Written By: Barry Goldwater | Goldwater Financial Group
It use to be that you got a job with a U.S. company, worked for that company most of your life and then retired with a company pension and social security. This double annuity income was usually enough for a comfortable retirement.
Then in the 1970’s companies started shifting retirement planning responsibility to the employee in the form of 401k plans, IRA’s, profit sharing plans. The company defined benefit plans, conservative annuity payouts which were usually comprised of 80% of an employee’s salary were being phased out in favor of employee invested retirement programs, designed to grow their future retirement income by investing in the stock market.
Retirement shifted from conservative no risk annuity payments to risk based asset growth combined with the promise of social security annuity payouts.
In the current political environment of debt burdens and reducing deficits, politicians are starting to sound the death knell for social security. They are preparing us for the eventuality of it going away. How will retirement planning adjust to this next reality which removes the only guaranteed income stream for a significant number of retirees?
For 50 year old employees and older, this question is essential. If older employees stay fully invested with their retirement assets in a 100% risk based portfolio, then they may experience severe loss of wealth if the stock market goes down dramatically in the year they want to retire.
Creating the Future Income IRA program addressed this concern head on. It is a non stock market growth building account that is funded from existing 401k plans and costs employees and employers nothing out of pocket.
The Future Income IRA program will provide participants with a guaranteed lifetime income stream when participants retire and this account will completely protect the integrity and growth of the asset from the volatility of the stock market and is a dedicated income producing strategy.
Here is how it works:
An employee takes an in-service distribution from his/her existing 401k account. This distribution in moved to an individual IRA and a Fixed Indexed Annuity account is established inside of the IRA. By design, this transfer immediately diversifies retirement assets from the 401k, positioning these assets in two different ways; one as a guaranteed lifetime income account ( F.I. IRA) and the other in the existing equity positions of the stock market (Current 401k). New contributions go into the 401k account, deductions and contribution numbers stay exactly the same.
The Future Income IRA program is broken into two parts, a contract account and an income account value. Growth on the contract account can be tied to a major market index, like the S&P 500. If the index is positive at years end, then this accumulation account grows as high as the cap rate allows, currently between 4.25% and 4.75%. The accumulation in the contract value will not decline, even in bear markets. The fees associated within this account are back end loaded, meaning that the fee assessed is triggered when excess money is withdrawn from the annuity in any year.
Alternatively, growth on the guaranteed income account rider is fixed and contractually guaranteed, and is currently between 5% and 8%. There is a fee associated with this account usually between 50 and 90 basis points. These two methods of measuring the account’s value will run side by side in the accumulating phase and neither the contract value nor the guaranteed income account value in the Future Income IRA program can ever lose money due to market volatility.
Lastly, The Future Income IRA program is beneficiary designated, which means the remaining contract value goes to the heirs that the participant chooses. Because it is beneficiary designated, there is no probate at death.
By having an annuity that is not affected by the stock market and which guarantees an income stream you cannot outlive, even in down market years, it becomes the hedge against retirement savings loss and loss is the number one concern for employee participants as they age within their retirement plans. Without the addition of a Future Income IRA alternative that protects and builds wealth under any market conditions, older employees will again potentially suffer the risks of 2001- 2002 and 2007-2008. For the first time, 401k participants can now have an alternative choice to protect, preserve and grow their income with complete safety and as the saying goes; First time shame on them, second time, shame on you!!
About the Author: Barry Goldwater is an advanced planning insurance professional from Newton, MA. He can be reached at (617) 527-9736 or Barry@frg-creative.com.
The Future Income IRA is a fixed indexed annuity that may or may not include an upfront bonus on the initial premium deposited by the participant. It can feature, for a potential charge, a lifetime benefit income rider that can appreciate between 5% and 8% depending on what the participant chooses. The distribution income percentage is based on a participant’s age. These annuity contacts vary from state to state as do the surrender charges associated with these products. Annuity products should be discussed only with licensed professionals. Insurance professionals who are not securities licensed cannot speak about equity positions in a portfolio or give investment advice. Only professionals licensed appropriately can give investment advice.