Annuity FYI Blog

Even though there are many Americans worried about outliving their savings, Americans do have more than $11 trillion saved in retirement plans.  The government has made some changes this week that will make it easier for Americans to transfer to a 401k annuity from their company 401k plans.  This information comes from The New York Times article, “New Treasury Rules Ease 401(k) Annuity Purchase,” by Mary Williams Walsh.

One of the biggest problems with the the 401k annuity transfer was that tax rules made it nearly impossible for any kind of a partial transfer.  People had to take an all or nothing approach and put their entire 401k into an annuity or none of it.  The government has relaxed the tax rules so that people will now be able to use just a portion of their 401k for an annuity and they won’t have to do all or nothing.

New rules will also make it easier for employers to get better terms from financial firms because employees will be able to see the fees being charged by these firms.  Running lifetime annuities is not something that employers want to deal with, so the changes being made by the government excite insurance companies eager to run annuities from retirement plans.  One change makes it easier for employers to work with insurance companies and other annuity providers so that 401 annuity transfers can be done at work and not through a separate advisor.

A treasury department spokesperson says that they are hoping for an increase in longevity insurance offerings.  This type of annuity doesn’t start until 15 or more years into retirement and is meant for the time in life when people tend to run out of money.  It usually starts around the age of 80 and is a perfect supplement for Social Security at a time when savings run out and health costs increase.  It’s much cheaper of course than a traditional annuity because you plan to use it when you are much older and it will likely be used for a shorter period of time.

The maximum that can be spent on longevity insurance is now capped at 25%, so that no one is “hiding” money there.  One more change the Treasury has made lies in the way it calculates minimum required distributions for those over 70.  The amount you have to withdraw yearly from your 401k will now exclude money that was used to buy an annuity or longevity insurance.

Written by Rachel Summit

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The Insured Retirement Institute, or IRI, has an 11-question quiz on their website that tests retirement financing knowledge.  Julie Jason published these questions in The News-Times in her article “A Quiz to Fine-Tune Your Retirement Knowledge.”  The IRI is focused on educating people about annuities through their nonprofit trade organization.  The facts from the quiz are summarized below.

While 4% of the U.S. population was over the age of 65 in 1990, by 2050 20% of the population will be over age 65.  Proving how strong the impact of inflation is, a loaf of white bread went from costing 20 cents in 1960 to $1.18 in 2000.  Each year that you remain living, you increase the chances that you’ll live an even longer life.  Seventy-percent of the people who are at least 65 years old today will reach the age of 80.  If you plan to retire early, you will have a smaller Social Security payment at retirement along with less in savings, a smaller pension, and fewer dollars in your retirement plan.

Contribute as much money as possible to your qualified plans so that you can achieve financial independence in retirement.  Throughout your retirement, you’ll likely need around 70-80% of your pre-retirement income to live.  While some of your working years expenses will be gone in retirement, your health care costs will likely increase significantly.  Social Security, personal investments, and annuity payments are all sources of retirement income.  While an IRA rollover, annuitization, and a trustee transfer will keep your money safe from taxes, a lump sum distribution will subject your money to taxes.

If you take money from a retirement plan prior to age 59, you are subject to a 10% penalty unless you make a 401k annuity transfer.  In order to ensure that you have enough income to meet your retirement needs, you have to make a plan, set your timing, know any tax penalties, and be sure not to do all of the planning without the help of a professional.  Retirement planning is some of the most important planning you’ll do in your life, so having a professional to help you is key.

Written by Rachel Summit

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In “Outlook 2012: Annuities-Industry at Crossroads, With Weatherford, Greenwald, Cortazzo,” John Sullivan of AdvisorOne says that annuities should do well next year despite some potential hurdles.  With two major annuity carriers departing the market recently, you would think that would forecast a big problem for annuities overall.  But that is just a product of some horrible market conditions and the need for annuities now is greater than ever.  Lifetime income guarantees are more important now than ever before as Baby Boomers retire and markets remain less than stable.  As the market makes it harder for insurers to hedge those guarantees and run their companies, the annuity market will likely change to try and keep up.

While there is a greater need for annuity products than there was in 2007, there are fewer carriers to meet that need.  Low interest rates and a volatile market are a double whammy for insurers, according to MACRO Consulting Group’s Mark Cortazzo.  He thinks that advisors should look at products with short surrender periods and liquidity.  He says that his company looks to match annuities with people who need income right away, want security, and may be making no money in a money market.  So even with low immediate annuity rates, there are many consumers who still stand to benefit from the use of annuities in their portfolios.

Matt Greenwald, CEO and president of an annuity research firm, doesn’t believe that the companies leaving the annuities market is quite that significant.  He stresses that factors beyond the annuities market led to the exit of these Canadian insurers and thinks that the annuity industry will continue to do well despite its challenges.  Cathy Weatherford of the IRI says that government recommendations for using 401k annuities and other annuity products so that some retirement income is guaranteed to Americans will also help to strengthen the industry in 2012.  So while the financial markets are making things difficult for the annuity industry, overall it should remain strong and overcome its challenges.

Written by Rachel Summit

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In the Investopedia article “The Best Retirement Account for You,” Mark P. Cussen reminds us that the best account is different for each individual.  It was back in 1974 that we started seeing qualified retirement plans like pensions and 401k’s.  Eight years later came the IRA, which helps people without an employer plan have tax-deferred retirement savings.  Roth IRA’s were introduced in 1997, then Roth 401k’s and 403b’s.  Annuities are another way to accumulate tax-deferred retirement savings and are not under the umbrella of ERISA regulations.

While the author adamantly points out that no plan is best for everyone and individuals must do their research, he does give his opinion as the most important options for certain groups of investors.  IRA’s, SEP plans and self-employed 401k’s are best for self-employed individuals.  An IRA or Roth IRA is good for lower income individuals, while people looking to save more than $20,000 a year should look into one of the last two savings plans.  Anyone who has an employer sponsored retirement plan, especially if they match any of your contributions, should definitely look into that.  When you retire, you can transfer it to a 401k annuity to have guaranteed lifetime income.

If your income is too high for Roth IRA contributions, you can look into an employer Roth IRA plan.  Those whose income exceeds all qualified plans should look into non-qualified plans like executive bonus plans and deferred compensation plans.  Annuities are a product that any investor can use to accumulate money tax-deferred.  The money placed in an annuity is not deductible, but there are no limits on how much you can invest.  The IRS can give you more information on tax savings if you need it.

Written by Rachel Summit

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While Americans have been focused on increasing education about annuities and retirement income options, our neighbors in Europe are dealing with the same issues.  MetLife Europe UK forecasts a 65% increase in retirees asking financial advisors about annuity products.  In the FT Advisor article, “IFAs expect rise in advice on annuities: MetLife,” Aamina Zafar says that fixed term annuities like the 5 year fixed annuity will become increasingly popular over the next two years.  Retirees and financial advisors are calling for more innovation and new products to help retirees.  They believe that better options should be out there to finance retirement.

Unfortunately, 47% of those surveyed did not use a financial advisor’s help when making decisions regarding their retirement income planning.  Of those, 17% admitted to regretting that choice, while it’s likely that more actually regretted it.  About 27% of retirees sought the advice of a financial advisor for retirement decisions, 21% used their employer’s 401k annuity or other retirement plan, and 9% just asked their family and friends for advice.  In order to get retirement income, half of retirees were drawing down their savings and capital rather than receiving income payments from annuities or pensions.  No matter what retirement vehicle you use, speak with an expert to help give you all of your options.

Written by Rachel Summit

Follow Finance Mama on Twitter http://twitter.com/#!/financemama