How Does a Next Generation Annuity Really Work?
Imagine a secure IRA retirement vehicle that credits you an upfront ten percent bonus to your fixed income account, and then grows your income at a guaranteed rate of seven percent annually until you decide to start taking your income in monthly withdrawals for both your life and your spouse’s life.
Next Generation annuities are here, and they are nothing like the annuities of old. Annuities are part investment, part insurance. They’re designed as a tool for retirement and best suited for people age 45 to 79. They add a pension dimension to your financial plan, while keeping you in control of your money.
There are several different annuity models available depending on your needs and wants. Income can be in the range of five to nine percent for life, depending on age and deferral period. That’s far better and even much safer than almost any bond fund right now. If you started withdrawing five to nine percent annually from a bond mutual fund, you would almost be certain to be out of money in less than ten to fifteen years. Bond funds are terrible investments for growth, income, and preservation in this era of low interest rates. If rates keep rising, you lose money with bonds.
More than ever, annuities are being used for Rollover IRAs from 401ks, 403bs, 457 plans, and TSPs. Imagine getting a ten percent bonus on your income with a seven percent growth rate until you start lifetime safe withdrawals.
I favor annuities that keep my clients in control of their principal—protected from market loss– and that provide high income WITHOUT annuitizing—regardless of whether the market is going up, down, or sideways. By using fewer dollars to get the income you need, you have more dollars left over to invest. It can be a winning combination.
Increasingly, many retiring professionals are including annuities as part of their financial plans for retirement, but many also hesitate because they can’t get their heads around some of the words and terms they hear.
That’s quite understandable, actually. Most of us tend to shy away from things that are outside of our immediate knowledge base, and none of us likes feeling “dumb”.
But for many people, a carefully selected NEXT GENERATION retirement annuity can provide certainty in all the right places: certainty of principal, certainty of income, and certainty of protection for heirs.
We would consider it a privilege to share our knowledge and experience with you. An annuity may not be right for you, but it won’t cost a penny to find out. We offer free reviews to help you compare your options, with no sales pressure or gimmicks.
Right now, you can get a full ten percent bonus on your fixed income account and grow your income at a rate of seven percent annually, guaranteed.
Even if the market crashes by fifty percent, you get the ten percent bonus, your income keeps growing at seven percent, and your principal may grow without losses, uncapped. You go up with the index never down, forward never back.
If terms like “participation rate”, “income rider”, “cap”, and “spread” are throwing you for a loop, don’t worry—let’s meet soon. I’ll explain them all.
How to Create Reliable Lifetime Income
Create 5 to 9 Percent Income
The best type of retirement income is the type that behaves very similarly to a pension. Ideally with lifetime guaranteed income ranging between 5 and 9 percent per year depending on how soon you need it to start. Also, this income source should find a way to compensate for future inflation with reasonable growth.
Lifetime Guarantee Both Spouses
Lifetime guarantees should mean exactly what they say. The right type of retirement income source will have no risk and will be contractually guaranteed to provide income for your life, your spouse’s life, whoever out lives the other. All of this, plus not disinheriting your heirs if that’s important to you.
Avoid Paying Unnecessary Fees
Fees are fees. Life does sometimes come at a cost, but not all retirement income options have annual fees. The ones that do can sometimes drain your income too much to be considered a good option. Instead, seek retirement income that isn’t attached by fees over its lifetime and instead provides you more than enough income.
What Has Changed for Modern Retirees?
The Next Generation
Today’s annuities make old annuities obsolete. When exploring the newer forms of consumer friendly annuities, you will want to leave your pre-conceived notions “at the door.” Today, you can find annuities with no upfront fees, no annual fees, ample liquidity, lifetime income guarantees, and full protection for your heirs. The life insurance company does not keep your money when you die! (when you choose the right kind).
Kiplinger reported in 2013 that it recognized annuities are going into IRAs and 401(k)s more frequently. The tax deferral is not the reason. It is the income security and other benefits motivating the consumer. They noted a statement from Brian Kunkel, national director of advanced planning and solutions for Prudential Annuities, who said that annuities with guaranteed income streams are “increasingly popular (in 401(k)s) with investors who have been burned by stock market volatility.” (Kiplinger, June 2012.)
With 76 million baby boomers retiring at a rate of 10,000 a day, more will be looking for simplicity, safety and income than stretching out for risk in the stock market. The insurance industry has responded with annuity offerings that are more flexible, liquid and consumer-friendly than ever.
Today’s low interest rate environment makes bond ladders unfeasible. The search is on for more effective ways to replace income from employment. More retirees are retiring without a pension and therefore in the market for an annuity to provide a secure lifetime income stream.
There are income riders, death benefit riders and combination riders. Some riders can increase income over time, which can be a benefit in protecting against inflation.
What is an Annuity?
An annuity is an agreement with a licensed, regulated, and audited life insurance company to guard your capital, pay you interest, and pay you income for a lifetime. it is part investment, part insurance. some annuities can accumulate principal and offer a return of capital, like a bond. annuities are not necessarily permanent contracts–you can choose the type of annuity that allows you to stay in for a period of time, and then “cash out”, or take systematic withdrawals for retirement income. most annuities allow for annual penalty-free withdrawals of 10%. other annuities offer an insured income rider that pays for life without the need for annuitizing.
It’s unfortunate that some media resources (with very little actual knowledge of annuities) lump all annuities into one category. In fact, there are four categories of annuities–immediate, variable, fixed, and fixed index.
- If you want to stay in control of your principal (most people do ), avoid immediate annuities.
- If you want to avoid fee deductions, avoid variable annuities.
- If you want to benefit from the upside of market increases, without any market losses when the market falls, explore fixed index annuities
- If you don’t want the insurance company to “keep your money when you die”, avoid immediate annuities and deferred income annuities (DIA’s);
- Immediate annuities are the least popular form of annuity, use sparingly.
To fortify your retirement, explore the next generation of flexible, secure retirement annuities. Next generation annuities: principal protection, lifetime income, and uncapped growth potential with no losses.
Q. “Why are more retiring engineers, teachers, health care professionals, managers, lawyers, accountants, and tech workers choosing annuities for their 401k, 403b & IRA rollovers?”
- Preservation of principal
- Certainty of income
- More income than bonds
- A way to “buy a pension”, without “locking up” money
- Strong diversification (non-correlated to stock market or real estate.)
As more companies move away from pension plans to 401k plans (where you are on our own to derive future income), annuities are being recognized as a way to own an asset that can pay recurring reliable income for a lifetime.)
What is an Annuity? (Part Two)
As stated above, an annuity is a contractual agreement with a licensed insurance company to protect you, the consumer. The annuity agreement spells out your benefits and guarantees. The insurance company is obligated to watch over your money, invest it conservatively, and pay it back to you in one of three ways: a) through steady withdrawals of 5% to 10% per year, b) through an “annuitization” (converting your lump sum to a stream of lifetime payments backed by the reserves of the company), or c) cashing out, just as you would with a bank account or mutual fund.
Annuities are similar to mutual funds or bank CDs in the sense that you are placing funds with a licensed trustee. They differ greatly from mutual funds and CDs by virtue of the fact that an annuity can be used to create guaranteed lifetime income for two spouses, much like a pension from work.
An annuity is not a market-traded asset likes stocks and mutual funds. Annuities are contracts for specific performance, which is a major benefit to retirees.
WHAT ARE THE 4 KINDS OF ANNUITIES?
There are four broad categories of annuities:
- Fixed Index (also known by nicknames—hybrid, new generation, next gen, and Next Generation)
WHAT SHOULD I KNOW ABOUT COMPARING ANNUITIES BEFORE MAKING MY DECISION?
You should always consider the source of the information you are getting about annuities.
Your stock broker or a financial advisor who focuses on accumulating money on a fee basis may criticize annuities, in some cases because it takes revenue from their plate.
What we have found is this: If they do recommend annuities, it may be based on minimal research because annuities are a sideline for them. Often, a professional who is proficient in managing stocks, bonds, and mutual funds for accumulating money has not spent much time studying annuities. This is reasonable and fine. The advisor may mean well and be eager to serve.
However, the better practice is that person should defer to an advisor with a deep background in annuities who has done substantial research and comparison—AND will help you compare before settling for the first one.
At IQ Wealth, we are fiduciaries. We are willing to work with you on your annuity choice, even if you keep your investments with another broker or do them yourself.
Brokers will usually only be offering variable annuities. Variable annuities tend to be very expensive.
Sources like Ken Fisher who “hate annuities” and think you should, too—obviously are using the tactic to get visitors to their website, where they can pitch their management services for annual fees that are typically 1% to 2% annually. Over ten years, that will total 10% to 20% and over 20 years that will total 20% to 40% in fees—and you still will never have a simple secure guaranteed lifetime income.
An annuity strategy can be the core and the foundation of a sustainable retirement strategy. It never relies on the stock market going up, and still pays you income when the market goes down.
The right annuity can perform the function that bond funds are no longer equipped to perform.
WHAT ANNUITY IS BEST FOR AN IRA ROLLOVER?
While any of the four kinds of annuities can be used for your IRA rollover, deferred annuities with income riders offer more control to the investor within their financial plan for retirement.
If you prefer to retain access to your principal and preserve your death benefit, the choice comes down to whether or not you want to take principal risk and pay fees–or not.
Variable annuities are “loaded” with fees. For that reason, demand has increased for the “Next Generation” style of fixed index annuities, with optional income riders.
This type of annuity offers a compelling combination of principal preservation, combined with exceptional income and the opportunity to grow capital based on the upward movements of market indexes. Your money is never subjected to stock market losses.
BE CAREFUL WITH VARIABLE ANNUITIES—THERE ARE SIMPLY TOO MANY FEES.
If you had the choice between two mutual funds–one with fees of a half percent and one with fees of three percent, which would you choose? Obviously, the lower fee fund.
Given the choice, most people would prefer NOT to pay 3% a year in fees while risking principal! However, the most (over)sold variable annuities today often have fees exceeding 3% to 4% annually. On a $300,000 variable annuity, it is quite normal to be paying $12,000 a year in fees. Over ten years, that could total over $120,000. With a carefully selected Next Generation fixed index annuity, you could enjoy more income with less risk with annual fee deductions of zero to one percent. Annuities can be a life-saver in retirement, but it is not necessary to over-pay for the best benefits.
When you hear the phrase that “annuities are expensive”, please remember that applies almost exclusively to variable annuities. Annuities have a fee for almost every benefit they offer. Other annuities build in the benefits without nickel and diming you to death.
Right now, variable annuities are not the optimal choice, since the stock market’s risk is currently at an all time high, possibly poised for a fall. next generation fixed index annuities can offer a share of the upside with none of the downside, with income riders that can often pay more income for life than variable annuities. why over-pay for the benefits you want and need?
Documented statistics on fixed index annuities, by such sources as the Wharton School of Business and others, clear show a more optimal choice for the conservative to moderate investor looking to simply their lives, increase their income, and lower their fees.
Remember, only a part of your money goes to the annuity. You still are left with plenty to invest as you see fit. In the IQ Wealth Safer Buckets retirement system, annuities are used for the Income bucket. By using fewer dollars to achieve more income, more of your money is left over to invest for the long term in the Growth bucket.
The correctly chosen annuity with flexible and dynamic income benefits can fill the void currently left by low interest rates on bonds and bank accounts.
If you’re looking to get off the stock market roller coaster, and upgrade your retirement income replacement strategy, we can help you compare and make a wise choice.
WHAT IS AN ANNUITY INCOME RIDER?
An annuity income rider is an insurance guarantee of lifetime income, which can be attached to your fixed index or variable annuity. click on the annuity video below for a few more clarifications on annuity income riders. please call our office for free, no-obligation reviews.
Annuity income riders are a form of income insurance benefit that can be attached to a deferred annuity like a variable or fixed index annuity. it turns a one dimensional annuity into a two or three dimensional retirement vehicle.
With an income rider on a fixed index annuity, your retirement money can remain protected from market losses while benefiting from market gains, and you have insurance that your income will never run out—like a pension.
Annuity income riders address the number one fear of most retired investors: running out of money and running out of income. By guaranteeing income for life ( even if your principal were to decline to zero), the income rider adds a benefit you will never find with a mutual fund or bank account.
Income riders are funded as a pooled benefit from all of the annuity owners in the annuity pool—which can be in excess of thirty billion dollars. Income riders are based on sound actuarial science and are not “gimmicks.” They are mathematically determined insurance benefits.
The cost for riders is typically in the range of one percent annually. Some fixed index annuities offer riders with no annual fee deductions. Riders must be added at the time of purchase—they cannot be added later.
Is it a good deal? Imagine if you walked into Home Depot to buy a battery powered lawn mower for $300. If you could guarantee that it will last a lifetime with full replacement for $3 a year, would you be interested? That’s how an annuity income rider works.
Some annuities also offer enhanced death benefit riders and long term care riders.
Our wealth management firm in Scottsdale can n help you build an effective financial plan for retirement from the ground up–insuring your income, insuring your outcomes and investing the rest with purpose.
Our objective is to make sure you always have the liquidity you need for emergencies and lifestyle. Wealth management begins with wealth preservation and lasting retirement income. Without solid predictable income in retirement, there can never be a truly comfortable retirement.
Our clients enjoy expert education in annuities without sales hype or sales pressure.
We are independent and committed for fiduciary duty. Our system compares leading annuity carriers and hundreds of annuities.
Newer forms of annuities can simultaneously allow for lifetime income without giving up access to your principal. This is accomplished through the use of specialized income riders¹.
Income riders require comparison. There can be as much as a 30% to 40% difference in the amount of income paid from the top paying annuities to the worst paying. We’ll help you compare and make a wise annuity selection.
At IQ Wealth® You Get More Than Secure Retirement Income
Freedom in Retirement
Through the financial counseling process, we help our clients implement strategies matched to risk tolerance, income needs and family priorities. We help our clients focus on where they are now, where they want to be and what steps must be taken to get there.
We offer a free retirement review for retiring professionals with portfolios of $500k to $5M+.
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Annuity guarantees rely on the financial strength of the issuing insurer. Annuities are long term income and preservation vehicles which may carry early surrender charges for a period of time, after which there are no surrender charges. Please see your annuity agreement for details and get a clear understanding before moving forward. A free second opinion service is available.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of IQ Wealth Management and our editorial staff. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Fee based financial planning and investment advisory services are offered by IQ Wealth Management, a Registered Investment Advisor in the State of Arizona. Insurance products and services are offered through IQ Retirement Planning, Inc. The presence of this web site shall in no way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any State other than the State of Arizona or where otherwise legally permitted. All references to locations outside of Arizona relate to our insurance services division only. Steve Jurich is a licensed life and annuity agent authorized in multiple states including California. (License 0b85609). Because our portfolios often allocate a combination of securities and insurance based products, we believe it is important for the consumer to understand the difference. Securities can and do lose money. Fixed index annuities should be viewed as long term income vehicles. Guaranteed Withdrawal Benefits are optional rider benefits for premium avaialble on some annuities, not available in all states. All guarantees are contractual guarantees provided by the claims paying ability of the insurer. Early surrenders beyond penalty free withdrawal privileges may incure surrender charges. Withdrawals prior to age 59 1/2 may incur tax penalties. Income rider values are are designed to generate contractually guaranteed income streams based on pooled reserves, and are separate from accumulated values. No specific investment, tax, or legal advice is being given and no offer is made to sell or buy any security, nor any specific insurance product. Always consult your tax preparer for tax advice. Past performance of all financial vehicles and indexes should not be relied upon to predict future results.Income and withdrawal guarantees on fixed index annuities refer to income values, not interest rates on accumulation values. Income withdrawal benefits are drawn from accumulation values. When withdrawal rates exceed interest rates on accumulation values, accumulation values are in position to fall. When withdrawal rates are less than interest rates on accumulation values, accumulation values are in position to rise. See your annuity documents for details.
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