Annuity Income May Contain a Hidden Surprise

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Annuity income may feel secure; but, is it really?   Once you realize that money is worth only what it can purchase, the effects of inflation become woefully clear.

Suppose your annuity will provide you with $50,000 in annual income through retirement.  It sounds good, but does it provide for cost-of-living increases?  If not, those payments will likely be worth less each year.  Assuming a 3% inflation rate, your $50,000 will represent only about $48,500 of purchasing power in today’s dollars in the second year.  In the tenth year, your purchasing power would be around $37,200 in today’s dollars; and, in the 20th year, it would be around $27,700!

The pattern is clear:  Your purchasing power would be declining each year.  If you purchased the annuity in order to preserve lifestyle security, you may be very disappointed.

Remember, there are different kinds of annuities:

  • Immediate
  • Deferred
  • Indexed
  • Variable

All have their own bells & whistles and all have their own set of characteristics and costs, sometimes not so obvious.   And, the chances are excellent you’re paying extra for any add-on benefits that may appear free.  Often, you may be able to replicate those same benefits with less cost through some basic and prudent financial planning.    Just remember NOTHING is ever the answer for ALL your money.  Diversification isn’t about money; it’s about risk.  And, there are more risks than one you should be considering.   Also remember….

When something sounds too good to be true… well, you know the rest.  If you’d like to learn more about income annuities, I’ve prepared an Income Annuity Primer for you.  It’s free when you subscribe to IFG Insights.  If you’re not happy with Insights you can always cancel; but, I think you’ll like both the primer and the ezine.  You can get the primer here.

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Enjoy!

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Buying An Annuity? Keep it Simple!

Jim Lorenzen, CFP®, AIF®

6a017c332c5ecb970b0192ac05f306970d-320wiIt isn’t uncommon for people to buy things they don’t need; and when it comes to annuities, it’s often no different, and it doesn’t help when (sometimes) an agent adds bells and whistles, in the form of elaborate policy riders, that the client will never use!

Today, because many baby-boomers are concerned about a lifetime income they can’t outlive, annuity recommendations often include a guaranteed minimum withdrawal benefit (GMWB) rider.  The problem is that often it isn’t needed.  Worse, the cost of the rider reduces the earnings potential for wealth accumulation by eating away at the interest clients would otherwise earn.

Rich Lane and Jeff Affronti, in the October 2015 issue of National Underwriter, cited an example of a buyer who purchased an annuity with $1 million in premium who paid more than $160,000 for this type of rider – and it ended-up being a benefit the client wasn’t even going to use!   They pointed out that the example may be extreme; but, the point is no less valid:  It’s a waste of money if it isn’t used.

In today’s low interest rates, it may not be the best choice to add an income rider over selecting the appropriate rate of return.  The GMWB rider may sound great, but during the accumulation stage the focus should be on accumulation.

If income is needed down the road, a deferred annuity will allow the client to turn-on (annuitize) the income stream.  If they need income now, simply purchase a single premium immediate annuity (SPIA) that allows instant access to funds that can be used to supplement Social Security.  For a guaranteed income, it’s probably the highest payout for the money available today.

Deferred annuities have an income stream ‘built-in’ to the product – they all have a basic fundamental feature that allows the owner to elect an income stream on or before the maturity date – and it doesn’t cost a thing.

Something to bear in mind.   You might find our Income Annuity Primer helpful.

Jim

Optimizing Retirement Income: Combine Actuarial Science with Investments.

6a017c332c5ecb970b017c384ba1fa970b-320wiYou’ve probably heard about “The 4% Rule” – it’s been an ‘accepted’ rule-of-thumb for years that a retiree could withdraw 4% of his or her initial retirement portfolio value each year (increasing for inflation only, not market returns) and could reasonably expect his or her retirement nest-egg to last.

Of course, that’s when the markets seemed to be going up all the time.  In recent years, due to low interest rates and increased market volatility introducing everyone to sequence-of-returns risk, many advisors have dialed back the 4% withdrawal rate to 3.5%

It’s also lead to some back-testing within the industry to determine just what retirees can expect.

Testing with annuities

An FPA Journal paper back in December 2001 by Mark Warshawsky and co-authors John Ameriks and Bob Veres introduced the use of immediate annuities into the retirement discussion.  In his current contribution, Warschawsky  examines  the use of immediate annuities combined with a fixed withdrawal percentage from a total-return portfolio.  The conclusions [1] were:

  • The 4% rule tends to fail when utilized for extended periods, i.e., 30 years, whereas immediate annuities provide continual cash flow, regardless of market or economic
  • A 3.5% or less is often more appropriate than 4% (for obvious reasons).
  • When incorporating an immediate annuity at age 70, the annual payout almost always exceeds the 4% rule and does not risk full income or running out of money – in essence it’s purchasing an unending cash flow that, testing shows, exceeds the 4% rate.

Immediate annuities offer many advantages, but they likely not suitable for those with impaired longevity, liquidity needs, and adequate pension income.  For those who face longevity risk with no pension income, creating a “floor” may make some sense, after all.

Testing with insurance

Industry thought-leader Wade Pfau, in a paper commissioned by OneAmerica, addresses this issue in three scenarios:

  1. Investments combined with term life insurance
  2. Investments, joint and 100% survivor annuity, and term insurance
  3. Investments, single life annuity, and whole life insurance[2]

He compared these three approaches for 35 year-old and 50 year-old couples.  Without getting into the weeds, I just say his study found a “substantive evidence that an integrated approach with investments, whole life insurance, and income annuities provide more efficient retirement outcomes than relying on investments alone.”  It’s not an either/or decision.

Withdrawal strategies vary  beyond what’s  been discussed here, of course, which is why professional help can be very important and the difference of even hundreds of thousands of dollars.

There are some things you should consider before purchasing an annuity.  You can access my report here.    Also, inflation is also an issue worth considering.

It pays to do your homework and have a good guide.  If I can be of help, feel fee to get in touch!

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.  Opinions expressed are those of the author and do not represent the opinions of IFG any IFG affiliate or associated entity.The Independent Financial Group is a fee-only registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

[1] Journal of Financial Planning, January 2016

2 ibid

Retirement in the New World

Fotilla Images

Fotilla Images

Some time ago, PBS aired an excellent program on retirement and how the various generation, including baby boomers, are being affected by their planning – or failure to plan.

It’s an hour-long program entitled, When I’m 65.  The program addresses savings rates, withdrawal rates, investment pitfalls, issues to address, pitfalls to avoid, and even the difference between advisors, including the fiduciary standard – what it means and why it’s different from the ‘suitability’ standard adopted by product sellers.  It also discusses the recent legislation affecting the advisory industry and consumers and even addresses annuities –  insurance-based products widely misunderstood by much of the general public who tend to see things through an ‘either-or’ lens (for additional information on income annuities, you can access a ‘primer’ here).

This PBS program is well worth watching. You may even want to forward it to someone who you think can benefit. You can see it here – scroll down to the video.

There have been questions about the failure of the 401(k) system that have been discussed in the media from time to time since the 2008-9 market meltdown.   This topic was addressed in a Frontline program some time ago and also well worth watching:

I addressed this issue myself in a webinar I recorded last year.  It’s also about an hour long; so, for those of you who aren’t faint of heart, you can access it here.  I think you might find it interesting, as well.

Hope you find all of this worthwhile and helpful.

Jim

 

HEALTH CARE COSTS MAY EAT HALF OF YOUR SOCIAL SECURITY INCOME

6a017c332c5ecb970b01a5116fb332970c-320wiJim Lorenzen, CFP®, AIF®

The 2016 Retirement Health Care Costs Data Report recently released by Healthview Services found that health care costs are continuing to rise, as if any of us are surprised, of course.

According to Marlene Y. Satter, writing for BenefitsPro.com in the July 2016 issue of Retirement Advisor, a healthy person retiring in 2016 can expect to spend $288,400 in today’s dollars on lifetime Medicare Parts B, D, and supplemental insurance premiums.

There’s more.  Ms. Satter indicates that Social Security isn’t going to be of much help, either:

  • A 66-year-old retiring this year will need 57% of the Social Security to cover health care costs.
  • A 44-year-old retiring in 10 years will need 88%.
  • A 45-year-old couple will require 116%!

And, she says, it’s going to get worse!  A 30-year-old female retiring at 65 can expect to pay $548,098… $118,632 more than a male the same age.

Wow.

What to do?

The simple truth for long-term investors is that nothing beats growth; but older investors may be tempted to grab any “sure thing” that comes down the path – thus the popularity of annuities, even at current low interest rates.

Fotilla Images

Fotilla Images

But, before you leap, it’s worth doing some homework.  You can begin with the Income Annuity Primer.  It won’t tell you everything you need to know; but, it’s a start.

Naturally, the Social Security claiming decision can be a costly mistake if not made properly.  We have a LifeGuide on retirement and Social Security you might like, as well. You can get it here.

Enjoy!

 

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

TO ROLL? OR, NOT TO ROLL….

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to pull the retirement cord?  In my last post, I talked about pension options – worth reviewing if that’s an issue for you.

Most, however, are wondering whether or not they should roll-over their retirement plan.   Unfortunately, it’s not a simple ‘yes’ or ‘no’ question.  It depends on your particular situation.

There are good reasons both for and against rolling over your retirement plan to an IRA; and, believe it or not, there may be a reason to take some of your retirement out in cash and pay taxes right now!

The key is to make an informed decision.   If you’re on of those now doing your homework – good for you – you may enjoy reading this report, Six Best and Worst IRA Rollover Decisions.  This report not only discusses those decisions, it will also provide some insight on additional issues worth considering.

I hope you find it worthwhile.  You can download it here>  Click here for your report!

Before you get to the report, however, here’s a bit of news I came across from Mark Dreschler, the president and founder of Premier Trust.  His words:

The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’  bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.

However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.”  The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds, but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.

Hope you find that helpful.  And, don’t forget to download your report.

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

 

Pension Plan Retirement Options

Fotilla Images

Fotilla Images

Jim Lorenzen, CFP®, AIF®

Choosing between pension options can be a difficult task.   Choosing an option that guarantees your spouse pension benefits after your death means extra security but also lower monthly benefits.

On the other hand, choosing a pension option that only pays through your lifetime can provide larger monthly payments, but requires a lump sum to protect your spouse if your spouse  outlives you.   So, what’s the best choice?  You need to get some numbers.

If you’d like see a calculation to help decide which pension option works best for your particular retirement needs,  this is the information you will need to conduct an analysis.

The input regarding your pension and plan retirement options information you’ll need to provide:

  • Your current age
  • Retirement age
  • Your health status and life expectancy
  • Spouse’s current age
  • Spouse’s health status and life expectancy
  • Single monthly pension amount at retirement
  • Joint monthly pension amount at retirement
  • Rate of return on your investments (be careful, many miscalculate and overestimate this because they fail to include all their financial assets)

I’ve put together a series of concept pages on Retirement Pension Decisions you might find helpful.  Just click on this link:  Retirement Pension Decisions Guide

If you need help putting an analysis together, you can schedule an introductory phone call with me.  A reminder:  You will need the above information for our call.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   

Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Investment Returns Can Be Misleading.

financial freedomJim Lorenzen, CFP®, AIF®

This sign represents the off-ramp many pre-retirees are seeking; but, there are usually many unforeseen detours before getting there; and, too often, far too many unpleasant road closings after finding it.

Example:  Average annual (arithmetic) returns tend to reflect how an investment has performed, while it’s compound (geometric) return may be more indicative of how the investor actually fared; but, that’s only part of the story.  In the real world, most portfolios have cash flows.

During our working years, we’re adding money to our investment nest egg; but, at retirement we begin taking money FROM our investments.  This presents a very different dynamic when a down market hits and we’re reducing our assets via withdrawals, too – and, it can change the probabilities of success going forward.

Understanding Investment Returns just might help pre-retirees, as well as those already retired, to better grapple with the sometimes confusing overwhelming data provided by financial product distributors who can sometimes make it into a shell-game.

You can get yours here.

Enjoy.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Rollover Mistakes Could Be Irrevocable!

Debt DespairJim Lorenzen, CFP®, AIF®

According to Cerulli Associates, rollovers from 401(k)s and other retirement plans will cause IRA assets to reach $12 trillion by 2020, and according to retirement expert, Ed Slott, CPA, fully 99% of advisors  – never mind the general public; good luck – know next-to-nothing about the rollover/distribution side of the business.[1]

It’s worth understanding that every time IRA or 401(k) money is touched, it’s a gamble for those who don’t know what they’re doing.  Mr. Slott says it’s like an eggshell – he’s good at metaphors – break it, and it’s over.  He’s right.

Few people realize that if they make a mistake on the rollover, they could lose the IRA entirely – and it’s irrevocable!

A number of years ago, I wrote a report, Six Best and Worst IRA Rollover Decisions, which is available on the IFG website.   One of the mistakes I mentioned was in not recognizing that some people maybe shouldn’t do a rollover at all!

Why?  First, you have to understand what a rollover is – as the well as the difference between a rollover and an custodian-to-custodian transfer.  A rollover happens when money has been withdrawn from a 401(k) and deposited into an IRA.  When that happens, the client is required to do the necessary withholding, pay the tax and wait for a refund the following year.  A transfer of the account directly between custodians avoids that problem; but, there’s a potentially bigger one.

Here’s an example scenario:  If a rollover has been previously rolled over in the past 12 months, the entire account now becomes taxable, and there’s no fix to correct the error.   Someone with a $500,000 or $1 million (or any other size) IRA could be in for a big shock.  Taxes will be due at their new rate – this withdrawal likely puts them in a new bracket – and the money left is no longer tax-deferred!

A direct transfer would have avoided this problem.

Keep Up with New Rules

A lot of seniors have CDs and IRAs at banks.  Last year, you could do one rollover per year for each of your IRA accounts.  No more.  Now, the law is one rollover per year for ALL IRA accounts – and that includes Roth IRAs.  Two rollovers means that one of them will be no good.

Inherited IRAs

Here’s where mistakes can, and do, happen far too often; because the rules are different – and stiffer.

Did you know a non-spouse beneficiary can NOT do a rollover?  A child who inherits a parent’s IRA must be careful.  Often , because the child wants to access the money right away, an attorney  will sometimes put the child’s name on it.  When that happens, that’s the end of the account.  It just became a taxable distribution – check with your tax advisor.   It should have been set up as a properly titled and inherited IRA.   Putting the money into the beneficiary’s IRA is a terrible mistake.

 Beneficiary Designation

Too often, problems happen because people fill-out the beneficiary forms and forget them – never reviewing them.  Failure to do this only puts off the day when siblings get “lawyered-up”  because  the investor didn’t understand the true meaning of the distribution designations.

There’s more to know, of course; but, hopefully this will get you thinking… and doing your homework before making mistakes that can’t be changed.   Working with a professional who’s been down the path before can’t hurt, either.4 Simple Steps Post_001

I did create a short piece not long ago, Four Steps to a Comfortable Retirement.  You might find it worthwhile.

Enjoy!

Jim

 


 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.  Opinions expressed are those of the author and do not represent the opinions of IFG any IFG affiliate or associated entity.The Independent Financial Group is a registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  

[1] 401kSpecialistmag.com, Issue 2 1015.

 

The Road to Retirement = 4 Simple Steps

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

When I was young, my father once advised, “Jim, just save 10-cents out of every dollar you ever earn and you’ll never have to worry about money the rest of your life.”

He always was smarter than I’ll ever be.  He was also right.  But, while I listened, I didn’t follow his advice, which puts me right with most of America.

Behavioral finance is a young science that uses psychology to understand irrational thinking.  DALBAR has been studying investor behavior for over thirty years and concludes that investors can be their own worst enemy.  They usually make bad decisions at critical points.  Example:  During October, 2008, equity investors lost 24.21% while the S&P Index lost 16.8%. [Source: Investment Advisor, June 2016]

Behavioral finance suggests investors remember losses more vividly than gains, even if the gains are greater!

Last March was the seventh anniversary of the bull market – the third longest rally in history.  Yet many have failed to realize much of the rebound due to their of buying back when the market was low.   Many may also believe that we’re in a Fed-fueled market, anyway; but, that’s another discussion.

Sometimes, the value of an advisor is in saving the client more than his or her fee on the downside.  After all, much of what investors need to do is more related to behavior than investment prowess.

4 Simple Steps Post_001Like my dad’s advice, the steps to a successful retirement aren’t simplistic; but, they are simple.

I created a short report, 4 Simple Steps to a Comfortable Retirement.  It’s not earth-shaking, but for many I’m sure it will be well worth reading.

I hope you’ll find it both informative and helpful.

You can access it here.

Enjoy!

Jim

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.