Do You Want to Give Your Grandchild a Head Start on Retirement?
If you are already retired, there’s a good chance that you receive Social Security. The likelihood that this stream of income will continue for the rest of your life, at least in some form, is probably pretty good. But what about your grandchildren?
According to the government, Social Security’s financing problems are essentially long-term in their nature, and should not affect today’s retirees and near-retirees. However, people are living longer, and the first baby boomers are nearing retirement. The result is that the worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it could be 2-to-1. At this rate there may not be enough workers to pay scheduled benefits at current tax rates . This could have an impact upon your grandchildren’s retirement lifestyle. For example, imagine that your grandchild is 26 years old. What will he/she face in the future? Based on today’s scheduled levels, his/her benefits could be reduced significantly when he or she reaches retirement.
As a practical matter, your grandchildren might have five or six decades before they retire. Based upon a 3% inflation rate, your grandchild might need as much as $219,195 a year to support a lifestyle that $50,000 covers today. On the other hand, it adds to attractiveness of putting money away sooner than later.
With the Social Security’s outlook, and the ever-increasing cost of living, our younger generation must become more self-sufficient in planning their retirement. This is where a variable annuity could be helpful.
Variable annuities are designed for long-term investors who are seeking a stream of additional cash-flow for their retirement. These investments also allow for systematic investments, and provide a variety of investment options. When you put it in your grandchild’s name, assuming he or she is old enough to own the contract, the earnings within the account can accumulate on a tax-deferred basis until he or she withdrawals the funds. If you should happen to put the account in your name, you will be able take advantage of the tax-deferral benefit too.
With the annuity in your name, you can name your grandchild the beneficiary. That way after you die, he or she will receive the money without going through probate. With a standard guaranteed death benefit, the money your beneficiary receives will usually be not less than the premiums that you paid into the annuity. As a practical matter, the cost of the standard death benefit is usually subsidized by the mortality and expense risk charges, which are mentioned below and run about 1.25% of the annuity account balance per year for many companies . Of course, these costs could run higher or lower than this amount, depending on the company involved.
Although variable annuities can be a good tool for accumulating retirement funds, there are a number of things you need to understand about these investments. As previously mentioned, variable annuities are designed for long-term investing and ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59 ½. Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government insured. Therefore, it’s important to consider the financial strength of the issuing company prior to investing.
One should also remember that early withdrawals from a variable annuity are subject to surrender charges, which are typically based upon the time the insured has been invested in the annuity. Additionally, variable annuities are subject to some other costs, including mortality charges, sub-account investment fees, and administrative expenses. These charges tend to vary from company to company. With this in mind, it is always a good idea to compare fees among the available companies.
As an investor you should carefully consider the investment objectives, risks, charges, and expenses of a variable annuity before investing. For this and other information about any variable annuity and its underlying sub-accounts you should contact your financial advisor to request a prospectus. You should also read the prospectus carefully prior to investing.
Do you want to know more about how variable annuities can help your younger family members with their retirement needs? Do you want to achieve a clearer understanding about the features of a variable annuity that you already own? For more information on variable annuities, ask your retirement advisor to fill you in.