24 May

Lifetime Legacy – Stretch IRA

Posted by waterstates - blog in Financial Planning, Retirement Planning. Tagged: , , .

Households managing wealth de-cumulation in retirement must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption.

It has been a very difficult economic environment. The combination of persistent low interest rates and high volatility is a challenging environment.  You may have seen the headlines like this as Wall Street was pounded last week. Which begs to question…How is your IRA or 401(k) doing?

In one week the Dow dropped 3.5%, the S&P lost 4.3% and the Nasdaq plunged 5.3%. For those of us that have been burned by Wall Street before, this is all too familiar.

Over the last 30 years, 401(k) and other defined contribution retirement plans have displaced defined benefit pension plans in the private sector. Defined benefit plans traditionally provided benefits in the form of a lifetime annuity.

In contrast, in 401(k) plans, annuitization is voluntary, rare, and often not even a plan option. Participants face the challenge of decumulating their wealth over their remaining lifetimes, trading off the risk of outliving that wealth against the cost of unnecessarily restricting their consumption.

A question that I get asked all the time is: “Should someone put an annuity within an IRA or 401k?”  A lot of people who have IRAs and 401ks would never touch that money if the IRS didn’t require them to take Required Minimum Distributions (RMDs) at age 70 1/2.

When you have qualified money, retirement accounts, IRA, 401k, or 403b IRS Guidelines require they begin taking minimum distributions from these funds at age 70 1/2. Required Minimum Distribution (or RMD) is designed to help you calculate the proper minimum distribution based on life expectancy.

What are Required Minimum Distribution (RMD) tables. These specify the minimum amounts that must be drawn out of IRA and 401(k) accounts to avoid tax penalties.  An individual who has attained age 70½ during the calendar year and has assets in an IRA or 401(k) is required to make a minimum withdrawal of a specified percentage of the account balance on the previous 31 December. Individuals who fail to make the withdrawals are subject to a tax penalty of 50 percent of the amount he failed to withdraw.

The purpose of the legislation is to recover the tax relief granted when the contribution was made and to ensure that tax-advantaged savings are used to fund retirement, rather than to fund a bequest.

The first retirees’ with substantial amounts of unannutized pension wealth is now entering retirement. They face the challenge of converting that wealth into lifetime income. One solution is to annuitize.

With your IRA or 401k assets, you can purchase a Single Premium Immediate Annuity.  A SPIA is a pure “transfer of risk” lifetime income stream that functions just like your pension payment or Social Security payment. The SPIA payment comes out of your IRA, and will cover the Required Minimum Distribution for the rest of your life while providing a lifetime income stream.

Another idea is you can use the Stretch IRA Strategy – The Stretch IRA is a very powerful concept. A stretch IRA is a good example of time value of money.  It’s been around for a long time, and is fully approved by the IRS. Stretching your IRA means that your RMDs can be taken over multiple generations when your beneficiaries are listed properly within your IRA.

The guidelines require less money to be distributed each year, which helps reduce the tax liability and allows more to be passed on to the your heirs. The heirs also have more flexibility, allowing them to “stretch” out minimum distributions of inherited qualified funds based on their life expectancy.

A non-spouse beneficiary (your kids and grandkids) can roll over a company sponsored retirement plan into a properly titled inherited IRA. The new rules will now allow non-spouse beneficiaries the ability to stretch distributions, and taxes, out over their lifetime.

Advantages

Since taxes are due when most IRA funds are distributed, choosing a stretch IRA has the following advantages:

• Spreads your tax liability over many years

• Allows tax-deferred growth

Triple Compounding allows you to continue earning:

  • • Interest on interest
  • • Interest on principal
  • • Interest on money that would have been paid in taxes

• Provides a lifetime income for your beneficiaries

Lifetime Legacy – Choosing a stretch IRA, rather than a lump sum distribution, can mean a legacy of a lifetime income for your children and grandchildren.

For example, when you pass away, your spouse can take your RMDs over their life expectancy. When your spouse passes away, your child can then take your RMDs over their life expectancy. When your child passes away, then your grandchild can take your RMDs over their life expectancy.

The Perpetuation of a Family Legacy: All too often, beneficiaries have no emotional, physical or spiritual connection to their inherited wealth. In these situations, rarely does the inheritance last beyond the second generation. Through the stretch method, beneficiaries can preserve, protect and perpetuate their inherited tax-deferred wealth until the end of their lives. Their families and descendants can enjoy the legacy created by the life, sacrifice and discipline of their parents and benefactors.

Fixed annuities (not variable annuities) work well under the Stretch IRA guidelines because there is no market volatility, and the IRA asset has a better possibility to be stretched over multiple generations. Stretching your IRA lessens the tax liability on your IRA for your beneficiaries, because taxes are paid only on the annual RMDs, not the total.

The question that you need to ask is “What would I like to achieve with my IRA assets?” If legacy is the answer, then a specific fixed annuity strategy might solve that problem.

To view IRS RMD worksheet:  http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Disclosure:  We do not give tax, legal or accounting advice.  Please consult your tax advisor to determine the suitability of this concept for your own situation.

20 May

The Rise of Financial Fraud

Posted by waterstates - blog in Retirement Planning. Tagged: , , .

Baby Boomers Beware!   To better understand how Financial Fraud may affect you, the Center of Retirement Research at Boston College has a brief that does a great job of providing helpful information so that you can better protect yourself from this growing problem!!!

Individuals save for decades to ensure that they will have financial security in retirement. That security can be threatened or eliminated virtually overnight if an individual who is in or near retirement be­comes the victim of a financial fraud, such as a Ponzi scheme or sham investment in high-yield securities.

Current economic conditions may be fueling fraud. People face serious financial problems ranging from stagnant incomes after the 2008 stock market crash to skyrocketing medical costs and house values that are less than the mortgage amount. Any one of these can make an individual more vulnerable to get-rich-quick schemes.

Identifying the patterns of fraud can be help­ful because scams and the con men who perpetrate them, once identified, are more easily recognized by a potential victim. This brief discusses fraud trends and describes some of the patterns.

The brief’s key findings are:

  • Financial fraud complaints by consumers have surged over the past decade, fueled by the rise of Internet-based scams.
  • This trend will likely continue as scammers target aging baby boomers, who have substantial assets and face cognitive decline.
  • Consumers can help protect themselves by recognizing standard fraud strategies and the disguises used by scammers.

To read the complete brief go to:

http://crr.bc.edu/briefs/the-rise-of-financial-fraud/

 

18 May

Are “Zero” Returns The Norm?

Posted by waterstates - blog in Retirement Planning. Tagged: , , , .

The Federal Reserve last week reaffirmed its commitment to a “highly accommodative” monetary policy, maintaining a near-zero federal funds rate at least through the end of next year. While that is great news for individuals and businesses taking on more debt—such as home buyers and refinancers—low rates remain a significant challenge to retirees.

The stock market had its best first quarter in 14 years, with the Dow Jones Industrial Average up 8 percent and the S&P 500 up 12 percent‑ the best start since the bull market of the 1990s.

It’s likely that many clients will want to take advantage of the current market environment, but as we know, people have short memories and would be wise not to forget not-so-long-ago events. Along those lines, a key point can be gleaned from one of the highlights above‑ the Dow rising above 13,000 for the first time since May 2008, only four months before the financial crisis destroyed a large number of retirement portfolios.

Yet once again, in May 2012 the Dow is down 818 pts to 12,461.  As that proves, change in the financial industry can happen quickly.  It is said the biggest financial risk anyone takes in their lifetime is the risk of running out of money before they run out of life.  The question is where do you do this investing?  Have we become so gun-shy about stock markets that we are now willing to settle for no real return on our money?

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.  - Douglas Adams, The Hitchhiker’s Guide to the Galaxy

Does the financial industry want to do American citizens a favor by providing options for saving for retirement? I don’t think so. The financial industry wants its companies to not only stay in business but to profit as much as possible. And to that end, it sells products — investment opportunities — designed to enrich the companies and their shareholders.

To illustrate better the extremes of market returns, we can examine the Russell 3000 index that accounts for nearly 98% of the publicly traded U.S. equity market. A study by Eric Crittenden and Cole Wilcox (2008) at Blackstar Funds was conducted using Russell 3000 data from 1983 through 2006. The findings were that “about 40% of the stocks had negative returns over their lifetime, and about 20% of stocks lost nearly all of their value.

A little more than 10% of stocks recorded huge wins over 500%” (Richardson, 2009). These data indicate that most of the positive market return over time comes from relatively few performers, which lends support to the use of stock index strategies as part of an overall portfolio.

Maybe you feel that you should buy bonds!’. It looks like a no-brainer…we’ll just take our money out of those ‘risky’ stocks and we’ll go buy ‘safe’ bonds. But…there is one huge problem. Interest rates today are at all time lows and even financial institutions are buying ‘one year U.S Treasuries’ that are paying ZERO percent interest!

It’s part of the Federal Reserve’s ‘zero interest rate policy’ to stave off a great depression by lowering interest rates to unheard of levels. Financial institutions and large companies would rather invest their money with the U.S. Government and earn ‘zero percent’ on their money than risk it in the not so safe stock market or alternative investments. Their philosophy is that even though they are earning zero percent, it’s better than losing money.

Even the longer term 10-Year Treasuries are only paying rates in the mid 3% range today…and that means you’d need to hold that investment for the next 10 years! Now to the problem…bonds function opposite of interest rates.

What this means is that as interest rates do rise, the value of your 10-Year ultra safe U.S. Government Treasury will go down. This is because when interest rates get back in the 5% range, why would I want to buy your 10-Year Treasury that only pays me in the mid 3% range when I can invest my money and buy a 10-Year Treasury that pays me in the 5% range?

So as the investor holding that 3% U.S. Treasury, I have to offer you, the buyer, a ‘discount’ in order to entice you to buy it from me. That means that as the investor, I’ll lose some of my principal value when I sell it to you. This same scenario plays out for Corporate Bonds, and Municipal Bonds.

Many Investors are now re-thinking their financial and retirement planning strategies in the aftermath of the recession, and acknowledge that new approaches are needed to make up for lost ground.  Investors may have multiple goals—income, growth and capital preservation.  Depending on their age, growth strategy and risk tolerance, employing a more aggressive strategy may be entirely appropriate, but retirement planning isn’t just about accumulation. It also needs to address retirement income and protecting against things like inflation and rising health-care costs.

It’s clear that the financial crisis has driven fundamental changes to the way Americans are saving for retirement, with millions of Americans perhaps at even greater risk of having insufficient income for a secure retirement.

For investors, annuity accounts have become one of the most popular market options. Treasury has noticed this trend, and is working with traditional accounts to improve their payout potential as Americans continue to live longer, healthier lives.  The reason Treasury has focused on annuity programs, and similar types of income streams, is annuities are insurance programs that guarantee a payment for life. The value of the payout is assured by the insurance company, providing people who live beyond their investment life the opportunity to continue receiving money until their death.

Stock dividends and real estate income are common sources of retirement income as well, but these do not provide guaranteed income. The retiree needs 53% more wealth to be just as satisfied as with an annuity. Few people want to retire with uncertainty about their financial future, and annuities are one way that retirees can find security in their Golden Years.

These annuity plans are typically meant for the retirees who prefer safety more than anything else. As the name suggests, it provides annuitants a guaranteed stream of fixed income. So, once you apply for a fixed annuity scheme, your income remains fixed for a lifetime.

At the time of finalizing your contract, you decide the amount you would like to have for your upcoming life and it stays fixed always.  Lifetime annuities help you stay secured until you die.  Annuities should not be thought of so much as an investment, but rather as insurance to protect against running out of wealth while still alive.

Since, you get the guarantee of fixed income; you get to cover all your basic expenses in a better way.

15 May

Sequence of Steps to Retirement

Posted by waterstates - blog in Retirement Planning. Tagged: , , .

Retirement planning is a concept, alien to many an individual. Retirement is not just about lazing in the armchair sipping the morning tea; it is something much more than that. For a comfortable life after retirement, a detailed  planning is a prerequisite.

The process of retirement planning includes setting the right goals, making investments, sketching out a vision and working towards achieving them. To sum it up, it is all about making a financial provision for a secure future, before hitting the retirement age.

Retiring isn’t a one-step process done because an eligible employee decides to stop working. Specific steps should be worked through to ensure maximum retirement income.

Effective retirement planning can and should require careful decisions being made well before – and long after – an individual actually stops working.

And, though no two retirements are the same, all future retirees need to work through the same basic checklist in order to ensure their golden years are all they can be. Here’s that suggested sequence.

Save Enough to Retire – 10 Years Before Retirement

Make sure that saving, retirement accounts, social security, and other sources of retirement income are going to adequately meet the need. Retirement calculators, the Social Security Administration, and an employer’s pension plan administrators should be able to explain current and projected benefits.

Why so far in advance? Because time is the pre-retiree’s biggest ally on the savings (and capital appreciation) front, and waiting any longer may mean account balances are too small. On that note, investors currently above the age 50 need to know they can contribute an extra $1000 above and beyond the normal IRA contribution.

Pay Off Debts – 5 Years Before Retirement

By this point, workers should have all major outstanding debts (such as real estate, business loans, etc.) paid off… or at least in sight before retirement. Lingering debt and the interest payments accompanied by them are the biggest sap n retirement savings and retirement income.

Any defined-contribution benefit plans (IRAs, 401ks, SEP-IRAs, SIMPLE IRAs, etc.) should be reviewed by a qualified investment professional, as the shift from growth to income and safety investments should begin now.

Review Savings and Investments – 3 Years Before Retirement

Again, any holdings in IRAs or brokerage account – or even savings accounts – should be scrutinized for appropriateness. Safety and preservation is becoming paramount at this point.

Make a Retirement Budget – 1 Year Before Retirement

Estimate a retirement living budget (again). Though this step should have been taken at the ’10 Years Before’ mark as well as every year thereafter, it’s most important to do this again – being realistic – at this point. Why? Because the cold hard facts may necessitate the need to delay retirement for a couple more years.

Pre-retirees should also consult the Social Security Administration at this point to determine what their options are, and what the specific monthly income should be. The SSA can also explain the income resulting from several retirement scenarios.

And, yet another honest look at the risk involved in any self-directed IRAs or investment accounts should be revisited. From here, income and safety holdings should make up the majority of these accounts.

Notify Employer and SSA of Intent to Retire – 3 to 6 Months Before Retirement

Employers should be notified of the intent to retire; the processing of the paperwork could take that long. Workers should also notify the Social Security office if they have elected to begin taking retirement benefits at this point.

If workers are going to retire before they are eligible for Medicare benefits, health insurance should be comparison shopped.

Roll Over IRAs, Address Legal & Health Issues – At Retirement

Retirement accounts that are held at employer-sponsored retirement plans may be best ‘rolled over’ to an IRA account that offers better choices with better service. Workers should be careful to not take possession of these funds directly, as this would cause a tax liability. The brokerage firm or fund company accepting the rollover can provide the procedures to rollover an IRA without causing a tax liability.

IRA beneficiaries should be reviewed and updated as needed. A qualified attorney may provide the ideal guidance for each worker’s situation. The same attorney may also offer advice regarding wills and power-of-attorney considerations.

If workers retire before becoming eligible for Medicare benefits, health insurance coverage should also begin when employer benefits stop.

Review Investments for Appropriateness – Every 3 to 5 Years After Retirement

Since the stock and bond markets are always changing, so too is the risk profile of retirements accounts. Therefore, IRAs should be reviewed by an investment professional every few years, and adjusted as needed. Indeed, even if the risk profile of these holdings doesn’t change, the aging of their owners might change the risk level sought.

 

11 May

Retirement Income Rider

Posted by waterstates - blog in Retirement Planning. Tagged: , , , , .

The risks in retirement are different from the risks an investor may have faced while accumulating retirement assets.  More than anything else, the changes to retirement lead to greater individual responsibility. That means saving more money and doing so in the most intelligent way possible.

As you are aware, interest rates have been trending downwards over the past year and are now at lows not seen since the 1940s. The 10-year treasury that was yielding 3.34% one year ago is now trading at 1.84%. This is a further drop from a 2.30% rate just a little over a month ago. Unfortunately, this interest rate action is also not limited to Government Bonds.

Coming up with the perfect investing strategy can take a lifetime of effort and discipline. Unfortunately, all that hard work can go down the drain with just a few lapses in judgment.  More aggressive clients who want to give themselves an opportunity to earn higher returns might choose to generate income by setting up a Systematic Withdrawal Plan, wherein they withdraw a certain percentage of their portfolio annually—usually 4 or 5 percent—in order to pay for their daily living expenses.

Chasing higher interest rates misses the point of what you should be doing with your life’s savings. “If you want a guaranteed income for life, annuities are the only way you can do it.  ”We’re paid monthly and it goes direct into our bank account, ”It’s always on time.” Conventional annuities represent the lowest-risk way of ensuring the majority of people do not end up in poverty in retirement.

While investing more aggressively brings with it the opportunity to achieve higher returns, it also opens the door for a number of risks. First of all, a systematic withdrawal plan is not a guaranteed, lifetime income stream. An advisor may estimate that a $500,000 portfolio will last 30 years, but it’s not guaranteed. Depending on what the market does, the client could run out of money or they might live 32 years in retirement instead of 30. What are they supposed to do then?

Today a husband and wife both aged 65 have a 47% chance that at least one of them will reach his or her 90th birthday and a 20% of chance that one of them will live to his or her 95th birthday5. That means a plan that shows assets lasting until 90 has almost a 50% chance of leaving one spouse without any money at the end of his or her life.

Aside from life expectancy there’s market risk. The bull market of the 90s caused a large number of investors to greatly over-estimate the future value of their portfolio. Many who retired in the past 10 years withdrew far more than they should have. Add the market decline of the last three years, and the result has been a great increase in the number of seniors who thought they had adequately saved for retirement, but now realize that they are at serious risk of running out of money.

A true believer in the market might counter that the S&P averaged 8.43% over the 20-year span from 1989 to 2008, even with two recessions in the 2000s. “Where else can you average 8.43%?” That’s fine in a buy and hold or accumulation scenario where the client is not liquidating assets, but in a systematic withdrawal scenario, simply averaging 8.43% is not enough. What many people do not realize is that how much the market returns is not nearly as important as when the returns occur.

This concept is known as Sequence Risk and it goes something like this. The timing of losses, namely those losses sustained early in the distribution phase, can have a major impact on a retirement portfolio’s duration. Specifically, losses that occur early on in retirement have a much greater impact than those suffered later on. And the damage from those losses increases exponentially when you are simultaneously depleting your portfolio through income payments.

You may have encountered annuities as an alternative to Bank CDs but these income annuities are a bit different. Unlike differed annuities, these income or also called immediate annuities pay you an income for life or a designated time you select. The income is guaranteed no matter what the stock market does and it is paid directly to you. It can even be paid to you and then a spouse once you are no longer around.

There are plenty of ways to create retirement income, but only a few of them come with guarantees. The guaranteed income riders offered in some of the recent Fixed Indexed annuity contracts are quite appealing.  How it works is by creating a separate income account. One account has your growth and principal. The other account is usually called an income account.

Guaranteed income benefit riders attached to fixed indexed annuities offer a chance to take the guesswork out of retirement income planning. They offer a guaranteed income stream that is competitive to most advisors stock market claims for retirement income. The rider also guarantees that income stream even if the market or index does not perform.

So what is an Income Rider? 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. There is an annual fee (currently around 1% per year), 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.  It is merely the imaginary roll-up rate of return on a hypothetical account value.

The income account is what the guarantee is based on and not your normal account that has your growth and principal.  You also retain access to your principal! You get an income stream guaranteed to never go away and you still have access to your principal. It is an amazing rider to add to your annuity.

 

5 May

Eliminate Probability of Ruin

Posted by waterstates - blog in Annuities, Retirement Planning. Tagged: , , , , .

With the turbulent markets and economic uncertainty that is present all around the world, a guaranteed income is starting to sound good.  The financial crash of 2008 was a big eye opener for baby boomers and made many realize they were not even remotely prepared for a possible 20+ year retirement.

These days it seems investors are looking for safety and security more than ever, especially after the major stock market correction witnessed from 1999-2002. Four years later, many still have not recovered their losses from that time period. Unfortunately, many investors were counting on those funds to provide income during their retirements.

Interest income is becoming a thing of the past.  With 13 Trillion national debt, the Federal Reserve last week reaffirmed its commitment to a “highly accommodative” monetary policy, maintaining a near-zero federal funds rate at least through the end of next year. While that is great news for individuals and businesses taking on more debt—such as home buyers and refinancers—low rates remain a significant challenge to retirees.

So if you are you retiring soon the questions is:  How can you generate income from your retirement savings that lasts the rest of your life, no matter how long you live and no matter what happens in the economy?

Do you want to eliminate all worry about future income and stock market ups and downs? Annuity laddering might be the answer.  Annuity laddering is the process of using staggered terms and multiple annuities to create an annuity investing plan. You can also use various types of annuities. The plan is designed to create a rising income over a certain number of years that is guaranteed as to principal and interest.

Annuity laddering is a way to increase your retirement income and increase the amount of money you have maturing at different intervals for greater access. The idea is to create a stable and secure income while taking little or no risk.

Annuity laddering is an age old way to creating more income from your annuities. It has been around under different names ever since different maturity annuities were invented. The idea was “stolen” from the securities market where bond laddering and the fixed market where CD laddering has been around even longer.

By using the annuity laddering idea you can increase your income and make it guaranteed at the same time. Remember that longer term annuities as well as other investments tend to pay more over time. When you have your entire annuity laddering plan set up you will have created 15 years or more of guaranteed income.

Annuity products provide greater peace of mind to retirement clients.  Lifetime probability of ruin, which posits: “Will I run out of money before I run out of life?”  How long will your money last if you stop working today, invest your nest egg as safely as possible and try to maintain your current standard of living?”

Only invest exactly the amount needed to create your streams of income. Use the rest of your investment money to invest a bit more aggressively, growth stocks or mutual funds. You income will be safe and secure so the volatile market fluctuations won’t make a difference in your income. You will have a chance to win big as well as have the security of guaranteed income

4 May

Widow Storm Protection

Posted by waterstates - blog in Annuities, Financial Planning. Tagged: , , , , , .

A key component of retirement security and comfort for women is securing a dependable income stream in retirement. The need for women in particular to ensure retirement income is magnified by longevity trends.  A woman’s longer lifespan exposes them to greater financial risk. Women face a perfect storm of conditions that can jeopardize their retirement security even more than men.

Statistically speaking, most women will outlive their husbands and be forced to face the rigors of financial responsibility. We all know women live longer than men on average, and many senior women are highly vulnerable when it comes to finances and managing their financial life.

Seventy-five percent of American married women will become a widow someday. There are one million baby boomer widows in the United States, a number that will rise significantly in the future because there are almost 25 million married boomer women, and 70 percent of them are expected to survive their husbands.

Women as a group, live longer than men by a margin of as much as 10 years. The Gender discrepancy is most pronounced in the very old: Among centenarians worldwide, women outnumber men nine to one.  Most married women can expect a five-to-ten-year period of widowhood at the end of their lives.

The reasons? Simple math: Since most men marry women who are two to four years younger than them, and women live, on average, three to five years longer than men, it’s inevitable that there’s going to be more women than men who survive into their later years.  As money is a finite resource, we have to get the most out of it.

One needs to be able to carry-on after the death of the other, without interferences caused by lack of information and understanding of bank accounts, investments, pensions, Social Security, property. With an average life expectancy of more than eighty-five, that translates into a lot of years where a widowed woman must deal with the issues of her own well-being without her primary life partner’s advice or guidance or income.

Today’s Retirees have weathered periods of staggering economic growth and periods of terrible economic downturn, each with their own sets of pitfalls and opportunities. Most important, though, is the fact — widows and others — build for themselves the financial security that lets them sleep at night.

It’s not magic; it’s not even rocket science. It is a logical, easy-to-follow program that helps bring you up to speed on what you need to know, what you need to do, and what you need to avoid. It’s a road map to your financial independence and security — a plan that is designed to work for you for the rest of your life.

When you withdraw from retirement savings on your own, you have to manage to the worst case, which is you living well beyond your life expectancy. You need to manage to the law of one number — you!  The longer you live, the greater your chances of running out of money. If you start withdrawing retirement income too early, withdraw too high of percentage, or don’t invest with principal protection in mind, you may spend down your principal too soon.  Under the joint and survivor annuity, a lifetime benefit is provided for the widow.

Persistent high poverty rates among elderly widows may justify additional initiatives to improve their retirement security.  Joint and survivor annuities fall into the category of annuities referred to as life annuities, which are annuities that continue to pay to the annuitants as long as one of the annuitants is alive. This choice does not jeopardize their spouses’ economic security if they become widowed.

If you’re married or are in a committed relationship, buy a “joint-and-survivor” annuity with at least 66.6 percent continuing to your spouse or partner after your death. You may want to elect a higher continuation percentage, either 75 or 100 percent, to give your spouse more security after you pass away. Understand, the higher continuation percentage you choose, the lower your monthly annuity income will be.

It’s important to understand that once you buy this type of annuity, you can’t change your mind and ask for your money back. What you have to remember is that annuities are effectively an insurance policy against the risk of you living too long. And there will be no money left over for a legacy after you and your spouse or partner die.

If you want to squeeze a little more retirement income out of your savings, you can also opt for an annuity that increases at a fixed annual rate of 3 percent, instead of increasing your retirement paycheck for the inflation rate as measured by the Consumer Price Index.

That is, you’ll neatly take care of two significant retirement risks — the risk of outliving your money, and the risk of inflation eroding your retirement paycheck. That will help you relax and enjoy your retirement.

There are two drawbacks to buying any type of immediate annuity:

  1. Once you buy the annuity, you can’t change your mind and get your money back.
  2. When you and your beneficiary die, no money goes to your heirs.

These two drawbacks are the price you pay for a significant advantage of an annuity: An immediate annuity usually generates the highest amount of retirement income, compared to the other methods, which are living on interest and dividends, and managed payouts.

These two methods don’t have the above drawbacks, but they generate lower retirement income compared to the annuity. So you have trade-offs between these methods of generating retirement income, which is why I recommend that you split your retirement savings between an annuity and one of the other methods.

25 Apr

Secure Income Protection

Posted by waterstates - blog in Annuities, Retirement Planning.

Changes in employee benefits, longer life spans, uncertainty about Social Security and Medicare, and the rising cost of health care have made planning for and funding retirement difficult. Combined with the fallout from the recent recession, the result is that Americans are experiencing low levels of confidence in their retirement expectations.

Retirees want three things from their retirement income:

  1. A very low risk of outliving their money.  Predictable, consistent availability of income.  Enough liquidity that they feel flexible enough to pay for emergencies — or splurges.

Today’s inflation rates create a very different reality for your Americans—one that is potentially quite frightening.  Instead of signs of fiscal hope, we are faced with daily reports of persistent high unemployment, declining home prices, increasing rates of foreclosures and bankruptcies, persistent federal deficits, high gas prices, and hints of coming inflation.

Too many retirement plans fail to take inflation into account. The threat of inflation, including skyrocketing health and long-term care costs, is a great reason for clients to consider taking advantage of the COLA feature available with annuities. This will enhance their stream of income as the cost of goods and services increase during retirement.

The most widely used measure of inflation is the Consumer Price Index (CPI). It is used to measure the changes in prices of all goods and services purchased for consumption by households. It is also an important measure of the overall health of the economy.  Over the past 12 months, the CPI increased 2.9 percent, according to the Bureau of Labor Statistics.

Today’s inflation rates present a very serious challenge for those living on a fixed budget or in retirement. People in or near retirement could still have several decades of need for inflation-protected income. Making the situation worse, interest rates are still near record lows, and most bank savings accounts, money market and CDs are yielding less than 1 percent.

What really matters, at the end of the day, for all individuals, is that their own income is keeping up with their own expenses.  The things we have to buy—life’s essentials—are skyrocketing. In the last 12 months, the price of beef is up 11.5 percent. Milk is up 9.2 percent. Gas? Up almost 10 percent.

Yet it’s a wonder that the same people who don’t hesitate to buy fire insurance are ignoring the potential for outliving their money and refusing lifetime annuities — even though the likelihood that they will live past 85 is far, far greater than the potential that their homes will burn down.

Individuals of all ages have begun investing in annuities due to the guaranteed payouts and the lifetime income stream.  Fixed and fixed indexed annuities provide the opportunity to combat inflation and your potentially shrinking purchasing power. Fixed indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and earnings potential that is linked to participation in the increase, if any, of an index such as the S&P 500 benchmark.

Chasing high returns carries with it high risk, boomers need secure, income producing investments for retirement.  Indexed annuities are contracts between you and the insurance company with guaranteed interest and guaranteed annuity income options.  Annuities’ “transfer of risk” strategies can provide guaranteed income for life.

There are no upfront sales commissions or administrative fees during the life of your indexed annuity. There are decreasing surrender charges that only come into play should you quit the plan early, much like a bank Certificate of Deposit.  Annuities are a spread product, exactly the same as bank term deposits. There are no performance, management, administration, distribution or product fees associated with an annuity. The promised rate of return is exactly what the policyholder receives.

Equity-indexed annuities give holders equity participation as well as some safeguards if the stock market performs poorly.  Most importantly, if the market does what people thinks it won’t—perform well—you will already be in the right place at the right time, with no need to make anguished decisions about being in equities.

What that means is that you no longer have to worry about how much the annuity earns, how well the market does, interest rate drops, the political climate, tax law changes that drop the market, or anything at all that could derail your retirement plans as far as income goes. You know exactly how much are going to receive at a minimum and it could possibly be more.

The key to successful investing will be to hold the types of stocks, funds, and other investments that do well in a secular bear market (when valuations are contracting), while avoiding the types that history has shown have less chance for success in such an environment.  Check what an annuity will do for you.

 

22 Apr

Risk Transfer Strategy

Posted by waterstates - blog in Financial Planning, Retirement Planning. Tagged: , , , , , , .

If you’re a retiree looking to get back into the market, tread carefully.  Think about how many hours a week are you currently spending worried about the security of your retirement savings, concerned whether your money will last long enough and genuinely anxious about ongoing economic uncertainties?

In the past fat investment cycle, which ended with the bubble, the Dow went from 900 to 11,700. You could throw a dart and pick a winner . . . lots of folks did. Those days are gone. Getting a decent return will be hard work for the next decade. You will need good judgment and good advice.

After a horrific decade of volatility and seemingly endless bad economic news, the markets seem to have quietly recovered, and yet, no one seems to notice or care. I suspect this is because they all think this may be yet another “head fake” designed to lure them in only to collapse and spit them back out, poorer for it once again.

Many want to be told it’s OK to stuff their money in the mattress or stick with certificate deposits. Perhaps it’s time to get some peace of mind by evaluating return in relation to the return on a risk-free investment by introducing annuities into their investment mix.

In a world of global market, political, and economic volatility with no end in sight, one of the primary concerns of retirees and pre-retirees is the fear of outliving their money. Fortunately, the rise of indexed annuity products in the last few years could not have come at a better time in financial history.

When you invest, you take certain risks. With insured bank investments, such as certificates of deposit (CDs), you face inflation risk, which means that you may not earn enough over time to keep pace with the increasing cost of living. With investments that aren’t insured, such as stocks, bonds, and mutual funds, you face the risk that you might lose money, which can happen if the price falls and you sell for less than you paid to buy.

Most people are interested in minimizing risk while realizing a satisfactory return.  The questions you need to ask yourself are: How much risk within my portfolio am I shouldering right now? 20%? 50%? 100%?” In addition to the usual risks facing investors – inflation, market risk, economic risk, longevity risk is at the top of their list of worries.

When you are planning your retirement investment strategy, remember that people retiring at 65 may have to fund 20 plus years of retirement with their savings.  Are you tired of the constant rollercoaster ride? Maybe it is time to transfer some or all of your risk using specific annuity strategies.

Failure to proactively and simultaneously address longevity risk and market risk can jeopardize the lifetime success of a financial plan. Because shares of stock don’t have a fixed value but reflect changing investor demand, one of the greatest risks you face when you invest in stock is volatility, or significant price changes in relatively rapid succession.

That’s a major concern of retiree’s given the risk that when interest rates rise by a percentage point, bond-fund values will decline 5 to 10 percent or more. The decline depends on how much time is left before the bonds mature, reflected generally by what financiers call duration. The longer the fund’s duration, the more rising interest rates will drive down its value.

The traditional wisdom of Wall Street is to buy low and sell high. While it sounds simple enough, the philosophy has fostered an entire industry of financial advisors, prognosticators, and experts. When you reflect on the carnage on Wall Street in the last few years, it is easy to place stock market experts in the same category as TV weathermen. Their advice for you to buy what they’re selling has been their same advice every year for a century. And it has been wrong about half the time. There are long periods when stock markets go up, but there also are long periods when markets go down or sideways.

Many retirement nest eggs dropped by double-digits in 2008. If you held on — didn’t touch it – you were rewarded last summer when the account nudged up against its old level from December 2007. Then, last July, the market began dropping again.  There are no easy answers. But investing in riskier assets than they would normally be comfortable with isn’t one of them.  Annuities have outperformed the average actively-managed cash, bond fund and equities over most medium and long-term time horizons.

When compared too many managed funds and structured products, annuities are self-evidently true to label and simply do what they say they will do. What you see is what you get. Nothing more, nothing less.  The guaranteed nature of indexed annuity products should remove the loss-aversion factor.  This loss aversion is what causes individuals to flee from stocks as the fear of losses drives them to seek cover in the form of guarantees. Typically, this fleeing only takes place once markets have already collapsed, thus locking in poor returns.

When the market is up it is very easy to forget the down years but if you prepare now for the market going down again, it won’t be so bad next time. After the market goes down again is too late. Now is the time to make a few changes.  Use indexed annuities to make your retirement money safe and secure. Your investments will be protected from market downturns.  Equity Indexed Annuities (also called Fixed Index Annuities) are a fixed annuity structure with an attached income rider that can be used for “target date” income planning.

For most people, the days of not playing it very conservative in retirement won’t get the job done, especially with all the uncertainty that continues to be a factor in the economy. A long retirement can be a blessing if you have the money to enjoy it.

20 Apr

Retirement Volitility Risk Tool

Posted by waterstates - blog in Annuities, Financial Planning. Tagged: , , , .

As baby boomers face the reality of stock market volatility in retirement, interest in guaranteed retirement income has never been greater. Fear and greed are the enemies of investing success, and they continue to prevail. Fear drives investors to sell when the markets are in a tailspin, and greed compels them to buy after market gains have already been booked.

People, more often than not, succumb to loss aversion, in which the pain from their losses is greater than the pleasure from their gains.

As a result, they are quick to flee the discomfort caused by excessive market volatility, and, subsequently, they miss out on the big gains that always come without warning.  In contrast, they usually only want to get back into the markets once they’ve heard about the big gains that have already taken place.

The economic models of rational behavior, which weigh the riskiness of outcomes against a person’s tolerance for risk, all show that equities and fixed income are not substitutes for annuities, because they do not address the major risk we face of outliving our assets.

Preparing for retirement is more challenging than ever before, given variables like life expectancy, inflation and market volatility.   For this reason, economists generally consider life annuities to be a separate asset class. Equities and fixed income can be complements to, but cannot replicate nor substitute for annuitization.

Our experience tells us that you will generally need to annuitize a significant portion of your remaining wealth, while investing the balance in stocks, fixed income securities, and money markets.   Enter the indexed annuity policy with secondary guarantees. If we are in for a seemingly long overdue and sustained rise in the equity markets, an indexed annuity will have the market exposure necessary to help provide a greater potential return than that offered by traditional fixed products. Yet that exposure won’t come with the sickening volatility that pure equity products have produced in the last decade.

These vehicles, often pitched as a happy medium between fixed and variable annuities, have exploded in popularity during the past several years. Although there are many different variations, the basic idea is the same: Equity-indexed annuities typically promise some guaranteed rate of return, much like a fixed annuity, but they also offer participation in equity market returns.

Under a typical scenario, an equity-indexed annuity will offer a minimum return that amounts to 90% of the premium paid at a 3% interest rate. In an up market, it will also offer a percentage of the return of a stock market index, usually the S&P 500. Some equity-indexed annuities cap the equity gains you’re eligible to receive.

As with the other annuities, earnings in equity-indexed annuities increase on a tax-deferred basis, and holders pay income tax on their distributions. Equity-indexed annuities also typically include a death benefit. Additionally, when stocks were going up, critics bemoaned that owners of equity-indexed annuities would receive only a fraction of the stock market’s gains. But as the stock market tanked from 2007 through early 2009, owners of these annuities were able to limit their stock market-related losses.

The unique beauty of long-term ownership of indexed products is, without fear of losses to contend with, individuals will be exposed to rising markets from the trough to the peak. No, they do not have pure exposure and thus won’t enjoy the full return. But they will have some exposure to the full force of the upward moves, in turn giving them a better return potential than fixed products—and a better return potential than individuals who choose to participate in equity markets in unprotected fashion.

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