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.

Under The Sun With An Annuity

If there is “a time under the sun for everything,” then surely there is a time in your life when you can look in the mirror and rightfully tell yourself, “I’ve worked hard all my life.  I’ve met every challenge life has thrown me.  It’s time to stop working and to start living life my own way.  These are the years that belong to me.”

In a way, retiring is like going on a trip abroad.  You wouldn’t just pack a suitcase and board a plane.  You try to prepare for your journey.  You’d read guidebooks about the places you plan to visit, study currency rate, and find out what kind of weather to expect. And of course you’d prepare a itinerary so you’d know where you are going and when. 

Similarly, if your journey into retirement is to be successful, you must equip yourself with the information you’ll need on your journey into the world of Social Security, Medicare, medigap, long term care, pensions and 401(k) plans. 

Today retirees must decide how and where to roll over their retirement assets, when to begin taking Social Security benefits and how to allocate their investments so that their financial needs are met.

Now that you have saved bit of money, think about how you can diversify your investments.  While a retiree maybe reasonably secure financially today, some still have to worry about whether they could run out of money during retirement. Retirees today face a complex financial and emotional landscape that can stretch out for 30 years or more in some cases.

It’s never a good idea to put all your “eggs in one basket.” A small amount of money must always be in your bank where you can withdraw for emergencies.  The rest of the money should be in various investments such as bonds and money market funds and annuities. Annuities appeal to people who want a predictable monthly income.

Annuities can play a useful part in the retirement asset allocation process by providing additional income streams. Many of those that invest in annuities will do so once they have reached their limits on other retirement savings options (i.e. when maximum contributions have been made to 401(k)s and IRAs).

Annuities can play a useful part in retirement planning for some. Those looking for a guaranteed income, for example, might use these products to form their base income and use savings with less predictable returns as an add-on.

There are various advantages to annuity investment. These products can, for example, give the following benefits:

• Income guarantees: Annuities can give a guaranteed income. A fixed annuity, for example, will give a secure income for the contracted period.
• Payment flexibility: Annuities can be purchased with a lump sum payment, regular payments or periodic payments. This allows individuals to use them at various life stages. Some will buy early in life; others will buy just before retirement.
• Annual contributions: There are no pre-set annual contribution limits for annuities.
• Payout flexibility: An annuity can be set up to make a one-off payment or regular payments (i.e. monthly or annually) for a number of years or for life.
• Tax status: Any profit made on an annuity will be tax-deferred until it is paid out. In some cases tax will only be applied to interest earned and not to the principal investment.
• Death benefits: If the investor dies before the annuity pays out then their next of kin will usually receive at least what they have paid in. In some cases, if they have a pre-determined payment schedule, they may also receive the income.

For many, the primary advantage to using annuities is the fact that they can be used for guaranteed income that does not have to be dependent on stock market returns. To make money in equities, we must be very expert in market trends and politics.

Even the weather can affect the stocks! When you are investing for your future, you need to realize that the best route is to risk a little for a little gain; otherwise, the odds will quickly catch up to you. It’s your future; play it safe, and you actually will have one.

Choosing whether an annuity is a suitable retirement investment tool also involves looking at the disadvantages. These include:

• Tax status: At least part of annuity payments may be liable for taxation. In some cases (i.e. a lump sum payment) the entire annuity payout may be taxed. Tax rates are set at income tax levels which are higher than the dividend rates charged for other investments such as mutual funds.
• Age limits: An annuity cannot pay out until the investor reaches the age of 59½ without penalties. Closing down an account inside a specific timescale can incur additional early settlement fees and costs.
• Inflation: The set payout that is given may look good when buying the annuity but the effects of inflation over the years could reduce the real value of the payout when it happens.
• Lack of flexibility: Annuities offer fixed benefits and once a contract has been signed it may not be able to be changed. If changes can be made, there are likely to be costs involved.
• Death: Although an annuity will pay back payments made or continue paying out (depending on the product stage) those inheriting this cash will have to pay income tax on it.

What is an Equity Indexed Annuity?

With an Equity-Indexed Annuity, your return is tied to the increase in one of several stock market indexes, such as the S&P 500. However, if the stock market goes down, you do not lose any of your money. In fact, most Equity-Indexed Annuities will even GUARANTEE you a minimum annual return (typically 3%), even if the index you invested in goes down the entire time you are invested.

An Equity-Indexed Annuity is a great place to protect the money you’ve saved in your CDs, money market accounts, IRA accounts, etc. Or perhaps as an alternative for the money you currently have invested in stocks and mutual funds. Equity-Indexed Annuities can greatly improve your earnings potential, while at the same time keep your principal safe from market fluctuation.

Additionally, Equity-Indexed Annuities are a good option for people who already own annuities and have seen their interest rates drop substantially. Many people do not realize that you can easily trade-in an older, possibly under-performing annuity for one that better suits your needs. This exchange can be accomplished with no out-of-pocket expense or current taxes to pay!

Just how good of an investment are Equity-Indexed Annuities? Well, if you had bought one just before the collapse of the stock market instead of investing directly in the stock market itself, you would be a much happier person right now!

Upsides of EIAs
If a deferred annuity is an appropriate part of a person’s overall financial plan, an EIA can be a good way to “share” in the potential gains of the stock market, while at the same time being assured that the principal investment will not go down in value (even if the stock market index to which the EIA is linked goes down). Some EIAs also provide for a guaranteed minimum rate of return. As deferred annuities, EIA earnings are not taxed until funds are withdrawn.

Like other annuities, an equity indexed product allows an individual to buy a form of insurance that can be converted into income at a later date. This is usually used to provide money in retirement. This option is often described as a “best of both worlds” solution that brings both fixed and variable payment components to the table. This may give a better return than a fixed annuity without the risks of a variable option.

So, for example, equity indexed annuities will pay a guaranteed minimum when they mature like a fixed product. But, they may also give an income boost as they incorporate a variable element linked to a stock market index. If this performs well then an annuity may pay out more than the fixed minimum. If performance is low, then the guarantee gives some security.

An individual who worries about having a large enough income to fund later life and who has a cash lump sum available may find that this is an investment solution worth considering.

Annuities – The Magic Bullet

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

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

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

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

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

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

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

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

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

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

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

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

Accumulation or Payout Phase

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

 Fixed Annuity

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

Payout Options

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

Death Benefit

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

Surrender Charges

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

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

Annuity Medicaid Benefits

1. Medicaid is a state-operated, federal-and-state-funded health insurance program for qualifying low-income individuals, including the elderly and disabled, pregnant women, and children. In some states, Medicaid also covers women with cervical or breast cancer, individuals with HIV/AIDS, refugees and other at-risk groups.

Dual Eligibility

1. Individuals with both Medicare and Medicaid may qualify for Qualified Medicare Beneficiary (QMB) or related programs. These programs offer recipients the benefit of paying their Medicare co-payments, co-insurance, deductibles and other out-of-pocket costs related to Medicare.

Dental Benefits

1. The Centers for Medicare and Medicaid services mandates that all state Medicaid programs must provide dental services to individuals under age 21. These programs must cover regular exams, X-rays, restoration of teeth and other essential services. States have the option to choose what level of dental coverage, if any, to provide to individuals 21 and over. Coverage of orthodontic braces varies among states.

Prescription Drugs

1. Medicaid offers coverage for most prescription drugs. However, if pill quantity or dosage limits are exceeded, a prior authorization will be required and the claim for coverage may be denied.

Mental Health

1. Medicaid provides comprehensive coverage for the mentally ill, including psychotropic medication management, individual, group and family therapy, case management, partial hospitalization services, inpatient and residential mental health and addictions treatment.

Elderly

1. Medicaid covers the cost of long-term care at nursing facilities, hospice care, in-home health services and other medical services for the elderly.

Medical Transportation

1. Emergency medical transportation is covered under all Medicaid programs. Non-emergency medical transportation coverage varies among states. Contact your local or state Medicaid office to determine the exact coverage.

General Medical Care

1. Medicaid provides coverage for a variety of inpatient and outpatient medical services, including annual checkups, services provided by specialists, physical therapy and more. Consult with your state’s Medicaid program to obtain a more comprehensive listing of covered services.

Annuities

  Annuities are private insurance contracts that guarantee an income to the insured. The insured deposits a lump sum of money, over time or all at once, into the annuity. In exchange, the insurance company promises to pay the insured a steady income to the insured for a set period of time or for the life of the individual. However, if you need long-term care, Medicaid rules mandate that you spend down your assets. This is where owning an annuity could be beneficial for your beneficiaries.

Flexibility

  Your annuity can be a deferred annuity until you need to annuitize the contract. Annuitization makes the deferred annuity an irrevocable contract that cannot be taken away from you. This can be beneficial when you need to enter a nursing home and want to qualify for Medicaid but do not want to spend all of your savings.

Change of Ownership

  Annuities are private insurance contracts and allow you to change ownership of the contract. Due to laws concerning Medicaid qualification, you would need to change ownership of the contract at least five years prior to your entering a nursing home. Medicaid will look back over a period of five years to determine what assets to include in your total savings and income. This, in turn, will determine your eligibility for Medicaid funds.

Preservation of Assets

  By using an annuity, you can preserve your savings for your beneficiaries. This is done by annuitizing the contract. During the time that you are alive, the nursing home will receive the monthly payments from your annuity; but after you pass away, your beneficiaries will receive the remainder of the annuity.