The Importance of Guaranteed Income in Retirement (Why Guaranteed Income Matters)

Lifetime Income Stream Key to Retirement Happiness

Pensions that provide  guaranteed income have become increasingly rare around the world, as employers have shifted from defined benefits plans to defined contribution plans. Studies in the U.S. have shown that retirees with a guaranteed income stream are more confident about their financial future.

The high costs of retirement mean that most people won't be able to rely on simply withdrawing from savings - they'll need to generate some sort of income through investments.

Far to many people believe they will be able to live in retirement by just drawing down their savings. But as people live longer and health care costs increase, this approach leaves people at risk of outliving their savings. Every withdrawal decreases the pool of assets needed to weather down markets, and rising inflation can make it necessary to draw more income than expected.

One in Three Americans Say Guaranteed Income is Top Retirement Priority

Two new TIAA-CREF surveys highlighted the troublesome facts of American retirement savings. Nearly three-quarters of Americans don't have or are unaware of lifetime income options through retirement plans, which could make it difficult for the 34% looking to retire early.

In one survey, just a third of workers who participates in a retirement plan say the primary goal is to generate guaranteed monthly income, but 72% say they either don't have or are unaware of this option. The second survey found that 21% of workers reported having not saved anything for retirement and 44% are saving 10% or less of their current income. Experts recommend saving at least 10% to 15%.

TIAA-CREF found that 44% of respondents are somewhat or very concerned they may run out of money in retirement while just 21% expect to receive income from annuities.

Retirement security is too important for wishful thinking and guesswork. All workers deserve a secure retirement, but many need help in setting realistic plans to achieve that goal. With life expectancies increasing rapidly, lifetime income options are essential to sustaining financial well-being over a lengthy retirement. A more reliable strategy is to guarantee a portion of savings as income you can't outlive to help cover essentials, like food and housing. Annuity payments create an income stream that lasts for life, even if your retirement stretches for 30 or 40 years. 

Annuities sold through big insurance companies like Allianz, American Equity and ING have soared in popularity as retirees have come to understand that guaranteed lifetime income makes them more financially confident - and happier, too. In general, fixed annuities offer the best combination of certainty and cost.

So, the next time that you hear or read a financial "expert" downplay the importance of a guaranteed income stream, just remember that he/she has their best interests at heart, not yours.$

www.raybuckner.retirevillage.com

The Truth About "Hidden" Annuity Fees

On a daily basis, consumers are bombarded with warnings from the financial press to beware of the "Hidden" costs and "High" fees associated with annuities. These misconceptions have undoubtedly kept some people from buying these financial products. Many annuities have come a long way in terms of lowering costs and clearing up confusion among shoppers. Also, stricter suitability standards mandated by State Insurance Commissioners have also made the annuity shopping experience a more transparent one.

 

While determining if an annuity is the right financial vehicle to help you solve for your specific needs, shoppers could benefit from knowing the rules of the road. By asking the right questions up front, and by having a better understanding of the features you might be paying for, you should be able to get a much clearer sense of whether an annuity may fit your needs.

 

Start by following some basic guidelines for evaluating the potential costs of annuities. Then, dig a little deeper into the details of any specific fees and determine whether it's worth paying for added features that may appeal to you.

 

Understanding the Big Picture

There are different types of fees that are specific to certain types of annuities. You should consider some general guidelines when contemplating annuity costs. For example:

 

Know your needs. The fees you pay for annuity features can reduce your overall return, so opt only for those features that you will use. If your situation and planning needs warrant these added features, then make sure you try to pay a reasonable price for a product with those features. For example, if maximizing money left to heirs is an important consideration, may be worth the added cost for a feature that provides more for heirs after you die.

 

Understand the product. Some annuities can be complex products to understand. When you're considering a purchase, it's important to understand how the proposed annuity works, what its benefits may be, and, perhaps most importantly, what role it can help play in your overall financial plan. Be sure to carefully read the marketing materials and prospectus (if applicable). If you don't understand what you're paying for, make sure to ask questions and receive full disclosure before making a decision.

 

Focus on value, including the price. It's important to evaluate any annuity's costs versus the guarantees it promises. Not all guarantees are created equal. Some guarantees involve cumbersome restrictions that may diminish their appeal, regardless of price. On the other hand, keep in mind that when you buy an annuity, part of what you are paying for is the creditworthiness of the insurance company standing behind those guarantees.

 

Get Familiar with Fee Types

While you don't have to become an expert on all annuity fees, knowing the most common types will help you evaluate products and ask the right questions. Generally, there are four typed of annuity fees:

 

Insurance charges. Also known as mortality and expense (M&E) fees and administrative fees, these charges pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract.

 

Surrender charges. Most insurance companies limit the amount of withdrawals one can take during the initial years of a contract, and place a surrender charge on any withdrawals above a preset limit. Be careful, as surrender charges can be significant and be imposed for an extended time period. Be sure to ask for details on any surrender charges to help ensure that you have enough flexibility.

 

Investment management fees. These are assessed depending on the investment options within variable annuities, and are similar to management fees on mutual funds. Check the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.

 

Rider charges. Riders are optional guarantees available in some annuities. There is typically an additional cost to purchase a rider in an annuity.

 

Fees Vary Among Annuities

It is really misleading to lump all annuities together when the pundits sound the alarm about "Hidden" and "High" fees. Different types of annuities - whether variable or fixed,- income or deferred - charge different types of fees (see the chart below). Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate (like CDs) or income payout amount.

 

Types of Annuities and Their Key Expense Components

 

 

Getting Good Value

There are a few other important considerations before making an annuity purchase.

 

Consider the totality of all costs. Rather than focusing on any single fee component, it's wise to look at all the associated costs together.

 

Buy from someone reputable. Whether you're working through an advisor or directly through a distributor, get the facts on the firm's financial strength and business practices. What is the company's rating with third-party ratings agencies? Is it known for fair claims-paying practices? How reliable is its customer service? Dealing with a company that's fair and financially sound may help save you from financial headaches in the long run.

 

Educate yourself. Knowledge is power. The marketing materials and prospectus (if applicable) can be invaluable in determining whether the benefits offered by the product are worth the associated costs. But, if it's not clearly spelled out, make sure to ask your financial advisor about any potential costs that might not be apparent.

 

Recent economic challenges have made it more important than ever to do your homework comparison shop when it comes to major purchases. Buying an annuity should be no different. It's easier to understand what you're buying if you do your homework. For more information, visit our website.$

 

www.RayBuckner.retirevillage.com 

 



 

 

Tips for Buying a MYGA Annuity

A Fixed Deferred MYGA ("Multiyear") Annuity is a tax-favored wealth accumulation contract issued by an insurance company. Its main advantage over a mutual fund or bank Certificate of Deposit is that earnings grow in your account on a tax-deferred basis. This means you pay no income taxes until you withdraw money from the account. Because of this, the value of your account is able to increase more quickly since the entire amount of each year's earnings works to create new earnings. You can fund a deferred annuity with personal savings ("after-tax" or "non-qualified" monies) or with a "rollover" from a qualified account such as an IRA or a lump sum distribution from a qualified pension plan. In this case, there is no tax advantage offered by the deferred annuity over the IRA, since monies in an IRA already grow tax-free.

In addition to compounded tax-deferred earnings, annuities may also offer a high degree of safety. Your premium and earnings are guaranteed by the claims-paying ability of the issuing insurance company. Insurance companies are required by law to set aside assets (known as "reserves") in order to cover the claims of their policyholders. Companies are also regularly monitored by ratings agencies such as A.M. Best, Standard and Poor's, and Moody's. By reviewing the ratings an insurance company receives from the rating agencies you may determine if it is operating on a sound financial footing.

The most common form of MYGA is a Single Premium ("SP") annuity. "SPs" accept a one-time-only deposit and accrue interest until the contract is surrendered or annuitized. A Flexible Premium ("FP") MYGA contract is one which accepts multiple deposits.

Virtually all MYGAs offer the contract holder a high degree of control over his/her investment. At the outset, there is a "right to examine" or "free look" period (10-20 days in most states) which allows you to return the policy for a full refund for any reason. Afterwards, you can cancel the contract at any time, although doing so will likely cause you to incur a surrender charge and also a market-value adjustment (a plus or minus "MVA") charge.

MYGA Interest Rates

The Initial Interest Rate and the length of time for which this rate is guaranteed (called the "Rate Guarantee Period or "RGP") are two of the most important features of a MYG annuity. Most insurance companies credit interest daily, allowing earnings to compound on a basis known as "day of deposit to day of withdrawal."

Some insurance companies offer "bonus" interest rates, which can tack on as much as 5% to the current first-year's interest rate, boosting the yield to 9% or higher. As alluring as these bonus rates may seem, they can also be confusing. Some companies only pay the bonus if you eventually annuitize with that company and take your money in monthly installments over a period of at least 10 years. If you want to withdraw your money in a lump sum, the insurer may retroactively subtract the bonus as well as the interest attributable to that bonus.

In a MYGA annuity, interest is credited at a declared rate for the full RGP. Some policies credit the same interest rate for the duration of the RGP. Other policies credit a bonus rate in the first year of the RGP and a lower rate for the following years. In either case, however, there is no uncertainty about the interest rate that your account will earn.

Expenses

Fixed annuities have no upfront sales charges. It would also be unusual for fixed annuities to charge maintenance fees. Because of this, 100% of your deposit - without any deductions - goes directly to work for you in your account.

Penalty-free Withdrawals and Surrender Fees

Almost all insurance companies let you withdraw interest as it is earned without having to pay a surrender penalty. Many also allow free withdrawals of up to 10% of your contract value (principal plus accumulated earnings) each year. If you want to withdraw more than 10% of your contract value, you are likely to be charged an Early Surrender Penalty. This is assessed as a percentage of the amount that exceeds the Penalty-Free Withdrawal amount. These charges are not the same as the 10% early withdrawal penalty that the IRS imposes when you take funds out of an Single Premium Deferred Annuity (SPDA) before you reach age 59 1/2.

Shopping for the Best Deferred Annuity

It is best to work with an agent that has the ability to comparison shop and find the best annuity that meets your particular needs. You can request a free quote on our website.$

www.RayBuckner.retirevillage.com

Inflation During Retirement (Makes Me Want To Holler)

"Inflation, no chance
To increase, finance,
Bills pile up, sky high
This ain't livin', no, this ain't livin'"

Marvin Gaye, Inner City Blues

Inflation. You can't afford to ignore it. People retiring today can expect to live another 20 years, according to Social Security figures. But, since roughly one in five of us will live past age 90, we have to account for 30 more years when making our financial plans.

Once you're retired, you live on a fixed income. There are no more raises, bonuses, or employer contributions to your retirement plan. Even if you can afford your lifestyle today, you have to worry about what's going to happen over the next 30 years as prices inevitably rise, some years more than others. Will Social Security keep up? Will your investments produce enough income?

Remember hearing about the era when grandma paid 20 cents to see a movie? Think back to your own childhood. How much did an afternoon at the movies cost when you were 10? A lot less than it does now! That's inflation.

The reason this matters to you and your retirement savings is that inflation can eat away at your money from two directions:

1. Inflation erodes savings. Inflation doesn't just literally reduce the number of dollars you possess, but it does reduce your purchasing power. The interest rate your savings account or CD is paying is likely well below the rate of inflation, which means that the cost of goods and services is climbing much faster than the value of each dollar in that savings account or CD. For example, assume that your annual budget for 2014 requires a net total income of $50,000. You can expect that purchasing exactly the same goods and services in 2019 will cost more with inflation. That's why many employers periodically offer cost-of-living raises to help you keep up. Unfortunately, your savings account does not get a comparable raise. On average, each dollar you own loses purchasing power and therefore value every year.
2. Inflation depletes budgets. During retirement, when you're no longer a full-time wage earner, budgeting becomes especially important. To help increase the likelihood that your savings will last through retirement, you'll have to establish a budget. The problem is that $50,000 per year in 2019 is expected to buy fewer goods and services than it will in 2014. And in 2024, $50,000 will probably buy even fewer goods and services than it did in 2018. You get the picture. You can't plan to spend the same amount of money year after year and continue to meet your needs in exactly the same way. So, as a retiree, you'll need to give your budget a cost-of-living adjustment every couple of years in order to continue buying the same goods and services.

You'll need to be especially aware of inflation in a few areas:

Medical costs are on the rise, and they're significantly outpacing CPI inflation averages. In retirement, you're likely to need more medical care than you do at a younger age, so carefully consider medical inflation as you plan your retirement. 

Food costs can be volatile. For example, dairy, beef and grains have seen pricing spikes in recent years due to factors such as drought, livestock illnesses and changing farming practices. Expect more of the same in the future. 

Fuel costs, like the price of gas, tend to affect most goods since shipping prices increase with fuel prices. As shipping costs rise, so do costs for goods that are shipped. And if you plan to travel in retirement, you'll also feel the impact of fuel inflation on how much it will cost you to fly or drive. 

What can you do to fight inflation during retirement?

First, as you calculate your retirement needs, you must incorporate inflation into your planning. You can find a variety of online calculators to help you do this, or else consult a financial professional. 

Second, a portion of your retirement portfolio should remain invested even during retirement. Bonds, CDs, money market funds, and bank savings accounts alone, which are generally considered relatively safe places to put your money, may not provide enough growth to outpace inflation. A portfolio consisting of stocks, bonds and annuities can greatly enhance your chances of meeting your financial goals during retirement. For more information and online calculators, visit my website.$

Get updates on financial and retirement planning delivered to your inbox.

http://youtu.be/57Ykv1D0qEE

Rollovers From Employer-Sponsored Retirement Plans

A rollover is generally a transfer of assets from a retirement plan maintained by your former employer. Rollovers from an employer-sponsored retirement plan can take one of four forms:

1. A transfer from your old retirement plan directly to an IRA trustee (this is a type of direct rollover)
2. A transfer from your old retirement plan to you, and then, within 60 days, from you to an IRA trustee (this is a type of indirect rollover)
3. A transfer from your old retirement plan directly to the trustee of the retirement plan at a new employer (this is a type of direct rollover)
4. A transfer from your old retirement plan to you, and then from you to the trustee of a retirement plan at a new employer (this is a type of indirect rollover)

Generally, rollovers come from defined contribution plans. A defined contribution plan is a retirement plan in which contributions are based on a set formula (e.g., a percentage of the employee's pretax compensation), while the payout is based on total contributions and investment performance. The 401(k) plan is the most common type of defined contribution plan.

If a rollover is done properly and rules are followed, there will be no taxes or penalties imposed on the retirement plan distribution. In addition, a rollover encourages retirement savings by allowing you to continue tax-deferred growth of the funds in the IRA or new plan. When you are eligible for a rollover from your plan, the plan administrator must send you a timely notice explaining your options, the rollover rules, and related tax issues.

Advantages of Doing a Rollover

A rollover is not a taxable distribution

A properly completed rollover (direct or indirect) is a tax-free transfer of assets, not a taxable distribution. That means that if you complete the rollover within 60 days of receiving the distribution and follow other federal rollover rules, you will not be subject to income tax or early withdrawal penalties on the money. You will not have to pay federal or state income tax on the money until you begin taking taxable distributions from the IRA or new plan. By that time, you may be retired and in a lower income tax bracket. Also, if you are 59 1/2 or older when you take distributions, you will not have to worry about premature distribution penalties.

A rollover allows continued tax-deferred growth

When you do a rollover, you are simply moving your retirement money from one tax-favored savings vehicle to another. This allows the money to continue growing tax deferred in the IRA or new plan, with little or no interruption. Tax-deferred growth allows your retirement money to potentially grow more rapidly than it might outside an IRA or retirement plan. To understand why, consider the power of compounding. As your IRA or plan investments earn money, those earnings compound on top of your principal and any earnings that have already accrued. As this is happening, no tax is due while the funds remain in the IRA or plan. Depending on investment performance, the long-term effect on your savings can be dramatic. In most cases, this benefit is lost if you receive a distribution from your employer's plan and do not roll it over.

A rollover may be an option every time you leave a job

You may be able to roll over your vested benefits in former employer's retirement plan every time you leave a job (whether voluntarily or involuntarily). You generally have the option of rolling over benefits from the old plan to the new plan. There is no limit on the number of rollovers from an employer-sponsored retirement plan you can do, which is an advantage for those who change jobs frequently.

Disadvantages of doing a rollover

You cannot revoke a rollover election

Once you have elected in writing to roll over your retirement plan benefits to an IRA or another plan and received payment, you typically cannot change your mind and revoke the election. If you do try to revoke it, you will generally be subject to income tax and penalties on all or part of the distribution. Before you elect the rollover option, be absolutely certain that this is what you want.

You cannot roll over certain amounts

You generally may not roll over any distribution that is not includible in your taxable income (direct rollovers of after-tax contributions from one qualified plan to another qualified plan and to a traditional IRA are permitted in some cases). Also, you cannot roll over amounts to be taken as required minimum distributions or as substantially equal payments.

An indirect rollover can be costly

If you are considering an  indirect rollover, bear in mind the 20 percent mandatory withholding requirement. To complete the rollover, you must make up the 20 percent out of your own funds, or be subject to income tax and possibly penalties on the shortfall. This can be a problem if you do not have cash available to replace the 20 percent. Also, with an indirect rollover, you generally have only 60 days to complete the rollover. The 60-day period begins with the date on which you receive the distribution from the former employer's retirement plan. If you fail to complete the rollover within this time frame, all or part of the distribution to you will be taxable and perhaps penalized.

Loss of lump sum averaging and capital gain treatment

If you roll over all or part of a distribution from a qualified employer retirement plan into an IRA, neither that distribution, nor any future lump-sum distribution you receive from the qualified plan will be eligible for special 10-year averaging or capital gains treatment.

This information is just a basic overview on rollovers from employer-sponsored retirement plans. For more detailed information or questions, use the contact me link at our website.$

Get updates on financial and retirement planning delivered to your inbox.

Fundamental Indexing: A Different Approach

Investors generally can divided into two camps: those who believe the market constantly misprices stocks, leaving opportunities for active traders to take advantage of; and those who accept the "efficient market theory" and believe that it is better to just hold index funds. But this "active versus passive" debate often leaves out a third viewpoint.

That view reflects the belief that while the market is not always perfectly efficient, it is difficult to consistently pick enough "winners" to overcome the management fees, trading expenses and income taxes associated with active stock trading.

Passive investors - meaning those who think that the market's pricing generally reflects the approximate current value of a company, given its future prospects - typically turn to index funds as the vehicle of choice. An index, like he S&P 500 or the Barclays U.S. Aggregate Bond Index, represents that particular small or large part of the market: If the market goes up or down, the index will move in parallel, since it is invested in the same way the market itself is constructed. Index funds are less expensive to operate, as their managers do not have to work to continually beat the market.

That said, most indexes have some disadvantages. Traditional indexes are "market cap weighted" (number of shares outstanding times their stock price). The higher the relative market value of a company, the greater portion of the index it will represent. However, when securities become over- or under-valued, market cap-weighted indices must assign a greater relative share to overvalued stocks; as a result, the market-cap indices exaggerate the market movement. For example, if a tech stock is trading at an excessive price/earnings (PE) ratio, a market-cap index will hold a larger amount of this stock than a similarly-sized company trading at a reasonable PE ratio.

Fundamental indices represent a different approach. Company size is measured by four equally weighted factors: sales, cash flows, book value and dollar value of dividends paid. These four factors are used to generate a ranking of the stocks in the sector being tracked. Note that his method completely ignores stock price, so while the market may be overvaluing that tech company mentioned above, the mispricing has no impact on how the stock ranks in a fundamental index. The fundamental methodology does not completely avoid owning "overvalued" stocks; it just holds them based on a truer measure of their value, not their stock market value. There is a large overlap when comparing the two - the names are most often the same, but the ranking is different.

Not many advisors have made the switch to fundamental indices, and we're glad they haven't. It's one more way that we can create an advantage for our clients. As we continue to scan the horizon for "best practices," we'll bring you what we find, so that there will be more and more ways for you to benefit from working with Retire Village.$

www.RayBuckner.retirevillage.com

Retirement: Five Financial Risks Ahead

In retirement, there are five major financial risks that must be accounted for. Your retirement income plan needs to have a solid strategy that helps you address and navigate these risks.

1. Interest Rate Risk. Traditionally, bonds were a great option to provide interest income to help supplement a retirees' Social Security or pension benefits. If a retiree required an extra $40,000 in annual income, and bonds were paying 4%, they would have to purchase $1 million worth of bonds. This would basically be an all-in strategy, where all of a person's savings went into bonds. That was ok when people retired at 65 and lived to age 72. Now, we have potentially 30-year periods in retirement. This leaves the retiree exposed to interest rate risk. Just what is interest rate risk? A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices on fixed-rate bonds fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds. A bond's maturity and coupon rate generally affect how much its price will change as a result of changes in market interest rates. A bond's yield to maturity shows how much an investor's money will earn if the bond is held until it matures. If you have to sell your bonds before maturity, say when interest rates are rising, they may be worth less than you paid for it.
2. Market Risks. Another strategy is a mix of stocks and bonds. Bonds provide interest and stocks would give growth, providing a hedge for inflation. The problem with this drawdown strategy is that the markets have to cooperate. If you start taking income when markets are down, you are really decimating your portfolio. You're exponentially increasing the chances of running out of money in retirement. Stocks and bonds can be down at the same time. Market risk is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk cannot be eliminated through diversification, though it can be hedged against. The risk that a major natural disaster will cause a decline in the market as a whole is an example of market risk. Other sources of market risk include recessions, political turmoil, changes in interest rates and terrorist attacks.
3. Longevity Risk. Individuals often underestimate longevity risk. In the United States, most retirees do not expect to live past 85, but this is in fact the median conditional life expectancy for men at 65 (half of 65-year old men will live to 85 or older, and more women will). For individuals, insurers provide the majority of products designed to help individuals manage the risk that they outlive their assets. Individuals without defined benefit plans can ensure lifetime income by purchasing annuities within their defined contribution plans and personal retirement accounts.
4. Inflation Risk. Inflation risk, also called purchasing power risk, is the chance that the cash flow from an investment won't be worth as much in the future because of changes in purchasing power due to inflation. Although the record inflation of the 1970s is history, inflation risk is still a common worry for income investors. Inflation causes money to lose value, and any investment that involves cash flows over time is exposed to this inflation risk. The ramifications of this can be serious: The investor earns a lower return than he or she originally expected, in some cases causing the investor to withdraw some of a portfolio's principal if he or she is dependent on it for income. It is important to note that inflation risk isn't the risk that there will be inflation, it is the risk that inflation will be higher than expected.
5. Healthcare Risks. Inflation on healthcare costs coupled with living longer in retirement can spell disaster if not properly managed. Compounding this issue further is the rate of inflation on items such as prescription drugs and preventive care, which have historically exceeded the 3% general rate of inflation. According to a 2011 Fidelity Investments study, a 65-year-old couple would need $230,000 to pay for medical expenses through retirement, not including long-term care costs ranging from $35,000 for assisted living facilities and home health care, all the way up to $70,000 or more for nursing home care. These are significant expenditures which show no sign of decreasing. Traditional solutions such as Medicare and Medicaid are helpful, but they aren't always enough to meet an individuals needs. Around 69% of pre-retirees are very or somewhat concerned about having enough money to afford adequate healthcare; 51% of retirees share that level of concern. Additionally, 63% of pre-retirees are concerned about having enough to pay for long-term care; 52% of retirees share that concern.

If you are nearing retirement, or are already there, you need a strategy that addresses ALL of these risks. Professional mountain climbers know that most fatalities and injuries happen on the way down the mountain, not during the climb. Likewise, you have successfully navigated your way to the retirement savings summit. Now, you need a way to safely de-cumulate. There are a lot of risks to staying retired. If your current advisor is not helping you address all, or at least most of these risks, it's time for a second opinion.$

Get updates on financial and retirement planning delivered to your inbox.