Payroll or Playroll: It’s All About The Lifestyle

We all want to be able to keep the lifestyle that we have become so accustomed to having while we are working.  But, how do we keep that lifestyle going once we retire?  Is it even possible?  The answer is yes to both.  I have a client who once told me that you have to live for the day but PLAN as if you are going to live to be 100 years old.  That may sound corny or unrealistic but it rings true.  My grandmother passed away on Christmas Day 2009.  She lived to be 107 years old and had no major health issues and had been living in an assisted living facility for the last seven years of her life.  Many of us know that these facilities are expensive and can drain our retirement savings rapidly.  As a result of solid planning, she had her money invested in financial vehicles that provided her enough income to live comfortably throughout her retirement years.  Most importantly, she was able to maintain the same lifestyle.

So, how do we make this a reality for ourselves?

One of the biggest obstacles to account for in our planning is the current condition of our economy here in the United States.  We hear it on the news everyday about how income tax rates need to be increased, capital gains and dividends being taxed at a higher rate, estate taxes and the poor interest rate environment.  Many companies are not even in a position to offer their employees 401k packages with matching funds like years before.  Public and private pensions have become increasingly underfunded and Social Security is still a big question mark in all of our minds.  It makes us question whether or not they are going to be there for us when it’s our turn to collect.  That leaves the burden of retirement planning on us as individuals.  The key here is to create your own private pension.

So how can we make it happen?

Fixed Indexed Annuities (FIA) have been increasing in popularity due to their ability to provide lifetime income payments, death benefits and tax-deferred accumulation.  An FIA is a fixed annuity that may earn interest based on the performance of an externally linked equity index, such as the S & P 500, Nasdaq-100 or the Trader Vic Index, to name a few.  The values of these indices vary from day to day and are not predictable. It is imperative to note that your principal is protected and is not exposed to the downside risk of the market.  In other words, an FIA credits an annuitant interest based on a positive gain in the particular index in which the annuity is linked to.  Once credited, the gains are locked in.  If that index is negative for that term, you have zero interest credited.  This gain or zero interest credit is generally calculated annually, however some contracts are calculated on multi-year terms.  Each contract does have a minimum guaranteed interest rate.  As with traditional fixed annuities, contract terms vary.  A Fixed Indexed Annuity can become your own private pension that you can fund and continue to contribute to while still being employed.

In addition, many insurance carriers offer an Income Rider.  This is an optional benefit that is added to your FIA contract and is designed to create a lifetime income.  A contract holder is typically charged less than 1 percent per year. Yet, your income account value may grow at an additional 6-10 percent per year as a result of your Rider purchase.  You have now created an income that cannot be outlived.

Some of my clients have expressed to me that they don’t really need any more income and are comfortable with where they are financially.  I generally tell them that there is almost always a good use for more income.  I call it the playroll.  You can design your payout options pretty much any way you want.  You can use the income to give to your kids or grandkids on their birthdays and Christmas, or you may want to use the income to save for a special travel fund.  You may even want to have a structured payout to your favorite charity.  So, whatever the reason, there is always room for a little more income!

Finally, if you are looking for a retirement income, the FIA with an Income Rider is an excellent vehicle to be able to achieve this objective.  The goal is to be able to maintain the same lifestyle in retirement as when you were working.  If you need a payroll or desire a playroll, it’s all up to you!

Michael B. Cratty is the President of Cratty & Swanson Insurance Services located in Seal Beach, California.  He served as the President and Chairman of two FINRA member Broker/Dealers.  Michael helps his clients by solving problems and providing world class service.  He can be reached at 562-799-5560 or e-mail him at michael@cswans.com