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You know that offering guaranteed income solutions can help complement a portfolio and instill confidence in your retirement plans. But some people, like those who plan to draw income based on returns from mutual funds and other assets in their portfolios, may not see the value guaranteed solutions offer. Unfortunately, there’s no way to predict how those investments will play out over time, especially in the face of life’s uncertainties. When evaluating investment options, consider guaranteed options such as Protective® Guaranteed Income Indexed Annuity. This product offers three guarantees to help people strengthen their retirement portfolios with predictable income they can count on. Below is a Protective flyer for its agents to use, if you are interested in this product, you can contact us here. In last blogpost, we discussed the difference for a spouse to be an annuity's joint owner or beneficiary. Now we will analyze the issue, also show you why a parent-child joint ownership of annuity also hurts you -
Joint Ownership Issues As stated before, required minimum distributions must begin at the death of any owner which means that when the first joint owner dies, the annuity must begin making distributions. The only exception is if the surviving spouse was named beneficiary, they could continue the annuity without current distributions. There is no real benefit to joint ownership as it does not extend the life of the annuity and it can be a detriment to continuing the annuity when the first owner dies. Many individuals believe that since they own their other property jointly, they should also own their annuity jointly. The better way to go would be to have each spouse name their spouse the beneficiary rather than making both spouses co-owners. Naming the spouse as beneficiary would allow a better tax outcome. Parent-Child Joint Ownership If a parent purchases a joint annuity with their child, the parent and child will own equal shares. A withdrawal requires two signatures and distributions are made out to both parent and child. If the parent paid the premium, they have just made a gift to their child of half the value of the annuity. If the parent wants to make a withdrawal, one half the distribution will be taxable to the child regardless of who receives the money. If the child is under age 59 ½ then the entire amount distributed is subject to a 10% penalty. If the parent owns the annuity jointly with a child or grandchild, making the child the co-owner makes no real difference in postponing distributions. If the child dies before the parent, the parent would be forced to begin liquidating the annuity even if they had supplied the money. The Bottom Line In most cases, using joint ownership only hurts the ability to sustain tax-deferred growth. Most owners think joint ownership will allow the annuity to continue until the second death and that they will obtain additional tax-deferred growth. In actuality, it is just the opposite. When the first owner dies it can trigger the required minimum distributions. Q. What is the joint ownership issue with an annuity?
A. Annuities provide excellent investment vehicles and tax-deferred growth. If you take two investment accounts with the same assets and one is taxable and one is tax-deferred, the tax-deferred account will always do better because it is not paying taxes until the money is distributed from the vehicle. Annuities are treated similarly to IRAs and qualified plans. The additional advantage of a non-qualified deferred annuity is that unlike a qualified plan or an IRA, no required minimum distributions need to be made during the life of the owner. Once the owner dies, the annuity must begin making post-death distributions to the beneficiary. Under IRC Section 72(s), upon the death of any owner, the annuity must begin to make post-death distributions to the beneficiary. The Tax Reform Act of 1986 changed the joint ownership of annuity taxation rules to prevent using joint ownership to avoid taxation of the annuity over two lives. This makes annuities distributable whenever one of the owners dies. However, if the other spouse is named as beneficiary, the taxation would then be postponed. When a surviving spouse is named the beneficiary of the non-qualified annuity, they may continue the annuity in their name. This is very similar to a spousal IRA rollover allowing the surviving spouse to continue to receive tax-deferred growth. If one spouse is the owner but names their spouse as the beneficiary, then the spouse who is named beneficiary can continue the annuity and continue to receive tax-deferred growth in the annuity. In next blogpost, we will analyze why a joint parent-child ownership also hurts you.. MYTH 1: Consumers hate annuities
Truth: Although some people may not fully know the benefits of annuities, or hold outdated, incorrect opinions, a growing number are becoming educated and are choosing to add fixed indexed annuities (FIAs) to their retirement plans. In fact, recent annuity sales are shattering previous records. According to the LIMRA Secure Retirement Institute, FIA sales were $20 billion in the second quarter of 2019, 14 percent higher than prior year results. Indexed annuity sales are expected to grow by double digits to about $96 billion by the end of 2023, a 38 percent gain over 2018. Those who understand the benefits FIAs can provide — income protection and stability with little or no maintenance — are not surprised. MYTH 2: Annuities are not an accumulation vehicle Truth: With the innovation of uncapped crediting strategies, this is no longer true. Consumers can take advantage of a positive index performance without worrying about another 2008. An indexed annuity with a decent participation rate will help significantly reduce clients’ risk, but also give holders the growth they need. In fact, according to a study on traditional asset allocation conducted by Roger Ibbotson and Zebra Capital Management, FIAs help control financial market risk, mitigate longevity risk, and will likely outperform bonds over time. MYTH 3: Annuities are unnecessary with proper asset allocation Truth: The Ibbotson and Zebra Capital Management study also showed that “a major advantage of an FIA is the ability of the insurance provider to ‘transform’ equity returns into a more ‘tailored’ return/risk profile (eliminating downside risk and providing an opportunity for interest earnings based upon a portion of equity returns). This downside protection is very powerful and attractive to many individuals planning for retirement. Additionally, with today’s low interest rate environment coupled with experts’ modest expectations for bond returns in the near-term, FIAs should be considered. If you are concerned about low interest rate and long life expectancy, index annuity could be a solution, see 7 reasons cited by AIG for its Power Index 7 product below -  Please contact us if you are interested in annuity products.
As you approach retirement, you want to protect your savings from market losses. A Lincoln fixed indexed annuity offers the potential for growth beyond that of a traditional fixed annuity, since the indexed accounts have earnings tied to the performance of an outside index. When the index increases over the indexed term, the account will be credited with earnings determined by that account’s crediting method. But what happens if the index performs poorly and has a negative return? The “power of zero” gives the client protection – the indexed account will never decrease due to negative performance…the lowest return is 0%. In our last blogpost, we discussed factors to consider when purchasing QLAC. Now the question - which carriers have the best QLAC products? We recommend products from AIG, Lincoln, and Principal. Below is up-to-date information about AIG's QLAC product, including producer and consumer guides, sales ideas, fact sheets, and more. If you are interested in the other carriers' QLAC products, please contact us. In our previous blogposts, we discussed what is QLAC and showed an example of QLAC. Now we will discuss what factors to consider before purchasing QLAC.
The decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it. Specifically, the following QLAC related decisions should be considers. Single or joint life? If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first. Include a cash refund death benefit? When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs. When to start income? A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:
Need to change the income start date? For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age. In our next blogpost, we will show you some of the best QLAC providers. In our last blogpost, we discussed what is QLAC, now we will show how to use QLAC to create steady later in life income streams.
Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs. An Example Let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85. During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer. In our next blogpost, we will discuss what factors to consider if you should purchase QLAC or not. Q. What is QLAC?
A. A QLAC is a Deferred Income Annuity (DIA) that can be funded only with assets from a traditional IRA or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b). The US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 72. At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations. QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings. Why Purchase QLAC? There are two main reasons. First, you can delay required minimum distributions (RMDs) on the money in your QLAC. Without a QLAC, you would be forced to start taking distributions based on the total value of that retirement account at age 72 (formerly 70 ½) - and paying income tax on those distributions. Many people don’t need distributions at that age, and don’t want to pay tax on that money yet. With a QLAC, you won’t have any RMDs on premiums paid until age 85. Second, longevity. If you are worried about outliving your funds, a QLAC solves the problem. It provides guaranteed monthly income as long as you live. Plus, you get the amount you were promised at purchase, no matter what’s happened to the stock market or interest rate in the interim. You're effectively transferring that risk to the insurer. In our next blogpost, we will show you a few QLAC examples about how it works. Q. Will the Secure Act bill mean I could find annuities in my 401(k) plan?
A. Based on an article at Barron's, one provision of the bill eases the path for employers to offer annuities as part of their retirement plans by providing safe-harbor language that takes them off the hook if an insurer whose products they use runs into financial trouble. (The employers continue to have fiduciary duty in picking appropriate products, or annuities in this case.) Academics have long discussed the merits of having some sort of guaranteed income option inside plans to help retirees when they start drawing on their nest egg. The concern is that the bill leaves the door open to all sorts of annuities, not just the low-cost, simple ones academics favor. Policy watchers would have liked some framework for what annuities are allowed in a plan. As for when retirement savers will find such options in their plans, State Street's Kahn recommends thinking along the lines of evolution, rather than revolution. Employers have been looking at all sorts of guaranteed lifetime-income options and financial-services companies have been working on solutions for years, including target-date funds that incorporate some sort of guaranteed income option, Kahn says. If nothing else, the bill will likely bring attention to the need for providing some sort of guaranteed income stream for retirees beyond Social Security. The product highlights below show how Protective Guaranteed Income Indexed Annuity provides three times the guarantees with: Guaranteed Income for Life Fueled by a 4% roll-up to the benefit base (which can double in 15 years) thanks to opportunities for bonuses along the way. Guaranteed Rate Cap for Term A guaranteed rate cap that won't change for the term so you will never be surprised by a lower renewal rate during the withdrawal charge period. Guaranteed Flexibility Two unique income options chosen at benefit election, with access to competitive withdrawal rates at key ages both now or later. If you are interested in knowing how much your $250,000 could lead to lifetime payment, below is a table from American National showing you an hypothetical example -  Q. Why every retiree should consider a Single Premium Immediate Annuity product in his or her retirement portfolio?
A. SPIA should be considered by every retiree for two reasons: 1. Eliminate Longevity Risk A SPIA is an excellent way to reduce the fear of running out of money. It can allow an individual to spend the growth in their portfolio on travel, new cars, hobbies and other activities of daily living that occur in retirement. Retirement has become a new Life Stage and people want to enjoy retirement but it takes income to do so and a SPIA provides that income and they will receive it as long as they are alive. 2. Avoid Unnecessary Losses in a Down Market By covering fixed and necessary living expenses with a SPIA, an individual has reduced the risk of loss in retirement portfolio. They no longer need to sell off assets in a downmarket in order to fund everyday living expenses. Their social security and Immediate annuity income cover all those necessary expenses. The Power Series of Index Annuities® with the Lifetime Income Plus FlexS guaranteed living benefit (GLB) rider provide with the flexibility to take Required Minimum Distributions (RMDs) without eliminating rollups or locking in withdrawal rate for life. See a hypothetical example below - income is guaranteed to grow for the first 10 contract years, even after RMDs begin. Plus, you can wait until you’re in a higher withdrawal age band to activate your rider and lock in more income for life. Grandparents can pass retirement income to grandkids. The document below shows how to make it happen. The document below is a good description of QLAC and how to grow protected lifetime income while you defer RMDs. Q. Why people usually advise wait until 70 to take social security benefits?
A. It's because you will be buying the best annuity in the world! Here is an example with numbers to illustrate: Consider someone who is age 66 right now, if she delays taking social security until she is age 70, she will have to pull about $36,000 annually from her savings over the 4 years in order to replace the benefits that she would have gotten if she claimed. In return, however, when she does claim at age 70, she will get a monthly benefit that is $1,040 higher than it would be had she claimed at age 66. To buy that $1,040 monthly payment with inflation protection as an annuity in the private market, it will cost her $252,000! So in return for using $150,000 for 4 years, she would get a government annuity that is worth $252,000, that is a discount of 40%! First, What Is DIA? Is your mindset turning toward how to safeguard your retirement standard of living for many years ahead? A deferred income annuity (DIA) provides protected lifetime income in the future. While the income stream can be started as soon as 13 months after purchase, it also can be delayed for a long time (40 years in some cases). Bottom line: The longer the deferral period, the larger the income payout amount. Next, What is QLAC? A qualified longevity annuity contract (QLAC) is a special type of DIA and it brings added advantages. It allows traditional IRA owners and defined contribution plan participants to ignore the QLAC funds in those accounts when calculating their RMDs. As long as the QLAC distributions are delayed, the associated Required Minimum Distributions (RMDs) and taxes are too. 2 Reasons why a QLAC stands out for modern retirements include:
Overview Flexible premium. May include a first year interest rate enhancement. 10% surrender charge free withdrawals each contract year. 7 year surrender period. PRINCIPAL GUARANTEE FEATURE The Minimum Guaranteed Surrender Value is return of premiums paid less any cumulative withdrawals. INTEREST RATE ENHANCEMENT American National may offer an interest rate enhancement on all premium payments received in the first 36 months of the contract for one year. This enhancement is not guaranteed and is subject to change. INTEREST RATE GUARANTEE The declared annual effective interest rate for the initial premium and each subsequent premium payment will be guaranteed for two years from the date the premium payment is received. After two years, the interest rate is declared annually. MINIMUM GUARANTEED INTEREST RATE: NAIC Index. See rate sheet for current rate. RATE LOCK: 60 days for 1035 Exchanges, CD Rollovers, Mutual Fund Transfers and Institutional Transfers SURRENDER CHARGE SCHEDULE: Year 1 2 3 4 5 6 7 8+ % 7 7 7 6 5 4 2 0 SURRENDER CHARGE FREE WITHDRAWALS 10% of annuity value as of the beginning of each contract year, including first year SURRENDER CHARGE WAIVERS*
In last blogpost, we discussed how does DIA work, now we will discuss how to determine if DIA is right for you.
Does DIA Make Sense For You? These DIA products tend to be most beneficial for pre-retirees between the ages of 55 and 65 who are planning to retire in 5 to 10 years. In addition to reducing market and longevity risk—an advantage of all fixed annuities—DIAs have the following advantages over immediate annuities:
If you are interested in DIA or other annuity products, please contact us. In last blogpost, we showed you a case study how DIA could be combined with 401k to create secure retirement income. Now we will explain how DIA works.
How Does DIA Work? Income annuities are different from other investment options because they offer longevity risk pooling (referred to as mortality credits). Effectively, assets from annuitants with shorter life spans remain in “the mortality pool” to support the payouts collected by those annuitants with longer life spans. Put simply, the longer you live, the more money you will receive. This is why it is so challenging for an individual investor to replicate this income stream. DIAs are able to leverage the mortality credits and turn a portion of your savings into a stream of income beginning anywhere between 2 and 40 years that will last over your lifetime. By investing in a DIA you are starting the planning process ahead of your retirement age. In return for investing early, you are potentially securing a higher income amount than if you waited and invested in an immediate income annuity. Why Guarantee Your Income? Guaranteed income products serve a very particular purpose. They can shift some key retirement risks--longevity and market risk—off your shoulders and onto the issuing insurance company. When you buy a DIA, you shift the risk of outliving your income to the insurer, who promises to pay you a certain amount of income for either a predetermined period of time or the rest of your life. The insurer also assumes the interest and market risk associated with your DIA investment; even if the market and interest rates are down significantly during your deferral period, you still get the same guaranteed rate of income. However, DIAs, like any investment product, aren't right for everyone. There is an element of trading growth potential for a guaranteed future lifetime income stream. Part of that trade-off is giving up some flexibility (access), which is why it’s better to allocate a portion, rather than all, of your savings to a DIA. The amount you commit to a DIA is irrevocable, but the tradeoff is being confident that your income will be there when you need it. In our next blogpost, we will discuss how to determine if DIA is right for you. In last blogpost, we showed you what is DIA and its advantages. Now we will use a case study to show its value. Consider a hypothetical example of how a DIA might work under different market conditions. Imagine a 60-year-old couple with a hypothetical retirement portfolio of $500,000 who wants to generate income starting at age 65. The example below illustrates 2 different ways of creating income: Option 1 The couple decides to invest their $500,000 in a balanced target asset mix (TAM) (50% stock/40% bonds/10% short term), then starts taking income at age 65. The plan is to use only a Systematic Withdrawal Plan (SWP) with an initial 4% annual withdrawal rate and payments increasing 2.5% on each payment anniversary thereafter. Option 2 The couple decides to diversify and splits the $500,000 as follows: (1) $250,000 is invested in a balanced TAM for 5 years; then, at age 65, income is taken using a SWP with an initial 4% annual withdrawal rate and payments increasing 2.5% on each payment anniversary thereafter; and (2) $250,000 is used to invest in a joint life deferred income annuity contract with a cash refund and Consumer Price Index (CPI) cost-of-living adjustment (COLA), with payments starting at age 65.  As you can see, assuming average historical returns for the balanced TAM, the portfolio with the guaranteed income generated first-year monthly income that is $248 less than that generated from the portfolio without the guaranteed income. Because deferred income annuities are not exposed to market volatility, the income amount remains consistent regardless of a market downturn. Therefore, when historically low returns are assumed in the example, the portfolio with the guaranteed income outperformed the portfolio without the guaranteed income—generating first-year monthly income that is $361 higher.
One of the strongest reasons to buy a DIA is the foundation it provides for your retirement income plan. You establish a guaranteed level of income no matter what happens over the next several years, and are one step removed from the anxiety of watching the markets move every day with your retirement in sight. Another consideration with deferred income annuities is the ability to invest incrementally over time by making additional payments. While most income annuities only allow a single investment, DIAs allow you to make additional investments to the annuity before your income payments—each additional investment subject to the interest rates available at the time of purchase—so you can increase your retirement income stream. By building your income plan in increments, you can stagger your investments with a range of interest rates and possibly take advantage of higher interest rates. In next blogpost, we will discuss how does DIA work. With pensions increasingly a thing of the past, most Americans now need to build their own streams of income for a retirement that could last decades. The success of your individual retirement income plan will rely on 2 key factors:
The Solution - Deferred Income Annuity (DIA) That's where guaranteed income annuities may be able to help. These products are able to deliver a stream of income that you can rely on for either a predetermined period of time, or for the rest of your life. And, specifically, deferred income annuities (DIAs) let you lock in a stream of guaranteed income years before retirement, while reducing the effect of market volatility on your retirement income plan. The Advantages of a DIA The advantage of a DIA is that it offers a degree of certainty. You can secure a portion of your retirement income years before entering retirement so you don't have to wait until the moment you retire to know what your investment will deliver in income. You can gain peace of mind and some flexibility with your other assets. For some, using a portion of retirement assets to lock in guaranteed income for the first several years of retirement is an attractive option; knowing the income is secure, some investors may have the confidence to invest part of their retirement assets more aggressively during those early years. While DIAs are an efficient way to generate income, keep in mind that you are giving up access to the assets you dedicate to this solution and the opportunity for potential market performance. In next blogpost, we will show you a case study how DIA combined with your 401k investment could provide secure retirement income. |
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IMPORTANT DISCLOSURES PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. |