When you think about it, you’ll realize that there are essentially three financial stages in any estate: (1) accumulation, (2) preservation, and (3) transfer of assets. We are not interested in encouraging persons of retirement age to continue being subjected to substantial market risks unless they are multi-millionaires. Even then, my own suggestion is to "gamble" with only that percentage of one's portfolio which, if lost completely, would not devastate you emotionally.
Recommendations must be tailored to individual circumstances and no product or plan fits all. That said, the fact is that a handful of specific guidelines and criteria apply. These ought to be taught in high-schools and colleges as part of the required curriculum. Of course, they are not. A cynic might suggest that the reason they are not is to maximize profits for banks and other financial businesses.
Over the years I have gained enough overview to realize that financial planning encompasses a wide variety of legal and financial expertise. It is, therefore, advisable to affiliate with competent fee-paid financial professionals, certain estate-planning attorneys, and highly experienced accountants. When done properly, this sort of service should not cost an arm and a leg.
From what I see, there is considerable competion of financial firms and individuals focusing on high net-worth clients here in Florida. I want to help working persons who have been hit hard and who desperately need basic information, advice, and financial solutions for their families and their future.
It is the responsibility of individuals to provide for retirement incomes and to determine their own retirement lifestyles. The average life expectancy for a male is somewhat more than seventy-six years and a female born in the U.S. today has a life expectancy of more than eighty-one years. Persons who have accumulated retirement assets, or are in the process of doing so, need to make plans that assure, as well as possible, for twenty to thirty years or more of retirement without running out of money.
It is important, particularly for persons retired or approaching retirement age, to understand that earnings of brokerages houses, huge banking firms, and their salepersons depend overwhelmingly on commissions and fees generated from buying and selling stocks, bonds, mutual fund shares, etc.
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When you retire or change jobs, you can do four things with money accumulated in your employer-sponsored tax-qualified retirement plan:
- Leave the money where it is.
- Take out the cash, pay income tax and, perhaps, if you are younger than 59 1/2, pay a 10% federal tax penalty.
- If changing jobs, transfer your funds to another employer plan (if your plan allows)..
- Roll over your retirement funds into a tax-qualified IRA. This will allow your money to grow tax-deferred. You must eventually take income distributions or face huge tax penalties. A good accountant can help you decide if a rollover is right for you. I can help you find vehicles including but not necessarily annuities, for protecting and growing retirement assets.
In the interest of helping you understand annuities, here is a valuable Lesson in Fixed Interest and Indexed Annuities.
Be Careful Regarding Annuities:
Annuity salesmen might not understand this message, especially if they are salivating about getting a 4% - 7% commission on your nest egg. Salesmen who are life-insurance licensed, which is what is needed to sell annuities, aggressively seek to "roll over" the entire accumulated value of retirement plans that have been methodically funded over years during the working lives of their insurance prospects. Typically sales commissions on annuities range between 4% - 7%. Four percent of a $300K nest egg such as a 401K plan amounts to a $12,000 commission! The same percentage of $500K equals a $20,000 commission! You see why salesmen love to pitch annuities?
If a salesman leads you to believe that you ought to use an annuity as the basic savings or investment portion of your retirement portfolio be careful. It may be that he is digging into his bag of retirement financial goodies and bringing out the only thing he has inside it to start with. Even if he is licensed to sell securities (not just variable annuities) along with insurance company products, a huge annuity commission in prospect might be just too tempting.
What is fundamentally important is that any financial product, especially a fixed annuity, be considered in conjunction with a comprehensive financial plan. Such a plan must consider one's needs and goals including the impact of inflation, liquidity considerations, income requirements, and particularly alternative solutions. What financial vehicles, including annuities, are available to provide the best chance of achieving your financial objectives using low risk and low cost methods? Annuities do work well at times and the way to determine if one works appropriately in your situation is to test and forecast results by constructing a financial plan both with and without one or more annuities.
Under what circumstances do fixed annuities fit into a comprehensive retirement plan? They work best when planning for guaranteed income, now or in the future. Here is a somewhat over simplified technique for determining whether or not to consider buying an annuity: First, total up monthly income that is guaranteed from sources such as pensions and Social Security. Add monthly income you can conservatively estimate from low risk, low volatility investments that have strong audited financial data going back prior to 2000. For the sake of this brief discussion, we will call this total "projected income". Next, estimate the income you will need monthly in retirement. If the projected income is greater than your needed monthly income then you probably don't need to buy an annuity, or you might consider a small one to insure a guaranteed income and to sleep better.
In making these calculations remember to consider expected major changes in both guaranteed income and monthly income needs. These should be gone through methodically with the help of your advisor or financial planner. Annuity salesmen generally can't be bothered with all that. If needed monthly income exceeds guaranteed monthly income this "income gap" may be filled by means of an annuity. The amount allocated to the annuity will probably be considerably less than that proposed by an insurance salesman. Just how much money needs to be placed in an annuity for this purpose depends upon your age, or both your ages if married, as well as when the income will be needed, now or in the future.
If a small dollar amount positioned here is a good thing, why isn't more better? Annuities are, in the overwhelming majority of cases, subject to inflation risk whether they contain an "inflation rider" or not. Your retirement portfolio ought to contain investments with adjustable interest rate yields to help offset inflation risk as well as to get you out of harms way during periods of falling markets. Annuities are generally illiquid. They frequently contain substantial penalties for withdrawing cash initially. It is important to have funds readily available in the event of emergency. Do not place money into an annuity unless you will have a substantial amount of liquid assets remaining.
The big pitch used in selling fixed annuities involves stressing two important features of these products, both of which are attractive: safety of principal and the ability to provide an income that cannot be outlived. These advantages must be weighed against illiquidity and inflation risk as well as the less likely default risk. In purchasing any annuity the rating of the issuing company should be viewed as an important consideration.
As with all financial products, advantages must be weighed against disadvantages and appropriate application must be made in terms of individual financial circumstances. More recent economic and societal changes, especially increased volatility of financial markets as well as increased life span, have moved the focus toward annuities by honest and well-meaning persons in the insurance industry who, unfortunately for their clients, often lack alternative solutions. Salesmen earning their living by selling securities and compensated transactionally have traditionally looked askance at annuities except during market troughs when it is harder to sell other financial products. In both cases, the public is disadvantaged.
Recent times dictate an increased desirability for persons, especially those near or in retirement, to go to trained fiduciaries for advice and for the positioning of assets that they must rely upon for the rest of their lives. The goals of the game today are low risk, low volatility, and not going backward, along with a high degree of probability of growth during advancing equities markets. The role of annuities in financial planning, as opposed to that of other financial products, may be more determined by individual factors such as risk tolerance and stress concern than by non-subjective considerations.
An annuity salesman may quote an insurance company's cleverly designed percentage ("roll up") that has been calculated to create a phantom "account" upon which future income payouts are calculated. Such a percentage may differ substantially from an annuity's annual yields before or after exercising an income option. Any life insurance company's actuaries are able to project how much the company can affordably pay out of retained principal based on mortality tables. I see no reason for an insurance company to make an annuity's guaranteed lifetime income payout a function of a phantom "account" that contains a "roll-up percentage" as high as 8% or more, other than for marketing purposes.
Too often this numbers game results in salesmen quoting that "roll-up" percentage as the "asset growth" within an annuity. The sales pitch, passed from an insurance company to a distributing FMO and then pitched to gullible insurance salesmen, frequently results in projecting annuity yields higher than those of other investments. Since it will take quite a few years of income just to return a client's initial deposit(s), most annuity buyers are likely to get a return more in the 1% to 2% range. The best annuities may generate a yield of 3% to 5% to their depositors, if still alive, only after years of retirement income. See Jason Wenk's AnnuityGator.com.
Life insurance companies invest conservatively, overwhelmingly in long-term bonds. Obviously, they can't pay out higher percentages than they earn. Unfortunately, this fact gets lost, too often, by salesmen pitching annuities. As shown by Jason Wenk's mathematical annuity analyses, the accumulation growth of these products over time runs between 1% to 3% net of fees, as expected.
Although money can be lost in variable annuities, money placed in fixed annuities of top-rated carriers is as safe as anything that can be found and is guaranteed never to go backward. In today's volatile markets they make sense when used as the safest and most secure portion of one's retirement portfolio. How much goes there depends upon individual situations and risk tolerances. Understanding this does not, in any way, eliminate the importance of safety and security when positioning growth assets that are earmarked for one's own future and reducing what we consider to be unacceptable levels of market risk.
There is nothing wrong with protecting a portion of one's assets that never go backward, are guaranteed by assets of a huge financially sound insurance company, and experience at least some growth, although they are exposed to loss of purchasing power through inflation.
A fixed annuity can provide you safety of principal combined with a guaranteed lifetime income, subject to an insurance company's financial ability to meet its contractual obligations. A fixed annuity is not an investment. It is an insurance product that hedges longevity risk, the risk that you might outlive your money. That is what fixed annuities are uniquely designed to do and they do it well.
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