Published October 01, 2012
When people start thinking about creating a lifetime income, especially those of you with a 401(k) plan, for example, you really start to appreciate when someone else promises to pay you their benefits. By and large, regardless of what you think about the government or the Social Security program—which is expected to run out of money within the next 30 to 40 years if taxes aren’t raised—I think we all feel comfortable believing that when those Social Security benefits begin, that they are guaranteed for the remainder of our lifetimes. That’s a great and very valuable benefit, and you want to make that as big as possible, so it behooves most of us, if we can, to delay those Social Security benefits. Instead of working well into your 70s, consider other vehicles that can complement your Social Security benefits or at least provide you with period certain income until you begin accepting those Social Security benefits.
Drawing down retirement savings too early…
Many people follow the old “4% rule.” This is where you position yourself with a “balanced portfolio” of stocks and bonds and withdraw 4% annually for income, and make suitable adjustments for inflation. The problem with this is that nobody seems to ever take out 4% annually on a consistent basis; many times, be it because of a market downturn or an emergency, people find themselves withdrawing 5% to 8%. This will almost certainly lead many folks to run out of money before they pass away. That’s a mistake we’re seeing in surveys and financial records. People just start taking the money out and don’t think about running the well dry. They think to themselves, “I need to withdraw this amount to cover my living expenses and to enjoy myself. I thought this is what retirement was for!” And though that’s a good and nearly universal attitude, it would be foolhardy of anyone not to look towards what lies ahead.
Now, I like annuities because they serve their purpose: They’ll pay you, guaranteed down to the penny, a series of monthly payments no matter how long you live. When I ask people if they would like to have a guaranteed pension to pay them lifetime income, no matter how long they live, everyone always answers, “Yes!” However, when I ask those same people if they would consider an annuity to complement their retirement portfolio, I usually receive a resounding, “No! That’s just another way for those big corporate insurance/financial companies to steal and control your money!”
Annuity Myth #1: Annuities are too confusing.
Many are often left a little confused and surprised when I explain that an annuity works exactly like a company pension or Social Security benefits. You agree to set some of your retirement savings aside, and they agree to provide you with lifetime income from that pool of money (regardless if they end up in “the red” when it’s all said and done as they already made a contractual commitment to you). It’s as simple as that.
In fact, the more information I provide about annuities to people, the more responsive they are. Not only do annuities provide you with the same type of lifetime benefits as Social Security and company pensions, but they offer the most flexibility (as far as contributions/distributions go) and often provide greater monetary benefits.
Annuity Myth # 2: The insurance companies always keep the remaining money once you die.
With the exception of immediate annuities, this is simply not true. To be clear, an immediate annuity doesn’t spend any time in deferral or gaining interest. They provide high guaranteed payments within 30 days of the policy being issued. In exchange for the high guarantee, the income payments cease at your demise.
However, fixed indexed annuities pass along any and all remaining money in your account, probate free, to your named beneficiaries. Further, your accounts can be set up as “joint life” and provide both you and your spouse guaranteed lifetime payments no matter how long each of you live. And, same as before, any remaining monies still pass probate free to your named beneficiaries.
Annuity Myth #3: All annuities have high and hidden ongoing fees.
All the different type of annuities I discussed above have no fees at anytime. The only annuities that have fees are variable annuities, this is because they are an equity product, not an insurance product, and you must pay ongoing fees for managing the equities within the account.
The only time a fee can be assessed with a fixed indexed annuity is when a rider is added to your policy. There are a few riders available with fixed indexed annuities. For example, a death benefit rider may be added to your policy; this is where they guarantee you a high lump sum payout to your named beneficiary after you pass away. But the most popular rider is the income rider; this is where the insurance company guarantees you a higher interest rate during your deferral period (usually between 4% to 8% annually) for the purposes of receiving lifetime income. Nearly all riders have a fee of less than 0.95% and are always clearly stated upfront and within the policy if you apply for one.
A great option for your retirement savings…
If you are near and planning for retirement and/or currently investing in a qualified plan, do yourself justice and look into how the guaranteed benefits of a lifetime annuity can complement your portfolio and provide you with a more certain and secure retirement.
To learn more about how annuities could be a beneficial strategy to your retirement plan, contact Joe Weissman at (800) 313-PLAN (7526) or Joe@WealthPreservationLLC.com