Annuity – Longevity or Health Risk Solution

Couples often don’t realize until they’re near or actually in retirement that their savings may not generate sufficient income to support the life they expected.  As preretirees, especially Baby Boomers, shift from the accumulation phase of their retirement planning to distribution, they need to be sure that they understand the risks they face as a retiree.

Something as simple (or as common) as an illness, injury, longevity (i.e. outliving your savings), inflation, market performance, or current interest rate can derail all your careful retirement planning.

As luck would have it, we’re caught in a unique period of time where two trends are converging to put the squeeze on our retirement dreams.

A weak economy and longevity are income-threatening challenges facing preretirees.

You will have to plan for your expenses. This number should include more than an estimate of your expenses as they sit right now because after you retire, you may have additional expenses (e.g. increased health care costs), new expenses (e.g. illness therapy), less income (in the case of lower than expected returns), maintenance expenses (e.g. your roof will need to be replaced at some point during your retirement you stay in the same house you live in now), and the cost of your expenses will likely increase due to inflation, if for no other reason.

It is important to assess and inventory income sources by listing the most predictable sources and amounts of retirement income. These may include Social Security, pensions and other long-term retirement income resources. Then list income from investments and assets like CDs, stocks, bonds and employer-sponsored plans. 

Most people understand the importance of diversifying their financial portfolio, but when it comes to deciding how to convert their savings into income, creating a plan that provides guaranteed income for life can help families mitigate two of the biggest risks to their retirement income – longevity and an unexpected health event.

You may not think of pensions and Social Security benefits as “immediate lifetime income annuities.” But that’s what they are, paying a set monthly amount for life (with Social Security, adjusted for inflation).  Annuities are a type of investment that is designed to pay you monthly income over your lifetime. 

The greatest component of an annuity is guaranteed benefits. These provide built-in protections that allow investors to transfer some risks to the insurance company.  These gurarantee benefits allow retirees to protect themselves from risks, such as longevity, illness, inflation and market volatility that could compromise their financial security.

By choosing a lifetime payout, it is possible you will receive a guaranteed income stream you will never outlive, lessening longevity risk.

The peace of mind this knowledge brings — together with the freedom to invest the rest of our money more aggressively if we want — is to us the most important and often unheralded benefit of lifetime income annuities.  The advantage of this type of investment is that you are guaranteed income unlike other investment strategies.

The point: An immediate annuity is not so much investment as insurance against outliving your money. Independent studies have found that including an immediate annuity in a retirement portfolio boosts income because the steady annuity payouts lessen the need to sell other investments for living expenses during a down market.

You may well achieve a greater rate of return by investing your money elsewhere, particularly with interest rates so low (annuity payouts are based on age, gender and prevailing rates when you buy). But an annuity may provide a bigger return if you live a long life and keep collecting for many years.

Fixed annuities (both traditional and equity index) can be appropriate investment vehicles for someone looking for an investment that has preservation of principal as its primary goal.  There is a fixed annuity (known as equity-indexed) in which the investor receives a guaranteed rate of return. However, the return can go up based upon the performance of the stock market.

With these types of annuities, in addition to buying U.S. Treasury and government bonds for the portfolio, the insurance company also buys some options on various indexes of the stock market.  If the stock market performs well, the return can rise.  On the other hand, if the market does not perform, the principal is not at risk.

The rising cost of health care has become one of the biggest and most complex issues facing our country—in fact, it’s likely to be your Boomer clients’ greatest or second greatest expense in retirement.  The Long Term Care Insurance (LTCI) rider on an annuity is an equally effective door opener because it also addresses the crucial need to fund long-term care. 

Medicare does not cover long-term care.  The treatment of long-term care insurance riders that are added to annuities have opened the door to health concerns of retirees.  The “last in first out” IRS rule is thrown to the wind because the cash surrender value of the annuity can be used to fund the LTCI portion of the contract without a tax consequence to the contract owner.

The cash surrender value of the annuity can be used to fund the LTCI portion of the contract without a tax consequence to the contract owner. Charges that normally would be assessed against the annuity’s cash value for such distributions are excluded from gross income.

The charges will reduce the basis in the contract and will not be tax-deductible, but they may create an incentive for the annuity owner to use those assets when he needs them, rather than spending out of pocket for LTCI coverage he may never use. 

The contract owner can use the annuity’s cash to fund his retirement or long-term care needs, whichever he prefers. Ultimately, these hybrid products are not seen as a replacement for LTCI coverage but as a form of self-insurance.

Annuity – An Retirement Income Formula

Change (good and bad) is inevitable in life. Some you choose, some – like the current financial crisis – is thrown at you. It was just a few short years ago, when everyone held bright and optimistic outlooks for their futures, that the sorts of financial considerations needed today took a place on the back burner. 

You understood the downside of poor money habits.  But the feeling that things would eventually work themselves out has diminished.

Now, the prudent saver and investor is examining their financial lives like never before.  Baby boomers in particular are analyzing their retirement options to determine how much risk they’re willing to take in order to increase their savings.

Most people think retirement planning is about saving, investments, and the timing of retirement account withdrawals and Social Security benefits. Once upon a time, retirement funding consisted of one-third Social Security, One-third corporate pension, and one-third personal investments.  But in 2010 that formula no longer works.

The financial crisis of 2008-2009 forced many consumers to take a closer look at their complete financial picture.  In this new economic climate, the less you have, the more careful you need to be. Ensuring you have sufficient income is definitely one of the most important aspects of retirement planning.

As the saying goes – the buzz word for many consumers has become “risk” rather than “growth” heightening consumers concerns about the return “of” their money rather than the return “on” their money. 

Baby boomers are more challenged than ever to have retirement solutions that can guarantee income for life while allowing for the possibility of increasing income.  In an unstable economy you need guard what you have, but with care, you can certainly continue to have your investment portfolio grow in your senior years.

There is no one investment portfolio that is right for every retirement plan. The image most people have of investments involve securities like stocks, bonds, options and futures. But a much more mundane type of low risk investment is the annuity which is good for people who wish for a stable investment income.

People who own annuities ranked them second-highest (50%) in satisfaction among all financial instruments, beating out mutual funds at 38%, stocks at 36%, U.S. savings bonds at 35% and CDs at 25%.

Here’s where your annuity offers you a return that’s, in part, fundamentally different from your other investments – like CDs, stocks, bonds, and mutual funds. All these other investments represent your money. They each have a risk to your money and return on it. But none of them offer you more than your principal plus whatever earnings that principal may produce.

Your annuity does. It offers you the assurance that you’ll get paid a fixed monthly payment for the remainder of your life – no matter how long you live.  It’s a better deal to buy the immediate annuity since the assurance it gives you that you’ll always have an income no matter how long you life is itself a return – and a better return than earning the 5% or more that can leave you broke. .

Thanks to science & technology our longevity has increased and numbers of working years haven’t.  Yet, after retirement the cost of living will be much higher and your income may not be steady. This is the period when you will be dependant and cost of medical expenses will be at the maximum. For a steady income after retirement you need to have proper retirement plan.

Financial independence conjures up more than simply cash or material wealth; it also suggests a certain peace of mind and an approach to life that focuses on abundance and not shortage.  Since the risk levels are relatively higher today, retirees should still approach such investments with caution and careful scrutiny. 

Seniors should still consider the annuity as a potential source of retirement income. The immediate and income annuity’s special features allow you to obtain lifelong payments from your investment, making it a good addition to your portfolio.  Annuities come with guarantees, which make these one of the more stable ways to protect your retirement money.

Annuity Solve “Boomer Honeymoon Phase”

The “honeymoon phase” of a relationship is simply that. It’s just a stage. It will not last.  As life expectancy continues to increase, we’ll have to rethink what the ideal retirement age is and how big of a nest egg we need to accumulate to pay for a comfortable retirement. 

Longevity risk is the risk of outliving your savings. Due to advances in medicine and healthcare, people can expect to live longer after retirement.  Being retired for 20-plus years seems to be the norm today.

There is a more conservative orientation of investors in the wake of the severe recession beginning in 2007 and concurrent plunge in equity values that did great damage to investors portfolios and retirement plans.  This is the key reason why there has been a big shift among investors moving from high to low-risk portfolios.

People used to believe that in retirement you could live on a fraction of what you did while you were working. In today’s world this makes no sense. The honeymoon is over, everyone will need a rising income throughout your lifetime. We all know this to be true. After all does anyone think that 10 years from now it’ll cost you less to live than it does today? 

What does a person do?  Surveys show that the typical mutual fund investor does little if any additional research on the funds that are recommended; instead, they do exactly what their broker or financial planner or investment adviser suggests, without second-guessing that recommendation.  

This creates a problem for investors as they have become extremely vulnerable because they choose to rely heavily, if not exclusively, on the recommendations they receive from professionals – to help them make investment decisions. –

This is serious given the conflicts of interest that pervade the securities industry and investors’ difficulty in distinguishing between sales- and advice-based services. Whereas, in comparison, annuity brokers are required to disclose all information to the buyer about the risk involved in taking on a particular annuity, the charges involved and the company’s financial information.

Most annuity brokers maintain high standards of honor and loyalty, promoting just and equitable principles of trade. They are not supposed to use any fraudulent device or malpractice to induce the buyer to invest in high-risk annuities.

How can annuities help protect your principal.  Spend what you earn from your investments carefully.  You’ve worked hard to acquire your money.  It’s not how much income you gross but how much you get to spend after tax. So even though you may be retired, you have to watch your taxes .

Instead of drawing down on one account at a time, take a little income from each account. Interest, dividends, capital gains, and a tax free income combination will keep your income high and taxes low.

Most income annuities offer last-in, first out (LIFO) tax treatment.  This method of payment could result in paying out the gain and income principal on a pro-rata basis and allow an individual to control and distribute income more tax efficiently.

Boomers who are at or near retirement and who depend on an annuity (in addition to Social Security and an IRA or pension) to fund basic living expenses will give greater priority to income guarantees.

Annuities provide a reliable flow of cash that you can use to augment your spending, giving or investing.  Annuities are a safe mode of investment. They offer very strong asset protection to all clients.

An equity indexed annuity is an insurance contract linked to a common market index, such as the S&P 500. If the index grows you’re entitled to a majority of the earnings. If the index declines, you’re account is protected against losses with a modest baseline rates.

A fixed index annuity offers the benefit of capital preservation and equity-based growth. This means you’ll spend less time worrying about your nest egg’s safety and grow your wealth faster.

The diminished liquidity of index annuities make them well-suited as retirement instruments. Investors looking to capitalize on market growth can do so with risking loss of principle. Investors with a horizon of 5+ years are ideal candidates for index annuities.

In looking at historical data, index annuities often out-perform investments that are traditionally thought-of as higher-yielding, and this they do without exposing investors to undue market risk. Growth potential for index annuities is strong, averaging 10-15%, on up years, and 1-3% on down. Over periods of 10-20 years, an index annuity is guaranteed to shield your money from economic turmoil while averaging 7-10% returns.

Index Annuity Features:  Index annuities vary, but generally feature:

• Single Premium — Buy into the contract with a single lump-sum payment. Further investment typically requires additional contracts.
• Invest in the Market — Linked to an index like the S&P 500. Equity indices outperform debt-based vehicles like CDs or bonds in the long-term.
• Minimum Guaranteed Rate — No matter how much the market drops in a given year your account will grow at the 1-3% baseline rate.
• Low Risk — Can’t lose principle. Money can only be lost if the insurer becomes insolvent and your investment exceeds state annuity insurance.
• Good Growth — Ideal of investors looking for stock market growth and coverage against bad years. Good retirement vehicle.
• Variable Returns — Annual rate of return varies based on index performance.
• Hassle Free — No micro management. Sign the contract, pay the premium, start growing your nest egg.
• Vesting Schedule — Withdraw earnings early without penalties up to certain amounts.
• 1-10 Year Term — Index annuities are available for short, medium, or long terms.
• Tax Deferral — Pay nothing on interest earned until you cashout. Earn interest on the IRS’s money.
• Unlimited Contributions — Invest as much as you’d like tax-free without the IRS breathing down your neck. Beats 401(k) and IRA.
• Life Insurance — Optional life insurance provision offers death benefits to loved ones. Save money on separate life policy.
• Inheritance — Bequeath money to loved ones probate-free. Avoid estate/death taxes.
• Tax-Free Gifts — Gift up to $10,000 per individual, per year, tax-free. Gift money to an unlimited number of individuals.

Recessions and down-turns are inevitable over long time frames. In fact, they’re guaranteed every 5-10 years. If that were not the case, index annuities would be foolish investments. But as it is the case, index annuities are sound investments because they average out natural market volatility.

Index annuities offer greater overall benefits than directly investing in stocks or even a market index. Debt-based instruments like bonds and CDs are a guaranteed bet (the same as index annuities), but they offer half the growth potential.

This, in addition to miscellaneous advantages like tax-deferral, death benefits, lifetime income options, and probate avoidance, make index annuities a great candidate for your retirement plan.

Annuities: Safe & Secure

A secure retirement is a dream of everyone who worked hard for years.  Yet after two brutal bear markets (2001-2002 and 2008-2009) retirement plan investors in 401(k) plans saw much of their lifetime retirement savings get walloped.

After the chaotic stock market of the past few years, capital preservation and sleeping well at night have trumped most other things. For investors dependent on interest payments for income, especially those near or in retirement, the current environment is challenging, to say the least.

The bottom line is that today’s retirees face greater challenges than ever, with diminishing sources of income, longevity risk and volatile markets that have eaten away much of their retirement portfolio.

Low yields mean low income, which has investors concerned about risk as they try to figure out how to augment their investment earnings without taking too big a gamble.

This doesn’t resonate if someone is trying to live off the investment income of a certain amount of principal. At 2007 rates, for example, you would have needed $1 million in government bonds to generate an income of $50,000 a year. Today, you’d need nearly twice that much.

It is often tempting to risk it all for the promise of a high return on your investment but you must remember that with great reward comes great risk and most of the time your security is simply not worth that particular risk.

You just can’t count on companies as we’ve seen big-name firms run into serious trouble in the last several years, including some big-name companies that were established nearly a century ago (Bear Stearns, Lehman Brothers, Enron, Worldcom) wind up defunct.

If you decide to delve into the realm of stock market investment you should be aware that every transaction costs money, that you need to thoroughly research the ins and outs of this type of investing, and that you are taking a substantial risk with your retirement investment.

History provides many lessons for all of us. There remains a need for retirement products that address volatility and attempt to generate consistent, absolute returns.  The idea of income planning, unlike other financial-planning concepts, is natural and comforting to many Boomers approaching retirement.

Perhaps they have gotten used to receiving two paychecks a month for 40 years or more. Remember the peace of mind that a steady income gave you during those years. Why would you want to give that up when you retire?

No amount of accumulated assets can replace the comfort created by a steady and guaranteed income for life, particularly an income that has built-in inflation hedges.

401(k) legislation was passed and rules crafted in the late 1970’s/early 1980’s. This 401(k) legislation was rooted in the belief that permitting investors to have more input on numerous aspects of their retirement savings was a good thing. 

These aspects included segregating each individual retirement account, offering the choice to save (defer) or not to save, ranges of deferral amounts, the ability to modify those deferral amounts, investment election choices, portability, loans and much more.  There were, however, no guarantees.

The “guarantee” was resurrected for retirement plan savers in the form of annuities. Unlike Bear Stearns and Lehman Brothers, the insurance industry has its own “insurance” in the event that one of the companies runs into financial difficulties and defaults.

Policyholders can rely on the insurance guarantee funds of the various states, to the extent that they are available. While this is not the same as a Federal guarantee, no state life insurance fund has ever let one of its members renege on its claims. The state funds typically get other stronger insurers to takeover the failed companies’ policies.

With CD rates at all-time lows, ultra-conservative investors are looking to annuity plans as a place to secure a higher return on their retirement nest egg.  Annuities that have guaranteed income benefits attached to them are appropriate for a large portion of the population. Additionally, the Fixed Indexed Annuity product has solved the market volatility problem.

What Does Standard & Poor’s 500 Index – S&P 500 Mean?

The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index – each stock’s weight is proportionate to its market value.

An indexed annuity pays out a rate of return on your money that’s tied to an economic index, such as the S&P 500. It’s considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment, but can also enjoy a higher return when there are gains in the broader market.

In a study conducted at Wharton School by authors Marrion, Babbel and VanDerPal’s, Real World Index Annuity Returns, shows that, based on data from 15 Fixed Indexed Annuities issuers, Indexed annuities outperformed conventional investments during much of the past 10 years —a  period when the S&P500’s cumulative return has been roughly zero.

The five-year annualized returns for indexed annuities, from 1997 through 2007, averaged 5.79%, compared to 5.39% for taxable bond funds and 4.73% for fixed annuities. From April 1995 through 2009, indexed annuities beat the S&P 500 over 67% of the time and a 50/50 mix of one-year Treasury Bills and the S&P 500 79% of the time.

Starting in 1997 through 2004, during eight five year periods, their data shows, the indexed annuities they looked at, offered an average annualized return of 4.19% to 9.19%, with no negative years. By contrast, an investor in the S&P500 would have seen four positive five-year periods and four negative ones.    

The question is how do Fixed Indexed Annuities maintain such an apparently even keel? In a bad equity markets, their substantial bond component offers downside protection. In rising equity markets, their equity option component increases in value.

Investors in Fixed Indexed Annuities therefore don’t need to fear the bears and aren’t as slavishly dependent on the bulls. Or, as the authors put it:  “By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.”

Besides insulating investors from volatility, the-authors say, Fixed Indexed Annuities do, contrary to certain media reports, offer liquidity (penalty-free withdrawals of at least 10% a year) as well as tax-deferred compound growth.

The usual definition of safe money is money you cannot afford to lose. AnnuityNews.net defines a safe money place as one where your principal is protected from loss as long as you follow the initial guidelines, and if you do decide to take your money and leave, you know pretty much what leaving early will cost.

The opposite is a risk money place where if you decide to take your money you don’t know what you will get back. It could be more than you put in – risk money places offer the potential for much higher returns than safe money places – but it could also be less than you started with or even zero. 

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.