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Sam Nelson

on 24 April 2010

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Transcript of Annuities

Annuities Two Different Animals Immediate Deferred Common Features Both types are essentially a contract with an
insurance company
No limit on amount you can invest
Death benefit to heirs if you die prematurely
High commissions & fees
Surrender charges (always) in first 6-10 years
on withdrawals of >10% of accumulation value/year Fixed or Variable? Fixed:
Guaranteed rate of return
Guaranteed payout Variable:
No guarantee
Return varies
Based on investment options you choose You pay premiums (tax deferred) while working
Receive payments at future date You pay lump sum (usually at retirement) and receive immediate payments until death Purchased with
Single premium (SPDA), or
multiple payments over a period of years
Most annuities purchased with after-tax $
Earnings are tax-sheltered, until withdrawn Types of Deferred Annuities Fixed Annuity: money earns interest at rates set by the insurance company.
Variable Annuity: the insurance company invests money in stocks, bonds or other investments you choose.
Equity-Indexed Annuity: the interest rate is based on an index;
-pays a base return, but it may be higher if the index increases Fixed Annuities might be for someone who... wants guaranteed interest rate
5 year lock-in so buy when interest rates are high
wants tax-deferred earnings
has significant assets to set aside for retirement, and
does not need to access their assets for at least five years An investment inside an insurance wrapper
Stocks, bonds, money market investments
Principal & return are not guaranteed
you may lose some or all of your investment
More features & higher fees than fixed annuities
Regulated by the SEC Variable Annuities Equity-Indexed Annuity Complicated investment for sophisticated investors
Minimum guaranteed return
Rate of return on investment is based on an underlying index such as the S&P 500
One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked.
Don't Cash Out Early! Penalties for cashing out before age 59 ½
10% early withdrawal penalty imposed by IRS
Withdrawals taxed as ordinary income
Surrender charges imposed by insurance co.
If funds withdrawn before 5-7 years
Surrender charges (6-7%) decrease over time TIPS Avoid salespeople who advise switching annuities (churning)
Fees & penalties Only Consider a Deferred Annuity IF: You contribute the maximum to your employer’s retirement plan
You fully fund your IRA
$5,000/year or $6,000 if 50+ (2010)
If self-employed:
You fully fund a SEP-IRA or SIMPLE plan Want to spend your last $ the day you die? (or close to it) Buy a Lifetime of Income Monthly payments as long as you live
cannot change or stop payment option once annuity payments start Should You Annuitize? Living to 100 Life Expectancy Calculator
http://www.livingto100.com/ No Pension? No Problem!
Create your own “synthetic pension” with an immediate fixed annuity
Purchase a lifetime stream of income for a lump-sum payment @ retirement Purchase a guaranteed income stream for life with single payment
$ can come from IRA, 401(k), or other source
Tax-free rollover to immediate annuity
Plain vanilla: Regular payments begin at once and last for life
Annual, semi-annual, quarterly, monthly
If you die early: No benefits to heirs
If you live long: you (& children) win! Payment Options Straight life annuity
Lifetime income for annuitant only
For life or at least X years (10-20 years)
Heirs receive payments if you die before X years
Joint & Survivor
Pay spouses (or other 2 people for as long as either lives) Single Premium Immediate Annuity $100,000 SPIA
Straight like annuity (until you die)
Installment-certain (10 years minimum)
Heirs receive payments if you die b/4 10 yrs
Joint & Survivor (lasts as long as 2nd to die)
$640/month Lifetime Annuity Income PROs
Can’t outlive your income
Complement to risky stock investments

No inflation protection w/ most immediate fixed annuities
No $ for heirs
Payments depend on prevailing interest rates @ purchase Laddering Strategy At retirement, purchase immediate fixed annuity with 25% of assets & invest remainder
After 5-10 years, purchase second annuity with 25% of assets & continue to invest remaining assets
After another 5-10 years, repeat process To summarize... Annuities come in two basic types
Deferred- investing for retirement
Immediate- a lifelong retirement income
Many different “flavors” with lots of variety
Guarantees only as good as the insurance company selling the annuity Questions???
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