How to Implement an Annuity into Your Portfolio

You understand what an annuity is, how it works, and what the advantages are, but do you know how to implement it into your portfolio?

In this eighth and final installment of our “Annuities – Why Ever Use Them series, we’re sharing how to use an annuity as part of your retirement portfolio.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

A quick summary

Before we dive into how you can incorporate an annuity into your portfolio, there are some things to be aware of. We’ve already covered these points in detail in other articles within this series, so do visit our blog to find more information about anything covered below.

Here’s a quick recap:

  • Our focus for the “Annuities – Why Ever Use Them series is on fixed index annuities only.
  • We prefer fixed index annuities over variable annuities because you can lose money in a variable annuity.
  • Fixed index annuities protect your principal, so your investment is guarded against market volatility.
  • Fixed index annuities are linked to an index, such as the S&P 500 – they earn interest depending on how the index performs.
  • You can choose from a range of strategies for how you want to receive interest, for example a cap or a participation rate strategy.
  • If you use a cap strategy set at 5%, for example, and your index earns 10% over an annual point-to-point reset, your annuity will earn a maximum of 5% interest.
  • If you use a participation strategy set at 50% and your index earns 10% over the reset period, you’ll earn 50% of the index’s 10% growth (5% interest on your annuity).
  • There are liquidity restrictions, so we recommend using an annuity as part of a more diverse portfolio.
  • Most annuities allow you penalty-free access to 7-10% of your money in any given year.
  • Annuities often have a surrender charge that applies for a set number of years.

Why choose a fixed index annuity?

Most people use an annuity as part of their retirement portfolio for two reasons. First, a fixed index annuity gives you complete safety and still grows your investment at a good rate of return. A fixed index annuity is not affected by market downturns and is protected against risk. So, if your main concern is safety, an annuity would be a good option for your portfolio.

The second reason is income planning. There are a few ways to get guaranteed income in retirement, including taking a pension and Social Security. A fixed index annuity is a straightforward addition you can make to your guaranteed income sources that lasts for the rest of your lifetime.

Implementing an annuity in your portfolio

We’re going to use an example to demonstrate how to build an annuity into your retirement portfolio. In this example, we’re going to be using hypothetical figures and a fictional retiree, Mary. Please bear in mind that while these figures are representative of fixed index annuities, these are not accurate rates.

Mary is 60 years old and has $1 million of IRA/401k savings. She wants to retire in 7 years time, at the traditional retirement age of 67. She’s calculated how much she spends on her essential needs, wants, and legacy money each month, and discovered that she needs $4,000 of guaranteed income a month to cover her essential needs alone.

Social Security will give Mary $3,000 a month. She doesn’t have any other forms of guaranteed income, so Mary is looking for a way to get an extra $1,000 a month.

What is your risk tolerance?

One thing we talk to all of our clients about is risk. Knowing what your risk tolerance is can help you make decisions about your portfolio that you’re comfortable with. So, before we can advise Mary about finding that additional $1,000 per month, we need to understand how much risk she’s willing to take.

There are a few different ways that you can make a return and manage risk. Banks, for example, have essentially no risk, but the rate of return is very low. Money markets in general are well below 1% currently. So, while there is no risk, there is also hardly any return.

However, if you look at the stock market, this is the complete opposite. There is potential for incredible returns, but also huge losses. Annuities, on the other hand, give a good rate of return, but there are liquidity issues. Your total investment won’t be easily accessible to you. This is something to be aware of in case liquidity is a concern for you.

Let’s go back to Mary. To find out Mary’s risk tolerance, we’d have a conversation with her about how much she’s prepared to lose. Take her $1 million, for example. If we’re talking in percentages, a 10% gain or loss might be something Mary is willing to accept. But if we convert that into dollars, a $100,000 loss may be too much for Mary. In this case, we would keep discussing figures until we land on a percentage that Mary is comfortable with.

Once you understand how much risk you’re prepared to take, then you can decide how to build a portfolio that suits you.

How to construct your portfolio

Mary’s risk tolerance helps her decide that she wants to invest 50% of her $1 million in the stock market and 50% in a fixed index annuity. This gives her roughly $550,000 of liquidity. Mary still needs that extra $1,000 of guaranteed income a month, so she puts $150,000 into an income-based annuity. At age 67, this will start providing her with a lifetime monthly payout of $1,000. Now, she has complete peace of mind that her essential income needs will be covered when she reaches retirement age.

In terms of Mary’s portfolio, she still has $850,000 left. So, to achieve that 50/50 split, Mary could invest $350,000 into another fixed index annuity. She’s got the guaranteed income coming from her first annuity, the second one will be to give her that risk-free growth that she wants. The remaining $500,000 will go towards the stock market as she wishes.

So, where will Mary’s portfolio get her by the time she retires? If the $350,000 in her annuity earns 4%, it will grow to around $480,000. Meanwhile, if the $500,000 that she invested in stock market earns 7%, it will have grown to over $1 million.

The final piece to this portfolio is her remaining annuity, which will start generating $1,000 a month of guaranteed income to add to the Social Security payments of $3,000.

However, one thing that we need to consider is inflation. Mary’s expenses are now $6,500 a month. So that original $4,000 of guaranteed income no longer completely covers her essential income needs. But, thanks to Mary’s growing investment portfolio, she can afford to withdraw from her accounts to cover that extra cost.

Inflation and other costs can drastically impact your retirement plan, but we can use our system to adjust numbers and show you exactly how your funds could play out in different scenarios. We can illustrate what happens to your money if you want to withdraw more at the beginning of your retirement than you do later on, or if you want to purchase a second home, for example.

Overall, Mary’s retirement plan shows that her funds last throughout her retirement, and well into her 90s. Constructing a portfolio that’s safe, liquid, and has income, can give you this same security and peace of mind that you don’t need to worry about your retirement finances. But, please remember, this is based on an illustration only.

If you want to learn more about using an annuity as part of your portfolio, please do reach out to us by booking a complimentary 15-minute call. We can give you individualized advice about annuities and constructing a portfolio that’s right for you.

Documents for Estate Planning and Retirement

Documents Every Person Needs for Estate Planning

     Is Estate Planning on your priority list? A common misconception about estate planning is that it is only necessary if you have a big estate, many assets, or a complicated family situation. 

The reality is, estate planning ensures that decisions that would be difficult to make in the moment are made in advance to make things easier in the future. 

    By making these decisions in advance and setting them out in writing or in some other way, you can ensure that the wishes of you or a loved one are preserved and that there is a concrete plan for what happens if someone needs to make a decision on your behalf after you die.

     Estate planning also governs what comes next after you die, from what happens to your property to how your funeral will be handled. At its core, estate planning is giving yourself the peace of mind that the people you leave behind will know what to do and will be taken care of, a concept that is very comforting for many. This can be part of your Retirement Planning Checklist.

Estate Planning Documents

      A number of legal documents must be prepared as a part of the estate plan. It is important that these documents are prepared correctly to ensure that your intent is reflected, that nothing slips through the cracks, and of course, that your will and other related documents are validly executed so you do not die intestate. 

      When Preparing for Retirement with estate planning, there are generally three main documents that attorneys advise families to prepare: A will, a durable power of attorney, and a healthcare power of attorney with a living will component. These three documents allow others to legally act for you, which is a powerful, invaluable tool when it comes to managing your end-of-life affairs.

  • Will
  • A will is a legal document that tells readers your wishes after your death, from the distribution of your property to the management of your estate to your intentions for how your children will be raised, in some situations. 
  • While, in some states the law recognizes handwritten/holographic wills, working with a seasoned estate planner or attorney will ensure that your estate is distributed exactly as you would like it to be. 
  • Some wills benefit from the inclusion of specialized clauses that allow for others to act on behalf of the estate, which can come in handy if the language of a will is unclear or if the way a certain property is set to be distributed is impracticable. 
  • For example, wills can include a power of sale provision, which allows the executor of the estate to sell a given property and distribute the funds among the will’s beneficiaries. 
  • Healthcare Power of Attorney
  • A healthcare power of attorney is a legal document that allows an established person to make healthcare decisions on the behalf of another. 
  • This kind of estate planning document is particularly helpful in situations where you or a loved one are unable to make healthcare decisions on your own behalf, like if you are in a medically induced coma or experience a lack of capacity. 
  • A living will is often part of the healthcare power of attorney document. The living will expresses what a person wants, while the healthcare power of attorney states who is authorized to be a decisionmaker.
  • Durable Power of Attorney
  • Durable power of attorney is similar to the healthcare power of attorney but is much broader. Durable power of attorney allows a person to entrust another with virtually all legal decisions. 
  • Someone who has durable power of attorney can make healthcare and financial decisions and even sign legal documents on behalf of another in the event that the person who gave them the power is incapacited or otherwise cannot act on their own behalf. 
  • Power of attorney is a powerful tool to entrust someone with, and can be used to make changes and allow access to bank accounts, various assets, and even change the beneficiaries of a will or similar legal document.

      With the help of these three key estate planning documents, you can feel confident that your loved ones will be taken care of and that it will be as simple as possible for your wishes to be respected after you die.

      If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

      In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

The Retirement Planning Checklist

As you start to think about retirement planning, you might quickly feel overwhelmed or unsure about what to plan for. Retirement is made up of many different elements, and you’re going to have to make decisions about all of them – but where do you start?

We realized that many people approaching retirement don’t know what they should be thinking about or what questions they should be asking. So, we’ve put together a checklist of the nine most important things you need to consider before retirement.

You can watch the video on this topic above. To listen to the podcast episode, hit play below, or read on for more…

In this post, we walk you through each of these nine elements and help you better understand some key retirement planning aspects. You can make notes on these yourself, use them to talk to your financial advisor, or even see them as retirement planning conversation starters between you and your family. Let’s dive in.

List your retirement goals

You only retire once, so make sure you’re prepared for it! You might have lots of big plans and ideas about what you want to do in retirement. This might include going on a trip, spending more time with grandkids, or anything that you’re initially very excited to do. But often, people don’t plan beyond their first year of retirement. We call this the “retirement honeymoon phase.”

You need to think about what you want to be doing in retirement long-term. We’re talking for 10-20 years! After that first year or “honeymoon phase,” what would you like to be doing regularly, or what would you like to accomplish? Take a pen and paper and write some ideas down in a list or create a retirement journal. Here are a few questions to get you thinking.

  • Do you want to work part-time or volunteer? Are there any organizations that you’d like to work with?
  • Where do you want to live? Perhaps you want to downsize, move into your retirement transition home, or look into other retirement accommodation.
  • Do you want to travel? If so, will it be one long trip, annual vacations, or frequent getaways to places nearby?

Having a list of all the things you want to do in retirement is a great way to get excited about your future. It can also help you make the right choices so that you get to live your dream retirement.

Know your numbers

You may have opened many different bank accounts throughout your life. Perhaps you have multiple 401ks or have various assets. One of the first steps to preparing for retirement is gathering up all of this financial information.

When you’ve consolidated these accounts, you’ll be able to see how much you’ve got, and start building your financial retirement plan. From here, you can find out how much guaranteed income you can expect to receive when you retire.

Your incomings are one thing to know, but you should also be aware of your spending. If you’re working, you may be less worried about how much you’re spending month-to-month, but after you’ve retired, you’ll no longer have money coming in the door. It’s important to know what your fixed expenses will be so you can budget accordingly.

Ideally, your guaranteed income (e.g., your Social Security and pension) will cover all of your fixed expenses. But remember, the unexpected can happen. Sudden healthcare costs or inflation, for example, can affect your retirement plan. So, while we can make illustrations and help get your finances in a good place, we can’t predict the future.

Social security: look at the big picture

People usually want to know how they can get the most money from Social Security. While this is completely understandable, we want to urge you to look at the big picture.

If you wait and start taking Social Security at age 70, then you will receive more money in total – if you live into your 90s. However, if you’re withdrawing more on your assets because you’re not taking Social Security yet, this could have a massive impact on your finances 10-15 years down the road.

It can be easy to fall into the trap of wanting more from Social Security, but we strongly advise you to look at what waiting will do to your assets in the long-term. A comprehensive, written retirement plan can show you and help you understand how something like this will affect your overall finances.

Take an interest in your investing

You don’t need to be a stock-guru, but we recommend that you find out what strategy best suits your money goals and risk tolerance. There are many different ways to invest, but we break these down into two main categories: passive and active.

The passive, or buy-and-hold strategy, is more suited to those who want to invest their money and leave it. This is typically a long-term strategy, where you’ll invest over many years and (hopefully) your money will accumulate. However, when the stock market is volatile, you need to have a high-risk tolerance to weather the storm.

For those approaching retirement, we advocate a more active strategy. This is where you make adjustments depending on market shifts. It’s more suitable for those with a lower risk tolerance, as it attempts to protect against any downturns or crashes that may have a big impact on your retirement savings.

If you’re not sure where to start, consider what your risk tolerance is. If you lost 5% of your invested money today, for example, how would that make you feel? What percentage would you be comfortable with losing?

Understand your Medicare options

You will start receiving Medicare at age 65. However, there will be many, many options to consider. We suggest that you don’t wait until the last minute.

A year before you’re due to receive Medicare (around age 64), start finding out what options will be available to you and get an idea of what to expect. This way, you won’t be as overwhelmed when the time comes. We also recommend speaking to an expert, if you can.

On the Secure Your Retirement podcast, we spoke to Medicare specialist Lorraine Bowen about navigating its complexity. To hear Lorraine answer some of our questions, please listen to the podcast episode “Navigating Medicare in Retirement.

Get your legal documents in order

It’s imperative to update all of the legal documents you may have before you retire. There can be complications if your documents don’t match up or if there is conflicting information in them, so make it a priority to get these in order.

Check that your power of attorney, will, and account beneficiaries are all correct. If these are not aligned with each other, one may usurp the other in case of an event. For example, a beneficiary form can be more powerful than a will – so it’s necessary to make sure that these are all in line with your wishes.

If you have trust documents or think you may need a trust, you should also start having a conversation about if this is a good option for you.

Plan your long-term care options

You may already know that you need long-term care insurance, but, again, there are many options, and it can be complicated.

You could opt to self-insure, or you could purchase traditional long-term care insurance or hybrid insurance. Traditional long-term care insurance has previously presented problems with sharp rate increases making it less affordable for many. Meanwhile, hybrid insurance premiums do not increase, but the insurance model itself can be a combination of many things. It could be part annuity, part life insurance, and part long-term care.

To learn more about long-term care and the differences between hybrid and traditional insurance, read our post “Long-Term Care Insurance: Traditional vs. Hybrid.”

Understand your taxes

Taxes will always be a part of your finances, so you need to plan for them. When you’re consolidating your accounts, it’s a good idea to note how each one will be taxed.

Many account types are taxed differently. For example, if you take withdrawals from a pre-tax IRA, that will be considered taxable income, so you’ll need to plan for this. If you have a Roth IRA, this will grow tax-free and can be a big tax advantage in the future. Annuities and brokerage accounts are taxed differently again – it’s up to you to find out the implications of each on your retirement plan.

Get your retirement income plan in writing

Finally, we strongly recommend putting your retirement income plan in writing. This can give you peace of mind about your financial freedom in retirement. It can show you an estimated projection of multiple scenarios and help you decide how you’re going to approach your future.

We often have clients approach us who feel uncertain about what’s possible for them in retirement. After seeing their “what ifs” played out and how we take different parts of your finances into consideration, they leave feeling far less stressed and optimistic about their future.

So, those are the nine key things you should think about when planning your retirement. We hope that this checklist comes in useful and helps you on the road to retirement.

If you want to learn more about preparing for retirement, consider getting our complimentary online masterclass, 3 Keys to Secure Your Retirement. You’ll learn how to create your own Lifetime Retirement Income Plan and start your journey to a confident financial future.

Retirement Planning Checklist to a Worry Free Life

Retirement should be worry-free, but many in the United States don’t have any retirement savings. Your goal should be to retire with as little stress and worry as possible.

It’s possible, but you’ll need to make sure that you begin securing your retirement today.

We’re going to outline an eight-point retirement planning checklist to help you retire worry-free.

8-Point Retirement Planning Checklist

1. List All of Your Retirement Goals

You can’t know where you’re at in reaching your goals if you haven’t defined them yet. Planning starts with your goals. Make a list of answers to the following questions:

  • What is your definition of a happy retirement?
  • Want to travel? Which destinations will you go to?
  • Want to spend time with family? How often will you travel to see them?
  • Would you like to move closer to family?
  • How much money do you want to spend or give away during retirement?
  • Will you help pay for a grandchild’s college education?

While this step may seem tedious, it can really put your retirement into perspective.

2. Know Your Numbers

Retirement is all about numbers. Money is a number’s game, and throughout your lifetime, you likely have made and contributed to a lot of accounts. You need to know how to access these accounts, how much money you have in them and where your money is allotted.

You may have an IRA, 401(k), annuity, brokerage and several other accounts.

When you have all of these accounts available and know their numbers, you need to consider your spending. Spending habits will typically have three main parts:

  1. Needs, or money to live
  2. Wants, or money to use for vacation, etc.
  3. Legacy, or money you would like to give away

You’ll need to consider that your money will come from your IRAs and 401(k)s, and then consider your income from Social Security, pension or other income streams.

Inflation will also play a role in your retirement planning because you’re not earning anymore, yet prices are still going up. All of these numbers will help you better know your financial situation when retiring.

3. Social Security’s “Big Picture”

When’s the best age to retire? Most places will tell you 70 – that’s a long time to wait. You can retire at 62, 67 or 70. Sure, the earlier you retire, the less you’ll receive. There’s a lot more to consider.

The moving parts may mean taking your Social Security earlier is more beneficial.

4. Educate Yourself on How to Invest Your Savings

Retirement savings should be invested. You’ll find two main forms of investing: active and passive. The main differences are:

  • Passive. You’ve likely been doing this for a long time. A 401(k) is passive in that you buy, hold and don’t do anything else. People that bought into Amazon back when it IPO’d, for example, have likely held on to it and reaped the benefits. Rebalancing may occur where you change up your asset allocation slightly, but it’s not on the level of an active investor.
  • Active. You manage the portfolio daily based on the current market. This is a time-consuming strategy, but you can hedge your losses and control your risk tolerance best.

Educate yourself on these two methods of investing your retirement savings, and you’ll have greater control of your retirement planning.

5. Understand Medicare

An integral part of your retirement planning checklist is to understand Medicare. Your health is so important, and we recommend talking to a Medicare expert. You need to have a plan to take care of Medicare.

There are a lot of options available, and they’re very complex with gaps.

At least one year prior to retirement, sit down with an expert that can help you understand your Medicare options, what’s covered, what’s not covered and how you can cover some of these gaps.

6. Put Your Legal Documents in Order

Estate planning is an essential part of retirement planning. Sit down and look over your estate planning documents. We’re talking about your:

  • Wills
  • Trusts
  • Power of Attorney, etc.

Have an attorney overlook your will. Have things changed since you’ve had these documents drafted? Update your legal documents to have the beneficiaries up to date. Do this with all of your documents.

7. Long-term Care Planning

People are living longer. Hopefully, you never have to go into a long-term care facility, but if you do, it’s a major expense. There are different layers of expenses:

  • Assisted living
  • Nursing care

You can self-insure these expenses, or you can take out an insurance policy that rises throughout your lifetime. Hybrid plans also exist, which will have long-term care plans and possibly life insurance in one.

Deciding how to cover the costs of long-term care will help you sleep well at night knowing that you can have a basic plan if you need help in the future.

8. Write Out a Retirement Income Plan

A written retirement income plan seems daunting, but it’s an integral part of every retirement planning checklist. Your retirement relies on your plan. There are a lot of items included in your plan that you’ll outline:

  • Retirement accounts
  • Expenses
  • Future expenses
  • Renovations
  • Car purchases
  • Inflation
  • Paying for your grandkid’s childhood expenses

When you think through almost everything that you can before retiring, you’ll have a plan to refer to and update as needed. You’ll also be able to see how your current actions are impacting your retirement.

If you follow these eight points, we’re confident that you’ll be on the path to a worry-free retirement. 

Need extra help or want to follow a proven program for retiring with peace of mind. Our 4 Steps to Secure Your Retirement mini course can help.

Click here to learn more about our course and how we’ll help you secure your retirement.

What Limitations Are There to an Annuity?

Annuities can be a safe way to grow your money – but they’re not without their limitations.

In our “Annuities – Why Ever Use Them series, we’ve talked a lot about the advantages of using a fixed index annuity. However, there are always drawbacks. So, what do you need to be aware of?

If you’re thinking about purchasing an annuity, there are two main limitations to consider. The first is how liquid your annuity is, and the second is surrender charges. In this post, we’re going to explain how both of these limitations work, how to avoid them, and what you can do to balance your portfolio.

You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…

Annuities: the need-to-knows

Here’s a quick review of what we’ve covered about annuities in our series so far:

  • There are two different types of annuities, deferred and immediate. Immediate annuities can provide you with income from the moment you set them up, whereas deferred puts your money aside to grow. In this series, we’re talking exclusively about deferred annuities.
  • Deferred annuities can be either variable (where you invest in mutual funds, so there is risk involved) or fixed (principal guaranteed with no risk). Our focus is on fixed annuities.
  • You can get a traditional fixed annuity, similar to a CD, where the insurance company gives you a fixed rate for a set number of years.
  • Or you can get a fixed index annuity. Here, your interest is linked to the performance of an index, such as the S&P 500.
  • A fixed index annuity earns interest through a cap or a participation rate.
  • If you use a cap, and set it at 5%, for example, then if your index increases to 10% over an annual point-to-point reset, your annuity will increase by your cap amount of 5%.
  • If you use a participation strategy and set it at 50%, then, if your index increases by 20% over the reset period, your annuity will increase by 50% of the index’s 20% growth (so, 10%).
  • There are three reasons why people choose a fixed index annuity: safe accumulation, guaranteed income, and death benefit.

We’ve explained these points in greater depth in previous episodes of our “Annuities – Why Ever Use Them series. To find out more about any of the points above, read the posts on our blog, listen to the episodes on the Secure Your Retirement podcast, or watch them on our YouTube channel.

How liquid is an annuity?

When an annuity is part of your portfolio, you need to know how accessible your money is. An annuity should never be the be-all and end-all of your portfolio. It should be one part that’s helping your money grow safely and securely, while other parts give you access to your money if you need it.

Annuities are not entirely restrictive. Most annuities allow you a penalty-free withdrawal. For the majority of annuities we recommend, this is usually between 7-10%, but it can vary. So, if you have $100,000 in an annuity, up to 10% of that ($10,000) is easily accessible to you.

But if 10% of your annuity isn’t enough to cover you in an emergency or you need frequent access to more liquid funds, what are your options?

We never suggest that you put all of your savings into an annuity because of their limited liquidity. Having unrestricted access to a fair amount of funds is paramount in retirement, so instead, we suggest splitting your money as part of a wider strategy. You could put 50% of your savings into an annuity, and the other 50% into stocks, bonds, ETFs, mutual funds, or another completely liquid asset.

So, if you have $1 million of savings and split it equally between an annuity and a fully liquid asset, you could have $550,000 of easily accessible cash. This equates to your $500,000 as a liquid investment and 10% available from your annuity.

How surrender charges affect your annuity

If you need more money than your penalty-free withdrawal amount allows, you may be subjected to a surrender charge. This is a period where you will have to pay a penalty to withdraw more than your limit. Let’s use an example to demonstrate.

Say you have $100,000 in your annuity, with a free withdrawal amount of 10% (so, $10,000), but you need access to $11,000. The 10% that you withdraw will be penalty-free, but that extra $1,000 will be subject to the surrender charge.

Insurance companies use surrender charges because they’re giving your investment guaranteed protection against market volatility. This comes at a cost to them as, to do this, they have to make long-term investments of their own. If you need to withdraw more money than they’ve prepared for, they will incur penalties. In essence, a surrender charge is a way of passing this penalty to you.

Most annuities that we work with have a surrender charge schedule lasting anywhere between seven and twelve years. Typically, these charges decline over time until they no longer apply, but this means they will be much higher in the initial years. So, if your annuity has a 10-year surrender charge schedule, you might face a surrender charge of 12% in the first year, 8% in the seventh year, and 0% in the eleventh year – as you’ll be out of surrender.

Your overall portfolio must ensure you have enough liquid assets so that you don’t have to worry about accessing cash or these surrender charges impacting your finances. There are pros and cons to every investment and limitations to how they work. So, how can you build a balanced portfolio?

The three elements to investing

There are three main elements to any investment strategy, safety, liquidity, and growth. No investment can suitably provide you with all three, but most investments give you two. So, how can different investments satisfy each element?

  • If you’re concerned about safety and liquidity, then a money market might be the right investment for you. Bear in mind that it will not give you substantial growth.
  • If you want liquidity and growth, the stock market could be a suitable solution. It has lots of growth potential but isn’t going to give you safety because there’s also the chance that you could lose money.
  • If you prefer growth and safety, we recommend fixed index annuities. As we’ve seen in this post, they have limited liquidity, so it would be wise to use an annuity alongside another type of investment in order to give you a better amount of liquidity.

Remember that every investment has its limitations. But by thinking about these three elements, you can decide what is most important to you. You should keep these elements in mind when picking your own investments or work with a financial advisor to build a portfolio that covers all three bases.

If you want more information about preparing your finances for the future or retirement, check out our complimentary video series, “4 Steps to Secure Your Retirement. In just four short videos, we teach you the steps you need to take to secure your dream retirement. Get the free series here.

5 Things You Should Do 5 Years Before Retirement

Retirement planning is more than just putting money into an investment account and hoping you have enough money to retire. You need to plan your retirement, and you need to keep revisiting this plan throughout your lifetime.

If you’re getting closer to retirement, there are five main things that you can do five years before retirement to ensure you’re able to reach your retirement goals.

1. Gather Your Important Documents

You should start gathering all of your important documents to have them ready to overview before retirement. We’re talking about documents relating to:

  • 401(k) plans
  • 403(b)
  • Annuity paperwork
  • Brokerage accounts
  • Estate planning documents
  • IRAs
  • Pension
  • Savings
  • Social Security

If you’re going to have a pension, call your company and ask them about the pension plan and what you can expect to be paid at certain ages. You might be able to take a lump sum.

You’re going to need all of these documents before retirement, so gathering them early on allows you to see where your retirement stands five years out from your actual retirement.

Note: Social Security pays out different amounts depending on your age. You can check this information on SSA.gov, but generally, you can retire at 62, full retirement age and 70. Early retirement, or age 62, will result in a 75% reduction in your benefit amounts.

2. Get Real About Your Spending

There needs to be a link between how much you save for retirement and how much you plan to spend when retiring. Retirement planning should never be left to chance by simply choosing a random monetary goal that you would like to achieve.

You might be fine living off of $2,000 a month during retirement, while others easily spend $10,000 a month when they retire.

We recommend breaking your down spending into three categories so that you really know what your spending will look like in retirement:

  • Essential income. Mortgages, food, bills, subscription services, gym memberships, etc.
  • Wants. Travel, spending time with grandkids or family members, golf club or other subscriptions. This category is really what you envision for your retirement.
  • Legacy/Giveaway. Charities, money left to family members, etc.

Try and factor in everything a good retirement means for you. You might need to cut back on some of your plans to reach your goals, but this is okay.

3. Write Down Your Goals

You know what your spending habits may look like, so now it’s time to really have some goals in place. The first year is fairly easy because you’re transitioning to a life without a 9-to-5 schedule. You’re free to do what you want, and this is an awakening feeling.

But the next few years are really where your retirement planning will be a success or failure.

Sit down today and write down:

  • Where you want to live
  • Where you want to travel
  • Goals of things you want to do in retirement

Be as specific as you can when writing down your goals. You may want to spend time with grandkids or go to Italy for a year. Whatever your goals are, write them down.

4. Learn About Investment Strategies and Risk Tolerance

You’re five years out from retirement, and you’ll need to be very cautious about your risk tolerance. Now is not the time to invest in high-risk investments because you don’t have the luxury of being in your 20s and taking these risks.

Investing has two main categories:

Passive Management

A passive investor puts their money into a stock and holds it over the long-term, or the person can be investing through other investment vehicles where no active management occurs. In all cases, even if the portfolio is diversified, there is a level of risk.

Google may be going strong today, but it could be the JC Penny of tomorrow where stock prices in 2011 were $35 to $40 a share and are $0.11 a share today.

Active Management

A strategy that shifts with the current markets. If the stocks are slumping, more precious metals may be purchased or stocks to hold your retirement fund’s money steadier, even if the possibility of returns may be lower. Managers will be working to mitigate potential losses and will be actively monitoring investments.

Risk tolerance changes, and you may not be able to afford risking 40% of your retirement before retirement begins. Educate yourself on your risks and the strategies you can take to lower them.

5. Come Up with an Income Plan

Retirement planning needs to be put down on paper. You need to think about:

  • Inflation
  • Long-term care
  • Healthcare
  • Remodeling
  • Home repairs
  • New car purchases

When your plan is well-developed, you’ll have “what if” scenarios in place that you can follow during retirement. It seems like a lot of work, but an income plan can give you peace of mind in knowing that you can confidently leave the workforce and finally retire.

Whether you plan to retire five years from now or 20, you don’t have to go at it alone.

Click here to follow our 4 Steps to Secure Your Retirement course.

How Much Money You Need to Retire?

When can you afford to retire?

Our clients often come to us wanting to know a set figure or amount to save that will mean they can retire. But it’s more complicated than just how much you have in your savings. There are lots of different factors to consider when creating a financial plan for a stress-free retirement.

In this post, we’re going to look at two example scenarios to show you what other variables impact your retirement savings and why the amount you’ve saved doesn’t necessarily mean you’ll have a better or longer retirement.

You can watch the video on this topic above or, to listen to the podcast episode, hit play below, or read on for more…

How much money do I need to retire?

The amount you need to have saved to retire is entirely dependent on your situation. No fixed amount or formula applies to everyone. Even if you had saved a million dollars, you’d still have to work through all the different variables to find out if it was enough for you to retire.

There are many variables and things to consider, including:

  • What age you want to retire
  • Your spending
  • Inflation
  • Healthcare costs
  • Your guaranteed income

When you want to retire has a huge impact on how much you need to save. You should consider both your savings and your spending habits whether you want to retire early or closer to retirement age, around 66 or 67 when you’ll receive Social Security.

Your spending is one of the biggest factors influencing your financial retirement plan. Living within your means before and after retirement is crucial to managing your money with longevity in mind.

Inflation also plays a part in how much you’ll need to retire. It’s been relatively low over the last decade, but inflation can change at any time. We set inflation at 3% for our retirement plans. This is the average inflation rate over the last 100 years. If inflation rates do rise higher than average, this typically only lasts for a short period and then readjusts. But it’s something to be aware of, as it will impact your spending and your savings.

Another factor that we cannot necessarily plan for is future healthcare costs. If you need long-term care or face health challenges in the future, it could take a chunk of your savings. While you can’t always prepare for these things in advance, you can take financial precautions, such as taking out insurance.

The one variable you can count on is how much guaranteed income you’ll have in retirement. Most people will have a pension or Social Security. Knowing how much guaranteed income you have in place helps you figure out how much extra you’ll need to save to cover your expenses.

How much you should save for retirement

We’re going to show you two scenarios to better understand how some variables affect savings and why it’s important to manage your money properly in retirement.

In the first scenario, there is Mary. Mary is 60 and has saved one million dollars ($1,000,000).

In the second scenario, there is Susan. Susan is 67 and has saved half a million dollars ($500,000).

Which do you think is going to have a longer retirement based on their age and savings?

Let’s run through these scenarios without changing any factors other than the amounts that each have saved and their ages. In both scenarios, the retirees will get $3,000 of Social Security each month, starting at age 67.

Scenario one: can I retire with a million dollars?

At age 60, Mary retires with one million dollars in IRA assets and has a spending plan of $6,500 a month. That means she needs $6,500 of guaranteed income coming into her bank account every month to pay the bills and live the life she wants to lead.

In both scenarios, the retirees are facing an inflation rate of 3%. This means that Mary’s spending is increasing by 3% a year. After ten years of retirement, inflation alone pushes Mary’s $6,500 up to $9,000 of spending each month.

Mary has invested her one million dollars, so it’s increasing at 5% on an annual average basis. This grows her savings at a decent rate of return, but she is withdrawing these funds to cover her rising costs. Mary has to rely solely on her savings immediately after retiring, as her Social Security payments won’t start until she’s 67.

There are some other factors at play, but to keep this simple, based on Mary’s spending and inflation, it will take only 13 years for her assets to run out. Mary will still have her Social Security payments, but these aren’t nearly enough to cover the lifestyle she’s built and grown accustomed to.

So, even though Mary retired with one million dollars at age 60, which seems like a powerful position to be in, she only makes it to age 73 before she has no more savings.

Scenario two: how much do I need to retire at 67?

Now let’s look at the second scenario. Susan retires at age 67 with half a million dollars saved in an IRA. Susan immediately gets $3,000 of Social Security each month, just like Mary did at 67. But Susan also has a pension of $500, taking her guaranteed income up to $3,500 a month.

Susan wants a different lifestyle from Mary. She plans to spend only $4,000 a month – $2,500 less than Mary. By the time Susan is 80, inflation will push her monthly spend up to $6,000 a month, still less than Mary’s original monthly spending.

In both scenarios, inflation does make a big impact. But for Susan, inflation isn’t as detrimental to her savings. Susan needed to take less out each month than Mary to supplement her guaranteed income and so it’s a more manageable withdrawal over the long-term.

In this scenario, Susan’s spending habits mean she can comfortably maintain her lifestyle in retirement past age 90 before she runs out of her assets.

How to manage your money in retirement

Retiring later, having a pension (even if it’s small), and reducing your spending can make a significant impact on how long your assets will last you. Even though Susan had saved half the amount Mary had, she had a far longer retirement plan because she retired seven years later, took a small pension, and reduced her spending budget.

If Mary had reduced her monthly spending by $1,500 to $5,000, it would have added almost ten more years to her retirement plan. This reduction alone would mean that she’d be 82, instead of 73, before her assets run out.

Your spending is arguably one of the easier factors to change within a retirement plan. It can be very helpful to take a good look at your spending habits now and consider what they’ll be in the future so that you can get an idea of what your retirement could look like.

How to plan your savings for retirement

If someone has saved more money than you for retirement – don’t panic. People have very different circumstances. They may need more money to cover costs or plan to spend more in retirement. Having more savings doesn’t necessarily mean a longer, more worry-free retirement.

A written retirement plan can help you understand how all of these factors will affect your situation and prepare accordingly. It gives you peace of mind that your finances are set for your future.

We’ve put together a complimentary video course to help you prepare for retirement financially. If you want to put a strategy in place for your retirement savings and spending, the free mini-video series is available to access here: Four Steps to Secure Your Retirement.

How to Retire Comfortably and Be Happy

Retirement planning should allow you to retire comfortably and be happy. You should find a comfortable medium, where you can retire and maintain the lifestyle that you want to enjoy. The lifestyle you live, and your spending habits will have a major impact on your ability to be comfortable in retirement.

Today, we’re going to outline a five-step process to follow so that you can retire the way you want.

5-Step Process to Retire Comfortably and Be Happy

1. Defining “Comfortable” for You

What is your definition of “comfortable?” Some people want to hit a monetary goal of $1 million before retiring. Once these individuals hit this milestone, they’ll retire. For other people, they want to have the income they need to pay their bills or travel.

Identifying what you want to do in retirement will help you define what comfortable is for you:

  • Do you want to be able to travel whenever you want?
  • Do you want to give money to charity or to your family members?

A lot of people are comfortable when they’re able to pay their bills and put food on the table. You might not want to travel or give money away to grandchildren – that’s perfectly fine. The goal here is to understand what you envision for retirement and what would make you comfortable exiting the workforce.

Knowing your definition of comfortable will help you prepare for retirement.

2. Know Your Risk Tolerance

Investments always have risks, but there are safer ways to allocate your assets as you age. The typical way people approach risk tolerance is:

  • Invest in riskier investments when you’re younger – you have time
  • Slowly start adjusting your portfolio for less risk as you get closer to retirement

Oftentimes, we find that people don’t adjust their investment portfolios, leaving them open to a high level of risk exposure. Could you risk your retirement losing 20% to 30% of its value because of high risks?

For some people, they have more than enough money and can afford to keep the majority of their investments in stocks. But there are ways to lower your risk tolerance and still retire comfortably without worrying about stock market fluctuations or volatility in the markets.

3. Write Down Your Plan

Make your retirement plan real by putting it in writing. A lot of people have plans in their heads, but they don’t put their plans to paper. When you create a retirement income plan on paper, it helps you:

  • Refer to the retirement plan
  • Make adjustments easily to your plan
  • Visualize your ability to retire

If you don’t know where to start when writing your plan, work with a professional that can help you devise a successful retirement plan.

4. Educate Yourself on Retirement Income Strategies

You’ve worked towards your retirement by putting money into IRAs, 401(k) and other investment vehicles. The tax consequences are different for each option. For example, some IRAs are tax-free, and some are pre-taxed.

A traditional IRA is basically ordinary income. Roth IRAs are tax-free.

There are a lot of ways to withdraw money from these accounts. You need to have a plan so that you can withdraw the money you need without suffering from major tax burdens or financial strain in the process.

And there’s also different streams of income, such as Social Security or a pension, which is guaranteed income. Dividend stocks that are income generating may be part of your portfolio, but the stock market isn’t guaranteed income. There are risks and advantages to stocks, and this is really what you need to educate yourself on.

Creating a retirement plan that is comfortable and that you can depend on is the key to a stress-free retirement.

5. Focus on Your Retirement Plan – Not Everyone Else’s Plan

Life is stressful enough, and comparing your retirement plan to someone else’s plan only makes it more stressful. Don’t start comparing your plan to your neighbor’s, brother’s, sister’s or other person’s retirement plan.

Why?

Your lifestyle may be different. Your neighbor may have $300,000 saved but no pension plan to rely on. You may be comfortable living on $40,000 a year and have already paid off your mortgage, but Joe down the street may struggle to get by on $120,000 a year because he needs the newest vehicles, takes expensive vacations and always has the “best of the best.”

When you compare your retirement to other people’s retirement, you need to look at the entire picture. You might not have the same savings or amount stashed away in a 401(k) as someone else, but your retirement may be a lot more secure.

Want to take your retirement planning to the next level? We’ve created a mini course called 4 Steps to Secure Your Retirement that you can follow to retire comfortably and happy.

If you want to discuss your retirement goals or make sure that you can comfortably retire, one of our team members will be more than happy to help you.

Click here to schedule a 15-minute complimentary call with us today.

How to Get Guaranteed Income with a Fixed Indexed Annuity

If your Social Security benefit or pension won’t provide you with enough guaranteed monthly income to keep you comfortable in retirement, an annuity can help.

You can watch the video on this topic further down, to listen to the podcast episode, hit play below, or read on for more…

 

There are often limited resources for securing guaranteed income in retirement, but if you have or are considering opening an annuity, you may be able to access an “income rider”. An income rider is an additional annuity feature designed to guarantee income for the rest of your life.

 

In this post, we continue our “Annuities – Why Ever Use Them series by diving into how a fixed index annuity provides guaranteed income using the income rider.

 

Our annuities series is a comprehensive guide to this complex product. If you want to learn more about annuities, we encourage you to read the posts on our blog, listen to the episodes on the Secure Your Retirement podcast, or follow the links below to watch them on our YouTube channel:

 

Why choose a fixed index annuity? A quick summary

We believe there are three reasons why you would want to add a fixed index annuity to your portfolio. The first is good accumulation. Fixed index annuities accumulate similar to a bond, but with the added benefit of no downside risk. The second is the death benefit, and the third is guaranteed income.

 

Before we discuss how to get guaranteed income from your annuity, here is some high-level information to help you understand how annuities work, the different types, and why we recommend a fixed index annuity.

 

  • Deferred annuities are either fixed or variable.
  • Variable annuities are linked to market investment through buying mutual funds. The rates are often high for variable annuities, and they come with risk. To make a decent return on your variable annuity, you have to overcome these fees and more.
  • Fixed annuities have guaranteed principals, meaning you cannot make a loss, which is why we prefer them.
  • There are two types of fixed annuity, traditional and indexed – both guarantee your principal.
  • The traditional annuity is similar to a CD (certificate of deposit). You give your principal to an insurance company, and they provide a return based on a fixed rate for a number of years.
  • With an indexed annuity, your return is linked to an index such as the S&P 500 or the NASDAQ. Even though indexes can fall, your principal is guaranteed, so the worst a fixed index annuity can earn in a year is zero.
  • The crediting methods for fixed annuities are based on a point-to-point annual reset. For example, if you open an annuity on January 1st, 2021, you’ll earn your interest on January 1st, 2022.
  • If you have a fixed index annuity, your interest will be calculated depending on what strategy you use. This could be a cap or participation strategy. To learn more about caps and participation rates, read our blog post, Fixed Index Annuities: How They Work and Things to Consider, or watch the podcast episode.

Our “Annuities – Why Ever Use Them series covers many of these points in much greater depth, so if you have any questions about how annuities work, please visit the other articles on our blog.

 

A fixed index annuity is our recommended option, especially for retirees who need access to a higher guaranteed income.

 

Why guaranteed income is important in retirement

When planning for your retirement, you want to ensure that you have enough guaranteed income to cover all of your essential income needs. Your income needs fall into one of three categories:

  • Essential: anything you need to pay for, e.g., your water bill
  • Wants: anything that isn’t necessary but gives you a better quality of life, e.g., vacations
  • Giveaway money: for gifting to your children or a charity

We believe that at least your essential outgoings should be covered by your guaranteed income.

 

Most retirees have two guaranteed income sources, their pension and Social Security. Beyond this, there are limited options to secure guaranteed income. One option is to add an income rider to your fixed index annuity.

 

The cost of a fixed index annuity income rider

Adding an income rider to your annuity gives you a lifetime income benefit. This is a powerful tool to help you take care of your essential income needs and grant you continued access to your principal. But, if you’re aiming for your highest guaranteed income, you’re going to have a fee.

 

There can be two different types of fees with an income rider. The first is a clear-cut fee, where the insurance company will charge you a percentage of your principal. This is usually around 1%. The second is a built-in fee, where you won’t be charged directly, but you will see a reduction in return.

 

 

How a fixed index annuity income rider works

A fixed income annuity already accumulates money for a death benefit. The income rider income generation is separate from this. Bear in mind that this income value is not lump sum money. If an insurance agent tells you that their annuity can give you 6% growth, this rate is for income purposes and isn’t available as a lump sum.

 

Let’s use an example to demonstrate. If you have $100,000 in a fixed index annuity with an income benefit growing at 6%, in roughly ten years, your annuity will be worth around $200,000. You cannot take this as a lump sum – this figure is a calculation based on how much income the annuity generated. That 6% growth-rate of $200,000 equates to $12,000 a year of guaranteed income. That’s $1,000 a month guaranteed income for the rest of your life, generated by the fixed index annuity income rider alone.

 

Suppose you’ve calculated your essential income needs at $4,000 per month, but your Social Security will only give you $3,000. In that case, we can work out how much you should put in a fixed index annuity with an income rider to guarantee that extra $1,000.

 

The income rider creates, in essence, a pension that you cannot outlive. Even if your annuity account’s value decreased to zero, you would continue to receive payments through the income rider.

 

 

Why an income rider could suit your future

If you’re married, you may want the guaranteed income to last for the entirety of both yours and your partner’s lives. You can choose to have survivorship, but this will decrease your monthly income, similar to a pension.

 

You do not have to decide whether your annuity income rider is dual or single life until you start taking income. This is a plus point for annuity income riders as it offers flexibility for the future. If you set up an income rider today but won’t need your income for the next five or ten years, you won’t have to choose dual or single income until you’re ready to take it.

 

In most cases, you can start taking income from your annuity after a year. But, just like a Social Security benefit or pension, the longer you wait, the higher your income will be.

 

How could an income rider increase your guaranteed income?

We understand that annuities are a complex and often confusing product and visualizing how they suit your situation can be difficult. If you’d like to see how an annuity could benefit your specific retirement plan, we can help.

 

 

Our advisors can show you how an income rider could impact your guaranteed income when you book a complimentary 15-minute phone consultation. On the call, we can discuss how an annuity would work for you and how it could help you meet your essential income needs. If you want to speak to a team member, book your call today.

Long-Term Care Insurance: Traditional vs. Hybrid

Which long-term care insurance plan is right for you?

 

If you want to protect against the financial strain of future healthcare challenges, you might be considering buying a long-term care insurance plan.

 

There are many different types of long-term care insurance policies. They vary from how much your premium is, to the benefit they provide, so it’s important to understand which plan best suits your financial situation.

 

You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…

In this post, we share a high-level overview of traditional long-term care insurance, the differences between the traditional and hybrid models, and how you can adjust the options to fit your needs.

What is long-term care?

 

Long-term care is when you need continuing assistance in your daily life. This includes help with getting around, bathing, and other requirements within your home or assisted living facility. It also covers full-time medical care, such as a nursing home.

 

If you’re paying for long-term care insurance, both traditional and hybrid models have the same qualifier. A doctor would need to verify that you need help with two out of the six Activities of Daily Living for your insurance policy to start paying out. The six activities are bathing, dressing, eating, transferring, toileting, and continence.

 

Regular health insurance and Medicare don’t cover long-term care, so insurance could be a good idea if you want to protect your assets.

 

Buying long-term care insurance

 

Insurance for long-term care is similar to any other insurance. It’s a personal decision to transfer risk from yourself to an insurance company so that they can cover any unexpected costs.

 

Think about your car insurance, home insurance, or life insurance. You buy it to protect yourself in case something happens – but you may never use it. Long-term care insurance works in the same way.

 

There are two different types of long-term care insurance plans: traditional and hybrid. They both transfer risk from yourself to an insurance company and have the same qualifiers but have very different costs and benefits.

 

Understanding traditional long-term care insurance

 

Traditional long-term care insurance is a standalone policy, and it includes customizable options to better suit your needs.

 

Like any other insurance, you can pay monthly or annually to keep your insurance plan in force (active). You’ll also have to make decisions on the following items to ensure that your long-term care plan is right for you.

1. Your benefit

 

If you need long-term care, you can decide whether to take your benefit on a monthly or daily basis. Typically, your benefit can range from around $3,000 to $12,000 a month. Depending on how much benefit you want, your premium will change. If you want less benefit, your premium will be lower, and it will be higher if you want more.

 

2. Your benefit period

 

Your benefit period is how long your insurance will cover your long-term care needs. You can choose to have your policy cover your bills for a set number of years or cover you for the rest of your life.

 

3. Your inflation rate

 

It’s vital to keep up with the rising cost of care, so inflation is crucial to bear in mind when choosing a long-term care insurance policy. Many traditional policies have inflation protection built-in, and you can choose from a 3, 4, or 5% compound inflation rate.

 

If you qualify for a policy that covers $3,000 a month, for example, but you don’t need long-term care for another 10, 20, or 30 years, your policy may no longer cover your needs without inflation protection.

 

However, if you have inflation protection at a 5% compound rate and need long-term care next year, the insurance company will cover around $3,150, versus the original $3,000 you signed up for.

 

4. Your waiting period

If you need long-term care and have been approved to receive your insurance money, you’ll need to cover your expenses for a certain period. This is called the ‘waiting period’ and is typically 30, 60, or 90 days.

 

This is very similar to the deductible on your car insurance. For example, you may have to pay the first $500 for any damages to your car, and then your car insurance will pay for anything above that. The waiting period is when you have to use your own assets to cover a set amount of time before your insurance company will pay.

 

It’s important to consider how much risk you want to cover, as costs can mount quickly in your waiting period.

 

The pros and cons of a traditional long-term care insurance policy

 

One of the main positives of a traditional long-term care insurance policy is that you can manipulate each of these four factors to build the policy you want. However, they all affect your premium.

 

But a drawback to the traditional plan is that there is no cash value. Like car insurance, you pay to stay in force, but you don’t build up any cash reserves. So, if you start your policy in your early 50s and never need long-term care, you could pay thousands of dollars for peace of mind alone.

 

Some insurance companies will allow you to pay part of the premiums upfront, but the majority are paid on an annual basis and continue for as long as you’re using the policy. Once you’ve been approved for a policy, companies can’t reject or turn-off your insurance, so long as you continue to pay your premiums.

 

However, premiums can rise. In the past, they’ve risen every 3-5 years, and this may eventually put a strain on your cash flow. If this happens, and you want to adjust your premium, you can reduce your service based on the four factors above. Otherwise, you can cancel your policy and cover any long-term care costs that may arise using your own assets.

 

Understanding hybrid long-term care insurance

 

Hybrid long-term care insurance is designed for those who feel unsure about paying for insurance premiums when they may never need long-term care. These policies allow you access to your money and provide other benefits alongside covering long-term care.

 

In this post, we’ll detail two of the hybrid long-term care insurance models.

 

Long-term care annuity hybrid

The long-term care annuity hybrid combines an annuity and long-term care benefit. With this hybrid, your cash grows in an annuity with the added benefit of long-term care insurance. You also have an interest rate, and you can access those funds whenever you need to.

Let’s use an example. If you put $100,000 into your long-term care annuity hybrid, that $100,000 is still your money and accessible to you. You can earn interest on this money and grow your cash as if it’s in a regular annuity.

 

Depending on your age and your situation, the long-term care side will determine how much of your annuity can be used for long-term care. For example, you might be able to use three times the amount you put into the annuity. In this example, that’s $300,000 of long-term care benefit.

 

If you don’t need long-term care, then your $100,000 will continue to grow through the interest rate. You can also add it to your estate plan and distribute it to your beneficiaries at the end of your life.

With the annuity hybrid, you won’t have to worry about rate increases on long-term care insurance, and your money always stays accessible to you.

 

Triple hybrid – long-term care, cash value, and life insurance

 

If you’re unsure about what cover you might need in the future but want to keep your cash flow options open, then a triple hybrid insurance policy provides comprehensive cover and has a cash value.

The triple hybrid is similar to the long-term care annuity hybrid but offers life insurance as an extra.

Let’s use another example. If you put $100,000 into a triple hybrid insurance plan, you could have:

  • $300,000 for long-term care
  • $250,000 instantly of death benefit which can go to your heirs tax-free
  • Cash value close to $100,000, accessible to you

An advantage of both hybrid policies is that your beneficiaries can receive their benefits if you don’t need long-term care. Also, you won’t need to worry about rate increases as insurance premiums on hybrid policies are fixed.

Hybrid long-term care insurance is often favored over the traditional plan, but there’s lots to think about before deciding which plan is right for you. You may opt not to buy an insurance plan at all and instead finance any long-term care using your own assets.

If you want to talk to an expert about which long-term care insurance plan is right for you, our team can help. Book a complimentary 15-minute call with us, and we can explore what insurance solutions suit your unique situation and answer your questions about long-term care.

How Fixed Index Annuities Grow Your Money With Low Risk

Money accumulation is paramount as you approach retirement. However, high-risk, high-reward strategies may no longer suit your approach, as many retirees become increasingly risk-averse.

If you have savings that you want to grow risk-free, there are some options available to you. CDs, bonds, and money markets are safe, low-return ways to increase your savings over time. But fixed index annuities could provide a much greater return and are entirely risk-free.

In this post, we share the benefits of a fixed index annuity and explain how insurance companies avoid risk while growing your money.

Annuities are complex; however, they can be beneficial to a retirement portfolio if you understand them. That’s why we’ve created our “Annuities – Why Ever Use Them” series, to answer all the common questions about the pros and cons of annuities.

You can watch the video on this topic at the top of this post, to listen to the podcast episode, hit play below, or read on for more…

 

This post is the fourth installment in the series, so we encourage you to listen to the first three episodes to learn more about annuities. Find them on our Secure Your Retirement podcast, read the posts on our blog, or follow the links below to watch the episodes on our YouTube channel:

1. Annuity types – a quick recap

As we dive into the details of how annuities work, it can be useful to have a foundational knowledge of different annuity products. For a quick, high-level overview, here are the main types of annuities and their key characteristics:

  • Immediate annuity: is a quick and simple way to get an immediate income stream. You give money to an insurance company, which redistributes it back to you as income. For example, if you bought a $100,000 immediate annuity, the insurance company could begin giving you $500 a month for the rest of your life.
  • Deferred annuity: is tax-deferred with some surrender penalties. Deferred annuities can be either variable or fixed and must be committed to for a certain period.
  • Variable annuity: you can use a variable annuity to invest in the stock market. Typically, variable annuities are used to buy mutual funds. There are fees, and a lot of risk involved as the market can fluctuate and so can your annuity’s value.
  • Fixed annuity: is tax-deferred with a principal guarantee, so unlike a variable annuity, you cannot lose any money. However, your money can still grow. Fixed annuities can be broken down into two types, traditional and index.
  • Traditional fixed annuity: similar to a CD, you lock your money in a traditional fixed annuity for a set period at a fixed interest rate. It’s a risk-free way to grow your money.
  • Fixed index annuity: this grows your money using market links. You may be tied to an index like the S&P 500 or the NASDAQ. You’ll receive a portion based on the index’s performance over an annual point to point reset. This means if you start your annuity on January 1st 2021, how the index performs between January 1st 2021 and January 1st 2022 will determine what interest will be credited to your annuity.

We’re going to focus on fixed index annuities in this post. We’ll break down how insurance companies can guarantee your principal even when your annuity is linked to market performance and explain why it’s a win-win for you and insurance companies.

 

2. How to earn interest on fixed index annuities

There are two ways to earn interest on a fixed index annuity, either through a cap or a participation rate.

A cap prevents your principal from reducing due to market volatility. So, if you set a cap at 5%, and your annuity’s index earns 10%, then your annuity will only grow up to 5% in that year. However, if the market falls, you cannot earn a negative rate of return, meaning that your money will not decrease below your guaranteed principle or any increases from previous years.

Participation rates are similar, but instead of using a cap, they increase your principal by a percentage of how the index performs. For example, if your index earns 10% and your participation rate is 50%, then you’ll earn a 5% rate of return.

We dedicated an entire podcast episode to explaining how caps and participation rates work in detail. To learn more about earning interest on fixed index annuities, please watch the episode.

 

3. How insurance companies guarantee your principal risk-free

Caps, participation rates, and a guaranteed principal mean that fixed index annuities can look almost too good to be true, and you may question how they benefit the insurance company.

Some of the most popular questions we get about fixed index annuities are, “If the index drops 20%, does the insurance company have to me back the equivalent of my loss? or “If my cap is 5%, and the index earns 10%, then does the insurance company keep the extra 5%?”

The answer to both questions is no. So how do insurance companies guarantee a rate of return on your principle without putting themselves at risk?

Here’s an example. You have $100,000 to put into an annuity with an insurance company. The insurance company manages billions of dollars and earns 3% on its total assets. They want more people to invest with them, so they try to attract new policyholders with a return rate of 2.5%. This might not be the most attractive rate to all potential investors, so they take the 2.5% and create a futures contract.

A futures contract is a legal agreement to buy or sell an asset at a predetermined price in the future. For example, if you wanted to buy a company’s share at $100, but the current price is $150, you could set up a futures contract to only buy a share when the price hits $100.

In the case of an index fund annuity, the insurance company takes the 2.5% and puts it into a futures contract related to your index. This futures contract might state that if the index increases, then the insurance company will participate. So, if the index goes up, then the insurance company can provide you with your agreed participation rate. However, if the index is down, then that 2.5% is lost, but it has no negative impact on your principal.

Caps work in a very similar way. If your cap is 5%, then the futures contract will expire at 5%. This will give your annuity a 5% rate of return, and the insurance company will not participate above 5%, meaning that they won’t be pocketing any extra money if the index continues increasing.

If the index is down in either case, then neither you nor the insurance company will lose anything, but you won’t earn a rate of return that year. The worst an index fund annuity can do is earn a zero rate of return, but there’s potential to earn a much greater amount, risk-free.

 

4. Why we recommend fixed index annuities for retirees  

Compared to bonds, CDs, and money markets, fixed index annuities are a good alternative to safely accumulate your money. They have no-risk and are much safer than investing in the stock market, but they have more earning potential than lower-rate products or accounts.

We highly recommend adding a fixed index annuity to your retirement portfolio, but only if you understand how they work.

 

We appreciate that annuities are complex and can be difficult to fully understand. If you have any questions, please reach out to us. We can discuss how annuities can work for your individual retirement plan and answer any further questions you may have. Start by booking a complimentary 15-minute call with a member of our team today.

How Are You Going to Stay on Top of Your Finances in 2021?

How are you going to stay on top of your finances in 2021?

Financially planning for retirement can feel like a lot of work, especially if you have multiple moving parts to your money. Dealing with 401Ks, IRAs, Social Security, and RMDs can become overwhelming as the year gets busier, so we recommend taking stock of your finances early and planning ahead.

The beginning of the year is a great time to review your finances but knowing where to start is challenging. So, we’ve created our retirement and financial planning checklist.

Read on to discover the nine key areas you should consider for the upcoming year. We also point out some key changes and information for 2021, so you can start this year as securely as possible.

1. Review your 401K, traditional IRA, Roth IRA, and HSA contributions

If you’re earning income, you should review your accounts and plan how much you want to contribute to each one this year. Do you have a goal for each? How much will you need to contribute to get you there?

Bear in mind that contributions may be limited, so you might need to adjust your plans and payroll accordingly. For example, the contribution limit for 401Ks in 2021 is $19,500. However, if you’re over 50 years of age, you can qualify for the ‘catch-up contribution’, increasing the $19,500 limit by an additional $6,500. This also applies to 403Bs and 457 plans.

Roth IRA accounts have a much lower contribution limit of $6,000, with an additional $1,000 for those over 50.

We’ve detailed the difference between Roth IRAs and traditional IRAs before, but to recap, the main differences are:

  • A Roth IRA is tax-free assets: contributed to after you’ve paid tax on the money – these have income limitations, so if you earn over a certain amount, you will not be able to contribute
  • A traditional IRA is pre-tax assets: contributed to before you’ve paid tax on the money – no income limitations

To learn more about the pros and cons of Roth IRAs vs traditional IRAs, read this post.

Once you are aware of your accounts’ limitations, we advise you plan your contributions for the year. This way, you can ensure you’re on track to achieving your long-term money goals without having to continually review your accounts’ statuses.

2. Update your beneficiaries

Life sometimes moves so fast that it can be hard to keep up. New grandchildren, marriages, or other life changes may affect who you want as a beneficiary.

It’s important to stay on top of your different accounts and which beneficiaries are associated with them. Your accounts and associated beneficiaries should align with your overall estate plan and life insurance to avoid confusion.

Updating beneficiaries can be easily done online or with a signature on a form. It should only take a few minutes and is something we highly recommend putting in order while you have the time.

3. Consolidate your accounts

If you’ve previously changed employment, you may well have more than one 401K plan open. We often speak to clients who have two, three, or four 401Ks with past employers, that they’ve completely forgotten about – and that have substantial balances in them!

Moving existing 401Ks into a traditional IRA is a fantastic way to consolidate your accounts. It’s completely tax-free, with no risk, penalties, and typically no fees. If you hold multiple traditional IRAs, we also advise consolidating these into just one account.

By reducing the number of unnecessary accounts, managing your money will become more straightforward and less stressful.

4. Assess your mortgage rate

It’s very unlikely that mortgage rates will reduce further, so we recommend taking advantage of them while you can. Now is a great time to refinance your house or any investment properties you have a loan on. An advantageous rate could lower your payments, giving you greater monthly cash flow, or help you pay off the loan faster.

We spoke to a Loan Officer with 15 years’ experience about the benefits of refinancing in our podcast episode ‘Tammi Rowe – Planning Your Mortgage and Retirement’. To find out more about what refinancing could do for you, listen to the episode.

Top of Form

Bottom of Form

5. Plan for emergencies

You might be faced with a financial opportunity, for example, paying off your mortgage, but it’ll leave you with less cash in the bank than you’d like. Should you do it? Or should you build up your ‘emergency fund’ first?

Having cash reserves in case of emergencies is necessary. But you don’t always have to choose between keeping lots of cash in the bank or paying off a substantial loan.

One tip we give our clients is to open an equity line of credit. There can be a minimal fee to open it, but there’s no interest if you don’t have any balance. This means that if you spend your cash reserves on something like paying off a mortgage, you have easy access to cash, as an equity line of credit comes with either a debit card, a checkbook, or both.

An equity line of credit is only available to those still working, so if you want an emergency fund for the future, we urge you to set one up while you still qualify. You won’t need to make any payments, and it won’t gain any interest, so long as the balance is zero.

6. Consider how and when you’ll take your RMDs

If you’re turning 72 in 2021, pay close attention. RMDs or Required Minimum Distributions were optional in 2020, however, the rules are changing for 2021, and if you turn 72 this year, you will have to take your RMDs this year and every year going forward.

Your individual RMDs are based on your IRAs’ combined balance, so there isn’t one set figure for everyone. You can spend your RMDs, or you can reinvest them into another brokerage account, but they must leave your IRA and cannot go into another IRA.

Bear in mind that money in a traditional IRA is pre-tax. So, when it leaves the IRA as an RMD, it’s treated as income and will be taxed.

There is no rule when you should take your RMDs, but you must start taking them before December 31st from the year you turn 72. Some people choose to take it monthly, like a paycheck, and others take it as a lump sum at the beginning or end of the year.

If you don’t need to take your RMD and don’t want to pay tax on the money you don’t need, you can make a qualified charitable deduction once you’re aged 70 and a half. This is where you direct your RMD straight from your IRA to a charity of your choice. This way, your RMD leaves the IRA but isn’t claimed as income, making it tax-free.

You can also do this with a portion of your RMD. For example, if your RMD is $10,000, and you want to instruct $5,000 to a charity and keep $5,000 for yourself, you only have to pay tax on the $5,000 you keep.

7. Apply for Social Security

If you’re planning on taking Social Security in 2021, it can be a long process. Right now, there are thousands of people applying every single day, so we advise applying two to three months ahead of when you want to start receiving your Social Security benefits.

You can apply as early as three months before the date that you want to start receiving them, so if you’ve already decided it’s part of your financial plan for 2021, don’t wait. Plan ahead, make the phone calls, and fill out the paperwork as soon as you can so that you can receive your benefits when you need them.

8. Research your Medicare options

Health insurance has never been more vital, so putting a plan in place as soon as possible is recommended. There’s a lot to think about with Medicare, from how your income affects your premiums to when the open enrollment periods are. If you’re turning 65 or going to be receiving Medicare, we encourage you to research your options.

We spoke to Medicare Specialist, Lorraine Bowen, on our podcast, and she answered all of our Medicare questions, including what it covers and how to find out if you’re entitled to it. To learn more about Medicare, listen to this episode.

9. Understand your income plan

When you stop working, you might find it more challenging to keep track of your income. There can be many moving parts in retirement with different income streams and RMDs, and it could leave you with an unnecessarily high tax bill or with fewer cash reserves than you’d like.

Now is the perfect time to adjust your income to ensure that you’re not taking too much or too little. We use a couple of different software programs that help us automatically track income on a month-by-month basis to find a monthly income figure that’s best suited to you. If you want to learn more about how we do this, reach out to us.

Those are our nine key points for preparing your finances for retirement in 2021. By completing this checklist, you’ll be giving yourself peace of mind that you’re on track to achieving your financial goals throughout the year.

We’re going to delve deeper into more of these topics as the year progresses, but if you have any urgent questions about any of the subjects we discussed in this post, please get in touch. You can contact us, or if you want to discuss your retirement goals with a member of our team, we invite you to schedule a 15-minute complimentary call with us.

Fixed Index Annuities: How They Work and Things to Consider

You may never have considered a fixed index annuity, but is it something you should look at for your retirement plan?

Many people think annuities are too complicated. That’s why throughout our “Annuities – Why Ever Use Them” series, we’ve tried to answer the questions which may have led you to dismiss them in the past.

In this post, we’re focusing on fixed index annuities, specifically how interest is credited on them. We’ll also recap some general advice on annuities, so you can stay informed about how they work and what they can offer.

What are annuities? A quick recap

If you’re unsure what annuities are, how they work and the benefits they offer, be sure to go back to part one and two of our “Annuities – Why Ever Use Them” series. It’s worth understanding the basics before we launch into the more complex areas of deferred fixed index annuities, which we’ll cover in this post.

As a quick recap, here are some key points to be aware of:

  • Annuities are generally used for one of two reasons: as a safe money alternative or as a fixed source of income in retirement.
  • There are two main types of annuities: immediate and deferred.
  • Immediate annuities are when an insurance company sets up an income stream based on your retirement assets.
  • A deferred annuity is used as both a safe money alternative and an income stream.
  • Deferred annuities have two types: fixed and variable. We wouldn’t recommend variable, as there’s a risk you could lose money.
  • Instead, we always suggest declared rate or fixed index deferred annuities.
  • A declared rate annuity offers a fixed rate of return over a set period; it’s often compared to a bond or a certificate of deposit (CD).
  • A fixed index annuity is when the rate of interest you earn varies in line with an index, such as the SMP500. This is a great option because you can benefit from upswings in the market without the risk of losing money.

We appreciate that’s a lot of information to take in. If you’re at all confused by how different types of annuities work, we’d encourage you to read parts one and two of the “Annuities – Why Ever Use Them” series.

Alternatively, listen to episode 26 and episode 30 of the Securement Your Retirement podcast, where we cover these topics in detail. They’re available on your usual podcast app or on YouTube.

What is an index cap and how does it affect a fixed index annuity?

Now we’ve covered what you need to know about annuities, let’s continue our conversation about how interest is credited on a fixed index annuity.

In part two of “Annuities – Why Ever Use Them,” we talked about the annual reset and how it relates to the interest you earn. Think of this as a reset point for the interest-earning period; it varies depending on the terms of your contract but usually happens every 12 months.

The beauty of a fixed index annuity is that any interest you earn is guaranteed and will be credited to your account on the annual reset. This then becomes the starting point for the new interest-earning period.

However, there are a couple of other things to note about interest crediting on a fixed index annuity, including the “index cap”.

The index cap is the maximum amount of interest you can earn in an interest-earning period, as a percentage sum. It’s set by the insurance company who controls your annuity and is based on a range of factors, including the overall financial outlook.

To help you understand how an index cap works on a fixed index annuity, here’s a simple example:

  1. You put $100,000 into a fixed index annuity
  2. The insurance company sets a 5% index cap
  3. The index performs well over your interest-earning period and is up 15%
  4. The index cap means you’ll make 5% interest
  5. The interest is credited during the annual reset
  6. You now have $105,000, which is guaranteed and will never fall

This is just a simple example to show you how the index cap dictates the interest you earn on a fixed index annuity. Whether it’s the SMP500 or the NASDAQ; no matter how strongly an index performs, you’ll only earn interest up to the index cap.

It’s worth remembering that you can’t lose money on this type of annuity, even if the index performs poorly or goes negative. Any interest made is guaranteed, so whatever you earn is yours to keep – making a fixed index annuity a powerful way to grow your retirement fund.

What is the participation rate and why does it matter?

Something else that affects the interest you can earn is what we call the “participation rate”. This is a percentage sum, set by the insurance company, which essentially decides how much money you should make from an index. 

To show you how the participation rate works and how it affects the interest you’ll earn on a fixed index annuity, here’s a basic example.

Let’s say you pay $100,000 into a fixed index annuity with a 50% participation rate. This means you’ll earn 50% of what your index makes.

So, if an index made 10%, you’d get 5%. If it made 12.5%, you’d make a 6.25% return.

Participation rates vary widely and are one of the first things we look for when finding the most lucrative fixed index annuity deals. Insurers offer lots of different rates, with the majority falling in the 80-90% range, though they can be higher or lower based on a range of factors.

Do you want to put your money in a fixed index annuity? We can help

The world of fixed index annuities can be complicated, with lots of options and things to consider. But if you think this sounds like the right direction to take with your retirement plan, we’re here to help.

Our experts have years of experience in helping people set up and manage a fixed index annuity. And with the potential to boost your retirement assets by a considerable amount, taking advantage of our knowledge and expertise is certain to be worth your while.

We’d also like to reiterate that while annuities may sound complicated, they have been around for a long time, with billions of dollars passing through them each year. Through our “Annuities – Why Ever Use Them”series, we want to get you thinking differently about these products, so you can make an informed decision on where to put your retirement assets.

Are you ready to take the next step on your retirement plan? Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

The Stretch IRA is Gone: What Next for Your Inheritance?

The stretch IRA is dead, so what options do you have when it comes to inheritance planning?

At the start of 2020, new rules were introduced on how individual retirement account (IRA) holders can use the “stretch” IRA to manage their inheritance. With changes to the way beneficiaries access inheritance assets, you may have questions about what the rules mean for you and your loved ones.

In this post, we look at what happened to the stretch IRA and how it could affect your inheritance planning. We also cover some of the alternatives to stretch IRAs, including life insurance and Roth conversions.

What happened to the stretch IRA?

On January 1, 2020, the Secure Act was passed and with it came to the end of the stretch IRA. For years, this estate planning strategy was a tax-advantageous way to leave an IRA to a non-spouse beneficiary, but now it’s no longer an option.

So, which new rules were introduced under the Secure Act 2020? And what effect have they had on how IRAs work?

The biggest change concerns how a beneficiary can access an IRA after they’ve inherited it. Previously, a stretch IRA allowed non-spouse beneficiaries unlimited time to withdraw funds from their inheritance. Now, the money must be out of the IRA within 10 years after the date of death, so beneficiaries can no longer access them over their lifetime.

Say, for example, you want to leave $40,000 to your grandchild, who is 30 years old. The Secure Act now means they must withdraw all of the assets within 10 years, either as a lump sum or as annual distribution payments. If they don’t, they’ll have to pay tax all at once, which could significantly reduce their inheritance pot.

Thankfully, the introduction of the Secure Act isn’t all bad news for those with an IRA. There are two other rule changes which many will see as a benefit:

  • The age at which you must withdraw required minimum distributions (RMDs) from your IRA has risen from 70 to 72. This means you’ll have two more years to pay into your retirement account before you need to start drawing money from it.
  • The Secure Act has removed the upper age limit of paying into an IRA. Now, so long as you’re still earning income, you can continue paying into your retirement account indefinitely.

What to consider when withdrawing from an IRA inheritance fund

Now that beneficiaries have just 10 years to withdraw assets from an IRA, they must think about how and when to access their inheritance. Remember, a beneficiary can withdraw funds either as a lump sum or as regular distributions, affecting how much they pay in tax.

If a beneficiary is 60-65 and within 10 years of retirement, it could be worth waiting until they retire before withdrawing money from the IRA. That’s because retirement means a smaller income, so they’ll be in a lower tax bracket and pay less tax on the total inheritance amount.

For younger beneficiaries, withdrawing from an IRA over the 10-year period may be more advantageous – especially if they expect their income to increase as they get older.

Through these examples, you can see why it’s important for beneficiaries to think about the best time to withdraw funds from an IRA. We’d always recommend discussing these options with your beneficiaries so that they can make the most of their inheritance after you’ve gone.

How to manage your inheritance now that the stretch IRA is gone

Now that the stretch IRA is a thing of the past, what other options can help you make the most of your inheritance?

With advanced IRA planning, you can make sure your beneficiaries don’t face a heavy tax burden on their inheritance. There are a few different options that provide good alternatives to the stretch IRA, including Roth conversions and life insurance.

Roth conversions

A Roth conversion is the process of switching your pre-tax IRA assets into tax-free ‘Roth’ assets. This means that you pay the tax on your beneficiary’s inheritance so that all the money they receive is tax-free.

The beauty of Roth assets is that, while the 10-year Secure Act rule still applies, there’s no tax to worry about for both lump sum and annual withdrawals. What’s more, as Roth assets earn interest, it’s well worth letting the inheritance grow over the 10-year period.

A Roth conversion does mean you’ll have to settle the tax bill yourself, passing this benefit to your beneficiary. If that’s important to you, it could be a great option.

Life insurance

The second option we’d recommend as an alternative to the stretch IRA is life insurance. Although slightly more complicated than a Roth conversion, taking out life insurance guarantees tax-free inheritance for your beneficiaries after you’ve gone.

A key thing to note about the life insurance option is that you have to go through underwriting, meaning you first have to qualify. Some people may be concerned that their age will bar them from taking out life insurance, but you may be surprised at the rates and options available.

Life insurance is a great way to ensure your non-spousal beneficiaries can enjoy their inheritance without worrying about tax. What’s more, there’s no 10-year rule on when an inheritor has to withdraw the funds from a life insurance plan, making it a beneficial long-term inheritance option.

So, if you have money set aside as inheritance, life insurance could be the best way to guarantee a tax-free benefit for your loved ones.

Do you need help with your inheritance planning?

We understand that planning your inheritance can be complicated, especially given the recent rule changes introduced by the Secure Act. So, if you need help understanding the different options available, our experts can provide impartial advice on the best way to pass your retirement assets on to your loved ones.

Whatever you’re planning for your inheritance and however big the sum you’ve set aside for your beneficiaries, we can help make the process simpler to manage. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

What Are Annuities and How Do They Work?

When it comes to your retirement plan, you may have dismissed fixed annuities as overly complicated. But with major benefits to be had, we think investing in an annuity is a conversation worth having.

In this post, we’re taking an in-depth look at fixed annuities, including what they are, how they work, and the different options available. We’ll also walk you through an example, so you can see how this type of annuity could benefit your retirement fund.

Annuities – a quick refresher

In part one of our Annuities – Why Ever Use Them’ series we covered the basic what, why, and how of annuities. If you missed it, here’s a quick refresher:

  • An annuity provides income in retirement, either as a stable income stream or as a place to earn interest on your money
  • People take out annuities for one of two major reasons: income planning in retirement and as a safe place to store money
  • There are two major types of annuities: immediate and deferred
  • An immediate annuity is when you give a lump sum to an insurance company, which then distributes it back to you through income-for-life payments
  • A deferred annuity is a place to invest and store money for your retirement. You can earn interest on the money you’ve invested before withdrawing it as a lump sum or setting up an income stream
  • There are two major types of deferred annuities: fixed and variable

We always recommend the fixed-rate option, so that’s what we’ll focus on in this post.

If you’d like more information on the basics of how annuities work, be sure to watch part 1 or listen to our podcast episode.

What are the main types of deferred fixed annuities?

If you’re looking for somewhere to store your savings and make money, a deferred fixed annuity could be a good option. This is when you give a lump sum to an insurance company to earn interest on your retirement fund.

There are a couple of benefits to fixed annuities which make them more attractive than immediate annuities. Firstly, the money you give to the insurance company isn’t locked away, so you can access your savings for big purchases, like vacations or home improvements.

Secondly, you’ll earn interest on your investment, giving your retirement pot a significant boost without fear of losing your principal investment.

The amount of interest you earn will depend on the fixed annuity you invest in, with the two main types being declared rate and fixed index. Let’s take a closer look at how these annuities work and what they offer.

Declared rate annuities

A declared rate annuity provides a fixed rate of return over a set period. Think of them like a certificate of deposit (CD), wherein you consistently earn interest in a safe, stable way.

Declared rate annuities are a popular option for those who want to boost their retirement pot with a reliable source of interest. At the end of the plan, you can withdraw your money and walk away or set up an income stream for your retirement years.

Of course, the downside to declared rate annuities is that the amount of interest is fixed, so you’ll never make more than the declared amount. While this does mean reliable earnings, it takes away the opportunity to make money when the markets are up, so you’ll miss out on a potentially higher rate.

Fixed index annuities

Fixed index annuities bridge the gap between fixed-rate and variable annuities, allowing you to benefit from market upswings without fear of losing your principal investment. With this type of annuity, the interest you earn is based on an index, be it the SMP500 or the NASDAQ.

Having your retirement assets linked to the stock market might sound alarming, but the beauty of this type of annuity is that your investment is guaranteed. That means you can take advantage of higher interest rates when the market climbs, without fear of losing money should it fall.

The drawback to fixed index annuities is that when the market is negative, you could make little to no interest over a 12-month period. However, if this is a risk you’re willing to take, the interest you earn when the index goes up will more than likely outstrip that of a declared rate plan.

How is interest credited on a fixed index annuity?

So, how does the interest you earn through an index make its way to your retirement fund? To answer that, we’ll set out a basic example of a fixed index annuity, so you can get an idea of the numbers and timeframe.

Let’s say you invested $100,000 in a fixed index annuity on January 1, 2020. Over the next 12 months, you’ll earn interest based on how the index performs.

On January 1, 2021, the annual reset occurs, and you’ll receive your first statement. This tells you how much interest you’ve earned from the index as a percentage sum.

So, if you made 5% interest, your investment would now be worth $105,000. This is the amount that you start the new earning period with, and it’s guaranteed money that you can’t lose, even if the market declines.

Say, for example, the index performed poorly for the next 12 months; you wouldn’t make any money, but you wouldn’t lose any either. That’s why fixed index annuities can be a powerful way to boost your retirement fund and guarantee a good rate of return over the earnings period.

We understand that the annuities world can be complicated. That’s why we plan to continue this series, walking you through the ins and outs of the different options available.

Remember, if you need any advice or expertise in setting up an annuity for your retirement, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.