Designing Your Income Annuity Plan

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While one of the benefits of income annuities as stated in Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan is reduced dependence on ongoing investment management, anyone considering the purchase of an annuity should first engage the services of a professional retirement income planner.

A professional retirement income planner, after discussing your retirement income needs with you and analyzing your financial situation, will prepare an income annuity plan that includes a comprehensive analysis and recommendations. The analysis should include multi-year cash flow, income tax, and portfolio projections that illustrate the following:

  • Use of income annuities vs. other types of annuities
  • Use of income annuities vs. other types of investments
  • Amount of taxable vs. nontaxable annuity payments in the case of nonqualified annuities
  • Taxation of projected Social Security benefits with and without single premium immediate annuities (“SPIAs”) and deferred income annuities (“DIAs”)
  • Affect of the use of income annuities on projected required minimum distributions (“RMDs”)
  • How income annuities are being used to close one’s income gap
  • Advantages and disadvantages of implementing an income annuity plan now vs. later
  • Projected portfolio assets in the event of a long-term care situation
  • Projected portfolio assets upon death
  • Projected ongoing cash flow following death to surviving spouse and other beneficiaries
  • Implementation of other planning techniques that can be used in conjunction with income annuities

If it is determined that fixed income annuities should be part of the recommended solution, the recommendations should discuss specific design parameters, including the following:

  1. Contract type: nonqualified or qualified
  2. Whether SPIAs and/or DIAs should be used
  3. Number of SPIA and DIA contracts to be purchased
  4. Initial purchase amounts
  5. Ongoing purchase amounts and timing of same
  6. Source of funds to be used for initial and ongoing purchases of each contract
  7. Whether the annuity contract is replacing another annuity contract or life insurance policy
  8. Plan type: period certain, life, joint life
  9. Payment commencement dates for DIAs
  10. Payment amount
  11. Payment frequency: monthly, quarterly, semi-annual, or annual
  12. Inflation percentage increase
  13. Number of payments in the case of a period certain
  14. Owners
  15. Annuitants
  16. Beneficiaries
  17. Life insurance companies

As you can see, the analysis and parameters associated with the design of an income annuity plan is complex, to say the least. Annuities should never be purchased as stand-alone products when used as part of a retirement income planning solution. A professional retirement income planner should always be engaged to perform the requisite analysis and make recommendations that will result in the best solution for determining, and closing, your projected income gap before purchasing any annuities.

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