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Annuities

Annuities range from being simple to incredibly complex and as an investor it is your responsibility to learn what you may be buying.  The simplest form of an annuity is when you give an insurance company a lump sum and then they provide you with an income stream for a period certain (or life), this is known as a Single Premium Immediate Annuity.  The more complex products are deferred annuities and usually are variable or indexed based.

Annuities

Why Hasn’t an Investment Firm or Insurance Company Created this Product?

by Evan October 21, 2014

After reading the twelfth article about how there is yet another generation woefully unprepared for retirement and how the 401(k) is a terrible product I started to think about what an investment firm or more likely in this case an insurance company can do to engage in my generation and the answer is so simple. Create and market a defined benefit pension.

Private Pensions Are All But Gone

It is no secret that private pension participants are decreasing.  One Social Security Study found that,

The percentage of workers covered by a traditional defined benefit (DB) pension plan that pays a lifetime annuity, often based on years of service and final salary, has been steadily declining over the past 25 years. From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent (Bureau of Labor Statistics 2008; Department of Labor 2002). In contrast, the percentage of workers covered by a defined contribution (DC) pension plan—that is, an investment account established and often subsidized by employers, but owned and controlled by employees—has been increasing over time. From 1980 through 2008, the proportion of private wage and salary workers participating in only DC pension plans increased from 8 percent to 31 percent (Bureau of Labor Statistics 2008; Department of Labor 2002). More recently, many employers have frozen theirDB plans (Government Accountability Office 2008; Munnell and others 2006). Some experts expect that most private-sector plans will be frozen in the next few years and eventually terminated (Aglira 2006; Gebhardtsbauer 2006; McKinsey & Company 2007). Under the typical DB plan freeze, current participants will receive retirement benefits based on their accruals up to the date of the freeze, but will not accumulate any additional benefits; new employees will not be covered. Instead, employers will either establish new DC plans or increase contributions to existing DC plans.

While the Department of Labor provides us with these two graphs regarding pension plans from 1975 to 2012:

Number of Active Pension Plan Participants Number of Pension Plans

 

The purpose of this post is not to argue whether the move from a defined benefit to a defined contribution is better or worse for our society.  In fact, while I dislike my 401(k) I don’t believe it is the vehicle’s fault, rather, it is participant’s fault who can’t seem to steadily invest in their own retirement.  If I had to make one complaint about the system it would be to open it up.  Why are there 14 different types of retirement accounts (SEP IRA, SIMPLE, IRA, 401(k), 457, 403(b), etc.).  I understand that they each have their place and nuisances, it feels like 1500 pages of the IRC could be wiped out and replaced.

A Financial Product Almost Every Generation Y and Millennial Would Buy

I am 33 so I think I am in At this point most major insurance companies (investment companies haven’t caught up yet it seems) sell some type of Deferred Income Annuity or a Longevity Annuity.  Unlike deferred variable annuities these products are pretty transparent.  You give $X to an insurance company and they’ll give you back $Y over Z Years.  For example, if a 50 year old gave a pretty major insurance company that I can run illustrations for $100,000 he would be able to receive $963/mo for the rest of his life starting at age 65…and if you die before getting your $100K back, the company will refund the remaining amount to your family.

Most people upon hearing those numbers fall into one of two camps.  The first thinks, that is a terrible return on investment I want to fight it out with the market.  The second thinks, they can shift some of their risk to AAA rated insurance company to guarantee that they are going to eat for the rest of their life.  In the end after the gut reactions subside people can move more towards the middle.  As back office support for financial planners I have seen these products fit amazingly well into plans for 50 to 60 year old individuals and couples we are not retiring for 5 to 10 years.  The retiree now doesn’t have to turn to his portfolio in the amount of $963 every month for the rest of his life.  It is amazing how much something like that can relieve your portfolio during a bear market.

As you can probably tell I like the product, however, I have yet to see one that is priced and marketed towards Millennials.

The first problem is the marketing.  I see ads from almost every major insurance company on a daily basis.  Despite being financially sound some of these companies don’t even bother advertising to the general public (The Guardian, Jackson National, etc.), however, I have yet to see one that literally tells me I can buy a pension.  Maybe some State Insurance Departments would have a problem it being referred to as that way, but someone, somewhere can come up with something catchy.  How about a slogan that reads, “for the generation who is barely 35 and have seen two very real market corrections lets take some of your retirement risk off the table.”

The much bigger problem is the pricing.  If it is a good enough deal it will get sold.  Those companies I have had the opportunity to illustrate price horribly for someone around my age.  For example, if a 35 year old put in that same $100K and took it out at 65 he would only be receiving $1,470 dollars in 2039 dollars.  Inflation over 15 years is one thing but inflation over 30 is completely different.  Who the hell knows what $1,470/mo will pay for?  Yes, there are cost of living adjustment riders for most products but they are so prohibitively exepnsive they are almost never illustrated.  Then add int he problem that most 35 year olds are not going to be cutting a check for $100K, instead it is likely they will do annual contributions which would cause that already low payout number to decrease.   If I had to guess the internal rate of return would be somewhere in the low 3% range net of all fees.  That is an unacceptable number considering I am signing up for 30 years in the future and the fact that the insurance company isn’t going to have to pay out every claim.  

Doubt any insurance executive read this blog, but if you do, most Millenials can write me a thank you note.

October 21, 2014 3 comments
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AnnuitiesBloggingBusinessDebtDividend InvestingDividend Investment PortfolioEconomicsEstate PlanningEstate TaxesFinancial AdvisorsInsuranceInvestmentsLife InsurancePersonal SituationPoliticsQualified/RetirementRandomRantSpecial NeedsTaxesThe Wife

I Can’t Believe I have Been Blogging for 4 Years

by Evan August 6, 2012

On August 5th of 2008 I put up my first post.  I had no idea if anyone would read about my journey, nevertheless care about what was going on in my life, but I wanted to share my thoughts with whoever wanted to read them.  Since putting that first post up I have seen somewhere between 570,000 and 630,000 pageviews (analytics vs sitemeter) and while that is probably a day’s worth of views for a news site I am pretty happy with it, especially since most of the first year or so I was getting under 15 page views a day.

I figured I would go through the full archive of My Journey to Millions and pick out some of my favorite posts in hopes that some of my newer readers can see that my writing was actually even worse back then!  Some of the tax information may have changed but I think these posts stand the test of time almost a half decade later.

It is funny as I built this list there doesn’t seem to be a connection between the topic of the posts, some are financial planning based, some are just about my life, and some are law based.  While there is no topical question I think the style in each of the picks chosen were me being me.

Favorite Posts from 2008

  • Everybody Needs a Will
  • My Greatest Asset is My Wife
  • Education is Not Always Tax Deductible
  • It only took about 20 days before I told The Wife about my blog
  • Are CDs worth it?  Maybe I should do a follow up on the topic since I would LOVE to have some of those interest rates today
  • Who Cares that the FDIC raised the insurance limits
  • Socialism is never a good idea
  • To Know Thyself is the Only Way to Overcome your Deficiencies
  • Simplest Personal Finance Advice for Newlyweds
  • The Wife and Finally Implement a Plan and Build a Financial Road Map
  • 15 vs 30 Year Mortgages why I like Longer

Favorite Posts from 2009

  • Goals for 2009 – Funny for me to read it.  As much as things have changes some things have not!
  • The Wife and I almost get ripped off while on vacation!
  • Forget your RMD? You can beg the IRS for Forgiveness
  • Accountability Leads to Success – Easily one of my favorite posts of all time that doesn’t have to do with my personal life
  • Life Insurance and Annuities May be Right for Retirement
  • Top 10 Reasons you need a Will ASAP – This is when I found out my father was having major surgery
  • A real life story of how lack of diversification destroyed a client’s retirement
  • Life is More than Finances – 14 hours spent at a hospital for my father’s surgery
  • A reminder that an average of 10% investment returns doesn’t guarantee success
  • Planning for Children with Special Needs Part 1, Part 2, and Part 3
  • Colleges are the Next Big Bubble to Burst – A theory I am still believe in but am waiting for it to hit
  • 9 Months and I paid off $12,000 of Credit Card Debt!
  • My First of many posts about Whole Life Insurance
  • An apology post I had to write
  • reasons a 401(k) is better than an IRA – My first of many posts about how there are very few bright line rules in Personal finance
  • Comparing the United States against Marx’s Communist Manifesto
  • Announcement of a Child The Wife and I were Expecting, the subsequent loss of that child (still hard for me to read today) and The Wife’s views on the situation.
  • New York Defaults getting thrown out because of bad service (and bad attorneys)
  • 2008 Tax Statistics prove that Multiple Streams of Income Are Key to Success
  • Lesson Learned the Hard Way – Some Lenders do Not Apply Extra Payments to Principal
  • Buying Life Insurance on a Child Part 1 and Part 2 (advice where I eventually practiced what I preached)
  • Using Whole Life Insurance to Build a Pension Like Stream of Income
  • Ode to my Dog
  • Living Paycheck to Paycheck Could Cost you Your Life
  • There were Never Good Ole Days when it Comes to Personal Finance
  • I don’t Understand Personal Finance Blogging – A problem I still have today
  • What did African Americans Think President Obama was Going to Do? Some fun, “Evan you are a racist” type of comments
  • Four Words in Personal Finance that PISS me off and The Wife Says them ALL the time – She has since stopped saying them as we got older

Favorite Posts from 2010

  • Goals and Objectives of 2010
  • The Wife’s Post about Messing with my Manhood
  • The Basics of Personal Finance are the Same Regardless of Income Level
  • Is There Anything More Important than Money When Talking about a Job?
  • Three Common Qualities of High Net Worth Individuals’ Balance Sheets
  • Good Humanitarian or PF D-Bag?
  • The Very First Start of my Dividend Investment Portfolio
  • My first attempt to narrow down my Dividend choices
  • Defending Financial Planners
  • A Million Bucks is still a LOT of money
  • Asking Whether the Health Care Bill was Constitutional – Boy did I miss the mark on this one, huh
  • What is Valuable May not be Worth Anything
  • Coming up with a theory on Cell Phone Insurance
  • A real life reminder of wanting financial freedom – Side note this guy has since changed jobs and is loving life!
  • My Easy Fix for Illegal Immigration
  • We are expecting a child! – VERY welcomed after the shit we went through in 2009
  • Most People that Tell you that they don’t want to be wealthy are LYING
  • Faith Based Investing May be a Terrible Idea
  • Some People may Need a Nice Car
  • People who Refuse to Change What Makes the Miserable Drives me Nuts
  • How I try to overcome paralysis by analysis
  • Why Teachers Anger me –  I still get comments on this post every so often lol
  • Would you Opt out of the Social Security Ponzi Scheme?
  • A letter to my unborn son on my 2nd Blogging anniversary
  • How I have to keep myself Cash Poor
  • Are Generation Y-ers Different? Do I follow the stereotypes?
  • My Theory on whether Money Buys Happiness
  • Get off your Ass and Follow Through with your Business Idea
  • If you have a Child with Special Needs Please Check with a Financial or Legal Professional
  • I don’t understand the Early Retirement Extreme Movement
  • Example of a High Net Worth Balance Sheet that Inspires me
  • Do I think about Money too much?
  • Do You know what You spend per year?
  • Introducing my Baby Boy! I can’t believe how little he was!
  • Review of my 2010 Goals

Favorite Posts of 2011

  • 2011 Goals and Objectives (written in 2010)
  • Past Wasn’t as Good as you Remember it
  • I came up with a new way to track and share my net worth – I updated it every month but only share a few in this list
  • Practicing what I preach when I bought Life Insurance on my Child
  • Stop Bitching and created a Second Stream of Income
  • It is Okay to Just want things
  • My Favorite thing about paying off debt
  • My Biggest Fear Laid out there for Everyone to read
  • Investment Services Don’t make Sense
  • Sharing my First Experience Being an Entrepreneur
  • Do you Compartmentalize Spending Decisions?
  • Are you the Kind of person that Best to Win? Place? or Show?
  • June 2011 Net Worth Update (half way through the first year) – Up 33.6%!
  • What You Think Someone Else Wants at Death is Irrelevant
  • What do you Do at Night? I try to make money
  • Is Something Valuable if No one Knows?
  • The difference between liberals and conservatives when it comes to Equality
  • Insurance Products should not be a 4 letter word
  • My Unlikely Financial Hero
  • Is your financial ship run by one captain or two captains?
  • A cool Scotch tasting experiment my friends and I did – one bottle was free while the other was $130 (and a few in between)
  • An update to my family’s cash flow chart
  • I feel guilty when making unneeded purchases
  • Why I am not a huge fan of Revocable Living Trusts
  • It is probably about time to Grow the Fuck Up
  • My Trip to Atlanta for my 30th Bday
  • Am I a complete Hypocrite or an Opportunist?
  • There are other Dividend Stock Lists besides the Dividend Aristocrats
  • No Research Reasons why I like Mature Dividend paying stocks
  • Don’t assume your time is worth money
  • Happy First Birthday to my Boy!
  • Great discussion on Unequal Distribution to Future Heirs
  • Reviewing how I did on my 2011 Goals and Objectives

Favorite Posts of 2012

We are only half way through the year but I have some favorites:

  • Why the Hell are there New Pension Plan Participants?
  • You have Absolutely No Patriotic Duty to Pay High Taxes
  • Don’t be a Sheep When it Comes to Your Finances
  • My Experience at a Storage Auction
  • A Reminder why buying life insurance early is important
  • Our House is on the Market – Another chapter in my life is going by
  • There are Some Business Models I don’t Understand
  • Thoughts on Professional, Personal and Family Relationships
  • Responding to Someone Calling you Cheap
  • There are NO Money Rules
  • I don’t get he Hype about the Facebook IPO – Only time will tell if I am correct
  • The Secret Business I am dying to open up
  • What the Hell is Wrong with Some People – Emergency Fund vs the Smart Phone Statistics
  • How I Invested my Child’s Money – I hope to share this with my son one day
  • Where Would You Invest if You didn’t Trust the Markets?

If you told me that I would be blogging 4 years later I would have said you were crazy!

  • That is as long as HS,
  • As long as College
  • Longer than I was in Law School
  • One-Third of my Relationship with The Wife (we dated a long time before getting married)
  • It is more than a seventh of my life

This blog has kept me on track with my finances and has opened up opportunities to save money like I never would have imagined.  I started a very viable business with someone I have only met once in real life (I don’t talk about it much here, but it is pretty damn successful); I have shared some of my happiness, scares and tragedies with people I will never meet.  I have actually met like-minded people who have their own blog which is always cool.

For all those things above I want to thank everyone who has ever stopped by my blog.

August 6, 2012 28 comments
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Annuities

What is a Longevity Annuity?

by Evan June 15, 2012

You may not agree with how the product is used, sold or priced but you really have to respect the financial industry for being able to make a products to fit almost all situations.  I recently heard about a relatively new product called a Longevity Annuity which seems to operate like an extended deferred annuity with a single premium immediate annuity twist.

What is a Longevity Annuity?

To be able to understand what a longevity annuity is you first have to under the basics of an annuity product.

Basics of Common Annuities

The easiest type of annuity to understand is the Single Premium Immediate Annuity (SPIA), in which you give a lump sum to the insurance company and in exchange they give you back your principal plus a growth in an installment payment.  Your monthly/quarterly/annually payout is known beforehand.  The purchaser is shifting the risk of liquidating the portfolio to the insurance company, as well as,  growth (and avoiding losses) of the portfolio.

The second very common type of annuity is the deferred annuity.  A deferred annuity is basically an investment account with an insurance company that acts as a hose. You are going to put money into the deferred annuity, either in a lump sum or in installments, by sending money to an insurance company.  The money stays in there growing, either at a fixed rate or a variable rate, until you turn on the hose where the money will then come out in equal installments.  The build up within the hose may not even reflect market conditions and that is why people buy them.  So if you were to give an insurance company $100,000 with some type of rider that guarantees 5% growth.  Your “annuity shadow account” could be at $105,000 even if the market dropped 20% however if you go to pull the money out you’d only get $80K minus surrender charges.  People purchase these to shift risk to the insurance company since most deferred annuities are coupled with some fantastic riders which may include:

  • Guaranteed Minimum Income Benefit – As Defined by Investopedia: Receiving a guaranteed minimum income benefit ensures that an annuitant will receive a payment regardless of market conditions. This minimum payment amount is predetermined by assessing the future value of the initial investment. This option is only beneficial to annuitants who plan to annuitize their annuity.
  • Guaranteed Minimum Accumulation Benefit – As Defined by Investopedia : A rider on a variable annuity, which guarantees the minimum amount received by the annuitant after the accumulation period, or a set period of time, is either the amount invested or is locked in gain. This protects the value of the annuity and the annuitant from market fluctuations.
  • Guaranteed Minimum Withdrawal Benefit – As Defined by Investopedia: This specific option gives annuitants the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.

What are you giving up? If the market shoots up 22% you won’t see all the gain plus the insurance company gets their expenses off the top first.

Combining a SPIA and a Deferred Annuity to Get a Longevity Annuity

Like a SPIA you are going to give an insurance company a lump sum today for a predetermined installment payout.  Like a deferred annuity your payments won’t start till a point in the future.  In the examples I have seen online the date is chosen by the purchaser but seems to be  after 80.

The main drawback is that if you die prior to the annuitization date the insurance company keeps the money.  The main advantage is that if you blew through your retirement money you know you have a new income stream starting on your 80th birthday.

It should be fairly obvious that the longer you wait and the earlier this product is purchased the higher the payment will be and the lower amount needed to fund, respectively.  Why? Because the longer you wait the less likely you will survive to receive payout and the earlier  you provide the insurance company with the lump sum the longer they will have to grow your money.

Would I Buy A Longevity Annuity?

I have not had the opportunity, nor could I find a way, to play around with the illustration system of the product, as such, I can’t answer the question right now.  I would need the illustration system to determine the internal rate of return on the product.  My gut tells me that the product is too new, it is in its infancy and in 10 or so years they will start adding cool riders to provide for partial principal repayment upon a premature death.

 

Have you been approached to buy this product? Do you already own one?

June 15, 2012 1 comment
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Annuities

Would You Build an Income Stream Based on SPIAs If you are 30?

by Evan March 22, 2012

With pensions becoming as common as the Dodo bird, annuities are losing their negative connotation and are even becoming more and more popular in the main stream financial media.  Despite the fact that I am only 30 I have started giving real thought to purchasing small staggered Single Premium Immediate Annuities as part of my multiple income stream strategy.

What is a Single Premium Immediate Annuity (SPIA)?

At its most basic form an annuity is nothing more than,

a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment.

The easiest type of annuity to understand is the Single Premium Immediate Annuity.  In the simplest form you give an insurance company a lump sum and then they return a monthly, quarterly or yearly check for the rest of your life.  There a few variations or riders you can add but aren’t that important to this conversation such as:

  • If you want to protect your Spouse you can do Joint Lives
  • If you want to protect against the fact that you may die in year 2 you can guarantee a beneficiary will receive a payout for either 5 or 10 years from the contract date
  • If you want to protect against inflation you can add a COLA rider

Building My Own Pension Using Single Premium Immediate Annuities

I must be obsessed with insurance product based retirement income because I have discussed building a pension using whole life insurance in the past.   So my thought process is that I could purchase small chunks of guaranteed lifetime income sort of like setting myself up with a pension that starts tomorrow.

For example I ran a quick quote and $10,000 (way more than I am willing to test for this experiment) buys a 30 year old male (i.e. me) about $100 per month of income (some of which isn’t taxable as it is return of basis).  The company I ran the quote with is not as competitive as others but is a VERY safe company.

Pros of Using SPIA for a Younger Person

  • Simple
  • I can use Different companies depending on who provides the best quote at that time
  • Completely Transparent
  • Easy to think about income in terms of chunks like $5K, $10K rather than waiting till I have a full nest egg
  • Since I don’t need the income yet, I can reinvest it into this experiment
  • I have shifted some market risk to the insurance company

Negatives of this Type of Strategy for a 30 Year Old

  • The quote I used didn’t include an inflation rider – this will obviously take down the monthly income.
  • Not all companies sell or quote for 30 year olds
  • I will not participate in upswings in the market which hopefully there will be a lot of in the next 30 or so years

Right now I am entirely focused on the goal of home purchase so free floating cash is not going anywhere but my savings account, however, I think this would be a cool option one day.

Think about if every year for the next decade I purchase a $10,000 SPIA I could  effectively provide 40+ Year old Evan with a grand a month pension (some of which will be income tax free for a bit of time).

Of course I’ll share what I choose to do with everyone, but I am curious what you think about just the idea of it?

 

UPDATE: I DIDN’T RUN THE ILLUSTRATION CORRECTLY.  TO GET ABOUT $110 FROM THE COMPANY I RAN I NEED TO PUT IN $30,000.  WAY MORE THAN I ORIGINALLY THOUGHT! THE DEFAULT BIRTH DATE WAS NOT SAVED TO MY BIRTHDAY LEADING TO THE CONFUSION.  I WILL NOT BE USING THIS STRATEGY ANYTIME SOON.  

 

March 22, 2012 9 comments
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AnnuitiesQualified/Retirement

Insurance Products Should Not be a Four Letter Word When it Comes to Retirement Income Planning

by Evan July 26, 2011

The Wall Street Journal had a recent article that I think was detrimentally incomplete even taking into account that it is 1,000 words on a subject that can take years to master.  The article, “You Need a Plan to Boost Retirement Income” by Jeff D. Opdyke highlights three asset vehicles/classes that he thinks should take retirees through retirement,

The proper mix of stocks and bonds and cash is the mix that allows you and your parents to sleep at night. That may sound trite, but it is the only true gauge that works. Mom and Dad can look at all the charts and all the probabilities, but if at the end of the day the mix of assets has them paranoid that a market correction will wipe them out or leave them unable to afford their cost of living, then it is clearly the wrong mix. Thus, telling you what an appropriate mix might be for your parent is largely impossible. But there are a couple of generalities and rules of thumb around which you should begin helping your parent structure a nest egg.

Mr. Opdyke briefly goes into:

  • Stocks – Domestic/Foreign/Blue Chips/Dividend payers
  • Bonds – Broad based/Munis
  • Cash – CD Ladder

While reading the short article all I could think of is how could he miss a very important competent to a Retiree’s income?

Insurance Products Usually Have a Place in Retirement Income Planning

I am not providing specific financial advice for anyone, but I truly believe that insurance products (we’ll discuss a few kinds in a bit) can fit into retirement income planning.  There are a couple general types of “insurance products” that could be used for retirement income planning.  Each product could have an entire blog dedicated to the different types of variations, however, this post’s purpose is just to get you to think outside the box.

Single Premium Immediate Annuity

At its most basic form an annuity is nothing more than,

a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment.

As such, the easiest type of annuity to understand is the Single Premium Immediate Annuity.  In the simplest form you give an insurance company a lump sum and then they return a monthly, quarterly or yearly check for the rest of your life.  If you ever researched or listened to an annuity pitch you know there are variations:

  • If you want to protect your Spouse you can do Joint Lives
  • If you want to protect against the fact that you may die in year 2 you can guarantee a beneficiary will receive a payout for either 5 or 10 years from the contract date
  • If you want to protect against inflation you can add a COLA rider

The variations can go on, but the most important thing to remember when it comes to SPIAs is that

  1. One is shifting the risk of a market downturn to an insurance company which seems to be important to retirees
  2. One is receiving a steady and reliable “paycheck” which is part principal (non-taxable) and part interest (taxable)

Deferred Annuities

The topic of Deferred Annuities can get very complicated very fast but like my inspiration for this post, Mr. Opdyke, I will keep it as simple as possible.  Before I dot hat for this topic a thought; anytime someone brings up the topic of annuities I hear about “the fees” but remember we are shifting the risk to an insurance company and you have to pay for that type of protection.  Maybe that is something you are into, maybe it is not, but please if you take nothing away from this post take this away deferred annuities are just a tool they are not inherently evil.

There are two types of Deferred Annuities:

  1. Fixed
  2. Variable

As the name implies  a fixed annuities have a fixed growth rate associated with them.  I like to think of them as mega-CDs, where the interest is usually higher and the gains are tax deferred but to get those benefits you usually have harsh penalties associated with trying to roll out of the vehicle before an aforementioned surrender period (usually between 5 and 9 years).

Likewise, a variable annuity has a portion that is invested in the market, however, promises are often provided by the insurance company that say if the market hits the fan we will still provide you with “X.”  Variable Annuities are often attacked by personal finance bloggers due to their fees…but what are you getting with those fees? Here are some common riders:

  • Guaranteed Minimum Income Benefit – As Defined by Investopedia: Receiving a guaranteed minimum income benefit ensures that an annuitant will receive a payment regardless of market conditions. This minimum payment amount is predetermined by assessing the future value of the initial investment. This option is only beneficial to annuitants who plan to annuitize their annuity.
  • Guaranteed Minimum Accumulation Benefit – As Defined by Investopedia : A rider on a variable annuity, which guarantees the minimum amount received by the annuitant after the accumulation period, or a set period of time, is either the amount invested or is locked in gain. This protects the value of the annuity and the annuitant from market fluctuations.
  • Guaranteed Minimum Withdrawal Benefit – As Defined by Investopedia: This specific option gives annuitants the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.

GMIBs aren’t as common as they once were because of how good of a deal they turned out to be for the consumer.  There were 150 year old AAA rated insurance companies providing 5% GMIBs so that says you put 100K but it is only worth 50K, however, you decided to turn on the income stream – you would get the income stream based on the 100K pot growing at 5%!  All fun and games for the insurance company until the market has a couple negative years.

Again, if you tried to “roll out” you would have only gotten that 50K value not the $100K+growth value.  That “fake” growth is only for the income stream purpose.  Re-read this paragraph it was the source of a many of lawsuits against advisors!

Cash Value Life Insurance

Another unpopular choice, but one that should have been covered by Mr. Opdyke.  For purposes of this post I will ignore whether one should buy Whole or Universal Life insurance (if you want to read where I fall on that check out the category: Life Insurance).  Rather we are going to briefly focus on those who already own a Variable Universal Life Insurance Policy, Whole Life Insurance Policy, Guaranteed Universal Life Insurance Policy or one of the myriad of in-betweens.

These policies have cash, that is what they are built around.  The cash in the policy is yours to be used how you like.  It can usually be turned into an income stream right within the product using a technique that surrenders cash until you reach basis then instead of taking from gains you actually borrow from the policy.  I can’t stress enough that CARE SHOULD BE TAKEN IF ONE IS TO PARTICIPATE IN THIS TYPE OF DISBURSEMENT STRATEGY.  Alternatively you can take your cash value that was growing tax deferred and preform a 1035 Exchange from a life insurance policy to an annuity.

Retirement Income Planning Conclusion

I think Mr. Opdyke did a great job highlighting the asset classes he did look into, however, there are a lot of retirees with other options and I just figured this could be an add on to that article.

July 26, 2011 15 comments
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