Transcript Tax-Sheltered Retirement Plans

Annuities
Two different animals!
Deferred or Immediate
What is an annuity?
• “An annuity is a contract in which an
insurance company makes a series of
income payments at regular intervals in
return for a premium or premiums you
have paid. Annuities are most often bought
for future retirement income, and can pay
an income that can be guaranteed to last
as long as you live.”
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Objectives (be able to)
• Understand the BASICS of annuities
• Distinguish between
– using annuities to invest tax-deferred for
retirement &
– using annuities to provide income during
retirement that you will never outlive
• Describe how to shop for an annuity
• Know who should NOT buy deferred
annuities
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Annuity: Insurance company
contract with 2 distinct phases
• Accumulation phase
– Invest tax-deferred during earning years
• Pay-out phase
– Pay regular income for life or for specified
period
– Payments cease when annuitant (recipient)
dies
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Annuity plans offered through
Employers
– 403(b) or 401(k) plans
– Limits on yearly contributions
– Today our focus is on individually purchased
annuities, NOT employer plans
– Similar concepts
– No sales commissions when participating in
employer plan
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Fixed or Variable?
• Guaranteed
rate of return
• Guaranteed
payout
• Insurance
product
– Regulated by
states
• No guarantee
• Return varies
– Based on
investment
options you
choose
• Securities
regulated by SEC
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Annuities b/4 & after Retirement
• Deferred
– Investment or
accumulation phase
– Tax deferred
accumulation
• Immediate
– Pay out phase in
retirement
– Income for life
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Annuities: Common Features
• Contracts backed by insurance company
– Death benefit to heirs if you die prematurely
• No limit on amount you can invest
• High Commissions & Fees
– If purchased from salesperson
• No Load or Sales Commissions
– If purchased directly from insurance arm of NoLoad MF company
• Vanguard, Fidelity, TIAA-CREF, etc.
• Surrender charges (always) in first 6-10 years
– on withdrawals of >10% of accumulation value/year
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Accumulation Phase
• Purchased during working years
• Money is invested in contracts backed by
insurance companies
• Fixed or variable rates of return
• Penalties & fees for withdrawals b/4 59.5
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Deferred
• Purchased with
– Single premium (SPDA), or
– multiple payments over a period of years
• Contributions MAY be tax-sheltered
– If part of 401(k) or 403(b) plan
• Most annuities purchased with after-tax $
• Earnings are tax-sheltered, until withdrawn
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Types of Deferred Annuities
• Fixed Annuity: your money earns interest at
rates set by the insurance company.
• Variable Annuity: the insurance company
invests your money in stocks, bonds or other
investments you choose.
• Equity-Indexed Annuity: the interest rate is
based on an outside index, such as a stock
market index. The annuity pays a base return,
but it may be higher if the index increases
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Fixed Annuities might be for:
• Individual who
– wants guaranteed interest rate (like a CD)
• One co.’s rate as of 03/15/2007 is 4.25%
• 5 year lock in so buy when interest rates are high
– wants tax-deferred earnings (CDs don't offer)
– has significant assets to set aside for
retirement, and
– does not need to access their assets for at
least five years
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Variable Annuities
• An investment in an insurance wrapper
– Stocks, bonds, money market investments
• Principal & return are not guaranteed
– you may lose some or all of your investment
– Trade off security for chance for more gain
• More features & higher fees than fixed ann.
• Regulated as securities by the Securities
and Exchange Commission (SEC)
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Equity Indexed Annuities
• Complicated investment for sophisticated
investors
• Minimum guaranteed return
• Rate of return on your 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.
• difficult to compare one EIA to another
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Don’t cash out early!
• Penalties for cashing out early
– 10% Early withdrawal penalty imposed by IRS
• Before age 59 ½
• Withdrawals taxed as ordinary income
• Surrender charges imposed by ins. co.
– If funds withdrawn before 5-7 years
– Surrender charges (6-7%) decrease over time
• Watch out for salespeople who advise you to
switch annuities (churning)
– Fees & penalties
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Consider a Deferred Annuity IF
• You contribute the maximum to your
employer’s retirement plan
• You fully fund your IRA
– $4,000/year or $5,000 if 50+
• If self-employed:
– Start a SEP-IRA or SIMPLE plan
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Alternative to Deferred Annuity
• “Tax-managed” mutual fund
– no-load, low expense
– Managed to reduce yearly taxes
• Manager buys and sells underlying assets strategically to
yearly minimize taxes
• Most taxes are long-term capital gains (max. 15%) vs.
ordinary income (max. rate = 35%)
– Often require $10,000 minimum
• Exchange-Traded Funds (ETFs)
– For lump sum investment
– Very low expense ratio
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Summary- Deferred Annuities for investing
for retirement during earning years
• Be absolutely sure an annuity is right for
you before you buy!
• Do your homework! Read!
• Don’t buy from a salesperson who
contacts you
• Don’t pay commissions to salesperson
• Shop the internet
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Questions on Deferred Annuities?
• Investing for retirement by purchasing an
annuity (generally with regular payments)
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Part 2
How to Avoid Running out of
Money in Retirement
Everything you always wanted to
know about Immediate Annuities!
The “payout” phase
Afraid of Outliving Your $?
• Babyboomers are at risk of living long
lives and outliving their assets
• Want to spend your last $ the day you
die? (or close to it)
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Buy a Lifetime Income
• Immediate annuity
– Monthly payments until you die
– Fixed $ amount (inflation reduces
purchasing power)
• Generally, you cannot change or stop
your payment option once the annuity
payments have begun.
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Should you annuitize?
How long are you likely to live?
• Living to 100 Life Expectancy
Calculator
– http://www.livingto100.com/
• Calculate your longevity (Module 1b):
– http://www.ces.purdue.edu/retirement/
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Safe Retirement Withdrawal Rate
• Withdraw from nest egg no more than 45% yearly ($4,000 payout from $100,000)
• What happens if the value of your
investments dives (as did stocks in
2000-2002)?
– $1 million in Jan. 2000 = $.5 million in 2003
• Expect irregular, unpredictable
investment returns from stocks
• Risk outliving your money
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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
• Provides income security for persons
with only defined contribution plans such
as a 401(k)
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Immediate Annuity
Guaranteed Income Annuity
• Purchase a guaranteed income stream
for life with single payment
– From IRA, 401(k), etc.
– 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!
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Payment Options
• Straight annuity
– Lifetime income for annuitant only
• Installment-certain
– For life or at least X years (10-20 years)
• Joint & Survivor
– Pay spouses (or other 2 people for as long as
either lives)
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$100,000 SPIA Examples
• Straight annuity (until you die)
– $790/month
• Installment-certain (10 years minimum)
– Heirs receive payments if you die b/4 10 yrs
– $680/month
• Joint & Survivor (lasts as long as 2nd to die)
– $640/month
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Lifetime Annuity Income
• Pros
• Can’t outlive your
income
• Complement to risky
stock investments
• Cons
• No inflation protection
w/ most immediate
fixed annuities
• No $ for heirs
• Payments depend on
prevailing interest
rates @ purchase
– 2001-2002 was a bad
time to buy
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Using Fixed Immediate Annuities in
Retirement
• TIAA-CREF research study (2000)
– 65 year old retiree
– Conservative portfolio
– 4.5% withdrawal rate
– Only 33% chance of lasting 30 years
• Purchase annuity with 25% of assets
– 53% chance of lasting 30 years
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Laddering Strategy
• At retirement, purchase immediate fixed
annuity with 25% of assets & invest
remainder moderately aggressively in
growth investments
• After 10 years, purchase second annuity
with 25% of assets & continue to invest
remaining assets
• After another 10 years, repeat process
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Is an Annuity right for you?
From the Federal Citizen Information Center
1.
2.
3.
4.
5.
6.
7.
8.
Answer Yes or No to the following
Saving for retirement is one of my main goals.
I do not want to touch my principal or interest until I
am at least 59½ years old.
I contribute the maximum deductible amount to my
IRA, 401(k) or 403(b).
I need an investment that will earn tax-deferred
interest for many years.
I am retired or very near retirement now.
I have a lump sum of money and I want to begin
drawing an income from it.
I want immediate return from my investment.
I want to receive a steady monthly check for the rest
of my life.
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Quiz Results
• If you answered yes to questions 1 through 4, a
deferred annuity may be appropriate for you.
• If you answered yes to questions 5 through 8,
an immediate annuity may be suitable.
• A trusted financial advisor can help you decide
if an annuity is appropriate for you.
– Salesperson will earn a commission if you buy.
– Read & educate yourself before you talk with
salesperson!
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Tips from the SEC
• Before buying any variable annuity do
your homework and compare; evaluate
insurance company
• Request a prospectus from the insurance
company or from your financial
professional, and read it carefully.
• The annuity contract contains: fees and
charges, investment options, death
benefits, and annuity payout options.
• Compare it to other annuities and other
types of investments like mutual funds.
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Escape Clause:
How to Dump a Bad (deferred variable
or equity indexed) Annuity
• Strategy depends on:
– How long you’ve owned the annuity & amount
of surrender charge
• Wait until surrender period expires
• Withdraw 10%/year w/o charge
– Tax consequences of cashing out
• If owned inside a retirement account, cash out and
reinvest w/o paying taxes
• If owned outside a ret. acct. you owe taxes on gain
Kiplinger’s January 2007 @ kiplingers.com
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Annuities and Senior Citizens
• http://www.insurance.utah.gov/Annuities_alert.htm
• Senior Citizens Should Be Aware Of Deceptive Sales
Practices When Purchasing Annuities
• “Annuity sales to seniors have significantly increased in
recent years. However, as annuity sales have risen, so
has a sense of confusion among consumers. This is due,
in part, to questionable or deceptive sales practices
employed by companies and agents looking to take
advantage of uninformed consumers. It is extremely
important, when considering whether or not to buy an
annuity, to take the necessary precautions in order to
make an informed decision that is best for you.”
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Annuity sales pitches to sellers:
Who can you trust?*
• “Not all annuities are created equal. Some
pay MUCH higher commissions while
providing GREAT benefits to your clients.
Introducing… a 13% commission equity
indexed annuity.”
• Info that puts “clients and customers at
your marketing mercy” using “maximum
persuasion”
*Probably not the sales person
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“Annuity University”
• “Spend 2 days with me and I will turn you
into a premium machine or suggest that
you get into a different type of work.”
• Books:
– 11 Amazing secrets of outrageously
successful insurance agents
– Kick your ‘But’: 18 steps to removing the
obstacles to sales success
– Red-hot cold call selling: Prospecting
techniques that pay off
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Dinner Seminar Marketing Concept
• ‘has helped thousands of advisors across
the country generate the highest
commissions and see more prospects in
one month than most advisors see in a
year’
• Double your Fun: Sell enough annuities to
qualify for both a 5 night stay in Cancun
and a 7-night Caribbean cruise.
Thanks to Wall Street Journal writer Jonathan Clements
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Annuity Seller Websites
• Find out the sales pitches to be wary of
• ProducersWeb.com
http://www.producersweb.com
• Life Insurance Selling
http://www.lifeinsuranceselling.com/
“Baby boomers aren’t driving the economy; they are
the economy!
Discover how to have better, deeper relationships
with aging boomers and older clients!”
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Reporting Unethical Sales
• Blow the Whistle
– Contact state insurance & securities
regulators
• Utah Division of Securities
• UT Insurance Dept. http://www.insurance.utah.gov/
– Regulators may pressure insurer to allow
withdrawal w/o penalty
– Help protect other consumers
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Summary
• Annuities come in two basic types
– Deferred- for investing for retirement
– Immediate- for a retirement income you won’t
outlive
– Many different “flavors” with lots of variety
• Guarantees only as good as the insurance
company selling the annuity
– Caveat emptor!
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Annuity Resources
• Morningstar & Lipper- var. annuities
• http://www.immediateannuities.com/
• http://www.sec.gov/investor/pubs/varannty.
htm
• http://www.pueblo.gsa.gov/cic_text/money/
annuity/annuities.htm
• http://invest-faq.com/articles/insannuities.html
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Questions?
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