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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Near-retirees have purchased indexed annuities (also called fixed indexed annuities or equity-indexed annuities) in relatively modest but nonetheless record numbers in the past year or so. The reason: the guaranteed lifetime withdrawal benefits (GLWB) of these products are now in some cases more generous than the GLWBs offered on variable annuities.

Why? Indexed annuities, which invest mainly in bonds, are less risky than variable annuities, which invest largely in stocks. Less risk means lower hedging costs for the insurer, which (generally speaking) enables the insurer to offer a higher lifetime payout rate. Testing one particular indexed annuity GLWB with the help of an online calculator, I seemed to be able to get an extra guaranteed $2,000 a year at age 70 (after a 10-year waiting period) than I could from a typical variable annuity GLWB. (Individual products and results will undoubtedly vary).

When I wrote Annuities for Dummies, indexed annuities did not yet have GLWBs. I did not recommend indexed annuities at the time, for several reasons. First, they were not easy to understand. Second, the past returns of apparently similar products varied so much that it seemed difficult to make an informed purchase. Third, some insurers paid huge commissions to agents, which implied a smaller share of the pie for the consumer. In a few headline-grabbing instances, the high commissions also appeared to incentivize high-pressure sales. Today, for near-retirees in need of guaranteed income (but who shy away from pure income annuities), indexed annuities might be worth a fresh look.

Written by Kerry Pechter

While 77% of people are happier in retirement than they were when they were working, retirement does face challenges that may be unexpected.  Milwaukee’s Journal Sentinel works on “Addressing the four most common post-retirement challenges.”  Longevity, or the fear of running out of money during your lifetime, is one of the biggest risks in retirement.  As many people live to age 90 and beyond, retirement savings need to stretch farther than ever before.  Health care costs are rising fast and the fact that you need more health care as you age makes this added cost a stressor for many retirees.

Becoming a widow is one retirement challenge that no one wants to think about.  But the reality of the situation is that 75% of married couples have a spouse who spends at least five years as a widow or widower.  The need for long term care of some sort is becoming a bigger challenge for retirees.  Four out of five women and three out of five men will need some type of long term care for a chronic health condition during their lifetime.

There are some solutions to these four major retirement challenges.  Annuity products help to make sure that you do not run out of money in retirement.  The guaranteed income from an annuity can last over a retiree’s lifetime and even include death benefits to last over a spouse’s lifetime.  Purchasing Medicare supplement insurance helps retirees face the increasing health care costs by covering whatever Medicare does not.  Some life insurance policies work in terms to cover long term care.  This long term care insurance is important to help cover the cost of extended care and the life insurance policy helps ensure that a widow is cared for in the tragic death of a spouse.  Insurance against financial doom will help relieve retirement challenges.

Written by Rachel Summit

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Recently I visited a website that provided financial education for people nearing retirement. An article on the site told potential variable annuity buyers to read each product prospectus thoroughly before investing.

I was slightly surprised by that. Virtually no one reads VA prospectuses thoroughly. Today’s prospectuses can be hundreds of pages long. Half of the pages focus on the mutual fund (i.e., subaccount) options, and a contract may offer scores of funds. Even advisors don’t read prospectuses; they subscribe to services that do it for them.

You should look at the prospectus, but fast-forward to the important stuff. I concentrate on three areas: the Fee Table, the section on “Optional Living Benefit Riders,” and the sub-section on “Investment Restrictions.”

On the fee table, look for the Mortality & Expense Risk charge, the current (and maximum) fee for the income rider you want (either the single-life or joint-option), the current fee for the death benefit rider you want, and the range of fees for the subaccount investments. These are your annual expenses.

Then flip to the Living Benefit Rider section. Check out the annual bonus, if any, that you can get by delaying withdrawals. Then look at the so-called “age bands” that tell you the percentage of your guaranteed income basis you can receive each year for life.

Finally, under the same section, look for a subhead that says “Investment Restrictions.” Typically, if you choose an income rider, certain high-risk funds will be off limits to you or a cap will be fixed on the amount you can invest in certain funds.

Not all prospectuses are organized exactly alike. But if you consult the table of contents (or use the search window, if you’re reading a pdf online), you should be able to find what you’re looking for quickly.

Written by Kerry Pechter

Some scary statistics came out of ING’s Retirement Research Institute last year.  A whopping 71% of Americans don’t have any kind of formal retirement plan in place.  That’s nearly 3/4 of America that either won’t be able to retire or will have to struggle financially because they didn’t plan ahead.  This is not good news seeing that Americans are living longer than ever and costs are steadily increasing.  This information comes from Financial Planning’s Danielle Reed, in her article “Year-End Reality Check: 71% of Americans Don’t Have a Retirement Plan.”

Of those researched between the ages of 25 and 69, working full-time and earning $40,000 or more per year, 48% of them feel unprepared for retirement.  And that isn’t to say that they don’t have any plans in place.  Seventy-five percent of them are contributing to some type of workplace retirement plan, they are simply worried that it isn’t enough.  This is why many experts want you to compare annuities when planning your retirement.  They are a perfect bridge for the gap between your workplace plan savings and the expenses you will have.

More than 4,000 men and women were surveyed for this study and less than half of them had actually sat down and figured out how much money they will need in retirement.  Not surprisingly, only 28% were working with some type of financial planner to help them ready for retirement.  If more were working with an expert, they surely would have calculated how much they need to live off of in retirement.  By using 401ks, IRAs, pensions, and Social Security in conjunction with annuity products, Americans should be able to finance their retirement well.  We just need to make sure we save enough to use these products and live how we’d like.

Written by Rachel Summit

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