Annuities - Part 2

A Fixed Term Single Premium Immediate Annuity Helps Keep You in Control

In retirement, a guaranteed income can reduce your stress and allow you a less-panicked approach to investing. With no pension, you may be relying on Social Security as your only assured income. Buying a life annuity can guarantee that extra income, but you lose both control of your assets and their use as your legacy. What’s a solution to this dilemma? The fixed term SPIA solution Use a single premium immediate annuity (SPIA). In this case we’re looking at a fixed term SPIA where you purchase the SPIA for an immediate payout, but only for a fixed term – perhaps 5, 10 or 15 years. The idea is to buy the fixed term ingle premium immediate annuity with only 50% of your savings. The term you choose depends on how much extra assured income you need and what you plan to do with your other 50% of savings. Let’s see some examples for this approach. New retiree – getting adjusted Take this hypothetical example. If you’re a 66 year old man beginning retirement with $400,000 in savings but no company pension, you may want to complement your Social Security income with single premium immediate annuity income while you pursue some endeavour for [...]

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Posted by Bob Richards - January 16, 2009 at 10:42 am

Categories: immediate annuity Tags: immediate annuity

Should You Choose an Immediate Variable or Fixed Annuity?

When you buy an immediate annuity, you pay a lump sum to an insurance company and begin receiving monthly payments right away. An immediate life annuity is attractive to retirees because it guarantees them a lifetime income. But should they choose an immediate variable annuity (IVA) or an immediate fixed annuity (IFA)? The IFA gives you a guaranteed but fixed payment – generally monthly for your lifetime. That’s because the underlying annuity investment relies on long term bond investments purchased by the insurance company. But in twenty years the purchasing power of that fixed monthly payment may be significantly less due to inflation. The IVA also offers a lifetime (monthly) payments, but those payments will vary. That’s because the underlying annuity money is invested in the subaccounts that fluctuate with the underlying securities (e.g. stocks and bonds). The attraction of the IVA is based on the hope that over time, the investment markets will rise and help offset inflation by producing larger monthly payments. The danger is that the stock market can go into a slump and reduce those payments. With the IVA, you can change how your annuity is invested among subaccounts associated with it. You can also [...]

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Posted by Bob Richards - January 15, 2009 at 12:30 pm

Categories: immediate annuity Tags: immediate fixed annuit or immediate variable annuity

CD versus Fixed Annuity Comparison

CD versus Deferred Annuity Comparison Safety, Return, and Investment Time Retirees with cash often seek an investment with a lot of safety. Holding a certificate of deposit (CD) gives you that safety but sacrifices investment return. Let’s compare a CD to a deferred fixed annuity for safety, return and investment time. Then you can choose what’s best for you. The Safety Issue Banks offer CDs. The Federal Deposit Insurance Company (FDIC) guarantees any investment in a bank up to $250,000 (through 2009) against the bank’s failure. If you plan to invest more than that, spread it between different banks – not different accounts in the same bank – so all your holdings are FDIC guaranteed. Bank failures are not all that uncommon. A deferred fixed annuity hasn’t any FDIC protection. But it’s still considered a conservative investment. First it’s backed by the financial strength of the company that issues the annuity. So, before buying a deferred fixed annuity, check the insurance company’s financial rating. Independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch provide this information to you. As a safety backup in case of failure, many insurance companies are affiliated with a guaranty association in [...]

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Posted by Bob Richards - January 14, 2009 at 10:33 am

Categories: CD, fixed annnuities Tags: cd vs fixed annuity comparison

Provide for Your Beneficiary Survivor with a Reversionary Annuity

When couples are in their retirement, circumstance may arise where a wife is in jeopardy of losing a living income when her husband dies. Perhaps the husband – before a late marriage – had opted for a ‘single life’ payout for his pension or annuity. Or, perhaps a 50% reduction of his pension payout for his wife just won’t be enough. How can one spouse assure an adequate income for his surviving spouse when a pension or Social Security benefit is involved? Normally, you might say, ‘just go out and buy life insurance on the husband’s life so the wife can live off the death benefit’. But buying permanent life insurance may be too expensive for a retiree. And then there’s the issue about whether or not the wife can manage it to maintain an income for her life. A reversionary annuity as an alternative A reversionary annuity would supply an immediate annuity payout for the life of the wife at the death of the husband. The funding for the ‘immediate annuity’ comes from the life insurance death benefit associated with the husband’s reversionary annuity premium payments. The reversionary annuity is similar to a combination of term life insurance policy, a [...]

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Posted by Bob Richards - January 12, 2009 at 9:52 am

Categories: reversionary annuity Tags: prospectmatch, reversionary annuity

A Stretched-Out Legacy Benefit to Your Retirement Annuity

Have a deferred retirement annuity you might not get to use? You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life. A non-qualified annuity is one you funded with after tax dollars. You can provide your assigned annuity beneficiary – after you die – with a lifetime income stream from it. Its holdings can be “stretched out” over the beneficiaries’ lifetime, creating what’s known as a non-qualified stretch annuity. The ability to stretch out distributions to a beneficiary comes from IRC section 72(s) which requires non-lump-sum annuity distributions to begin within one year of the annuity owner’s death. But the option to stretch out this distribution must be elected within 60 days of after the benefit is payable. So this rule preserves the non-qualified annuity’s tax-deferral advantage for the beneficiary and allows him to avoid a high taxation rate that an all-at-once payout would produce. How long can your beneficiary stretch annuity payments? He can either have payments made to him over the IRS’ projected remaining life expectancy for his age or simply have the payments annuitized under one of the insurance company’s annuitization options. These options would be [...]

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Posted by Bob Richards - January 9, 2009 at 10:54 am

Categories: stretch annuity Tags: retirement annuity, stretch annuity

Pros and Cons of Fixed Annuities

For retirees, the most attractive feature of fixed annuities is the assurance that it’ll provide a fixed income for life. But all investments have their good and bad points; and fixed annuities are no different. Let’s overview some of their advantages and disadvantages summarized in the table. Advantages The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually. Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you’re considering buying from. A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better. With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy. Disadvantages Because an annuity is a long-term investment with tax-deferred status, the IRS [...]

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Posted by Bob Richards - January 7, 2009 at 12:52 pm

Categories: fixed annnuities Tags: fixed annuities

Might You Live to 100?

Live to 100. Sounds great. But what are the downsides of longevity? “How can there be downsides?” you may ask. After all, you’d have more time to golf, go fishing, and spend with the grand-kids. Well, the risk may be that if you hadn’t planned to live that long you could end up running out of money. Very few people have sufficient retirement savings to live to 100. Yet, if you are already age 70, life expectancy of living to age 100 is 3% (one of every 33 people). If you make it to age 80, then your life expectancy to 100 jumps to 4% (one out of 25 people). So how long of a retirement should you plan for? How can you prepare for significant longevity? According to the IRS longevity tables, a 70-year-old person is expected to live for 17 more years to age 87. However, this is an average. Half of the 70-year-olds will live longer, and half will not. Therefore, a 70-year old individual who is basing his or her retirement plan and spending habits on living to 87 is rolling the dice. Furthermore, when you consider that there are more than 70,000 U.S. centenarians who represent the fastest-growing segment [...]

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Posted by Bob Richards - January 5, 2009 at 10:34 am

Categories: immediate annuity, longevity, reverse mortgage Tags: fixed annuity, life expectancy, longevity, prospectmatch, reverse mortgage

Poor Health Can Be a Factor in Producing More Retirement Income

There’s a type of annuity that pays you more if your health profile is not good. This may sound strange, but here’s how it works: SPIA, which stands for Single Premium Immediate Annuity (also referred to as health adjusted immediate annuity), has long been a popular investment for obtaining a fixed income which cannot be outlived (income for life). With the income for life option, the issuing insurance company calculates the size of your monthly payment based on standard life expectancy tables, based on an analysis of your health. Once calculated at the beginning, you continue to receive the same monthly amount, regardless of how long you live. It’s almost like getting a second social security check. companies take into account your individual health condition and use that information to calculate your life expectancy. If your health records indicate conditions that could lower your life expectancy, this is factored into the monthly payment you receive and increases the monthly payment. You then receive this fixed monthly amount no matter how long you live.| Take this hypothetical example. A man age 70 decides to obtain a SPIA. He deposits a $100,000 premium and based on his standard life expectancy of 16 years, his [...]

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Posted by Bob Richards - January 4, 2009 at 12:58 pm

Categories: lifetime income Tags: health adjusted immediate annuity, lifetime income, prospectmatch

Keep Pace With Inflation in your Life Annuity

For millions of Americans, a life annuity can provide safety of principal and tax deferral. However, one disadvantage inherent in most life annuities is their inability to keep up with inflation over the long-term. For example, assume that you invest $100,000 into a single premium immediate life annuity. as an example, a current contract from a major annuity company would then pay out $658.59 per month, for a total of $7,903.08 for the year. The problem is if the rate of inflation is 3%, then the purchasing power of these payments will decline from one year to the next. Obviously, $7,903 will not buy in a future year what it can now. Imagine how you feel twenty years from now when the purchasing power of your life annuity is reduced by 47%! One way that life annuity buyers can deal with this problem is to purchase a cost-of-living rider in the contract. This rider is designed to ensure that the income from the annuity stays abreast of the rate of inflation over time. However, these will be a trade off in that less income may be received today. For example, the same immediate life annuity contract with a 3% inflation [...]

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Posted by Bob Richards - January 3, 2009 at 8:36 pm

Categories: life annuity Tags: cola rider, cost of living, inflation, life annuity, prospectmatch

Split Annuity Taxation

An investment’s return is what most people analyze each year. However, what really counts is how much you hold on to after taxes. After all, that’s what you get to spend. If you’re shopping around for CDs, you may want to look at an alternative idea that will let you keep more of what you earn. Suppose that you are considering a five-year jumbo CD. The certificate’s earnings may push your provisional income over the government’s threshold (provisional income is the income calculated by IRS to determine if and how much of your Social Security income becomes taxable). The result is that more of your Social Security check will become taxable when you add interest from CDs. The solution could be an immediate annuity that will pay you an income for five years (five-year certain). Part of that income will be taxable, while the rest considered a tax-free return of your investment. At the end of five years, the payments stop. To replace the funds you put into the immediate annuity, you would invest in a five-year fixed annuity. Interest earnings on the fixed annuity are tax-deferred, and not counted towards the government’s threshold of taxation of Social Security income. The [...]

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Posted by Bob Richards - January 2, 2009 at 10:41 am

Categories: retirement income Tags: annuity tax, annuity taxation, split annuity