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21st Century Retirement Planning Equals Social Security, Pensions, 401ks and Annuities

Ryan Allor

Retirement in the 1960s almost always consisted of your Social Security and your savings. About 90% of people working used this method to fund their retirement years, and most families only had one wage-earner to draw Social Security, so the decision of when to start taking it was an easy one – most of the time, when you stopped working.

To keep their best talent, many companies in the 1970s offered monthly pensions to their employees upon retirement. It was at the company’s expense to cover the cost of pensions 20 to 30 years in the future. At this point, the standard retirement for most people shifted from Social Security and savings, to Social Security, savings, and a company pension. The company pension was a game-changer for a lot of people because if you failed to save for retirement, your company did it for you. Some company pensions allowed you to add your own money to get a larger monthly pension when you retired. In these plans, the company paid the pension for as long as you lived, and in some cases, as long as your spouse lived.

As the cost of funding a company-paid pension increased, many companies moved to 401k plans to replace pensions. In most of these plans, the company matched the amount that you contributed up to a percentage. This was a major cost-saver for these companies, because when times were bad they could reduce the percentage or drop it completely until the company was profitable again. In most of these company 401k plans, the company offered different types of investments for placing your money; a lot of the funds were in the stock market or mutual funds, which meant there was a risk that you could lose some of your future retirement money, and your gains were never locked in each year. During this time period, the method to fund your retirement was Social Security, savings, a 401k plan, and maybe a company pension.

The variable annuity was gaining popularity during this time, but the problem was that the retiree placed his hard-earned money at risk because the gains that were made using this new retirement funding method were based on how the market performed. There were also high fees that came out of your funds and ate into the gains that your annuity made during the year. In 2003 and 2009 when the markets crashed, many people who had their retirement money in variable annuities saw losses of 30 to 40 percent of their total retirement account. Even a number of years after the market recovered, they only broke even with the point they were before the downturn. They lost three to five years of market growth just to return their money to its prior amount – and remember, this has happened twice since 2000. When will it happen again?

Now, what do you need to fund your retirement years in the 21st century, with the end of the company-funded pension? People are living longer, so retirement could last 30 years or more. This could almost equal the length of time that someone worked before his or her retirement started. It’s reported that more companies are not offering pension plans to their employees, and it’s projected that even fewer will offer them in future years.

The new retirement plan for retirees now and in the future could be funded by:

  • Social Security
  • Savings
  • 401k Plans
  • Indexed Annuities

It’s reported that currently about 88% of people rely on Social Security as their steady stream of retirement income, and 55% say that they count on it as a major part of their retirement. President Franklin D. Roosevelt signed Social Security into law on August 14, 1935; taxes were collected for the first time in 1937, and it was a lump sum payment until January 1940, when monthly payments started. The first person to receive a benefit payment was Ernest Ackerman, who received a one-time lump sum payment of 17 cents, while only paying 5 cents in taxes. Monthly payment started on January 1940, and the first person to receive this was Ida May Fuller, who retired at age 65 and paid taxes into Social Security for three years, for a total of $24.75. Her monthly payment in benefits was $22.54. Ida May died at 100 years old and collected her monthly check for 35 years, for a total payment of $22,888.92. Ernest earned a 340% return, and Ida May earned a 92,480% return on her money. With returns like these, it’s not too hard to understand why the system is in trouble today, with increased life expectancy and the decreasing ratio of people getting benefits versus people paying into systems.

Social Security today is not as simple as it was before; more effort is needed to make the right choice to get the maximum payment per month. A person now needs to decide when to start taking their Social Security, since you can start receiving benefits as early as age 62 or as late as age 70 – or any time in between. When a person starts receiving benefits at 62, it comes at the cost of a loss of 25% of your monthly benefit at full retirement age. For example, if your full retirement benefit was $1,000 per month, then it would be reduced to $750 dollars per month at age 62. The full retirement age today is 66, and it will soon increase to 67 in the future. Should someone wait until they reach full retirement at age 70, they will receive an increase in their monthly payment of 32% (or 8% per year), which would equal $1,320 dollars per month in this example.

To really benefit from waiting until age 70 to start taking Social Security, you must live past your average life expectancy age. The probability that someone who is 65 today will live to age 85 is about 55% for women and 48% for men. For a couple, however, the probability that one person will live to 85 years old is about 73%. For a lot of married couples today, both spouses have worked, so they can each get Social Security on their own work history. One way to increase a couple’s total Social Security benefit is to apply for a spouse’s benefit. There are many different ways to do this, and every couple has different options, so it’s best to discuss this with your Social Security office to get the maximum benefit for you.

For example, one spouse may want to retire, while the other still wants to continue working. One spouse would retire, and the other could apply for spousal payment while continuing to work, which would equal 50% of the retired spouse’s benefit if both were at full retirement age. The person getting the spousal benefit could then keep working and earn an extra 8% per year on their benefit. When this person decides to retire, he would then stop the spousal payment and start his own benefit, which could be a 32% increase to the Social Security benefit if he started at age 70. Remember that spousal benefits do not increase after the full retirement age and will stay at 50% of the spouse’s individual benefit. Also, if the spouse claims early at age 62 it comes at the cost of a loss of 30% of the monthly benefit from full retirement. It should be noted that in President Obama’s fiscal-year 2015 budget, these loopholes may be closing to eliminate claiming strategies that manipulate the timing of benefits to maximize delayed retirement credits.

One way to replace the company pension is to purchase a new type of annuity, called the Fixed Indexed Annuity (FIA). The Fixed Indexed Annuity is an insurance product designed to protect your life savings. It’s a tax-deferred, long-term financial tool used for growth and safety. This product can provide an income stream for life that you cannot outlive, just like a pension. With an FIA, you are able to enjoy the good years of the market, but will never see a loss if it takes a negative turn. If your annuity has gains at the end of the year, they are locked in and cannot be at risk in future years, called the reset provision. This is unlike other investments where your interest is always at risk unless you take out your gains and pay taxes.

If you have a basic FIA with no riders, then there are no annual fees to the owner, unlike the 1-2% paid annually for mutual funds. All commissions paid to the agents are paid by the insurance company and are not taken out of your portfolio, so it doesn’t reduce your total return. Most Fixed Indexed Annuities pay the client a 4-10% bonus when they purchase the annuity, depending on the product and the age of the client. After owning the annuity for 12 months you are allowed to have a 10% penalty-free withdrawal without any charges, and the penalty-free withdrawal is allowed again every 12 months afterward. If you have medical emergencies or need the services of a nursing home, these costs could potentially be penalty-free withdrawals as well, but this can vary from state to state, so check with your agent. However, if you turn your annuity in early, you will pay a surrender charge depending on the length and terms of your contract.

There could be other fees, but these are optional policy riders, such as income, healthcare, and death benefit; these are not required when you buy an FIA, but could be selected if in your best financial interest.

Remember that this is not a tax-free investment, but rather a tax-deferred product. The owner is responsible for any taxes that might be due from withdrawal of funds or surrender of the whole policy. And if you are younger than 59 ½ years old, there could be a 10% IRS penalty, so always consult with your tax professional.

What a Fixed Indexed Annuity is not:

  • It is not a get-rich-quick scheme.
  • It is not a place for short-term money.
  • It is not a high-fee financial product.

The only way to build real wealth is by slow, steady and wise investments of your funds. There are no get-rich-quick investments without a high risk of losing your hard-earned money. An annuity is not for the person who needs or wants to have access to his or her funds a few years after they purchase the product, as it will cost you some of your retirement fund if you turn it in early. Finally, the Fixed Indexed Annuity is not a high-fee product; commission is paid only once to the selling agent over the life of the product, and it’s paid by the insurance company and not from your funds.

Do you know what the definition of insanity is? It’s when you do the same thing over and over again expecting different results. There is no time like the present to start investigating alternative methods of insuring your financial security for your retirement funds. You don’t need to have your retirement funds at risk in the market or continue to pay high fees every year to manage your funds. More massive downturns in the market are possible, and it could cost you your retirement plan in the future. I’m sure that a lot of people wish they made different decisions with their retirement funds before the downturns in 2003 and 2009. If you want to have a return that can’t go negative in a bad market, enjoy the highs, and never lose your gains, or if you want to have an income stream for life that you can never outlive, then you need to investigate what an FIA could do for your retirement plan.

About the Author:

Ryan Allor is the president and founder of Michigan Asset Preservation, LLC. Ryan has been in the financial services industry for seven years, helping families understand their retirement and achieve their financial goals through protecting their assets from market risk and probate avoidance. He has comprehensive knowledge of wealth enhancement, retirement income, long-term care, life insurance, and estate planning. The majority of his time is spent with new and established clients, helping them become educated on safer alternatives to the stock market and wealth transfer techniques to leave a legacy to their heirs tax-free.

Ryan resides in Novi, Michigan with his wife, Nicole, and together they have four children. Ryan received his bachelor’s degree from Madonna University in Livonia, Michigan, and holds a fifth-degree black belt with the World Taekwondo Federation, Seoul, South Korea. Visit online at


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