Room at the Inn?

approved InnWhen it comes to guaranteeing lifetime income, few tools are as handy as annuities. Given that the original long-term savings vehicle — the company-sponsored pension — is almost as extinct as the coelacanth, it’s become abundantly clear that your employer is no longer going to look out for your long-term financial interests. In today’s business culture, that burden’s been shifted to you. This makes implementing a long-term, income generating retirement vehicle to augment your Social Security benefits more crucial than ever, and this is often where annuities can make the difference between a comfortable retirement or a struggle.


The ultimate retirement safety net, annuities are designed to provide you with income every month for as long as you’re alive. You keep living, annuities keep paying.


Essentially a form of insurance, the concept behind annuities is fairly simple: Depending on your choice of annuity, you pay an annuity carrier a premium either in one lump sum or in installments before you retire. In return, after a predetermined period of time, the carrier guarantees to repay you in predetermined monthly installments until your death — no matter what. With most annuity policies, as long as you pay the premiums, the insurer will fund your retirement for the rest of your life. In most cases, when you die, whatever is left goes to your beneficiary.


While lifetime income is one of the annuity’s most appealing features, they offer additional benefits worthy of your consideration, not the least of which is favorable tax treatment. All of the money you use to fund an annuity grows tax-free until the point at which you begin withdrawing funds. As with most products, however, there are penalties associated with premature withdrawal, and those penalties extend to taxes in the form of treatment as ordinary income. That said, it’s always a good idea to discuss the tax benefits or limitations of annuity products with a professional advisor or agent to ensure you understand the policy thoroughly.


Another benefit of annuities is that when compared to other “safe money” choices such as bank CD’s, they tend to earn more interest. Some fixed index annuities have roll-up rates as high as 7% when you buy the optional rider.


Since annuities aren’t designed for short-term investment, the longer the annuity is funded, the better those returns are likely to get. Shop your annuity products carefully (or ask your advisor to do so on your behalf) to find the most appropriate product with the best rates of return. Here are some choices:


Fixed Annuities: The most conservative form of annuity, a fixed annuity earns interest at rates determined by the carrier or in a manner outlined in the contract.


Variable Annuities: Variable annuities have a strong investment component, as the insuring company invests your money into what are called sub-accounts they select based on your risk aversion profile. These are the riskiest annuities available, as those sub-accounts can be invested into stocks, bonds or other investment products. If those underlying investments fail, it is possible to lose a portion (or even all) of your money. That’s why I  recommend most investors stay away from variable annuities.


Equity-Indexed Annuities: Equity-indexed annuities are fixed annuities for which the interest rate is tied to an investment index, such as the S&P 500. Considered to be somewhere in the middle of the risk spectrum, the base premium is guaranteed, but if the index performs well, you can earn higher returns.


Single-Premium Annuities: This type of annuity is funded wholly upfront with one single payment. These are often ideal for those looking to transfer funds into a better performing vehicle.


Multiple-Premium Annuities: Outstanding tools for those looking to accumulate savings, these annuities are funded by paying a predetermined amount of premiums to the insurer.


Deferred Annuities: Deferred annuities are structured in such a way that the payments from the insurer don’t commence for many years, commonly known as the accumulation phase – the time during which you actually fund the annuity – until the annuitization (or payout) phase, which typically occurs upon retirement.


Immediate Annuities: Unlike deferred annuities, an immediate annuity pays out very quickly, typically no later than a year after the purchase. Its name more or less says it all.


With so many annuity options in the market, engaging an advisor to help you navigate the maze of products might make sense. But if you do decide to go it alone, do as much research as you can, weigh your prospects carefully, and only buy an annuity from a company with a strong financial rating. Check out information sites such as:


And remember, while annuities can be the answer for the vast majority of Americans, they’re certainly not appropriate for everyone. Like all investments, some annuities are good, some are bad. Annuities work best for older investors looking for lifetime income, not younger investors growing their savings. Annuities have surrender charges for early withdrawal, and there can be tax penalties as well. And like many fixed-income investments, annuities are subject to interest rate risk. As with all investment options, do your homework and consult professionals.

When to Retire?

65 yrs oldThe concept of retirement is evolving, as many Americans are not retiring as early as previous generations.


For starters, the age for collecting full Social Security benefits is moving up. If you were born in 1937 or before, it’s still age 65. If you were born between 1938 and 1959, it’s now 66. For men and women born in 1960 or later, it’s climbed to 67.


You can still claim Social Security before your full retirement age, but your benefits will be discounted, possibly significantly. On the other hand, your monthly benefits will increase if you postpone your start date past full retirement age.


Just because you retire doesn’t mean that you have to start collecting Social Security the same year. In fact, each year you delay up until age 70 gives you an 8% increase in benefits. Do that for four years and you’ll be setting yourself up for almost a third more in monthly benefits – for life.


That’s a significant incentive for those who can wait it out and have confidence that the Social Security Trust Fund will make good on its promises.


As you can see, deciding when to retire and when to start collecting Social Security are two of the biggest decisions you will make. That’s because, once you start collecting benefits, you can’t change your mind. You’re locked in. For example, if you decide to retire at 62 and full retirement age is 65, then your benefits will be reduced by 25% versus what you would have received if you waited until age 65. You’re not allowed to take payments for a couple years, put Social Security on pause, then turn it on a few years later at a higher rate. You’re stuck at the original lifetime income benefit amount forever.


Given all the possible outcomes, what is the best retirement age? I saw an article recently that attempted to answer that very question. You can find it here: 

Lobbying for a Pension

New Jersey state house TrentonRecently I read a rather surprising Associated Press story. Did you know that some states award public pensions to private lobbyists?


According to the article ( at least 20 states — including New York and New Jersey — give full state pensions to private organizations who don’t work for the state (and in fact may lobby against state interests at times).


The rationale behind this largess is that the lobbyists represent associations of counties, cities and school boards. This perk was granted decades ago based “on the premise that they serve governments and the public.” In many cases the lobbyists also receive health care benefits.


Does this seem extravagant? Most states in our area are struggling to fund their pension obligations. Democrats and Republicans have acknowledged that more legislation designed to raise revenue is almost certain. In other words, higher taxes.


There are ironies galore in this story. One is that the very people who are advancing the idea of benefit cuts for other government workers are themselves enjoying a cushy pension. Another is that their salary increases are without state oversight. As their salary increases so too do their pension benefits.


How many people do you know today who have lifetime pensions? If you look at the statistics, it’s less than one out of 10 workers. Is there anyone lobbying for you to get lifetime retirement income?


Fortunately, there are ways to get a pension that pays you as long as you live, even if you’re not a lobbyist. If you don’t currently have a guaranteed income stream to supplement your retirement, you might want to consider looking into a “personal pension plan.”


Some people think that once they pass a certain age, it’s too late to get started on creating a pension. Here’s an example of a client who’s over 60, who wanted to supplement his retirement. He put $200,000 into a personal pension plan at age 61. He plans on starting his pension at age 75. At that time he will receive $32,598 every year for the rest of his life. Given his family history, he expects to live past 90. If he’s correct, sixteen years at $32,598/year would equal $521,568. If he lives longer, he continues to collect. If he dies sooner, his beneficiaries get what’s left. The pension payments are guaranteed by an insurance company.


There are pros and cons to every financial strategy, so contact us for more details and information.

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Soc. Security Statements Are Back – Sort Of

They’re baaaack.


Those paper Social Security statements, which we used to get every year, but which have been on AWOL since 2011, may now coming to a mailbox near you.


The operative word here is “may.”


You will get a paper statement this year only if you are age 25, 30, 35, 40, 45, 50, 55 or 60 and only if you have not signed up to view your statements online.


Starting last month, the Social Security Administration (SSA) decided to eat the snail mail cost (about 50¢ per mailed statement) and resumed delivery of annual statements — to some. As long as you have not signed up online to view your statements you will receive the latest accounting of your benefits — once every five years.


Three years ago, the SSA put a halt to annual mailings in an effort to save some cash. Indeed, they saved $70 million per year in postage costs. But the agency has been criticized for ending a popular service. In response to critics — and bolstered by an improved budget outlook — the SSA has implemented a compromise solution.


According to Reuters, 10 million American workers have signed up at www.ssa/gov to view their Social Security benefits online. That represents just 6% of all eligible employees. None of these wage earners will receive paper statements.


The annual statement includes an estimate of monthly Social Security benefits at various ages. It also documents your work history and the amounts you’ve contributed to Social Securty over the years. Whether you get your statement online or in the mail, it’s worth reviewing. Here are a few things to look for.


1) Double check your earnings history – In preparation for the move online, the SSA converted over 150 million accounts. Do you think there’s a chance that there could be a mistake or two in there? Your Social Security benefits are based on your earnings record. If your record is incorrectly low, it’s up to you to spot the discrepancy and request a correction. Otherwise, you could be shortchanged throughout your (and your spouse’s) retirement.


2) Calculate your expected benefits – In 20 years, will the Social Security Trust Fund have enough in its coffers to pay you 100 cents on the dollar? No one knows for sure. However, the Social Security trustees are predicting that there will only be enough revenue to cover 75-80% of benefits staring in 2033. A number of remedies have been suggested, from raising contribution limits to raising the retirement age. Which changes, if any, willl be adopted is anybody’s guess. But in all likelihood, men and women who are already collecting benefits will not see a reduction. Depending on your age and income level, you may want to factor in a 25% reduction in benefits down the road.


3) Use Social Security as the foundation of your retirement income – What percentage of your income will Social Security replace? The average is 35-40%. That means most people need to supplement Social Security with additional savings. An annuity might be something to consider. The best ones work just like Social Security in that they pay you a guaranteed income you can’t outlive.


4) Don’t forget Social Security’s 3 Other Benefits – Most people evaluate Social Security in one dimension – in terms of their own retirement benefits. This is a mistake. Social Security also offers spousal benefits, survivor benefits and disability benefits. How and when you decide to claim can affect all your benefits. Sometimes it makes sense to take less money in your early retirement years in order to get more for you and your spouse in later years. The difference can be tens or even hundreds of thousands of dollars over the course of your retirement.


Social Security is an asset. It’s an asset that you control and influence — and can grow, in some cases at over 8% per year. Most people are passive about Social Security. They file for benefits 30 days after they retire and their attitude is, “I’ll get what I get.” Adopting this approach is a good way to shortchange yourself. Instead, you’ll want to take an active role in its management. And it all starts with the annual statement.