Investors have been buying fixed annuities for a long time now for the added security they can offer. The current best interest rate on a five-year fixed annuity is 3.9% compared to the current 2% rate of a bank CD.
Fixed index annuities are paying income streams with a guaranteed rate as high as 6% over much longer time periods. These annuities earn their interest from participation with stock or bond market indexes. When the market is up, you earn a percentage of the gain in what is known as a participation rate strategy.
An example might be if the chosen index were up 10% for the year and your contract paid 70% participation, you would earn 7%. If the index selected should go down 10% for the year, you are guaranteed not to have any market losses ever. There are additional strategies for index annuities to pay interest, and each strategy has its limitations compared to the actual index earnings. As always, make sure you read the fine print.
In addition to guarantees and income provided by these products, there are additional tax strategies used to increase your net return. It’s one thing to earn interest, but it’s another to keep it.
The tax system is a huge factor in retirement planning. For example, if your account is an IRA and you elect to have a guaranteed income rider on the index annuity contract, you and your spouse will have income guaranteed as long as either is alive. At the time both of you have passed, the company would pay any remaining balance to your beneficiaries.
But what if you live a long time taking a guaranteed increased income but the stock market indexes do not go up during that period? The insurance company still has to pay you your increased income even if your account runs out of money. In this example, the year your account runs out of money, you convert the remaining small amount to a Roth IRA. All future income would be considered Roth IRA income with a “zero-tax liability.” You do need to make sure you have a Roth IRA currently in order to do this strategy.
One of the least-known tax strategies is to take regular non-qualified money and purchase a fixed index annuity where the income paid out each month is, depending on your age, approximately 70% tax-free. There is a limit on how much you can put into a Roth IRA to obtain tax-free income, but this strategy has no limit. An example might be that you deposit $1 million into this type of account.
Immediately, if you were drawing $100,000 income each year under this strategy, you would only have to pay taxes on about $30,000 with the remaining $70,000 being tax-free. Who doesn’t like the sound of that?
The final piece of the puzzle is longevity planning. What if you outlive your savings? There is a form of life insurance that will advance the death benefit to pay for home health care, nursing home care, and even offer advanced lump sums of money if you are diagnosed with a critical condition. Also, under current law, the advance is all tax-free.
What about the pensions that go away when the breadwinner dies? What about the potential of decreased Social Security income? The life insurance mentioned above can also provide enough money to replace the lost pension and Social Security dollars providing for your soulmate’s standard of living in the manner in which you want them to have. Your final love letter, so to speak.
People are living longer, which has driven down the cost of this type of insurance, making it possible to provide for you and your spouse. Critical care, chronic care, and loss of your income can all be addressed with one properly structured insurance contract.
Insurance company products can offer stability that most retirees want and need. With proper planning, you can reduce or even eliminate taxes and have retirement income you can enjoy for the rest of your life. You won’t have to worry about running out of income or keeping up with inflation.
So back to the beginning question – do retirees hate annuities and insurance companies? I believe it is safe to say at the rate these products are being purchased by retirees, they actually love insurance companies. How things have changed from the past generations.
This content was brought to you by Impact PartnersVoice. Insurance and annuities offered through Donald W. Owens, OH Insurance License #16525. DT# 1023595-1220.