Annuity Income Riders


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Preserving Financial Resources


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As traditional pension plans become extremely rare and life expectancy increases, one of the biggest sources of retirement insecurity is outliving your money. Statistically, an average 65-year-old male will live to be 84, while the average female will reach 86. These are average statistics. That means one half will live even longer so you have to cover for roughly 20 to 30 years after retirement.

Retirement planning is probably the only aspect of life in which longevity is considered a risk, and in this context, the risk is that you get the timing wrong by spending your last dollar long before you die. You can reasonably budget for living expenses, but longevity and health care costs are wild cards.

No matter how well you invest up until the point that you retire, you can still have a less than satisfactory retirement if you don’t handle your money well.   Those who live a long time after going broke may very well regret pursuing a strategy designed to destroy — rather than build — their wealth.

Most retirement planning strategies are centered on trying to preserve financial resources for as long as possible.  One of the problems with spending all your resources before you die is that you don’t know how long you are going to have to live with the decision.

That’s where deferred income annuities come in. They’re a valuable tool for creating an income distribution program that is very similar to now-scarce defined benefit pensions, traditional plans that paid you a fixed amount based on your salary. With a deferred income annuity you can preserve your investment capital and make sure that you have a steady income for the rest of your life — no matter how long you live.

As bond yields, savings account rates, CD rates and other traditional sources of income have plunged toward zero, retirees have seen the ability of their assets to generate income all but disappear. This exacerbates the risk of spending your money too quickly, because with low bank rates it will take more savings to generate the returns you need.

While investment in the stock market is considered to be a capital investment in our productive economy, it very seldom is. If you are able to purchase new stock directly from a corporation that will use that money to expand their productive capacity, then you are investing capital in our economy.

But when a stock is sold the second, third and so on… times, the new owner is not investing in that corporation. The vast majority of stock trades are done between one investor-speculator and another, trading places between would-be owners and those who would rather not be owners.

As far as our productive economy is concerned, these dollars serve no useful purpose. They create no jobs, build no factories, nor do they feed or shelter anyone, except stockbrokers and speculators. The taxes paid on gains are offset by the deductions taken on losses.

The following generation will be too small in population and earning capacity to bid up prices and produce a profit for the boomers to retire on.  The generations following the Boomers are going to have their income taxed heavily to pay the Social Security and Medicare for the Boomers and thereby will not have the pocket money to buy into IRA’s and 401K’s; causing those markets to fall catastrophically in value and bankrupt many Boomers.

Consider also that most 401K plans are not invested in industrial stocks and bonds; rather they are only speculating on the profitability of a mutual fund company, i.e., the stock you own and will need to sell at a higher price to have retirement income is your investment firm’s stock, and no other. Since your fund managers must buy and sell stocks and bonds, etc. to make a profit, similar to all other mutual funds, you can only come out a winner if other 401K speculators come out losers.

The Boomers will either suffer losses that will destroy the value of their retirement investments, or they may be forced to keep their capital tied up in owning stocks and bonds and only receive relatively small dividends, without ever being able to recover and spend their invested capital.

The cover-your-basics retirement income approach aims to match your fixed expenses with fixed sources of income. Retirees should use an income annuity to cover any gap. Purchasing an annuity’s fixed income option gives you peace of mind, knowing your lifestyle will be relatively stable and not depend on the whims of an inherently volatile market. Life annuities remove the uncertainty of living a very long time (longevity risk).

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Thursday, February 19th, 2015 Wealth Preservation Comments Off on Preserving Financial Resources

Safe Place For Your Retirement Nest Egg

When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. In layman’s terms, volatility is like car insurance premiums that go up along with the likelihood of risky situations, such as if you have a poor driving record or if you keep the car in a high-theft area.

Market volatility makes it hard for people in the real economy to plan ahead. There are some concerns about how the U.S. economy will fare now that the Fed is no longer going to be adding billions of dollars in liquidity to the markets every month through the purchase of Treasury bonds and mortgage-backed securities. So the Fed’s next challenge will be to figure out how to raise interest rates gradually so it does not jeopardize the economic recovery — or freak out the financial markets.

Recent market swings have many retirees and pre-retirees seeking safe places to put away what’s left of their nest egg. Because double-digit losses can take a serious toll on retirees’ assets, the financial security many people anticipated enjoying in retirement may be compromised.

Unfortunately, because of this weeks recent economic turbulence, most equity-based investments have experienced a significant drop in value. For most investors, market volatility is a fact of life. Stock prices fluctuate from day to day, and markets ebb and flow over time along with the economy and business cycle.

Those saving for long-term goals can usually overlook temporary volatility in the interest of long-term gain. But for retirees, who increasingly rely on their investments to fund their living costs, market volatility can mean the difference between living comfortably and just scraping by.

In fact, retirees are particularly vulnerable to market downturns, especially in the early years of retirement, because of their dependence on portfolio income, their limited investment horizon, and their need to make sure their savings last throughout their retirement.

Positive returns early on can mean a lifetime of financial comfort, while early losses can mean running out of money in the midst of retirement. Unfortunately, the timing of market losses and gains is something that we cannot control.

During the great depression a few years ago, many investors lost a significant portion of their retirement savings. Those who were unlucky enough to be on the brink of retirement — or worse, those who were recently retired — found themselves making radical adjustments to their retirement plans in order to get by.

As a result, many retirees are looking for the safety net provided by annuities.  No matter how the financial markets perform in the coming years, a retiree can have peace of mind from knowing his/her lifestyle is financially secure because of the income provided by a Guaranteed Lifetime Income Annuity.  In addition, since the payout is guaranteed, a retirees’ retirement income is safe from future stock market swings and can never be exhausted.

When investors research current annuities today, what they are likely to find is that there are a large number of optional features that are now available as additional features on the annuity product. These options, often referred to as riders, allow annuity holders to access some additional benefits that are not offered within the main annuity product.

The riders are usually known as Lifetime Income Benefit Riders. These riders can be added to a Fixed Indexed Annuity for a small annual cost of approximately 0.45% of your Contract Value.  An income rider is an optional add-on income benefit for a fixed indexed annuity that (once started) provides a guaranteed lifetime income stream…even if your account balance falls to zero.

And you earn an enhanced rate each year you don’t take any distributions and defer commencement of the guaranteed lifetime income benefit. This enhanced rate is most often called the ‘roll-up rate’. Roll-up rates can range from 5% to 8% per year for a compound accumulation, or 10% per year for a simple accumulation. These roll-up rates only apply to a separate and hypothetical income account value.

The income account value is not real money. You can’t access it, and it only exists until such time as you terminate the annuity or rider, or start your lifetime income benefit. With deferred annuities like indexed annuities that have income riders attached to the policy, the accumulation value and rider value are typically a separate calculation. The difference between the two is that the income rider calculation can only be used for income.

You can’t peel off the interest, transfer that amount, or get to the total in a lump sum. An easy way to remember how this works is to draw a line down the middle of a blank sheet of paper. The left hand side of the ledger is the accumulation value. This would be the index option value for indexed annuities. The right hand side of the ledger is the income rider calculation that is for income only. Two separate calculations with two separate contractual rules.

Fluctuations in the market may cause your asset mix to become too heavy in stocks — which could expose your retirement nest egg to damaging, even irreversible, setbacks when you are on the verge of retirement.  Although market volatility is a normal part of investing, it can pose serious challenges to investors, especially those entering or already in retirement. Market declines in the early years of retirement can dramatically increase the probability of running out of money in later years. Income riders do have their place when planning for future income or what I call “income later.”

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Wednesday, December 17th, 2014 Wealth Management Comments Off on Safe Place For Your Retirement Nest Egg

Completely Different Skill Set

While many older Americans find themselves looking at a longer lifespan than prior generations, they should also anticipate additional costs — in living expenses, health care and other financial outlays. Concern over retirement income far outweighs investors’ interest in growth today.  This, coupled with expectations of longer life expectancy in the U.S, underscores the need for more flexible retirement solutions that take into consideration life’s unpredictability.

Americans are saying their retirement savings strategy must include products and choices that offer guarantees, even though equity markets have performed well this year.  Concerns about covering basic expenses and outliving money in retirement are clearly driving more interest in solutions that can address these topics while still protecting against market losses.

The combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk, even if that risk isn’t apparent. The “investments” bought and sold take many shapes and sizes from shares of individual stocks, mutual funds, options and more with each offering a dazzling array of choices.  When it comes to the portion of your savings that you must have ready access to and don’t want to put at risk, you need to play it safe.

Stocks are less risky for young investors, who have years to overcome bear markets, than they are for retirees, who depend on their investments for much of their income. There will always be volatility in the investment world. As you are accumulating retirement assets, volatility can work to your advantage when properly understood and managed.

But, when you decide it’s time to retire and become responsible for creating your own paycheck from your savings, volatility can be one of your biggest challenges.  Investing for accumulation takes a certain skill set, as well as a great amount of patience and time.

Investing for retirement income requires a different level of understanding and a completely different skill set. If you believe the market is not potentially hazardous to your retirement well-being, please study the American stock market movements over the past 20 years.

Diversification may help reduce, but cannot eliminate the risk of investment losses. There is no assurance that by assuming more risk, you are guaranteed to achieve better results. Some believe an effective retirement strategy called the “Age-In-Bonds” formula is a great guide.

The strategy reduces your equity allocation by one percentage point a year. A 25-year-old, for example, holds 25% in bonds, and thus 75% in stocks, whereas an 80-year-old holds 80% bonds and 20% stocks.

The theory behind this rule is simple and intuitive: Stocks are less risky for young investors, who have years to overcome bear markets, than they are for retirees, who depend on their investments for much of their income.

Many in the financial press create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are anemic. But none of that means that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more volatile than bonds.

But the point is that dividends or no, stocks have a much bigger downside potential than bonds. So by all means include dividend stocks as part of the stock allocation in your portfolio. But don’t let anyone sell you on the idea that dividend stocks can be a substitute for bonds.

As a starting point, the safest approach is for an investor to build a portfolio that throws off enough principal and income to cover the investor’s expenses. One way to do that, for those who have enough assets, is to buy an inflation-adjusted annuity with payouts that match projected spending.  This provides a safe portfolio dedicated to essential living expenses from a risky one.

For retirement peace of mind, buy yourself guaranteed income. There’s actually a lot of truth to this statement. Research shows that retirees who get a monthly check for life from a traditional pension are more content than those who have the same level of wealth but only a 401(k).

With defined pension plans becoming increasingly rare, a fixed index annuity with a lifetime income rider for consumers who want to start building retirement income that is protected from market losses and has the potential to grow before and after withdrawals begin.

If you would like more guaranteed lifetime income than Social Security alone will provide, consider putting a portion of your savings into an annuity. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.

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Tuesday, December 2nd, 2014 Wealth Management Comments Off on Completely Different Skill Set

Retirement is the biggest purchase you’ll make in your life

Clearly, if Americans expect to cover most of their retirement expenses with sources of guaranteed income, they are going to have to fund more of this from their own savings. Recent stock market volatility has brought concerns about retirement savings and income into sharper focus. Adding to those concerns, thanks to the Federal Reserve holding down interest rates, our savings have not grown for five years.

Retirement is the biggest purchase you’ll make in your life – bigger than your home and the cost of every vacation you’ve taken.  Retirement will last many years and there are numerous unknowns.  For a married couple both age 65, one is expected to be living at age 90…and reaching 100 or more is no longer rare.  No doubt you’ll face many financials risks.

Sequencing your withdrawals”- Guaranteed-return places like annuities that offer principal protection, tax-deferral and conversion to a guaranteed lifetime income should not be overlooked to avoid spending down when your investments have losses.

It seems that every financial journalist and fee-only advisor I come across hates annuities, but unfortunately many of them don’t understand them well enough to be giving advice on them.  I admit that annuities can be very confusing, but they also offer some very attractive income benefits that will prevent you from outliving your money – guaranteed. Show me a stock or a mutual fund that can promise that?

Immediate income annuities, longevity annuities and indexed annuities offer income benefits that can either be setup to pay for an individual or a couple (for a joint payout, the benefit is usually lower).  How much you get all depends on the insurance company, type of annuity, amount you have to invest, and when you start taking the money.

Fixed-indexed annuities (sometimes referred to as indexed annuities) offer attractive features such as principal protection and guaranteed income benefits. Since the market collapse of 2008, indexed annuities have become much more popular. With indexed annuities, your principal is protected in years the market loses money no matter how steep the losses.

Where Indexed Annuities Really Flourish is the availability of Income Riders -.If you’re tired of seeing your investments rise and fall with the Dow Jones, then an equity indexed annuity might be a good fit.  You want to diversify. You might be a strong believer in the markets, but a little certainty never hurt anyone. Taking some money and locking it up in annuity with a guaranteed income rider could make sense.

A Fixed Index Annuity (FIA) is a fixed annuity with an interest rate that is linked to the performance of a stock index (the S&P 500 for example). Some insurance companies also give you the ability to get guaranteed future income account growth between 5% and 8% annually through the income rider.

An income rider on a fixed or fixed indexed annuity allows a retiree to build a secure retirement income. The issuing insurance carrier guarantees the payout provided by the income rider for the life of the annuity owner, as well as bearing all of the investment and longevity risk on the guaranteed payout — which means that the consumer is completely protected from these risks.

Some annuity carriers even provide for the income to substantially increase in case the annuity owner is confined to a nursing home, further sheltering the annuity owner from risk. In addition, the annuity owner retains access to the annuity’s remaining value and continues to reap the benefits of interest credits to the annuity’s value.

The income rider is optional and there’s usually a fee associated with it, but for the right person, it can be one of the best retirement prizes ever invented. The reason: an income rider can guarantee a great income that will last your whole life, whether you live to be 85, 95, or 125. The income rider is such an attractive benefit that nearly 3 out of 4 fixed index annuity purchasers elect this option.

If you have five to ten years before you actually need to draw income. Income riders are a viable option for those that want to avoid the market and want to have a guaranteed income stream at retirement. With the income account increasing each year for each year that you’re not touching it, this can be a huge benefit for someone who has a chunk of money that can invest it and sit on it for a few years.

Beware: The Benefit Base- is the annuity’s value that GLWB Guaranteed Withdrawal Payments are based upon. This is a separate value from the account value, and it is only available by taking Guaranteed Withdrawal Payments. If you have a fixed index annuity with an income rider that pays 6.5% compounded, it does NOT mean that you are making 6.5% annually on your money.

Rather, the rider guarantees that the insurance company will credit 6.5% to a separate income-only account. That’s a difference you need to understand. This income account value can only be taken as income, and only by the initial contract owner. Again, a guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value.

Accumulation Benefit- With income riders, the income value is completely separate from the accumulation value. It typically grows at a fixed rate of interest, and when the retiree elects to start taking lifetime withdrawals, a payout factor is applied to the income value to determine the guaranteed annual withdrawal.

If the accumulation value is higher than the income value when the policyholder decides to withdraw the income, then the accumulation value is used in the payout calculation instead. Once the amount of guaranteed withdrawal is calculated, the retiree may withdraw that amount from the annuity every year for life.

A common feature on GLWBs which guarantees that the Benefit Base will grow by a specified percentage (4% – 12%), as long as the annuity contract is held in deferral and lifetime income payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base contract. It can only be realized if the annuitant holds the policy in deferral, and is usually limited to a specified number of years (usually ten).

Say that a 60 year old invests $250,000 into an IA and wants to start taking a guaranteed monthly benefit, (assume 4%) they would have a $10,000 ($250,000 x 4%) guaranteed annual income for life.  Where income riders get even sweeter.  If you’re a 60 year-old individual that has $250,000 to invest but doesn’t plan on retiring until 65 or later, then the income benefit riders becomes that much more attractive.  Insurance companies will give an additional credit to the income account that, in turn, gives you a potential higher payout when you need it.  Let me explain……

A 60-year old may get a 5% income credit increase each year up until the day they decide to start taking their money. That means that the insurance company will add 5% a year to original deposit (in this case $250k) each year. Once you start taking your income, the payout will be the amount in your income account multiplied by the withdrawal percentage based on your age.

The table below illustrates this over a 10 year period.

YEARS DEFERRED       AGE     INCOME ACCOUNT VALUE       ANNUAL PAYMENT

1          61         $262,500           $10,500

2          62         $275,625           $11,025

3          63         $289,406.25      $11,576.25

4          64         $303,876.56      $12,155.06

5          65         $319,070.38 (5% payout begins)        $15,955.51

6          66         $335,023.89      $16,751.19

7          67         $351,775.08      $17,588.75

8          68         $369,363.83      $18,468.19

9          69         $387,832.02      $19,391.60

10         70         $407,223.62      $20,361.18

The 5% income credit is for hypothetical purposes. Each insurance company will have their own set interest rate.  Recently, I’ve seen anywhere from 5% all the way up to 7%. Another thing to consider is that the maximum withdrawal percentage is typically lower if you’re looking for a lifetime guarantee for you and your spouse.

While taking these withdrawals, the retiree is provided with two very valuable guarantees.

  1. Although the annual withdrawals are deducted from the accumulation value, the additional interest (declared or indexed) continues to be credited to the accumulation value, and the retiree retains access to the remaining accumulation value at all times.
  2. Even if the annual withdrawals ultimately deplete the accumulation value, the issuing carrier must continue making the annual payments as long as the retiree lives.

Outliving your money – this is the greatest fear of most retirees and is called longevity risk, the risk your retirement money will fall short or be depleted before you’ve run out of time.  If your family has a history of longevity, outliving your money might top your list of retirement worries.  With people now living well into their 80s, and often into their 90s, it’s a legitimate concern.

The only true guaranteed source of lifetime income comes in the form of an annuity.  One benefit of income annuities is that they can take some of the guesswork out of retirement planning. For example, it’s easier to figure out how to make a retirement nest egg last until these payments begin than it is to figure out how to stretch it over an uncertain lifetime.

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Saturday, November 15th, 2014 Wealth Management Comments Off on Retirement is the biggest purchase you’ll make in your life

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