Managing Post-Retirement Risks: Longevity

The past decade has seen not only economic uncertainty and volatility, but also an increased emphasis on individuals taking responsibility for securing their financial well-being in retirement. As a result, today's retirees may be exposed to a variety of risks that can affect them both as individuals and as members of society.

Longevity: Outliving Retirement Resources

Managing one's own retirement funds over a lifetime has many pitfalls, even with expert help. Nobody knows how long the money must last.

Life expectancy at retirement is an average, with some retirees living longer and a few living past 100. Counting on living only to a certain age is risky, and planning to live to the average life expectancy for someone their age will be inadequate for about half of retirees. In theory, retirees want to make sure their money will last a lifetime without cutting back on expenditures or reducing their standard of living. In practice, unexpected events may make this very difficult.

A licensed insurer is the only entity outside the government that can contractually guarantee to pay lifetime income. However, purchasing an annuity involves trade-offs; the household must give up the account balance to purchase the income stream. Financial products from firms that aren't in the insurance business could run out of money to pay income to a long-lived individual.

Predictability

Long lifetimes are difficult to predict for individuals. It's easier to predict the percentage of a population with a long life than to do so for an individual. In the total population, women live longer than men and wives outlive husbands in most cases.

Longevity has increased over time. Any medical breakthroughs could bring additional improvement.

Managing the Risk

Social Security, traditional pensions and immediate payout annuities all promise to pay an individual a specified amount of income for life. In addition, they may also pay income to the surviving spouse or other named survivor. Some newer products can help protect retirees from outliving their assets.

Deferred variable annuities and indexed annuities can include guaranteed lifetime withdrawal benefits that guarantee the availability of annual withdrawals up to a specified amount, even after withdrawals have exhausted the account value.

"Longevity insurance" is an annuity that guarantees a specified income amount but does not start paying benefits until an advanced age, such as 85. This niche product may fit into a carefully designed financial plan.

"Managed payout" plans, offered in several forms by financial services firms, enable the retiree to draw down assets gradually. Lifetime income from such plans is not guaranteed, but is set at a level that provides a high probability that income can be received for many years, e.g., to age 90. In some cases, a "contingent deferred annuity" can be added to guarantee that the income payments will continue for a lifetime.

A Reverse Mortgage can convert home equity into ongoing monthly income as long as the homeowner lives in the home. Administrative charges for these mortgages can be high.

Conclusion

"Payout annuities," also called immediate annuities or income annuities, can be useful for retirees because they maximize the amount of guaranteed lifetime income available from a sum of money.

Some mutual fund companies are offering "annuity alternative" arrangements to ensure liquidity in retirement with cash/mutual fund structures that can be blended with annuities.

An annuity that seems unattractive to buy at retirement age may make sense later. Multiple annuity purchases can be made over time to average interest rates inherent in their purchase prices. People generally should not annuitize all their assets, but they may want to consider annuities in their overall retirement plan.

Financial projections can be very useful in retirement planning , but actual experience will differ. All retirees should review their expected income needs and sources at least every few years and adjust spending if necessary.

Reverse mortgages can help to mitigate risk in some cases, but they may also increase it in others. Care is needed in the use of these products. The mortgage proceeds can be paid in a lump sum, as a monthly income, or as a line of credit.

Annuities and reverse mortgages differ in an important way. When interest rates are higher, you get higher monthly payments when you buy an annuity. In contrast, when interest rates are higher, you get lower monthly payments if you take out a reverse mortgage.

Retired individuals with outstanding mortgages can effectively improve their monthly cash flow by replacing the conventional mortgage with a reverse mortgage, using the lump sum proceeds of the reverse mortgage to pay off the conventional mortgage.$

Next up: Inflation

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Life Insurance - Your Retirement Account's Best Defense

The single best, most cost-effective yet amazingly underutilized strategy for protecting retirement account balances, especially large ones, from being decimated by the highest levels of combined taxation is buying life insurance to offset the tax burden beneficiaries may face.

How Much Life Insurance Should You Have?

You should have enough to cover the taxes and other expenses that must be paid on your estate after you're gone. To do that you will need to know the balance in your account at the time of your death, which means you will have to project that balance. You cannot go by today's market or values - because if you have an IRA that's worth, say, $1 million right now and you are only 60 years old, that IRA could easily be worth $5 million or more over the long term given today's long life expectancies.

A good rule of thumb is to buy enough life insurance to cover at least 50 percent of the projected value of you estate at your death. That may seem like a lot of insurance to buy now, but as you and your account grow older and fatter, not only will purchasing more life insurance become an increasingly expensive proposition, but if your health deteriorates, you may become uninsurable.

A quick way to estimate the value of your IRA (without taking withdrawals or taxes into account) is to use the "rule of 72." This is a little math trick that shows how many times over the years your retirement account money will double at a given interest rate. Just divide 72 by an estimated average interest rate. For example, if you use a conservative interest rate of, say, 6 percent, that means your money will double ever 12 years (72/6 = 12). An 8 percent rate would double your money every 9 years (72/8 = 9), and so on.

Let's use the rule of 72 with some dollar figures, and say your IRA isn't a million but $300,000, and you're not 60 years old but 50 (with a life expectancy of 86).

Using an average 8 percent interest rate for the rest of your life, the value (straight growth excluding withdrawals or taxes) of your $300,000 IRA will double every nine years (72/8 = 9), so that by the time you reach 86, your $300,000 IRA will have doubled four times and be worth $4.8 million!

It is absolutely astounding what compound interest can do, especially in a tax-deferred account such as an IRA. That is why even people with modest retirement accounts need life insurance. Through the magic of compounding, even the smallest accounts can well exceed the estate tax exemption (currently $5.34 million) come inheritance time.

So, there you have the "Insure It" step. It really is amazing to see how powerfully a creative but simple life insurance plan can build tax-free wealth, isn't it? Can you imagine choosing tax confiscation of your retirement account when this alternative exists? And yet many hundred of thousands continue to do just that, even with professional advice.

But you're not going to be one of them, are you?

You've seen the light!$

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Source: The Retirement Savings Time Bomb...And How To Defuse It by Ed Slott

Retirement Income Planning: Risky Business



With millions of baby boomers in or nearing retirement, a huge concern is what to do with the trillions of dollars in retirement savings that they have accumulated. How do they reinvest their savings, ration it over time, or protect it from taxes?

Few employer-sponsored retirement plans offer advice or options for converting savings into retirement income. Many people will leave their plans with a lot of money but no strategy for investing it, protecting it from taxes, or spending it. Without a strategy, an employee may withdraw her money in one lump sum, fail to roll if into an IRA, and lose 25 percent of it to taxes in the first year. Obviously, the a sense of an income plan raises the risk of running out of savings during retirement. 

Running out of money in retirement is too large a risk to self-insure. Retirees need the best information and tools to help them determine how much income they will need, where the money will come from and how to make it last. They need access to safe, affordable lifetime income products.

Given the continued importance of individual responsibility in accumulating and managing retirement assets, there is a greater need than ever before for education and guidance. Individuals who do not fully understand their situation can be unduly influenced by emotions. For example, as the Hueler Companies noted in in its written statement to the United States Senate Special Committee on Aging in June 2010, research indicates that retirement decisions are often influenced by behavioral factors - such as fear of the unknown, lack of trust, and desire for control.

Retirement age plays a critical role
One of the most important decisions individuals face is when to retire. The Society of Actuaries 2007 and 2009 Surveys Post-Retirement risk indicate that many people do not fully understand the impact of retiring later, and that they underestimate the impact of working longer. In addition, the decisions surrounding Social Security claim in age are misunderstood, especially by couples.

An unprecedented challenge 
The challenge for those who are pension-less - including those who have ample savings - will be to convert those savings into do-yourself pensions. The new retiree will face three important risks: sequence-of-return risk, investment risk, and longevity risk. These risks exist for almost everyone, but not everyone chooses to acknowledge them - and even fewer choose to insure against them. Transferring these risks are for people who choose not to ignore:

• Investment risk: The possibility that your portfolio won't earn enough to support you in retirement.
• Sequence-of-returns risk: The chance that, just before or after you start drawing down your savings, a sharp market downturn and take a huge bite out of your portfolio and greatly increase your chance of running out of money too soon.
• Longevity risk: The chance that you'll outlive your financial resources.

In the distant past, many people worked at a single company for their entire career. At retirement, most people left the company with a pension that took care of their retirement income needs for the rest of their life.

When it came to figuring out retirement income, all one had to basically do was fill out a form to determine how they wanted to take their pension and whether or not they wanted to include a spouse. From there, their job was quite simple: merely deposit each check every month (before direct-deposit days) for the rest of their lives.

All the difficult and complicated decisions as to...

• Where to invest
• How to get the most amount of income
• How to compensate for inflation
• How to ensure one wouldn't run out of money
• How to keep income flowing to a surviving spouse

...were left in the hands of professional actuaries and managers who collectively spent all their time making all these complex decisions for us.

These days, however, things have changed quite a bit. Especially of the last decade, pensions have quickly become a dinosaur of the past. Only a select few still get them and for those that do, governments and corporations are successfully reducing, and in some cases, completely eliminating them.

So it's now up to us individuals to do the job that those full-time, experienced pension managers once provided. In most cases, retiring simply means retiring from one's job but the work isn't over. In many cases, it's just begun and this new work is being the CEO of your own retirement company. Are you prepared to handle this responsibility and these risks on your own?$

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Annuitizing Retirement

Retirement today requires more planning than for previous generations. Americans are living longer - many will live 20 to 30 years or more in retirement. Finding a way to make savings last over such a long period of time is one of the biggest challenges of today's retirees.

In addition, sources of steady retirement income have changed. Fewer workers are covered by traditional employer-provided pension plans that provide a lifetime benefit. Also, Social Security is not likely to provide future retirees the level of benefits that it provides today. Americans need other ways to create and guarantee lifetime income so their standard of living doesn't decline with age.

To achieve a secure retirement, more and more retirees are including an individual annuity in their plans. An annuity can provide a steady stream of income for life, shifting the burden of managing savings from you to your life insurance company. No other personal financial product offers this guarantee of lifetime income. For many, the income guarantee helps offset worries associated with running out of money.

To assure yourself an income during retirement, consider "annuitizing" a portion of your retirement savings. Annuitizing means converting some of your assets into regular income that can last for a specific number of years or for life. This post will explain the pros and cons of annuitization and help you decide if it's the right way to help meet your retirement income needs.

Should you annuitize?
You should annuitize if you want to reduce the risk of outliving your assets. Because you receive a guaranteed income stream, annuitizing can help protect your standard of living in retirement.

When is the best time to convert to an income stream?
It depends on your situation. It could be at retirement  or whenever you need to replace other sources of income.

How much income could you receive by annuitizing?
It depends on the amount you convert, your life expectancy, interest rates, and the payment option you choose.

Can you change your mind after annuitizing?
The decision to convert is irrevocable - you can't change your mind. And once you choose an annuity payment option, the decision becomes irrevocable as well.

Benefits of Creating an Income Stream with a Portion of  Your Retirement Assets

• Guarantee yourself - and someone else, if you wish - an income for life. (Other distribution methods - automatic withdrawals, lump-sum distributions - don't do this.)
• Spend more comfortably, knowing that your risk of running out of money is reduced.
• Create your own pension.

Set up your income stream to meet your priorities
By choosing the right payment option and calculation method, you can tailor your income stream to meet your needs, and, if you wish, the needs of your spouse or others.

Choose a payment option

Option 1: Life annuity.
If you choose yourself as the "annuitant" - the person whose life expectancy will be used to calculate each annuity payment - you'll be guaranteed income for as long as you live.

Option 2: Joint and last survivor annuity.
If there are two annuitants, such as you and your spouse, payments will continue as long as either of you is living. The survivor, or joint annuitant, can receive payments that are 100%, 75%, or 50% of the original amount.

Option 3: Life annuity with period certain.
You'll receive payments for a specific periods ranging from 5 to 30 years. If you die before the period ends, your beneficiary receives the remaining payments. This option is available only with fixed payments.

Other income options are available. You also can choose to receive income in a series of payments for a specified number of years.

All annuity contracts offer their owners the right to convert the money in their annuity to a guaranteed lifetime income. If the owner buys an immediate annuity, the conversion takes place within a year of the purchase date. If the owner buys a deferred annuity, he has the right to convert at some future date.

Federal Tax Treatment
Earnings on a deferred annuity build up free of current federal income tax. When you withdraw money or receive income payments, the portion that comes from earnings is taxed as ordinary income. With an immediate annuity, you pay ordinary income taxes on any earnings when you receive payments. The portion of the payment that represents your initial contribution is not taxed if your annuity was purchased with after-tax dollars.

Because taxes are deferred until money is withdrawn or received as income, there are tax penalties for early withdrawals. If you choose to withdraw money from your deferred annuity before you reach age 59 1/2, you will trigger a 10 percent tax penalty on the earnings portion of the amount withdrawn plus the income tax due on earnings.

Annuity earnings also may be subject to state taxes, which vary according to state. Check with a local tax adviser for more information.$
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The Facts About Fixed Indexed Annuity Compensation

Clearing up the confusion that can surround the subject of commissions and compensation on financial services products is very important. Financial journalists routinely fail to differentiate risk-based variable annuities from guaranteed fixed annuities. This omission leads to consumer confusion and even greater retirement illiteracy. Let's look at some basic facts.

Common Misconceptions About Indexed Annuities
There is not one type of annuity. There are two types: fixed and variable. Typically, when it comes to articles relating to annuity fees and commissions, these two very different types of annuities are lumped together under the broad term "annuities". This common practice is very confusing to the reader and does not help them understand their annuity choices.

Variable annuities offer investment choices, and returns are determined based on the performance of the investment options chosen. The money placed in the variable annuity is not protected from market loss.

From a fee perspective, variable annuities can include insurance charges, investment management fees, surrender charges, and rider charges.

Fixed annuities promise that you will never lose money as long as you follow the terms you agreed to when you purchased the annuity. Fixed annuities also promise that you will at least receive a guaranteed minimum interest rate.

Fixed annuities pay a guaranteed interest rate for a set period of time. This rate reflects reductions for expenses and profits. The rate is clearly stated in the contract and is easy to compare with other fixed annuities or similar products. Fixed annuities typically have surrender charges.

A Fixed Indexed Annuity is NOT an investment product. Because an indexed annuity is not an investment, it is not designed to perform like one. Indexed annuities are not intended to earn interest that is comparable to investments during the best of bull markets. However, because an indexed annuity is an insurance product, and not an investment, your annuity will not lose value when the market goes down.

The costs of marketing and providing the insurance guarantees are paid for by the insurance company the same way all insurance product expenses are paid for, including homeowners, auto and life - under the general account of the insurance company. Most importantly, the annuity buyer's premium and earned interest (annuity value) is never charged to cover these costs. Optional income riders can be purchased and are paid for out of the annuity value.

The average commission paid on indexed annuities have continually dropped, and average around 6% (and even lower for annuities sold to older-aged purchasers). Keep in mind that this commission is paid one time, at point-of-sale only, and the agent services the contract for life.

How Insurance Agents are Paid
There are essentially three types of compensation structures in the financial services sector. The first type is a commission, paid to the agent at the time the annuity is sold, once the annuity premium has been paid. Since most annuities are purchased with a single premium, the agent is paid only one time; they are not paid again on that annuity. The insurance company pays the agent directly in this type of compensation structure. There is no need to pay continuous commission payments on an indexed annuity, as are paid out with the next type of compensation structure.

The second type of compensation is paid based on assets under management (AUM). This type of compensation structure is used by most financial professionals who manage asset portfolios or sell securities, which can both increase and decline in value. In this structure, the financial professional is paid continually, often at a rate of 1% or more annually, on all of the assets that he or she manages for the client. This type of compensation arrangement provides incentive for the financial professional to manage the assets responsibly, and minimize any losses. The compensation paid to such financial professionals is paid directly from those assets. Because the financial professional is being paid to manage the assets, they are paid continually, regardless of the asset performance.

The third type of payment structure is often referred to as fee-based. A financial consultant charges a fee to review the customer's financial objectives, design a plan to meet those objectives, and make recommendations on what products to purchase to achieve those objectives. When the plan is executed, the customer may pay asset management fees, the insurance company might pay the agent for the sale of an annuity, or both payments may be made, depending on the plan and the products purchased.

In closing, annuities are not perfect products - there is no such thing. Annuities are neither one-size-fits-all nor too good to be true. However, annuities are fantastic contractual solutions that solve specific problems. Your situation is unique to you. When making a decision to purchase an annuity, it's important to remember that you should own an annuity for what it will do (contractual guarantees), not what it might do (hypothetical returns).$

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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.$

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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.$

 

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