Planning for retirement can seem pointless at times because of all the unknown factors that can affect what happens to your money over time. That’s why I try to advise my clients to look into the way those risks can be minimized using annuities from a life insurance company. Here are some of the risks you face in retirement and how such annuities can help overcome them:
Risk of Living Too Long: The insurance company does all the investing and then structures the results for your benefit. They spread the risk of you living too long out over millions of people. Thus, you will have huge peace of mind knowing you cannot outlive this income.
Risk of Dying Too Soon: Built into an annuity is life insurance that will give your beneficiaries more money than just the rate of return. This is possible as the insurance company can spread the risk out over millions of people.
Market Risk: The insurance company provides an annuity that has a “floor,” or guarantee that you cannot lose any of your money. Therefore, as you approach age 55, or older, an annuity is a wise choice so as to eliminate the risk of market declines. After a recession, historically, the market takes many years to return to the same value. If you need this money for retirement before the values return, you will run out of money much quicker. An annuity gives you level income for life, either single payments to you or joint payments to you and your spouse.
Risk of Inflation: Inflation has been with us for over 100 years. It is a real problem as the cost of food, utilities, medicine, travel, and taxes increase. Inflation is real and will erode your income throughout retirement. The insurance company does investing in such a way that you will always share in the gains of the index they use. The cost for this benefit is manifested in the margin. For example, the insurance company will take a stated 2.4 percent (this can fluctuate) of the gain to provide this benefit to you. You get the rest. Put another way, if the index receives 12.4 percent, you would net 10 percent. If the index achieves 2.4 percent. you would net 0 percent. The insurance company will guarantee you will never lose any of your money or the growth it has attained. Once you begin taking retirement income, the insurance company will still apply this same calculation each year for the rest of your life. An an annuity is structured not only to keep up with inflation, but to keep significantly ahead of it.
Risk of Increased Taxes: Do you think taxes will go up, down, or stay even? Regardless of what tax rates, at age 70.5 you must start taking distributions from your qualified retirement account — this is called a Required Minimum Distribution (RMD). If you don’t take this distribution, a penalty of 50 percent plus any ordinary income tax is applied. This would result in a 65 percent tax rate! Who would allow this to happen? To resolve this, a retirement account of $150,000, for example, can be separated into six IRA accounts. This will allow you to change one IRA each year for the next six years into a Roth IRA. As you pay the tax on $25,000 one time, it is eliminated from your income forever, regardless of how much growth you have on this money. There will be no further tax, even when you reach age 70.5 and face the RMD problem. Furthermore, this non-taxed income will not be present to force your Social Security benefits to be included for tax purposes either. If you need to use the life insurance portion, no taxes are paid on that increase in value paid to you, or your beneficiaries. Even after you are deceased, your heirs will not have to pay taxes on this money either. Just simply taking your IRA money and converting it to a ROTH IRA could save tons of future taxes. As discussed, when a retiree takes money from the ROTH IRA, this doesn’t count toward income and forcing your Social Security benefits to be included for tax purposes. It is strongly recommended that you plan to pay taxes one time, on a smaller portion of your retirement funds, and never again. Refer to an income tax specialist for counsel on your individual circumstances.
Risk of Long-term Care (LTC) Needs: National averages show three-in-four retirees will need to use some form of a LTC facility. The average stay in one of these facilities is four years. An annuity can be structured to double your monthly income if you do have this need, thereby reducing or eliminating your LTC risk.
Risk of Fees: It is important to know there are fees associated with insurance products. Read the small print. There are major differences between all insurance companies. To your benefit, an annuity can be structured without internal fees.
Risk of the Strength of the Insurance Company: While the insurance industry has an impeccable track record for safety, it is still important to examine the strength of an insurance company. You can do this by using a rating service. One such rating service is called Comdex. Using your search engine, place “COMDEX insurance ratings” into your browser and do your own comparison on the annuity insurer in question.
Some additional thoughts on annuities and insurance companies:
Not all annuities are created equal. Over the last 50 years, annuities have been structured to allow investing in the market using mutual funds. When the market goes down, the value of the annuity declines just the same. In the past when this happened, some policyholders were very disappointed and said this, “There was no safety with this insurance company, and yes, we did lose money!” That statement was correct, but the money was not invested into the insurance company, but through the company and right back out and into the market with all the normal risks associated. Annuities got a bad reputation because of experiences like this. A “variable annuity” is not what is recommended in this treatment. Annuities are now structured into fixed income products. They are indexed to the S&P 500, or Barclays, so when the market increases, so does the annuity. Some indexed annuities have caps on this gain and some do not. This is why indexed annuities are becoming so popular. They have no downside risk, but share in all the upside gains. Pretty exciting!
Not all insurance companies are equal, nor are their agents who represent them. Most agents/representatives have a tendency to sell what they know. Most don’t take the time to look at all the options that are available. Our team here at Money Mastery has identified the top 42 insurance companies that have various financial strengths and product designs that will help everyone in almost every situation. We make an extra effort to stay up-to-date on all these products and the many benefits to our clients.
If you haven’t considered annuities in the past, I strongly urge you to do so now. Annuities are structured for safety first, then to keep ahead of inflation, all the while bringing a guaranteed income stream you and your family can not outlive. This is one of the best retirement planning options around.