Suitability guidelines are very important for annuity products.  Those of us with good ethical standards need to make sure that the industry is treating consumers well.  Two groups putting suitability standards into effect are FINRA and the NAIC.  I just updated a blog post about suitability standards from the two organizations as Minnesota became the 31st state to adopt the NAIC’s guidelines.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

Last month brought about a lot of changes to the annuity market, as May often does.  In Darla Mercado’s Investment News article, “It must be May in VA-land: Payout cuts, price hikes, new products,” she writes about all of the variable annuity changes common to the month of May.  Changes over the past couple of years have been consistent.  Fees are higher, equity market risk is lower, and living benefits are not offered up as they used to be.  Many companies who sell variable annuities have made sweeping changes so that they are not taking on large amounts of risk and accepting market flows that could be absorbed elsewhere.  Those companies who haven’t tweaked their variable annuity business are jumping into the changes now.

MetLife made one of the biggest changes of the year, but it was not with a variable annuity.  Their Shield Level Protector is a single premium annuity that combines indexed annuity features with those of a structured product.  The annuity is tied to one of five different indexes, offers a few death benefit options, but does not have any lifetime income benefits.  To keep themselves safe, MetLife has capped some of the potential earnings for their new annuity.  The company points out that this annuity is not meant to be an income generator and it’s target market is pre-retirees rather than those very close to retirement.  The Shield Level Protector helps you accumulate assets while protecting your money.  AXA Equitable has a structured product similar to MetLife’s annuity and Allianz Life is releasing one later this year.  Insurance companies like these products because clients’ accounts won’t grow quite as much as older variable annuities and they don’t have the long term lifetime payment liabilities.

Lincoln National’s first quarter variable annuity deposits increased 35%.  They are decreasing living benefit riders for joint survivorship annuities in order to decrease their new premium flows.  Jackson National increased prices on their LifeGuard Freedom Flex GMWB.  The maximum charges went from 2.7% up to 3%.  They are also no longer offering quarterly step-ups on some of their single life annuities, but you can still get the quarterly step-ups with the joint life products.  The SafeGuard Max GMWB is no longer offered by Jackson.  These companies are not trying to be stingy or hurt consumers though, they are doing what they need to do to stay in business in an economic environment that has been difficult at best for the past 5 or so years.

Nationwide Financial is one of many companies who are offering new funds to manage their volatility strategies.  This strategy changes the equity exposure of the company’s clients as the markets increase and decrease.  Other companies are offering more choices for investments, including Jackson National.  It’s Elite Access variable annuity has 20 additional sub-accounts to give clients access to more investments rather than offering lifetime income.  Prudential Annuities has increased their number of asset allocation portfolios to 21 to give more options to consumers.  These changes that occurred in May are all settled now in June as we await the next changes to come in the variable annuity marketplace.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

Americans in general seem to dislike being told what to do.  The firestorm against President Obama’s Affordable Care Act, which requires all Americans to carry health insurance policies, has been unavoidable.  But still, BlackRock Inc.’s CEO thinks that Americans need to be forced into saving for their retirement.  It certainly is easy not to save for retirement, especially when many Americans are struggling just to make ends meet.  Retirement seems far away and there is a chance that we won’t even live that long.  But chances are better that we will and not having the proper retirement savings can be catastrophic.  Fortune’s Katie Benner told us about “Larry Fink’s radical retirement recommendation” in a CNN Money article last month.

On average, retirees plan on Social Security covering 70% of their expenses in retirement.  But there is simply not enough money coming into Social Security to meet the needs of the Americans retiring on a daily basis.  When Social Security was first introduced, a 21 year old male only had a 50% chance of living until he was 65.  Chances are good today that he will live well into his 80′s.  And while the Social Security system is struggling, not enough Americans are taking their retirement savings into their own hands.  One-third of Americans don’t have any retirement savings.  Many of those who are saving have less than $25,000 saved.  Fink believes that one of the biggest challenges in this generation is that people are living longer, but have retirement savings that are grossly underfunded.

Much like what has already been done in Australia and Chile, BlackRock’s CEO suggests that the government in America should require mandatory retirement savings just like they require people to pay into Social Security.  He says that this socioeconomic issue is being ignored and calls for politicians and business leaders to work on addressing this crucial issue.  In a speech to NYU finance students, Fink pointed out that the finance industry is too focused on short-term goals and gains, while they need to start focusing more on long term objectives.

I found it interesting that he called out corporations and asked them to work harder to help their employees save for their retirement.  As pensions become nearly nonexistent and saving is changed to 401k’s, Fink says that the employer still maintains what he refers to as a “moral obligation” to make sure their employees are saving for retirement.  Do you agree with that?  I think it is wonderful when companies encourage their employees to save for retirement, especially when they match 401k contributions.  The future will be a lot brighter if more companies help to educate employees on saving, match their funds, and even auto-enroll them in retirement plans.  He says that investors don’t really care where their money goes, as long as it is helping them meet their future financial goals.  It’s the job of us as individuals, employers, and the finance industry to take care of our retirement financing.  Do you think the government needs to get involved?  Let us know.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

“Dementia Care Cost is Expected to Double by 2040.”  This is unbelievable.  My Grandmother suffers from dementia and has been in a care facility for years.  The cost of this care is astronomical and while it is good, it certainly is not great.  The fact that my children will pay double this cost seems unimaginable.  In Pam Belluck’s New York Times article, she discusses recent research on this issue from the RAND Corporation that was published in The New England Journal of Medicine.  Not only will the cost of dementia care double in the next three decades, but so will the amount of people requiring treatment for this chronic disease.  The costs rival those of cancer and heart disease, but most people don’t have insurance to cover dementia care.  That is likely to change.

Currently, 15% of the population over age 70 suffers from dementia.  That accounts for 3.8 million people, a number that is forecasted to reach 9.1 million people by 2040.  No other diseases have this kind of anticipated growth.  The direct health care expenses in 2010 for dementia care totaled $109 billion.  Informal care cost estimates ranged from $50 to $106 billion, depending on how the estimates were figured.  This accounts for family members taking care of dementia sufferers in the home and giving up their income, along with other informal costs.  Dementia is different than other diseases because there is no way to prevent or cure it and treatment is not yet effective.  People often suffer from dementia for a long time and with annual costs around $50,o00, it is a struggle for families to pay for the care of their suffering loved ones.

The article doesn’t speak about what can be done to help families who will have this increasing burden of dementia care.  A few years ago, I blogged about a new annuity product with a rider for long term care insurance.  Since then, there have been many more such annuities introduced into the market.  It could be a wise decision to use an annuity and long term care insurance combination to help finance your retirement.  Due to the fact that many more of us will suffer from dementia and the costs are skyrocketing, being prepared so that we don’t have to pay for this care out of pocket is crucial.  RAND’s study numbers are similar to, but not the same as, those forecasted by the Alzheimer’s Association.  A third study will be completed by the Mayo Clinic to further expand on the projections.  It really doesn’t matter exactly how high the costs will go because they will no doubt be significant.  What matters is that we prepare for this future.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

Most of the major news publications have published articles about annuities recently, and the Boston Globe is no exception.  In “Annuities regain a bit of luster as retirements get longer,” Lynn Asinof talks about how many annuity products are finding new fans as people live longer.  As annuities are becoming increasingly popular in retirement planning, more and more people are using them and talking about them with friends and family.  High fees and low returns are the main reasons that people disapprove of using annuities, but they are doing further research to understand the costs and the great benefits as life expectancy, and therefore retirement length, increases.

In the search for a lifetime income that will last as long as they do, people are turning more and more to annuities.  The government has been working to make them more attractive in retirement as pensions become non-existent and Social Security’s future is unclear.  The reason that annuities are good as part of a retirement plan is that once you pay your lump sum of money, you have guaranteed income payments.  Although you often give up control of that money and the ability to leave your income to your heirs.  That isn’t true with all annuity products, however if you pass on death benefits or eliminate surrender charges you will pay more for those benefits.  With the large array of annuity products available, there are many different guarantees, fees, and payouts from which to choose.

Low-cost, single-premium income annuities are recommended as the basic product for guaranteeing lifetime income.  Use this product’s income as a bridge between other retirement income and the expenses you will have for retirement.  Invest other assets into accounts that you can leave to your heirs upon death.  The article uses an example of a 65-year old couple looking to receive $25,000 yearly to bridge their retirement expenses and their pension and Social Security payments.  By withdrawing 4% to come up with that money yearly, they would need a $625,000 portfolio.  And that money isn’t guaranteed, especially if it is in stocks.  Using immediate annuities to finance the same $25,000 a year, they would only need $445,000 because they could get a payout of $5,630 from each $100,000 annuity.

This is for a couple; a single annuity would pay out significantly more.  The reason that annuities pay more is that those who die early make up the payments for those who live long.  While this turns many people away from annuities, it is actually just purchasing insurance against the fact that you will outlive your money.  This is why you shouldn’t invest all of your portfolio into annuities.  Around one-quarter of your portfolio is often recommended for annuities.  There are products to account for inflation, or a certain period of time if you are worried about dying prematurely.  It’s wise to ask a financial professional about annuities because they can be complicated and you might not be properly calculating your longevity risk on your own.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

There are some deadlines when planning for retirement that could really hurt you if you miss them.  Emily Brandon of U.S. News & World Report lists twelve notable ages and dates for which to prepare in her article “12 Important Retirement Planning Deadlines.”  If you don’t pay close attention to the rules of Medicare, Social Security, and 401k planning, you could end up paying more in taxes, fees, and even penalties.  Reading this article, I wanted to immediately share it with everyone I know who is nearing 50 because the information is quite valuable.  Some of the penalties you’ll receive include missing out on certain Medicare plans, something that cannot be undone.  Pay attention before the deadlines hit.

Whether you are on point or behind in your retirement savings, 50 is the age where you can increase your contributions to 401k’s and IRA’s.  Once you turn 50, you can contribute $23,000 yearly to your retirement savings plan.  You can also add $1,000 per year to the $5,500 that everyone else can put into IRA’s.  While you will still pay income tax on your 401k and IRA distributions at age 59 1/2, you no longer have to pay the 10% early withdrawal penalty.  At 62, workers are able to start receiving Social Security payments, but hold off if you can.  Your payments could be around 30% less if you start receiving them at 62, rather than waiting until 66 or 67.  Payments can also be withheld if you are still working at this age.

Age 65 is important because you become eligible for Medicare.  Pay attention to the fact that you can enroll as early as three months before your birthday, but if you don’t enroll by four months after, you have the potential to lose a lot.  Premiums for Medicare Part B and D could increase to a higher permanent level and you might even be denied supplemental coverage.  By not signing up for Medicare Part B on time, you get a late enrollment penalty as well as 10% added to your premium for every year you are late signing up.  If you want to buy a Medigap policy in your state, you can do so for six months after turning 65 guaranteed.  If you don’t do it in that time frame, costs could be higher or you could be denied altogether.

Most Baby Boomers are eligible for their full Social Security payments once they turn 66.  The age increases the younger people are until age 67 for people born in 1960 or after.  Once you reach your full Social Security age, you won’t be penalized for taking payments while you are working.  If you wait longer than your full retirement age to start receiving Social Security, your payments will increase 8% each year until age 70.  After that age, payments will not increase any further.  The final important age is 70 1/2.  At this point, you have to start taking payments from your 401k’s and IRA’s.  The penalty is huge if you don’t take out enough each year.  You’ll pay half of the amount that you should have withdrawn in taxes if you don’t follow the withdrawal rules.  If you are still working, you can delay receiving money from your 401k until 6 months after you retire.  Once you withdraw the money and pay your income taxes, you can buy an annuity or invest elsewhere with your income payment.

In addition to the ages, there are a few deadline dates to keep in mind yearly as well.  Your 401k contributions as well as required minimum distributions need to be made by December 31 of each year.  If you are taking your first required 401k distribution, you have until April 1 of the following year.  You might not want to wait though because then you will have to take two distributions in the same year and your taxable income skyrockets.  April 15 has always been a significant date because of taxes, but it is also the deadline for making IRA contributions for the previous year.  You’ll get big tax savings in addition to helping save for retirement.

This retirement information is helpful to every age group, because although I am not yet at the first age, I know exactly what deadlines that I don’t want to miss.  Pass on these retirement deadlines to your friends, family, and clients so that they don’t miss out on anything or get steep penalties and additional taxes.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

It’s the end of May, so although summer doesn’t officially start for a few weeks, it’s summer in my books.  And summer for football fans signals the beginning of serious football chatter as teams start practicing and getting ready for the fall.  Stan Haithcock wrote an interesting article for Marketwatch tying football to annuities called “Separated at birth: Tim Tebow and annuities.”  I know the basics about Tim Tebow; good college player, the stance, very religious, somewhat controversial.  That last bit of knowledge immediately screams to annuities and the love/hate relationship that consumers have with these insurance products.

Since Stan lives where Tim Tebow went to high school, he constantly hears people either criticizing or doting on the NFL player.  He’s also known as “Stan the Annuity Man,” so he certainly hears a lot of good and a lot of bad about the perception of annuities.  Tebow’s critics don’t like his throwing motion or his inability to read defenses.  Critics of annuities always bring up high fees, complex products, or missed opportunities as if they are consistent across all annuities.  They aren’t.  Fans of Tebow proclaim him a “winner” and say that warrants an NFL quarterback job, much like some annuity promoters and lock-step agents advertise the word hybrid to promote fixed indexed annuities as a product suitable for everyone.  There are no annuity products suitable for everyone because we all have individualized needs and situations.

Critics tend to point out a string of negative facts and run with them as if there is no potential for an upside.  For Tebow, it is his low quarterback ratings and his low percentage of completions.  When it comes to annuities, they point specifically to higher than average variable annuity fees and indexed annuity returns of 3.27% over the most recent 5-year period.  We all know the last five years have been tough financially and that many people have not even seen returns.  Perhaps the most frustrating thing on both accounts is that people won’t even listen to an argument for what they are against.  After making up their minds about Tebow or annuity products in general, sometimes based on false information, they won’t hear facts about the other side of the argument.

Stan’s final comparison is of the media circus associated with both “products.”  He says that at least locally, there are stories daily about Tebow and people pondering why every NFL team is not beating down his door.  When it comes to annuities, the 10,000 people retiring daily can be inundated with information online, on TV, and in their magazines and newspapers.  Not all of this information is legitimate.  Just as Tebow will work out best with an offense that can help him thrive with his skills, annuities are best used when you have a specific situation or goal for which you are using them.  While both products are good and important for their individual situation, they can be oversold by those who really believe in their products, some with good intentions and some not so much.

This is an interesting comparison between Tim Tebow and annuity products.  If you are looking at annuities, you really have to look at the transfer of risk you are receiving and compare your benefits and costs.  Know the guarantees you will receive and base your decision on your individual situation and not on outside “noise”, as Stan calls it.  Unless you own an NFL team, you don’t really have to worry about whether or not Tebow will get a job, but the risk balancing is similar to that of purchasing an annuity.  Anyone ready for football season yet?

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

In the Fox Business article, “Should Annuities Provide Your Retirement Paycheck,” Tom Hegna discusses the possibility of annuities financing the new American retirement.  He says that annuity products should definitely be considered as a means for meeting your monthly expenses in retirement.  They are a good option for retirees without a pension and those whose Social Security will not cover their basic expenses, so mostly everyone.  But you definitely need to speak with a financial advisor before making the final decision to buy an annuity.  Here are some of details shared in Mr. Hegna’s article about using annuities for a retirement paycheck.

Annuities give you monthly paychecks after paying your initial premium and also provide what Mr. Hegna calls “playchecks.”  He points out that during your working life, you typically spend the most money on Saturdays whether it be from shopping, golfing, or seeing a movie.  But once you retire, everyday is similar to a Saturday and you have a lot more time in life to play.  You’ll need monthly income coming in to guarantee that you will be able to pay for all of your expenses, whether they are for play or not.  Lifetime income, or single premium immediate annuities offer you guaranteed income either over a certain time frame or for the rest of your life.  By choosing the lifetime income option, you are basically creating your own pension from your retirement savings.

Only 100 years ago, the life expectancy of Americans was around 50 years old.  Can you believe that?  Now couples at age 65 have a 50% chance that at least one of them will live until they are 92 and a 25% chance that one will live until 97.  That means that our retirement savings needs to last way longer than our grandparents and great-grandparents’ retirement savings.  Far and away, the biggest risk in retirement is longevity risk, or outliving our assets.  Not only does this risk increase the longer you live, it also increases the other retirement risks of inflation, the markets, deflation, and long term care needs.  Single premium immediate annuities are one of the only ways to beat longevity risk by guaranteeing your income over as long as you, or both you and your spouse, live.

If you are looking for a safe investment, annuities could be the right product for you.  The retirement red zone, or the five years before and the five years after your retirement date, is the worst time for you to take a hit from the stock markets.  Annuities can help you grow your money without worrying about declining values because of their guarantees.  Some variable and fixed indexed annuities can even offer market upside without the risk of losing any of your original principal.

The article points out some other things that you really need to take into consideration before purchasing an annuity though.  Contracts are usually complex and can hide fees if you aren’t careful about what to look for.  Make sure you know all of the fees ahead of time.  Mr. Hegna recommends not purchasing any annuity where sales commissions over 4%-6% are paid.  Keep in mind that you need to protect yourself from inflation.  Many SPIAs offer yearly increases to help combat inflation, but if you have a fixed annuity without an inflation increase, make sure other investments in your portfolio account for this.  Interest rates are a part of your annuity payment determination, so keep that in mind.  But the older you are, the less they matter when it comes to your annuity payments.

If you think an annuity could be right for your retirement, speak with an expert and do your research.  This Fox Business article believes that annuities are a good way to receive a retirement paycheck that will keep your finances in order.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

Are you one of the people who don’t think you can get any good annuity rates right now?  The AARP recently sent out some advertising for an immediate annuity rate of 6.5%.  While that is not a bad rate, we were able to find better.  Many people contacted us looking to see if the AARP’s deal was a good one.  The 6.5% immediate annuity is through companies like New York Life Insurance and is based on a male aged 72.  Annuity FYI was able to find an interest rate for the same male for 6.76%.  It’s important to note that these annuity rates are payout rates, rather than straight interest rates.  Payout rates include both interest rates and a return of your principal.  This percentage shows how much of your purchase price is paid out each year.

Using a $100,000 example for this 72 year old man, we compared the payout rates that we found with those from the AARP.  Our annual payout rate of 6.76% gives you monthly payments of $563 and annual income of $6,763.  In contrast, the AARP’s 6.5% payout rates gives you $543 per month and $6,516.  That’s a couple hundred dollars every year that you can save or spend somewhere without giving anything else.  If you are looking for competitive annuity rates, Annuity FYI offers free quotes and annuity advice through trusted advisors.  The income shown is before any taxes that will be due upon receiving payments.  Before taking anyone’s word on the best annuity rates out there, do a little comparison shopping for your immediate annuities.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

I just updated an old blog with interesting information about the 10 worst states for retirement.  In December, I updated this same post with the best places to retire on less than $40,000 a year.  Originally, the information in the blog listed 7 tips for retirees.  Oddly, these states are beautiful and often very touristy, but that doesn’t always make for a good retirement location.  I’m certainly not saying that no one should retire in these states, only arming you with knowledge about their taxes, cost of living, and crime rates.  Compare the benefits and drawbacks of retiring in these 10 states, just like you would compare the pros and cons of various annuity products.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+