| Fred Orentlich on Annuity Retirement Planning |
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fredorentlich
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| Fred Orentlich on Annuity Retirement Planning |
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Hello I am Fred Orentlich and I will be talking about Annuity Retirement. In addition to providing a death benefit, annuities can be an important part of any retirement plan. Even so, there are a myriad of ways to set them up. In order to determine how best to use annuities to best fit an individual situation, it is important to know the main differences between them. Specifically, one should determine if their risk tolerance is better suited for a fixed for variable plan. Second, they should consider if a qualified or non-qualified plan is desired. If a qualified plan is desired, one should then delve into the specifics of qualified plans.
Fixed vs. variable
When considering whether a fixed or variable annuity is the best fit, one should determine how much they want when it's time to take distributions (that is, retirement payments), the rate of return they want on their investment, and how much risk they're willing to take to get there.
The fixed annuity is the slow and steady option. Much like a savings account it provides a stated interest rate and therefore a contractually guaranteed rate of return. However, interest rates on fixed annuities tend to be quite low. The risk of losing money on a fixed annuity is virtually nil, but one is not likely to make a lot on the interest either.
A variable annuity is more akin to a mutual fund. Indeed, most variable annuities invest their contributions in what are called “separate accounts” which operate very similar to mutual funds. Because financial instruments such as stocks and bonds are involved in the background, variable annuities tend to perform significantly better than their fixed counterparts in the long run. However, for the very same reason variable annuities carry a certain amount of risk: money can be lost in them. This risk can be tempered by investing in more conservative separate accounts, or if desired can be increased (along with the potential reward) by investing in aggressive separate accounts.
Hybrid annuities, such as the indexed annuity, attempt to combine the more desirable aspects of the fixed and variable products. An indexed annuity is tied to the annual performance of a stock index such as the Standard and Poor's Index. It often features a ceiling and floor, meaning it's rate of return can never be less than a certain amount, nor more than a certain amount regardless of what the index does.
Qualified vs. non-qualified
Non-qualified annuities are the simplest form of annuities. They have no contribution limits, no age-restricted distribution requirements and in fact no point where distributions are required at all. But they also lack any tax advantages. Contributions are taxed. Distributions are then taxed again. As a result most people use some form of qualified plan in their annuity retirement planning scheme.
The two most common qualified plans used with annuities are the Individual Retirement Account (IRA) and the 401k. Most people will find one or the other (or both) to be their best fit. Annuities can exist as other types of qualified plans, but these plans are usually quite specialized. For example, the 403b qualified plan is available only to employees in the public education field, certain non-profit organizations, and to self-employed ministers.
IRA
Under an IRA individuals are currently allowed to contribute up to $5,000/year. After age 50 the amount is currently $6,000. Distributions may be taken at age 59 ½ and must be taken by age 70 ½. Withdrawals taken before age 59 ½ are permitted, but are subject to a substantial tax penalty. An annuity as an IRA often works well by itself or in conjunction with a 401k or other retirement plan offered through an employer.
401k
The 401k behaves much the same as an IRA with identical distribution rules, but the 401k offers a much more generous contribution limit. However, one cannot open a 401k as an individual; it must be done either through an employer or by a self-employed individual through his or her business organization such as a sole proprietorship, LLC, corporation and so forth. Because the annual contribution limits are significantly higher for a 401k than for an IRA, they are often the better choice for self-employed individuals.
A self-employed individual who works alone or with his or her spouse may want to consider the Simplified Employee Pension Plan (SEP) variety of the 401k. Small business owners with fewer than 100 employees may find the Savings Incentive Match Plan For Employees Of Small Employers (SIMPLE) variety most useful.
Traditional vs. Roth
The IRA – and since 2006 the 401k – are both further distinguished in traditional or Roth varieties. Understanding the differences is important from a tax standpoint.
A traditional qualified plan taxes the distributions. In other words, contributions made to the plan are tax deductible now, while distributions are taxed at the regular income tax rate. A Roth qualified plan is the exact opposite: contributions are in after-tax dollars, but distributions are tax free (although capital gains derived from the plan may still be taxed). Ultimately the question boils down to when one wants to pay the tax man. If living largely tax-free later is ideal, go with the Roth. If one wants as many tax deductions as possible now, go traditional.
The benefits of it all
Given the ongoing uncertainty involving Social Security, it stands to reason that virtually everyone benefits from some sort of individual retirement plan. While it is certainly advantageous for one to start planning for retirement at a young age, being older is no excuse not to do it either. A good insurance professional can find the best fit for any situation.
Generally speaking, younger people tend to be more risk tolerant and benefit more from tax deferral than older people. As a result a younger person is more likely to benefit from a variable Roth annuity, while an older person may be better off with a fixed traditional annuity. However, there are no hard and fast rules regarding any of this; one's best fit must truly be tailored to individual needs. This is why suitability is such an important part of starting an annuity. Before recommending any annuity product an insurance professional is duty-bound to determine the client's overall financial picture as completely as possible.
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Wed Sep 07, 2011 10:22 pm |
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Benstoke
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The fixed annuity is the slow and steady option. Much like a savings account it provides a stated interest rate and therefore a contractually guaranteed rate of return. However, interest rates on fixed annuities tend to be quite low. MS-200 exam dumps
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Wed Apr 17, 2019 9:51 am |
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