Tag: DIA’s

Categories
Annuities Celebration Retirement Asset Planning Retirement Income Planning Roth IRA

Retirement Income Visions™ Celebrates 1-Year Anniversary!

Retirement Income Center

It’s hard to believe that a whole year has gone by since Retirement Income Visions™ initial blog post, but it has! This marks Retirement Income Visions™ 52nd post since it debuted on August 16, 2009 as a weekly blog, with new posts published each Monday morning.

As stated in the initial post, Retirement Income Visions™ Makes Its Debut, the blog, and the associated importance of retirement income planning as a separate and distinct niche, was inspired and motivated by my clients’ experience during the October, 2007 – March, 2009 stock market decline.

Also, as stated in the initial post, my goal in writing Retirement Income Visions™ was, and still is, to bring to your attention innovative planning strategies that you can use to create and optimize your retirement income, and, in many cases, reduce your exposure to adverse financial market conditions. If reader feedback, Twitter followers, and media attention, including a May 15th quote by The Wall Street Journal as the result of the timely publishing of the May 10th post, Be on the Lookout for Roth IRA Conversion Opportunities, is any indication, it appears that I’m off to a great start in achieving this goal.

I’ve covered a broad spectrum of information over the course of the last year, however, it’s been anything but random. If you’re a subscriber or regular reader, you’ve probably noticed the themed approach that’s been used to build upon, and provide a body of knowledge about, different retirement income planning topics. This has included the creation of a customized Glossary of Terms to assist in the understanding of the technical subject matter. The Glossary currently includes definitions of 84 terms.

Following the initial post, the next 11 posts addressed the retirement planning paradigm shift from retirement asset to retirement income planning, including associated risks associated with the former type of planning that has been the impetus for this shift.

The last 8 posts of 2009 focused on creating and optimizing retirement income via strategic systematic implementation of single premium immediate (“SPIA’s”) and deferred income (“DIA’s”) annuities. This series culminated in the December 28, 2009 interview of Curtis Cloke, the inventor of the Thrive® Income Distribution System, one of the leading retirement income planning solutions available to financial advisors.

2010 kicked off with the January 4th publishing of What Tools Does Your Financial Advisor Have In His or Her Toolbox? This post cited a 2009 Fidelity study that found that 83% of investors between the ages of 55 and 70 who are working with a fee-based adviser believe it’s more important for them to generate guaranteed (subject to individual insurers’ claims paying ability) income for retirement than to deliver above-average returns. The implied dilemma is that not all financial advisors have made the transition from using retirement asset to retirement income planning strategies for their clients.

Beginning with the January 11th post, Year of the Conversion, the last 30 posts have focused on a retirement income planning strategy that, although it has been around since 1998, was thrust into the limelight this year with the removal of its entrance barrier. I’m referring to the Roth IRA conversion technique that, up until 2010, was limited to taxpayers with modified adjusted gross income of less than $100,000.

While anyone who has a traditional IRA can convert part or all of his/her accounts to one or more Roth IRA accounts to embrace the two main attractions of a Roth IRA, i.e., nontaxable distributions and no required minimum distributions (“RMD’s”), this strategy isn’t necessarily beneficial for all traditional IRA owners. This is one area where multi-year income tax and retirement income planning analysis is essential for determining (1) who is a good candidate, (2) how much traditional IRA should be converted, and (3) when conversions should be made. In addition, there are various tricks and traps that need to be understood and incorporated in Roth IRA conversion planning in order to increase the probability for success.

I want to thank all of my readers for taking the time to read Retirement Income Visions™. A special thanks to my clients and non-clients, alike, who have given me great feedback regarding various blog posts. Last, but not least, thank you to my amazing wife, Nira, for all of her support with this endeavor. She has spent many a Saturday morning the last year doing other activities while I’ve been sitting at my desk writing this blog.

Categories
Annuities Deferred Income Annuities Retirement Income Planning

What Tools Does Your Financial Advisor Have in His or Her Toolbox?

Retirement Income Center

I want to wish all of my readers a very Happy New Year! The theme of the last eight blogs, beginning with the November 9th post, Using Fixed Income Annuities to Build Your Income Portfolio Ladder, through last week’s post, The Thrive® Income Distribution System – A Revolutionary Retirement Income Planning System, was creating and optimizing retirement income with fixed income annuities.

To summarize, the strategic implementation of single premium immediate (“SPIA’s”) and deferred income (“DIA’s”) annuities by trained and experienced professionals as part of a comprehensive retirement income plan can be a powerful solution for generating guaranteed (subject to individual insurers’ claims-paying ability), inflation-protected, and tax-efficient income that, when combined with other sources of income, e.g., Social Security, is designed to match a client’s projected retirement income needs.

If you’re within ten years of retiring or if you retired within the last ten years, you may be wondering why your financial advisor hasn’t talked to you about any of the strategies discussed in the last eight blogs. Rest assured, you’re not alone. A 2009 Fidelity study found that 83% of investors between the ages of 55 and 70 who are working with a fee-based adviser believe it’s more important for them to generate guaranteed (subject to individual insurers’ claims paying ability) income for retirement than to deliver above-average returns.

In the same study, 97% said protecting against market volatility is the most critical role that advisors can play today, and 86% said they would be interested in a product with monthly guarantees for life. So why isn’t your financial advisor talking to you about these types of products?

There’s a strong likelihood that if your financial advisor isn’t discussing fixed income annuities with you, he or she probably isn’t licensed and trained to do so. While your financial advisor may be an excellent retirement asset planner, he or she may not be equipped with the necessary tools to design and implement a comprehensive retirement income planning solution for you.

The purchase of annuities as part of a retirement income planning solution involves a technical process that requires the expertise of a trained and experienced professional, in this case, a retirement income planner. As stated in the December 21st post, Designing Your Income Annuity Plan, the design of an income annuity plan is complex and annuities should never be purchased as stand-alone products when used as part of a retirement income planning solution. As evidence of the technical nature and complexity of this area, 18 out of 56, or one-third, of the terms currently in the Glossary of Terms section of Retirement Income Visions™ were added in conjunction with the last eight posts.

As explained in The Retirement Planning Paradigm Shift – Part 2, retirement planning is undergoing a paradigm shift. Instead of relying on retirement asset planning as a solution for both the accumulation and withdrawal phases of retirement, people are beginning to recognize, understand, and appreciate the need for, and value of, employing retirement income planning strategies during the withdrawal phase. The understanding of this paradigm shift is the first step that is necessary for a financial advisor to be successful in the retirement income planning arena.

Once a financial advisor understands the difference between retirement asset vs. retirement income planning, and the importance of using retirement income planning strategies for clients approaching or entering retirement, he or she then must acquire the requisite tools to practice as a retirement income planner if not already possessed. To begin with, in order to sell any type of annuity, an individual must have a valid life/health agent insurance license issued by the state in which he or she would like to sell annuities. As with all professional licenses, there are initial and ongoing educational requirements to obtain, and maintain, an insurance license.

With any profession, while education provides the foundation, experience, in this case, in retirement income planning, including the design and implementation of retirement income planning strategies, is essential. The knowledge and experience obtained from having other related professional licenses and credentials, such as the CERTIFIED FINANCIAL PLANNER™ designation, CPA, or CPA Personal Financial Specialist (PFS), can also prove to be quite valuable in the design and implementation of a retirement income plan.

If you’re within ten years of retiring or if you retired with the last ten years, you may want to take a peek into your financial advisor’s toolbox to see if he or she has the tools to design, implement, and maintain a retirement income plan for you that will provide guaranteed (subject to individual insurers’ claims-paying ability), inflation-protected, and tax-efficient income that, when combined with other sources of income, e.g., Social Security, is designed to match your projected retirement income needs.

Categories
Annuities Deferred Income Annuities Retirement Income Planning

Designing Your Income Annuity Plan

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.

Categories
Annuities Deferred Income Annuities Retirement Income Planning

Lifetime Annuity Payout – Watch Out!

Retirement Income Center

Using Fixed Income Annuities to Build Your Income Portfolio Ladder introduced two types of fixed income annuities: single premium immediate annuities, or “SPIAs,” and deferred income annuities, or “DIAs.” As stated in that blog post, while the use of SPIAs is widespread, DIAs are currently offered by only a handful of life insurance companies.

SPIAs and DIAs come in two flavors insofar as the length of time that life insurance companies are on the hook for making payments to you: life annuities and period certain annuities. While SPIAs have traditionally been favored over DIAs, life annuity payment modes have generally been chosen over period certain annuities. This is understandable since most people don’t want to run out of money, with married couples preferring income to last for the remainder of both individuals’ lifetimes.

A life, or joint life, payout, can be a great choice in certain situations, however, if your goal is to create a retirement income plan that provides for different and distinct income streams to match your expense needs associated with different stages of your retirement years, it probably won’t be the best solution. Also, a lifetime payout, due to the open-ended nature of the number of payments, is the most expensive annuitization choice. Finally, unless you purchase an appropriate amount of life insurance in conjunction with the commencement of lifetime annuitization of a fixed annuity, you could potentially lose your entire investment after receiving just one annuity payment.

Let’s take a look at the last situation first since it is potentially the most devastating. Suppose that you are 65 and the value of your fixed income annuity is $250,000 when you decide to annuitize it, choosing a life annuity payment option resulting in a $1,400 per month payment to you for the rest of your life. This seems like a good deal to you since you will be receiving $16,800 a year, or 6.7% of the current value of your investment each year for the rest of your life. After receiving your first electronic deposit (whatever happened to checks?) for $1,400, you die in a car accident. Guess what? Game over. Life insurance company passes go and retains $248,600 ($250,000 – $1,400). Your beneficiaries receive nothing.

The previous example, while it’s certainly possible, is not your typical scenario. What’s more likely to occur is that you will live for a longer period of time, say ten, twenty, or even thirty years, receiving $1,400 each and every month. While it may not end up being such a great deal if you live to 75 since you will receive a total of $168,000, or $82,000 less than the value of your investment of $250,000 when you began receiving payments, if you live twenty or thirty years, you will receive payments totaling $336,000 or $504,000, respectively.

While you may receive payments under a life payout option for an extended period of time that may meet your needs when you retire, this generally won’t be the case after five or ten years due to inflation. Assuming 3% inflation, your $1,400 per month payment will be worth $1,045 in ten years, $775 in twenty years, and $580 in thirty years. Unless your retirement income plan includes another source of income kicking in ten years into your retirement, e.g., a deferred income annuity, or DIA, you may be forced to adjust your lifestyle and/or sell your house in order to cover your expenses.

Finally, when deciding between different payment options, always keep in mind that a lifetime payout is always going to be the most expensive way to go. When you choose this option, and assuming that you are 65 when you begin receiving payments, keep in mind that the life insurance company is potentially liable for making payments for 30, 40, or more years. Due to the open-ended nature of the number of payments combined with increasing life expectancies, the monthly payment that you will receive by choosing a life, or joint life payout, will usually be much less than if you choose a term certain, e.g., twenty years, payout.

Categories
Annuities Deferred Income Annuities Retirement Income Planning

Deferred Income Annuities: The Sizzle in a Retirement Income Plan

Retirement Income Center

The blog post two weeks ago, Using Fixed Income Annuities to Build Your Income Portfolio Ladder, introduced a powerful income laddering strategy using a customized blend of two types of fixed income annuities to create and optimize retirement income. The purpose of the strategy bears repeating since it is the catalyst for this week’s blog. As discussed two weeks ago, 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.

The two types of fixed income annuities that are used to implement this strategy are immediate and deferred. Immediate income annuities, or “SPIAs” (the acronym for single premium immediate annuities) was the subject of last week’s blog. I encourage you to read this post if you haven’t done so already. It discussed the unique characteristics and benefits of SPIAs that often position them as the cornerstone of retirement income plans. This week’s blog focuses on the second type of fixed income annuity that is used to create and optimize retirement income – deferred income annuities, or “DIAs.”

As noted in Using Fixed Income Annuities to Build Your Income Portfolio Ladder, while the use of SPIAs is widespread, deferred income annuities, or “DIAs,” are currently offered by only a handful of life insurance companies. These include Hartford Life, Prudential, and Symetra Life Insurance Company.

DIAs are similar to SPIAs since they both 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. Whereas SPIAs may be viewed as the steak in a retirement income plan, DIAs are the sizzle.

Why use DIAs in a retirement income plan? As illustrated in Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan, an individual SPIA can solve many income needs due to its many unique characteristics and benefits. As pointed out in Is Your Income Portfolio Plan Laddered?, our financial situation and needs will change at different stages of our retirement years. As a result, the primary goal of an income plan should be to generate different and distinct income streams to match our expense needs associated with each stage while also funding periodic one-time needs.

Given this reality, the income from a single investment that makes a fixed payment beginning one month after purchase for either a fixed number of years or for the remainder of one’s life, i.e., a SPIA, while it may, in combination with other income sources, match one’s income needs for the first several years of retirement, generally will not, in and of itself, accomplish this result for the entire duration of most individuals’ retirement. Recognizing this fact, the life insurance industry developed a solution that has all of the wonderful benefits that retirees seek from SPIAs with one big difference: a delayed start date.

As an example of the use of DIAs in a retirement income plan, suppose that you are about to retire, your monthly income need is $6,000, with $2,000 covered by Social Security, and the other $4,000 met by withdrawals from an IRA. The problem is that the value of your IRA account is projected to enable you to take your required monthly withdrawals of $4,000 for only ten years before it is depleted. In addition to your IRA, let’s assume that you also have a nonretirement brokerage account with a value of $700,000. Recognizing your predicament, you invest $500,000 from your brokerage account into one or more DIAs that will begin to pay you $4,000 per month plus an annual increase of 3% for twenty years beginning ten years from today.

In addition to solving a retirement income need that isn’t projected to begin until several years into retirement – ten years in the example – DIAs allow you to take advantage of another often-ignored financial planning strategy: time value of money. If you were to purchase the same income annuity as the one in the example, with a monthly payout of $4,000 with an annual increase of 3% and a twenty-year payout that begins one month from today instead of ten years from today, i.e., a SPIA, in addition to not matching your income needs, you may be required to invest an additional $150,000, or $650,000 from your $700,000 brokerage account.

DIAs are the sizzle in a retirement income plan since you can combine them with SPIAs to design a customized retirement income plan that will enable you to enjoy predictable inflation-adjusted monthly income that, in combination with other source of income, e.g., Social Security, dovetails with your projected income needs for the duration of your retirement while minimizing or eliminating the risks associated with investment in the stock market. I would venture to say that most retirees would be very satisfied with this solution.