Investors have been buying fixed annuities for a long time now for the added security they can offer. The current best interest rate on a five-year fixed annuity is 3.9% compared to the current 2% rate of a bank CD.
Fixed index annuities are paying income streams with a guaranteed rate as high as 6% over much longer time periods. These annuities earn their interest from participation with stock or bond market indexes. When the market is up, you earn a percentage of the gain in what is known as a participation rate strategy.
An example might be if the chosen index were up 10% for the year and your contract paid 70% participation, you would earn 7%. If the index selected should go down 10% for the year, you are guaranteed not to have any market losses ever. There are additional strategies for index annuities to pay interest, and each strategy has its limitations compared to the actual index earnings. As always, make sure you read the fine print.
In addition to guarantees and income provided by these products, there are additional tax strategies used to increase your net return. It’s one thing to earn interest, but it’s another to keep it.
The tax system is a huge factor in retirement planning. For example, if your account is an IRA and you elect to have a guaranteed income rider on the index annuity contract, you and your spouse will have income guaranteed as long as either is alive. At the time both of you have passed, the company would pay any remaining balance to your beneficiaries. But what if you live a long time taking a guaranteed increased income but the stock market indexes do not go up during that period? The insurance company still has to pay you your increased income even if your account runs out of money. In this example, the year your account runs out of money, you convert the remaining small amount to a Roth IRA. All future income would be considered Roth IRA income with a “zero-tax liability.” You do need to make sure you have a Roth IRA currently in order to do this strategy.
One of the least-known tax strategies is to take regular non-qualified money and purchase a fixed index annuity where the income paid out each month is, depending on your age, approximately 70% tax-free. There is a limit on how much you can put into a Roth IRA to obtain tax-free income, but this strategy has no limit. An example might be that you deposit $1 million into this type of account. Immediately, if you were drawing $100,000 income each year under this strategy, you would only have to pay taxes on about $30,000 with the remaining $70,000 being tax-free. Who doesn’t like the sound of that?
The final piece of the puzzle is longevity planning. What if you outlive your savings? There is a form of life insurance that will advance the death benefit to pay for home health care, nursing home care, and even offer advanced lump sums of money if you are diagnosed with a critical condition. Also, under current law, the advance is all tax-free.
What about the pensions that go away when the breadwinner dies? What about the potential of decreased Social Security income? The life insurance mentioned above can also provide enough money to replace the lost pension and Social Security dollars providing for your soulmate’s standard of living in the manner in which you want them to have. Your final love letter, so to speak.
People are living longer, which has driven down the cost of this type of insurance, making it possible to provide for you and your spouse. Critical care, chronic care, and loss of your income can all be addressed with one properly structured insurance contract.
Insurance company products can offer stability that most retirees want and need. With proper planning, you can reduce or even eliminate taxes and have retirement income you can enjoy for the rest of your life. You won’t have to worry about running out of income or keeping up with inflation.
So back to the beginning question – do retirees hate annuities and insurance companies? I believe it is safe to say at the rate these products are being purchased by retirees, they actually love insurance companies. How things have changed from the past generations.
This content was brought to you by Impact PartnersVoice. Insurance and annuities offered through Donald W. Owens, OH Insurance License #16525. DT# 1023595-1220.
Financial advisors may hate annuities because of the complex contracts. The intricacy of annuity contracts can be confusing, posing a challenge for people to determine if they're making a wise financial move. Annuities are also highly competitive, with many options on the market, and some are rife with parasitic fees.
Annuities are considered poor investments for many reasons. Depending on the annuity, these include a variety of high fees, with little to no interest earned, an inability to keep up with inflation, and limited liquidity.
"It makes absolutely no sense for you to put a tax-deferred investment such as an annuity within a tax-deferred or tax-free retirement account," Orman stated. "Almost in 99% of the cases, it makes no sense to put an annuity within a retirement account." Orman isn't against all annuities.
You can end up paying a lot in just fees for the commission, investment management and insurance. The plans make it hard for you to take money out of the annuity, say in the case of an emergency, charging a penalty of anywhere between 5% to 20%.
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
Yep—if you want to get your hands on the money you've put into an annuity, it'll cost you. That's a big reason why we don't recommend annuities. Remember, annuities are basically an insurance product where you transfer the risk of outliving the money you've saved for retirement over to an insurance company.
Periods of high inflation, like that which consumers have experienced over the past few years, diminish the buying power of an annuity's predetermined monthly payout in the short term, but the impacts can be even worse over a longer period. According to AARP, inflation is the single biggest risk to annuities.
Most of these variable annuities have high fees. If you're less than 50 years old, you have time for markets to be volatile, and then you can make up for any type of losses or volatility, etc. If you're less than 50 years old, you should never buy an annuity of any type.
While annuities are one of the safest options for retirement income, they aren't your only choice. Consider options like 401(k)s, IRAs, stocks, variable life insurance, and retirement income funds.
Your savings are already on track to last throughout your retirement. You have health concerns or otherwise don't expect to have a long retirement. You don't have enough money to purchase an annuity contract.
Otherwise, you won't lose money in a fixed indexed annuity when the index falls. Fixed annuities, MYGAs, and immediate annuities aren't affected by market crashes. They will continue to earn interest or provide you with guaranteed payments, as you are contractually entitled to.
These fees can end up being higher than any interest you earn, which means you could actually lose money. While variable annuities may be suitable for a younger investor, they aren't ideal for growing and preserving your nest egg in retirement.
Annuities used to have a bad reputation, and rightly so. In the past, they had long surrender periods (periods when you can't withdraw all your money without a penalty), offered limited options like tax-deferral and standard death benefits, and were often not implemented properly.
This is okay if the compensation among all the bank's product offerings were the same, allowing for unbiased advice. This is not the case, however, as annuities provide the biggest payday to the bank and its sales force (6-7% average commission for the salesperson).
More than two-fifths recommend an annuity with guaranteed lifetime income to less than a quarter of their clients. Most professionals who do suggest annuitization recommend variable annuities with a guaranteed income rider.
This is okay if the compensation among all the bank's product offerings were the same, allowing for unbiased advice. This is not the case, however, as annuities provide the biggest payday to the bank and its sales force (6-7% average commission for the salesperson).
Because most Americans count on Social Security to cover the bulk of their retirement expenses. And that annuity, alone, doesn't provide enough monthly income to fund a comfortable retirement, at least not for many of us.
Introduction: My name is Dean Jakubowski Ret, I am a enthusiastic, friendly, homely, handsome, zealous, brainy, elegant person who loves writing and wants to share my knowledge and understanding with you.
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