Tag: pension

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Annuities Celebration Fixed Index Annuities Retirement Income Planning

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.

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Annuities Fixed Index Annuities Retirement Income Planning

Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck

Retirement Income Center

As stressed in the last three week’s posts, Where Have All the Pensions Gone?, A Retirement Paycheck is Essential, and No Pension? Create Your Own, we need to know that when we stop working, we will receive a predetermined monthly payment, i.e., a retirement paycheck, for the rest of our life, and, if married, our spouse’s life. Furthermore, due to its inadequacy and uncertainty, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Per last week’s post, No Pension? Create Your Own, a retirement income planning strategy that’s becoming more widely used the last few years is the addition of a rider, or endorsement, to a fixed index annuity to generate a retirement paycheck. The concept of fixed index annuities isn’t new to readers of Retirement Income Visions™. This topic has been featured for the last five months, beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall.

Up until now, the fixed index annuity strategy has been presented as a conservative, tax-deferred investment approach to obtain (a) higher interest rates compared to similar-duration CD’s, (b) a higher potential rate of return than traditional fixed annuities, and (c) downside protection. As discussed in several posts, greater potential return is available as a result of interest crediting being tied to the performance of one or more stock market indices. Fixed index annuities also offer downside protection since interest crediting is never less than zero, even when the return of selected stock market indices is negative.

When you purchase a fixed index annuity, although you will realize all of the benefits mentioned in the previous paragraph, you won’t create a lifetime retirement paycheck unless you also apply for an optional income rider when your retirement income planner submits your application. An income rider, like all insurance contract riders, provides coverage that’s in addition to, and isn’t included as part of, the base contract. Since the features of the income rider aren’t included in the base contract, an additional charge must be paid to the life insurance company in order to obtain the benefits associated with the rider.

Income riders aren’t available with most fixed index annuities. In a search of 484 products, only 182, or 37.6%, offer an income rider. It’s important to keep in mind that all fixed index annuity income riders aren’t created equally. When available, each fixed index annuity income rider has its own specifications for determining the amount of income that the annuitant(s) will receive when the rider is activated. In addition, every life insurance company that offers an income rider reserves the right to change the specifications for products offered to new applicants.

How does a fixed index annuity income rider work? Specifically, how can it be used as part of a retirement income planning strategy to create a retirement paycheck? Next week’s post will be the first in a series of posts about this topic.

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Annuities Fixed Index Annuities Retirement Income Planning

No Pension? Create Your Own

Retirement Income Center

Last week’s post, A Retirement Paycheck is Essential, emphasized that it’s imperative for each and every one of us to have a retirement income plan. The cornerstone of a retirement income plan is a retirement paycheck. Specifically, we need to know that when we stop working, we will receive a predetermined monthly payment for the rest of our life, and, if married, our spouse’s life. Furthermore, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Given the fact that the majority of us won’t receive a pension from an employer’s defined benefit plan that our parents’ generation took for granted (see the November 21, 2011 post, Where Have All the Pensions Gone?), it’s incumbent upon us to create our own retirement paycheck. This isn’t an task and generally requires the assistance of an experienced retirement income planner.

As pointed out in the Where Have All the Pensions Gone? Post, the nature of many investment vehicles don’t lend themselves to plan for a predictable known future lifetime or joint lifetime stream of income. This is true, for example, whether you’re talking about a savings account, CD, bond, stock, mutual fund, or exchange traded fund.

Fortunately, there exists a long-standing, reliable, conservative investment solution that’s specifically designed to provide us with a predetermined monthly payment for the rest of our life. The payment will be made without interruption, no matter how the stock market is performing. This investment solution is commonly known as a fixed income annuity and is offered exclusively by life insurance companies.

Unlike a traditional defined benefit pension plan that pays a defined stream of income that generally doesn’t change beginning at retirement age and ending at death, a fixed income annuity strategy can be quite flexible. There are several types of fixed income annuities that can be used to customize a retirement income plan that dovetails with one’s retirement income needs. This entails both timing and amount of payment, including adjustment for inflation.

There are two broad classes of fixed income annuities that are distinguished by the timing of the commencement of the initial income payment: (a) single premium immediate and (b) deferred. A feature shared by both types of annuities is “annuitization,” or the conversion of an annuity to an irrevocable structured payment plan with a specified payout by a life 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.

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 name “immediate.”

The second broad class of fixed income annuities, deferred income annuities, or “DIAs,” although they play an important role in a retirement income plan, aren’t as prevalent in the marketplace as SPIAs. Like SPIAs, DIAs pay periodic income for a specified period of time or over one’s lifetime or joint lifetimes as applicable. Unlike SPIAs, the start date of the payments for DIAs is deferred for at least 13 months from the date of investment.

SPIAs and DIAs can be used alone or in combination to create a retirement paycheck. In addition, a rider, or endorsement, can be added to a fixed index annuity to generate a retirement paycheck. This retirement income planning strategy, which is striking a chord with more and more people the last few years, will be introduced in next week’s post.

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Retirement Income Planning

A Retirement Paycheck is Essential

Retirement Income Center

Last week’s post, Where Have All the Pensions Gone? made the point that given (a) the scarcity of traditional defined benefit pension plans, (b) the inability of 401(k) plans, employee and self-employed retirement plans, and many nonretirement investment vehicles to provide for a predetermined monthly lifetime income beginning at a specified age, and (c) the inadequacy and uncertainty of the Social Security system, it behooves each and every one of us to create our own pension plan.

With this week’s post, I want to expand upon and clarify the conclusion in last week’s post. I understated the point when I said that it behooves each and every one of us to create our own pension plan. It isn’t simply beneficial or worthwhile to create our own pension plan – it’s imperative that we do so. To do otherwise is to leave our retirement exposed to too many variables beyond our control and, in turn, risk that we will outlive our retirement assets.

Retirement Roadblocks

Outliving one’s retirement assets can happen in any number of ways, including, but not limited to, experiencing one or more of the following eight retirement roadblocks:

  • Insufficient investment assets to sustain a longer- than-average life expectancy
  • Prolonged higher-than-average inflation
  • Sequence of returns with bad early years. See the October 5, 2009 post, The Sequence of Returns – The Roulette Wheel of Retirement.
  • Withdrawal drag. See the September 28, 2009 post, Withdrawal Drag – The Silent Killer.
  • Excessive investment withdrawals relative to available retirement assets
  • Uninsured events, e.g., long-term care
  • Unfavorable income tax law changes
  • Poor investment management

As you can see, too many things can happen, many of which are beyond our control, that can prematurely deplete one’s investment assets. Although unplanned, the occurrence of one or more of these events could easily derail what’s suppose to be our golden years.

Something we have the ability to control, and, furthermore, as previously stated, is imperative for us to do, is creation of our own pension plan. Specifically, we need to replace employment income with a retirement paycheck.

The risk that we will outlive our retirement assets is shared by individuals of all means. A sizeable nest egg, while it can sustain one through many years of retirement, can also be depleted before the end of one’s and one’s spouses, if married, lifetime(s) in the absence of a sound retirement income plan.

Although a retirement paycheck doesn’t guarantee that we won’t outlive our retirement assets, it will eliminate our exposure to several of the eight retirement roadblocks, and, in turn, improve our odds for success.

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Retirement Income Planning

Where Have All the Pensions Gone?

Retirement Income Center - Pensions

If you aren’t receiving a pension from a former private sector employer, there’s a pretty good chance that your employee benefit package doesn’t include this once-cherished perk. According to a study by Towers Watson & Co., as of May 31, 2011, only 30% of Fortune 100 companies offered a defined benefit plan to new salaried employees. That’s down from 37% at the end of 2010, 43% in 2009, 47% in 2008, and 83% as recently as 2002. This is a far cry from 1985 when 90% of Fortune 100 companies offered a traditional pension plan to new employees.

While defined contribution plans, predominantly 401(k) plans, have replaced defined benefit plans in the private sector, the pension aspect is lacking in the majority of such plans today. Specifically, with limited exceptions, these plans generally don’t provide for a predetermined monthly payment that an employee can expect to receive beginning at a specified age for the rest of his/her life and his/her spouse’s life if married.

Furthermore, to the extent that a 401(k) plan is available, the future accumulation value of a participant’s account is unknown. It’s dependent upon several variables, including number of years of participation, IRS-imposed employee and employer contribution limits, employee contribution amounts, potential employer matching contributions, investment offerings, performance of chosen investments, participant loans, and potential plan distributions.

The inability to provide for a known monthly lifetime income upon retirement is not unique to employer-sponsored plans. It’s also common to employee and self-employed retirement plans, including, but not limited to, traditional IRA’s, Roth IRA’s, and SEP-IRA’s.

In addition, the nature of many investment vehicles, whether held inside or outside a retirement plan, don’t lend themselves to plan for a predictable known future lifetime or joint lifetime stream of income. Whether you’re talking about a savings account, CD, bond, stock, mutual fund, or exchange traded fund, this feature is generally unavailable.

Finally, a discussion about retirement income wouldn’t be complete without mentioning Social Security. Social Security is a wonderful provider of monthly retirement income for those individuals who qualify to receive it. Of all non self-funded plans, it comes closest to duplicating the pension aspect of a defined benefit plan. Unlike most defined benefit plans, the monthly benefit can increase as a result of cost of living adjustments. Unfortunately, the uncertainty that surrounds the Social Security system makes it difficult to plan for this benefit, especially for younger individuals.

Given (a) the scarcity of traditional defined benefit pension plans, (b) the inability of 401(k) plans, employee and self-employed retirement plans, and many nonretirement investment vehicles to provide for a predetermined monthly lifetime income beginning at a specified age, and (c) the inadequacy and uncertainty of the Social Security system, it behooves each and every one of us to create our own pension plan.

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Retirement Income Planning

The Retirement Planning Paradigm Shift – Part 1

Retirement Income Center

It’s a fact of life that, unlike our parents’ generation who could depend on a monthly pension supplemented by Social Security, most individuals retiring today from the private sector don’t receive a pension. Many of us have 401(k) plans that are typically rolled over into an IRA as a lump sum when we retire. However, generally speaking, the various organizations that employed us during our working years won’t be making monthly electronic deposits into our checking accounts when we retire.

Unless your lifestyle allows you to survive solely on Social Security or a comparable monthly benefit if you don’t qualify for Social Security, it’s necessary for you to create your own monthly pension. Similar to private sector pension plans that were popular years ago, your monthly pension needs to last for an uncertain period of time – your lifetime as well as your spouse’s lifetime if you’re married.

Many of you are probably asking yourself, “Why do I need to create a monthly pension when I’ve been accumulating all of these assets for all of these years that I plan on using to fund my retirement?” That’s the million dollar question and is precisely the reason why I created this blog. The answer to this question requires a paradigm shift, or a sudden and radical change in one’s accepted thought pattern or behavior. You know when this occurs when you have an “Aha!” experience whereby you suddenly see things in a totally new and different way.

The term paradigm shift was introduced by Thomas Kuhn in his 1962 landmark book, The Structure of Scientific Revolutions. Kuhn demonstrated how almost every significant scientific breakthrough is initially a break with accepted, and typically, long-standing, ways of thinking. While Kuhn provided many historical scientific examples to explain this phenomenon, Stephen Covey provided us with one of the best and most powerful non-scientific examples of a paradigm shift in his #1 national bestseller, The 7 Habits of Highly Effective People.

Covey was traveling on a New York subway one Sunday morning where people were sitting quietly. Suddenly, a man and his children entered the subway. The man sat next to Covey, closing his eyes. His children began running wild, yelling back and forth, throwing things, and even grabbing people’s papers. While everyone on the subway, including Covey, felt irritated, the children’s father was oblivious to the situation. Finally, Covey asked the father if he could control his children since they were disturbing a lot of people. The father replied, “We just came from the hospital where their mother died about an hour ago. I don’t know what to think, and I guess they don’t know how to handle it either.”

Needless to say, Stephen Covey suddenly saw everything differently. This caused him to think differently, feel differently, and behave differently. His heart was filled with the man’s pain. Everything changed in an instant.

So how exactly does the paradigm shift phenomenon apply to retirement planning? Be sure to mark your calendar for Monday, August 31st at the crack of dawn when “The Retirement Planning Paradigm Shift – Part 2” AKA “Return of the Blog” descends from the blogosphere to a local blog site near you. If you haven’t yet subscribed to Retirement Income VisionsTM, please do so now since you won’t want to miss it! And remember, don’t be afraid to click on “Subscribe” at the top of this page.