Longevity Insurance


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Outliving Retirement Assets is Number One Fear


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Retirement planning is not just about accumulating a sizeable nest egg to pay for retirement living expenses?   It is also about managing the accumulated funds during your retirement years in order to provide further retirement income, so that your nest egg continues to grow even at retirement.

If you withdraw your funds too quickly, this will result in you outliving your savings. Meaning, your money will run out before you pass on. Indeed this is a big concern and a major challenge many retirees face.  In fact, the number one concern for seniors isn’t health insurance or the demise of Social Security. It isn’t the economy nor is it the fear of Alzheimer’s.

The number one fear for seniors is outliving their assets.  As life spans have been growing, so has the fear of living so long that the nest egg, the equity in your home, the stocks, bonds, CDs and whatever other sources of income you have dry up before you’re ready to leave this life.

Retired people most value above anything else when it comes to income in retirement is certainty. They want a guaranteed annual income every year forever.  However, next year is looking “worse than at any point in the past decade,” and whether it is the see-sawing balance of further volatility for markets.

Is your retirement portfolio down in the dumps because you are heavy into equities? Are you selling stocks and mutual funds at a loss to get cash to cover living expenses? Are you confident that the market will come back over time and wish that you had cash to ride out the storm?

Bonds, supposedly the safer alternative to stocks, aren’t looking so safe right now. While the S&P 500 index is up 1.6% this year, many fixed-income funds have negative returns—particularly those that own a lot of lower-rated bonds. Some are down 4% or more. Rate risk has been on a lot of investors’ minds for months amid speculation about when the Federal Reserve might raise interest rates.

Bond yields move opposite to bond prices, so rising interest rates erode the value of a mutual fund’s bondholdings. That’s rate risk.  It’s been crazy volatile lately. The stock market has gyrated based on fears about interest rate hikes from the Federal Reserve.  It’s a nervous market here and that’s moving due to the fact I think the market wants to hear from the Fed its intentions of future rate hikes.  .

If a stock is climbing for no reason at all and continues to climb, chances are it will fall for the same reasons.  The chance that you’ve uncovered a rare gem that the rest of the free world has overlooked is quite slim, especially if you got the idea from an investment forum or a newsletter.  Unfortunately, far too many retirees have not taken steps to reduce their investment risks by heading for the safe places. Why is that?

First, you’re bombarded with advertisement, advice and promises that encourage you to keep your money in the market.  You’re told that “longer term” you’ll do a lot better with stocks, bonds, mutual funds, diversified portfolios and other risky investments than if you keep your money in safe places like bank CDs, government bonds and fixed annuities.

You’re presented with slick graphs and charts showing that here’s how much better you’ll do with your money at risk.  The entire brokerage industry is dependent upon you to put your money at risk in the market and they’re working very hard to make sure you do.  You can’t read a newspaper personal advice column, watch the news or read any of the thousands of magazines or newsletter devoted to investing without being told you’ll be much better off by placing your retirement money with Wall Street for safe keeping.

Don’t throw good money after bad. If you buy a stock and it falls while the rest of the market is going up, understand the difference between a market correction (when everything falls because prices are ahead of themselves) and a bad investment (when your stock falls because there are problems with the company or industry).

One option is to look into locking in a guaranteed lifetime income you can’t outlive.  You see, there is insurance for longevity risk: insurance companies which are among the world’s largest, strongest and oldest financial institutions are willing to guarantee you a lifetime income you can’t outlive if you’ll deposit with them some of your retirement money.  They will take the risk associated with the markets, stocks losing value, real estate crashing and other unforeseeable developments that can erase your retirement money.

You don’t have to give up control of your money to get a guaranteed lifetime income because in the past couple of years insurance companies have begun offering new products that specifically take care of longevity risk faced by retirees.  These new plans allow you to change your mind if your circumstances change.  Bottom Line:  Annuities supply a source of income that can supplement other retirement incomes like pensions and Social Security.

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Tuesday, December 15th, 2015 Wealth Management Comments Off on Outliving Retirement Assets is Number One Fear

Retirement Income Management

To enjoy a comfortable retirement lifestyle, you’ll need to have adequate financial resources in place. And that means you must plan for the expected — but prepare for the unexpected.  You also need to know that your money will be there for you as you need it during retirement.

Knowing that, you’ll then have to figure out how much you can withdraw each year. This is a complex decision that must take into account a number of factors including your life expectancy, risk tolerance and asset allocation. Of course, your choice of withdrawal sum will have a significant impact on how long your money will last.

If your investments are going to provide a significant part of your retirement income, you need to carefully manage annual withdrawals from your portfolio. Your withdrawal rate plays the biggest role in determining the sustainability of your spending strategy. In other words, it is key in helping to ensure your portfolio provides for your needs as long as you need it.

You can avoid or minimize your danger of overspending in retirement by doing some thorough thinking and planning well before you retire. Perhaps start with the widely promoted 4% withdrawal rule, which suggests that you withdraw 4% of your nest egg in your first year of retirement, and then another 4% each year thereafter, adjusting the 4% for inflation.

That withdrawal rate is designed to make your money last. You can use the rate to estimate the nest egg you’ll need in retirement by multiplying your desired annual income stream by 25. So, for example, if you’re looking for $15,000 annually to supplement your Social Security income, you’d multiply that by 25 and would get $375,000. (Four percent of $375,000 is $15,000.)

It is critical to prepare for unexpected market declines, as this can affect the health of your portfolio and can also affect your ongoing withdrawal rate. It is important to either budget for this by being more flexible with spending (and possibly withdrawing less) or consider insuring against this risk by using an immediate life annuity to provide you with a guaranteed income stream.

How long you can expect to live is somewhat of a mystery. If you were to live longer than you anticipated, would you be financially prepared? To help make sure your money lasts throughout your lifetime, you may need to consider investments that can provide you with a lifetime income stream. And your longevity will obviously also affect your annual portfolio withdrawal rate.

Even the U.S. Treasury encourages annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes.

Here are a few benefits of annuities not offered by other investments:

• Guaranteed Income for Life – even if annuity value falls to zero,
• Creditor Protection – if you get sued you can’t lose your annuity
• Guaranteed Increases in your future income,
• Tax-Deferral – can help reduce income-tax on social security and Medicare Part B premiums,
• Control of when, and how much income you want,
• Tax-free fund exchanges,
• Free from Probate – pass directly to beneficiaries at death without the cost, delays and publicity of Probate,
• Safety – Backed 100% by issuing companies,
• Liquidity – offer 10-12% annual free withdrawals offering immediate liquidity,
• Annuitization can eliminate need for RMDs,
• Long-Term Care riders
• Backed by state insurance departments

With a fixed annuity, you pay a sum up front and, in return, receive a fixed monthly payment for life, providing you with a reliable stream of income you can’t outlive. This may make sense if you’re seeking income now or if you want a known income stream that won’t be affected by market fluctuations

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Wednesday, August 26th, 2015 Wealth Management Comments Off on Retirement Income Management

Guarantee of Retirement Income

The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility. Markets don’t always go up, and if the first year of our retirement coincides with a market crash, the future doesn’t look so bright.

Stocks plunged nearly 2 percent or more on Monday for their worst day of the year, then on Tuesday The Dow Jones industrial average traded about 90 points higher.  Talk about “Volatility” if you are retired this is like being on a roller coaster ride.  What will ignite the fuse that sets off the next big market crash?

Fortunately, positioning your portfolio to weather the next big downturn doesn’t require that you be able to foresee when the setback will occur or what will instigate it.  One lesson of the 2008 financial crisis has been the importance of having some investment diversification in your retirement portfolio.

If you’re retired, you likely still want to have at least some of your nest egg in stocks to assure that your savings can generate income that will stand up to inflation throughout retirement.  However, the lesson learned is, the more places one invests their retirement assets, the less chance that the overall retirement portfolio will take a big hit when any single asset class slumps.

Many future retirees and present retirees have not taken in consideration the impact that “Uncle Sam” will have on the income from your 401(k), 403(b) or IRA accounts.  Uncle Sam owns up to 30-, 40-, or even nearly 50-percent of your account value.  If you have not started taking distributions yet you probably don’t realize the impact this will have on your actual retirement income.

Whether you like it or not, if you have a traditional IRA or 401(k), when you turn age 70 ½ you will have to start taking money out and pay taxes on that amount annually. Think of it as the IRS gently tapping you on the shoulder.  Required Minimum Distributions, (RMD) is the amount of money Uncle Sam requires you to withdraw each year from your IRA and 401k accounts once you reach age 70-1/2. The IRS makes you take this money out of your IRA and 401k accounts so it can tax that money.

In July, 2014, the Treasury Department relaxed the RMD rules a bit, reflecting the government’s desire to encourage you to prepare financially for your retirement.  The new rules allow you to buy a longevity annuity with your 401(k) or IRA money and not worry about having to include the value of that IRA annuity in your RMD calculations from age 70-1/2 up to age 85.  By investing in the QLAC you essentially postpone paying income tax on some of your IRA money.

Annuities should be in place for lifetime income, lifestyle, and a worry free retirement that doesn’t involve the stock market.  Annuities contractually solve for only four things: Principal protection, Income for life, Legacy, and Long-term care. The acronym you can use to remember this is P.I.L.L.

Most retirees prefer to continue to receive a secure income for the rest of their lives.  Start taking some of the risk off the table and transferring that risk to an insurance company to provide the needed income right now or at a specific time down the road. It really comes down to lifetime income now or lifetime income later.

When you add up your pension (if you are so fortunate), Social Security payments, and other investment income, there might be a gap in the amount of guaranteed income required that needs to be filled. Annuities are the only strategy that can provide a lifetime income stream that you and your wife can never outlive.

A QLAC is a new breed of longevity annuity (also known as deferred income annuity). You set up a QLAC by transferring money from any of your existing IRA or 401k accounts to an insurance company annuity. Your QLAC is designed to pay you a steady monthly income later in life.  Income options can be single or joint life, either life income or life income with cash refund.

This is an annuity in which you pay a lump sum premium to an insurance company and then at a future date which you specify today, you begin receiving a guaranteed monthly payout amount that continues for as long as you (or your spouse) are alive.

The beauty of the longevity annuity is that the insurance company tells you today exactly how much income you will begin receiving in the future. There is no stock market or interest rate risk. The future income amount that’s quoted is guaranteed!

With a longevity annuity you get income security that starts in your old age and at an attractive price. Financial planners estimate that if you own a longevity annuity you can increase the amount you withdraw from your savings in the early years of retirement by as much as 30% because of the reassurance in knowing your income in later retirement is guaranteed by the annuity.

QLACs can also be used in more complicated annuity and financial planning strategies that are based on a concept called laddering in which you space out the maturity dates or dates on which income becomes available. The goal of these strategies is to diversify your portfolio and minimize interest rate risk.

With staggered maturity dates that may stretch across years or decades, you can also plan for times when you anticipate needing more money such as for increased care or even to fund a purchase such as a retirement home.

Another advantage is knowing you have the income security from your QLAC which doesn’t have exposure to stock market or interest rate risks might make you feel more comfortable with being more aggressive with your other investments.

Annuities can be useful in financing retirement.  Your retirement income plan is probably the most important investment decision you’ll make in your life.  Thanks to advances in healthcare, retirees are living longer than ever – sometimes stretching their retirement out 20 years or more.

Living longer, healthier lives is certainly an exciting proposition, but ensuring that your retirement savings will last 20 to 30 years, and possibly longer, is the challenge. Annuities are one of the only guarantees that you can get in life.

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Wednesday, July 1st, 2015 Wealth Management Comments Off on Guarantee of Retirement Income

Preserving Financial Resources

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

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