Know These 3 Things Before You Invest in a Fixed-Index Annuity

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Know These 3 Things Before You Invest in a Fixed-Index Annuity
By David Stone/ Founder and CEO of RetireOne/ Smart Insights from Professional Advisers/ Kiplinger/ Retirement/ kiplinger.com

"To evaluate whether a FIA is right for you, you need to understand how you'd make money on the investment, how the insurer profits and how and at what point you can get access to your funds.

With interest rates as low as they’ve been lately and stock markets as volatile as we’ve been seing, the stage appears to be set for a different kind of investment: fixed-indexed annuities (FIAs).

Created more than 20 years ago, FIAs salved the wounds of many investors who had their portfolios whipsawed by the great recession. Offering some upside potential with a guarantee against losses, these investments are principally a trade-off: You transfer some risk to the issuing insurance company in return for limited participation in the gains of an index. On the other hand, equities offer more growth, but … they can't guarantee anything.

Because of the low interest rate environment, finance experts like Dr. Wade Pfau and economist Roger Ibbotson have recommended that financial advisers and their clients think of FIAs as another asset class, framing them as an alternative to fixed-income investments like bond funds. Dr. Pfau believes that the guarantees afforded by FIAs may be especially beneficial for retirees during volatile conditions, saying that "This protection may make it easier to retire successfully in down market environments."

It's easy to see how they could appeal to investors. As markets grow more volatile, FIAs are enjoying a swell of popularity … but they are sometimes oversold and misunderstood. Before you buy a fixed-indexed annuity, you need to understand these three things:...."

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Richard

 

[bluehende]

Every time I see anything on annuities all I can hear in my mind is the fisher investments commercial...

It starts


I will die and go to hell before I sell an annuity.

 

[Brett]

Every time I see anything on annuities all I can hear in my mind is the fisher investments commercial...

It starts


I will die and go to hell before I sell an annuity.

The Wall St Journal had a recent article about annuities. Annuities are making a resurgence since the end of the "fiduciary rule" and annuities offer the highest sales commissions (10% !)

 

[bogey21]

I'm way past that point in life that I need an annuity but if I were young, say in my 40s, I would look at buying deferred annuities kicking in at say ages 70, 75 and 80. Then I would be better able to spend my money rather than worry about running out. I haven't analyzed this in any detail but on the surface it seems to make sense...

George

 

[WinniWoman]

Social Security will be our annuity.

The money in our bank and investments will be our second annuity.

 

[Talent312]

Between SS for the 2 of us and my pension,* we're fully annuitized.
Our investments (4-IRA's) are our rainy-day fund (a/k/a candy-store).

*It's a significant amount, based on 30 yrs. in state government.
.

 

[tompalm]

I'm way past that point in life that I need an annuity but if I were young, say in my 40s, I would look at buying deferred annuities kicking in at say ages 70, 75 and 80. Then I would be better able to spend my money rather than worry about running out. I haven't analyzed this in any detail but on the surface it seems to make sense...

George

Hind sight is always 20-20 and inflation has been very low over the last 10 years. The fear now is inflation might go up a lot and getting $2000 or $3000 per month might be great the first year you start, but 10-15 years from now that might not buy much.

 

[WinniWoman]

The only thing I am not sure of is exactly "how" to live on our savings until we wait to claim SS. We have to take our money out of our iRA's to live on, so does the financial company take the federal and state taxes out for us first each month? We have no pensions to live on, so we need to take out enough to cover our monthly expenses, so it is a lot of money coming out for years. We are trying to have my husband wait until age 70 to claim SS (he is going to be 65 next year) and figured I would take mine at 66 and 4 months- my full retirement age. But I am only 62 so have 4 years to go with that. Then I will also have a monthly health insurance bill at some point. OMG...

It just seems like such a large amount of money to take out every year and we could go broke fast. We don't have millions of dollars. Then there is the stock market- ugh.

We have to take $10,000 out each year right off the bat for school and property taxes. Then like $4000 per month for every thing else.

I was thinking we should maybe put our home up for sale in the spring, but if it sells we would have to move and my husband will have to quit work because we are getting out of NY. If we do manage to move, then we are hoping our property taxes will go down by at least half, but it is possible we might have HOA fees. The there are the expenses of selling and moving and buying another place and all of that.

I am so confused with this and there are literally no objective financial advisors around here. But we have to do something. It's now or never. We are not getting any younger and things can go wrong, as my recent leg injury has proven to me while my husband was away hunting for the week- we cannot stay in this house. And we definitely cannot stay in NY.

 

[billymach4]

MaryAnn,

As a life long NYer myself I am one foot out the door of NY. My advice is when you and hubby are ready, please do consider moving to a lower tax state out of NY. Or downsize your property and tax bill. Those NY taxes are out of control.

 

[billymach4]

My ticket out of NY was a job opportunity. I have no regrets.

 

[Brett]

The only thing I am not sure of is exactly "how" to live on our savings until we wait to claim SS. We have to take our money out of our iRA's to live on, so does the financial company take the federal and state taxes out for us first each month? We have no pensions to live on, so we need to take out enough to cover our monthly expenses, so it is a lot of money coming out for years. We are trying to have my husband wait until age 70 to claim SS (he is going to be 65 next year) and figured I would take mine at 66 and 4 months- my full retirement age. But I am only 62 so have 4 years to go with that. Then I will also have a monthly health insurance bill at some point. OMG...

It just seems like such a large amount of money to take out every year and we could go broke fast. We don't have millions of dollars. Then there is the stock market- ugh.

We have to take $10,000 out each year right off the bat for school and property taxes. Then like $4000 per month for every thing else.

I was thinking we should maybe put our home up for sale in the spring, but if it sells we would have to move and my husband will have to quit work because we are getting out of NY. If we do manage to move, then we are hoping our property taxes will go down by at least half, but it is possible we might have HOA fees. The there are the expenses of selling and moving and buying another place and all of that.

I am so confused with this and there are literally no objective financial advisors around here. But we have to do something. It's now or never. We are not getting any younger and things can go wrong, as my recent leg injury has proven to me while my husband was away hunting for the week- we cannot stay in this house. And we definitely cannot stay in NY.

With my IRA's I sell a security within the IRA (bonds, stocks, mutual fund, etc) then transfer the money to a bank account. At the time of transfer you specify if taxes should be withheld or wait and pay when you file a 1040.

 

[sue1947]

The only thing I am not sure of is exactly "how" to live on our savings until we wait to claim SS. We have to take our money out of our iRA's to live on, so does the financial company take the federal and state taxes out for us first each month? We have no pensions to live on, so we need to take out enough to cover our monthly expenses, so it is a lot of money coming out for years. We are trying to have my husband wait until age 70 to claim SS (he is going to be 65 next year) and figured I would take mine at 66 and 4 months- my full retirement age. But I am only 62 so have 4 years to go with that. Then I will also have a monthly health insurance bill at some point. OMG...

You may need to pay estimated taxes. Your tax bill needs to be within 10% of what is owed or at least as much as last year to avoid penalty. Run a 'what if' scenario with your 2018 taxes to see the impact of various options. Given that you stopped working and, I assume, stopped paying taxes, you should make sure you won't get caught.
The amount you take out may also impact your health insurance premiums if you end up on the Affordable Care Act options. Money taken from IRA's counts towards income to determine if you get a subsidy or not.

Whether the tax is taken out and how much depends on the company. I have IRA in 3 different companies. One requires a 20% tax payment (which is higher than my tax bracket) so I use withdrawals from that account to avoid having to file estimated taxes. The other 2 companies give me the option of paying tax or not and how much so I can adjust throughout the year as circumstances change. I also keep a close eye on the borderline for the next highest tax bracket. Those went up this year so not much of a concern for me now but it was in the past. You don't have to take it out all at once, so start with a bit and then see how it goes through the year. Once you figure this out, it won't be difficult.

 

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Fixed Annuities -- Unlike Variable Annuities -- Can Be Attractive
By Eve Kaplan/ Personal Capital/ Forbes/ forbes.com

"I've been a critic of annuities (primarily variable annuities) for years. Some of the reasons I'm critical of variable annuities --including indexed annuities that sometimes are pedaled as "fixed annuities" -- has to do with their cost and the fact that they often are sold to people who don’t need or understand them. Variable annuity salespeople who earn fat commissions on annuity sales often appear eager to put anyone into an annuity regardless of the client's needs.

In my previous article ("Annuities Can Be Good, Bad or Ugly") I listed many of my objections to variable annuities. In this 2nd article, I’ll focus on what kinds of annuities may be considered “good” for investors: fixed annuities.

Reminder Regarding How Annuities Work: Annuities have two phases: 1) investment/accumulation phase and 2) pay out phase. During the investment/accumulation phase, clients place taxable or after-tax assets in an annuity, invest in annuity investments (if they’re variable annuities) and – like most investment accounts – hope to see these investments grow. At a certain point, the annuitant (annuity owner) flips a switch and converts this account into a stream of income. The amount of the monthly payment is based upon actuarial tables – if you live past your predicted life span, you continue to collect payments and you’ve “won” in terms of collecting more payments than your actuarial average y. If you end up living a shorter life than the actuarial tables predict, you’ve lost in two ways: your life ended early and so did your payment stream – unless you have a joint annuity that continues to pay your annuity joint owner or you accepted a lower stream of payments in order to have some of the principal go into your estate...."

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Richard

 

[bogey21]

Between SS for the 2 of us and my pension,* we're fully annuitized.

I am also fully annuitized and have been for the last 18 years, also SS and Pension. Mucho peace of mind. All I have to do is monitor the entity paying my Pension to make sure they have no problems...

George

 

[PigsDad]

I am also fully annuitized and have been for the last 18 years, also SS and Pension. Mucho peace of mind. All I have to do is monitor the entity paying my Pension to make sure they have no problems...

And what could you do if that entity did have problems? You are locked into them with no backup.

Kurt

 

[bogey21]

I'd rather know than not know. If I saw the entity paying my annuity heading South I might modify my future spending plans and I might see if I could cash out of my annuity even at a loss. I don't know if the latter can be done or not and have no immediate need to find out as the payer of my annuity is in sound financial condition...

George

 

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How to Protect Your Retirement With Income Annuities
By Reshma Kapadia/ Retirement/ Barron's/ barrons.com

"Policy makers, academics, and industry executives agree: The challenging task of getting decades’ worth of savings to last a lifetime can be made more manageable with a single product: an income annuity. Annuities, however, have long suffered an image problem—for reasons both deserved and exaggerated—so investors have been slow to embrace them. But that could soon change, as individuals grapple with increased market volatility and rising interest rates.

Financial advisors and retirement experts have long advocated having some guaranteed source (preferably plural) of lifetime income to supplement Social Security. Guaranteed income, of course, offers peace of mind; it also lets retirees take more risk in the remaining parts of their portfolio, and/or enables them to tap their nest egg at a higher withdrawal rate.

Generally speaking, the best way to create a guaranteed income stream is through a simple income annuity: Invest a lump sum that the provider will turn into a stream of payments right away, known as an immediate annuity, or in the future, via a deferred income annuity. These are about as fancy as a bond with a coupon....."

Illustration by Leif Parsons


Richard

 

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How Income Annuities Are Taxed - and Why
By Jerry Golden/ Smart Insights From Professional Advisers/ Retirement/ Kiplinger/ kiplinger.com

"The guaranteed payments for life that income annuities deliver offer retirees a great sense of security. What people might not realize is that how those payments are taxed will depend on how the annuities are bought.

As you know, things sometimes don’t work out the way you plan. People die too young or need professional care after an illness or disability. Sometimes, just living to a nice old age drains the savings you worked so hard to bank.

That’s why people who care about their families and themselves buy insurance to address these life risks. And believe it or not, the government occasionally recognizes — and rewards — those of us who plan ahead for the unexpected. Life insurance is one example: Payouts to beneficiaries are received income tax free.

Longevity insurance — in the form of income annuities — also receives some tax benefits. (Those benefits could and should be better, however, as we will discuss in Part 2, publishing soon.)

Retirees and near-retirees face two important tax impacts when they consider including income annuities in their retirement portfolio: First, which of their savings sources will they use to buy the annuity, and second, once they begin to receive payments from the annuity, how will they be taxed?....."

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Richard

 

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Does an Annuity Belong in Your Retirement Plan?
By Jack Guttentag/ Retirement/ Forbes/ forbes.com
"An annuity is a stream of monthly income guaranteed for life, starting immediately or deferred to a specified time in the future, in exchange for an upfront lump sum payment. For example, a woman of 65 investing $500,000 can receive about $2700 a month starting immediately, $3900 starting in 5 years, or $5900 starting in 10 years. The 5 and 10 years are the deferment periods, which can be as long as 25 years.

These are stand-alone quotes, meaning that the annuity is not tied to any other feature of the annuitant’s retirement plan. In my view, annuities are best deployed as one part of an integrated plan in which part of the retiree’s assets are used to purchase a deferred annuity, and the balance is used to live on during the deferment period. My colleagues and I have been developing the technology for such a plan, called the Retirement Income Stabilizer (RIS), which I will be writing about in the months ahead. But this article is about misperceptions of annuities in general...."

Annuities in Retirement Planning(c) cantockphoto/everin



Richard

 

[bogey21]

In my view, annuities are best deployed as one part of an integrated plan in which part of the retiree’s assets are used to purchase a deferred annuity, and the balance is used to live on during the deferment period. My colleagues and I have been developing the technology for such a plan, called the Retirement Income Stabilizer (RIS), which I will be writing about in the months ahead...

If I was not set up the way I am (Pension + Social Security) and was retiring with a bunch of money, this is exactly what I would consider. It would keep me from under spending (to my detriment) fearing that I would run out of money...

George

 

[VacationForever]

Since retirement we have been burning through taxable savings but in a few years' time our income needs will be met by
- Social Security income (husband at 70, me at 62)
- Deferred income annuities (used all of my IRA to buy these which will pay from when I turn 60, for 25 years)
- Required Minimum Distribution (husband's), which is the only variable component.

The rest of the taxable investments will ride with the market and if I live beyond 85, I may need to tap into them if my husband's remaining IRA is insufficient to meet expenses.

 

[MULTIZ321]

The Truth About Annuities and Retirement
By Robert Powell/ Retirement/ The Street/ thestreet.com

"Annuities get a bad rap, but some are the right solution for retirement savings dilemmas.

We know what you're thinking. Annuities! Run away!

But that would be a mistake. Annuities are just an investment product -- like many others, and much like Social Security and defined benefit pension plans.

Annuities get a bad rap because people tend to lump all annuities -- single premium income annuities (SPIA), variable annuities, fixed index annuities, deferred income annuities, and qualified longevity annuity contract (QLAC) -- together, but they shouldn't.

Annuities also get a bad rap because some advisers recommend these products (and earn in some cases hefty commissions) for all people and all fact patterns. After all, it's tempting to treat everything like nail if the only tool you have is a hammer.

But annuities are appropriate for some people in some situations, and not for others. When are such products appropriate? Consider the case where you are trying to use guaranteed sources of lifetime income (Social Security and a defined-benefit pension) to pay for essential expenses (housing and healthcare, for example) in retirement. And let's say there's a gap between your sources of lifetime income and your essential expenses.

How might you plug the gap? Well, you could simply withdraw money from your accounts earmarked for retirement. But if you did that, you would be using risky assets -- assets that could decline in value - to pay for a certain lifestyle, a standard of living to which you aspire.

Another option would be to purchase, for instance, a single premium income annuity, or SPIA, with some of the assets (not all) in you accounts earmarked for retirement that would be plug the gap.

Doing this, would manage one of the major risks you and your household face in retirement: longevity. And that, at least from my perspective and that of many other academics, is an appropriate use of an annuity.

Unfortunately, the world has a bias against annuities, which, truth be told, are more often sold than bought.

So, enter the Alliance for Lifetime Income. In June, 24 services asset management and insurance companies, including AIG, Jackson, Lincoln Financial, Prudential and TIAA, came together to form the Alliance for Lifetime Income, an organization that aims to educate consumers and refocus the national retirement discussion on lifetime income planning versus accumulation.

In a recent interview, Colin Devine, the spokesman for the Alliance, discussed the organization's mission, its research (the Protected Household Index), and its tool (the Retirement Income Security Evaluation) that helps financial advisers and their clients better quantify and understand their protected retirement income needs....."

Richard

 

[Luvtoride]

MaryAnn,

As a life long NYer myself I am one foot out the door of NY. My advice is when you and hubby are ready, please do consider moving to a lower tax state out of NY. Or downsize your property and tax bill. Those NY taxes are out of control.

Billymach, I’m reading older posts here about annuities as we’re considering some now for retirement, but I had to comment on your statement above.

I live in NJ, about as bad as NY tax wise (both property and state income tax) and although it is expensive, it is the area where our family all still reside. I would no sooner move to a lower tax state and away from my kids and grandkids than cut off my arm!

Instead I choose to PLAN for the cost of living here and paying for that lifestyle including taxes during retirement.
Maybe some folks don’t have that consideration or really don’t care for their family members but it’s not just a $$$ consideration to pick up and move.


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