Fixed Annuities:

The Missing Piece of Your Retirement Planning Puzzle?

By Doug Lockwood

U.S. News MONEY

Increasingly, the responsibility for funding a comfortable retirement is shifting from the employer and the government to the individual. Many people contribute to employer-sponsored retirement plans and IRAs, but there is another tax-advantaged retirement vehicle that shouldn’t be overlooked: annuities.

Annuity essentials

An annuity is a contract between an individual and an insurance company. They’re long-term, tax-deferred investment vehicles designed for retirement purposes. In exchange for purchasing an annuity (either through a lump-sum payment or through periodic installments), the buyer receives a regular payment during retirement.

A fixed annuity essentially earns a guaranteed rate of interest for a specific period of time. Likewise, the amount of the benefit paid out at retirement is fixed. This feature can help when planning a budget for your later years because you’ll know in advance how much regular income you will receive. However, in exchange for less risk, the fixed annuity buyer gives up the potential for a larger investment return. Conversely, a variable annuity allows the buyer to choose from a variety of investments that will change in value. A variable annuity buyer takes on more investment risk in exchange for greater growth potential.

Increasingly, the responsibility for funding a comfortable retirement is shifting from the employer and the government to the individual. Many people contribute to employer-sponsored retirement plans and IRAs, but there is another tax-advantaged retirement vehicle that shouldn’t be overlooked: annuities.

Breaking down fixed annuities

Tax advantages

One advantage to owning a fixed annuity is that you can accumulate money on a tax-deferred basis. This means that the earnings in your annuity are not taxable until you “annuitize,” or begin receiving payments—at a time when you may be in a lower tax bracket.

Generous investing guidelines

There are generally no contribution limits on annuities. This can be especially advantageous if you’ve fallen behind in investing for your later years, or if you’re looking to minimize taxes while investing for retirement and have contributed the maximum amounts to other tax-advantaged options. Unlike other retirement vehicles, annuities may allow you to continue contributing even after you’ve retired and whether you have earned income or not.

Estate planning benefits

If you die prior to receiving money from an annuity, your beneficiary may still receive a death benefit, although he or she will have to pay taxes on the amount.

Fees and penalties

As with other tax-advantaged retirement accounts, you may have to pay a 10 percent IRS penalty if you withdraw money from an annuity prior to age 59 1/2. In addition, you may have to pay a “surrender” charge to the issuing insurance company if you cancel your contract prematurely.

Fixed annuities for retirees

Already retired? You can still purchase a fixed immediate annuity. In exchange for contributing a lump sum to a fixed annuity, you can immediately begin receiving income payments for a specific length of time. This may be beneficial to a retiree in good health who is concerned about outliving assets.

One annuity can be very different from another, and the rules surrounding them are complex. But if steady income and preservation of principal are goals you want to pursue, a fixed annuity may offer advantages worth looking into. Keep in mind that if you are against annuitizing your contract, you may be able to take systematic withdrawals instead, thus avoiding annuitization and keeping full control over your assets.

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Article By: Kim O’Brien, Executive Director, NAFA

The investment community has historically used fixed annuities as a stable value component of an integrated investment strategy. Now, two recent innovations within the fixed annuity insurance industry are expanding the role of these products. These innovations provide new opportunities for financial advisors to diversify risk and complement the investment side of an individual’s retirement plan with guarantees and insurance.

These new types of annuities are deferred lifetime annuities and fixed annuities with long-term care benefits.

The Challenge of Retirement Planning

To understand how these annuities are used, it is helpful to examine the core challenge facing retirees and individuals planning for retirement. To retire with confidence, most retirees need:

(a) Sufficient income to cover their expenses,

(b) Income that increases over time to bridge the gap between Social Security and any other income,

(c) Certainty that they cannot outlive their income,

(d) Emergency income for long-term care or assisted living assistance, and

(e) Discretionary income for travel, vacations, weddings, and so forth.

An investment portfolio can create a desired income and provide of the potential for value and income growth over time. However, without an insurance portfolio, the investment-only portfolio creates uncertainty and troubling variability for clients. Plus, when retirees don’t prepare in advance, the cost to add solutions to provide for these contingencies increases significantly year after year.

Dealing with Longevity Risk

Consider the need to guarantee income for life. Ignoring longevity risk, a typical investment-only approach is to build a portfolio that creates a desired income and asset value through the client’s life expectancy and perhaps a few years beyond that. However, there remains the possibility that a client could be the outlier, the person who lives 15 years or more beyond the typical life expectancy. How do you deal with that?

Often a solution has been to use immediate annuities and guaranteed lifetime withdrawal and income benefits on variable annuities. Unfortunately, creating a sufficient income with these products often requires committing a large chunk of the client’s assets. Thus, the longevity risk “tail” ends up wagging the investment strategy “dog.”

Annuity Innovation: Longevity Insurance

The new solution is a form of longevity insurance called a deferred payout annuity. The basic idea is that your client, who is perhaps age 65, purchases a guaranteed stream of life-contingent income starting at an age well in the future, such as age 85. The payout can be based on a single life or the lives of a married couple. Because the income is delayed until far into the future and because it is only paid if your client is then alive, it is cost efficient.

This annuity solution can be a win-win. Since less money is needed to fund the guaranteed lifetime income stream that can increase over time, more money can be available to create an optimal investment portfolio to take your clients to age 85. Your clients are free to live their early retirement years with confidence, perhaps traveling more, because they know the later years are covered.

Dealing with Long-Term Care Risk

Next, consider the issue of long-term care. Medicare typically does not cover such care beyond a short period following a hospital stay, and Medicaid will typically not pay for long-term care until after your client’s assets are depleted. The federal government estimates that half of nursing home residents are paying out of their own pockets. Thus, this is a risk that is clearly the family’s to bear, and it can be costly.

Genworth Life Insurance Company, in their 2010 Cost of Care Survey, indicated that nearly two-thirds of Americans over age 65 will need long term care at home or through adult day care, an assisted living facility, or nursing home. Median national costs range from $38,220 to $75,190 annually depending on the type of care needed, and these costs are in addition to – not a replacement for – your client’s current living expenses.

Historically, this risk solution has been long-term care insurance (LTCI), but clients tend to be cool to the idea since they often believe such care will be unnecessary or prefer a home-care solution and either wait until it is too late or too expensive. This mindset is demonstrated by the fact that LTCI sales have fallen six out of the last seven years.

Annuity Innovation: Long Term Care Benefits

The new solution is an annuity that automatically increases the benefits it pays if long-term care is needed. Congress included some helpful provisions in the Pension Protection Act of 2006 that went into effect on January 1, 2010 that provide for such benefit payments to be income-tax free.

Under these annuity designs, clients do not pay out-of-pocket for the long-term care coverage. Rather, the carrier deducts charges from the interest that is credited to the annuity. These charges are less than the amount of interest being credited to the annuity, so the annuity balance continues to grow. Moreover, these monthly charges are not included in the owner’s income, but instead simply reduce the income-tax cost basis of the annuity.

The benefits for your clients are easy to see. They can do a 1035 exchange of their existing annuities and get something more – sometimes up to triple their money if long-term care is needed. They get long-term care coverage and don’t need to invade their savings, and they can receive benefits for care received at home. But notice, it is not use it or lose it – if they never use the long-term care benefits, their annuity balance grows.

Finally, almost all deferred fixed annuities provide many surrender-free liquidity options for unexpected expenses such as trips or to purchase a special gift. So retirees can still enjoy the spontaneity and joy of visiting loved ones or the smile of giving a treasured gift.

These new annuities are not for everyone, and it is the financial professional’s job to look for all suitable solutions that meet their client’s unique needs. However, many clients may want to consider these affordable and powerful benefits. The insurance industry is innovating all the time and these new products are a great balance to an investment portfolio. To ensure suitability, NAFA encourages investment advisors to consider these insurance options to complement investment planning solutions.

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Fixed Index Annuities were introduced to provide the same principal protection from market losses enjoyed by all fixed annuity owners. But, here is the kicker…FIAs also gave the annuity owner the potential for higher interest based on the market index used.

The FIA era began in 1995 when a 60 year old from Massachusetts made a $21,000 premium in a Keyport KeyIndex annuity that grew to $51,779. Not a bad start for FIAs, and did I say something about “Principal Protection.”

The beauty of an annuity is SAFETY. You are guaranteed not to lose your principal, or any interest credited to your account. Like a Fixed Annuity, FIAs also guaranteed a minimum rate of interest. Is it any wonder why, FIAs have grown from just over $100 million the first year to (are you ready)…$210 BILLION at the end of 2010. There was something more than SAFETY going on here!

An FIA follows the trends of a market index, like the S&P 500. Your money is not invested in the index, it just follows the index. Here is what’s going on – You RETAIN YOUR GAINS. I wont get into the details, but simply put, your account is credited with interest from the gains, and if there are no gains, then zero percent of interest is credited. Your account retains the previous gains, and waits for the next up tick of the index for more gains. It resets at the low point, and starts all over at that point. That’s HUGE!

Nobody lets the Bears out on annuities. The diversification pixie dust (Read Dave Vick’s book Bat-Socks & Vegas) that Wall Street has sprinkled over your mutual funds, and equity accounts has time and time again found itself not immune to Bear markets. Millions of baby boomers who are now reaching retirement age in record numbers have seen the market give and the market taketh away from their 401ks. When the bears come out of hibernation, they just eat the legs right off of your retirement savings. This is more than enough to keep anyone from sleeping at night. Bear markets just don’t go away overnight. They can and have lasted for years.

Insurance companies are great at taking risks away from consumers, and putting it on themselves. Everyone understands life insurance. The insurance company knows approximately how long you are going to live according to actuarial tables, and price life insurance products accordingly based on your age, and other criteria. The insurance company always comes out ahead because they pool these risks with millions of policies. Some people die early, and others outlive the projections.

I would have liked to have been at the life insurance company meeting when it was decided that they could also take the risks of Mr. and Mrs. Consumer living to long. That has to be one of the best brainstorming meetings of all times. Someone was really thinking outside the box, and the rest is history.

Last year, there were over 131,000 people in the United States that lived to be 100 or older. That figure is growing every year. Annuites, fixed or FIAs, can give a baby boomer an income for life, that they can’t outlive. With all of the concerns over Social Security, current inflation, and low interest rates, that is a benefit worth considering.

Speaking of low interest rates, find yourself a good savings calculator, and get a feel for the power of 2%. CDs are presently paying less than 1% interest. Fixed annuity products are paying 2 to 3 times these current CD rates, and FIAs have the potential of much more. The power of just a 2% difference compounded in a tax-derred account is eye opening at the least.

There is always a debate on how much of your retirement savings should be in annuities. Some financial planners like to use the Rule of 100. Simply take your age and subtract it from 100, and that is the amount of money you should keep in the market. The balance should be placed in principal protected products of which an annuity is one of the choices.

There are also test you can take to determine where you fall on the risks tolerance scale. Google Dave Vick, and purchase his book, Bat-Socks & Vegas. It is even available in a downloadable pdf format if you don’t want to wait and pay more for the hard copy. I promise, you will enjoy this book, and the risks tolerance test is included.

I hope this post has thrown some light on the What, When, and Why of Fixed Index Anuities. If you are a baby boomer, the time for taking market risks should be over.

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Indexed annuities have helped Frank and his wife Mary Lou achieve their targets for retirement. They have always been diligent about saving money, and wanted the peace of mind and safety indexed annuities provide. Because of their stable funds, Frank and Mary Lou have been able to travel, provide funding for their grandchildren’s education and donate to causes they are passionate about.

Frank explains that if he had left a large portion of money in the stock market, he would likely have to be working part-time to support he and his wife to make up for what he would have lost. Hear more of Frank’s story below:

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“Fee disclosure is…very cumbersome,” explained vice president of corporate retirement plans at Personal Capital Tom Zgainer, adding that “participants need an easier way to discover and understand expenses associated with their retirement plans.” About the only thing that the disclosures appear to accomplish is making participants aware that they may be paying fees and expenses. Slightly more than a fifth of all participants believed after the disclosures that they pay no fees or expenses on their 401(k) plans. That number used to be more than a third (38 percent) when the disclosures were not required.

Unfortunately, this issue is a much bigger one than you might think at first. According to NerdWallet, more than 90 percent of American adults underestimate the lifetime costs of their 401(k) administration by about $150,000[2]. The survey included more than 800 Americans. The Department of Labor supported these findings as well, reporting that a poor understanding of fees can result in reduced retirement balances that are as much as 28 percent lower than retirees might expect. How do you keep your retirement-related administrative fees under control? Do you know if you are paying any?

Article written by The Self Directed Retirement Report

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Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods.

In the latest filing for Buffett’s holding company Berkshire Hathaway, Buffett has been drastically reducing his exposure to stocks that depend on consumer purchasing habits. Berkshire sold roughly 19 million shares of Johnson & Johnson, and reduced his overall stake in “consumer product stocks” by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.

With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome.

Unfortunately Buffett isn’t alone.

Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.

Finally, billionaire George Soros recently sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup, and Goldman Sachs. Between the three banks, Soros sold more than a million shares.

So why are these billionaires dumping their shares of U.S. companies?

After all, the stock market is still in the midst of its historic rally. Real estate prices have finally leveled off, and for the first time in five years are actually rising in many locations. And the unemployment rate seems to have stabilized.

It’s very likely that these professional investors are aware of specific research that points toward a massive market correction, as much as 90%.

One such person publishing this research is Robert Wiedemer, an esteemed economist and author of the New York Times best-selling book Aftershock.

Editor’s Note: Wiedemer Gives Proof for His Dire Predictions in This Shocking Interview.

Before you dismiss the possibility of a 90% drop in the stock market as unrealistic, consider Wiedemer’s credentials.

In 2006, Wiedemer and a team of economists accurately predicted the collapse of the U.S. housing market, equity markets, and consumer spending that almost sank the United States. They published their research in the book America’s Bubble Economy.

The book quickly grabbed headlines for its accuracy in predicting what many thought would never happen, and quickly established Wiedemer as a trusted voice.

A columnist at Dow Jones said the book was “one of those rare finds that not only predicted the subprime credit meltdown well in advance, it offered Main Street investors a winning strategy that helped avoid the forty percent losses that followed . . .”

The chief investment strategist at Standard & Poor’s said that Wiedemer’s track record “demands our attention.”

And finally, the former CFO of Goldman Sachs said Wiedemer’s “prescience in (his) first book lends credence to the new warnings. This book deserves our attention.”

In the interview for his latest blockbuster Aftershock, Wiedemer says the 90% drop in the stock market is “a worst-case scenario,” and the host quickly challenged this claim.

Wiedemer calmly laid out a clear explanation of why a large drop of some sort is a virtual certainty.

It starts with the reckless strategy of the Federal Reserve to print a massive amount of money out of thin air in an attempt to stimulate the economy.

“These funds haven’t made it into the markets and the economy yet. But it is a mathematical certainty that once the dam breaks, and this money passes through the reserves and hits the markets, inflation will surge,” said Wiedemer.

“Once you hit 10% inflation, 10-year Treasury bonds lose about half their value. And by 20%, any value is all but gone. Interest rates will increase dramatically at this point, and that will cause real estate values to collapse. And the stock market will collapse as a consequence of these other problems.”

See the Proof: Get the Full Interview by Clicking Here Now.

And this is where Wiedemer explains why Buffett, Paulson, and Soros could be dumping U.S. stocks:

“Companies will be spending more money on borrowing costs than business expansion costs. That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs.”

No investors, let alone billionaires, will want to own stocks with falling profit margins and shrinking dividends. So if that’s why Buffett, Paulson, and

Soros are dumping stocks, they have decided to cash out early and leave Main Street investors holding the bag.

But Main Street investors don’t have to see their investment and retirement accounts decimated for the second time in five years.

Wiedemer’s video interview also contains a comprehensive blueprint for economic survival that’s really commanding global attention. Now viewed over 40 million times, it was initially screened for a relatively small, private audience. But the overwhelming amount of feedback from viewers who felt the interview should be widely publicized came with consequences, as various online networks repeatedly shut it down and affiliates refused to house the content.

“People were sitting up and taking notice, and they begged us to make the interview public so they could easily share it,” said Newsmax Financial Publisher Aaron DeHoog.

“Our real concern,” DeHoog added, “is the effect even if only half of Wiedemer’s predictions come true.

“That’s a scary thought for sure. But we want the average American to be prepared, and that is why we will continue to push this video to as many outlets as we can. We want the word to spread.”

By Newsmax Wires

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“They are addressing the primary fear that baby boomers in particular seem to have about retirement, which is that they are going to run out of money before they run out of time,” she said.

With people living much longer than ever before, it is extremely important to build up a nest egg that can sustain you for two or three decades. It is more important than ever that those approaching retirement employ a savings strategy that is fit to last you through the years by focusing on accumulation and lifetime income, rather than pure growth. It is impossible to predict how long one might live, but adding conservative financial vehicles to your retirement plan, such as a fixed indexed annuity that can guarantee income for life–no matter how long that may be–can eliminate some of the guesswork when it to outliving your savings.

Chatzky is not alone in her favorable perception of annuities for those preparing for retirement. Suze Orman has been singing the praises of indexed annuities as a way to shield your retirement nest egg from market volatility for some time. In her 2001 book, “The Road to Wealth,” Suze Orman tells readers that “if you don’t want to take risk but still want to play the stock market, a good index annuity might be right for you.”

As many boomers witnessed their retirement savings take a big hit due to the financial crisis and recession, it is evident that this advice still holds water in today’s economy. Indexed annuities are unique because unlike investments, these insurance products offer a guaranteed minimum return, so you are protected from the negative effects of market volatility. However, because interest returns on an indexed annuity are based on an external index, such as the S&P 500, there is still potential for market-linked growth when markets are doing well. Those saving for retirement can add some balance to their financial plans—particularly in risky markets—by providing protection when the markets are down and potential for additional interest when the markets are up. Your personal risk tolerance can serve as a guide to determining the perfect balance for your retirement portfolio.

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