 |
|
|
|
|
 |
Members Log In |
 
|
|
Our MissionTo provide unbiased accurate information on variable annuities, by providing a third party evaluation and ranking of the major variable annuity provider's contracts.
We want you to have the opportunity to find the best variable annuity product for your needs. We are not paid by the insurance industry and we do not sell variable annuities.
 |
 |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Annuity IQ
By: Scott DeMonte
October 2, 2006
As we all know, pensions are going by the wayside. They are either under funded or being closed by the sponsors. With the end of the traditional pension, the question arises: “How do you plan for post retirement income?”
Social Security will provide you with some income, but chances are it will not be enough to fund your retirement years. You will have to rely upon your personal savings to generate the income you want. What are your post retirement income options?
There are several options you may have in your post working years to give you enough income and growth to last the 20 to 30 years you will be living in retirement. We have seen several options take center stage for replacing your income. These options range from immediate annuities (either fixed or variable) to a laddered bond portfolio. But, what is best for your needs?
You should first consult a financial advisor to discuss different options, but here are a few suggestions.
Immediate annuities:
These products will pay you income for life and they can be either fixed or variable payments. This means you can choose to have your money invested in mutual funds, specifically sub-accounts. Your income will vary based on the performance of the underlying investments. A fixed immediate annuity is a lump sum of money invested in a contract that will give you a specific dollar amount every month for a specified number of years or until you pass away.
Fixed immediate annuities have received a lot of press recently and have been attracting a lot of new business. This is not a bad thing, but people need to be aware that these investments are often irrevocable and may not guard against inflation.
The variable immediate annuity has also picked up some favorable press as of late as well, mostly the Vanguard variable immediate annuity. People have to remember how these products work and that the income can vary depending on the investment performance of the sub-accounts. The initial income amount or bench mark is chosen by you, this is called the assumed investment return or AIR. This will be either 3.5% or 5%, and you choose this percentage at the time of purchase.
The AIR represents the annual total return needed, after expenses, to keep your payments level. When the actual return from your portfolios in a given period is higher than your AIR (after deducting the mortality and expense risk charge), your payment for that period will be larger than your previous income payment. Similarly, when your return falls below the AIR (after deducting the mortality and expense risk charge), your next payment will decrease by the shortfall.
Laddered Bond Portfolio:
A laddered bond portfolio is baskets of bonds you or your financial advisor creates for you. The idea is to have some money mature at specific times to reinvest into newer bonds, hopefully at better interest rates. This is ideal if you have enough money to create a diversified portfolio, usually $100,000 or more.
The idea is to give you the current income you need and to provide you with a defined period of liquidity, which is predetermined when the bonds mature. This can give you a hedge against inflation because as inflation increases, so do interest rates. Since you have money maturing every year, or whichever time you choose, you have the ability to capture higher yielding bonds.
Bond mutual funds:
This is perhaps one of the worst options to choose to provide you with income. A bond mutual fund does not mature and is open to investment and interest rate risk. Simply put, if interest rates climb you will be receiving poor capital return. About 80+% of a bond fund’s total return comes from dividends being reinvested. If you are taking the dividends in cash you are, in essence, reducing your ability to recover after a period of poor investment returns.
A bond mutual fund is only good when you use it as part of a portfolio and rebalance every year or if you want to invest in high yield bonds. If you have less than $100,000 to dedicate solely to bonds, it may make sense to use a bond mutual fund. Other than those situations, I do not believe bond mutual funds make sense as a stand alone investment when you are taking the dividends in cash.
Variable annuities:
I can hear people rolling their eyes as I write this. Variable annuities are a newer option to generate income. You can accomplish this by using living benefits such as a GMIB (guaranteed minimum income benefit) or a GMWB (guaranteed minimum withdrawal benefit) For-Life. Both of these options can guarantee you either future or current income.
Not all living benefits are created the same, (this is why www.annuityiq.com exists), but they can generate significant income. They can also guard against inflation as well, because your money is invested in stocks and not just fixed income options. Many of these benefits can step-up in basis and allow for greater income either now or in the future.
A living benefit can generate between 4 to 6% income for as long as you live. This is even if your cash value goes to zero. Essentially, you are insuring your equity investments through these benefits. These are complex riders attached to the variable annuity and they are not all good, but the right one can provide you with plenty of income moving forward.
There, of course, are other income options, but the ones listed above make the most sense for the general retiree. You should always talk to a financial advisor before making any investment, but these are just general ideas to investigate.
You will see more emphasis being placed on retirement income moving forward and you need to design an income plan before you actually retire. I cannot stress this enough. If you have no plan, then you are not ready to retire. You have to remember people are living 20 to 30 years in retirement and that number will be climbing as people begin to live longer. Plan now or you may have to memorize this line; “Welcome to Wal…”
October 2, 2006
As we all know, pensions are going by the wayside. They are either under funded or being closed by the sponsors. With the end of the traditional pension, the question arises: “How do you plan for post retirement income?”
Social Security will provide you with some income, but chances are it will not be enough to fund your retirement years. You will have to rely upon your personal savings to generate the income you want. What are your post retirement income options?
There are several options you may have in your post working years to give you enough income and growth to last the 20 to 30 years you will be living in retirement. We have seen several options take center stage for replacing your income. These options range from immediate annuities (either fixed or variable) to a laddered bond portfolio. But, what is best for your needs?
You should first consult a financial advisor to discuss different options, but here are a few suggestions.
Immediate annuities:
These products will pay you income for life and they can be either fixed or variable payments. This means you can choose to have your money invested in mutual funds, specifically sub-accounts. Your income will vary based on the performance of the underlying investments. A fixed immediate annuity is a lump sum of money invested in a contract that will give you a specific dollar amount every month for a specified number of years or until you pass away.
Fixed immediate annuities have received a lot of press recently and have been attracting a lot of new business. This is not a bad thing, but people need to be aware that these investments are often irrevocable and may not guard against inflation.
The variable immediate annuity has also picked up some favorable press as of late as well, mostly the Vanguard variable immediate annuity. People have to remember how these products work and that the income can vary depending on the investment performance of the sub-accounts. The initial income amount or bench mark is chosen by you, this is called the assumed investment return or AIR. This will be either 3.5% or 5%, and you choose this percentage at the time of purchase.
The AIR represents the annual total return needed, after expenses, to keep your payments level. When the actual return from your portfolios in a given period is higher than your AIR (after deducting the mortality and expense risk charge), your payment for that period will be larger than your previous income payment. Similarly, when your return falls below the AIR (after deducting the mortality and expense risk charge), your next payment will decrease by the shortfall.
Laddered Bond Portfolio:
A laddered bond portfolio is baskets of bonds you or your financial advisor creates for you. The idea is to have some money mature at specific times to reinvest into newer bonds, hopefully at better interest rates. This is ideal if you have enough money to create a diversified portfolio, usually $100,000 or more.
The idea is to give you the current income you need and to provide you with a defined period of liquidity, which is predetermined when the bonds mature. This can give you a hedge against inflation because as inflation increases, so do interest rates. Since you have money maturing every year, or whichever time you choose, you have the ability to capture higher yielding bonds.
Bond mutual funds:
This is perhaps one of the worst options to choose to provide you with income. A bond mutual fund does not mature and is open to investment and interest rate risk. Simply put, if interest rates climb you will be receiving poor capital return. About 80+% of a bond fund’s total return comes from dividends being reinvested. If you are taking the dividends in cash you are, in essence, reducing your ability to recover after a period of poor investment returns.
A bond mutual fund is only good when you use it as part of a portfolio and rebalance every year or if you want to invest in high yield bonds. If you have less than $100,000 to dedicate solely to bonds, it may make sense to use a bond mutual fund. Other than those situations, I do not believe bond mutual funds make sense as a stand alone investment when you are taking the dividends in cash.
Variable annuities:
I can hear people rolling their eyes as I write this. Variable annuities are a newer option to generate income. You can accomplish this by using living benefits such as a GMIB (guaranteed minimum income benefit) or a GMWB (guaranteed minimum withdrawal benefit) For-Life. Both of these options can guarantee you either future or current income.
Not all living benefits are created the same, (this is why www.annuityiq.com exists), but they can generate significant income. They can also guard against inflation as well, because your money is invested in stocks and not just fixed income options. Many of these benefits can step-up in basis and allow for greater income either now or in the future.
A living benefit can generate between 4 to 6% income for as long as you live. This is even if your cash value goes to zero. Essentially, you are insuring your equity investments through these benefits. These are complex riders attached to the variable annuity and they are not all good, but the right one can provide you with plenty of income moving forward.
There, of course, are other income options, but the ones listed above make the most sense for the general retiree. You should always talk to a financial advisor before making any investment, but these are just general ideas to investigate.
You will see more emphasis being placed on retirement income moving forward and you need to design an income plan before you actually retire. I cannot stress this enough. If you have no plan, then you are not ready to retire. You have to remember people are living 20 to 30 years in retirement and that number will be climbing as people begin to live longer. Plan now or you may have to memorize this line; “Welcome to Wal…”
Design by: Web Page Design Pro