Retirement and Annuities

Written by on 11/1/2012 12:42 AM . It has 0 Comments.

Growth

Indexed annuities are like other annuities, but instead of growing by an interest rate that is declared by an insurance company, they are linked to the performance of a market index. As opposed to a variable annuity that can go up or down in value and doesn’t protect your principal, an indexed annuity has built-in safeguards that ensure your principal, as well as past gains, remain protected.

It is important to note that indexed annuities rarely, if ever, include any fees that would be deducted from your account. On the other hand, variable annuities typically have fees that are assessed even if the market goes down.

For instance, a variable annuity often contains a variety of charges and fees. These fees can increase if you add optional riders to your policy. The basic fees associated with variable annuities are Mortality and Expense Risk Charges and administrative fees which average around 1.4 percent. Also, the underlying sub-accounts carry their own fees which average around 1 percent. If you add an income rider or death benefit rider, these fees can easily exceed 4 percent per year. In order to break even from these charges, the sub-accounts would need to grow by 4 percent each and every year.

Structured, Lifetime Income

Financial tools are designed to do specific things. For example, life insurance pays a lump sum amount to beneficiaries. Checking accounts are used to pay bills and manage short-term cash. Health insurance helps pay medical bills.

Income annuities are specifically designed to create income – either today or at some point in the future. When you place a lump sum into an income annuity, the plan is custom designed to address a primary retirement need: on going income.

If income is not needed right away, these products contain a provision commonly referred to as a “roll up”.

The Advantage Group Research

In 2003, The Advantage Group, a nationally- recognized annuity research group, published a study demonstrating how a fixed indexed annuity would have performed during the very turbulent five-year period from September 30, 1998 to September 30, 2003. The study examined the performance of the mere (14) fixed indexed annuities that were available in 1998 and averaged their credited interest over that time frame.

Over the five-year period, fixed indexed annuities that reset annually averaged 35.67 percent in interest. This resulted in a return of more than 7 percent per year during a period of time when many retirees lost large sums of money.

Taking Control Of Your Retirement Savings

Even though the number of workers retiring with a traditional pension are at all-time lows, the need for guaranteed income in retirement continues to be extremely important.

There are several scenarios where qualified plans such as 401(k)s, 403(b)s and IRAs can be transferred into an annuity. Many annuities can offer the income dependability of a traditional pension, but with greater flexibility and enhanced retirement features. Establishing a guaranteed income stream through the purchase of an individual annuity creates a level of financial security many retirees find comforting. Additionally, you may be able to reduce the amount of fees and charges inside your savings plan by transferring your retirement savings from a company- sponsored plan to an individual annuity you choose. Understanding the transition from your working years to your retirement years is an important step. If creating financial stability and a dependable income is one of your retirement goals, purchasing a properly structured annuity is an important solution to consider.

The Income Annuity “Roll Up”

Depending on your future income needs, an income vehicle can be structured and set in place to create that income for you.

If you need income in the near future, it is possible to set aside that money today and take advantage of an income annuity that includes a “roll-up” value. If you use a “roll-up” type of income annuity, each year the value available for a lifetime income increases by a set amount. This increase will continue until you begin taking income, regardless of market performance. This guarantee* (feature?) provides excellent financial peace of mind that your investments are growing, even with an uncertain economy or volatility in the stock market.

These products don’t just generate income for a few years, rather, they create an income stream that is contractually guaranteed* to last the rest of your life. These contracts can be set up for individuals or spouses who need stable income and potential growth.

For all these reasons, a fixed indexed income annuity has become one of the most popular options for retirees looking to protect their assets and prepare for a successful retirement. It may be a great fit for you!

Let’s take a look at some of the concepts and terminology that you might encounter as you research fixed indexed income annuities that fit your situation.

Indexing

An indexed annuity is an insurance contract linked to a common market index, such as the S&P 500. If the index experiences a gain, you are entitled to share in the earnings. If the index experiences a loss, your account is protected against that loss with a modest baseline rate. Indexed annuities are fixed annuities that provide an opportunity to potentially earn more interest than other safe money alternatives. The indexed annuity returns vary based on participation in a market index, and unlike variable annuities, you are insulated against market losses. Growth potential for indexed annuities can be strong, and has returned over 15 percent in the past.

Incorporating indexed annuities into your overall retirement plan can afford you the following benefits:

• Safety and guarantee of principal • Minimum guarantees • Tax deferral • Penalty-free withdrawal and liquidity options • Guaranteed lifetime income*

• Stock market index-participation growth • Probate avoidance • Ability to select and customize enhanced features, such as:

- Guaranteed growth rates - Lifetime income (Based on either single or joint life) - Death benefit - Health care protection

Annual Reset

Most fixed indexed annuities utilize a concept known as annual reset. This strategy allows interest earned to be “locked in” annually, and the index value is “reset” at the end of each year. This means that future decreases in the stock market will not affect the interest already earned. Annual reset can potentially offer higher credited interest than other methods should the stock market fluctuate. It also increases policyholder value and allows an index credit to be added to the index account on each anniversary.

The anniversary date is the actual day the annuity was purchased. Once added, the credit is “locked-in” and can never be taken away, even if the index performs negatively in the future. The index credit of your initial premium now becomes the guaranteed index account “floor” which participates in all index crediting moving forward. This new amount will participate in future index growth, giving you the advantage of compounding. Additionally, the index starting point is reset each year on the anniversary of your policy.

This strategy is extremely beneficial when the index experiences a severe downturn or loss during the year. The account will not participate in any losses during the contract year and will still be credited from that point forward.

This an ideal product solution if you are looking for the potential of market index participation returns without any risk of loss. Your indexed annuity contract with the annual reset feature does not have to make up previous losses in order for the annuity to earn additional interest. Each contract year, the index’s ending value becomes next year’s starting value.

Income Rider

A lifetime income benefit rider allows you to take lifetime income from your indexed annuity without losing control of your retirement assets. Income riders are designed to provide safety of investment, predictability, guarantees, lifetime income and financial clarity to people who are worried about running out of money in retirement.

At the time of annuity purchase, insurance companies will offer you the option to add an income rider to the policy. This is possible because the lifetime income is in the form of regular withdrawals from your annuity rather than annuitized payments. Most income riders will guarantee a set amount of growth each year for the life of the contract which is determined by multiplying your income account value by a guaranteed income percentage. The guaranteed income percentage is based upon your age at the time you elect payments.

 

 

 

 

 

 

 

 

 

 

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