Retirement Income Visions

Delayed Gratification is the Key to Maximizing Income with Fixed Index Annuities

When you're planning for retirement, income is the name of the game. The more sustainable income that you can generate, the less you need to worry about things like sequence of returns and major stock market downturns – before and during retirement.

The idea is to build a base, or floor, of predictable income that will cover your day-to-day expenses. For most people doing retirement income planning, Social Security is the core element of an income floor. Although pre-retirees today can plan to receive a full Social Security benefit beginning somewhere between age 66 and 67 depending upon their year of birth, the benefit that they, and potentially their spouse, will receive will increase by 8% per year for each year that they defer their start date up until age 70. This equates to as much as a 24% - 32% greater benefit depending upon your year of birth and how long you defer your start date.

Insure Your Longevity

When people hear the term, "longevity insurance," they immediately conjure up images of insurance agents trying to sell them an insurance policy. Longevity insurance isn't a product in and of itself. It is instead one application of a couple of different types of fixed income annuity products offered by life insurance companies.

The Need for Longevity Insurance

It's been my personal and professional experience that people generally underestimate how long they will live. Not only is it common to live to age 80, it isn't unusual to survive to age 90 and even to 100. According to a March, 2012 report, The 2011 Risks and Process of Retirement Survey, prepared for the Society of Actuaries, when a couple reaches 65, there's a 10% chance that at least one of the individuals will live to 100. There's a 1% chance that one spouse will reach 107. More than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live.

With a Fixed Index Annuity, You Can Have Your Cake and Eat It Too

Beginning with the August 1, 2011 post, Do You Want to Limit Your Potential Gains? through the November 5, 2012 post, Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4, there were a total of 58 posts about fixed index annuities ("FIA's"). Not to state the obvious, however, that's a lot of information about one subject!

The impetus for the volume of material on FIA's was, and continues to be, the fact that a FIA with an income rider is a unique and underutilized strategy that can provide a meaningful lifetime income floor for many retirement income plans while protecting against downside risk. As evidence of this fact, fixed index annuity sales have been increasing at a rapid pace the last two years while sales of variable annuities have been on the decline. Furthermore, their use as a retirement income planning tool is affirmed by the fact that the majority of sales have included an optional income rider.

Is It Time to Take Some Chips Off the Table?

For those of you looking forward to reading Part 2 of the New Tax Law – Don't Let the Tax Tail Wag the Dog post, my apologies to you. It will be published next week. After the recent surge in stock prices with the notable exception of Apple, which has lost 265 points, or 38% of its value, in just four months from its September 21st high of 705.07 to its close of 439.88 this past Friday, I feel compelled to write and publish this post first.

I was in Las Vegas attending a professional conference last week which may have been the impetus for the title of this post. As an investment advisor, when I see the Dow Jones Industrial Average increase by 792 points, or 6%, from its December 31st close of 13,104.14 to Friday's close of 13,895.98 in less than one month, including 13 out of 17 sessions when the closing price has exceeded that of the previous day with 7 consecutive daily increases through Friday, on top of a 7.3% increase in 2012, I take notice. The phrase "reversion to the mean" comes to mind.

Social Security – A Lifetime Deferred Income Annuity

Do you have an investment that will pay you guaranteed lifetime income totaling $870,000 to $1.87 million? This is the projected range of income that my wife and I expect to receive from Social Security during our lifetime based solely on my earnings record depending upon when I choose to start my benefits and how long both of us live. Granted that my earnings have exceeded the taxable Social Security wage base for most of my working years, however, this isn't unusual.

Our projected benefits assume that (a) my current earnings level continues until I begin receiving Social Security, (b) either my wife or I live until at least my age 90, (c) my wife potentially lives until age 95, and (d) Social Security cost-of-living adjustments ("COLA's") are 2% each year which is less than the average increase of 2.6% over the last ten years. If all of these assumptions are realized, our actual benefits will likely be greater than the projected amounts since the projections don't include COLA's between now and retirement.

Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4

The first three posts in this series discussed five differences between fixed index annuities ("FIA's") with income riders and deferred income annuities ("DIA's") that will influence which retirement income planning strategy is preferable for funding long-term care insurance ("LTCI") premiums in a given situation. If you haven't done so already, I would recommend that you read each of these posts.

This week's post presents a sample case to illustrate the use of a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement.

Invest in DIA to Fund LTCI Premiums When Retired – Part 3 of 4

Last week's post discussed the first three of five differences between fixed index annuities ("FIA's") with income riders and deferred income annuities ("DIA's") that will influence which retirement income planning strategy is preferable for funding long-term care insurance ("LTCI") premiums in a given situation. Once again, the differences are as follows:

1. Income start state flexibility
2. Income increase provision
3. Income tax consequences
4. Investment value
5. Death benefit

This post will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Invest in DIA to Fund LTCI Premiums When Retired – Part 2 of 4

Last week's post discussed the use of a deferred income annuity ("DIA"), commonly referred to as longevity insurance, to fund long-term care insurance ("LTCI") premiums during retirement. Similar to a fixed index annuity ("FIA") with an income rider, in exchange for an initial investment, or premium, you're entitled to receive a lifetime income beginning at least a year from the date of purchase.

As noted in last week's post, there are five important differences between FIA's with income riders and DIA's that will influence which retirement income planning strategy is preferable for funding LTCI premiums in a given situation. These differences are as follows:

1. Income start date flexibility
2. Income increase provision
3. Income tax consequences
4. Investment value
5. Death benefit

Invest in DIA to Fund LTCI Premiums When Retired – Part 1 of 4

As explained in the last two weeks' posts, Invest in FIA to Fund LTCI Premiums When Retired – Parts 1 and 2, the purchase of long-term care insurance ("LTCI") needs to be a lifetime commitment. It isn't enough to plan for how you will pay for your LTCI premiums during your working years. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement.

One potential source of income that can be used to fund LTCI premiums during retirement is a fixed index annuity ("FIA") with an income rider. As explained and illustrated in the last two weeks' posts, with a FIA, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Invest in FIA to Fund LTCI Premiums When Retired – Part 2 of 2

Part 1 of this post alluded to a perfect storm awaiting many long-term care insurance ("LTCI") policy owners when they retire, an analysis of which should be included as part of the planning process when the potential purchase of a LTCI policy is being considered. The perfect storm is as follows:

• Due to potential sizeable ongoing benefits, LTCI premiums aren't inexpensive.
• Depending upon when a policy is purchased, LTCI premiums may need to be paid for 30 to 50 years.
• While historically infrequent, LTCI premium increases can be significant.
• Although it may be needed in one's 50's, long-term care is more often required in one's 70's, 80's, or 90's.
• Premiums may be affordable when employed; however, this may not be the case when retired.

The last item in the list is critical. Given all of the foregoing items, when you purchase a LTCI policy, it needs to be a lifetime commitment. As part of this commitment, you need to have a plan in place for how you will pay for your LTCI premiums not only during your working years, but for the rest of your life.

Invest in FIA to Fund LTCI Premiums When Retired - Part 1 of 2

The need for long-term care is created by one or both of the following conditions/impairments:

• A chronic medical condition that compromises the individual's ability to get through the most basic of daily routines
• A cognitive impairment that compromises one's ability to safely interact with his/her environment

Long-term care is costly. According to Genworth's 2012 Cost of Care Survey, national median hourly rates for licensed homemaker and home health aide services are $18 and $19 per hour, respectively, adult day health care is $61 per day, assisted living facilities are $3,300 per month, and semi-private and private rooms in nursing homes are $200 and $222 per day, respectively. These are median costs. Actual costs in specific areas of the country may be much greater.

Simplify Your Financial Life With Fixed Index Annuities

When you get to a certain point in life, there's a tendency to want to downsize and simplify. That large, two-story house with all of that land becomes a burden. That expensive exotic car that you had to have years ago is no longer necessary.

The same thing applies to investments. Let's face it, for the average person, the inner workings of most investments are difficult to understand, if not over one's head. Not to mention how the investment fits into your financial, or retirement income, plan. Add on the risk factor associated with many investments and it can contribute to many sleepless nights.

Fixed Index Annuities – A Long-Term Commitment

"I, Robert Klein, take you FIA, to be my Fixed Index Annuity, to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part."

While you don't say a traditional wedding vow when you purchase a fixed index annuity ("FIA"), you do make a long-term commitment. This is especially true when you purchase a FIA with an income rider. Divorce is generally an expensive proposition. This applies to FIA's as well.

Retirement Income Planner Key to Success When Investing in Fixed Index Annuities

Last week's post presented a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities ("FIA's"). As evidenced by the questions, themselves, as well as the number of questions, this is a very technical area that requires specialized expertise.

So where do you find answers to the various questions? Assuming that investment in one or more FIA's makes sense in your financial situation, where should you go to purchase these long-term investments? The remainder of this post will assume that you're considering FIA's in the context of a retirement income plan.

12 Questions When Considering Fixed Index Annuities

It's hard to believe, however, it's been over a year since I began writing about fixed index annuities, or "FIA's", as a retirement income planning strategy. Beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, this has been the subject matter of virtually every Retirement Income Visions™ weekly post. Several of the posts, including the last nine, have been organized into multi-part series.

As evidenced by the titles of many of the posts as well as the number of parts in the various series, this is a highly technical area. Not to mention that there are currently 251 products offered by 40 life insurance companies to choose from.

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn't have a retirement income plan in place when he/she retired.

Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?

Last week's post made the point that, in addition to the accumulation value of a fixed index annuity ("FIA"), there's a value that can be calculated and attached to the future income stream from an income rider. Furthermore, unlike the accumulation value of your FIA that will change over time, unless you make additional investments or take non-income withdrawals, the amount of your lifetime income withdrawals are predetermined and are contractually guaranteed.

So if the amounts of lifetime income withdrawals are known at the time of purchase of your FIA, why don't life insurance companies show the present value of the withdrawals on annual statements? The reason it's not done is because there are several unknowns throughout the life of the contract that can affect the amount and duration of the income payout. There are two types of unknowns:  amount and duration variables.

What is the Real Value of Your Fixed Index Annuity?

If you own a fixed index annuity ("FIA"), you can generally visit the website of the life insurance company from which you purchased your FIA to see the current value of your investment. In addition, your life insurance company will send you an annual statement shortly after the anniversary date of the issue of your contract showing you the accumulation value of your FIA on your anniversary date.

In addition to your anniversary date value, a typical annual statement will provide you with a list of the various transactions during the previous contract year, including investments, interest crediting, withdrawals, surrender charges, and premium bonuses and income and other rider charges if applicable.

FIA’s With Income Riders vs. DIA’s: Which is Right for You? – Part 5 of 5

The first four parts of this series compared and contrasted the features available in two major types of fixed income annuities that defer the payment of their income, i.e., fixed index annuities ("FIA's") with income riders and deferred income annuities ("DIA's"). So now that we've thoroughly analyzed both of these excellent retirement income planning tools, which is right for you?

The answer to this question depends upon your retirement income planning needs. The ideal retirement income planning strategy is one that will generate one or more guaranteed streams of income that will close the gap between projected expenses and projected existing sources of income with the smallest investment. Whether FIA's or DIA's or a combination of both strategies, will achieve this goal, will be dictated by the unique facts in a given situation.

FIA’s With Income Riders vs. DIA’s: Which is Right for You? – Part 4 of 5

If you haven't read the first three parts of this series yet, you may want to do so since it will provide you with the background for this post. The first three parts listed and compared 12 features offered by fixed index annuities ("FIA's") with an income rider with deferred income annuities ("DIA's"). It organized the 12 features into three categories: (a) offered by DIA's, (b) applicable to DIA's, and (c) applicable to DIA's on a limited basis.

DIA's are a unique investment in and of themselves. As such, they offer features that are unavailable in other investments, including FIA's with income riders. This week's post discusses the retirement income planning benefits that are applicable to DIA's that aren't present in FIA's with income riders.

FIA’s With Income Riders vs. DIA’s: Which is Right for You? – Part 3 of 5

I hope that you're enjoying this series so far comparing two innovative retirement income planning tools - fixed index annuities ("FIA's") with income riders and deferred income annuities ("DIA's"). Of the 12 features offered by FIA's with income riders that are listed in Part 1, we've looked at three features that are also offered by DIA's, and five that aren't applicable to DIA's.

FIA’s With Income Riders vs. DIA’s: Which is Right for You? – Part 2 of 5

As stated in Part 1 of this post, while fixed index annuities ("FIA's") with income riders can be used to provide guaranteed (subject to the claims paying ability of individual life insurance companies) lifetime income beginning at a future date, they aren't the only fixed income annuity game in town. Of the 12 features offered by FIA's with an income rider that are listed in Part 1, three are offered by deferred income annuities ("DIA's"), four are applicable on a limited basis, and the remaining five aren't applicable. The last group is the subject of this post.

FIA’s With Income Riders vs. DIA’s: Which is Right for You? – Part 1 of 5

Judging by the number of recent posts regarding fixed index annuities ("FIA's") with income riders, is it obvious that I'm excited about the use of this strategy as a potential piece of the retirement income planning puzzle solution? While FIA's with income riders can be used to provide guaranteed (subject to the claims paying ability of individual life insurance companies) lifetime income beginning at a future date, they aren't the only fixed income annuity game in town.

As stated in the April 30, 2012 post, Target Retirement Income to Match Your Financial Needs, a FIA with an income rider offers 12 features that are listed at the beginning of the post, and, furthermore, is the only investment of which I'm aware that offers all 12 features. While it doesn't have all of the bells and whistles of a FIA with an income rider, there's another fixed income annuity option that includes a couple of retirement income planning benefits that aren't found in FIA's with income riders. The strategy I have in mind is the deferred income annuity, or "DIA."

Fixed Index Annuity Income Rider Similarities to Social Security – Part 4 of 4

This is the fourth and final part of our series discussing eight characteristics that are shared by fixed income annuity ("FIA") income riders and Social Security. The first seven characteristics were addressed in Parts 1 through 3, with #8, income taxation, the topic of this week's post.

There are three income taxation attributes that FIA income riders and Social Security have in common as follows:

Fixed Index Annuity Income Rider Similarities to Social Security – Part 3 of 4

I hope that you're enjoying this series about fixed index annuity income rider similarities to Social Security. I personally find it easier to understand a new concept when there's something familiar I can compare it to.

Parts 1 and 2 discussed the first five of eight characteristics shared by fixed index annuity ("FIA") income riders and Social Security. This post addresses characteristics six and seven as follows:

Fixed Index Annuity Income Rider Similarities to Social Security – Part 2 of 4

Part 1 of this post began a discussion of eight characteristics shared by fixed index annuity ("FIA") income riders and Social Security. It discussed the first two characteristics, lifetime income and entry fee. This post continues the series, addressing characteristics three through five as follows:

1. Flexible income start date
2. Increased annual lifetime income
3. Inflation and longevity risk protection

Fixed Index Annuity Income Rider Similarities to Social Security – Part 1 of 4

As evidenced by the number of blog posts regarding fixed index annuity ("FIA") income riders beginning with the December 12, 2011 post, Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck, there are a lot of things to consider before adding this powerful optional benefit to a FIA.

It isn't easy to determine which FIA income rider will produce the optimal amount of lifetime income in a given situation. This task is best left to an experienced retirement income planner who not only works routinely with this and other retirement income planning vehicles, but more importantly, understands you, your retirement income planning needs, and your overall financial situation.

When Should You Begin Investing in Income Rider Fixed Index Annuities?

The last two posts, When Should You Begin Your Lifetime Retirement Payout? – Parts 1 and 2, analyzed the different possibilities for timing of commencement of income withdrawals from a fixed index annuity ("FIA"), assuming that you purchase an income rider. As discussed, while the timing should be targeted when designing a retirement income plan before any FIA's are purchased, the income withdrawal starting date is open-ended. As a matter of fact, as pointed out in Part 2, there's no requirement to ever exercise your income rider.

Let's take a look at the front end of the retirement income planning timing decision. Assuming that your primary reason for purchasing one or more FIA's is to provide you, and your spouse or significant other if applicable, with guaranteed (subject to the claims-paying ability of individual life insurance companies) predictable lifetime income with a flexible starting date, and further assuming that you purchase an optional income rider, when should you begin investing in FIA's?

When Should You Begin Your Lifetime Retirement Payout? Part 2 of 2

When should you begin taking income withdrawals, or lifetime retirement payments ("LRP's") from your fixed index annuity ("FIA"), assuming that you purchase an income rider? Part 1 of this post looked at both ends of the spectrum, i.e., (1) during or after your first contract year assuming that the provisions of your income rider permit this, and (2) age at which withdrawal percentages no longer increase, e.g., 80 or older.

Although either of these two possibilities may be appropriate, the answer to this important question for most situations lies somewhere in between. The answer should be determined before the purchase of any FIA's by an experienced, independent retirement income planner who has access to numerous FIA's and income riders from highly-rated life insurance companies.

When Should You Begin Your Lifetime Retirement Payout? Part 1 of 2

When you purchase a fixed index annuity ("FIA") with an income rider, in addition to having an accumulation value that's standard with every FIA, you purchase the right to receive a future lifetime income stream, or lifetime retirement payments ("LRP's"). The income stream is payable over your life and potentially that of a spouse or other joint annuitant if applicable.

Although you're not required to exercise the income rider, it behooves you to do so since there's generally a cost associated with the rider. The income rider charge is deducted from the contract's accumulation value. It's calculated as either a percentage of the accumulation value or the income account value, sometimes referred to as the guaranteed minimum withdrawal benefit, or "GMWB," with the calculation based on income account value for most riders.