Archive for the ‘Retirement Planning’ Category
BOSTON – A 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement, according to the latest retiree health care costs estimate calculated by Fidelity Investments. [more at Fidelity]
Guaranteed Lifetime Withdrawal Benefit (GLWB) is not a stand-alone product but is a rider attached to a variable annuity insurance product.
How does it work?
The GLWB allows the annuitant to withdraw a fixed percentage of the total annuity premiums each year regardless of market performance. The income payments are guaranteed for life.
Bob, the annuitant, buys a variable annuity for $200,000 with a GLWB rider that pays 3% annually. The stock market had declined sharply during the past 10 years and the annuity is now worth $150,000. Bob will receive $6,000 per year for the remainder of his life ($200k x 3%). The guarantee is computed on the initial investment ($200,000) and not on the declined portfolio value ($150,000).
This product sounds like a winner. The annuitant receives downside protection through lifetime income and upside potential based on market performance. Not so fast. While the guarantees is favorable in a bear market by shifting the risk from the annuitant to the underwriter, this product comes with a cost.
- The income received will not protect the annuitant against inflation.
- The fee structures is frequently complicated and expensive.
When does this product make sense?
- It permits the retirees to have a peace of mind without worrying about stock market conditions.
- It is helpful if the retirees have limited access to other guaranteed income sources (e.g. corporate defined-benefit plan).
When to avoid this product?
- If the retirees have other guaranteed income sources (e.g. corporate defined-benefit plan).
- If one expects inflation is to rise in the near future.
(VA Dec 12, 2011) Sun Life Financial Inc.’s exit from the U.S. variable annuity and individual life insurance businesses. http://www.investmentnews.com/article/20111212/FREE/111219990
“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” — j.p. morgan
Today fewer employers are offering defined benefit plans to their employees. As an alternative retirees are purchasing annuities that would provide them with a steady stream of income into their retirement years. Insurance companies have responded to the retiree’s needs with various annuity products. In recent years annuities continue to grow in popularity. According to LIMRA, the Windsor, CT-based financial services research firm, the sale of all annuity products reached $122.4 billion for the six months through 6/30/2011, an increase of 13% (a).
What are types of annuity?
Annuities can be segregated into variable annuities and fixed annuities. With fixed annuities the investors are offered a lower return as the insurance companies assume the investment risk. With variable annuities the investors assume the risk an can invest in a variety of investments with the expectation of achieving superior returns.
Fixed annuities provide guaranteed regular payments to the policyholder over the term of the contract. These contracts can either start immediately or deferred to a future date. Retirees are using annuity payouts to supplement Social Security and cover basic expenses.
Advantages and disadvantages?
With a deferred annuity the investor lose control of his assets once he hands over the money to the insurance company. Should the investor change his mind there could be substantial surrender charges.
With an immediate annuity the investor give up control of his money. Most immediate annuity provide the investor with income for life. Once the investor dies, nothing is left to the heirs.
There are immediate annuities that can provide income to heirs. Such policies are more expensive resulting in a smaller income to the investor during his lifetime.
Create your own Fixed Annuities.
To save on high commission fees, you can create your own fixed annuities.
In the charts below are example computations using an initial investment of $100,000. I used the 10 year Treasurys for investment in the fixed income portion. This instrument currently pays an annual yield of 2.5% (b). I use the SPY ETF to mimic investment in the S&P 500.
In exhibit A, I allocated $79,250 to 10 year Treasurys with the balance going to the SPY ETF. Should the market declines 13% per year (twice the gain of 6.7%), the investor have protected his initial investment after 5 years. Should the market stay flat the investor’s $100k investment grows by 10.4% to $110,414. Should the market increase by 6.7% per year (c) the investor’s $100k investment grows by 18.4% to $118,361. In the three scenarios, the Treasurys provide a guaranteed return. And you, the investor, maintains the assets, not the insurance company,
In exhibit B, I show a 100% allocation to 10 year Treasurys. If the investor can achieve a rate of 2.63% for the 20 year investment period, he should be able to withdrawal $6,414 per year over twenty years.
Should you buy a fixed income annuity or should you create your own fixed annuity? Call us at 415.967.EDGE or e-mail us at firstname.lastname@example.org today and let us crunch out the answer for you.
- – - – -
The IRS has produced a chart showing whether a rollover between 401(k), 403(b), 457(b), IRA, Roth IRA, SEP IRA and SIMPLE IRA accounts is permitted.