annuities

How to Solve These 6 Problems Your Heirs Could Have With Your Estate

Emily Guy Birken — Wed, 23 May 2018 08:30:40 +0000

Fifty-eight percent of Americans have no will, according to a 2017 Caring.com survey. That means state laws, rather than the wishes of their loved ones, will determine what happens to the property and assets of the deceased.

But before the 42 percent of Americans who do have a will start congratulating themselves on helping their heirs avoid such challenging situations, it's important to remember that even well-planned estates can cause problems for those who inherit. Here are the potential issues your heirs may face, and how you can make sure your final wishes are followed.

1. Your heirs don't know where to find your estate plan

You may have very specific wishes regarding everything from your burial instructions to who will get your mint condition Cal Ripken rookie baseball card — but those intentions can't be followed if your heirs don't know where to find your will and other estate planning paperwork.

Unfortunately, this is a relatively common situation, since many people consider talking about inheritance to be taboo or uncomfortable. Even if your heirs know that you have a safety deposit box in the bank, they may not know which bank, or which branch, or where to find the key.

This is why it's important to discuss your estate plan with your family. Introduce your kids to your attorney so they know whom to call in the event of your death. It's also a good idea to create an "in case of emergency" folder that provides your loved ones with the information they will need about where to find your estate documents, as well as the information necessary to handle your banking, taxes, bills, and other issues if you become incapacitated or pass away. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

2. Your will is too vague

There are number of ways that a vaguely-written will can cause your heirs problems. The classic example would be if the deceased simply states that her jewelry is to be divided among her children. This kind of imprecise language can end up causing a rift among siblings if more than one wants the same brooch — or if anyone feels slighted as to how the jewels are distributed. It is best to make sure valuable items are specifically distributed in your will to ensure that your wishes are followed without causing family strife.

But a vague will can have bigger consequences than hurt feelings for heirs. For instance, sometimes a will specifies that one family member is to inherit all of the money because the deceased had a verbal agreement with that heir to share the money with another family member. (You may remember this as the beginning of the plot of Sense and Sensibility.) Without specific language in place, there is no guarantee that your heir will do what you asked.

These sorts of informal agreements are often created in order to protect assets for minors or other individuals who cannot directly inherit — such as special needs adults who rely on government assistance and would lose it if they were to come into a large sum of money. Since a verbal arrangement can be disregarded, it is far preferable to create a trust to ensure the money goes to the person you want it to. There are a number of different types of trusts that can make sure your wishes are followed, can protect the government assistance of the family member in question, and will allow for no confusion or misunderstanding. (See also: The Fair Way to Split Up Your Family's Estate)

3. Your beneficiaries don't match your will

If you put together a well thought out estate plan in your will, but forget to update your beneficiaries on your assets, then it doesn't matter how detailed your estate plan may be — your assets will be distributed according to the beneficiary designation rather than your will.

This is a common issue for many estates, since relationships often change and account holders don't think to update their beneficiary designations. Everyone should review their beneficiary designations every few years to make sure they are not leaving unintended money to ex-spouses, estranged siblings, or other family members who have drifted out of their lives.

4. You name the estate as a beneficiary

A common error in estate planning is if you name your estate as the beneficiary of your IRA, 401(k), or life insurance. If instead you name a person as your beneficiary on these sorts of products, the assets can pass to your beneficiary without having to go through probate. That means the individual beneficiary will receive their money, no matter how many creditors have claims on your estate. But if your whole estate is your beneficiary, the money must go through probate — and your heirs will get only what is left after creditors have been paid.

In addition, if your estate is the beneficiary of your IRA or 401(k), your heirs must liquidate the investments within five years of your death, and pay the required taxes. If instead an heir is named as a direct beneficiary, they may have the option of delaying the required minimum distributions until they reach age 70½, allowing the money to grow tax-free until then. (See also: 6 Times You Need to Update Your Will)

5. Your non-spouse heir cannot roll over a retirement account

Even if you name an individual as the beneficiary of your IRA or 401(k), if the beneficiary is anyone other than your spouse, there are still some pretty big tax pitfalls that could affect your heir's inheritance. Non-spouse beneficiaries of tax-deferred retirement accounts cannot roll IRA or 401(k) money directly into their own retirement accounts without triggering a major tax bill. That's because a rollover would cause the entire amount to be considered taxable income. For that reason, it's preferable for non-spouse heirs of IRA and 401(k) accounts to take the money as required minimum distributions (RMDs) over a lifetime to minimize the tax bite. This is known as the "stretch" option.

Unfortunately, stretch RMDs are not without pitfalls. If your heirs do not take the correct required amount, there is a tax penalty of 50 percent of whatever they were supposed to take, plus whatever their ordinary income tax rate would be on the amount. To avoid this problem, you can direct your IRA or 401(k) custodian to administer inherited IRAs and automatically take care of any required minimum distributions.

6. Your annuity can push your heirs into a higher tax bracket

Passing on an annuity can be a good way of providing regular income to your heirs after you die. However, annuities also come with a potential tax problem since these products are also tax-deferred. An inherited annuity has untaxed growth, and the insurance company holding your policy will issue a Form 1099 for that untaxed growth to your heir, which means it will be included in the heir's gross income for the year. Depending how much growth there is, this could push your heir into a higher tax bracket, and the annuity payments they receive during the first year may end up being swallowed up by the increase in that year's taxes.

Like this article? Pin it!

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Should Ask Your Financial Adviser at Your Annual Meeting

Matt Bell — Tue, 17 Apr 2018 08:30:09 +0000

The decision to work with a financial adviser is not a one-and-done type of deal. You need to stay engaged and informed. While you probably covered most of your key financial questions in your first meeting or two, you should continue to meet at least on an annual basis. Here are some important questions to explore when you do.

Is my investment mix still appropriate?

When your adviser first put your financial plan together, he or she probably had you fill out a risk tolerance questionnaire or asked you questions directly. That information, coupled with your investment time frame, helped determine your portfolio's optimal asset allocation — the mix of stocks and bonds that's generally best for someone in your situation.

But your situation is ever changing. You're getting older, which could spell the need to make your portfolio a bit more conservative. Or changing market conditions might reveal something about your risk tolerance that the questionnaire couldn't catch. There's nothing like a real market downturn to find out just how risk-tolerant you really are.

So, one key question to keep on the table is whether your portfolio is allocated appropriately. (See also: The Basics of Asset Allocation)

How will you help me navigate the next bear market?

This question could just as easily be, "How will you help me navigate the next bull market?" It depends on where we are in the market cycle. At the moment, we're still in the midst of a very long-running bull. But just as surely as night follows day, bear markets follow bull markets. President Kennedy once said, "The time to repair the roof is when the sun is shining." Right now is a good time to talk about your adviser's plan for the bear market to come.

When the market changes direction, are you expected to grit your teeth and ride out the storm? Or does your adviser plan to make changes to your investment holdings? If so, what changes will be made and what will trigger the need to make them? If your adviser plans to make adjustments, hopefully he or she will base them on clear, objective criteria. Make sure you understand them.

This is all about expectations management. The better you prepare yourself for challenging market conditions and the actions your adviser may take to steer your investments through those conditions, the better you'll be able to sleep at night when they appear. (See also: 6 Investment Truths to Remember When the Stock Market Is Down)

What if a bear market hits at the start of my retirement?

If you're within 10 years of retirement, it's not too early to ask this question. For the unprepared, a bear market that hits right at the start of retirement can be devastating. This is why some advisers recommend taking a "bucket approach." One bucket contains cash, or very conservatively invested money. It should contain enough to cover three to five years' worth of the living expenses that your adviser predicts you'll have once you've spent your monthly payouts from Social Security or other guaranteed income sources. The other bucket is more traditionally invested.

When the market is in decline, you use the first bucket to draw money for living expenses. That way, you can avoid selling more volatile investments while they're falling or recovering. When the market is growing again, you draw from that bucket and also use it to replenish your cash bucket.

What's your adviser's perspective on this approach? What else does he or she recommend if the start of your retirement coincides with a market downturn?

What's my Social Security contingency plan?

Your financial plan surely includes an assumption about the age when you plan to take Social Security. If you intend to wait at least until your full retirement age (67 for anyone born in 1960 or later), what contingency plan does your adviser recommend in case you're not able to wait that long?

Many of today's retirees left the workforce earlier than they expected due to medical problems, the need to care for a loved one, or a corporate downsizing. Your plan should include a contingency in case something similar happens to you. (See also: How to Plan for a Forced Early Retirement)

Should I consider an annuity at some point?

An immediate annuity purchased upon retirement or shortly thereafter could provide some invaluable peace of mind, especially if it covers much or all of your essential living expenses. Generally, what does your adviser think of immediate annuities? And how does he or she recommended sorting through the myriad decisions related to annuities, such as: whether to base benefits on your life only or your spouse's as well, whether to include an inflation rider, whether to include a "period certain" provision whereby benefits would continue being paid to your spouse or heirs even after your death.

What annuity companies does your adviser recommend and will he or she earn a commission from the sale of an annuity provided by one of those companies? Are there other annuities available to you that may offer better terms but no commission to your adviser?

Also, what does your adviser think of longevity annuities? This type of annuity helps protect against the financial risk of a long life. You might purchase it for a lump sum when you are 65 or 70, with benefits not kicking in until you are 80 or 85. Should you plan to purchase one?

Just because you're working with a financial adviser doesn't mean you can think of yourself as having outsourced your financial life. Stay involved, see it as a partnership, and keep asking informed questions.

Like this article? Pin it!

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways to Make Long-Term Care More Affordable

Matt Bell — Wed, 13 Dec 2017 09:30:09 +0000

A long life can be both a blessing and a financial burden. As our health inevitably declines over time, medical expenses can skyrocket. What follows are several ideas for keeping later-life health care costs under control.

1. Save for health care like you save for retirement

It's common for people to save for their retirement. Far less common is the habit of saving for future health care costs. And yet, a growing number of people have access to a triple tax-advantaged way to do just that — a health savings account. If you have a high-deductible health insurance policy, that's you. (See also: How an HSA Could Help Your Retirement)

Money you contribute to such an account is tax-deductible, and assuming it's ultimately used for health care expenses, earnings and withdrawals are tax-free. If you don't spend all the money you contribute each year, the balance can be carried over from year to year. With some account providers enabling you to invest the money, you could build up quite a balance.

That money could be used to help pay health care costs in your later years, including some expenses for long-term care, whether provided in your home or a nursing home. The money also could be used to pay the premiums for Medicare Parts A, B, C, and D, and at least a portion of long-term care insurance (LTCI) premiums.

2. Don't over-save

Headlines about later life health care costs can strike fear into your heart and wallet. According to a recent Fidelity Benefits Consulting study, a 65-year-old couple retiring in 2017 will need $275,000 to cover their health care costs throughout retirement — up from $260,000 for couples retiring in 2016. And that's just for normal older age health care; it doesn't include the cost of long-term care.

But let's take a look past the headlines. Assuming a 20-year retirement, $275,000 works out to $1,146 per month. While people's health care costs vary widely, $1,146 is less than some families pay right now for high-deductible health insurance premiums plus monthly contributions to a health savings account.

Instead of relying on headlines about average health care costs, estimate your later-life health care costs to make sure you aren't obsessively over-saving out of fear. You can go a long way toward that by getting some Medicare estimates. Pairing an Original Medicare plan with a Medigap policy or choosing a Medicare Advantage plan can take away a lot of uncertainty regarding out-of-pocket costs for deductibles and copays.

3. Purchase some long-term care coverage

One of the main reasons people end up in nursing homes is dementia, and one of the primary risk factors for getting dementia is a family history. If your parents or grandparents had it, it may be wise for you to pick up at least some long-term care insurance coverage.

Just keep in mind that buying a long-term care insurance policy is not an all or nothing proposition. You could opt for enough coverage to take the sting out of long-term care costs, while still keeping your premiums manageable.

Choosing a longer elimination period (how many days you have to be in a nursing home before benefits begin) will lower the cost of the policy. Other ways to save include opting for a lower daily benefit, a lower maximum benefit period (compare the costs of one, three, and five years as opposed to lifetime coverage), and doing so without inflation protection. (See also: Is Long Term Care Insurance Worth It?)

4. Buy a deferred annuity

The risk of getting Alzheimer's disease goes up with age. According to the Alzheimer's Association, 3 percent of people between ages 65 and 74 have the disease, whereas 32 percent of those over age 85 have it.

One way to manage the financial risk of an age-related disease such as Alzheimer's is to purchase an advanced-life deferred annuity. With this product, you pay a relatively small lump sum premium now in order to secure a guaranteed monthly benefit down the road. For example, a 65-year-old may be able to pay $10,000 now in order to receive $575 per month beginning at age 80. By comparison, if a 65-year-old wanted that much per month right now via an immediate annuity, he or she may have to pay $100,000.

5. Move closer to adult children

One more idea for keeping long-term care costs down is to live near or with your adult children during your retirement, assuming they are in a position (and are willing) to help you. Living close to a caring relative can lessen your dependence on — and the cost of — outside help for long-term care.

Like this article? Pin it!

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Make Sure You Don't Run Out of Money in Retirement

Philip Brewer — Fri, 26 May 2017 08:30:09 +0000

An annuity is a stream of fixed payments that's guaranteed, often for as long as you live. Having an annuity can make retirement more secure, but it's hard to recommend them as investment vehicles, because almost every annuity on the market is a terrible investment. They tend to be sold by salesmen, so they're often loaded with fees. And, because being upfront about the fees would make them hard to sell, these fees are obscure (often outright hidden) and are typically different for every product, making it especially hard to comparison shop. (See also: Should You Get an Annuity?)

But my experience these past few years — helping older relatives with their finances, and starting to take the little pension I earned as a software engineer — has given me a new perspective on annuities. Having an annuity is more than just nice: It's wonderful! It's just buying them that's usually terrible.

Fortunately, there are a few that are worth buying. You don't hear about them often, because they don't siphon off a big chunk of your investment to pay a salesman, so salesmen don't push them.

Why annuities are great

It used to be that anyone with a good job retired with an annuity in the form of a pension. This is how I've gotten my recent experience with just how great it is to have an annuity: All my older relatives are now receiving pensions.

You never outlive your income

The main thing that's great about an annuity is that having one means you're never going to be broke. Even if you overspend and run down your savings, even if the stock market crashes or you make terrible investment decisions and your investment portfolio takes huge losses, you'll still get that monthly check for as long as you live.

You don't need to have an annuity to arrange that — you can live off capital in a way that makes it last the rest of your life — but an annuity makes it much easier.

They can raise your income

The other thing that's great about an annuity is that it can, at least potentially, be more money to live on. See, the only safe way to live off capital is to just spend the income from your investments. But that's not much money (especially these days).

If you knew how long you were going to live, you could spend down your capital so that you'd die with just enough money to pay off your last month's bills. But since you don't know how long you're going to live, you have to make a conservative estimate, holding back enough capital so that you won't go broke even if you live to 100. (Of course even that might not be enough. What if you live to 114?)

The company that provides your annuity has a much easier job. They don't need to know whether you'll live to 97 or kick the bucket at 67. They count on the fact that the average person will live an average life span. They can arrange the terms of the annuities so that the payouts don't exhaust the total pool until the last person dies. The fact that some people die the month after their pension starts means that there's enough money to pay for the people who go on to live for decades.

Offset against that is the fact that the company that's providing your annuity needs to make a profit, and it also needs to hold back a reserve against the possibility that it'll get unlucky and a bunch of their customers will live longer than average — but both of those factors are relatively small.

Annuitize, but how much?

If you accept the idea that you probably ought to have an annuity of some size, the next question is: How big should the annuity be?

At one extreme, you could just annuitize all your money — take all your savings and investments (except your checking account and your emergency fund) and buy an annuity. Then you'd know what your income would be for the rest of your life and you could budget for it.

I recommend against that. There are many reasons why it's worth having some capital. Your capital earns an investment return and it also provides a measure of safety as a backup to your emergency fund. It makes it possible to fund expenses beyond your bare-bones budget. Perhaps most important, having some capital saves you money in all kinds of different ways — because you have funds on hand, you can take advantage of deals, you can avoid high-interest borrowing, and you have money to put down a large security deposit in cases where that will save you money.

At the other extreme, you could annuitize none of your money and just live off your capital. I've just explained the downsides to that.

You want to be somewhere in the middle. With a modest annuity, you're protected from running your income down to zero, and yet you can preserve some amount of capital.

My advice is this: You should annuitize enough to cover your rock-bottom expenses, the lowest amount you could live on indefinitely. That way, you're putting yourself in a position where you can be sure you can get by no matter what happens to your investments, while preserving enough of an investment portfolio to fund your other life goals — travel, making a major purchase, leaving an estate to your heirs, etc.

Before you start shopping for annuities, be sure to take into account any annuities you already have. But unless you're old, and even then only if you had a pretty good job at a pretty big company for many years, you probably aren't going to have a great pension. (If you're only kind of old, and worked at a pretty big company for a few years before they all phased out their traditional pensions in the early 2000s, maybe there's a small pension waiting for you. If so, that's great. Even if it's not enough to live on, it's a very positive contribution to your retirement income.)

However, most people reading this probably won't get a good pension.

Fortunately, there is an annuity you very likely do have.

The annuity you already have

You almost certainly already have an annuity in the form of a national pension scheme, such as Social Security. The amount of Social Security you will get depends on your own employment history. For most people, it will provide a large fraction of the "rock-bottom expenses" I recommend you cover with an annuity, but you can generally expect there to be some gap.

If you have an employer-sponsored pension, even a small one, it may well cover the gap. If you don't, I recommend that you cover it with an annuity that you buy.

How to buy an annuity

As I said at the beginning, most of the annuities you can buy are terrible investments, but there are good ones. It is possible to buy an individual annuity and get an OK deal. It's just hard because the companies that sell them make it virtually impossible to compare one annuity to another.

This is especially true for the sorts of annuities that are most like a pension: The ones set up so you make a payment every month starting in your 30s or 40s, then get a check every month starting when you're 65.

Those are called deferred annuities (because you defer getting your money until age 65), and they're always terrible. They always have what are called "back-end" fees — money that the salesman gets to keep when you figure out that you've made a terrible deal and want to get (some of) your money back. The rules on back-end fees are always different.

To make it even harder, these sorts of annuities are usually bundled with some sort of life insurance (supposedly so that if you die before you retire your estate won't "lose" all the money paid into the annuity) — and of course the details of those insurance policies are always different as well.

Comparison shopping

It is possible to buy an annuity in a way that does allow you to compare them. Don't buy one with monthly payments. Instead, save and invest the money in the stock market yourself during your working years. Then, when you're ready to retire, buy what's called a "single premium immediate annuity" — you put up a big chunk of money today, and then start receiving monthly payments immediately that last for the rest of your life. (The monthly payments, of course, should equal the gap you identified between your Social Security and your rock-bottom budget.)

That is something that's easy to compare: How much do you have to pay today for a stream of income that starts next month and lasts the rest of your life? You can get a few quotes and pick the best deal.

These sorts of annuities usually don't have the life insurance policy that supposedly protects against your dying before you start taking payments, because the payments start immediately. That's good. Bundling in life insurance just makes it harder to compare prices. If you need life insurance, buy a life insurance policy separately.

Be very careful of letting them include any sort of survivor benefit, because that can also make the annuities harder to compare (although as long as the rules are exactly the same, it is at least possible). One alternative, if you need a survivor benefit, is to buy a life insurance policy that will pay off enough for your spouse to buy his or her own annuity.

As an aside, let me mention that the annuity salesmen among you are going to jump in and point out that you're giving up an important tax advantage if you only consider an immediate annuity. This is technically true, but in fact is pretty unimportant. Let me just say this: If you are maxing out your 401(k), and your IRA, and your Roth IRA, there is an opportunity to tax shelter a bit more money through an annuity contract. In practice, I'm willing to bet that the tax advantage will never equal the fees you're going to end up paying.

If you do save your money in a 401(k) or IRA, there are tax rules for using that money to buy your annuity. Follow the rules and you won't owe any taxes when the money is used to buy the annuity. You will, however, pay taxes on the annuity payments when you receive them (just like you would if you'd taken distributions from the tax-deferred plan directly).

Where to buy

Pretty much any life insurance company will sell you an annuity, but I only know of two places to get a good one: Vanguard and TIAA-CREF. (There used to be a third, but Berkshire Hathaway got out of the business a few years ago.)

The main problem with buying directly from an insurance company is just that their annuity sales operations are organized around their annuity salesmen, who will immediately start trying to sell you something that's more profitable (to them) than a single premium immediate annuity — that's the step you avoid by going through Vanguard or TIAA-CREF. (They also have enough buying power to get especially good rates, because they bring in large numbers of customers.)

If you're sure you can bear up under the sales pressure, there's no reason not to get quotes directly from the insurance companies. (Just because I don't know of any other good places to buy one doesn't mean there aren't any.) Insurance companies that sell annuities will be very easy to find — just do an internet search for information about annuities and you'll get a dozen ads for them and for online tools to compare their offerings.

You're handing over a large fraction of your wealth and counting on the insurance company to be around for the rest of your life, so you want to have considerable confidence in the financial soundness of the company you pick. I would not consider any company rated less than A by the insurance grading firm A.M. Best, and I'd be happier with one rated A+.

Buy when rates are high

To buy an annuity, you have to put up a pretty sizable chunk of cash. (Vanguard quotes the cost today to a 65-year-old male buying a single premium immediate annuity of $1,000 a month for the rest of his life as being $180,052.)

Unless you're rich, the cost of an annuity that covers your rock-bottom expenses is going to be a large fraction of your entire retirement savings — which is OK, because it's going to be a large chunk of your entire retirement income.

The insurance company that sells you your annuity is going to invest that sizable chunk of cash in a portfolio of stocks and (mostly) bonds, and then use the dividends from those stocks and (mostly) the interest payments from those bonds to pay your annuity. Because of this, an annuity is much cheaper when interest rates are high.

If you bought an annuity right before the financial crisis, you made out very well. If you wanted to buy one in the past eight or nine years, you probably found that they were incredibly expensive. But in the current era of rising interest rates, annuities are becoming more affordable again.

Still, if you're approaching retirement age, understand that there is no rush. Figure out your rock-bottom expenses — and then live with that budget as an experiment. Maybe you'll find that you'll need more than that in retirement. Maybe you'll actually need less. Do some comparison shopping. Take your time. Then, when you've got a pretty good handle on the expense of your retirement lifestyle, at a time when interest rates are up a bit and you're ready to quit working, go ahead and buy that annuity.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Retirement Products That Aren't Worth Your Money

Tim Lemke — Tue, 19 Jan 2016 14:00:03 +0000

Saving for retirement is actually quite simple. But there are many products out there that make it seem more complicated than it actually is. Others simply cost more than they're worth.

As you approach retirement age, you may hear about all kinds of ways to ensure that you have enough money to continue to live comfortably. But steering clear of the following products may ultimately help you keep more money in your pocket.

1. Variable Annuities

A variable annuity might make sense for those approaching retirement, but generally doesn't for those who are already retired. That's because the idea behind a variable annuity is that you invest a sum of money and get a stream of income at a future date. Try to access your money early, and you might pay a penalty. Current retirees are better off with an immediate payout annuity, which requires you to pay an up-front lump sum, and then provides regular payments immediately. It's worth noting that variable annuities can have fees of as much as 3.5%, according to Kiplinger.

2. Reverse Mortgages

We've all seen the ads on television, and the concept seems simple enough: You use the equity in your home to help fund your retirement via a guaranteed income stream. Reverse mortgages are a legitimate retirement product, but there are downsides, including high closing costs and fees. Plus, the equity in your house won't last forever, and by tapping it, you leave less for your heirs when they inherit the home. (See also: 5 Downsides of a Reverse Mortgage)

3. Long-Term Care Insurance

It's daunting to think about the costs of your care as you age. Assisted living and nursing home care can cost anywhere from $40,000 to $90,000 a year. A long stay in a nursing home might mean you'll outlast your savings and leave very little to your family.

An insurance policy for long-term care might seem like a good investment, but it's important to know that the premiums can run upwards of $2,000 annually for a healthy couple at age 60. If your golden years are healthy and more independent than you expected, you may pay more in premiums than what your care would cost. Retirees are likely better off investing well and trying to save as much as possible for their retirement — unless they have good reason to believe they'll make use of long-term care facilities or services.

4. Whole Life Insurance

On the surface, whole life insurance seems like a swell product: You get life insurance along with some tax-free growth. But whole life insurance is generally more expensive than term life insurance, and the investment returns are usually less than what you might find elsewhere.

5. Junk Bonds

It certainly makes sense for retirees to have bonds in their portfolios, but they should steer clear of these types of high-yield bonds, which don't perform particularly well unless the economy is doing great. And if the economy is doing poorly, they could be crushed. If you're close to retirement and still looking for yield, take a look at stable dividend stocks instead. If you want safety, go with lower-risk bonds or cash.

6. Non-Traded REITs

Real estate investment trusts (REITS) can be great investments for retirees, because they offer high dividend income with low volatility. However, there are some REITs that are public, but not traded on any public exchange. The Financial Industry Regulatory Authority has issued a warning about these products, because upfront fees are high, and they are often difficult to sell. If you want real estate in your portfolio, look to some of the larger REITs like Simon Property Group or Boston Properties, or find a good REIT mutual fund or ETF.

Where are you keeping your retirement funds?

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Safe Investments That Aren't Bonds

Tim Lemke — Wed, 03 Jun 2015 11:00:10 +0000

So you have a good nest egg built up and you want to protect it. Bonds are a popular choice for those looking for stability, but these days, they are being viewed with more skepticism as interest rates may soon be on the rise.

What to do? There are plenty of other places to put your money with relatively low risk. Consider these investments that offer predictable returns and some peace of mind for investors.

1. Cash

I know, it's boring. But if you truly don't want to see your nest egg decline, there are worse things than placing your money in a bank. Interest rates are near historic lows, so you won't be getting much of a return, but inflation is also pretty low right now, so cash isn't really losing value, either. To get a slightly higher return than a run-of-the-mill savings account, consider looking into certificates of deposit, some of which allow you to withdraw money without penalty.

2. REIT Stocks

Shares of real estate investment trusts, or REITs, can be a stable part of an investment portfolio because they're known for high dividends (though not necessarily growth in share value). REITs are a way for an individual investor to have real estate in their portfolio without needing to buy property. They are furthermore required to pay out all of their taxable income in the form of dividends. This makes them a great option for income investors, though it's still important to diversify your portfolio to protect against a crash in the real estate sector (like we saw in 2008). Remember that REIT dividends also count as ordinary income for tax purposes.

3. Lending Club

Lending Club is an increasingly popular investment vehicle that allows an individual to invest in other people's debt. You can build a portfolio of loans based on your own risk tolerance, and there's a good chance you'll make money because Lending Club only approves applications from borrowers with solid credit. Lending Club claims that 99% of account holders with more than 100 notes earn positive returns. (See also: Everything You Need to Know about Investing with Lending Club)

4. Your Electric Company

Investing in utilities such as your electric provider will historically bring you steady, if unspectacular, returns. Generally, utilities pay above-average dividends and are a reliable bet because they provide products and services that we all use. If you are unsure of what specific companies to invest in, consider buying into the Vanguard Utilities Index Fund (VPU) or the iShares US Utilities ETF (IDU).

5. Annuities

There are many different types of annuities, but most of them operate on the principle of paying out a steady stream of income for a set period of time — or even the rest of your life. Some annuities are designed to give you maximum payments each month, while others are designed to offer additional tax-deferred savings if you've already maxed out your other retirement contributions.

6. Preferred Stock

Shares of preferred stock can go up and down just like common shares, but offer some advantages for those looking for more stability. Generally, preferred stocks offer a fixed dividend, and owners of these have priority over the owners of common shares if a company goes bankrupt. If you're interested in preferred stock, but unclear on what company to invest in, consider a mutual fund or ETF, such as the iShares U.S. Preferred Stock ETF.

7. Consumer Goods

Everyone needs food and clothing. And our economy is built on the idea of people buying stuff, after all. That's why if you invest in consumer goods, you'll probably see a steady and solid investment return even when the rest of the stock market is all over the place. Companies like Procter & Gamble are good bets, or you could invest in a vehicle such as the iShares Dow Jones U.S. Consumer Goods Sector Index Fund (IYK.)

8. Health Care and Pharmaceuticals

People aren't getting any younger, and Americans are going to need health care regardless of the economic environment. The Vanguard Health Care Fund (VGHCX) has generated a 13% return over the last decade and nearly 30% over the last year. Companies like Johnson & Johnson and Pfizer have been some of the most reliable performers in the stock market for decades.

9. The Broader Stock Market

Yes, the conventional wisdom is that you should avoid investing in equities if you want to protect your assets. But there is an argument to be made that investing in the S&P 500 is as safe an investment as anything else. Consider that the value of the S&P 500 has risen every year in the last decade, except for one (2008). In fact, since 1980, the market has brought positive returns in all but six years. Investing in index funds or ETFs such as the iShares Total Market ETF is anything but a risky move.

What alternatives to bonds do you use to provide stable returns?

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Know What Annuities Are? You Might Be Missing Out

Damian Davila — Wed, 23 Apr 2014 08:24:18 +0000

When it comes to finance, most people like stability.

Having the certainty of when and how much cash you will receive for a set period of time provides you peace of mind that allows you to focus on more important things. This is the reason that annuities may be an attractive long-term source of income for some investors. (See also: 5 Super Safe Investments)

Let's take a look at what are annuities and when they are a good choice.

How Annuities Work

Annuities are contracts between you, referred to as the annuitant, and a financial institution, such as a mutual fund or insurance company. In these contracts, you commit to make a lump sum payment or to follow a schedule of periodic payments in exchange for a guaranteed income stream. Under most annuities, you have to hold the annuity until age 59 1/2.

The financial institution, often an insurance company, uses your annuity contributions to make investments based on your target start date for your distributions. Financial institutions make money from annuities by charging recurring monthly, quarterly, or annual fees, which are all deducted from your annuity funds. The more complex the annuity, the more additional fees you can expect. Additionally, there is the infamous surrender charge. If you decide to cancel your annuity during the surrender period (ranging from 4 to 15 years), then the financial institution is entitled to keep a portion of your deposits.

Despite all of these fees, do not hesitate to negotiate for a better deal. The annuity business is very competitive so make sure to get several quotes. Insurance agents are able to increase your annuity rates or lower your fees, but only if you ask. (See also: Costs You Should Always Negotiate)

Tax Deferral Benefit

During the "ramp-up" period, all monies contributed to an annuity grow tax-deferred until they are withdrawn. You are still responsible for applicable income taxes on your contributions, but your earnings are tax-free until withdrawal. Unlike retirement accounts, annuities have no limits on how much you can contribute. The tax deferral benefit and absence of contribution limit make annuities attractive for wealthy individuals as retirement planning tools. Most annuities allow you start collecting payments at age 59 1/2, but there are some exceptions (e.g. immediate annuities). The financial institution issues distributions for a fixed amount of time (usually 10, 15, or 20 years) or until the death of the beneficiary.

You are responsible for income taxes on earnings only when you start receiving distributions. Note that a fixed amount of each distribution is not taxable because it is considered to be a return of your contributions, which were already subject to tax. This allows annuitants to defer applicable income taxes until they are in a lower tax bracket during retirement. (See also: The 10 Worst Tax Moves)

When Are Annuities a Good Choice?

Annuities offer an option for those who have maxed out their contributions to other retirement accounts. They fall under three broad types: fixed, variable, and indexed. Each type offers different income potential and is appropriate for a different purpose and reason. Let's start with fixed annuities.

Fixed Annuities

Fixed annuities offer you the most stability because they guarantee a stream of income. The financial institution holds all of the market risk. This is why fixed annuities are a good choice for people that are very risk averse when it comes to their retirement planning.

Within fixed annuities, there are two subtypes: immediate annuities and deferred annuities. Immediate annuities require a single and very substantial lump sum payment, but they start issuing distributions after a short period of time. This makes immediate annuities a great choice for people that are very close to retirement age. (See also: Boost Your Retirement Savings Fast)

On the other hand, deferred annuities require several smaller payments over several years. These annuities start issuing distributions once you turn age 59 1/2. If you receive distributions earlier than that, then the IRS applies an additional income tax. Young workers should look into deferred annuities so that they can take advantage of the tax deferral benefit.

Fees and Rates:

Fixed annuities typically offer a 5% return.
When investing in deferred and immediate annuities, you can expect around 1.5% of your total investment to be assessed towards expense charges. For example, if you invest $10,000, then you can expect about $150 to go towards expense charges.
When investing in deferred annuities, you can expect the surrender charge to be around 7% of the total investment if the annuity is cashed during the first year. The surrender charge usually decreases by 1% per year until it reaches zero. Remember that withdrawals before age 59 1/2 receive an additional 10% income tax by the IRS.
The minimum investment requirement for deferred and fixed annuities is typically between $1,000 and $5,000. For example, Prudential requires a minimum of $3,500 for an immediate annuity.

Variable Annuities

Unlike fixed annuities, variable annuities offer you a higher income potential. The catch is that your return is no longer guaranteed and you do hold part of the market risk from the annuity investments. Variable annuities provide you more freedom in selecting investments. Some variable annuities offer a death benefit so that the beneficiary is guaranteed your original investment, in case you pass away.

Variable annuities are useful tools for estate planning. If you would like to set up a steady source of income for your children, grandchildren, then variable annuities may be a good choice. It is a good idea to add the death benefit to your annuity to protect your estate.

Additionally, variable annuities are a good match for people who would like to have a more "hands on" approach on directing their investments for retirement. (See also: Awesome, Free Investment Tools)

Fees and Rates:

On the average, variable annuities provide a 7.1% return.
They offer a minimum return on your investment in case of your death (known as the "death benefit") while not forgoing excess gains in case of good investment performance.
Financial institutions may or may not charge a fee for the death benefit. Make sure to check this when shopping for a variable annuity.
On top of the average 1.5% expense charge, you can expect an extra 0.82% of your total investment to go towards subaccount management fees. The greater availability of investment options comes with an extra cost per selected subaccounts. This means that if you invest $10,000 in a variable annuity, you can expect to pay at least $232 in fees.
When investing in variable annuities, you can expect the surrender charge to be around 7% of the total investment if the annuity is cashed during the first year.
The minimum investment requirement for variable annuities is typically $10,000. For example, Fidelity requires $10,000 for a variable annuity.

Indexed Annuities

Under this scenario, the annuitant receives distributions that are indexed to a market benchmark, such as the Dow Jones or the S&P 500. Indexed annuities often offer a minimum return, but it depends on the financial institution issuing the annuity.

Indexed annuities are a good choice for people that would like to have just a bit more market exposure than that of fixed annuities but less than that of variable annuities. Indexed annuities are full of additional rules and fees.

Fees and Rates:

Most indexed annuities put a cap on your return:
- If your selected market benchmark returned 12% over a period, and your annuity has a cap of 6%, then you only get 6%. The cap of an indexed annuity determines the maximum return you can get on an indexed annuity.
- Another way that an indexed annuity can limit your return is through the participation rate, which is the annuity's participation in the index's return. For example, if the annuity's participation rate is 90% and the benchmark went up by 5%, then your return is 4.5%.
- On an indexed annuity, you can expect a spread fee. This is a percentage fee that may be subtracted from the gain linked to the market benchmark. If the benchmark gains 15% and the spread fee is 5%, then your annuity return is 10%.
The minimum investment requirement of an indexed annuity ranges between $5,000 to $10,000. For example, Jackson requires $5,000 and $10,000 for indexed annuities, depending if you meet its qualification criteria.

Bottom Line

From these three broad categories: fixed, variable, and indexed, you can find all kinds of different annuities. In general, the terms of fixed annuities are easier to understand than those from variable and indexed annuities. However, the return of a fixed annuity is lower than that from variable and indexed annuities.

No matter the type of annuity you prefer, the consensus among financial advisers is that you should not choose an annuity within an existing retirement account because those products already have a tax-deferral benefit. Plus, the management fees of annuity within a retirement account are quite high, particularly the more features you add to your annuity.

Different financial institutions provide different annuity features. Make sure to read the fine print and choose one that matches your level of risk tolerance, your investment objective, and your desired start date for distributions.

What is the type of annuity that appeals to you?

Like this article? Pin it!

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Retirees Are Using Annuities Instead of Early Social Security

Lisa Cintron — Wed, 20 Oct 2010 12:00:12 +0000

As some Baby Boomers reach retirement age, they have postponed taking Social Security until later in their lives. Social Security attempts to average benefits over the expected lifetime remaining for its participants. Taken in concert with recent economic problems — which have caused some senior citizens to return to work — many senior citizens have become more interested in how annuities can fulfill their retirement investment goals.

How has the recession impacted retiree investment choices?

Many responsible senior citizens (who own stock) have calculated their retirement income based on an expected rate of return. When the subprime mortgage crisis surfaced, the Dow Jones Industrial Average (DJIA) declined by 46.22% from a near-term high of 14,164.53 on October 9, 2007 to a near-term low of 6,547.05 on March 9, 2009. This stock decline destroyed much of the value in investment portfolios, which had been saved for retirement purposes.

Stock investments can require years before they return profits. Unfortunately, many senior citizens don't have a lot of time to wait for their stock portfolios to regain their value. Some have "unretired" and returned to work; others are considering different investment options, like annuities.

Postponing Social Security

Social Security check amounts are calculated using an average of health, life expectancy, and wealth for beneficiaries based on a "normal" retirement age according to their birth dates. If you retire "before" your "normal" retirement age, then Social Security reduces your benefits by five-ninths of 1% for each month before your "normal" retirement age (up to 36 months). For example, if you retire nine months before your "normal" retirement age, then your Social Security benefits would be reduced by 5%.

Therefore, if you retire at age 62, then the government calculates that you will have a longer period of time to enjoy the benefits, so it reduces your benefits. Generally, if your health and wealth are better than average, it makes sense to retire later; if your health and wealth are worse than average, it makes sense to retire earlier.

These are the most common reasons to wait to draw on Social Security:

You have good health.
You have ample savings.
You are single.
You are working.

If you work, Social Security benefits are reduced when you make more than the "annual earnings limit" (AEL) — the government deducts $1 for every $2 earned above the AEL. Thus, some seniors must carefully estimate whether continuing to work while receiving Social Security benefits makes economic sense.

What are the different types of annuities?

An annuity is an investment whereby an investor deposits a lump sum with an insurance company, which guarantees a retirement income stream.

Deferred Annuity: Payments begin at later date
Equity Indexed Annuity: Rate of income stream depends on market index (i.e., the Standards & Poor 500)
Fixed Annuity: Fixed income stream for fixed period of time
Immediate Annuity: Payments begin immediately
Variable Annuity: Rate of income stream depends on value of underlying securities.

How do annuities help retirees with monthly income?

Retirement can be a shock if preparations were not made ahead of time to ease the transition. While you work you maximize your income; once you retire, you conserve your wealth to make it last the rest of your life. An annuity helps retirees ration wealth by replacing the former working income with a retirement income. Retirees can adjust more easily to retirement knowing that they are generating annuity income that covers their expenses.

In a certain sense, an annuity is a reverse life insurance policy. While a traditional life insurance policy provides a lump sum payment for premature death, an annuity provides retirement income for a long life.

How can annuities help retirees with lifetime income?

Actuaries calculate that the average person who is aged 65 has an average life expectancy of 20 years. With an annuity, retirees can designate the time frame that this investment covers in order to provide a "guaranteed income for life." An annuity ensures that invested money is working for the retiree; it can be purchased in conjunction with other investments — stocks, bonds, and real estate — to provide liquidity and security.

Basic procedures for annuity investing

After carefully researching annuities and determining which type of annuity provides the desired monthly income — "Fixed" versus "Variable" rate of returns, and "Immediate" versus "Deferred" payment schedules — a retiree should decide on a specific company and product to invest in. Finally, the senior will be required to pay a fixed lump sum to an insurance company for the benefit of receiving the annuity's guaranteed income stream for a designated period of time. It is that easy.

Guest Post Blurb:

This is a guest post by Lisa Cintron. Lisa is Executive Vice President at AdvisorWorld.com, a social community of consumers and financial advisor who engage in conversation to help you research financial topics.

This article is from Lisa Cintron of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How much do I need to retire? How much can I spend?

Philip Brewer — Wed, 09 Jan 2008 15:23:03 +0000

Especially for people hoping to retire early, but also those just hoping they can retire at all, there's the question, "How much money do I need?" People who are already retired want to know "How much can I can spend, without running out of money?" Some people refer to the answer to the first question as "The Number." Really, though, these are both the same question.

There are a lot of ways to calculate your number. They all suffer from the same fundamental problem: nobody knows the future. To come up with the correct number you'd need to know (at a minimum) how long you'd live and what interest and inflation rates will be between now and then. Even if you knew those things, though, reality could come back and bite you.

Still, even without knowing the future, it's possible to take a useful stab at calculating your number. Here are a few of the classic methods.

Living on income

If there were no inflation, and you weren't desperate to retire early, this would be the number one choice: Save and invest until your interest and dividends reach the point that they cover your expenses. Once that happens, you're done and you can retire.

Of course, there is inflation. To deal with that, you need to reinvest enough of your income to replenish your starting capital each year.

For example, if your number were $1,000,000 and inflation turned out to be 2%, then you'd need to reinvest enough of your income that your capital was boosted to $1,020,000 by the end of the first year. As a practical matter, what you need to do is estimate future inflation and make sure that your income covers not only your expenses, but does so with enough left over to make those reinvestments.

If the government's inflation data could be trusted, this wouldn't be too hard. In fact, there'd an easy way to do it: invest in TIPS (Treasury Inflation-Protected Securities). They automatically do exactly what I've described--the face value of the bond adjusts so as to keep the inflation-adjusted value of the principle constant.

Unfortunately, the government's reported inflation numbers have been seriously understating the actual rise in the cost of living just lately. I don't tend to assign malice to this. (I've read some of the papers written by the economists at the Bureau of Labor Statistics, and they sound to me like sincere people trying very hard to produce honest numbers.) In the final analysis, though it doesn't matter what the overall inflation rate is. What matters is your own cost of living. You need to adjust your capital by however much your cost of living is going up, or else you're going to gradually fall behind.

Having some of your money invested in stocks can cushion this--there's a good chance dividends will rise, and there's a good chance the values of the stocks will rise. There's no guarantee that it'll match inflation (or even that it will happen at all), but it has generally happened for decades now.

Two other gotchas to beware of:

Be sure that you know what your expenses actually are--any unexpected ones (taxes? a new car, new roof, new furnace? health insurance?) eat into your standard of living (or worse).
Be sure your income is secure--it can be very tempting to take a little extra risk, to boost your standard of living, but that can bite you badly.

Now, all the fiddly detail work of adjusting for inflation aside, the real downside of living on income is that it takes too much money. Let's say you can live on $50,000 a year. The amount of money that you'd need to invest in TIPS to earn that $50,000 (guaranteed by the government and adjusted for inflation) would be something like $2.8 million. Now, if you've got $2.8 million (and you can live on $50,000), then you're pretty much all set. I wouldn't invest it all in TIPS--diversify into stocks as well--but a very straightforward investment plan will do the trick for you, and I think you can safely retire right now.

Most people, though, would like to retire without having to save up quite that much capital relative to how much money they're going to need to live on. Happily, that's almost certainly possible, if you make the (rather likely) assumption that you're not going to live forever.

Spending down capital

If you invest $2.8 million in TIPS and just spend the income, you'll eventually die with a nest egg worth (an inflation-adjusted) $2.8 million. That's great for your heirs, but doesn't otherwise do you a lot of good.

If you knew how long you were going to live, you could calculate how much of your capital you could safely spend each year, and die with any particular sum you wanted.

If you have a financial calculator, here's how to do the calculation. (If you don't, there are plenty of financial calculators on the web.)

Suppose you knew you were going to live for 34 years in retirement and wanted to die broke. You could plug in a Future Value of zero (dying broke), a payment of $50,000 (or whatever you need to live on), an interest rate of 1.85% (the current rate on 20-year TIPS) and solve for Present Value (the amount you need to invest today to get those 34 payments of $50,000 (adjusted for inflation because you're buying TIPS). It'll tell you that you need about $1.25 million--a big improvement over the $2.8 million income-only solution, assuming that you want to retire early.

If you knew you were going to die younger--for example, that you'd only live in retirement for 12 years--you wouldn't need nearly as much. In fact, just a bit over $500,000 would do the trick.

That's still pretty conservative, mainly because we're using the very low interest rate that TIPS are currently paying (just 1.85% over inflation). If you invest in a diversified portfolio of stocks and bonds, you can probably earn more than that. The average return in the stock market runs in the 10% to 12% range. Deduct 3% or 4% for inflation, and there's a good chance the stock market portion of your portfolio can return 6% or even 7% after inflation. Use that rate in place of the 1.85% you could get on TIPS, and you'll find that you can retire on a very modest amount of capital, as long as you're sure that you'll die on schedule.

People have long looked for a sweet spot somewhere in between assuming that you'll live forever (income-only spending) and assuming that you'll die on schedule (spending down capital). They've come up with a couple rules of thumb.

The 4% and 5% rules

Among people who invest for large institutions, there's a rule of thumb that you can spend 5% of your endowment each year, and then expect to have a bit more to spend next year than you spent this year.

Of course, they can't expect that 5% to be more every single year. Some years the investment portfolio does poorly--and after one of those years, the 5% that's available for spending will be less than the previous year. Maybe much less.

That may be okay for institutions, but it doesn't work so well for households. Most people, especially most retired people, don't have the flexibility in their budgets to easily accept, let's say, a 20% budget cut--an amount that's not only possible but entirely to be expected, if a good bit of your investment portfolio is invested in stocks.

For households, therefore, the rule of thumb is 4%. If you have a well-diversified portfolio of stocks and bonds, you can spend 4% the first year, and then increase the amount by the inflation rate each year, and you will very likely die before you run out of money. (In fact, you will very likely die with quite a large portfolio indeed, because you probably could have started out spending 5%.) But if you have enough capital that 4% will support you at an acceptable standard of living, then you're in a position to ride out a good bit more in the way of bad luck. (Such as, for example, a 20% drop in the market the very first year after you retire.)

Social Security, pensions, and other annuities

An annuity is a stream of money that gets paid to you until you die. You can buy one from an insurance company. Annuity payers are in a position to (roughly) follow the 5% rule, because they can play the averages. Some people will buy their annuity just before the market takes a 20% dive, but most people won't. Some people will live a very long time, but most people will live an ordinary length of time and a few will die young. If you die young, they keep the rest of the money, and that puts them in a position to pay out more than you could safely spend yourself.

It's worth having some sort of an annuity, as a fall-back in case you both face poor investment returns and live a long time. As I said, you can buy one from an insurance company, but you may not need to, if you have a pension.

Pensions are a special case of annuity. In the old days, many people earned some sort of pension, if they worked for a largish company for many years. These days, they're pretty rare, but lots of older folks are still owed a pension from jobs that they worked back when they were more common.

If you have a pension, even a pretty small one, you may not need to annuitize any more of your capital. But, if you don't have any pension at all, an annuity is worth considering.

Besides the now-rare pension, almost every worker in the US is promised a Social Security pension (and people in other wealthy countries have similar promises from their governments). I don't know about the situation in other countries, but in the US a lot of people are dubious about that promise being paid in full--and with good reason. My own take on the situation, though, is that most people will actually get a large fraction of what they've been promised. In fact, it would be pretty easy to adjust things to pay people nearly all of what they'd been promised, if they did the adjusting sooner rather than later.

At any rate, the way to deal with any sort of annuity, Social Security or otherwise, is to discount it by however much you think is appropriate (against the risk that you won't get the whole thing), and then deduct what's left from the amount that you want to spend each year. Your investment portfolio needs to cover the remainder.

The answer

So, that's your answer for the questions we started with.

How much do you need to retire? Take what you want to spend, subtract the amount you confidently expect to receive from Social Security and any other pensions or annuities you've got coming to you, and then divide by 0.04.

How much can you spend? Multiply your investment portfolio by 0.04 and then add whatever you're getting from Social Security and other pensions (suitably adjusted, if you're not confident you'll keep getting them).

There are too many variables for it to be safe to put any of these things entirely on autopilot. When you figure the inflation adjustment for next year's spending, cross check to see if you're spending more than 4% of your capital. (If the market hasn't kept up with inflation, you probably will be.) If that's true, you'd be well advised to cut your spending a bit--a few bad years, especially early in retirement, can put a portfolio into a hopeless downward spiral if you go on spending without regard to how much money is really there.

If you can earn some money in retirement, even a pretty modest amount, that can take a big weight off the investment portfolio. Well worth trying, even if just for a few years early on.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Insured Annuities for Wise Bloggers

Nora Dunn — Tue, 18 Sep 2007 03:44:43 +0000

Have Your Cake And Eat It Too With Insured Annuities

Today's seniors are often concerned with covering their living expenses while still preserving their hard-earned capital for their beneficiaries. They are also typically more conservative investors, not willing to bet their life savings on higher risk/reward investments.

Yet they don't have enough money to kick off an income that will provide for their expenses without encroaching on the capital itself.

Or, they have loads of money, but are paying tax year over year on the interest income, and are sick of seeing a chunk of their cash going to the taxman.

In either of these cases, utilizing a concept called the Insured Annuity would be perfect.

The Insured Annuity is a concept that involves the use of two different insurance products; an Annuity to provide tax-preferred lifetime income, and Life Insurance to guarantee the capital.

The best way to demonstrate this concept is with numbers.

Primary Market: Single seniors aged 65+, with heirs

Desire for the highest possible guaranteed revenue stream
Wants to leave something for their heirs
Looking to minimize taxes
Desires safety against volatile markets

Example: Female, aged 77, 2 children and 3 grandchildren

$500,000 in assets, invested in secure investments yielding 4% interest/year
Wants to leave the full $500,000 to her heirs
For illustration purposes, assume she is in a 25% tax bracket

Given her current situation, her annual income from the $500,000 is $20,000, fully taxable. After tax, she receives $15,000.

Insured Annuity Option:

Purchase a $500,000 Life Annuity with a 10 year guarantee option. (This means she gives up the $500,000 to the insurance company, who in turn uses it to provide her with a steady lifetime guaranteed income. If she dies in the first 10 years, the insurance company will guarantee the 10 years of payments to her estate).
Annual income from the annuity: $48,031
Taxable portion: $9,569
After-tax income from the annuity: $45,639 (The taxable portion is so small, because the insurance company is paying out part capital, part interest as the annual income).

Is this too good to be true? Right now, yes. She has given up the full $500,000, and currently has nothing to give to her heirs. To get around this, she purchases a $500,000 Life Insurance policy.

Cost of a Term-100 $500,000 Life Insurance policy: $25,575

After-tax annuity income: $45,639

Subtract life insurance premiums: ($25,575)

Final after-tax income with the insured annuity concept: $20,064.

Bottom line: She just paid less tax to the tax-man, increased her after-tax income by over $5,000/year, and guaranteed her full principal to her beneficiaries!

Additional benefits:

With her original situation, she was at the mercy of the prevailing interest rates determining her income. Right now it is around 4%, but it fluctuates, which makes it hard to plan.
Since the $500,000 is paid to beneficiaries as a life insurance payment, the lengthy probate process is circumvented, and the distribution of insurance proceeds is private (read: not subject to contesting in the will).
What if in our example, she doesn't need the income from the $500,000? She could use the annuity income to purchase an even bigger insurance policy for her heirs or charity: approx $900,000.

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: