Written By: Jeffrey Kiesel in Chester Springs, PA
As Baby Boomers look ahead to a retirement with life expectancies which could be the longest part of their lives, they need to have an adequate, dependable and long lasting stream of income. This means their nest eggs should provide the funds to allow them to enjoy their retirement years and to not outlive the source of their income.
For this reason retirement planning is extremely important. Besides being a complicated and somewhat threatening process, it is a highly charged emotional period of life. It involves the realization that our list of assets that we have accumulated is the final source of funds that we will have available to cover our expenses during our retirement years. This planning and analysis might be a sort of report card on our lifetime of work. It will show how we have used our earnings for the lifetime of expenses, savings and investments during the accumulation stage of our life. For many of us, this is an overwhelming process and for most of us, we need the guidance and assistance of knowledgeable and trustworthy financial advisors.
The problem is that a lot of advisors don’t understand or appreciate the basic need of people in or near retirement, to have a safe, protected and dependable nest egg or retirement bucket. Many advisors keep doing what has earned them their compensations over the years, and may have helped build up their clients’ portfolios during their accumulation stage of life. The danger is that this thinking or strategy may be catastrophic to their clients’ accounts, whenever there is a collapse or even just a major correction in the markets. A 20% loss in your account at sixty has a lot more impact than a 20% loss at forty.
Besides the normal stock market and interest volatility, we also have to plan for the expected rise in health care costs, inflation and taxes to pay down the national debt. So retirement planning should include a major shift in our thinking and also our advisors’ plans about what to do with our nest egg. We need to look at and use some alternative classes of assets. These instruments or vehicles will help us get to our retirement destinations without losing any more of our funds and will help us not run out before we run out of life. One of the best retirement tools is a fixed or fixed index annuity, and these are the best 10 reasons to own annuities in a portion of your retirement portfolio.
1. Safety Features – the two biggest financial fears for most retirees are losing money and running out of money. I think that avoiding loses, especially large ones, is 90% of a financial professional’s job. Loses in the pre-retirement and early retirement years will devastate a retirement income stream and may be irreparable. Unplanned income withdraws and fund loses will increase the probability of running out of income.
Annuities provide alternative vehicles which have contractual guarantees that can insulate the owner from outliving their income, even if they deplete their “bucket”.
2. Account Growth Potential – nest egg predators like taxes, inflation, health care costs, long term care, unexpected losses and expenses, will reduce the available funds. Most annuities will offer a variety of investment options with the potential to help keep pace with income needs over the long term.
3. Potential Account Growth – Retirees need to have their assets grow more than their withdraw and loss rate. Every year taxes, inflation, management fees and charges, market volatility, low interest rates and their account withdraws, will deplete their nest egg. Years ago when interest rates were higher, even bank CDs were a viable tool for retirement accounts. Since many retirees have little to zero risk tolerance, annuities can provide more protection for a large portion of a retirement portfolio, and give more peace of mind to the market investment portion of their accounts.
The growth potential in an index annuity is in the double digits with a historical growth record around 6% per year. The features, benefits, riders and guarantees of an annuity can be instrumental in increasing the willingness of people to invest larger portions of their retirement funds into annuities.
4. Tax Advantages – Most retirement accounts are subject to taxes like income taxes, capital gains taxes, state taxes, capital gains taxes, dividends and interest, estate taxes and more.
With regards to taxes, annuities have two unique advantages. One is that Non-qualified money will grow tax-deferred and be added to the compounding growth effect of the account. The second is that the non-qualified money will provide tax advantaged income during the distribution stage of retirement. This feature of annuities will provide options that may be used to minimize many forms of taxation for non-qualified money.
5. Lifetime Income – Life expectancies today are greater than ever because of our available healthy food, the unending advancements in modern medicine and the booming technology in medical procedures and applications. When Social Security was first enacted in 1933, the average life expectancy for a male was about 59 years old…and yet Social Security didn’t start paying benefits until age 62!
Since males today have an average life expectancy of approximately 85 years old and it’s predicted that by the year 2030, more than two-thirds of the U.S. population will be above the age of 60. The boomer generation will need a much longer period of income distribution. This is where the guaranteed retirement income plans using Annuities, are proving to be so vital in providing peace of mind with lifetime streams of income.
6. Owner Control – Along with good growth, one of the most essential functions of a successful retirement plan is that it never runs out of money. Annuities are able to provide a guaranteed income for life and they are able to do that and still have the owner maintain control of the instrument. The owner has control over the accumulation phase as well as the distribution phase of the annuity. They can still choose how and where to invest their funds in their annuity and make changes as desired each year as the rates are adjusted annually.
7. Access to Funds – Another factor for a senior is to maintain access to the funds in their accounts. Proper retirement planning includes having an emergency fund available for those unexpected events which may cause severe changes to a plan. Because of this possibility, most retirees do not want their account monies locked up. They want to have easy access and quick liquidity available for them. Annuities offer this with the functions of the account. However, there will be a surrender fee charged if you withdraw too much from the account in early years. That’s why an emergency fund is vital to a retirement plan as well as the income stream that an annuity will provide. Using a well planned retirement design will easily help to avoid any surrender fees which will also maintain the needed income stream for life.
8. Reduction and Simplification – Many retirees like to “downsize” their home and consolidate all of their personal belongings, as well as their investment accounts. Annual statements and account reviews reduce and simplify planning and tracking. The result will be far less stress and worries, reduced number of financial statements and maybe even more success at growing your retirement nest egg. This is possible because of no losses with the annuities and you can get a reasonable amount of growth in the account. This is accomplished with a fixed rate of return, an index rate, and if you use an Income Rider, it will help you build your own personal pension like retirement account to pay throughout your lifetime.
9. Advisor and Staff Support – Many retirees look forward to a long and wonderful, vacation like life style. This could include things like sports, shopping, traveling, donating time and money, dining out more often, spending more time with friends and families, and working with hobbies. The one thing that most retirees don’t want to be worrying about is their nest egg funds, the Market’s performance or their broker. With annuities, they are primarily purchased with the help of licensed professionals. The annuities may only need an annual review to look at the performance of the account, and with the guarantees, there will never be a loss to account value, outside of the withdraws. These professionals will be a valuable resource for their investment opinions and recommendations. They may help the retiree monitor their retirement plan and make minor changes annually at the owners request and consent. This provides a much less stressful retirement and allows for more peaceful sleeping.
10. Legacy Design – One desire of many retirees is to be able to pass on a legacy to their spouse, heirs or charities. Annuities offer the ability to pass on the balance of their accounts in a very efficient way. The accounts have the guarantee of principal feature, as well as the accumulated interest each year. With the death of the account owner, all of the balance of funds in the account will be passed on to the beneficiaries, which is done very quickly by the insurance Carrier without any fees or charges. Generational Wealth Transfer can be accomplished with tax efficiency and tax advantages.
About the Author: Jeffrey Kiesel operates his own retirement income and planning business with a specialty in Social Security benefit maximization. To learn more, click on the following link (Jeffrey Kiesel).
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