Saturday, January 18, 2014

Will You Have Enough Income at Retirement?

In my numerous meetings with retirees, I have met many who live very comfortably in their golden years. Foremost, they have conservatively invested nest eggs - typically in annuities and brokerage accounts. They also possess sizeable deposits at the bank including certificates of deposit, savings and checking accounts. This generation experienced the tribulations of The Great Depression and they understand the importance of saving their money.

Their most important assets, however, may not be invested in an annuity, a brokerage account or at the local bank. The monthly income they receive from their pensions and their regular Social Security payments, when combined, pay most if not all of their living expenses. This recurring income operates as their primary asset allowing annuity, brokerage and bank deposits to grow undisturbed for future use. In this way, the income this generation receives provides significant and immediate financial stability.

It makes sense that today's seniors would be able to accumulate a sizeable nest egg as well as considerable bank deposits. Their monthly income usually more than covers monthly expenses allowing their existing investments to accumulate. Thus, the main concern for retirees is usually their health and long term care related expenses. That issue is easily solved with the purchase of a long term care policy. With an adequate monthly income and long term care health insurance, this prepared group of seniors can rest easy.

From Where Will You Receive Regular Income?

But what if you did not receive a Social Security payment? And what if you had no pension set up through work? Remember, your 401(k) is not a pension plan. That 401(k) or 403(b) plan is the same plan that seniors today have turned into their nest egg, not their retirement income. If you had no regular monthly income, how long would your nest egg last you?

These are the dilemmas facing many younger workers today. Company pensions have been frozen in many cases and have altogether disappeared in others. In an effort to cut costs, some of the largest employers in America have chosen to discontinue offering pension plans to their employees. Additionally, the Social Security Trustees forecast that this federal program will begin running a deficit in 2017. To make matters worse, the Social Security Trust Fund is only projected to be solvent until the year 2041.

It is safe to assume that you know whether or not you have a pension program at work. It is very difficult, on the other hand, to predict what might happen with Social Security. Depending on government surpluses and deficits or Congressional intervention, the program may or may not live up to its promises. Based on what we know today, younger generations counting on Social Security to shore up their retirement income may be in for an unpleasant surprise.

You Must Plan for Your Own Retirement

What should a concerned worker do? The bottom line is this: you will need to make arrangements for your own retirement. The days of the federal government and a large employer sponsored pension taking care of you are quickly fading away. If you are self-employed, you probably came to this realization some time ago.

I have been encouraging younger wage earners to start their own pension savings plans. And, yes, it is a good idea even if you are contributing to some kind of traditional retirement plan like an I.R.A or a 401(k). An easy and very safe way to accomplish this is to set up a non-qualified annuity account. Contributions can be done systematically or sporadically based on your personal situation.

Why Should You Invest in an Annuity?

Fixed and indexed annuities are guaranteed financial instruments offered by insurance companies. They work very much like a savings account insofar as they earn interest, but do not lose value based on equity market conditions. If you select a non-qualified annuity, there are no restrictions on the amount you may deposit, but your deposits are not tax deductible like a traditional retirement account. On the other hand, these deposits will grow tax deferred until a later date, which allows you to enjoy the benefits of compound interest.

Once age 59 ½ is reached, you can begin to withdrawal your funds with no penalties from the IRS. Unlike most retirement accounts, with a non-qualified annuity you are not forced to withdrawal a portion of your funds at 70 ½. This way, you stay in control of how and when you withdraw your funds.

Annuity Pension Benefits - Taxes and Creditor Protection

The main benefit of an annuity is that it produces a guaranteed systematic payment. If that sounds like Social Security or a pension plan, that's because they are all quite similar. Once you have accumulated your principal, you can turn those funds into a guaranteed stream of income for your lifetime. However, unlike Social Security and many pension plans you may elect a beneficiary to receive your payments should you pass away prematurely.

An annuity that has been turned into a stream of income carries additional benefits. An annutization will spread out the taxable income over several years. Your systematic payment would be part principal and part taxable interest. In this scenario, the taxable income is not automatically withdrawn first and the principal second. The principal and interest are withdrawn simultaneously. The monthly portion which is not taxable is referred to as the exclusion ratio. To summarize this point your contributions are never taxed when withdrawn from a non-qualified annuity, but the interest would be. If the account is annuitized, then the taxable interest will be distributed evenly in each payment, not in a lump sum.

Furthermore, in many states, the payment to the owner is protected from creditors. Once the annuity principal has been annuitized, it is very difficult for creditors to attach to the monthly payments. As such, if you are involved in unfortunate legal proceedings in the future, you can know that you will have guaranteed income still available to you.

In summary, a non-qualified, fixed annuity can be an extremely valuable product in retirement. You can always wait until you are retired to establish the annuity principal with a lump sum contribution, but it can be less stressful to contribute a little each year. A guaranteed income stream will allow you, like today's seniors, to worry less about your income and enjoy your retirement years.

No comments:

Post a Comment