things we buy, at whatever price. Even if it is expensive, we expect it to last longer than we might have a couple of years ago.
Our great recession has made people want to change their spending as too much debt and the accumulation of unneeded things have soured shopping for shopping’s sake.
Find Financial Freedom. Everyone is different and will undertake their road to success in their own way. I have always believed if you’re going to do something, do it well and don’t look back.
If you’re about to retire and want an income you can’t outlive then you’d be wise to buy annuities to supply a lifetime of income. Annuities offer a great deal of diversification in your portfolio if you select an equity indexed annuities. If you fret too much about market conditions, these products also have guarantees.
For those that simply want an interest bearing product then a fixed annuity might be just to their liking. Fixed annuities work very much like bank CDs. The difference between the two is simple, tax deferral of the growth. Retirees and those about to retire in a higher income bracket benefit from sheltering their interest growth from taxation.
If you’re a retired senior on social security, you know there comes a point when your income exceeds the limit and you have to pay taxes on the second half of your social security. Buy keeping the growth of your dollars in a tax-sheltered product; you could save hundreds of dollars each year by not only sheltering that growth but also keeping your income under that fine line that triggers even more taxation.
People often buy annuities for more than just the tax break they receive. The products are also good investments. People often prefer Equity Indexed annuities to mutual funds because of the vast number of fund families represented in the index selected. If the purchaser changed fund families outside the annuity, he would have to pay a new load each time he made the change.
Of course, each change would trigger a taxable incident. While the equity indexed annuity owner eventually has to pay taxes on the growth of the annuity, the taxation process is a lot simpler. The mutual fund owner has to fill out the laborious capital gains form. This means that he must track every transfer he makes, including date, purchase and sale price.
At tax time, he must fill in the ominous form that brings grown men to their knees and makes women weep. Even accountants aren’t impervious to an occasional swear word when it comes to capital gains on mutual funds. The annuity owner, however, simply reports the gain shown on the 1099.
When you buy annuities for an immediate income, you have a lifetime of income no matter how long you live. While it is a comfort to know that each month you’ll receive another check, it also is a benefit to getting older. The longer you live, the more you make on your investment in the annuity.
If you buy annuities to pass money on to heirs, you have a choice on who receives the funds. Unlike wills, heirs or want-to-be heirs can’t contest beneficiary designations as they can wills. This means a disgruntled family member won’t be able to tie up the assets and keep them from the rightful owner.
Retiree’s Tools and Calculators
J.P. Getty said, “People who don’t respect money don’t have any.” A key component of every financial plan is a retirement projection mapping out the type of lifestyle the retiree would like to enjoy, & how they are going to get their goals. This calculation depends on several key factors: the retiree’s current age, size of their nest egg, expected retirement date, desired lifestyle during retirement, & a projected life expectancy.
Interestingly, a majority of wealthy Americans said they’re concerned that they won’t have enough retirement income to last through their lifetimes, according to a 2010 Bank of America survey. The Bank of America survey said 53 percent are concerned about making sure retirement assets will last.
Over half of non-retired respondents made some adjustments to their lifestyles last year, such as spending less on personal luxuries or giving less to charities, & 29 percent said they expect to retire later than originally planned, the study said.
In a recent survey conducted on behalf of Merrill Lynch Global Wealth Management, retirees were asked where they would recommend those within ten to fifteen years of retirement focus their attention on retirement planning & where those over fifteen years from retirement should be focused:
Within Ten – Fifteen Years of Retiring:
• Generate a retirement plan around what is most important to you (51 percent).
• Have a retirement plan to manage income throughout retirement (47 percent).
• Pay down debt before retirement (40 percent).
• Account for unexpected costs & risks such as health care, cost of living and/or market fluctuations (38 percent).
• Pursue home ownership (24 percent).
• Be cautious of taking investment risks (21 percent).
More Than 15 Years Before Retiring:
• Generate a retirement plan around what is most important to you (43 percent).
• Pay down debt before retirement (41 percent).
• Have a retirement plan to manage income throughout retirement (39 percent).
• Account for unexpected costs & risks such as health care, cost of living and/or market fluctuations (38 percent).
• Work with a financial advisor if you don’t already (25 percent).
• Pursue home ownership (25 percent).
No doubt if you follow the financial advice of these retirees, you will do all right.
Being conservative when constructing a financial plan is critical — The assumptions made in your plan should always be conservative & achievable. Frequently updating the financial plan maximizes the probability the client’s goals will be achieved.
Other variables to think about are the rate of return the client’s investments can accomplish (both before & after retirement), how much the client can contribute to their nest egg before retiring, & the effects of inflation.
When it comes to getting a handle on your financial situation & gauging how much you will need to retire the Internet offers a buffet of retirement planning tools & calculators that can be helpful. A number of the best retirement planning tools & calculators are easy to use & don’t charge a fee.
Plenty of retirement calculators chart your retirement outlook & suggests ways to help you create a plan to reach your goals and/or projects whether your retirement-income needs will be met based on your retirement savings, other financial assets, & age.
There’s plenty of sites that you can utilize to figure out how much you need to save for retirement. First look at your Social Security Benefits on the Social Security government web-site you can estimate your future Social Security retirement benefits at different ages using different future earnings projection. http://www.ssa.gov/estimator .
Life expectancy planning is the next step in planning. http://livingto100.com The Living to 100 Life Expectancy Calculator uses the most current and carefully researched medical and scientific data in order to estimate how old you will live to be. Most people score in their late eighties… how about you?
www.tomorrowsmoney.org Wouldn’t it be nice to look forward to the future with confidence? Well, tomorrow is right around the corner. Take a few easy steps now and you and your loved ones will be able to enjoy a secure future with the money you’ve begun saving and investing today.
Everyone wants to look forward to their future with confidence, but it’s difficult to know how to save and invest until you know three things:
1. How much money you currently have
2. How much money you’ll need, and
3. What type of investments to look into given your own personal needs.
This calculator is the first step in helping you answer those questions and making the money you earn today work to build you a better tomorrow.
http://www.choosetosave.org/ballpark/index.cfm?fa=interactive This site was created by the Employee Benefit Research Institute, this financial website offers savings tips, retirement calculators, and links to retirement resources to help you plan your retirement.
http://cgi.money.cnn.com/retirement/tools
http://moneycentral.msn.com/personal-finance
http://finance.yahoo.com/retirement
http://www.walletpop.com/calculators/retirement .
http://screen.morningstar.com/IRA/IRACalculator.html
http://immediateannuities.com .
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Annuities Manage Investment, Longevity and Inflation Risks.
Annuities are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year. The average 401(k) fund balance dropped 31 percent to $47,500 at the finish of March 2009 from $69,200 at the finish of 2007, according to a Fidelity Investments review of 11 million accounts it manages.
The distribution of assets is an art. For most of us, the immediate aim is to save for retirement so they can have a comfortable lifestyle. But once you have achieved that goal, the next task is to ensure that you don’t withdraw so much from your retirement nest egg that you finish up outliving your funds.
An annuity is a type of “insurance” against outliving our assets. Annuities are a widespread retirement product that guarantees a steady stream of income for a lifetime. An annuity is a contract between you and an insurance company, In exchange for your premium payment, the insurance company guarantees you income, beginning immediately or at some time in the future.” This potential income can be a great supplement to Social Security.
When it comes to retirement planning, there’s three main risks to a sustainable income. Investment risk, Longevity risk, and Inflation risk.
Stocks or mutual funds can lose money. Of coursework, they all understand this from watching recent financial news. Certificates of Deposit & Savings Accounts are also safe, but they have low interest rates.
Equity Indexed Annuity – The rates will be tied to a huge index like the S&P 500 or the Dow Jones. The return rate will be less than the actual market return in years when the index goes up. When the market goes down though, there is a guaranteed return rate so the account does not lose funds. A common guaranteed return would be 2% – 3%.
An Equity Indexed Annuity is the one device that can accomplish all three risks.
Investment risk: All investors have experienced the ups & downs of market cycles, but these fluctuations can be problematic in the years before & after retirement. The ability to generate a lifetime income from retirement can depend greatly on when you start to take income and, specifically, on the sequence of your returns. Negative returns early in retirement have more impact, and when returns finally turn positive, it takes longer to make up the losses caused by the initial declines.
Equity Indexed Annuities, provide investment risk protection by helping to assure a predicable level of income, regardless of market conditions.
Longevity risk: The risk of outliving your retirement savings. Thanks to advances in science and medicine, life expectancies – and the length of the average retirement – have increased by 20 years. and if both you and your spouse reach age 65, there is 52 percent chance that one of you will live to be 90. (Source: Society of Actuaries, 2006.)
As a result, without careful planning, the risk increases significantly that you may outlive your retirement savings. Income must be able to sustain lifestyle needs for much longer, while also covering health care, housing and other costs for an extended period of time. Length of retirement… life expectancy- It is very important to make sure your assets last a lifetime and if at all possible increase to provide for adjustments to the cost of living.
Equity Indexed Annuities, eliminate longevity risk by generating a guaranteed flow of retirement income that cannot be outlived.
Inflation risk: What would appear to be a statistical marvel is a financial irony, for inflation can devastate lives as readily as healthy lifestyle choices and modern medicine can sustain them. Inflation erodes the purchasing power of your income and wealth. and it doesn’t stop because you have retired.
Of particular concern in any retirement income plan is the cost of health care, which is rising far more rapidly than the cost of living. During the past six years, while inflation was pushing prices up by about 20 percent, the cost of health care over doubled.
Equity Indexed Annuities, combat inflation by allowing you to access the upside of the equity market and lock in gains to increase potential retirement income.
Historically in the past, it was possible to address these risks individually by combining multiple types of investment products, but it was impossible to effectively reduce all risks with a single investment vehicle. Today, however, new annuity designs integrate a range of features and benefits that make it possible to deal with all three risks.
