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finance issues. This analysis is based solely onthe information provided by you. All examples, if
any, are hypothetical and for illustrative purposes and do not represent current or future
performance of any specific investment. No guarantees are made as to the accuracy of any projection.
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Planning For Retirement:
You’ve finished your career and are you’re looking to enjoying the fruits of your labor. Though the wealth you’ve accumulated is significant, perhaps more than you thought possible. Is it enough?
Retirement Planning
As Americans tend to retire younger and are living longer than ever before this question becomes more pressing.
According to the U.S. Bureau of Labor Statistics, the average length of retirement has increased from 7 years in the 1950’s to over 20 years today.
You can help ensure that what you’ve worked so hard to accumulate will be there to provide for you when you need it most by setting up a retirement plan with your investment professional.
Use a Retirement Calculator to determine if what you’re saving now is going to be enough to fund the retirement you have in mind. Sadly sixty percent of today’s workers haven’t calculated how much money they think they’ll need in retirement.
The popular figure is 80-90% of your pre-retirement income.
Just to get an idea of what it will cost to eat, take a look at this:
Consider this; at just 3% annual inflation over 20 years, the purchasing power of a dollar will decrease to just 55 cents. This means those living on a fixed income will only be able to afford approximately half of what they can now afford.
Also keep in mind some cost is increasing at a much faster rate than 3%. One example is this year's annual increase is closer to 12% for retiree health care costs, including:
Prescription medications, Home health care, Nursing home care
Understandably some retirees are cautious about taking on investment risk with their nest egg. However you run the risk of not keeping pace with expected inflation if you invest too conservatively.
In 2004, 39% of retirees were dependent on social security for their source of income which may account for the 25% still employed in full/part-time jobs.
As you approach retirement it is important to set out your retirement objectives. As you do this you will realize that you probably have more than one objective and there is no one type of annuity or drawdown that will meet all of these objectives.
Regardless, you need an idea of the amount of money and in what increments you will need it to make a more accurate, realistic determination of which universal product design best fits your circumstances. So, click for the (Click Here for Calculations to be considered)that you should make to assist in your analysis.
The points below set out some of the most important objectives with a note about which product meets these objectives.
Sustainable Income
Few people want a falling income and the only sure way to guarantee an income is with an annuity. With Drawdown there is a significant risk that income may not be sustainable and may fall.
Keeping place with inflation
Inflation reduces the future value of income. Only an index linked annuity can guarantee to maintain its real value. Level annuities may be storing up trouble for the future if high inflation returns.
For those who still believe that in the long run, equities are a good hedge against inflation, then drawdown provides opportunity for long term income growth
Income for life
All pensions must provide income for life, but only annuities can insure against longevity. The mortality cross subsidy is not available with drawdown.
No Undue Risk
The main risks to consider are; the risk of income falling, inflation risk, investment risk and the risk that your circumstances may change. No one policy can manage all these risks which means that even an annuity is not risk free. Understanding and managing risk is one the most important aspects of retirement planning.
Flexibility
There is no flexibility with a standard annuity but there is with flexible annuities. Drawdown provides flexible income options, investment control and choice of death benefits. However flexibility comes with a price, the risk of a lower income in the future
Financial Security for family Annuities can be arranged with a spouse's pension and a minimum guarantee period. Drawdown provides better death benefits by allowing a lump sum (less 35% tax) or continued income for spouse and or dependants.
Protecting Your Nest Egg
in Uncertain Economic Times
One of the most common recommendations given to clients when discussing retirement and long-term financial security is to start planning as soon as possible. The sooner you start to invest in your retirement, the longer your contributions and the potential growth and income of those contributions can increase. Even modest amounts can compound to sizable sums over time. The longer your money has to grow, the better you will be able to weather the ups and downs of the economy.
But it's not enough just to start early. As with any journey, unless you have a destination you'll probably never arrive. So you must also set retirement goals.
Know Your Retirement Needs
Depending on your current income and standard of living, plan on saving between 60 and 80 percent of your pre-retirement income. Once you've set your income goal, try to estimate how much Social Security you may receive (you can find calculators to assist with this on the Social Security Administration website, www.socialsecurity.gov). Fortunately, it is rare that Social Security benefits are enough to fund a retirement. It is a good idea to research other vehicles for retirement savings.
Explore Options for Gathering Your Nest Egg
Find out if your company has a pension or profit sharing plan and check to see what your benefit is worth. Learn what benefits you may have from previous employment and before changing jobs, find out what will happen to your pension.
If your employer offers a tax-sheltered savings plan, such as 401(k), sign up and contribute all you can. Your taxes will be lower, your company may offer contribution matching and automatic deductions make it easy. With 401(k)s you can invest money that you haven't paid income tax on yet, which means your money works for you as your investment grows. Income tax is due later, when you finally use the money for retirement and may be in a lower tax bracket. Over time, deferral of taxes and compounding of interest make a big difference in the amount of money you will accumulate.
Retirement accounts can be set up by an individual, not only employers. The two most common types are the traditional Individual Retirement Account (IRA) and the Roth IRA. In both cases, it is up to an individual to set up an account and make contributions. IRAs have significant tax benefits – so much so that many people set up IRAs in addition to employee-sponsored plans. Refer to IRS Publication 590 for more information on IRAs.
Additional retirement income can also come from personal, non-retirement investments such as stocks (ii) , bonds (ii) , mutual funds (ii) , savings accounts, annuities (iii) , real estate or businesses. When choosing personal investments for retirement, consider these factors:
how much risk is involved with the investment
potential growth value
how long you will own the investment
the yearly cost of maintaining the investment
potential income flow from the investment during retirement
how easy you can liquidate the investment if necessary
costs involved in converting the investment into cash
tax benefits or costs involved with owning and selling the investment
Protect Your Nest Egg
Finding the right investments and managing them isn't easy. Review your retirement plan periodically to monitor the performance of your investments and ensure you're still on the path to meeting your retirement needs. Become familiar with income tax and estate tax consequences and benefits available to you.
Keep in mind that investing to meet your retirement needs is a lifetime pursuit. The sooner you start saving and having your investments grow in value, the longer your money can work for you. Remember, time is a great ally to help you meet your retirement goal – if you plan for it now. Make retirement savings a high priority, devise a plan and stick to it.
Best Product to compare all others against....IUL!
Strategies For Buying Indexed Universal Life Insurance:
With equity indexed universal life insurance, a clear strategy, or policy objective, should always be identified before making any purchase. Premiums for all universal policies are flexible, so the policyholder’s objective has a significant impact on how the policy is funded. There are a number of different strategies for buying an indexed universal life policy including paying the minimum premium, paying the no-lapse premium to guarantee the policy for the insured’s lifetime, or paying the maximum premium also known as overfunding. The strategy that you select will be determined by your personal goals and objectives, but the strategy most effective for equity-indexed universal life insurance is the retirement income strategy or overfunding strategy.
Retirement Income Strategy- “Overfunding” an Indexed Life Policy:
To “overfund” an indexed universal life insurance policy means to maximize the policy’s cash value growth potential and minimize its net insurance costs over time. When the maximum premium is paid into the policy, cash values grow faster which leverages the net amount of life insurance at risk. The net amount of life insurance at risk is the difference between the actual face amount of the policy less the current cash value, see diagram below. With all universal life policies, insurance costs are calculated based on the amount of life insurance at risk at any given point in time. As the net amount of insurance at risk decreases, the costs of insurance decrease and a higher portion of the premium payment can be directed to the indexed account. By overfunding the policy, cash values can leverage the cost of insurance therefore maximizing the cash value growth potential. For more information on insurance costs and the net amount of insurance at risk see, “How a universal life insurance policy works”.
The Internal Revenue Code and Overfunding Life Insurance*:
To better grasp the powerful concept of “overfunding” a life insurance policy, one must clearly understand the IRS regulations that must be met to avoid unnecessary taxation. Some of the legislation affecting the strategy of overfunding indexed universal life includes Internal Revenue Code Section 7702A, the Deficit Reduction Act of 1984 (DEFRA), and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).
Internal Revenue Code Section 7702A describes the seven-pay test which requires that cumulative life insurance premiums over any seven year period cannot exceed the seven-pay premium limitation. The seven-pay premium limitation is the maximum cumulative gross premium payment over any seven year policy period. Seven-pay premiums are calculated based on the specific insurance company’s cost structure and the insured’s age, health class, sex and benefit amounts. If the policy is overfunded up to or within the seven-pay premium requirements, then it will meet the Internal Revenue Code and policy cash surrender values may be accessed at any time tax-free. If premiums exceed the seven-pay test maximum, the life insurance policy becomes a modified endowment contract (MEC) and may incur taxes on distributions of cash values. (Click Here for EIUL Solutions)
Annuity Basics:
Annuities
An annuity is a long-term retirement planning tool designed to protect against the risk of outliving one's resources. Annuities are one of the few investment vehicles that allow your money to grow tax deferred. Furthermore, you have several annuity income options, including the choice to receive either a steady stream of income throughout retirement or one lump sum payment. Taxes are due upon withdrawal. There are various fees and charges associated with annuities.
Immediate or deferred?
Annuities can be categorized as either immediate or deferred. An immediate annuity provides annuity income payments immediately after you make the initial annuity payment. A deferred annuity delays annuitization, which provides more time and opportunity for your money to grow tax deferred.
Fixed or variable?
There are two basic types of annuities: fixed or variable. In a fixed annuity, your cash value earns a fixed rate of return. Additionally, you are guaranteed a fixed payout when you begin to receive your annuity income. Guarantees are based on the claims paying ability of the insurance company. Variable annuities provide a variable rate of return, which will fluctuate up and down depending on the performance of the investment portfolio you select. A variable annuity offers more growth potential and investment choices than a fixed annuity, but also carries more risk.
Annuitization options
There are several ways to receive your annuity income payments:
A straight life annuity provides income until the annuitant dies.
An period certain annuity provides income for a fixed period of time, such as 10 or 20 years.
A variable life annuity provides variable income during the annuitant's lifetime.
A variable life with period certain annuity provides variable income during the annuitant's lifetime. If the annuitant dies before the designated certain period, the insurer will pay the contingent payee you have selected.
A life income with refund annuity provides income throughout the life of the annuitant. If the annuitant dies before receiving payments at least equal to the purchase price of the annuity, the insurer will pay a refund to the contingent payee you have selected.
A life annuity with period certain annuity provides income until the annuitant dies. If the annuitant dies before the designated certain period, the insurer will pay the balance to contingent payee you have selected.
A joint and survivor annuity provides income to two or more individuals until all of the individuals die.
Other annuity income options include a lump sum payout or systematic distributions. Withdrawals before age 59½ are subject to a 10% penalty and withdrawals during the first several years are subject to surrender charges.
Which type of annuity is right for me?
Each individual's retirement needs are as unique as the individual himself. That's why it is important to speak with a qualified financial professional who can assess your unique situation: your plans for the future, your current financial status, etc. After evaluating your needs, you and your financial advisor can discuss the various investment options available.
How much money do I need to save for retirement?
There are many factors that can contribute to a satisfying retirement. One very important factor is the sufficiency of your resources to fund the retirement lifestyle that you seek. We have provided the Retirement Needs calculator to help you review how much money you will need to save to fund your retirement.
Not Legal/Accounting Advice
The information presented on this Web site is not to be construed as legal advice. Legal advice must be tailored to the specific circumstances of each case. Every effort has been made to assure that this information is up-to-date as of the date of publication. It is not intended to be a full and exhaustive explanation of the law in any area. This information is not intended as legal advice and may not be used as legal advice. It should not be used to replace the advice of your own legal counsel.