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Retirement Advice for Uncertain Times

August 26, 2010 By EloiseHines35 Leave a Comment

Maintain a Steady Keel

If you are at the outset of your retirement and are counting on your savings for income, you may be a bit disconcerted about the economy and seek some retirement planning advice. A dipping stock market and housing market, rising crude prices, and the government’s refusal to make meaningful moves, make fears of another recession real and have you worried. What you do not want to do is panic – especially in your investment approach.

A Panic Move
There are some who will pull all their equity investments and put them into a money market fund or CDs. They do not want to lose any of their previous years’ gains or, at least, any more than they have to this point.  They plan to live off their money market interest and count the time until equities begin to rise – perhaps after declining. Unfortunately, neither they nor I know when the worst will occur. That’s acting like a speculator which is only for day traders and specialists.  This is not good retirement planning advice to be short term oriented.

At 65 years old, you have n additional life expectancy of twenty one years. That gives a lot of time for inflation to undermine the dollar’s value. Inflation will cut sharply into the value of your nest egg – and its yearly returns if you are completely invested in CDs and money market funds.  Better retirement planning advice is to have a long term view consistent with a 21 year life expectancy.

A Better Plan
After setting aside one year’s living expenses in a money market fund, split the balance of your nest egg equally between income and stock market investments. You require those income investments to generate some of your retirement income. Choose a good income generating mutual fund or buy some bonds (more about the differences of individual bonds and bond funds in a later post). Be sure to ladder your bonds (i.e. some for 2 year maturity, some 4 years, some 6 years and so on)  so that you can take advantage of rising interest rates over the next few years as the shorter term bonds mature. Laddering will likely smooth out your bond income from interest rate gyrations that may occur.

Do your preparation on your equity investments.  Look for stocks or mutual funds that have a history of increase in good times and hold their value in bad (Fortune magazine does an annual ranking of such funds). It is your equity investments that should offset inflation to maintain the overall value of your retirement funds. Be sure to allocate your equity investments so all your eggs are not in the same basket under any economic outcome (i.e. diversify among several industries).  Note that mutual funds and stocks are open to risks, including the potential for principal loss but the best retirement advice is to maintain a long term perspective and not react to anything you see or hear on TV or what the market did this week.

Now sit tight and be frugal. Make use of savings tips to stretch your money. Be sure to re-balance your long term investments annually (so that you have half in income/bond investments and half in equities/equity funds) and maintain your ‘12 month’ living expense fund refilled.  You’ll be around for at least 2 decades after retirement so take some good retirement advice and plan your portfolio for the same long time horizon.

For financial advisors seeking tips on how to help clients and maintain their business during an uncertain economy:

Annuity Leads
Lead Generation
ProspectMatch
Prospecting System

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Annuity Frequently Asked Questions

August 25, 2010 By Admin Leave a Comment

What is an annuity?

An annuity is a contract between you and an insurance company that allows you to accumulate money on a tax-deferred basis and arrange for a systematic stream of income payments, usually when you retire. Variable annuities are subject to investment risks, including the possible loss of principal.

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What are the major advantages of an annuity?

Interest (earnings) accumulates income tax deferred until dollars are withdrawn. This helps clients build substantial funds for their retirement and can give them an income they cannot outlive.

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Is an annuity safe?

Yes, insurance companies are the only financial institutions that may underwrite and issue annuity contracts. Fixed Annuity values are backed by the general assets of the insurance company. The Department of Insurance in each state must issue licenses to the insurance company and their agents who solicit business in that state.

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What assets can be contributed into an annuity?

Maturing CDs, checking and savings accounts, money market funds, mutual fund accounts, stock and bond funds, IRA rollovers, Treasury bonds and bills.

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Is the annuity for everyone?

No. Dollars earmarked for short-term needs should not go into the annuity. In addition, at least six months of income should be saved for emergencies outside of the annuity. Also, those who need current income should consider an immediate annuity, not a deferred annuity. On the other hand, those looking for one of the safest ways “to accumulate” dollars on a tax-advantaged basis will find the deferred annuity extremely beneficial.

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Since a withdrawal of principal is tax-free and IRS penalty free, can principal be withdrawn first and then interest?

No, the IRS considers that interest earnings are withdrawn first. Naturally, any portion of a withdrawal exceeding interest earned would be a tax-free return on principal.

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How can an annuity provide me with retirement payments as long as I live?

If you annuitize your contract and choose a lifetime income option, you are guaranteed a stream of payments you cannot outlive, backed by the claims-paying ability of the issuing insurance company. (This guarantee does not apply to the investment performance of a variable annuities underlying investment options.)

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What is the accumulation phase of an annuity contract?

This refers to the period in which you make premium or purchase payments to the contract. These payments grow on a tax-deferred basis until withdrawn. Withdrawals of taxable amounts are subject to income tax and, prior to age 59½, the IRS may impose a 10% penalty. A surrender charge may be imposed by the insurance company if a withdrawal is made in excess of the free withdrawal amount during the early years of the contract.

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What is the payout phase of an annuity contract?

The payout, or income phase, refers to the period when you will receive regular income payments from the annuity. Income payments are based on the value of the contract at the time the option is elected. Income guarantees are backed by the claims-paying ability of the issuing company.

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What payout options are available?

Period certain–Income is guaranteed for a predetermined period of time.
Life with period certain–Income is guaranteed for the rest of your life or for a predetermined period of time, whichever is longer. If you die before receiving the minimum number of guaranteed payments, the remaining balance is paid to your beneficiary.
Joint and survivor–Income is guaranteed for the lifetime of two persons (typically spouses) for as long as either is alive. A period certain may be added to this option.
Life only–You will receive income for the rest of your life. Payments cease at death of owner with no payments to the beneficiary.

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How can I jump-start my annuity savings?

Premium-enhanced or bonus annuities offer the purchaser a purchase payment credit, or bonus, on their premium. This credit is a percentage applied to the purchaser’s premium payment.
Purchase payment credits are treated as earnings for distribution purposes and may be subject to income tax.

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What should I consider when choosing a fixed annuity?

Since the rate of return is fixed, it is important to consider the effects of inflation on your investment. It is also important to note that the assets are invested in the insurance company’s general account and are therefore subject to the claims of its creditors. With this particular type of annuity, you will want to consider the financial strength of the issuing company. Consumer rating services such as A.M. Best and Standard & Poor’s provide such information.

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Why would I choose an annuity for my qualified plan?

Annuities offer no additional tax deferral than that offered by a qualified plan and investors should always consider contributing the maximum allowable to their qualified plans before investing in annuities. Withdrawals from qualified plans and annuities of taxable amounts are subject to income tax and, before age 59½, a 10% IRS penalty. Surrender or withdrawal charges may also apply for annuities. There are, however, benefits you may want for your qualified plan that are available only in a variable annuity.

For an additional fee, many insurance companies also offer living benefits—guarantees to protect your accumulated assets during your lifetime and provide a regular stream of income during retirement.

Such guarantees, backed by the claims-paying ability of the issuing insurance company, have helped make the variable annuity popular among investors saving for retirement.

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How does a living benefit work?

Living benefits can assure you a minimum monthly income when you begin taking payments, or the return of your original investment, regardless of the value of your annuity contract when you activate the benefit. You pay for these optional guarantees only if you want them. They typically have a vesting period and are backed by the claims-paying ability of the issuing insurance company. Some are irrevocable. Guarantees and fees vary by contract. Read the prospectus for complete details.

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Why invest in an annuity if I already have an IRA and participate in a 401(k) plan?

Each year, the amount you can contribute to an IRA or 401(k) is governed by IRS rules. There are penalties for withdrawals before age 59½, as well as rules that dictate when you must begin withdrawing money.

Annuities in nonqualified plans, where contributions are not deducted from current income taxes, place no limits on your after-tax contributions other than those set by the insurance company and have no deadlines that tell you when you must begin withdrawing. Annuities purchased in qualified plans are subject to minimum distributions required by the IRS. This can help you save more on a tax-deferred basis and keep more of your long-term earnings for use during retirement. Withdrawals from qualified plans and annuities of taxable amounts are subject to income tax and, before age 59½, the IRS may impose a 10% penalty. Surrender or withdrawal charges may also apply for annuities.

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Why is it important to start saving now for retirement?

Americans are living longer. Retirement will be a bigger part of your life. How comfortable it is depends in part on how you supplement Social Security and pension payments with your own personal savings plan on a qualified or nonqualified basis.

The sooner you begin saving, the better. In its Saving Fitness guide, the Department of Labor estimates that for every ten years you delay saving, you will need to save up to three times as much each month to earn the same amount for your retirement.

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How do tax-free annuity transfers work?

Internal Revenue Code Section 1035 allows you to exchange one annuity contract for another, or exchange a life insurance contract for an annuity–without having the transfer treated as a taxable event. A 1035 exchange may be appropriate if you own an older contract and wish to avail yourself of recently-created death benefit options, or if the performance of your subaccounts has been not been good. There are costs associated with exchanging annuities including potential surrender charges.

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How do “stepped-up” death benefits work?

If you die before receiving income from your annuity, the death benefit provides your beneficiary with a guaranteed benefit, one that does not have to go through probate. Some contracts offer optional “stepped-up” benefits which guarantee a minimum yearly percentage increase for your account and/or a minimum return on the value of your account. See the prospectus for detailed information on restrictions, limitations and fees for death benefit options. Death benefits are backed by the claims-paying ability of the issuing insurance company.

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What IRS reporting is required for annuity owners?

Unless withdrawals are made, or an annuitization option elected, there is no tax reporting on deferred annuities. At death, the value of the contract is included in the estate of the annuity owner. Any gains in the contract will be taxable to any beneficiary except surviving spouse.

A surviving spouse beneficiary may elect to continue the contract indefinitely, thereby postponing any current income tax liability. As with any investment, you should check with your tax or legal advisor regarding your personal situation.

Filed Under: Annuities

Types of Annuities

August 25, 2010 By Admin Leave a Comment

Fixed Annuity

A fixed annuity is a contract that lets you invest your money with an annuity carrier; and in return, the carrier will pay you a fixed, stated rate of return. The interest rate is guaranteed for a certain period of time, such as a year, and then the rate will change, based on current market conditions. You will be notified of what your new rate will be and then that rate is locked in for another period of time, for example, another year.

There’s also a “minimum” guarantee rate so you know that your money will always earn a certain amount no matter how low interest rates fall.

Immediate Annuity

An immediate annuity is for someone with a lump sum of money who is interested in immediately turning that amount of money into a guaranteed income stream.

Unlike other types of annuities: fixed, index or variable, which are also called deferred annuities; the immediate annuity doesn’t accumulate any earnings for you at all. It’s purchased strictly to provide you an income payment on a regular basis which begins right away.

Index Annuity

With an index annuity, you receive a guaranteed minimum interest rate, but could potentially receive a higher crediting rate based on the performance of one of a variety of market indices. There are many types of index annuities and an AnnuityScene.com licensed professional can show you more specifically how an index annuity may be suitable for you.

Variable Annuity

A variable annuity is one type of annuity that’s different from the index or fixed type annuity. A variable annuity comes with a menu of professionally managed investment options in which to allocate your annuity investment. Most variable annuities offer a wide range of investment options to suit your tolerance for risk, from conservative to aggressive. Variable annuities even offer a “fixed” option for investors who want to keep a portion of their annuity investment earning a fixed rate of interest.

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What is an Annuity?

August 25, 2010 By Admin Leave a Comment

An annuity is long-term retirement product that can help protect you against the risk of outliving your assets. It is a contract between you and an insurance company: you receive future income in return for your contributions.

Any earnings on contributions are tax-deferred until they are withdrawn, usually at retirement. You may receive income in a number of ways, including payments that will last for as long as you live. Annuities can be a valuable addition to your retirement plan.

Annuities may help you:

  • Receive retirement income payments for as long as you live
  • Protect beneficiaries with a death benefit
  • Diversify your investments
  • Provide an opportunity for growth on a tax-deferred basis
  • Avoid outliving your assets
Type Key Features
Fixed Annuity Safety, stability and guarantees

  • Tax-Deferred Growth
  • Guaranteed Principal, Interest and Renewable Rates
  • Benefits to Spouse and Beneficiaries
Index Annuity Safety, growth potential and guarantees

  • Tax Deferred Growth
  • Crediting linked to major market indexes
  • Guaranteed Principal
  • Benefits to Spouse and Beneficiaries
Immediate Annuity Regular income now and for life

  • Regular Payments
  • Distribution Options
  • Choic of Contract Types
  • Tax Benefits
  • Postponement of Taxes
  • No Withdrawals
Variable Annuity Growth potential from investmenet portfolios

  • Tax Benefit to Help Protect Beneficiaries
  • Death Benefit
Filed Under: Annuities, Retirement Planning and Advice

Annuities 101

August 25, 2010 By Admin Leave a Comment

An annuity is a retirement planning tool designed to protect against the risk of outliving one’s financial resources. Annuities are one of the few financial vehicles that allow your money to grow tax deferred1. There are several annuity income options, including the choice to receive either a steady stream of income throughout your lifetime or one lump sum payment if you choose to surrender the policy.

Immediate Annuity or Deferred Annuity

Annuities can be categorized as either an immediate annuity or deferred annuity. An immediate annuity provides income payments shortly after you make the initial annuity payment. A deferred annuity delays annuitization, which provides more time and opportunity for your money to grow tax deferred.

Fixed Annuity or Variable Annuity

There are two basic types of annuities: fixed annuities and variable annuities. In a fixed annuity, your cash value earns a current rate of interest, which will never go below a minimum guaranteed interest rate. Variable annuities provide a variable rate of return, which will fluctuate depending on the performance of the sub-account investment portfolios you select. A variable annuity offers more growth potential and investment choices than a fixed annuity, but also carries more risk. If you annnuitize a fixed or variable annuity, you are guaranteed a fixed payout when you begin to receive your annuity income.

Annuitization Options

There are several ways to receive your annuity income payments:

  • A life only provides income until the annuitant dies.
  • A period certain only provides income for a fixed period of time, such as 10 or 20 years. If the annuitant dies during the specified period, payments continue to the beneficiary or the beneficiary can choose to receive the value of the remaining payments in a single lump sum.
  • A life annuity with period certain provides income until the annuitant dies. If the annuitant dies during the specified period certain, the insurer will pay the balance to the contingent payee you have selected.
  • A joint and survivor2 provides income to the annuitant and joint annuitant until they die.
  • A joint and survivor with period certain2 provides the annuitant and the joint annuitant with a fixed income for a specified period, such as 10 or 20 years. If both joint annuitants die during the specified period, payments continue to the beneficiary or the beneficiary can choose to receive the value of the remaining payments in a single sum.
  • A joint and contingent provides fixed income for the annuitant’s life, then to the contingent payee when the annuitant dies.

Which type of annuity is right for me?

Every person has unique needs. That’s why it is important to speak with an AnnuityScene.com advisor who can assess your particular situation including your plans for the future and your current financial status. After evaluating your needs, you and your AnnuityScene.com advisor can discuss the various investment options available.

1Tax deferral is available only to individuals. It is not available for annuities owned by entities such as corporations and most types of trusts. There is no additional tax benefit derived from placing IRA or other tax-qualified funds into an annuity.

2Payout options may not be available for all products in all states.

Filed Under: Annuities

Learn Investing–Ask Your Kids

August 18, 2010 By EloiseHines35 Leave a Comment

Your kids are likely far better investors than you.  The seek to learn investing on their own so as to avoid the dependence and fees of using a professional.

Young millionaires disparage the value of financial advisors per a recent study by Spectrem Group.  The study summarizes that millionaires under the age of 45 prefer self-directed investing and they believe the services of professional advisors to be over-priced.

The study polled three different age groups: age 41 to 45, 35 to 40, and under 35. The youngest group was most against using a financial advisor; 58% of respondents between ages 41 and 45 found the offerings of a financial advisor too expensive while an overwhelming 74% of those under age 35 felt advisors were over-priced.

Younger investors find the financial information they need on the Internet, according to Spectrem.  This means they are self-confident, self-taught and self-learners.  These are the traits needed for learning to invest well.

The thing that young millionaires have in common is that they are self-learners.  They know that they can easily learn investing from the Internet, magazines and books what any financial advisor can tell them.  Rather than pay someone to lose their money, these young success stories realize they can learn to invest on their own and have no one to blame for results.  And they can do so without paying fees.

They know that from the plethora investment choices, there are only two: stocks and bonds.  Every other product is just some combination or derivartive of stocks and bonds with a 70-page prospectus hiding fees so that the brokerage firms can take you to the cleaners.  If you do a little reading (yes, read the prospectus), you will learn how many fees are buried in the products maufactured by Wall Street and you will realize that all of these products are simply some version of stocks or bonds.  Learning about investing is simply reading.

It’s unfortunate, but of all financial advisors, brokers/wealth managers, whatever you want to call them (or they call themselves), maybe 10% to 15% can do anything of value for you.  The rest are just salesman of products they don’t even understand.  They have never read the prospectus for the junk they sell or understand if it’s even good for you.  If you want the best results, learn investing and take your investment education into your own hands.

Your kids have learned about investing and know that it’s probabaly best to do their own.  A good lesson.

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FINRA Fines

July 26, 2010 By EloiseHines35 Leave a Comment

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,700 brokerage firms, about 167,000 branch offices and approximately 635,000 registered securities representatives.  Their job is to protect you, the investor, that you have a safe place to invest.  How well are they dong?

I did a Google search on “FINRA fines” and here’s what i found from the first two pages (there were 143,000 total results):

Finra Fines Deutsche Bank $7.5M In Subprime Case‎

FINRA Fines SunTrust $1.4M for Unsuitable Trades‎ -

FINRA Fines Terra Nova Financial $400000

Finra Fines Phoenix Derivatives, Others a Combined $4.3M – WSJ.com

FINRA fines Citigroup for supervisory violations  $1.5 million fine …

FINRA Fines Double In 2009 – Representing Investors – Blog Archive

FINRA Fines Morgan Stanley, Other Firms – On Wall Street

FINRA Fines H&R Block Financial Advisors for Inadequate …

FINRA Fines Citigroup $600000 for Failing to Supervise Trading …

FINRA Fines MetLife Securities, Affiliates – ABC News

The above is all fairly recent.  Do these fines against these firms indicate that FINRA is protecting you well OR that if protections were adequate, there would not be so many fines?  You will need to be the judge.

It is clear however, that these firms  (notice that many are large and well known to you) seem to be little interested in your benefit or profit and are complacent to break the rules.  And that’s the point of this post.  Don’t trust anyone in the investment or insurance industry without asking questions. It’s not that you should not trust, a necessary element for a healthy economy, but get all of your questions asked and issues explained to your satisfaction.  Don’t simply take anyone’s word for the facts.  Get the evidence before you invest or buy insurance.

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Invest for Retirement- The Right Way

July 22, 2010 By Retirement Expert Leave a Comment

You mess up your own retirement investing

While it seems that the economy, interest rates or the stock market has much to do with your retirement financial success, your own actions may account for more of your success or lack thereof, then you care to admit.  Morningstar, the well known mutual fund research firm, estimates that investors sacrifice a lot of return by buying and selling at the wring time.

To estimate the impact of poor timing, Morningstar calculates a figure that it calls investor returns. This represents how much the average dollar in a fund actually returns. If investors buy at the peak and sell at the trough, the investor return will be low. In contrast, total returns indicate how much you would have gotten if you invested at the beginning of a period and stayed put. To appreciate the importance of investor returns, consider that CGM Mutual returned 4.1 percent annually during the decade ending in May. But individual investors, because they bought at peaks and sold at troughs, the investor return for the fund was only 2.6 percent.

So in the above example of CGM mutual, investors would have had 57% more return had they not traded and just held the fund.  People trade too often and make these timing mistakes for two reasons:

1. Investors (you) get too much useless information–they listen to CNBC, read the Wall Street Journal, listen to their friends opinions and act on all of this information while it should all be ignored.  Not only is ignorance bliss, it can make you money.  Realize that all of this input is OPINION, not fact, and there are no “experts” in the financial arena (okay, maybe we can call warren Buffet an expert) .  While these people who position themselves as experts may have years of experience or degrees from great schools, they cannot forecast the future any better then you.

2. Investors (you) react emotionally.  Even if investors attended only to the facts such as unemployment data, trade flows, currency exchange rates and other hard data, they don’t have any system or model for their decisions and will buy or sell based on how they feel.  Using emotions to make investment decisions will make you poor

If you would like a comfortable retirement, reduce or eliminate your exposure to financial opinions. Additionally, if you receive any factual economic information, wait 48 hours before you make any financial decision. Last, never look at the direction of the market to influence your decisions.

Get the Retirement Financial Guide to keep you on course
(click on the graphic below)

Financial Advisors who seek to help retirees with sound decisions: ProspectMatch

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Rollover IRA to Meet Your Retirement Goals

June 29, 2010 By Admin Leave a Comment

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A rollover IRA is a retirement account that you can use to consolidate the funds you’ve set aside in various other retirement accounts. Bringing your funds together can give you access to a wider range of investment options and will make the management of your investments much easier. This way, if your retirement savings goals change, you can change the strategy for the management of your money quickly and easily. And make no mistake – your goals will change as your life changes.

A rollover IRA is also known as a target IRA by most financial professionals. What this means for you is that this is the IRA where your money is going to wind up – regardless of where it came from, it’s the target or destination of the IRA rollover. Be aware when you’re considering a rollover IRA that some types of IRAs can’t accept funds from other types of IRAs. Therefore, you’ll want to choose a rollover IRA that is of a type that can accept money from all of your old accounts (or, if not all, at least the majority of them).

If you haven’t already, this would be an ideal time to enlist the services of a financial professional. Many of the current IRA rollover rules can be very complex, and simple missteps in the IRA rollover process can lead to significant costs, in terms of unnecessary taxes, fees or penalties. This really isn’t an arena that you’ll want to walk into by yourself.

Once you’ve determined the type of rollover IRA to set up, the next thing to remember is that in almost every instance, you want to request an IRA direct rollover. As the name implies, this type of transfer occurs when money is moved directly from the administrator of one account to the administrator of the other. The money never comes into your hands. This is vital to protect the tax status of the money you’ve accumulated thus far. Once you take possession of your money, it can be classified as a withdrawal or a distribution. In that instant, you are subject to mandatory withholding – usually 20% of your account balance – as well as taxes and penalties.

To initiate an IRA direct rollover, contact the administrator of your target IRA and tell him or her to perform an IRA direct rollover; use those exact words. This will begin a legally defined process whereby the administrator of the target IRA will contact his or her counterpart at the old IRA and arrange for the transfer the money, typically using a check or a wire transfer. There will be some paperwork associated with this, but the administrator will be able to help with any questions you may have.

Following these simple rules, you’ll be able to use the rollover IRA process to both consolidate your funds and maximize your control over them. This way, as changes in your life necessitate changes in your retirement goals and strategies, you’ll have easier access to your retirement money to make those changes.

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Senior Investment Newsletter Provides Fresh Retirement Advice Each Month

May 11, 2009 By Annuity Expert Leave a Comment
Get Unbiased Advice on Retirement Finances
Receive 12 monthly issues of the SeniorFinances Newsletter. Here is a small sample of articles that have appeared:
  • Social Security Benefits How To Get A Bigger Check
  • If You Can Save In Retirement Put It Where It’ll Count
  • Eight Ways To Generate Supplemental Retirement Income Without Special Skills
  • The Best Ways To Take Charge Of Your Retirement Income And Expenses
  • A New Type Of Trust May Be Able To Solve Many Estate Planning Problems
  • How To Get Income From An Old Life Insurance Policy
  • Refinance Your Rental Property For More Retirement Income
  • Annuities That Help You Qualify For Medicaid
Senior Finances e-Newsletter
 
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