Tag Archives: Retirement Benefit

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.

Tips to Maximize Your Social Security Benefits

Tips to Maximize Your Social Security Benefits

A married couple, or an unmarried couple who were previously married for at least 10 years, combine their working records, for the purposes of Social Security benefits, while they are both living. With careful planning, a couple can maximize their benefits in ways that are not available for single people.

Claim Deceased Spouse’s Benefits

If your spouse is deceased, you are eligible to receive his/her full retirement benefit when you reach the age of 60. If you are disabled, you only need to be 50 years old to collect. If you claim benefits before the full retirement age of the deceased, they can be decreased up to 28 ½ percent. However, you could choose to ask for the lower benefit on your deceased spouse’s working record when you reach 60, and change to your own full benefit when you reach your full retirement age.

Claim Ex-Spouse’s Benefits

If you are at least 62 years old and were previously married for at least 10 years to the same person, and unmarried now, you could be entitled to collect benefits from your ex-spouse’s earnings. The amount that you collect will not decrease the amount that your ex-spouse receives.

Claim % of Your Spouse’s Benefits

A spouse can collect 50% of the amount of his/her spouse’s benefit if that would be more than his/her own benefit amount. You must have reached your full retirement age to collect that amount. If you apply at the earliest age you can, which is currently 62, you will only receive 35% of your spouse’s benefit amount. Note that the higher earning spouse must apply for Social Security benefits before his/her spouse can receive spouse’s benefits.

If the higher earning spouse has reached full retirement age, he/she may apply for the benefits and then ask to have them postponed. In this way, the spouse who earns less can apply for the spousal benefit while his/her spouse keeps working until age 70 to earn more credits. Each year that you postpone claiming benefits after reaching your full retirement age adds approximately 7 and 8 percent to your retirement checks when you apply at age 70. Note that there is no advantage in delaying benefits past the age of 70.

If you and your spouse are both past your full retirement age, you can draw based on your spouse’s benefits and keep working and accumulating credits on your Social Security record. You can then claim benefits on your own work record when you reach the age of 70 and get a larger monthly check because you deferred your credits.

If you can increase your benefits by any of these methods, it is worth a phone call or a trip to your nearest Social Security office.

Create Your own Pension with a Fixed Annuity

Create Your Own Pension with a Fixed Annuity

Remember when pensions were part of every job and every retiree had one? Pensions were great; they paid the pensioner a fixed sum each month for his or her entire life and in most cases, at least a portion was paid to the surviving spouse at death. While pensions may be a thing of the past, the concept of a qualified retirement benefit that pays a guaranteed monthly amount for life is not. Instead of a company pension, they now take the form of self-funded immediate fixed annuities.

Immediate fixed annuities may as well be a distant cousin to pensions in the way that they provide and guarantee a retirement benefit. Some of the similarities include:

  • A guaranteed monthly payment for the life of the annuitant, regardless of the actual growth of the underlying principal.
  • Optional death benefit for surviving spouse – for a smaller monthly payout, if the annuitant dies before he or she has received enough payments to equal a return of principal, their beneficiaries will continuing receiving funds.
  • Annuities, like pensions, offer a low-risk, guaranteed return. While this return may not be as substantial as that of more high risk investments, it is perfect for conservative retirement planning.

While many aspects of the two retirement benefits are similar there are also many differences. The most important difference between the two is that an annuity is self-funded whereas a traditional pension is funded by the pensioner’s employer. This difference introduces a number of considerations that you must make before you buy an annuity-considerations that would not matter in an employer-sponsored plan, like:

  • Because annuities guarantee you a certain payout based on the original contribution, you generally can’t remove additional funds after you’ve purchased the annuity. That means that if you put your life’s savings into an immediate annuity you may no longer have access to the funds in the event of an emergency. Now there are some newer products on the market that do offer increased access to funds, but you usually give up something in return such as a lower monthly payout.
  • If you do have access to the funds and you remove a lump sum there will be surrender charges imposed. This could not only negate any interest growth you’ve experienced but could cut into your principal and will reduce the monthly income paid out by the annuity.
  • Your heirs will generally not inherit any of the remaining annuity value after your death. While this may not be a concern in an employer-sponsored pension, it should be considered when making a contribution to a straight life immediate annuity.

If the concept of an annuity for funding retirement benefits appeals to you talk then call me today about the many flexible annuity products available. You may find that while a straight life immediate annuity does not fit your needs, a joint and last survivor or period certain annuity does.

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.