Tag: income rider

Categories
Annuities Fixed Index Annuities Social Security

Delayed Gratification is the Key to Maximizing Income with Fixed Index Annuities

When you’re planning for retirement, income is the name of the game. The more sustainable income that you can generate, the less you need to worry about things like sequence of returns and major stock market downturns – before and during retirement.

The idea is to build a base, or floor, of predictable income that will cover your day-to-day expenses. For most people doing retirement income planning, Social Security is the core element of an income floor. Although pre-retirees today can plan to receive a full Social Security benefit beginning somewhere between age 66 and 67 depending upon their year of birth, the benefit that they, and potentially their spouse, will receive will increase by 8% per year for each year that they defer their start date up until age 70. This equates to as much as a 24% – 32% greater benefit depending upon your year of birth and how long you defer your start date.

Assuming that your goal is to build a solid base of sustainable income with the ability to increase your lifetime income amount similar to Social Security, one of the best ways to do this is to invest in a flexible fixed index annuity (“FIA”) with an income rider. The reason that you want to use a flexible, vs. a single, premium FIA is to provide you with the ability to add to your investment should you choose to do so. In addition, you need to purchase an income rider, which is optional with most FIA’s, in order to receive guaranteed (subject to the claims-paying ability of individual insurance companies) income.

Like Social Security, the longer you wait to begin receiving your income, the greater it will be. Unlike Social Security benefits which are increased by cost of living adjustments (“COLA’s”), the lifetime income from the majority of FIA’s available today will remain unchanged once it’s started.

To demonstrate the benefit of deferring the start date of FIA income withdrawals, let’s use one of the contracts purchased by my wife and me two years ago when we were 55 and 48, respectively. I will use my wife’s age as a point of reference for the remainder of this post since income withdrawal amounts are always calculated using the younger spouse’s age.

Per our annuity contract, my wife and I are eligible to begin income withdrawals at least 12 months after our contract was issued provided that both of us are at least age 50. It generally doesn’t make sense to take withdrawals from a FIA income rider before age 60 since the formula used to calculate the withdrawal amount is less favorable and the withdrawals will be subject to a 10% IRS premature distribution penalty and potentially a state penalty. Assuming that we plan on retiring after my wife is 60, there would be no need to begin income withdrawals before this age.

I have prepared a spreadsheet with various starting ages in increments of five years beginning at 55 through 75. The spreadsheet shows the projected percentage increase in our annual income withdrawal amount that we will realize by deferring our income start age compared to ages that are 5, 10, 15, 20, and 25 years younger, depending upon the starting age chosen.

Using an example that’s comparable to the Social Security starting age decision, suppose that we decide to defer our income start age from 65 to 70. This would result in a 31.2% annual increase in lifetime income. We will receive 120.3% more income if we begin our income withdrawals at age 70 instead of at 60. The percentage increases are significant in many cases depending upon the chosen withdrawal starting age compared to another potential starting age.

Similar to the Social Security starting age decision, there are numerous factors that need to be considered when determining the optimal age to begin income withdrawals from a FIA with an income rider, a discussion of which is beyond the scope of this post. Like Social Security, when possible and it makes sense, delayed gratification is the key to maximizing lifetime income.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities Longevity Insurance Retirement Income Planning

Insure Your Longevity

When people hear the term, “longevity insurance,” they immediately conjure up images of insurance agents trying to sell them an insurance policy. Longevity insurance isn’t a product in and of itself. It is instead one application of a couple of different types of fixed income annuity products offered by life insurance companies.

The Need for Longevity Insurance

It’s been my personal and professional experience that people generally underestimate how long they will live. Not only is it common to live to age 80, it isn’t unusual to survive to age 90 and even to 100. According to a March, 2012 report, The 2011 Risks and Process of Retirement Survey, prepared for the Society of Actuaries, when a couple reaches 65, there’s a 10% chance that at least one of the individuals will live to 100. There’s a 1% chance that one spouse will reach 107. More than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live.

Given the foregoing facts, combined with the uncertainty of the sustainability of a traditional investment portfolio as a source of retirement income, there’s a need for a guaranteed lifetime income solution for the latter stage of one’s life. The income amount, when combined with other sources of sustainable income, needs to be sufficient to meet projected known and unforeseen expenses for an indefinite period of time.

Products Providing Longevity Insurance

There are two types of fixed income annuities that can be used for the purpose of longevity insurance: deferred income annuities (“DIA’s”) and fixed index annuities (“FIA’s”) with income riders. Both provide the ability to (a) receive income beginning in a future year, and (b) have the income be paid for the remainder of one’s life and a spouse’s life if married.

Deferred Income Annuities

Although DIA’s are currently offered by only a handful of life insurance companies, they’re the solution that’s typically been touted for longevity insurance up until now. Like single premium immediate annuities, or “SPIA’s,” DIA’s pay periodic income for a specified period of time or over one’s lifetime or joint lifetimes as applicable. Unlike SPIA’s which begin payments one month after date of purchase, the start date of DIA payments is contractually defined and is deferred for at least 13 months. The longer the income start date is delayed, the lower the premium, or investment, required to provide a specified amount of income.

Although DIA’s can be purchased for a specified term, e.g., ten years, when used as longevity insurance, the payout on DIA’s often starts in one’s 80’s and is for life. Depending upon the age at which a DIA is purchased, the premium can be a relatively small amount compared to the potential lifetime income that may be received.

Fixed Index Annuities With Income Riders

For those individuals who don’t want to be locked into a fixed starting date, in addition to providing an accumulation value, FIA’s with income riders offer greater flexibility than DIA’s. With FIA’s, which are more readily available than DIA’s, there’s no contractual income start date. Income withdrawals can generally begin any time at least one year after the initial investment is made. The longer the start date is deferred, the greater the amount of lifetime income. The start date can be targeted when the investment is purchased based on the amount and timing of initial and projected ongoing investments and desired amount of income. A flexible, vs. single, premium FIA is required in order to invest additional funds.

Depending upon one’s needs and marketplace availability, it may make sense to use a combination of DIA’s and FIA’s with income riders. and potentially multiple products within each category, to meet deferred lifetime income needs. As with all things of this nature, a thorough analysis should be prepared by a professional retirement income planner to determine the solution that will best meet your needs.

Categories
Annuities Fixed Index Annuities

With a Fixed Index Annuity, You Can Have Your Cake and Eat It Too

Beginning with the August 1, 2011 post, Do You Want to Limit Your Potential Gains? through the November 5, 2012 post, Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4, there were a total of 58 posts about fixed index annuities (“FIA’s”). Not to state the obvious, however, that’s a lot of information about one subject!

The impetus for the volume of material on FIA’s was, and continues to be, the fact that a FIA with an income rider is a unique and underutilized strategy that can provide a meaningful lifetime income floor for many retirement income plans while protecting against downside risk. As evidence of this fact, fixed index annuity sales have been increasing at a rapid pace the last two years while sales of variable annuities have been on the decline. Furthermore, their use as a retirement income planning tool is affirmed by the fact that the majority of sales have included an optional income rider.

What’s so special about a FIA? In one word – flexibility. A FIA is the only fixed annuity where you can receive a stream of income and also enjoy an investment value — that comes with downside protection. The other two types of fixed annuities, i.e., single premium immediate annuities (“SPIA’s”) and deferred income annuities (“DIA’s”) fulfill the income role (immediate in the case of SPIA’s and deferred with DIA’s), however, neither one of these two vehicles has an investment value. In addition, the lifetime income stream from a DIA often isn’t as competitive as lifetime payments from a FIA income rider with the same deferral period.

Another example of the flexibility associated with FIA’s is the income start date. Unlike a DIA where there’s a contractual fixed start date, the commencement of lifetime income from a FIA is totally flexible. It can typically be turned on at any time beginning one year after the contract date. Furthermore, while the lifetime income amount generally increases the longer you defer the start date, there’s no requirement to ever begin taking income withdrawals.

While SPIA’s and lifetime DIA’s (there are also period certain, or fixed term, DIA’s), are both designed to protect against the risk of longevity, the fact of the matter is that premature death can reduce their value, in some cases significantly. Some DIA’s can be purchased with a death benefit to protect against the possibility of death prior to their deferred annuitization date, however, the added insurance protection often increases the required investment amount, all else being equal.

When FIA’s are purchased with an optional income rider, it’s usually done in conjunction with some type of retirement income planning. As such, the emphasis is on deferred lifetime income, with the investment, or accumulation, value playing a secondary role. The fact of the matter is that the investment value is the anchor that provides the following four important benefits in addition to the sustainable lifetime income from the income rider:

  • Principal protection
  • Minimum guarantees
  • Upside interest potential
  • Death benefit

Assuming that no withdrawals are taken from the accumulation value in addition to income rider distributions, the accumulation value will only decrease by the income rider charge prior to turning on the income stream. Given this fact, unlike SPIA’s and lifetime DIA’s, FIA’s will have a death benefit available from day 1 that continues for much of the life of the FIA.

Once income begins, the accumulation value, i.e., death benefit, will decrease by the amount of income withdrawals in addition to the income rider charge. An optional death benefit rider can be added to the contract at the time of purchase to provide a guaranteed death benefit that will be paid even if there’s no accumulation value.

A fixed index annuity with an income rider is truly a unique retirement income planning tool. Unlike other types of fixed annuities where income begins immediately, i.e., SPIA’s, or at a contractually fixed date in the future, i.e., DIA’s, a FIA income start date is totally flexible. In addition, unlike SPIA’s and DIA’s which are only about lifetime income, FIA’s include an investment value. Furthermore, the investment value has built-in downside protection. Who said you can’t have your cake and eat it too?

Categories
Annuities Retirement Income Planning

Is It Time to Take Some Chips Off the Table?

For those of you looking forward to reading Part 2 of the New Tax Law – Don’t Let the Tax Tail Wag the Dog post, my apologies to you. It will be published next week. After the recent surge in stock prices with the notable exception of Apple, which has lost 265 points, or 38% of its value, in just four months from its September 21st high of 705.07 to its close of 439.88 this past Friday, I feel compelled to write and publish this post first.

I was in Las Vegas attending a professional conference last week which may have been the impetus for the title of this post. As an investment advisor, when I see the Dow Jones Industrial Average increase by 792 points, or 6%, from its December 31st close of 13,104.14 to Friday’s close of 13,895.98 in less than one month, including 13 out of 17 sessions when the closing price has exceeded that of the previous day with 7 consecutive daily increases through Friday, on top of a 7.3% increase in 2012, I take notice. The phrase “reversion to the mean” comes to mind.

As a retirement income planner, I look for windows of opportunity for my clients to transfer, what amounts to slivers of their investment portfolio in many cases, from the unpredictable fluctuations of the stock market to conservative investments that are designed to provide guaranteed income* payable over a specified period of time that they can depend on throughout retirement. This includes single premium immediate annuities (“SPIA’s”), deferred income annuities (“DIA’s”), and fixed index annuities (“FIA’s”) with income riders. Since my crystal ball shattered years ago, I don’t try to time the market to determine when it has peaked in order to recommend and perform this heroic service for my clients.

While my clients are unanimously very happy with the recent increased value of their portfolios, I know from many years of experience that this state of euphoria is often short-lived. The reality is that their equity allocation is more than what is targeted for their portfolio in several cases. As a result, the risk associated with their portfolio is greater than what is appropriate for their risk tolerance level. This is inevitably a ticking time bomb unless corrective action is taken in a timely manner.

Shifting a portion of a managed investment portfolio to guaranteed income* at opportune moments has proven to be a winning strategy for my clients within 20 years of, or in, retirement. They have everything to gain and nothing to lose. Each time that a client implements this recommendation, he/she accomplishes two important goals shared by all individuals doing retirement income planning: (a) portfolio risk reduction and (b) decreased likelihood of running out of money in retirement.

Although I haven’t done any formal large-scale studies, I can confidently state from personal and client experience that this generally results in reduced short- and long-term stress levels, fewer cases of insomnia, and less health issues in general for those individuals who implement this strategy compared to those who don’t. This unequivocally trumps the short-term euphoria associated with increased portfolio values in a bull market.

Let Apple’s recent experience be a lesson for us all. Don’t be afraid to take some chips off the table, especially when your retirement, health, and happiness are at stake.

*Subject to the claims-paying ability of individual insurance carriers

Categories
Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4

The first three posts in this series discussed five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. If you haven’t done so already, I would recommend that you read each of these posts.

This week’s post presents a sample case to illustrate the use of a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement.

Assumptions

As with all financial illustrations, assumptions are key. A change in any single assumption will affect the results. The following is a list of assumptions used in the sample case:

  1. 55-year old, single individual
  2. Planned retirement start age of 68
  3. Life expectancy to age 90
  4. Current annual LTCI premium of $4,000 payable for life
  5. Need to plan for infrequent, although potentially double-digit percentage increases in LTCI premium at unknown points in time
  6. Given assumptions #4 and #5, plan for annual pre-tax income withdrawals of approximately $6,000 beginning at retirement age
  7. Solve for single lump sum investment at age 55 that will provide needed income
  8. Investment will come from a nonqualified, i.e., nonretirement, investment account
  9. One investment option is a fixed index annuity (“FIA”) with an income rider with lifetime income withdrawals beginning at age 68.
  10. Second investment option is a deferred income annuity (“DIA”) with no death benefit and lifetime income payout beginning at age 68.
  11. FIA premium bonus of 10%
  12. FIA annual return of 3%
  13. FIA income rider charge of 0.95% of income rider value otherwise known as the guaranteed minimum withdrawal benefit (“GMWB”)
  14. No withdrawals are taken from the FIA other than the income withdrawals.
  15. All investments are purchased from highly-rated life insurance companies known for providing innovative and competitive retirement income planning solutions.

Investment Amount

The first thing that needs to be solved for is the amount of investment that must be made at the individual’s age 55 in order to produce lifetime annual income of approximately $6,000 beginning at age 68. The goal is to minimize the amount of funds needed for the investment while choosing a strategy from a highly-rated insurance company that’s known for providing innovative and competitive retirement income planning solutions.

It turns out that an investment of $50,000 to $65,000 is needed to produce lifetime annual income of approximately $6,000 beginning at age 68. Given the fact that my goal as a retirement income planner is to use the smallest amount of investment for a fixed income annuity to produce a targeted income stream in order to preserve the remainder of a client’s investment portfolio for my client’s other financial goals, the amount of the investment needed is $50,000.

Results

There are three items we will examine to compare the results between investing $50,000 in a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement. They are as follows:

  • Annual gross income
  • Annual taxable income
  • Value/death benefit

Annual Gross Income

Per the Exhibit, the annual payout, or gross income, from the FIA is $5,764, or $236 less than the annual gross income of $6,000 from the DIA. This equates to a total of $5,428 for the 23 years of payouts from age 68 through age 90.

Annual Taxable Income

If the investment was made in a retirement account like a traditional IRA and assuming there have been no nondeductible contributions made to the IRA, 100% of the income would be taxable. This would be the case for both the FIA or DIA.

As stated in assumption #8, the investment will come from a nonqualified, i.e., nonretirement, investment account. Per Part 2 of this series, this makes a difference when it comes to taxation of the withdrawals. Per the Exhibit, 100% of the annual FIA income of $5,764 is fully taxable vs. $3,066 of the DIA income. This is because the DIA, unlike the FIA, is being annuitized and approximately 50% of each income payment is nontaxable as a return of principal. Over the course of 23 years of payouts, this results in $62,054 of additional taxable income for the FIA vs. the DIA.

The amount of income tax liability resulting from the additional taxable income from the FIA will be dependent upon several factors that will vary each year, including (a) types, and amounts, of other income, (b) amount of Social Security income, (c) potential losses, (d) adjusted gross income, (e) itemized deductions, (f) marginal tax bracket, and (g) applicable state income tax law.

Value/Death Benefit

While the present value of the future income stream of a DIA represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment. In addition, while some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income, per assumption #10, this isn’t the case in this situation. Consequently, the DIA column of the “Value/Death Benefit” section of the Exhibit is $0 for each year of the analysis.

On the other hand, there’s a projected value for the FIA from age 55 through age 79. This value is also the amount that would be paid to the FIA’s beneficiaries in the event of death. There’s a projected increase in value each year during the accumulation stage between age 55 and 67 equal to the net difference between the assumed annual return of 3% and the income rider charge of 0.95% of the income rider value.

Per the Exhibit, the projected value/death benefit increases from $56,278 at age 55 to $68,510 at age 67. Although the assumed premium bonus of 10% is on the high side these days, this is reasonable given the fact that FIA values never decrease as a result of negative performance of underlying indexes, the assumed rate of return of 3% is reasonable in today’s low index cap rate environment, and the assumed income rider charge of 0.95% of the income rider value is on the upper end of what’s prevalent in the industry. The projected value/death benefit decreases each year from age 68 to age 79 until it reaches $0 beginning at age 80 as a result of the annual income withdrawals of $5,764.

Conclusion

As discussed in Parts 1 – 3 of this series, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums during retirement in a given situation. Two of the differences, income start date flexibility and income increase provision, haven’t been addressed in this post.

In addition to the five differences, the amount of the investment required to produce a targeted lifetime annual income amount to pay LTCI premiums, including potential increases, will differ depending upon the particular FIA or DIA strategy used. In the illustrated case, which isn’t uncommon today, an investment of $50,000 resulted in an almost identical lifetime income payout whether a FIA with an income rider or a DIA is used.

As illustrated, the taxable income associated with a DIA in a nonqualified environment is much less compared to a FIA. As previously discussed, the amount of tax savings resulting from the reduced taxable income will depend upon an analysis of several factors and will vary each year. Ignoring the potential income tax savings resulting from the tax-favored DIA payouts, the FIA with income rider would be the preferred investment choice for many individuals in this case given the presence, duration, and projected amount of, the investment value/death benefit.

The FIA edge is reinforced by the fact that, unlike most traditional DIA’s, the income start date and associated annual lifetime income payout amount for FIA’s is flexible. This would be an important consideration in the event that the year of retirement changes. Furthermore, this is quite possible given the fact that the individual is 13 years away from her projected retirement year.

As emphasized throughout this series, the purchase of LTCI needs to be a lifetime commitment. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement. Whether it’s a FIA with an income rider, a DIA, or some other planning strategy that’s used for this purpose will depend on the particular situation.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 3 of 4

Last week’s post discussed the first three of five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. Once again, the differences are as follows:

  1. Income start state flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

This post will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Investment Value

Although guaranteed lifetime income is the primary purpose when using a FIA with income rider or DIA strategy for funding LTCI premiums during retirement, the presence of an investment value may be important for many people.

With traditional DIA’s, you purchase from a life insurance company the promise to pay a periodic income stream for either a term certain or lifetime, with or without inflation, beginning at a defined future date at least 13 months from the date of purchase. Although the present value of your future income stream represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment.

A FIA, on the other hand, has an “accumulation value” in addition to the right to receive income withdrawals when you purchase an optional income rider. The accumulation value is increased by initial and ongoing investments, premium bonuses if applicable, and periodic interest crediting. It’s reduced by income and other withdrawals, income rider charges, and surrender charges.

Death Benefit

There may or may not be a death benefit with both FIA’s with income riders and DIA’s. In the case of DIA’s, it’s a contractual issue vs. a function of the accumulation value in the case of a FIA.

Some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income. If this is the case, the income payment will often be less than what it would be if there’s no death benefit.

With FIA’s, the death benefit will be equal to the greater of the minimum guaranteed value or the accumulation value. As previously stated, the accumulation value is a moving target that increases and decreases as a result of various transactions. Depending upon the amount of cumulative income and other withdrawals as well as income rider and surrender charges, there may eventually be no minimum guaranteed value or accumulation value remaining.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities Longevity Insurance

Invest in DIA to Fund LTCI Premiums When Retired – Part 2 of 4

Last week’s post discussed the use of a deferred income annuity (“DIA”), commonly referred to as longevity insurance, to fund long-term care insurance (“LTCI”) premiums during retirement. Similar to a fixed index annuity (“FIA”) with an income rider, in exchange for an initial investment, or premium, you’re entitled to receive a lifetime income beginning at least a year from the date of purchase.

As noted in last week’s post, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums in a given situation. These differences are as follows:

  1. Income start date flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

The first three distinctions are explained below. Part three will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Income Start Date Flexibility

FIA’s with income riders are known for their flexibility when it comes to their income start date. Income can typically be withdrawn beginning one year from the initial issue date with no time limit after that. The lifetime income payout will generally increase the longer you wait to begin your withdrawals as a result of potential increases in the income base and withdrawal percentages.

Unlike FIA’s, DIA’s generally aren’t flexible when it comes to the income start date. With most DIA’s, you’re tied to a specified payout at a specified start date at the time of investment.

Income Increase Provision

Although DIA’s generally have a fixed income start date, an annual inflation factor can be applied to the income payout to result in increasing annual payments. A greater premium, or investment, is required for this feature.

While the annual lifetime income payout will generally increase the longer you wait to begin your withdrawals with a FIA, the income amount generally won’t change once you turn on your income. In other words, there’s inflation protection built into FIA income riders only up until the time that you begin taking income withdrawals.

Income Tax Consequences

If retirement plans such as 401(k)’s or traditional IRA’s are the source of premium payments, then 100% of withdrawals from DIA’s and FIA’s will generally be taxable as ordinary income. Consequently, it doesn’t matter if the source of funds for LTCI premium payments is a FIA with an income rider or a DIA since taxation will be identical.

Whenever possible, nonretirement funds should be used to pay LTCI premiums. Here’s where DIA’s have the edge, especially during the early years. DIA payouts are considered to be an annuitization of the investment. Part of each payment through one’s life expectancy is deemed to be principal and interest. Any payments received thereafter are fully taxable.

Since only the interest portion is taxable and a large part of each payment is often classified as principal over the course of one’s life expectancy, DIA distributions receive tax-favored treatment.

When you take income withdrawals from FIA’s, on the other hand, you aren’t annuitizing your investment. Instead, “last-in first-out,” or “LIFO,” taxation is applied to your withdrawals. This means that 100% of your initial withdrawals will be taxed until all interest is recovered with subsequent withdrawals received tax-free as a return of principal.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities Long-Term Care Longevity Insurance

Invest in DIA to Fund LTCI Premiums When Retired – Part 1 of 4

As explained in the last two weeks’ posts, Invest in FIA to Fund LTCI Premiums When Retired – Parts 1 and 2, the purchase of long-term care insurance (“LTCI”) needs to be a lifetime commitment. It isn’t enough to plan for how you will pay for your LTCI premiums during your working years. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement.

One potential source of income that can be used to fund LTCI premiums during retirement is a fixed index annuity (“FIA”) with an income rider. As explained and illustrated in the last two weeks’ posts, with a FIA, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Another strategy that can be used for this purpose is to purchase a deferred income annuity (“DIA”), commonly referred to as longevity insurance. Similar to a FIA with an income rider, in exchange for an initial investment, or premium, you’re entitled to receive a lifetime income beginning at least a year from the date of purchase. You can invest a specified amount in a DIA that will result in the amount of lifetime income beginning at retirement that will be sufficient to pay your LTCI premiums.

There are several important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums in a given situation. There are five key distinctions that need to be considered as follows:

  1. Income start date flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

The first three distinctions will be explained in next week’s post. Part three will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Categories
Annuities Fixed Index Annuities Long-Term Care

Invest in FIA to Fund LTCI Premiums When Retired – Part 2 of 2

Part 1 of this post alluded to a perfect storm awaiting many long-term care insurance (“LTCI”) policy owners when they retire, an analysis of which should be included as part of the planning process when the potential purchase of a LTCI policy is being considered. The perfect storm is as follows:

  • Due to potential sizeable ongoing benefits, LTCI premiums aren’t inexpensive.
  • Depending upon when a policy is purchased, LTCI premiums may need to be paid for 30 to 50 years.
  • While historically infrequent, LTCI premium increases can be significant.
  • Although it may be needed in one’s 50’s, long-term care is more often required in one’s 70’s, 80’s, or 90’s.
  • Premiums may be affordable when employed; however, this may not be the case when retired.

The last item in the list is critical. Given all of the foregoing items, when you purchase a LTCI policy, it needs to be a lifetime commitment. As part of this commitment, you need to have a plan in place for how you will pay for your LTCI premiums not only during your working years, but for the rest of your life.

Per last week’s post, one way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Let’s look at an example. Let’s assume that Ms. Nice, age 55 and single, is planning on retiring at age 68. Let’s further assume that she is currently, and is projected to be throughout retirement, in a 20% income tax bracket. Ms. Nice is considering the purchase of a LTCI policy with an annual premium of $4,000. This amount can comfortably be paid out of her current and projected employment earnings, however, this isn’t projected to be the case in retirement, especially with potential premium increases.

Ms. Nice’s retirement income planner, who specializes in planning, managing, and protecting retirement income, projects that she will need annual pre-tax income of $6,000 in retirement to pay for her LTCI premiums. This amount is projected to cover income tax liability on income allocated for LTCI premium payments plus modest premium increases.

One of the options that Ms. Nice’s retirement income planner proposes to her for providing her with the income she needs to pay her LTCI premiums throughout retirement is a FIA with an income rider. For the recommended FIA and income rider, by investing either (a) $54,000 today, or (b) $40,000 today plus $1,750 per year for the next 12 years, Ms. Nice will receive lifetime annual income of $6,000 beginning at age 68.

Given the fact that the purchase of LTCI needs to be a lifetime commitment and LTCI premiums increase with age, planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process. By taking this approach, you will increase the likelihood that your LTCI policy will be in force when you need it.

Categories
Annuities Fixed Index Annuities Long-Term Care

Invest in FIA to Fund LTCI Premiums When Retired – Part 1 of 2

The need for long-term care is created by one or both of the following conditions/impairments:

  • A chronic medical condition that compromises the individual’s ability to get through the most basic of daily routines
  • A cognitive impairment that compromises one’s ability to safely interact with his/her environment

Long-term care is costly. According to Genworth’s 2012 Cost of Care Survey, national median hourly rates for licensed homemaker and home health aide services are $18 and $19 per hour, respectively, adult day health care is $61 per day, assisted living facilities are $3,300 per month, and semi-private and private rooms in nursing homes are $200 and $222 per day, respectively. These are median costs. Actual costs in specific areas of the country may be much greater.

Fortunately, there’s a planning opportunity that’s available to fund a portion, or perhaps most, of these costs and remove the physical and emotional burden of caregiving from family members. It’s called long-term care insurance, or “LTCI.” Guess what? Given the fact that (a) long-term care is costly, (b) the cost of providing care continues to escalate, (c) people can live for many years with cognitive impairments, and (d) the possibility of requiring long-term care services is very real, LTCI isn’t cheap. Furthermore, insurance premiums for new applicants continue to increase as carriers increase their claims experience.

Complicating matters, while individuals in their 50’s and younger may require long-term care, it’s more often an experience that plays out in one’s 70’s, 80’s, or 90’s. Unless you have a limited-pay policy where, for example, you pay front-loaded premiums for a fixed period of time, e.g., ten years, you generally need to make premium payments for a long period of time to realize the benefits from your LTCI policy.

While LTCI premiums may be affordable when employed, it may be another story once you retire. In addition, as we have seen in recent years, LTCI premiums can increase. While increases generally are infrequent with most carriers, when they do occur, it’s not unusual for them to be in the range of 15% or more. When you purchase a LTCI policy, it needs to be a lifetime commitment. You need to have a plan for paying premiums throughout your working and retirement years, including potential increases.

One way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Stay tuned to next week’s post to see an example of how a FIA with an income rider can be used as a planning strategy for funding LTCI premiums in retirement.

Categories
Annuities Fixed Index Annuities

Simplify Your Financial Life With Fixed Index Annuities

When you get to a certain point in life, there’s a tendency to want to downsize and simplify. That large, two-story house with all of that land becomes a burden. That expensive exotic car that you had to have years ago is no longer necessary.

The same thing applies to investments. Let’s face it, for the average person, the inner workings of most investments are difficult to understand, if not over one’s head. Not to mention how the investment fits into your financial, or retirement income, plan. Add on the risk factor associated with many investments and it can contribute to many sleepless nights.

Welcome fixed index annuities (“FIA’s”). There are basically two flavors – (a) a base product and (b) a base product with an income rider. The key to investment simplification with both is long-term commitment. Per last week’s post, Fixed Index Annuities – A Long-Term Commitment, FIA’s have unique features that can result in lifetime income that exceeds that of other investments provided you have the staying power. If you do, FIA’s are an opportunity to simplify your financial life.

Per last week’s post, staying power was defined as (a) five to ten years, or potentially longer, depending on the surrender charge schedule of the particular FIA, for the base product, or (b) lifetime if you purchase an optional income rider. Assuming that you only invest funds that you’re confident you won’t need for the duration of the surrender charge schedule for the base product, or for your lifetime if you purchase an income rider, this should simplify your financial life going forward.

There are four parts to simplification as it’s applied to FIA’s assuming that the funds used for investment are coming from a traditional diversified investment portfolio:

  1. Reduced risk
  2. Known lifetime income stream beginning at a specified age
  3. Elimination of investment management
  4. Reduction or elimination of investment management fees if applicable

Reduced Risk

Depending upon the types of investments in the portfolio that’s used for your FIA purchase, the risk reduction associated with a FIA can be significant. Please refer to the July 18, 2011 post, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities. Furthermore, the overall risk level of your entire investment portfolio, including your FIA, will generally be reduced as a result of your investment in a FIA.

Known Lifetime Income Stream Beginning at a Specified Age

Unlike a traditional investment portfolio that doesn’t provide for lifetime income, assuming that you purchase an income rider with your FIA, you will have the benefit of a known lifetime income stream beginning at a specified age. In addition, you will have the flexibility to increase your lifetime income to the extent that you defer the start date of your income. Please refer to the January 9, 2012 post, 5 Things You Receive From a Fixed Index Annuity Income Rider – Part 1 of 2.

Elimination of Investment Management

With a traditional investment portfolio, there’s ongoing investment management that’s required, including, but not limited to, investment selection, monitoring, and periodic rebalancing. Whether you do it yourself or hire someone else to do it, investment management is time consuming. With a FIA, there are limited investment choices. These typically include a fixed account and three to five indexing strategies. Once you make your initial investment allocation, although you can typically change it on the anniversary date of your contract, it’s often not necessary to make any changes. Please refer to the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth.

Reduction or Elimination of Investment Management Fees if Applicable

To the extent that you transfer funds from a professionally managed investment portfolio to purchase a FIA, those funds will no longer be subject to ongoing investment management fees. If you purchase an income rider with your FIA, an income rider charge will be deducted from the accumulation value of your FIA, however, it generally won’t reduce the amount of lifetime income that you will receive from your FIA.

In order to optimize the benefits that you receive from a FIA, it’s important to work with a qualified retirement income planner. Please refer to the August 27, 2012 post, Retirement Income Planner Key to Success When Investing in Fixed Index Annuities.

Looking to downsize or simplify your financial life and have staying power? Take a look at fixed index annuities.

Categories
Annuities Fixed Index Annuities

Fixed Index Annuities – A Long-Term Commitment

“I, Robert Klein, take you FIA, to be my Fixed Index Annuity, to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part.”

While you don’t say a traditional wedding vow when you purchase a fixed index annuity (“FIA”), you do make a long-term commitment. This is especially true when you purchase a FIA with an income rider. Divorce is generally an expensive proposition. This applies to FIA’s as well.

In order to realize the benefits of fixed index annuities, including upside potential with downside protection (See the July 18, 2011 post, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities), you need to stay invested, i.e., not take withdrawals, for five to ten years, or potentially longer, depending on the particular FIA.

Of the 245 FIA’s available today, 147, or 60%, impose surrender charges for ten years or longer, with 182, or 74%, having surrender periods of eight years or longer. There are only two FIA’s that have a surrender period of less than five years, both for four years. Surrender charges are generally assessed using a declining schedule, with 148, or 60%, imposing a charge of 10% or more in the first year. Generally speaking, the more severe the surrender charge provision, the greater the potential benefits.

While most FIA’s allow you to withdraw up to 10% of the value of your contract in any year without a surrender charge, you shouldn’t plan on taking advantage of this provision when you purchase a FIA. You should only invest funds that you’re confident you won’t need for at least the duration of the surrender charge period. This assumes that you haven’t purchased an income rider.

When you purchase a FIA with an income rider, you extend your commitment – to life. In addition to the time period you must remain in any FIA to avoid potential surrender charges, plan on keeping your FIA for the duration of your life, and your spouse’s life, if married. You need to do this in order to optimize your return. Unlike most fixed income investments that have a fixed rate assigned to them, this isn’t the case when it comes to a FIA with an income rider.

Return on a FIA with an income rider is measured by the total amount of income withdrawals received over one’s lifetime. In order to maximize your lifetime income withdrawals, you need to generally do two things: (a) maximize your income account value in order to optimize your annual withdrawal amount (see the March 19, 2012 post, Income Account Value vs. Accumulation Value – What’s the Difference?) and (b) once you start your withdrawals, keep your FIA in place for the rest of your life.

FIA’s have unique features that can result in lifetime retirement income that exceeds that of other investments provided you have the staying power. Are you ready to make a long-term commitment? If so, say “I do.”

Categories
Fixed Index Annuities Retirement Asset Planning Retirement Income Planning

What is a Retirement Income Planner?

Retirement Income Center

Choosing the right fixed index annuity (“FIA”) with the right income rider for your situation requires that you first choose the right individual who specializes in this unique retirement income planning strategy. The conclusion of the post, Retirement Income Planner Key to Success When Investing in Fixed Index Annuities, was that the person you choose should be a professional retirement income planner.

What is a retirement income planner? Before answering this question, let’s start by stating what a retirement income planner isn’t. Although it’s possible that the same individual may perform both services, a retirement income planner isn’t the same thing as a retirement planner.

Simply stated, a retirement planner develops and manages strategies for building assets that are intended to be used for retirement. Retirement planners practice retirement asset planning, As defined in Retirement Income Visions™ Glossary, Retirement Asset Planning is:

The process of planning for the accumulation of sufficient assets to be used for retirement and “spending down” of those assets during one’s retirement years.

Retirement asset planning is all about accumulating assets. It begins when assets are earmarked for retirement, either by (a) the nature of the assets, e.g., qualified plans including 401(k) plans, or (b) dedicating nonqualified assets for retirement. By definition, retirement asset planning ends at retirement whether or not there are sufficient assets that will last for the duration of retirement.

Retirement income planning, on the other hand, begins during the asset accumulation process and ends at death. As defined in Retirement Income Visions™ Glossary, Retirement Income Planning is:

The process of planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement.

Retirement income planning is practiced by retirement income planners. Per Retirement Income Visions™ Glossary, a Retirement Income Planner is:

An individual who is professionally trained, licensed, and experienced in developing and managing strategies for creating and optimizing retirement income to meet one’s financial needs for the duration of retirement.

“Income” and “duration of retirement” are the key words and phrases, respectively, in this definition. In today’s low-interest rate environment, it’s difficult to find investments that will generate decent income streams that will meet one’s short-term financial needs, let alone for the duration of retirement.

Categories
Annuities Fixed Index Annuities Retirement Income Planning

Retirement Income Planner Key to Success When Investing in Fixed Index Annuities

Last week’s post presented a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities (“FIA’s”). As evidenced by the questions, themselves, as well as the number of questions, this is a very technical area that requires specialized expertise.

So where do you find answers to the various questions? Assuming that investment in one or more FIA’s makes sense in your financial situation, where should you go to purchase these long-term investments? The remainder of this post will assume that you’re considering FIA’s in the context of a retirement income plan.

Unlike investing in the stock market, where you can utilize the services of an investment manager or be a do-it-yourselfer, you must purchase fixed index annuities from a licensed life insurance agent who has the requisite training to sell annuities. Life insurance agents can sell different types of insurance products, including life, disability, and long-term care insurance, as well as annuities. Life insurance companies, life insurance agents, types of products, and the specific products that can be sold, are regulated by an insurance body in each state.

Not every life insurance agent sells annuities. Some only sell variable annuities. Furthermore, there are several different types of fixed annuities, including single premium deferred annuities (“SPDA’s”), single premium immediate annuities (“SPIA’s), deferred income annuities (“DIA’s), and FIA’s. FIA’s are a unique type of fixed annuity that requires specialized expertise and training, and, as such, aren’t offered by every life insurance agent who sells fixed annuities.

Since a FIA is a unique long-term investment with several moving parts in the base product as well as the income rider that change on a regular basis in response to market conditions, it’s important to work with an independent life insurance agent who has access to at least two dozen FIA’s offered by at least six different highly-rated life insurance companies, and sells them on a regular basis.

Going beyond locating a life insurance agent who (a) sells annuities, (b) sells fixed annuities, (c) sells FIA’s, and (d) is an independent agent with access to several different FIA’s offered by several different highly-rated life insurance companies, there are other considerations to keep in mind before purchasing a FIA. First and foremost, you need to recognize and understand the fact that retirement income planning is a specialized discipline, it’s complicated, there are many risks that need to be considered, and mistakes can be costly.

Given the fact that the purchase of a FIA with an income rider for retirement income planning purposes is typically a lifetime investment that often requires a large upfront financial commitment and potentially ongoing periodic investments, it’s especially important that you work with the right individual. Specifically, the person you choose should be a professional retirement income planner. What exactly is a retirement income planner? Sounds like the subject of another post.

Categories
Annuities Fixed Index Annuities

12 Questions When Considering Fixed Index Annuities

It’s hard to believe, however, it’s been over a year since I began writing about fixed index annuities, or “FIA’s”, as a retirement income planning strategy. Beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, this has been the subject matter of virtually every Retirement Income Visions™ weekly post. Several of the posts, including the last nine, have been organized into multi-part series.

As evidenced by the titles of many of the posts as well as the number of parts in the various series, this is a highly technical area. Not to mention that there are currently 251 products offered by 40 life insurance companies to choose from.

The following is a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities:

  • Are fixed index annuities suitable for me?
  • How will they fit into my retirement income plan?
  • Should they be part of my nonretirement or retirement investments?
  • What are the current and future income tax consequences?
  • Should I purchase an income rider?
  • When should I begin to purchase fixed index annuities?
  • How much should I invest in fixed index annuities?
  • Should I make ongoing investments in addition to my initial investment?
  • When should I begin to take income withdrawals?
  • Which indexing methods should I choose?
  • Should I consider products that offer a premium bonus?
  • Which product(s) is (are) best for me?

As you can appreciate, these aren’t easy questions to answer individually, let alone collectively. Next week’s post will provide you with guidance regarding how to go about finding answers to each of these questions.