Annuity Security

There are 70 million plus baby boomers generation retirees that are on the verge of needing benefits, including medical expenses as well as normal retirement income.  One of the biggest risks in retirement is longevity, or the risk of outliving one’s resources.

Some say that an even greater risk is going to be the need for Long Term Care.

Most often, retirement savings and accumulation occurs over 30 to 40 years, but now de-accumulation, or the spending down of your assets, can be just as long.

Yet at the same time, politicians cannot seem to keep their hands off our Social Security system. 

Congress is considering cutting Social Security benefits. What’s worse, no consideration is given to the fact that Social Security has not contributed one penny to the federal deficit. 

What a situation Boomers are finding themselves in.

These days, retirees and near-retirees should first be vigilantly looking for ways to maximize their income. There are three sources providing retirement income: Social Security, pensions and annuities.  They also have to be sure that there is little risk of losing their savings.

Buying an annuity can help seniors achieve these two goals. The process of Social Security contributions (during the working years) then benefits (annuitization period) mirror the process of an annuity. 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.

Those receiving Social Security know that, depending on their earnings, they are responsible for paying income taxes on a portion of their benefits. The IRS adds half of an individual’s Social Security benefits plus all other income (such as pensions, CD/bond interest or capital gains) to calculate the income taxes owed.

By moving liquid investment funds into a deferred annuity, retirees may be able reduce or eliminate taxes on Social Security income. An added bonus is that deferred fixed annuities are a safe, stable way to reap tax-deferred growth on savings.

The two primary categories that people are most familiar with are the immediate and deferred annuities.  An immediate annuity is appropriate for somebody who wants to begin receiving income immediately.  Immediate annuities promise to yield a stream of regular income that is a great support for the retirees who do not have any other source of regular income.

As per this plan, the retired people receive a certain amount of money by check on a fixed date every month. You can purchase a 25 year Period Certain immediate annuity that will generate payments of $539 per $100,000 premium. Income of $539 each month will be paid for 300 months or $6,468 per year for 25 years. That’s a cash flow rate greater than 6% a year. What’s better is that 75% of each payment is considered a tax-free return of principal.

The mistakes you make along the way… can really shrink the size of your retirement nest egg down the road.  People today tend to have longer life expectancies means statistically boomers will be in a pool of individuals who have more than a 50 percent chance of needing long-term care at some point.

A recent study by the National Association of Insurance Commissioners, found that 68 percent of people older than age 65 are likely to need long-term care. And as the population ages, this will continue to grow.

On an hourly basis nursing care comes in at $22 to $25 per hour — long-term care costs an average of $60,000 a year at assisted living facilities and more than $85,000 a year for nursing home facilities costs that can implode even the best of retirement plans. 

Boomers should consider an annuity that could provide the rest of the predictable monthly income, ensuring they will never outlive their income. Additionally, an annuity may be the solution to the problem of needing long term care and qualifying for Medicaid assistance.

Annuities can be an invaluable tool in Medicaid planning. When used correctly, an annuity can convert a person’s spend-down amount (excess resources) to a stream of income for the spouse at home, or, in the case of a single or widowed person, can preserve some of the spend-down amount for expenses not covered by Medicaid.

Medicaid will pay for nursing home costs; but it does so only for those who are impoverished. Since Medicaid is a combined state and federal program, each state defines how little your assets must be before Medicaid will pickup your nursing home costs. Typical asset threshold levels are about $2,000 to $3,000.

When you apply for Medicaid help, it ‘counts’ your assets to determine if you qualify for free assistance. If you have too many, it’ll charge you annual costs appropriate to your state that you must pay from your assets until you’ve spent down your money to your state’s threshold asset level.

You can’t simply transfer your assets to someone else to impoverish yourself before applying for Medicaid. Medicaid will attribute whatever you transferred as a countable asset -unless you transferred it some 5 years – called the look-back period – before applying for help.

In the case of a married couple, when one spouse claims Medicaid assistance for his long term care, the state can consider the couple’s assets for first paying for Medicaid’s assistance. Rules allow the healthy spouse some percentage of the couple’s assets to live on. But Medicaid will claim any amount in excess of this for payment of the other spouse’s long term care costs.

An exception to the assets that can be claimed by Medicaid is any income stream the healthy spouse receives. So, by buying an immediate annuity with any excess ‘countable’ assets you have converts them into an income stream – which makes them a noncountable asset. Doing so also avoids the 5 year look-back period requirement.

To use an annuity to side step Medicaid claims, it has to fulfill these requirements:

* it must be irrevocable

* it cannot cover a term longer than the purchaser’s life expectancy and the payments expected during the annuitant’s life expectancy must at least equal the cost of the annuity,

* its payments must begin immediately, so a deferred annuity is excluded, and

* unless there is a spouse, a minor, or disabled child, the state must be named as the remainder beneficiary up to the amount of Medicaid provided

Lastly, the healthy spouse must name the state as the remainder beneficiary for costs incurred by the Medicaid recipient as well as herself if she ever receives Medicaid. (This provision would only come into effect if that spouse were to die before the guaranteed payments under the annuity had expired).

Medicaid planning requires competent legal guidance to keep your planning abreast of current laws. If you’re interested in using an annuity, be sure you acquire one whose provisions will avoid Medicaid’s claims.

Before you make a decision as to which annuity type best meets your retirement, financial goals and needs study the options and ask a financial consultant who you trust to explain the advantages and disadvantages of each annuity in your specific situation.

Golden Years Best With An Annuity

Americans’ attitudes, ambitions and preparation for retirement have changed dramatically as a result of the recession. As the stock, real estate and commodities markets continue to take investors on a rollercoaster ride, people planning for retirement may want to consider purchasing annuities. 

Stock market investors and 401K plan participants that invest in the stock market most likely saw a decline in value over the past few years due to the declining economy.

Yet those who invested in fixed indexed annuities most likely saw their holdings remain steady.

Stocks can be daunting since there’s always the risk that the company won’t be profitable and you’ll lose your investment. Most workers are worried that their retirement savings won’t last the rest of their life.  

Employees with a traditional pension are considerably more likely to feel satisfied with their financial situation than those with only a 401(k) plan. The best solution, which seems to be gaining ground it building the purchase of annuity right into the person’s 401(k) plan. This would allow them to see exactly how much they would get if they retired.

An ordinary annuity can provide a much-needed financial cushion. Further, investors can add options to an ordinary annuity such as one that pays a death benefit to a beneficiary or one that continues to pay a surviving spouse until his or her death. And, the tax treatment of an ordinary annuity is very favorable. All earnings grow tax-deferred until they are taken as part of a monthly payout

Over time, medical advances and the general rise in the standard of living have ensured that many live decades into their retirement. While this is definitely good news, what follows is not. Since people live 20-30 years into retirement, they need that much more money to see them through their golden years.

Planning for the retirement corpus means planning for a corpus that will help a person sustain for over 20 to 30 years.  When one thinks about retirement, the pension programs of insurance companies with their actuarial element – how long you will live is calculated into the payout, seems to be the most common and easiest route.

Retirement can only be fun when you have a regular income to support you. You can easily do this by going for a retirement annuity wherein you can convert a lump sum of your pension’s cash into regular income for the time ahead.

Most people who choose to invest in annuities instead of venturing into other investment opportunities do so because it ensures guaranteed periodic payments for the rest of their lives. Unlike investing in stocks, annuities are fixed so you are guaranteed the same amount every month. It is a perfect option for those who do not want to risk losing their savings into an unstable investment.

An index annuity with a “living benefit.” your living benefit value will rise by a guaranteed annual rate, in simple interest. So if you invest $100,000 with the intention of leaving it alone for 10 years, your account will have a living benefit value of $180,000.  A plus of the living benefit contracts compared to a regular life annuity is that you can access your principal, if necessary. You can’t do this with a life annuity – once you buy it, all you can get is a lifetime monthly income.

One of the biggest advantages of purchasing an annuity contract is that it is backed by the state guarantee funds so your investments are not lost in case the company becomes bankrupt and cannot pay. In addition, because any funds that are paid out as a lump sum is potentially taxable and the best way to minimize tax is to purchase an annuity.

A person readying for the retirement phase, needs to insulate himself for a few years from the fluctuations of the equity portion of his portfolio. An indexed annuity is simply a fixed annuity that credits interest in a very unique way. It pays interest based on the performance of a stock market index, usually the Standard & Poor’s 500.

A Fixed Index Annuity (also equity-indexed annuity) is a special type of fixed annuity contract that fuses the safety of fixed annuities with higher participation in the financial market. Strictly speaking, it is not an investment- as it is primarily an annuity contract between an annuity investor and insurer or annuity provider.

Indexed annuities are not at all like mutual funds which actually purchase stocks on your behalf and subject your principal value to market risk. In an indexed annuity your principal is never subjected to the fluctuations of the stocks in a fund because you never actually own any stocks. So unlike a mutual fund, you do not lose principal value in an indexed annuity if the stock market goes south.  There is no reason to panic about the erosion of capital when the market plummets.

Without getting too technical, the insurance company pays interest to your account based on the increase in the S&P 500 index, (The Standard and Poor’s 500 is the index most often used, as it viewed as the most representative of American industry) usually up to a cap.

The gains paid on an indexed annuity are tied to an underlying stock market index. However, indexed annuity funds cap the rate that will be paid.  For example, if the cap rate is 6%, even if the S&P 500 rises 8%, only 6% will be paid to the annuity.

In order to offer an additional level of investor protection, most insurance companies also offer a floor at which losses will not drop below. If the floor is 0%, and the market is down 3% for the year, the investor will lose nothing.

Indexed annuities are excellent way to benefit from the upside of an upswing in the stock market without the downside or market risk because you are not actually invested in the stock market.  A No Loss Guarantee is in place, should the S&P lose 15% in a year your loss is ZERO! That’s right S&P 500 loss means no loss of principal value.

The “Hair of the Dog” is Delaying our Economic Recovery

**An interesting view of our economy by Bob MacDonald: 

Have you ever been out on the town and had way too much to drink? So much so that when (if) you wake up the next morning you feel so bad that no matter what you do, it seems the only way you will ever get better is to die? Well, that is what happened to our economy.

The reality is that there is nothing wrong with the economy. It is simply temporarily reacting to the overindulgent abuses we’ve heaped upon it through our irrational misbehavior.

Don’t get me wrong, drinking alcohol is not a bad thing. Doctors even suggest that moderate consumption of alcohol (especially red wine) can be good for one’s health. But drinking too much can often be a problem. That is the reason why regulators require alcohol companies to put “drink responsibly” in all their ads. If we were to follow that rule and drink responsibly (we may not have as much short-term fun), we would never have to deal with the pain of the dreaded hangover.

If those who impact our economy – business, government and consumers – had been constantly warned to “act responsibly,” our economy would not be suffering the painful hangover it is now. But unfortunately the hedonistic message was to “party”—not to be responsible.

In the aftermath of acting irresponsibly — both fiscally and drinking immoderately — we are tempted to speed the return to normalcy by a shot of the “hair of the dog.” In a drinker’s parlance, that means consuming alcohol (typically a Bloody Mary) to reduce the pain of a hangover. For politicians, the superstition is to pump money into the economy to make things feel better. In either case, however, the result is more wishful thinking than established fact.

Economics 101

The cardinal rule among economists is that availability of capital is essential to the growth of an economy, and in difficult times, some reasonable amount of capital infused into the economy can jump-start and stimulate a recovery. Politicians, who need a strong economy to maintain they place and power, are only too happy to follow this rule. The problem is that in perilous times, such as the current recession, politicians often become drunk with power, and they can infuse to excess.

For most of our economic history the vehicle used to infuse capital for growth or to withdraw capital from an overheated economy has been the tax system. The theory was that reducing taxes would leave capital in the private sector that would be used to stimulate the economy. The belief was that, even with lower tax rates, the new growth would create revenues sufficient for government to cover the cost of the tax cuts. By the same token, it was believed that when the economy was overheated to an extent that caused damaging inflation, the solution was to withdraw capital – through higher taxes or increased interest rates – from the economy.

The first actions of Presidents Kennedy and Reagan – a Democrat and a Republican – both of whom entered office with the economy in the doldrums was to push for tax cuts. When Richard Nixon was in office he sought to control an unstable economy by raising taxes. President Carter attempted to control runaway inflation by allowing interest rates to rise to over 18 percent. To some extent, each of these actions achieved its objectives.

Then came the 1990s and the new millennium when the politicians came to believe that if a little capital infused into the economy stimulates growth, then a lot of cheap capital could produce boom times forever. This worked for awhile, but the “dot-com” crash of 2000 should have been the canary in the coal mine. It was, but we didn’t listen.

In an attempt to continue the party time attitude, the Bush administration, with the complicity of Congress, pushed through the largest tax cut in our history and reduced the cost of capital to virtually zero. (Worse, at the same time huge amounts of capital were being artificially pumped into the economy by the costs of two wars.) For a while these actions certainly created party time for the economy. But just as too much booze turns party time into pain time, so too the actions of government to make too much cheap capital available turned good times into bad times.

The actions of government allowed – indeed encouraged – businesses and consumers to take irrational actions that could not be supported by the reality of the core economy. In essence, the good times were on borrowed time, because they were supported by borrowed money. Companies and consumers went into hyper growth and consumption, not because of capital they had earned or saved, but on borrowed money.

Banks made irrational loans because the government continued to dump virtually free money into the system and in many cases even guaranteed the loans.

Companies made irrational investments because they lost respect for the value and cost of real capital.

Consumers made irrational purchases because of the assumption that their investments (401K) and the “equity” in what they buy (homes) will multiply ad infinitum.

The party had to and did end. And just as binge drinking leads to a painful aftermath, we now know that binge borrowing does the same.

The Politicians Continue to Chugalug

Companies and consumers seemed to have learned their lesson, but unfortunately the government has not and that is the real reason we continue to be mired in a sluggish economy.

A hangover is debilitating and painful, but in time our body will recover. That is, unless we continue to indulge in the same things that made us sick in the first place. When the party came to an end, the reaction was not to let the economy heal itself, but to bail out the most egregious offenders and to pump more capital (aka, stimulus) into the system. This action dulled the pain of the hangover, but is a short-term solution that does not repair the core of the economy.

People are worried about the value of homes. They are wishing and waiting for them to return to what they were before. The have a long wait. Today’s values are real. The “values” of yesterday were artificial. The fact is the value of today’s homes are substantially higher than they were 15 yrs ago. If the economy had been allowed to naturally support itself and grow organically, we would be more than satisfied with today’s values. It is like the old story of the guy or gal we met in a bar who seemed so attractive when viewed through beer-goggles, but are what they are in the bright light of reality.

The same story is true for all elements of our economy. Instead of the business and government stimulating real growth through innovation and creativity, i.e. alternative sources of energy, government, business and consumers took the easy path to short term fun and now we are all paying the price.

And the Moral of the Story …

We’re not all are paying the same price. The important moral to learn in this economic calamity is not the price paid by those companies and consumers who have failed, but rather those who have survived and even thrived. The bulk of the companies and consumers who are suffering now are getting what they deserve. (The sad story should be reserved for those who have been harmed through no fault of their own.)

It you look at companies and consumers who have survived – even done well – in this economy they are those who did not fall prey to the excesses of the times. They did not take risks that could not be managed. For the most part, they financed their operations and growth with retained earning and reasonable leverage. They did not make loans to consumers with questionable credit. They did not buy a home they did not need or could not afford, simply because they could. They did not drain the equity in their home to buy things they did not need. They did not borrow money to make money.

In short, they didn’t over indulge. They acted responsibly. It is a good lesson for us to learn. There is nothing wrong with our economy that a little “rational exuberance” won’t cure.

**Article written by Bob MacDonald:  Bob MacDonald was formerly CEO of ITT Life, wholly owned by The Hartford. He founded LifeUSA, which he sold to Allianz SE in 1999 $540 million and became CEO of Allianz Life of North America. Since 2002 MacDonald has headed CTW Consulting, LLC, a vehicle for offering his experience and unique approach to management and corporate culture development.

Annuities Bullet-Proof Guarantees

The Baby Boom generation—a whopping 76 million individuals who are steadily marching through middle age and into the ranks of senior citizens are looking for secure, safe investment vehicles that provide stable income for their retirement while providing competitive returns.

With the stock market in a long-term consolidation phase, chopping up & down, but actually going sideways this past decade, frustrated investors are perplexed as to where to put their money.

Today the average investor is left sitting on the fence with their money.  In the 1990s, the perception was that the S&P 500 was the ticket to retiring rich and young, but that went out the window in 2000. 

In the early 2000s, real estate offered the get-rich-quick strategy of owning a few houses, then living in one and getting rental income from the others, but that hasn’t worked out either.

After the devastation many accounts experienced during the market crash of 2008, many investors realize that they cannot afford to take such huge risks with their retirement nest eggs. So many pre-retirees and retirees alike watched their investment account balances get cut in half during the downturn. Some retirees had to go back to work, and pre-retirees have had to delay retirement for several years.

This market experience has led many investors to seek some type of bullet proof guarantee for their investment.  With the market volatility over the last several years investors have looked for more conservative products that provide stability and growth. Those objectives can be met with the use of products like the equity indexed annuity.

Fixed annuities and equity index annuities sales are continuing to double each year as the population trend in the United States continues to age. 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.

More Interest When Stock Index Goes Up; No Loss When Index Goes Down:  “Fixed Index Annuities” help you capture more interest if market index(es) you choose go up. The interest adds to your account. It is not taken away if the stock index(es) go back down.

This is the best alternative to take advantage of increases that occur in the stock markets without taking any chance of loss if the markets go down. Periodically, you can adjust which stock market index(es) excess interest is calculated with. In that way the opportunity to still plan for market swings to gain extra interest is possible.  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.

We know of no other investment that provides the kinds of benefits and protections annuities do. The deal you make with the annuity and insurance companies is that they will provide the increased benefits if you promise to keep the money in the contract for the agreed term.  

Annuities offer some wonderful investment and saving options in certain situations. Yet annuities come with mixed bag of pros and cons. When researching the Fixed Indexed Annuities PRO’s and CON’s there is a one con that is most usually discussed as a huge problem regarding these products: The “CON” is stated as such:

The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer. Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period.

The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.

Unless I misread the product, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.  End Quote!

Is this true?  What would happen if we said the same argument comparing another product: “Home Ownership”:

In researching the PRO’s and CON’s of Home Ownership and have come to the conclusion that there is a one huge problem regarding these products:

The problem is that a home’s property tax method—the formula that determines how much the investor pays—can change each year at the whim of the Government. Over 95% of Home sales are in counties that may change at least one element of their tax methodology after each reset period.

The ultimate determining factor in setting taxes in future years is not the interest rate environment or the cost of the home, it is what the Government decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any future taxes ultimately subjective.

Unless I misread the tax code, it seems reasonable to wonder why any advisor or trusted real estate agent would advise any American—the target market for Home Ownership—to invest in something so unpredictable.

This argument can be used with all products not just annuities.  However the answer to the “CON”?  Fixed Indexed Annuities? Why? Because annuities is the best alternative and you can Bullet-Proof your retirement better than any other financial product offers.  

How do Annuites Bullet-Proof your investments? 

You do not invest in a fixed annuity. You pay a premium for its insurance protection. That protection is a minimum guaranteed interest rate and at least one guaranteed lifetime income option. Without question, the guarantees are valuable – arguably more so now than ever before, which is why there is an explicit internal charge for them. This charge is used to operate a comprehensive risk management program which ensures that the product provider is able to meet the guarantees.

Index crediting is how the company determines excess interest above and beyond the guaranteed rate. As for the subjective nature, you would have to look at the subjective nature of the Nation’s Federal Funds Rate. All interest rates in America are derived from this rate.

If you can guarantee what the Chairman of the Fed will do, Insurance companies could easily guarantee how they would respond. Without that crystal ball, the companies must have a device to change rates when the Fed changes rates.

After all, the index really has nothing to do with Index annuities since ZERO dollars are actually invested in the index. The Federal Funds Rate has everything to do with the adjustments because it drastically changes the reserve requirements imposed by our government.

Insurance Companies can protect you from just about any Peril they can calculate. Unfortunately, the subjective nature of the government and those that vote our representatives into office are not a covered peril!!

Insurance and annuity companies have been updating annuity designs to meet modern needs. Annuities continue to be safe while offering greater opportunity to earn and collect interest.  “Safety and Security” is built into Annuities. Mutual funds, bonds or stocks do not offer the same protections.

Modern annuities provide great security for investment. State insurance commissioners regulate annuities and testify to their security.  One of the most fundamental laws of economics – with reduced risk, there must be reduced expected returns.

Annuities are a financial product that has many lucrative offers, not only a – promising yield, but huge additional benefits and conditions that work to guarantee your investment –”PRO’s”.

• Annuities Require Reserves to Meet Obligations: State rules make the companies and their products very safe. The companies keep required reserves set aside to meet obligations.  They are audited to assure compliance with those rules. If a company were to go under, procedures have other companies take on the obligations to you so you do not lose your money in annuities.
• Annuities Have Suitability Requirements: States require annuities be sold only to people for whom they are suitable in the first place. The insurance regulators require completion of a specific form that gives the information to decide if it is a suitable investment for you. This means you get further help to evaluate the annuity contract and greater assurance it works for your needs and wishes.
• Annuities Provide Protection from Creditors: In some states, statutes protect money in an annuity or insurance policy from your creditors.  An Annuity is not often liable to garnishment or attachment in the favor of creditor of individual insured. That means annuity offers creditor protection.  Annuities also serve as excellent ‘asset protection tool’ in the case of bankruptcy.
• Annuities Have Income Tax Deferral: Annuity income is tax deferred.  Therefore, your interest can compound in a way that accrues more interest. Since fixed-annuity earnings are tax deferred, they are not marked on your tax-forms. This ultimately keeps your fixed-annuity investment off the tax record until you extract money. This gives you the required privacy feature.
• Annuities Does Not Increase Tax on Social Security:  Tax deferred interest in an annuity does not make that tax higher.
• Annuities Have Tax Favored Distributions:  When you take the money out of an annuity the distributions are treated in an income tax sensitive way. Only the portion of the payment that reflects interest earned on the principal gets taxed. The portion that is the return of your principal is not.
• Annuities Avoid New Health Care Surtax: Income in a non qualified annuity is not subject to the new 3.8% surtax that is part of health reform. It is investment income on which that tax is not paid.
• Annuities Bonuses on Your Premium:  Annuity companies often provide bonus additions to your interest bearing account for signing up. For example, if you deposit $100,000.00 into an annuity with a 10% bonus, the interest additions will be calculated as if you deposited $110,000.00. This increases compounding interest being accumulated in a deferred annuity; therefore, increasing your payouts down the road.
• Annuities Have Estate Benefits:  As the annuity is an agreement with a designated beneficiary, it offers two more protections after the death of primary candidate, including contestability and probate process. Contestability means no person can raise questions on your settlement as to who is going to get your fixed-annuity advantages after your death. The fixed-annuity investment moves immediately to the beneficiary, which minimizes the overall cost related with probating the money and avoids the characteristic holdup. This also keeps the money transfer private, which is another privacy feature.
• But what about “surrender penalties”?  Fixed annuities commonly offer penalty-free access of around ten percent of the purchase price annual. Also, annuity contracts waive penalties for withdrawals for expenses of terminal illness, long-term care and other reasons. Annuity contracts can be of different lengths, so “laddering” and other techniques can be used to plan and capture opportunities and assure needed liquidity is possible.

Annuities will not solve all retirees’ investment problems, but they can help alleviate some of the unnecessary strains caused by the market.