Category Archives: Annuities

The Pros and Cons of Fixed Annuities

The Pros and Cons of Fixed Annuities

The precarious condition of the U.S. economy and stock market is causing many Americans to lose their confidence in being able to sufficiently fund their retirement years. According to the 2011 Employee Benefit Research Institute study, Americans’ confidence in their ability to afford a comfortable retirement has fallen to a new low. In fact, the percentage of workers who were not at all confident about their financial security in retirement grew from 22% in 2010 to 27% in 2011.

Generally speaking, a chaotic economy will have the largest affect on individuals that have small tolerances to risk and that have a limited time
horizon in front of them, such as individuals about to retire. Since fixed annuities offer stability and the potential for growth, but don’t involve the individual assuming a lot of the risks associated with the financial market, many individuals nearing retirement find them very attractive and valuable. Of course, soon-to-be-retirees aren’t the only investor group that will find the guaranteed stability and returns of a fixed annuity attractive in such an unstable economy.

Like any investment, fixed annuities have both pros and cons. Any consumer considering purchasing a fixed annuity should consider both sides very carefully:
Pros

1. Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.

2. An unpredictable market is a moot issue for a fixed annuity owner. Market volatility has absolutely no bearing on the rate of return since the insurance company is obligated by contract to meet the minimum rate of returns.

3. An annuity owner will not be taxed on annuity gains until they actually withdraw the money. Other financial vehicles, such as CDs, are taxed based on the interest it earns during the year.

4. Just like with a CD, the consumer can lock a set rate of return in for a set number of years.

Cons

1. All of the above pros aren’t without sacrifices being made somewhere. The rate of return will be more conservative than gains from the financial market.

2. It’s more difficult to liquidate fixed annuity assets because they offer a locked-in rate of return. There may also be surrender charges during the surrender of an annuity. Any withdrawal from an annuity will be taxed like regular income. If the funds are withdrawn before the individual reaches 59 1/2-years-old , then the withdrawal could be subject to a federal income tax penalty of ten percent.

When all is said and done, a fixed annuity might not be the best option for those looking to make big money at a big risk. On the other hand, a fixed annuity could be the ideal option for those looking to add stability and modest guaranteed returns to their portfolio. An experienced financial planner or adviser can address any additional concerns or questions.

Call Brian Gruss 509-927-9200

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

Escape from Stock Market Uncertainty

Escape from Stock Market Uncertainty

Investors, especially those that experienced considerable losses and watched helplessly as their investment portfolios fell to pieces during the last stock market crash, are making much more cautious investment decisions today. A fixed annuity has gained a great deal of investor appeal for many cautious investors. Compared to alternative investments of equal risk, the fixed annuity has several significant advantages.

Fixed Annuity Advantages

There is the chance of significant appreciation when a lump sum is invested into a tax-deferred annuity, and the process is much quicker than a savings account or CD. The element of tax deferral is one of the most appealing advantages. Unlike other options where earnings are taxed each year, the tax-deferred annuity also allows taxes to be delayed or deferred until the money is withdrawn.

Another attractive fixed annuity advantage is the opportunity for guaranteed lifetime income. There is much debate about the future, potential of insolvency, and possible ineptitude surrounding the Social Security program(s). Many are fearful that the system will resort to a drastic decrease in benefits or entirely dissolve benefits. Comparatively, the guaranteed income of a fixed annuity is much more attractive.

The Baby Boomer generation, in particular, has lost faith in the federal government’s ability to contribute to their retirement income. This group is also not very prone to placing faith in the stock market or any volatile index investment. Instead, the Baby Boomer generation tends to opt for the less glitzy guaranteed return from a fixed annuity.

How to Choose a Fixed Annuity

First, you will want to find a company that has a stable and steady track record, as the annuity will most likely need to last you 10-30 years post-retirement. A sign of adequate financial stability can be found using a Standard and Poor’s rating. An “A” rating by a firm like this is usually a good indicator of stability. Make sure to look back at past ratings too; the goal is consistently high ratings for several years.

Peruse the numbers carefully. An unusually high guaranteed interest rate may be indicative of sizable fees, which will definitely decrease the return on your annuity.
You should also determine if there is a penalty for early withdrawal and the circumstances where the penalty might be waived. Generally, a fixed annuity will have a penalty or “surrender charge” if you withdraw the funds early. The penalty will usually phase out in seven to five years. However, some annuities feature a wavier of withdrawal penalties if you are critically ill or confined to an extended care facility.

The professional advice of Brian Gruss can be an invaluable asset when considering a fixed annuity.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

Time to Split: Squelch Retirement Worries with a Split-Annuity

Time to Split: Squelch Retirement Worries with a Split-Annuity

Recent research shows that U.S. workers are growing increasingly apprehensive about their ability to fund a comfortable retirement. Only 18% of surveyed workers said they are very confident about having enough money for a comfy retirement, according to the Employee Benefit Research Institute’s 2008 Retirement Confidence Survey.

That means that more than 80% of workers are not certain that they have enough retirement savings. Of course, in the face of skyrocketing health-care costs and burgeoning inflation, it’s really no wonder why workers are so concerned. If you’re worried that you may not have enough income to last a lifetime, you may want to consider a split-annuity strategy. This tactic may allow you to start receiving a steady stream of income now that could continue well into your retirement years.

How to make the split

It’s fairly simple to pull off a split-annuity strategy. All you have to do is divide a lump-sum contribution between an immediate fixed annuity and a deferred fixed annuity. An annuity is a contract between you and an insurance company. You pay the insurance company either a lump sum or a series of payments in exchange for the promise that the company will offer you a stream of income in the future. This allows your money to grow over a specified period of time in a relatively low-risk environment.

The split-annuity strategy is an effective approach for those who need income now and well into the future. That’s because the immediate annuity starts paying you income right away for a specific period of time while the deferred annuity continues to accumulate interest-which will provide you more income in the future.

A case study

Let’s say a man named Bob splits a $500,000 lump sum between an immediate annuity and a deferred annuity-that’s $250,000 in each account. Bob chooses an immediate annuity contract that guarantees a 4% annual rate of return, allowing him to receive an annual payout of $35,000 for the next eight years.

In the meantime, Bob’s $250,000 in the deferred annuity is also earning a 4% annual return on a tax-deferred basis. After eight years, Bob’s immediate annuity has been drained, so he turns to the deferred annuity-which has grown to more than $342,000. Bob can now start collecting income from the deferred annuity.

Important annuity facts

Before you tap into this split-annuity strategy, it’s important to understand all the ins and outs of annuities. Here are a few things you’ll want to keep in mind:

  • Beneficiaries: If you have a deferred annuity and die during the accumulation phase (the time before the payouts begin), your designated beneficiary will collect the principal in addition to any interest that has accumulated. This is why it’s extremely important to designate a beneficiary in your annuity contract.
  • Surrender charges: Although there are some surrender charges associated with withdrawing money from deferred annuities, these charges typically decrease over time. After a certain amount of time, surrender charges will no longer apply.
  • Taxes: Annuity earnings are taxed as ordinary income. Also, if you make any withdrawals before the age of 59ВЅ, you may be subject to a 10% federal income tax penalty.

If you are concerned about having enough income to fund a comfortable retirement, ask your financial advisor about a split-annuity strategy. This effective line of attack may allow you to start collecting income right now and ensure you’ll have enough income well into the future.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

Understanding the Difference Between Annuity, Bond and CD Ladders

Understanding the Difference Between Annuity, Bond and CD Ladders

One great way of creating a gradually disbursing retirement benefit while still keeping the long-term savings portion of your money conservatively invested is to create a bond, annuity or CD ladder. These ladders are separate investment instruments with varying maturity dates that allow you to take advantage of long-term savings rates while still making sure that some of your money is readily liquid when you need it. This strategy is called “laddering” because each maturity date is its own rung on the ladder of your retirement years.

While each ladder is a great strategy in its own right, it’s important to understand the differences between each of them before you decide which is (or are) right for your retirement plan.

Annuity Ladders

An annuity ladder is created when you spread out your annuity purchases over several years. Instead of investing all your retirement savings at once into a single annuity contract, you only invest some of the proceeds. The rest remains invested in equities, bonds, CDs and other appropriate investments. Then, over time, say every 5 years, you buy another annuity. Doing so helps insulate your savings from being locked in to low-interest annuities. This gives you the benefit of guaranteed income without interest rate risk.

Bond Ladders

Bonds are debt instruments that act as loans to companies and municipalities. While the issuer is using your principal for their projects they pay out interest to you. Once the bond matures, you are paid back the principal that you invested. When you create a bond ladder, you purchase several bonds with varying maturity dates. The later maturity dates afford the investor greater interest payments, but the earlier maturing bonds give the investor liquidity when they need it. Many bonds also have put options so that if you should pass away before the bonds in your ladder mature, your family can execute the put and be paid the principal by the bond issuer.

CD Ladders

CD rates vary depending on how long you are willing to have your principal tied up in the CD. A 20-year CD will have a significantly higher rate than a 6-month CD, but tying all your retirement money up for 20 years in order to get that rate is not a smart strategy since you are likely to need something to live on during the 20-year period. With a CD ladder, you can invest a portion of your savings into CDs with varying maturities. They will mature and pay you your principal and interest throughout the years as you enjoy your retirement.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1вЃ„2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

Finding Money Safe Havens in the Present Economic Environment

Finding Money Safe Havens in the Present Economic Environment

There is an unbendable and unbreakable law of economics that states that wealth is created in one of only two ways: people working or money working. Many have attempted to break this law, and usually the results have violated both civil and criminal laws. These days, everyone is anxious to put their money in a safe place. This “safe place” would also preferably have low risk, high returns and tax advantages as well as be ready and waiting for them when they retire.

Does such a “safe place” exist? A respected commentator in the sports world says, “Let’s take a look.” It was not too long ago that investors were looking for returns in the 5 – 12% range. Today, those return expectations are greatly diminished, even if the willingness to take on risk has begun to come back.

As of this article, the current interest rate on a ten-year United States Treasury bond is 3.24%. High-quality ten-year municipal bonds are only paying 2.99%. Ten-year corporate bonds at the highest rating level are paying 3.60%. Keep in mind that these variables can change on a daily basis as investors vote their bond holdings up or down in response to political and economic developments, both foreign and domestic.

Meanwhile, certificates of deposit, which were once considered to be the safest of all investments among the older generations, have now sunk considerably in terms of interest payouts. One-year CDs these days are paying roughly 1.50% and five-year CDs maybe 3%. Previously CD investors could expect to see interest rates as high as 4-6% or even higher. What’s more, even to get the highest rates, investors need to park their money for a long time, as one can see in the case of the five-year CD.

So, the basic concerns have really not changed. They are, in no particular order:

– Principal safety

– Return rate

– Liquidity, or access to funds on short notice

– Flexible term, which depends on when the investor wants the money

– Tax-free

– Reliability and trustworthiness

Taking all of these factors into account, is there an investment that can satisfy all of them?

Surprisingly, the answer is yes. It is an instrument known as a fixed annuity. An annuity can guarantee the safety of both the payments and the principal by contract to the policyholder, in addition to guaranteeing that the owner will not outlive his money if he chooses to annuitize the contract. Annuities, in this respect, are unique as financial instruments.

Currently, credited interest paid on an annuity is not taxable until distributed. Unlike CDs, this allows the capital to grow through compound interest without any interference.

There are many annuity programs, such as equity-index annuities, that provide even more benefits like interest rates that are double-tiered, which means that the owner has a guaranteed minimum rate while also being allowed to participate in the stock market’s returns, if any. In the final analysis, annuities can offer investors a better return than most instruments today.

While annuities have always been attractive vehicles since their introduction, in an economic climate such as this, they are even more attractive.

(* Interest data from the WSJ 6/18/2010)

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.