Equity Indexed Annuities

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Decumulation Roadblock Removal

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Retirement is a new and potentially long chapter of your life.   As 401(k) plans have evolved from a supplemental retirement or capital accumulation plan to the sole retirement vehicle offered by most plan sponsors, sponsors and participants alike are increasingly focused on the decumulation phase—practically speaking, how to make the money last a lifetime.

That means ensuring that this income has the potential to last for your lifetime and to weather rising health care expenses, inflation, and market ups and downs.  First and foremost, you’ll want to make sure your day-to-day expenses are covered and that your income and assets will last for what could be a 30-year—or longer—retirement period.  There are many roadblocks to accomplishing that goal.

Federal Reserve Roadblock.  Retirees and their nest eggs have been hammered by the Fed’s policy. The Fed has said that low rates help the economic recovery. So it argues, in effect, that investors should enjoy the solid stock market returns and that savers should display a stiff upper lip.

Beyond savings and CD rates, the Federal Reserve’s policy is changing fundamentals of key senior financial products.  There is little new to say about the way non-existent interest rates on savings accounts, certificates of deposit, and U.S. Treasury securities have hurt all savers, particularly risk-averse investors.

Market Volatility Roadblock.  The impact of bad markets on a portfolio while you’re saving and investing during your working years may slow down your plans and delay your future retirement date.  Many investors feel that the stock market remains the most attractive place for investors over the long term – beating out bonds and other low-risk investments. However, to earn those higher returns, investors face more volatility.

After you enter retirement, down markets can be devastating, because your ability to recover is limited.  Many older investors simply don’t have enough time before retirement to risk a big loss. Even investors who are confident they can earn superior returns from stocks may reach a point where they want to lock in some of their gains in case markets turn fickle.

Many retirees learned the hard way that it’s dangerous to rely on outcomes that are merely a “best estimate” of the future. Instead, they need to rely on “scenario planning,” where you see if you can survive worst-case possibilities. It also helps to see what might happen if the future turns out to be better than your best estimate.

It might be smart to get some income from annuities that protect you if economic conditions are unfavorable and then other sources of income in the market that would do well if economic conditions turn out better than expected. Guaranteed products — annuities — provide higher retirement income under unfavorable conditions than products that rely on investing retirement assets.

Why do we suggest including a fixed-income annuity as part of a diversified income strategy? It’s straightforward: Fixed annuities, along with Social Security and/or pensions, provide guaranteed income to help meet essential expenses.  In many respects, Social Security payments are like an annuity, although one that has very attractive cost-of-living increases.

A lot of folks would like to have more retirement income that is that safe.  Often, one spouse wants to make sure that annuity payments continue for his life and, should he die, for the remaining life of his spouse as well. Lots of annuity contracts include that provision.

How can you achieve higher interest earnings without putting your hard-earned principal at risk? With a product that offers a minimum rate of return, ties its interest earnings to a stock market index and guarantees that the principal deposit and any interest earnings credited will always be protected – an equity indexed annuity, also called a fixed indexed annuity.

Fixed Indexed Annuities are tied to major stock market indexes and not to the performance of individual stocks or mutual funds, providing complete safety of principal.  Fixed index annuities allow you to share in stock market gains without risking your principal when the stock market takes a downturn.

Since annuities are based on external indexes like the S&P 500, when the markets go up you have the opportunity to share in gains.  If the stock market falls, your contract value will not decrease. Not only is there “zero market-risk” associated with fixed indexed annuities, but when the market goes up and you have a gain in your account, it is locked-in each year and yours to keep! It cannot be taken away, you cannot lose your gain.

What’s more important is that you now have the protection of lifetime income to ensure that your essential expenses are covered throughout retirement. Even in a 0% return market, although their investment portfolio may run out of money, their annuities continue to pay income for their lifetime

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Monday, August 18th, 2014 Wealth Management Comments Off on Decumulation Roadblock Removal

Retirement Crash Insurance

In addition to the usual risks facing investors – inflation, market risk, economic risk, and so on – there is a new risk to confront.  Actually, it’s not new, but it has been given name: the longevity risk. When planning for retirement, you want to insure that you have enough money to cover your living expenses for every year you are alive.

The problem is that you have no way of knowing how long you will actually live. The longevity risk is the good news/bad news that modern health care has extended the average life span, which is the good news part. The bad news part is that many of us may outlive our retirement plan.

Baby Boomers in general are living longer. Thanks to modern health care, for a couple retiring in their early 60s, odds are that one of them will live 30 years. This means they likely will be spending more money in retirement and opens up the possibility they could outlive their money. The idea that we can work for 30 years and support ourselves for 40 – the arithmetic just doesn’t work.

Once folks get the notion that half of people will outlive the average life expectancy of their age group—they could die before 80 or after 80—they need to revisit their financial planning time horizon. Our longer life spans mean that we must have vastly more retirement assets than previous generations. The good news is that there are actions you can take and financial insurance products to help you insure you do not outlive your assets – no matter how long you live. Lifetime Annuities are a good way of guaranteeing your income.

Market risk is another huge concern of near retirees or retirees.  When the economy is struggling, it is a common remedy for the Fed to lower interest rates. Lower interest rates make it cheaper for consumers and companies to borrow the money needed for a new house or a new manufacturing plant. While that’s a good thing, it makes earning a decent return on your money difficult. Bond rates, bank accounts and other savings options typically pay low interest when money is cheap to borrow.

There are always better potential returns in any market, but you must be willing to take more risk. Taking more risk with your investments in an uncertain economy is, well, risky. The stock market is notoriously unpredictable. The one thing investors know for sure is that taking a nap during a bull run can be costly. When the market is on a strong bull run, many investors want to believe it will continue indefinitely in an upward direction.

They have no idea why the market is climbing or why it is destined to crash like the previous rallies did. So if they continue to blindly invest now, they will find the stock market a better place to lose a fortune than to make one.” Stocks go up and stocks go down, sometimes dramatically. You don’t want to have your retirement fund mainly in stocks when the market decides to tank.

Investing in stocks is like driving a car on a crowded road.  You learn that some conditions are more risky than others – bad weather, heavy traffic and so on. Your best bet is to slow down, unfortunately not all drivers learn this lesson and suffer the consequences. When you are near retirement, you cannot afford a catastrophic loss. An accident (big market reversal) can cause damage that the older investor may not have time to recover from.

Corrections, pullbacks, or whatever you want to call them are a natural part of the market cycle. If you are closing in on retirement or facing some other financial need, these market swells can be devastating. The market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward. Investments that offer an extremely high potential reward invariably come with a high level of risk. For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards.

Active trading – is a guaranteed losing strategy for almost everyone who tries it. If you want to try your hand at active trading, plan to spend a lot of time studying the market and how it works. Also plan to lose a lot of money before you gain enough experience to profit. Active trading is really a full-time effort for most people, which leaves little room for other activities (like earning a living or enjoying retirement).

You might be wondering: Why not just invest in an S&P 500 fund? Well when the market swings, S&P 500 fund investors will be the first ones headed for the door, with the program traders that short the S&P chasing them out. We got our first clue with the “taper caper,” and we want to mitigate that risk.

When there is too much money in the stock market, it can be a warning sign that things are about to change. New money coming into the market means investors who have been holding cash investments (CDs, bonds, and so on) are jumping into equities. Like any market where there are more buyers than sellers, prices shoot up until professional investors began pulling their money out of the market and values crash.

One of the key issues facing every investor is to find the right balance of risk as opposed to gain. If you play it safe, you get back minimal returns, with some pre-specified interest. If you go for high profit margins, the risk factor is something that you learn to live with.

Don’t put all eggs in one basket.  Lots of volatility in the equities markets coupled with low credited rates and declining interest rate spreads on traditional fixed-rate products makes this is an ideal time for indexed annuities. Fixed Indexed Annuities are for consumers seeking to eliminate the risk of losing their principal or cumulative returns and [who] are focused on guaranteed income.

The stock market has posted record-breaking gains over the past several years, but now many are now beginning to doubt its sustainability, and are recommending you consider “Retirement Crash Insurance” before everything collapses. This little-known strategy will allow you to stay in the market, but in the event of a stock market collapse, you get the protection when you need it.

Faced with these opposing current, the insurance industry has come up an innovative solution in the form of fixed indexed annuities, which give an investor the best of both worlds – A percentage share in profits, if any, from investments in the stock market, coupled with the security of a guaranteed minimal amount.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With fixed-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

The returns from these annuities are based on the increase in the stock or equity index, such as the S&P 500. If stocks go up, you get a share of the profit. If the stocks fall, you won’t lose any money, since your contract assures you minimal returns of principal amount plus pre specified interest (usually 1% to 3%). In effect, you have a chance of making a profit, but you are not liable to bear any losses.

The risk of investments being wiped out at the stock market is taken entirely by the company.  The silver lining here is that you only have to worry about profit, and not the loss, unlike traditional stock market players.

Why FIAs? Because they can have the following characteristics:

  • 100% principal protection (your money will never go backwards due to negative returns in the stock market).
  • Positive gains in a stock index are locked in every year (minus dividends).
  • A guaranteed rate of return Indexed annuities come in many flavors. The annuity grows tax-free and generates a guaranteed minimum rate of return each year, often 2 or3%.
  • A guaranteed income for life you can never outlive (without having to annuitize). Indexed annuities with an annuity income riders are designed to provide safety of investment, predictable, guaranteed, lifetime income and peace of mind to people who are worried about running out of money in retirement.
  • A long-term care benefit – One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an annuity policy with a long-term-care rider, usually 200 percent or 300 percent of the face value of the annuity.

In conclusion: Cash flow is your life blood in retirement. It is what pays the bills. Not your net worth. Not the number on the top of your statement. Cash smooth’s out cash flow. The more uncertain your cash flow, the more cash you need to have. With more people entering retirement and the average life span of individuals getting longer, the focus of retirement planning is changing from merely accumulating wealth and managing assets to managing risk and creating a predictable income.

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Tuesday, March 11th, 2014 Wealth Management Comments Off on Retirement Crash Insurance

Senior Inflation Causes Concern

“Senior Inflation” is a concern of retirees as prices for products used by seniors  – including medical services, home health care, and nursing homes have increased significantly more than the overall consumer price index.  with necessities going up in prices, seniors have less disposable income to spend on things they enjoy.  So much for retirement being “golden years” than many envision them to be.

The economic recovery in the U.S. is appears to be certainly on track, although subdued, the latest set of economic data provides an opportunity to bolster markets which are testing new highs. The US bond-buying stimulus program has lasted too long, and there are signs it is now distorting financial markets and encouraging risk-taking and is stoking asset-price bubbles that “may result in tears” for investors acting on bad incentives. 

We are feeding imbalances similar to those that played a role in the run-up to the financial crisis.  We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again.

Retirement can be unpredictable, variables such as market performance, retirement dates, and cost of living can play out in unexpected ways and have a major impact on a retirees retirement.  It is now more important that ever that the waves of gray retirees and near retirees have to take “ownership” in that their future is up to them.

People are saving blindly. There’s no sense of how they’re doing or where they are trying to get to. A wake-up call is needed for people to realize that feathering their nest with retirement savings is absolutely essential.

There is no one-size-fits-all, however, a 401(k) with an employer match is a great core investment for building retirement security. It’s important to do everything possible – save everything possible – to build the biggest retirement nest egg you can and at the same time protect what you have already accumulated.

There is much more to financial planning than just the nuts-and-bolts, dollars-and-cents aspect of whether there will be enough money.  A thorough comprehensive financial plan will answer the specific questions you may have. This is a straightforward process where your expenses, income and assets are mapped out into the future.

As for the amount of money you’ll need to cover those expenses over a 25- or 30-year retirement, formulas vary.  Replacing 100 percent of household income, minus the amount you’re saving for retirement, insures against unknown expenses, such as higher taxes or extraordinary health costs.

Most want to shape an investment strategy that will provide growth and protection from negative market trajectories, with guarantees that provide certainty. By choosing an annuity product with an income guarantee you move market risk to an insurance company and continue access to growth.  An fixed indexed annuity guarantees that an investment would never lose value in a “bad” year while obtaining some growth in a “good” year.

To encourage you to save, the traditional 401(k) plans have a bunch of tax breaks and penalties. The money you invest in the plan – known as your contributions – is tax deferred until you are retired and withdrawing money from the account.  Annuities have some of the same tax treatment but there are differences.

There are tax issues you should consider in your plans? As we get ready to file for income taxes this year it’s a good time to have a discussion highlighting certain tax rules for general guidance. We are not offering tax advice, Individual taxpayers should consult a qualified tax advisor for specific advice that applies to their own case.

a. How is a pension or annuity taxed? Federal income tax treatment of a pension or annuity depends on whether or not the recipient has contributed “after-tax” dollars toward the cost:

  • Pre-tax dollars – Qualified Plans: If an annuity is purchased entirely with “before-tax” dollars, the benefits are fully taxable. This rule applies to benefits from a public or private pension plan that has no employee contributions, a 401(k) account accumulated from employer contributions or employee deferrals, or a traditional IRA funded by deductible contributions or rolled over from an employer plan (not a Roth IRA).
  • Post-tax dollars – Non Qualified Plans: If the individual taxpayer contributes “after-tax” dollars toward the cost of the annuity or pension — for example, from personal savings held outside a pension plan — the taxpayer later gets back benefits equal to these contributions (or “basis”) as tax-free benefits over his or her life expectancy based on IRS actuarial tables.

Because the individual’s contributions have already been taxed, IRS treats part of each benefit as a tax-free return of principal until the total benefit payments equal the taxpayer’s cost. From that point on, the annuity payments are fully taxable. The abrupt shift in tax treatment may come as an unpleasant surprise to the elderly people who are affected. Depending on the state where you live after retirement, you may pay little or no state income tax on retirement income. For retirees with substantial income, the state of residence can make a big difference.

b. How do IRS rules treat “early distributions” before age 59 ½?  Benefits paid from a qualified plan or IRA to an individual who has not reached age 59 ½, except certain early distributions permitted by IRS rules, are subject to a 10% excise tax (in addition to income tax). Lump-sum distributions generally are subject to this “early distributions” excise tax, but a series of substantially equal periodic payments is not, such as a life annuity that can begin at any age. This is one reason to consider receiving benefit payments that commence before age 59 ½ as a life annuity.

c. How do IRS rules treat annual “minimum required distributions” after age 70 ½?   Benefit payments from an IRA (except a Roth IRA) must commence when the individual reaches age 70 ½. Benefit payments from a qualified pension or 401(k) plan must commence when the individual reaches age 70 ½ and is no longer working for the employer that sponsors the plan.

The individual must take at least the minimum required amount out of the IRA or other fund each year. Whatever amount is withdrawn gets taxed as income, even if the individual just moves the money to another investment outside the IRA instead of spending it. Each year is treated separately, so an individual who takes out more than the minimum in one year may not count the excess toward the minimum for a later year. But each IRA is not treated separately — someone with several IRAs may add them up and take the total minimum required payment from one account.

In January 2001, IRS revised its rules for computing minimum required distributions after age 70 ½. The changes are helpful for individuals, reducing both their paperwork and their taxes. Instead of making each person choose among several complex calculation methods at age 70 ½, IRS automatically applies one method that produces the lowest minimum distribution in all cases. Also, a taxpayer can easily change the payout arrangements after payments have begun or the owner of the account has died. These rules are not yet final but they can be used right away.

The bad news is that IRS continues to charge a very stiff 50% excise tax on any shortfall in actual Payments’ compared to the minimum payments required in a calendar year. After age 70 ½ the financial institution or employer plan holding the funds usually will now notify both IRS and the individual each year about the amounts of required minimum distribution and actual distribution.

IRS expects the changes will make it much easier to enforce their rules and collect the 50% excise tax. Clearly, people beyond age 70 ½ who have funds in IRAs or other pension accounts must be very careful to take the minimum required distribution each year.

Amounts paid under a single-life or joint-life immediate annuity usually will satisfy these IRS rules in a simple way that does not expose the annuitant to the 50% excise tax.

Long Term Care Change:  As we get ready to file for income taxes this year, keep in mind that the Internal Revenue Service increased limits on long-term care insurance premium deductions for this year.

Premiums for “qualified” long-term care insurance policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of the insured’s adjusted gross income, or 7.4 percent for taxpayers age 65 and older (through 2016). Premiums are deductible for the taxpayer, his or her spouse, and other dependents.

If you are self-employed, the tax-deductibility rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit. Your medical expenses do not have to exceed a certain percentage of your income.

The IRS does impose a limit on how large a premium can be deducted, depending upon the age of the taxpayer at the end of the year.

Another change involves benefits paid under per-diem policies, (a set amount is paid for coverage per day). These benefits are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $330 per day for 2014, whichever is greater. The 2013 limit was $320.

You’ve worked hard to accumulate savings through your 401k plan and other types of savings.  Now that you are retiring  making a decision about your retirement savings can seem complicated.  Your choice could be key in achieving a secure future. An fixed equity-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

EIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

An equity-indexed annuity is in the category of “Fixed” annuities. That means, you may earn a comfortable return on your money while deferring the taxes on your gains. Fixed annuities also offer specified annual company-guaranteed returns.  Fixed Indexed Annuities can help retirees reclaim their retirement.


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Thursday, March 6th, 2014 Wealth Management Comments Off on Senior Inflation Causes Concern

Financial Prosperity For Retirees

After people retire, running out of money is a constant worry particularly for those who may have been greatly affected by the market swings in the last few years. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.

The problem with equity investing is that the long-term average, which is higher than the return from bank deposits and saving certificates, masks the ups and downs along the way. It is the nature of equity markets that a few good years are followed by a few bad years.

Retirement investing is a key to your financial prosperity, and 401(k) plans can help you realize your retirement dreams. But many complain about the lack of investment options in some 401(k) plans. The devil is in the details, we are told, and the details are often buried in an appendix or footnote.

It is the unseen things in well-intentioned policies that will have small, incremental, but finally significant effects upon the whole economic body.  There are many different types of investments. Whether you are playing the stock market or you are purchasing a tax-deferrable annuity, you are building a comfortable nest egg that can assist in sustaining your retirement.

The requirement of the typical retired investor is not complex. The need is for an inflation-adjusted income that will grow year after year, without putting the capital at risk. A simple bank deposit or saving certificate would provide the income, but offer no protection from inflation. An equity mutual fund would enable protection against inflation, but provide no income stream. It would also expose the capital to risk.

There are obstacles that retirees are the least prepared for.  Many retirees are ratcheting it down as they get closer to retirement.  Participating in the stock market can give an individual’s retirement savings and income the potential to keep pace with inflation; however, volatility in investment markets can significantly affect retirement income and savings.

A retired person, or for that matter, any equity investor, seeking to benefit only from the good years by cleverly avoiding the bad years is being unrealistic. There is no magical formula that can tell you when you should get in or out of the equity markets. The lack of such precise definition of benefits, year after year, spooks the retired investor.

Americans are living longer and the possibility exists that they could outlive their resources. The cost of care for an unexpected event, or long-term illness not covered by private insurance or Medicare is requiring more Americans to prematurely deplete their assets.

As baby boomers approach retirement, many may find themselves in different economic circumstances than they planned. Recent economic events have taught us the downside of risk, yet careful planning can help soften the impact.  So when it comes to retirement planning, creating a reliable income stream in retirement individuals need both a map and directions.

In the 4½ years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery:  Two straight weak job reports have raised doubts about economists’ predictions of breakout growth in 2014.

By the CBO’s reckoning, the economy will soon slam into a demographic wall: The vast baby boom generation will retire. Their exodus will shrink the share of Americans who are working, which will hamper the economy’s ability to accelerate.  There are no documented examples of an economy that had to emerge from a financial crisis while simultaneously absorbing the effects of an aging population.

At the same time, the government may have to borrow more, raise taxes or cut spending to support Social Security and Medicare for those retirees. The economy is trapped by “secular stagnation.” By that, it means a prolonged period of weak demand and slow growth.

History suggests that economies that seem doomed can sometimes enjoy sudden turnarounds and unexpected bursts of energy.  Financial crises do not last forever.  A decade is a long time. But a long time is not the same as forever, unless of course if you are retired during that period.

Social Security and pensions are great sources of dependable income, but most people will need additional stable, lifelong income. Start protecting your future income by the purchase an income annuity when you retire to cover any remaining expense gaps. Through annuitization, these products can provide a guaranteed income stream during retirement that will help supplement Social Security and pensions.

A lifetime annuity remains the mainstay of the retirement income market in the US. It is after all the only product that guarantees an income for the rest of the retiree’s life. Indeed, over 90 per cent of retirees buy a lifetime annuity on the premise of its lifetime guarantees.

In the era of final salary schemes, a lifetime annuity provided the continuation of a salary-related benefit into retirement, and delivered a promise made to the employee while they were still working. It also acted as an insurance product, as benefits could continue to be paid to your spouse no matter how long they lived. An asset allocation between equity and guarantees is required to solve this problem.

A Fixed-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500). EIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

While it’s a lot like investing directly in the stock market, you don’t get the full boost of a rising market. With equity-indexed annuities, the money put down by you, as a purchaser, isn’t invested directly in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, and a guaranteed minimum return if the stock market declines.

Benefits of the Fixed / Equity-Indexed Annuity

No-Loss Provision: The first and possibly most attractive provision of an fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

Interest Guarantees: The next benefit of an fixed-indexed annuity with wide appeal is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Competitive Rates of Return: With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the equity market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

A good portfolio is well-balanced. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

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Tuesday, February 11th, 2014 Wealth Management, Wealth Preservation Comments Off on Financial Prosperity For Retirees

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