Survey of Owners of Annuities

U.S. households lost trillions of dollars in the first few quarters of the economic and financial crisis of 2007, 2008, and 2009. Total wealth relative to after-tax income had fallen to its lowest level since March 1995 by the end of 2008.

The recession is a wake-up call for many Americans and their response is an appropriate one.  By preparing for and navigating an economic downturn with smart planning, they are more likely to take the actions needed to achieve financial security no matter where they are starting from.”

Annuities are considered conservative, providing the ironclad guarantees and are the perfect investment for anyone who is interested in finding a low risk investment; particularly those who have just retired and are looking for a way to protect their retirement fund from the volatility of the market. 

2009 Gallup Survey of Owners of Non-Qualified Annuities

The Committee of Annuity Insurers has partnered with The Gallup Organization and Mathew Greenwald & Associates to conduct 10 comprehensive surveys of non-qualified annuity owners between 1992 and 2009.

The surveys create a unique profile of non-qualified annuity owners and their attitudes toward saving for retirement. The 2009 survey, conducted among 1003 annuity owners across the country, found that non-qualified annuities contribute greatly to the retirement security of middle-class Americans.

Annuity Owners Are Overwhelmingly Middle-Class

• Eight out of 10 non-qualified annuity owners (80%) have annual household incomes below $100,000, and only 4% have annual incomes greater than $200,000.
• In fact, almost half (42%) have annual household incomes below $50,000.
• Majority of Annuity Owners Are Women
• Non-qualified annuity owners are more likely to be female (58%) than male (42%). With the exception of the 2001 survey, females have outnumbered males in every survey since 1997.
• The average owner is retired, 70 years old, a woman, and has a moderate income.
• Annuity Owners Are an Older and Loyal Group
• Almost all non-qualified annuity owners (93%) report that they still own their first annuity.
• Seven in 10 (69%) are retired, which is up from 58% in 2005. 
• The average age of annuity owners increased in 2009 to 70, compared to 66 in 2005.
• Annuity Owners View Themselves as Financially Prepared for Retirement
• While many Americans believe that they are not financially prepared for retirement, 91% of non-qualified annuity owners say that the statement “you have done a very good job of saving for retirement” describes them well.
• In that regard, almost 3 in 4 (73%) say that they have set aside more money for retirement than they would have if the tax advantages of annuities were not available. Almost 9 in 10 (88%) say that keeping those advantages is a good way of encouraging long-term savings, and more than 9 in 10 (91%) say that the prospect of paying tax on money withdrawn from their annuities makes them try not to do so before they retire. The latter suggests that the current tax rules successfully encourage them to retain their savings until needed in retirement.

A Safe and Secure Way to Save for Retirement

• Despite the recent market turmoil, which led to a decline in consumer confidence about preparedness for retirement, almost 8 in 10 annuity owners (79%) say that annuities are secure and safe, an important source of retirement security, and make them feel more secure in times of financial uncertainty.
• The vast majority of annuity owners say that annuities are an effective way to save for retirement (86%) and that their annuity was a safe purchase (89%).
• More than 3 in 4 (76%) say that they intend to use their annuities for retirement income. Other intended uses include a financial cushion in case they or their spouses live well beyond their life expectancy (83%) or to avoid being a financial burden on their children (81%).
• Almost 9 in 10 (85%) agree that investment and insurance guarantees available in annuities are a very important benefit of the product.
• Gallup and Greenwald indicated that they are confident that the survey results represent the characteristics of non-qualified annuity owners with a sampling error of plus or minus three percentage points at the 95% confidence level.

SOURCE Committee of Annuity Insurers

 Retirement and old age might seem a long way off for a lot of people, but the choices you make now will almost certainly have an effect in the years to come.

People think of ideal retirement as a combination of leisure activities, financial independence and luxury vacations – all these things are possible only if you have enough money when you retire.

Life really is what you make it, it doesn’t just happen. Basically, it is never too late if someone wants to improve their situation. Yet if you prepare beforehand you save yourself a lot of anxiety and stress.”

Annuities Provide a Trouble Free Retired Life

Potential Social Security cuts may eliminate income gains at some point in the future and baby-boomers who are trying to rebuild their nest eggs are now fearful of the stock market and frustrated with bonds’ low interest rates.

To realize a trouble-free retired life choosing a Retirement Equity Indexed Annuity Can Help.

It’s a fear that grips many especially in these tough times: Even if they have saved up all of their lives, a sudden change in fortune or a sharp decline in the value of their investments could mean you’ll outlive your retirement savings. Even people who did everything right still got hammered in the recent market crisis and many cannot retire as they wanted. 

Remember that back in October 2007, prior to the most recent market meltdown, the Dow was at 14,000 points.  Today, it’s at 10,000.

Consider the Dow, which stood at 7,487 on November 13, 1997, and then was again at 7,486 on March 18, 2009, almost 12 years later.

Because of this, people want to increase the odds that their retirement plans have a good outcome and I think that annuity products are an essential part of that.

A person’s life expectancy is a significant factor that should be considered when planning your retirement income.  Investments, pension plans, and the effects of inflation are just a few things baby boomers should take into account in planning their retirement.

This is where annuities can come into play. Most people typically consider and invest in annuities after they retire, when the fear of outliving their savings or not having sufficient income for the rest of their lives oftentimes becomes a reality. It’s a way to guarantee that your income will never run out, which is the No. 1 fear of retirees.

Immediate annuities can provide a predictable stream of income for the rest of your life. Purchased from insurance companies, immediate annuities transform a fixed sum of money into monthly payments based on your life expectancy. With both private pensions and Social Security on shaky ground, annuities may prove the only dependable source of guaranteed monthly

The first step is to establish your required expenses. Then you build a “floor” of guaranteed income in an amount sufficient to cover those required expenses for life. Funds in excess of what is needed to build the floor can be invested in a variety of ways to create additional income. 

Annuities are considered conservative, providing the ironclad guarantees and are the perfect investment for anyone who is interested in finding a low risk investment; particularly those who have just retired and are looking for a way to protect their retirement fund from the volatility of the market. In fact, not a single indexed annuity purchaser has lost a penny as a result of the market declines, bank failures, or general weakening of the economy.

Equity indexed annuities are relatively new products to the market and offer the best of all world’s to the investor. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark. These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract.

An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent (100 percent in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

There is a price for the investor to pay when they use this type of retirement annuity. Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.

Most people use equity indexed annuities as deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment.

On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.

Equity indexed annuities are good for those that want to keep up with inflation but still require safety. Make certain you check not only how the company calculates the return, but also how often they do it, in order to get the best policy.

Annuity Nuts and Bolts

You have been saving for retirement for many years and have amassed a nice nest egg of savings. Now is the time to determine the products and services that best fit your retirement needs. First of all, you need to realize that the most important part of your retirement planning is your investing.

You may have one set of products that you use during the “accumulation phase” of planning the saving and investing during your working years; and another during your actual retirement years, where the emphasis will be on wisely utilizing your nest egg.

People use stocks and mutual funds during the”accumulation phase.”  A stock is a share in the ownership of a company. For the company, a stock is a fundraising loan that they needn’t repay, but will typically yield greater income for both the company and its shareholders in the end. As an owner, you are entitled to your share of the company’s wealth.

A mutual fund is a lower-risk investment. Investors pool their money and allow professionals to select stocks for them. While stocks may generate a larger return, mutual funds are better for retirement planning because of their low risk and maintenance. 

A word of caution though, Mutual Funds can also possess much more risk than you thought you were encountering. So beware, stocks and mutual funds can be daunting since there’s always the risk that the company won’t be profitable and you’ll lose your investment. 

In the stock market, many investors will simply look at how a stock price of the company’s doing, and jump aboard only because the price is going up. There may be no profits at all behind that particular company (in fact there often aren’t) but they will still invest anyway, because their stock broker called them up and told them to.

Putting your retirement at risk doesn’t make sense to most retiree’s. What is your aversion to risk? Do you want to embrace investment risk, or do you seek to encounter as little risk as possible.  The high risk outweighs the high return to me.

But how does that nest egg translate to an income stream, and how much income can you take from your savings?

There have been dozens and dozens of studies and methodologies discussing sustainable withdrawal rates from retirement portfolios. Conventional industry wisdom considers a 4 percent withdrawal rate to be a “rule of thumb”.

However, where do you withdraw the 4 percent from? Should you take it from your 401(k), your Roth IRA, or your investment portfolio? Generally, you want to start taking withdrawals from your taxable accounts first, such as your investment portfolio.

Then start withdrawing from your tax-deferred accounts, such as your 401(k), and finally from your tax-free account, such as Roth IRAs. The thought process is that you want to allow your tax-advantaged accounts, like Roth IRAs and 401(k) s, to grow for as long possible. However, you must start taking required minimum distributions from your tax-deferred accounts when you turn 70½.

Some people prefer peace of mind and do not want to be disturbed by everyday fluctuation of the market or bothered by continuous management of one’s portfolio. For investors looking to diversify their retirement portfolio and provide a steady stream of income, annuities may offer a great choice. An annuity is one of the most popular options for investors who are approaching retirement by using an annuity to round out your retirement nest egg.

Converting to Annuity

Easy to understand and administer, this option of managing one’s retirement savings can provide a stable and guaranteed income for a specified period of time or for life. There is a fixed rate of interest associated with this. There are many annuity choices and plans available from which a retiree can make a selection.

Benefits 

For retirees looking for a steady income from a lump sum of money, an immediate annuity has several advantages over other alternatives. The monthly payment amount will usually be higher than other investments and guaranteed by the issuing insurance company. A large portion of the annuity payment will be exempt from income taxes, boosting the after-tax income compared with other investments.

Function 

An immediate annuity is usually purchased to provide a lifetime income to the annuitant. The annuity will pay a regular monthly or annual check until the annuitant dies, whether it is in a few months or after 40 years. Immediate annuities have options that will guarantee a minimum payout or payment for a minimum number of years if the annuitant dies early. Annuities will usually provide a higher level of income than CDs or bonds because the principal amount is paid to the insurance company and will not be returned. The annuity provides an income that cannot be outlived.

Significance  

The Internal Revenue Service considers immediate annuity payments a partial return of principal plus interest. The principal value is divided over the life expectancy of the annuitant at the time the annuity payments are started. For example, if the IRS life expectancy tables showed the annuitant had a 20-year life expectancy, the amount paid for the immediate annuity would be divided by 20 and that amount would be excluded from taxable income on the annuity payment. If the annuitant lives longer than the computed life expectancy, the annuity payments will become fully taxable.

Identification

The insurance company that quotes an immediate annuity will show the monthly or annual payment for the amount of annuity purchased and an exclusion percentage or amount. The exclusion percentage is the portion of each annuity payment excluded from income taxes. Subtracting the exclusion amount from the annual payment will provide the amount of taxable income from the immediate annuity.

An annuity makes regular payments to an insured individual in exchange for either regular contributions over time (a deferred annuity) or one lump sum of money (a deferred or immediate annuity). Annuity income is taxable.

Tax on Withdrawals

You are taxed at ordinary income tax rates when making withdrawals from your deferred annuity. Additionally, withdrawals are considered to be a withdrawal of interest earnings and are fully taxable. Principle is withdrawn after interest earnings have been depleted.

Exclusion Ratio

Immediate annuities are subject to an exclusion ratio. An exclusion ratio means that part of the annuity payment is considered to be principal, while part of the annuity payment is interest earnings. The principal payment is not subject to taxation but the interest earnings are. The excluded amount depends entirely on your age and the interest rate the insurance company is paying on the annuity.

Considerations

You will be taxed on 100 percent of your withdrawals in a deferred annuity, but you will have access to all of your savings in the annuity account. With an immediate annuity, you do not have access to your savings. Instead, you receive the exclusion ratio and steady payments from the insurance company.

Tax-qualified money is from retirement plans and IRAs. If qualified money is used to purchase an immediate annuity, the tax rules for those types of plans will apply. A non-qualified immediate annuity is purchased with money from other sources such as savings or investments. The immediate annuity purchased with non-qualified money pays a tax-advantaged regular income.

Reasons for using an immediate annuity

There are some upsides to any product. Ultimately, the question is whether these could sufficiently outweigh the downsides in your situation.

a) Security and stability

That annuity income is secure, stable and must provide an income until the day that you die is a major advantage. The immediate annuity is regarded as low-risk to no-risk.

b) Tax treatment

The income that you receive as an immediate annuity payout is either not subject to tax or enjoys favorable tax treatment. However, this is not a major benefit if you consider that the funds used to invest in the annuity are taxed already.

c) Creditor protection

The annuity also provides a safe haven from the lien of creditors. Annuity payouts are not normally under consideration when you file for bankruptcy or have debt obligations.

d) Qualification for State benefits

That you exchange a lump sum for reduced payments means that you’re giving up capital for income. The nature of this exchange means that for state benefits (such as Medicaid) that have a financial threshold for qualification, the lump sum allocated to an immediate annuity cannot be considered as part of your estate. This can also be used as an estate planning tool- but consultation with an estate planner is required.

The main point is to find out how much money you will need when you retire, and find the right investment vehicle for you to help get you there. Of course, this vehicle will be different for everybody depending on their retirement needs; however, annuities are a great retirement tool.

North Star Focus With An Annuity

Any stage of life is unpredictable and it’s important to make sure you are invested in the right products to meet that uncertainty.  Correct and wise decisions with proper planning, taken at the right time, will promise many happy times at retirement.

The usual definition of safe money is money you cannot afford to lose. We define 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.

The recession has been tough on America’s seniors. Fearful of the stock market, many retirees or near-retirees are shunning traditional investment vehicles like stocks, mutual funds, and real estate.

It is recommended that you look at your investment portfolio to make sure that you do not have all of your money in one place. In other words, make sure that you diversify your portfolio. First of all, remember there is no such thing as a “best” option for everyone, but flexibility is key to any plan.  

The most popular investments for retirees and the mix that many financial experts suggest are a mix of bonds and annuities. So what would be the best type of investment between Mutual Funds, CD’s, or annuities?

Annuities have long been one investment vehicle used by those putting together their retirement planning portfolios. Annuities may not be the only investment people use to plan for their golden years, but it is one the most popular, safe, and secure ways.

Interest in annuities is growing, reflecting a need for more financial self-reliance at a time when pensions are disappearing and there is increased anxiety about whether savings will survive a volatile stock market. The problem for retirees and near-retirees seeking financial safety is that it’s better to set your goals and then decide on which risks you’re willing to take and which you want to avoid.  Annuities can help seniors reduce risk

And now they have a new dilemma: what to do with the money they do have left. Many are turning to fixed and fixed indexed annuities because of their unique ability to provide a guaranteed income stream, as well as tax efficiency during both the accumulation and income distribution planning phases.

Many retirees who held immediate annuities enjoyed welcome security during the stock market meltdown that began in 2008.  They didn’t lose their savings — they continued to get their paychecks. Income annuities are the most efficient way of providing income in retirement and can pay as much as 6 percent to 8 percent of the purchase amount per year for life. 

Annuities can help meet several goals – First of all, they protect against the common worry of outliving your money.  Annuities allow you to receive income for life, no matter how long it is. Annuities could be helpful, especially if your biggest concern is outliving your assets, but they’re not a panacea. You still have to step back and make sure you have enough money overall to meet your retirement needs.”

Most annuities also insulate you from some or all market volatility which is a key reason for the change for the more conservative orientation of investors in the wake of the severe recession beginning in 2007 and a concurrent plunge in equity values that did great damage to clients’ portfolios and retirement plans.  It’s nice to know that at least a percentage of your portfolio is secure.

Once you begin receiving payments from the life annuity, you will have a steady income to depend on throughout your retirement to supplement the social security and assist in paying the medical expenses that Medicare does not cover.

Here’s an overview of the annuity world:

Immediate annuities. These are the traditional, plain vanilla annuities. You deposit an amount with the insurer, and the insurer begins making regular payments. Payments can be monthly, quarterly, or annually. Most immediate annuities make fixed payments, but some offer variable payments. The variable payments can be inflation indexed or be tied to the portfolio of investments selected by the annuity owner.

You can receive payments for your life, the joint life of you and a beneficiary (such as your spouse), a period of years, or life with a guarantee for a minimum period of years. The highest payout is for your life or a period of years shorter than your life expectancy. The other options result in lower initial payouts.

Studies show that having a portion of your retirement portfolio in immediate annuities reduces the risk of running out of money during retirement. “Annuities help stabilize a portfolio’s value and returns. They also can allow you to take more risk with the rest of your portfolio.

Equity index annuities. These are deferred annuities. The account compounds returns tax deferred until distributions begin. The returns of these annuities are tied to the performance of a stock market index. Popular annuities are tied to equity indexes like the S&P 500, and may offer returns that are close to the stock market. Usually there is an annual floor or guaranteed return of 2 percent to 3 percent. Many also have an annual cap or maximum return of around 10 percent.

EIAs usually guarantee the account against losses. “Sometimes 100 percent of the principal is guaranteed; sometimes only 90 percent or so is guaranteed. EIAs generally are for conservative investors who want a chance at higher returns than traditional conservative investments offer but can’t tolerate the risks of stock markets or other growth investments.

Hybrid policies. Some annuities can be used to pay for long-term care. A typical combo policy will pay up to two or three times the account’s value for long-term care over a period of about six years. For example, an annuity’s value is $150,000 when the owner needs long-term care. The policy will pay up to $300,000 to $450,000 after a long-term care claim is filed. The annuity does not earn income after a claim is filed, and the account’s value for other purposes is reduced.

There are many annuity features to choose from. “You need to remember that each of these features and protections costs money. They will reduce either your earnings or your payout. The reason to buy an annuity usually is to create a stream of guaranteed retirement income. However, inflation protection is the feature most likely to be worth the cost.

Another buying tip: The longer you wait to purchase an immediate annuity and begin income payouts, the higher your lifetime income will be.

The magnetic needle of a compass does not point in any and all directions to focus on many stars, it points to one central North Star. This single focus has directed countless beings to safety and security over many centuries. Knowing your own central focus will bring the same serenity to your life.