Tag: deferred annuity

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Annuities Fixed Index Annuities Retirement Income Planning

How Flexible are Flexible Premium Deferred Annuities?

When planning for retirement, you need to generate sustainable income that will meet your projected inflation-adjusted financial needs during various stages. This often requires multiple income-generating sources that ideally start, and potentially stop, to match your projected needs at different stages of retirement.

A diversified portfolio of fixed income investments that’s part of your overall portfolio generally needs to be designed to provide the desired after-tax income amounts and timing of same. The planning is complicated, should begin well in advance of retirement, and needs to be monitored and updated on a regular basis.

One popular investment that’s designed for the fixed income portion of a retirement income plan is a fixed index annuity (“FIA”) with an income rider. When you invest in a FIA, you’re purchasing a deferred annuity. As defined in the Glossary, a deferred annuity is an annuity that doesn’t mature or begin making payments until some future date.

Deferred Annuity Types

There are two types of deferred annuities, both of which are suitable for inclusion in a retirement income plan: (a) single premium deferred annuity (“SPDA”) and (b) flexible premium deferred annuity (“FPDA”). The basic difference between the two is the allowable investment frequency. A SPDA is a one-time investment whereas a FPDA provides for multiple investments in the same annuity.

The key to understanding FPDA’s, including how they will fit into a particular retirement income plan, is that flexibility is in the eye of the beholder, or, in this case, the insurance carrier that issues a particular product. While a FPDA by definition allows for multiple premiums, the number of years the additional premiums may be added and/or the premium amounts are often limited by the terms of an annuity contract. This can be problematic where ongoing investments of specific amounts are required to achieve a targeted level of retirement income.

Types of Flexibility Restrictions

While many FPDA’s provide for indefinite additional investments, several have a limited defined window of opportunity. To give you an idea of the possibilities, let’s take a look at the FIA offerings available through the life insurance agency with which I’m associated.

Of the 52 FIA’s currently offered by 14 carriers, all of which are highly rated, 25 are SPDA’s and 27, or 52%, are FPDA’s. 16 of the 27, or 59%, of the FPDA’s have no restrictions regarding the number of years additional premiums may be added or the amounts of same.

That leaves 11 FPDA’s with restrictions, seven of which limit the number of years that additional premiums may be added and four limit the additional premium amount. The seven FPDA’s that limit the number of years uses either one or three years as the limitation. The four that limit the premium amount are all offered by the same carrier which limits additional premiums to $25,000 per year.

Retirement income planning requires flexibility. The ability to make unlimited additional investments after the first contract year without restriction as to dollar amount is an important consideration in many cases when evaluating FIA’s with income riders. In summary, the type of fixed income annuity and product that you’re evaluating needs to dovetail with your projected financial needs to increase your opportunity for success.

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Annuities Fixed Index Annuities

Your Fixed Index Annuity Income Rider – What You Don’t Receive – Part 2 of 2

Retirement Income Center

Per Part 1 of this two-part series, before we talk about what you receive when you purchase an income rider with a fixed index annuity, it’s important to understand what you don’t receive. As stated last week, this needs to be placed in the context of fixed income annuities. If you haven’t done so already, I recommend that you read last week’s post before continuing with this one.

There are four things that you don’t receive when you purchase an income rider with a fixed index annuity that are associated with fixed income annuities:

  1. Annuitization
  2. Immediate payments
  3. Ability to receive payments over a fixed period
  4. Annuitization tax treatment of nonretirement distributions

The first three things will be addressed in the remainder of this post, with a discussion of annuitization tax treatment of nonretirement distributions deferred to next week.

Annuitization

As explained last week, one of the unique features that’s associated with a fixed income annuity is the right to annuitize, or receive an income stream for a specified length of time from your investment. While you retain the right to annuitize the accumulation value of a fixed index annuity, the determination of income rider payment amounts is a separate calculation, independent of the accumulation value. Although they reduce the accumulation value of the contract, income rider payments are deemed to be withdrawals vs. annuitization of the contract. This is an important distinction when it comes to income tax treatment as you will learn about next week.

Immediate Payments

With a fixed index annuity income rider, you have flexibility as to when you begin receiving your income so long as you don’t need the income right away. Unlike fixed income annuities, however, where the payments that you receive can be either immediate or deferred, with fixed index annuities, the earliest income starting date generally doesn’t begin until twelve months after the contract’s issue date.

Ability to Receive Payments Over a Fixed Period

Another important difference between a fixed income annuity and the receipt of income payments using an income rider that’s attached to a fixed index annuity is the payment duration. Per Part 1, when you annuitize a fixed income annuity, the payments are made (a) over a stated period of months or years, or (b) for the duration of the insured’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. With a fixed index annuity, payments are for life. This is the case even if there’s no accumulation value remaining in the fixed index annuity.

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Annuities Fixed Index Annuities

Your Fixed Index Annuity Income Rider – What You Don’t Receive – Part 1 of 2

Retirement Income Center

As stated in last week’s post, while a fixed index annuity has several unique conservative and desirable investment features, assuming your goal is to create a lifetime retirement paycheck, you need to apply for an optional income rider when your retirement income planner submits your application. As pointed out last week, income riders are currently available with less than 40% of all fixed index annuities.

What exactly do you receive when you purchase an income rider with your fixed index annuity? How does it work? How can it be used as part of a retirement income planning strategy to create a lifetime retirement paycheck?

Before we talk about what you receive when you purchase an income rider with a fixed index annuity, it’s important to understand what you don’t receive. The remainder of this post will begin a two-part discussion devoted to this topic.

In order to understand what you don’t receive when you purchase an income rider with your fixed index annuity, we need to place it in the context of fixed income annuities. A fixed income annuity is the broad class of annuities under which fixed index annuities fall.

One of the unique features that’s associated with a fixed income annuity is the right to annuitize your investment. Per the Glossary, annuitization is defined as the irrevocable structured payout of an annuity with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the annuitant’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. That’s a roundabout way of saying that you’re entitled to receive an income stream for a specified length of time.

In addition, when you purchase a fixed income annuity, the timing of commencement of payments can be different, depending upon whether you purchase an immediate or deferred fixed income annuity. With an immediate annuity, payments begin one month after date of purchase. Deferred annuities generally won’t begin making payments for at least 12 months from date of purchase.

Finally, with fixed income annuities, when the income stream as defined by the terms of the annuity contract ends, so does the annuity contract. Unless there’s a refund feature, there’s no accumulation value that’s payable to the annuitant(s) or to his/her beneficiaries.

Now that you have a basic understanding of fixed income annuities, I will continue the discussion regarding what you don’t receive when you purchase an income rider with a fixed index annuity next week when I share with you the unique characteristics of fixed index annuity income riders compared to fixed income annuities in Part 2.

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Annuities Retirement Income Planning

Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan

Retirement Income Center

Last week’s blog post introduced a powerful income laddering strategy using a customized blend of fixed income annuities to create and optimize retirement income. As discussed, this strategy offers retirees the benefit of predictable inflation-adjusted income streams to close projected income gaps as well as generate tax efficiency for the nonretirement portion of one’s portfolio while reducing exposure to the gyrations of the stock market. Two types of fixed income annuities were introduced: immediate and deferred, with the former being the subject of this week’s blog.

Annuities have a long history, tracing their roots to Roman times. Contracts during the Emperor’s time were known as annua, or “annual stipends” in Latin. Roman citizens made a one-time payment in exchange for a stream of payments for a fixed term or for life.

In 1653, a Neapolitan banker named Lorenzo Tonti developed a system for raising money in France called the tontine whereby individuals purchased shares in exchange for income generated from their investment. As shareholders died, their income was spread among the surviving investors until the last person alive collected all of the remaining benefits. Although the use of tontines spread to Britain and the United States to finance public works projects, it was eventually banned since it created an incentive for investors to eliminate their fellow investors in order to obtain a larger payout.

Private sector annuities have been available in the United States for over two centuries. In 1759, Pennsylvania charted a company to provide survivorship annuities for families of ministers. In 1912, The Pennsylvania Company for Insurance on Lives and Granting Annuities was founded and became the first American company to offer annuities to the general public.

The earliest commercial annuities became the predecessor for immediate income annuities, otherwise known as single premium income annuities, or “SPIAs,” that are in widespread use today.

Immediate income annuities, or SPIAs, are distinguished from deferred income annuities, or DIAs, based on the timing of commencement of payments from the insurance company to the annuitant. “Immediate” is somewhat of a misnomer since the payments don’t begin immediately after investment in an annuity contract. Most annuity investors choose a monthly payout and therefore receive their first payment from a SPIA one month after purchase. Initial payments will be delayed for one quarter, six months, or a year when quarterly, semi-annual, and annual payout modes, respectively, are elected.

While a customized blend of SPIAs when used in conjunction with deferred income annuities, or DIAs, can be an ideal retirement income laddering strategy, an individual SPIA can solve many income needs. As such, it’s often used as the cornerstone of retirement income plans. SPIAs’ unique characteristics and benefits are very appealing to retirees since they include the following, several of which also apply to DIAs:

  1. Immediate, predictable, guaranteed income (subject to individual insurers’ claims-paying ability), often for life, beginning at retirement
  2. Protection against outliving assets
  3. Flexible choices of payment plans to meet one’s needs
  4. Choice of frequency of payments
  5. Reduction of income tax liability through tax-favored status in nonretirement accounts, potential reduction of taxable Social Security benefits, and reduction of required minimum distributions (RMDs) in retirement accounts
  6. Reduced exposure to fluctuation of the stock market to the extent that funds used to purchase SPIAs were previously invested in the market
  7. Reduced dependence on ongoing investment management and associated reduction of investment management fees to the extent that funds used to purchase SPIAs were previously professionally managed

As a tradeoff for the foregoing seven benefits, it must be kept in mind that the purchase of all annuity contracts, including SPIAs, is usually an irrevocable action. Once an annuity has been purchased, the owner doesn’t have the right to terminate the contract and request a refund without incurring a substantial penalty. In addition, depending upon how the payout is structured, it could last for many years, potentially over the lifetimes of two or more individuals.

Immediate income annuities, when properly customized for a particular financial situation, can result in reduced financial worries and an associated positive retirement experience. While they can be an effective cornerstone for many retirement income plans, however, they usually aren’t a total solution for creating and optimizing retirement income.

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Annuities Deferred Income Annuities Retirement Income Planning

Using Fixed Income Annuities to Build Your Income Portfolio Ladder

Retirement Income Center

The previous two blog posts introduced the income portfolio plan strategy and the importance of designing laddered income streams to fund a retirement income plan. If you haven’t read these two posts yet, I would recommend that you do so before reading this one. This post introduces a powerful income laddering strategy that can be used to create and optimize your retirement income.

As stated in last week’s post, due to the fact that our financial situation and needs will change at different stages of our retirement years, a retirement income plan must provide for different and distinct income streams to match our expense needs associated with each stage. One of the most efficient ways to do this is through the use of a customized blend of fixed income annuities. Before discussing this technique, let’s first review some basics of annuity investing for those of you who may not be familiar with this often misunderstood type of investment.

Annuities are offered by life insurance companies through a contractual relationship between the insurance company and the owner of an annuity contract. A distinguishing feature of annuities from other types of investments is “annuitization,” or the ability to convert the annuity to an irrevocable structured payment plan with a specified payout by the insurance company to an individual(s), or “annuitant(s)” over a specified period of time through different lifetime and term certain options offered by the insurance company.

Unlike most non-retirement vehicles that have ongoing income tax consequences associated with them while you own them, a basic distinction between annuities and other types of investments is that annuities offer the tax-deferred advantages of retirement assets such as 401(k) plans and IRA’s without several of the negative tax consequences associated with the latter.

There are two basic types of annuities, both offered by life insurance companies: fixed and variable. Fixed annuities are similar to CD’s since they have a fixed, pre-defined term and interest rate and don’t fluctuate in value. Unlike CD’s which are offered by banks and are insured up to FDIC limits, fixed annuities guarantee principal subject to the claims-paying ability of individual insurance companies. Variable annuities, on the other hand, are invested in equity investments, such as mutual funds, and as such, fluctuate in value and have greater risk associated with them.

When annuities are annuitized, they are referred to as “income annuities.” Unlike any other income planning strategy, in addition to closing projected income gaps, fixed income annuities can be structured to provide predictable inflation-adjusted income streams as well as tax efficiency for the nonretirement portion of one’s portfolio. Two types of fixed ncome annuities that will be the subject of, and will be discussed in more detail in, the next two blog posts can, and generally should, be used: immediate and deferred.

Single premium immediate annuities, or “SPIAs,” make periodic payments, typically monthly, for a specified number of months or for an individual’s lifetime or joint lifetimes as applicable. The payments generally begin one month after purchase of a SPIA, hence the term “immediate.”

While the use of SPIAs is widespread, deferred income annuities, or “DIAs,” are currently offered by only a handful of life insurance companies. Like SPIAs, DIAs pay periodic income for a specified period of time or over one’s lifetime or joint lifetimes as applicable. Unlike SPIAs, however, the start date of the payments for DIAs is deferred for at least 13 months from the date of investment.

The power of the use of a customized blend of fixed income annuities, including their preference as a retirement income planning solution, will become apparent in future blog posts. Suffice it to say, this is definitely the way of the future for many retirees to benefit from predictable inflation-adjusted income streams to close projected income gaps as well as generate tax efficiency for the nonretirement portion of one’s portfolio while reducing exposure to the gyrations of the stock market.