We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for February 13, 2024
Beneficiary Best Practices in Retirement – A Yearly Check-In
In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Nick discuss beneficiary best practices and what’s discussed in a typical beneficiary’s meeting. Things can change in a year, and that’s why we believe it’s important to update or change beneficiaries annually.
Beneficiary Best Practices in Retirement – A Yearly Check-In
Nick Hymanson, a financial planner who is also part of our team, joined us on our latest podcast to discuss something very important: beneficiary best practices. If you work with us, you know that this is something that we have covered during our financial planning strategy meeting.
Nick Hymanson, a financial planner who is also part of our team, joined us on our latest podcast to discuss something very important: beneficiary best practices. If you work with us, you know that this is something that we have covered during our financial planning strategy meeting.
What is a Financial Planning Strategy Meeting?
In the financial planning strategy meeting, we cover:
We look at your financial plan as a whole during the strategy meeting. A lot of people think that the most important part of retirement planning is the end goal, but if you don’t know where you are right now, it’s challenging to navigate your way to retirement.
You need to know your milestones ahead and what to do with Social Security, Medicare and your estate plan.
Your estate plan is where beneficiaries really come into the equation. If you have a “will,” you may assume that you have everything in order and you know who is getting what. The problem is that you have a variety of other accounts that have beneficiaries listed, such as your 401(k), IRA, life insurance and even your bank accounts.
When the terrible time comes and you need to put the estate in process, proper beneficiaries on your accounts will make the lives of your heirs much easier.
What We Do to Prepare Before Discussing Beneficiaries with Our Clients
Our team reviews all your investment accounts and will call insurance companies to verify:
Primary beneficiaries
Contingent beneficiaries
Percentage allocations
You may have multiple people listed as a primary or contingent beneficiary, or you can have one or two. We’ll gather information on all your financial and insurance account beneficiaries and separate them by account to make it easier to determine who is the beneficiary on what accounts.
We then present the accounts in the meeting to help you understand if your account needs to be updated.
Why do we review beneficiaries annually?
Of course, we have a lot of real-life examples of accounts that people seemingly forget to update during crucial life moments.
One client got divorced and didn’t remember to fix all the beneficiaries. It doesn’t matter who he is married to today. If he passed, the account would have gone to his ex, even though he is remarried.
Someone has a child who is in a lawsuit, so maybe you don’t want money to go to this individual based on the current circumstances.
A quick, annual review of your beneficiaries can help you better manage them because life changes can impact who you want to be named as a beneficiary on your accounts.
Common Example of Husband and Wife
Couples who have an individual account will, in most cases, have their spouse being 100% beneficiary of their accounts. If the person isn’t alive when the other person passes, the account would then go to the contingent beneficiary, who can be one or more people.
For example, if you’re married and leave your wife as the primary beneficiary and she passes before you, the contingent beneficiary would be “next in line.”
Joint accounts work a little differently.
On joint accounts, you’re both co-owners of the account, but you can have beneficiaries listed on the account.
Spouse and Three Kids
While you’re free to do as you wish, it’s most common for a person to leave their spouse as the primary beneficiary of their accounts. You should also list your kids as contingent beneficiaries so that if your spouse is no longer living, the account will go to your children.
It’s most common to offer an even percentage to each child, in this case, 33.33% share to each of the three children.
In certain cases, one of the children may receive 0.01% extra to make an even 100%.
Spouse and Two Kids Who Each Have Children
Every scenario is a bit different, and we really want to illustrate the importance of following beneficiary best practices. If you’re like most couples, you’ll:
Name your spouse the primary beneficiary
Name your children as contingent beneficiaries
Let’s assume that each of your children has a child, so you have two grandchildren. Your eldest child dies. What will happen to your grandchild? Does all the account go to the sole, living child?
You can put measures in place that allow you to pass the funds to your grandchildren. You can even pass the funds to children who may not be born at the time of naming your beneficiaries.
A strategy to use is called Per Stirpes.
What Per Stirpes does is allow for the funds, which you name for Child 1, to flow down their family tree if they pass away. You don’t even need to list the grandchildren on the account when using per stirpes.
Per capita can also be used, which means that the account goes to your kids only. In this case, if you have two kids and one passes, the other child will receive 100% of the account. You can also opt to give one child 75% of the account or 10% – it’s up to you. Certain clients opt to do this when one child makes significantly more money than another or they have a medical condition.
Children do have a right to disclaim their inheritance, which, if the benefit goes down the lineage, can have its tax benefits. Perhaps your child wants their children to inherit the money, so they disclaim their portion, and it goes to your grandchild.
If your grandchild doesn’t make any money or is in a lower tax bracket, this can be beneficial.
Major life changes are a good time to review these documents, too. If you get married, divorced, have a child or grandchild, it’s a good time to look through your beneficiaries and be sure that everything is in order.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for January 22, 2024
In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the risk and reward concept in retirement investing and how your age and life experiences will impact it. You will also learn how to avoid uncertainty and unpredictability with an investment strategy and the importance of a good long-term strategy and a diversified investment portfolio.
For a moment, you might be up and doing pretty well, but just like the stock market, things changed quickly. Risk and reward are crucial in retirement planning. You can roll the dice on investments and certain things a little more when you’re younger, but many want to limit rolling the dice when you’re 5 or 10 years away from retiring.
We were recently at a conference in Las Vegas, and it made us think about the retirement gamble. Gambling isn’t for everyone. Someone will hit a jackpot, but others simply aren’t good at it.
Murs went into the casino, and within ten minutes, he had lost the $100 he had set aside.
For a moment, he was up and doing pretty well, but just like the stock market, things changed quickly. Risk and reward are crucial in retirement planning. You can roll the dice on investments and certain things a little more when you’re younger, but many want to limit rolling the dice when you’re 5 or 10 years away from retiring.
When Does Risk Change in the Retirement Gamble?
Risk doesn’t matter as much when it’s money that you have set aside. If you put $10,000 into crypto using money that wasn’t going to be for retirement and whether you lose it or it triples, the outcome will likely feel different because you used money that was set aside. However, risk should be tamed the closer you get to retirement because you don’t want to have to be in the workforce for an additional year or two or more due to too high of risk.
Your risk tolerance can change at any time, but we often see two main circumstances where it changes:
Life experiences and milestones
Age
We have some clients in their 80s that are rather aggressive investors, and they’re often business owners who have dealt with ups and downs regularly.
Other clients are much younger and more conservative in their investments because they’ve been burned on investments in the past. These clients don’t want to deal with losses like they did in 2008.
Of course, the stock market is risk and reward, but there’s a stark difference between the risks of certain stocks. One stock may be in a dying industry, while another is a major grocery chain with less risk.
There’s no absolute wrong or right answer to the risk that you’re willing to take. We help our clients manage risk based on their tolerance so that they can be confident in their retirement strategy.
Uncertainty in Your Investments and Retirement
When people sit down and really start retirement planning, it’s common to have some uncertainties. You’ve never lived through retirement, and you don’t have experience knowing how to transition to using your retirement funds to:
Pay the bills
Derive income
Address taxes
You can have predictability and certainty in your retirement plan. Rules, just like at the casino, can help you manage your money so that it lasts the rest of your life. Plans allow you the freedom to leverage advanced tax strategies and have a steady stream of income from retirement that allows you to live the life you want without running out of the money you worked hard to invest and save.
Instant Gratification vs a Good, Long-term Strategy
Picture back in 2020, during the pandemic, there were MEME stocks, such as Bed Bath and Beyond and FOMO (fear of missing out). You would see on the news that investors were riding on the coattails of certain stocks, and everyone would follow the crowd.
Ultimately, these people who followed the crowd lost a lot of money because many of these stocks were being over-inflated.
People had a lot of fun with these trends, but as a long-term strategy, these trends ended up failing. A long-term plan is your best choice for retirement. We believe in multiple “buckets” in retirement so that all your money isn’t tied to the market.
For our longtime listeners and readers, you know we often discuss a few main buckets:
Growth
Safety/income
Safety/income buckets may make a 4 – 6% return in the next few years, and they’re not tied to the S&P 500. You can be confident that this money will be there for the next 10 – 20 years.
Growth buckets are separate from the safety and income buckets.
We can act like we’re in the casino with a growth bucket, still investing wisely, but your safety/income bucket is secure, and you can ride the ups and downs of the market. Volatility is here to stay in the market and it’s important to have a long-term strategy in place that allows you to secure your retirement and still make a nice return on investments.
Diversification in Retirement
You don’t want to put all your eggs in one basket or bet everything you have on one investment. A savvy gambler will put money on multiple games, and that’s what you should consider doing in your retirement.
For example, if your growth bucket has a high level of diversification, you hedge against losses and still have your safety/income bucket to rely on.
If the market goes down, you don’t have to stress or the emotions of the S&P 500 being down 20% because you have the money in your safety bucket to maintain your lifestyle. Your safety bucket allows you the freedom to let the stock market go back up again because history shows us that it will go back up if enough time passes.
It’s easy to see stocks down and sell because you’re down hundreds of thousands of dollars. But you’re less likely to sell at a loss and make a rash decision like this when you have other money to rely on.
Psychological Aspects of Investing
Investments are a gamble. Sometimes, people get stuck, and they say well, “I lost $1,000, but I have a good feeling this stock is going to rise.” Behavioral finance shows that sometimes people make decisions they may later regret based on what’s happening at the moment.
A sound strategy allows you to take a step back and avoid making rash decisions because you lost money in the stock market.
It’s inevitable that you will lose money in the market – periodically – but these losses are very likely to turn around. Going into the market with a plan of action and staying the course (with tweaks along the way) is better than making rash, costly decisions.
We don’t want you to gamble with your retirement.
Work with someone who will help you with investing, tax planning, Social Security and all of the other aspects of retirement. It’s helpful to have a professional in your corner who can help you navigate the different aspects of retirement.
We don’t have all the answers, but we have people on our team who can help.
Retirement planning has a lot of moving parts. You can be charitably inclined and save money on your taxes at the same time. On the Secure Your Retirement podcast, we’ve discussed Qualified Charitable Distributions (QCDs) and Donor Advised Funds. As we approach the end of the year, let’s take some time to revisit this strategy.
What are QCDs and How Do They Work?
QCDs often pop into a client’s mind close to the end of the year. If you’re charitably inclined, you can use a QCD to benefit from the donation. For example, instead of giving cash from your bank account to a charity, the money comes from an IRA.
The IRA sends the money directly to the charity on your behalf – it never touches your account. This is very important.
So, what’s the benefit of a QCD? A dollar-for-dollar tax deduction. If you do this correctly and before the end of the year, you don’t need to pay taxes on the money donated. Typically, a traditional IRA is taxed when the money comes out of the account. A QCD goes directly to the charity, so you avoid any taxes on this distribution.
If you plan on giving money to a charity anyway, this works in your favor.
When Can You Start Doing QCDs?
QCDs are only available to those who are 70-½ or older. This is the age when you start to take a required minimum distribution (RMD). When you hit this age milestone, you can start QCDs. If you’re not at this milestone, our next section can help.
For QCDs to work in your favor, you must distribute the funds properly: from the IRA made out to the charity directly. Otherwise, you will be taxed on the money going from the IRA to your own account.
Required minimum distributions (RMDs) are an important factor here. The IRS wants you to pay taxes on the pre-tax accounts, so they’ll require you to take distributions. If you have money coming in from multiple sources and don’t need the money from the RMD, a QCD may be in your best interest.
QCDs apply to your RMD amount.
If you have an RMD of $40,000 per year, you need to pay taxes on this amount. Donating $25,000 from your RMD using QCDs will allow you to pay taxes on just $15,000 instead. You may be able to donate the total amount, too.
What are Donor Advised Funds and How Do They Work?
Before going deeper into donor advised funds, it’s crucial to really understand itemized deductions and how they relate to your taxes. For example, let’s assume that you donate to a charity each year, even if it’s not part of a QCD.
Let’s assume that you give $15,000 per year to charity.
Itemizing your taxes only makes sense if you have $28,000 in deductions because it’s more than the standard deduction. If you give money to charity and can’t itemize on your taxes, you won’t benefit from the donation.
You can use QCDs in this case or you can “stack your donations.” What does this mean? Stacking can be set up in a donor advised fund. You can say, “I know for the next three years, I’m going to donate $15,000 each year.”
So, you can stack these donations into a fund that has $45,000 in it.
Since the $45,000 is higher than the $28,000 standard deduction, you can now itemize your deductions and save money on your taxes. You have control to:
Donate the money as you please
Choose any charity (or multiple ones) you want to donate money to as time goes on
Setting up these types of accounts is also very simple and straightforward. Charles Schwab, and a lot of custodians, have donor advised funds that are easy to create. However, once you earmark the money for charitable causes and put it into one of these accounts, it’s irrevocable.
Most accounts are very flexible and even allow you to donate amounts as low as $25.
You have a lot of flexibility in how the funds are dispersed, so you can donate to charities that you have a passion for and don’t need to be concerned about pre-planning which charities you want to support.
Funding one of these accounts can also be done strategically to save you even more on taxes. We often like to take a client’s highly appreciated stocks and fund the account with these stocks. Why?
You can lower the amount of stock you have through gifting. Perhaps you donate $45,000 worth of Apple stock to the fund. Once the stock is in the fund, the fund can sell the stock. The fund doesn’t need to worry about capital gains or tax complications.
Funding the donor advised fund with a long-term capital gains stock can help you lower your taxable income and take tax deductions through itemization.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
This Week’s Podcast – QCDs and Donor Advised Funds in Retirement Planning
Learn about QCDs, the tax benefits you can take advantage of when donating to charity organizations, and the rules of the strategy. You will also learn more about the donor-advised fund, how to take advantage of itemizing tax returns, and the rules of the strategy.
This Week’s Blog – QCDs and Donor Advised Funds in Retirement Planning
Retirement planning has a lot of moving parts. You can be charitably inclined and save money on your taxes at the same time. On the Secure Your Retirement podcast, we’ve discussed Qualified Charitable Distributions (QCDs) and Donor Advised Funds. As we approach the end of the year, let’s take some time to revisit this strategy.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for September 5, 2023
This Week’s Podcast – Integrated Wealth Management Experience in Retirement
Learn more about the elements of an integrated wealth management experience: a retirement financial plan, specific-to-the-client investment process, and tax planning. You will also learn how we’re involved in every step of the wealth management process, in-house or with a partner.
Integrated wealth management experiences are our way to help clients have the type of retirement planning assistance that is provided in a “family office.” If you don’t know what this term means or who it applies to, we’re going to cover that in great detail before explaining the concept of integrated wealth management to you.
Integrated wealth management experiences are our way to help clients have the type of retirement planning assistance that is provided in a “family office.” If you don’t know what this term means or who it applies to, we’re going to cover that in great detail before explaining the concept of integrated wealth management to you.
Note: Click here to listen to the podcast that this article was based on using Spotify, Apple Podcasts, Google Podcasts and Amazon Music.
What is a “Family Office?”
A “family office” caters to what can be considered ultra-high net worth. You have enough assets that you require an entire team to help manage your assets. These offices will help you with:
Family businesses
Taking care of budgets
Paying bills
Managing cash flow, credit cards, real estate
Individuals in a family office have assets of $50+ million. Anyone who falls into this category can be their “own client,” meaning that the entire team works for you to manage your wealth. Extensive assistance is offered, including tax and estate planning, to the degree that 99% of people will never require. You’ll also work with attorneys and CPAs.
All these employees work for you, they’re registered with the SEC, and they assist with managing your “family.” If a person has this high of a net worth, they may need to have a chief financial officer (CFO) who will handle hiring or working with certain experts to meet their family’s needs.
Often, with a family office, they have a CPA working with them full-time.
The family office works solely for the family and will handle all their financial and wealth management needs. If a lawyer needs to be hired to work on estate plans, that’s all handled for you behind the scenes.
Integrated Wealth Management Experience
In our office, our average client doesn’t have $100 – $200 million or a billion dollars. We can’t create a family office for these individuals, but we wanted to create a system that offered the same experience as a family office for all our clients.
What we devised is known as our integrated wealth management experience.
What Does an Integrated Wealth Management Experience Look Like?
Instead of working with one individual, we work with many and take on the role similar to a “CFO.” We look at the person’s entire financial picture and beyond to help you secure your retirement. We partner with multiple professionals on a range of services, in addition to in-house wealth management.
For simplicity, we’ll break this down into a few of our in-house and partnered services.
In-House Wealth Management
In-house, we specialize in wealth management. We are financial advisors, and fiduciaries- which means we’re required to put your best interests first. The majority of our clients are people close to or retirement, and we’re big on the retirement-focused financial plan.
In a few words, the retirement-focused financial plan:
Analyzes where you are today
Outlines retirement goals
Identifies changes that need to be made to reach your goals
Reaching your financial goals will often mean investing in some sort of return. We may invest in the market, bonds, annuities, or a wide range of other financial vehicles. We invest for a return that is comfortable for the client and is based on individual risk tolerance.
Next, we offer tax planning. Some of the tax planning is in-house and some of it is done by working with outside experts. We have checks and balances in place to understand:
What your taxes look like today
What strategies we can implement before the end of the year to lower the tax burden
What to do to save you money next year
We can also handle the tax return for you, and we have partnered with CPAs to lead this process. CPAs will also provide a stamp of approval for all the tax planning strategies that we prepare to ensure that everything moves along smoothly.
Our team helps clients understand where their income is coming from and ensures that their retirement-focused financial plan is operating to reach their goals.
Estate Planning
Estate planning is a crucial part of retirement planning that folks really struggle to talk and think about. However, we incorporate this planning into the experience because it provides you with peace of mind that your estate matters are all handled in a legal manner.
Without an up-to-date estate plan, it can be difficult for you to leave assets in your desired way for heirs and beneficiaries. If you’ve had a major life change since you’ve created or looked at your estate plan, it is a good idea to have your estate plan professionally reviewed and updated.
For our clients, we have a system in place for the state they live in to create a:
We believe this aspect of your retirement-focused financial plan is urgent, and strongly encourage our clients to review and update these documents on a regular basis.
Social Security
We work with a Social Security consultant, so our clients have an expert look at avoiding mistakes when filing for Social Security. Some clients have an easy process for Social Security, and we can help them apply for their benefits. However, other clients do not have as easy of a time.
Our consultant is on retainer and will help consider:
Complex decisions
Divorce
Optimizing for certain forms of income
Survivorship
She assists us when running the numbers for Social Security to help you make the best decision on when to take your benefits and how to reach your financial goals.
Insurances
Insurance includes many different options, but one of the major ones is health insurance. When you retire, you’re responsible for your own health insurance, which will be Medicare.
Medicare can be overwhelming when it comes to options, plans, and thresholds. We work with our clients and partners to help them find the best Medicare options for their health scenario and budget. We may be able to structure things to avoid IRMAA surcharges on Medicare, too.
Additionally, we help clients during open enrollment to find plans that may be more affordable or a better overall option for them.
Long-term Care Planning
Speaking of healthcare planning, we also dive into long-term care planning. Hopefully, you’ll never need this level of care, but you just never know what the future will hold for you. We recently had a podcast on long-term care planning.
We’ll analyze your long-term care options and even help you secure the insurance you need to pay for a nursing home or assisted living facility.
Life Insurance
We’ll work through the question of life insurance and how to structure it for you and your family.
These are just some of the insurance options that we can use to help build our clients retirement-focused financial plan. As we’ve outlined, we do our best to mimic the “family office” so that it works in your best interests.
What Getting Started with Our Integrated Wealth Management Experience Looks Like
If you call us to discuss your options, we already have:
Ongoing, up-to-date research to aid in building plan for your goals
Multiple estate planning methods in place
Many in-house Insurance and Wealth Management strategy options
We’re involved the entire time, working to have all your questions answered. We will do the research with the estate planner or Social Security expert to have your questions answered.
Since we work with the outside experts, you bypass the extra step to make sure your financial, tax, and estate planning professionals are all on the same page when it comes to your retirement-focused financial plan. We’re very much involved with every aspect of your plan to help you make sound financial decisions.
How can an annuity income rider give you more peace of mind in retirement.
A core part of planning for retirement is ensuring that you have as few worries as possible. That’s why we make it a priority to ensure that all of our clients’ essential income needs are covered by their guaranteed income.
There are three main ways to guarantee income in retirement. The first is a pension, the second is Social Security, and the third is adding an income rider to an annuity. This third option creates, in essence, a personal pension paid directly to you every month for the rest of your life.
You can watch the video on this topic further down the post. To listen to the podcast episode, hit play below, or read on for more…
In part five of our “Annuities – Why Ever Use Them” series, we discussed attaching an income rider to an annuity to produce guaranteed income. We encourage you to read part five before reading this post as we go into further detail about why we recommend adding an income rider to an annuity and explain how their rates of return work.
Our annuities series breaks down this product in short, easy-to-understand episodes to help you discover how this product works and why it’s a beneficial income source in retirement.
Many people opt for an income rider for the same reasons they’d take a pension or Social Security. It can give you more than just guaranteed income – it can provide you with peace of mind that your essential income needs will be covered in the future.
When you’re planning for retirement, you’ll work out how much income you need every year to cover your essential costs. This is where an income rider can be very useful. We often use them to plan for our clients, considering what income they’ll need 5-10 years down the road.
Understanding annuity income riders
In most cases, income riders come with a fee. This is usually around 1%. However, if the income rider is built into the annuity and doesn’t come with a fee, the rider may not have the highest possible rate of return.
Generally, built-in riders will not generate as much guaranteed income because the insurance company won’t be making enough money to pass it on to you.
If an agent states that their annuity has a 6% or 7% rate of return, it’s important to note that this is only for the income rider. This rate is not going to grow your principal at 6% or 7%. To get this maximum value from this income rider, you need to take income.
Let’s use a hypothetical example. If you add $100,000 into a fixed index annuity, it may earn 3%, depending on the index’s performance. Your income rider base, however, will grow separately at 7%. In 10 years, your original account value could be about $130,000, but your income rider may be worth around $200,000 in value.
A good way to think about these numbers is to consider what money you can access. If you were to pass away, the insurance company would only give your annuity’s account value (in this example, $130,000) to your beneficiaries. This is also what you would be able to walk away with if you decided to close your annuity.
But if you want to take income, this will be based on the income rider’s growth (in this example, $200,000). The insurance company will pay out a percentage of this figure to you as income.
Say this pays out at 6%, then you’ll get $1,000 a month, or $12,000 a year, guaranteed, for the rest of your life. This does not come out of or affect your account value.
If you did not have an income rider but wanted to take this same amount out of your account, you’d reduce your principal by a massive 10% in one hit. Over time, your annuity would empty, as you’d be withdrawing money faster than it could grow.
Why we recommend annuity income riders
What’s great about an income rider is, even if your account value drops down to zero, you are still guaranteed that income for the rest of your life. It’s a type of longevity insurance that can’t be beaten.
It’s best to think of an annuity and income riders as two separate entities. One is death benefit and walkaway money (your account value, the money you put into the account), and the other is like a pension that you cannot outlive. When the time comes to pay out your guaranteed income, these two sides do not affect each other.
So, if you’re concerned about covering your essential income needs, then adding an income rider to an annuity is a good option. This way, you’ll know you have a guaranteed $1,000 (or however much is possible in your situation). It won’t fluctuate and will be delivered to you every month for the rest of your life, from when you decide to take income.
To learn more about how an income rider could fit in with your personal retirement plan, get in touch with us. We offer a complimentary 15-minute phone consultation to discuss your specific needs and how you can put our advice into action. Book your free call with our expert advisors today.
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:
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
Giveawaymoney: 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.
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.
