Pros and Cons: Annuities in Retirement Savings Plans

Across the country, people are saving for retirement. It is true that many people lag behind when it comes to setting aside funds for the future, but despite this lag – where the typical couple aged 56-61 has only $17,00 set aside – there are many options available.

Employer-sponsored plans, Individual Retirement Accounts (IRAs), and even stock/bond or real estate investments represent some of the most popular and proven ways to prepare for retirement.

One commonly-overlooked option is that of the annuity. In this guide, we’ll share information on what annuities are, how they work, and how they can supplement other retirement savings plans. In short, everything you need to know to make an informed annuity purchasing decision will be presented. Let’s get started.

What is an Annuity?

Perhaps you have heard the term “annuity”, but do not truly understand what they are or what they can do for the retirement savings portfolio. In simple terms, annuities are a type of insurance policy that pays out an income, and remain a popular choice for investors who wish to receive a steady stream of income in their retirement years. The way an annuity works is that the investor chooses an annuity product, then invests in it. Depending on the setup and type of annuity, the annuity then makes payments to the investor in the future.

Income payments may be chosen to be distributed monthly, quarterly, annually, or even in a lump sum if desired. The size of the income payments depends on the amount originally invested, the account value’s growth, and the length of time premium payments were made into the annuity. There are two major categories of annuity, and within those categories are two forms:

• Deferred annuities are those which are invested in over a period of time – usually until the investor retires. Once retirement is reached, the annuity begins to pay out income. The money invested in the annuity grows in value until retirement. There may be penalties for early withdrawals, referred to as “surrender charges”.
• Immediate annuities work in a different way. The investor makes an initial investment, and soon after the income payments begin. This type is often used when the investor is close to retirement age.

A fixed annuity offers a guaranteed payout amount and rate of interest, which is specified in the annuity contract/policy. A variable annuity is tied to the performance of the investments associated with the policy. Fixed annuities may generate higher returns on a tax-deferred basis, depending on the investment performance, while variable annuities fluctuate in value with market performance. It is also important to note that the funds contained in an annuity are not protected or insured by the issuers, although most have some form of minimum guaranteed payout figure in the contract details.

What are the Drawbacks to Annuities?

Annuities are a good choice for many people who wish to diversify their retirement savings plans. They can produce a steady, reliable stream of income after retirement, and therefore help to cover the expenses retirees face after they’re no longer working.

Still, annuities aren’t for everyone. For those receiving Social Security benefits, they are already in possession of a fixed indexed annuity, designed to pay benefits for the rest of the person’s life. People with government- or corporate-sponsored pensions also already have an annuity that makes regular payments for the remaining life of the individual.

Other drawbacks include the potential for substantial annual maintenance fees, which can be as much as 3-4%. Also, there are surrender penalties for early withdrawal from certain annuity accounts, particularly those that are the deferred type. To avoid these penalties, annuity policyholders must sometimes wait 15 years or more for the policy to mature before becoming eligible to make penalty-free withdrawals.

Reasons for Purchasing Annuities

Now that we understand what annuities are and how they work, and have a clear picture of some of the potential drawbacks, what are the upsides to purchasing an annuity? There are several reasons, and these depend on both the type of annuity purchased and the stage of life the individual making the purchase is in.

• Interest rates are rising – with the strengthening U.S. economy, interest rates have climbed, translating to higher payouts in annuities. This rise in interest rates has also whetted the appetites of investors, meaning that annuity choices are more available than in years past.
• Annuities can help meet retirement goals – investing in IRAs, employer-sponsored 401(k) and 403(b) plans are important, but contributions to these plans can be limited and may not equal the amount needed to meet retirement goals. This is especially true of people who began the retirement savings process late in their careers. Annuities supplement these other savings plans, providing guaranteed income after retirement age is reached.
• Annuities build a diversified retirement portfolio – diversification is key to any investment plan at any stage of life. By diversifying the investment portfolio, investors are more able to weather changing market conditions and fluctuating interest rates. Annuities help to diversify the retirement portfolio. Of the annuity types, fixed annuities represent a unique asset class – one of the only investments that is guaranteed not to decrease and can increase at a pre-set interest rate (at minimum). The guaranteed payout and interest rate is tied to the claims-paying ability of the annuity issuer.
• Annuities can help protect a retiree against living past his or her assets – pensions and Social Security benefits provide income for as long as the beneficiary lives. IRAs and other retirement investment vehicles, however, may become exhausted, particularly if a person lives long after retirement is reached. Just like a pension, an annuity pays continuous retirement income for the lifetime of the policy holder, no matter how long that lifetime is.

As with any retirement account, determining if an annuity is right for an individual’s unique retirement needs and goals can be filled with challenges. Speak to a retirement planning professional to gain insights into annuities, including whether a fixed or variable annuity can help you meet your goals. A comfortable financial life after retirement is possible with the steady income and guaranteed payouts of an annuity.

Contact Synergistic Life Services for help today: www.synergisticlifeservices.com

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3 Tips for Successful Retirement Planning (For Your Father)

Planning for retirement can never come too early. Young people across the United States haven’t begun to set aside money for retirement purposes, thinking it is simply too soon to start worrying about something that will take place 30 or even 40 years from now. Unfortunately, there are many Americans who have put off retirement planning for far too long, and are now approaching retirement age with little or no finances set aside. Your own parents may not be adequately prepared for their retirement.

Now that Father’s Day has past, we’ve prepared a simple guide to help your father prepare for retirement. Think of it as a Father’s Day gift that keeps giving, helping to support your loved one and to give him a stable financial outlook well into the future. Let’s get started.

The Cold Facts about Retirement Planning

The Indexed Annuity Leadership Council conducted a survey to determine the status of retirement planning in the United States. The statistics collected in the survey were staggering. Of the findings, several important statistics stand out. These include:

• Almost 90% of survey respondents lack confidence in their retirement savings and financial futures.
• More than 40% of respondents report that they are worried about their retirement years, particularly not having enough money set aside to live comfortably.
• One in four baby boomers (people born between the mid-1940s and 1964) have less than $5000 in retirement savings.

The last number is especially concerning, as financial experts and retirement planners alike agree that savings should be based on one’s salary; ideally, one should have at minimum 10 times their final working salary set aside for retirement purposes. There’s even a timeline available to help track retirement savings:

• By age 30, an individual should have the equivalent of his or her salary set aside in retirement accounts.
• By age 40, three times the salary should be set aside.
• By age 50, six times the salary should be set aside.
• By age 60, one should have eight times their salary in retirement accounts.
• By age 67 (average retirement age in the U.S.), one should have saved 10 times their salary.

The sad fact is that too little is being set aside for use during the retirement years. Without adequate retirement savings, people are working longer, skimping on critical healthcare and medications, living well below their accustomed comfort level, and potentially winding up in serious, detrimental financial situations.

Three Ways to Help Your Father Plan for His Retirement

Now that we have a clear picture of the dire need for retirement savings, many people wonder what they can do to help their parents as they approach retirement age. There are many potential options, but we’ve highlighted three time-honored methods to help ease the process.

1. Take charge of your father’s retirement planning – many employers offer sponsored retirement plans and pensions. Employer-sponsored retirement programs like 401(k) plans can create a positive savings situation, but employees must enroll in these programs to take advantage of them. Encourage your father to explore these employer options if they are available; if they ARE available, get him to enroll as soon as possible. 401(k) plans typically offer matching funds – in other words, for every dollar an employee contributes to the plan, the employer will add a matching amount, sometimes even dollar-for-dollar. This can set aside a significant amount in a relatively short time period.

If employer-sponsored plans are not available or not offered by a given employer, there are still other retirement savings options. Some of the most popular options are Individual Retirement Accounts, or IRAs. In these plans, there are specific tax advantages, helping to preserve the value of the savings in the accounts well into the future. Even if your father is enrolled in a 401(k) plan, having a diversified retirement portfolio makes smart financial sense. An IRA is one option, as are fixed indexed annuities, investments in real estate, and even stock/bond investments. With a diversified retirement plan, your father can weather the ups and downs of the economy, ensuring a stable source of income long after he retires from his job.

2. Recruit a professional retirement planner – while many people choose to “go it alone” when it comes to retirement planning, the services of a financial professional can be invaluable in creating a safe, stable retirement. Financial professionals — some who specialize in retirement planning options — can provide guidance, identifying future needs and goals and developing a plan to reach those goals. These professional planners can also provide advice and insight into tax implications, alternative savings strategies, and can recommend ways to fill financial gaps. If your father is nearing retirement age and hasn’t set aside enough money to live comfortably, the investment in a financial planner’s specialized services can create a positive situation, paving the way for a stable financial future.

3. Spend more time with your father – this last tip is not specific to retirement planning, but it can lay the groundwork for the future all the same. It has been shown in numerous studies and surveys that those approaching their retirement years struggle to find activities to occupy them after they’ve quit working. Many retirees discover they are aimless – without a sense of purpose — now that the routine of work is no longer part of their daily activity. Retirees want to feel valued and loved, and spending time with them can create connections that last. To help your father feel like a valued member of the family, spend time with him. Introduce him to new activities such as:

• Hiking
• Fishing
• Museum visits
• Book clubs
• Volunteer efforts
• Bicycling
• Movie watching
• Traveling

These cost-effective activities can open new doors of opportunity, allowing your father to discover something to contribute to and to keep him occupied when he no longer is working. And, of course, it brings families closer when they can enjoy activities together.

With these tips, it is easier than ever to create a retirement plan that accounts for current and future financial needs and goals. It’s never too early to start planning for retirement, and by the same token, it’s never too late to take charge of your financial future. Help your father overcome his retirement planning deficiencies with these three steps, and you can rest easy knowing that he can retire comfortably when he is ready.

Source:
http://www.synergisticlifeservices.com/3-ways-to-prepare-your-dad-for-retirement-after-fathers-day/

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5 Things You Must Know About Retirement

No matter where we are in our careers, thoughts often turn to retirement.

From the young person just starting out in the employment journey to the seasoned veteran who is counting the days until finally being able to retire in peace, the concept of retirement is filled with challenges, misconceptions, and even some surprises.

Retirement may not be all about relaxation and freedom; the reality is that retirement can be a lot of work on its own.

In this article, we’ll talk about some of the aspects of retirement that may surprise you. The goal is to prepare you for a retirement that is both enjoyable and free from financial stress.  

Difficulty in Spending Retirement Savings

As responsible adults, many of us have spent our entire careers setting aside money for retirement. If done correctly – with a diversified retirement savings portfolio – chances are that the savings have grown over the years, thanks to the power of compounding interest and favorable market conditions. It may come as a surprise, then, that many retirees discover how difficult it can be to spend down that nest egg.

Throughout the process of retirement planning, we have been programmed to save, save, save. Now that retirement is here, the concept of spending that hard-earned savings seem alien and more than a little discomforting.

Retirement planners and financial professionals alike must oftentimes encourage their clients to spend down the retirement savings; in effect, giving their clients permission to spend their own money.

Government Retirement Benefits Aren’t Enough

It is an unfortunate fact in the United States that most of us do not save enough for retirement. One of the factors that influence this is the misguided belief that government-sponsored retirement benefits like Social Security, Medicare, and pension plans will provide all the funding we need after we retire. The sobering truth is that these benefits are simply not enough. Let’s look at some of the particulars behind these government retirement benefits:

• The average Social Security benefit is just over $1400 per month. Multiply that by 12 and we arrive at a figure around $17,000 in annual retirement income.
• The maximum retirement benefit under the Social Security program is based on the age in which one files for the benefit. Assuming you reach the age of 66, or the “full retirement age”, the maximum benefit is $2639 per month.
• Average benefits over a lifetime in the Medicare program come out to about $180,000. That may sound like a lot, but these benefits are paid over a number of years – sometimes 20 or more.

When we look at these numbers, it is clear that our expenses in retirement are hardly covered by government retirement benefits. The solution to this shortfall is to start saving right now with retirement plans of your own. Relying solely on government benefits is a recipe for failure. A retirement planning professional can help you get started with a portfolio that will provide the funding you need to retire comfortably. This can include a variety of investment strategies and accounts, from annuities to Individual Retirement Accounts (IRAs), life insurance, stock and bond investments, and more.

Retirement Savings Must Continue to Grow

It may sound counterintuitive, but after saving all that money for retirement, it is still incredibly important that those assets must continue to grow in value. What does this mean? In simple terms, it means that saving enough to retire should not be the final goal; rather, developing a plan to make your retirement assets last the rest of your life should be the real goal.

The key to this is allowing the bulk of retirement savings to remain in place, where they will continue to grow in value due to interest rates, and only make the withdrawals needed to pay for expenses. In other words, taking a lump sum of all your retirement savings can negatively affect the overall value, and may subject you to significant tax implications.

Minimizing risks in investments is one way to preserve the value of retirement assets. Taking advantage of tax-deferred or tax-free investment/savings opportunities is another. A retirement planning professional can help you develop strategies that allow you to invest wisely, gain asset value, and protect that value for the years after you retire.

Retirement Can Be Lonely

Many people discover that after they retire, they’re no longer as active as they once were. Going to work every day offers some measure of social interaction with others; once that is taken away, many retirees find out that their days may be spent in isolation. This can have profound effects, causing people to feel a loss of purpose.

To counteract this lost purpose and the feelings of loneliness, retirement experts suggest developing hobbies outside the home. Retirees have many options when it comes to engaging with others, from social clubs to hobbyist groups, outdoor clubs, and activities. Volunteering is another great way to regain lost purpose and to make connections with others. Retirees often delve deeply into volunteer programs, such as giving time and effort to services for the underprivileged.

By remaining active and taking part in volunteer opportunities and outside-the-home interactions, retirees can continue to lead productive, engaged lives.

Retirement May Mean Help from Others

As we age, we are often no longer able to do the tasks that help us lead our daily lives. Depending on health, simple tasks such as cooking, bathing, and dressing can become difficult. It’s a fact that retirees need a support system, regardless of their health status, and this is especially true for those with debilitating illnesses.

Planning for a support system in the future is part of the overall retirement process. Long-term care insurance is one way of preparing for the future, as is investigating the possibility of retirement homes and long-term care facilities.

In a perfect world, our family members pitch in to help with daily tasks, but it is crucial to remember that our families typically have commitments of their own and may not be able to assist in the manner we need. Setting up a contingency plan for the future is a smart move, and can help ensure a comfortable retirement.

Related: Can Life Insurance Protect Your Legacy?

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How Business Loan Insurance Plans Work (Part 2 of 2)

In the first part of our two-part series on business loan insurance solutions, we introduced the concept of these life insurance plans and how they can provide advantages to businesses of many types. We contrasted unincorporated versus corporate business interests, went over the financial hardships that may be experienced in a business owner’s untimely death, and talked about the many benefits such a plan provides.

In this article, we will delve into the mechanics of a business loan insurance plan and how they work to protect both business and personal assets. Finally, we will provide both a summary and a checklist to give business owners the information they need to make sound financial decisions. As with any business insurance plan, it is important to seek out the expertise of a qualified insurer to find the plan options that meet the specific needs of each individual business interest.

How Do Business Loan Insurance Plans Work?

Business loan insurance policies are economical and efficient methods for protecting critical business (and personal) assets. If a business owner were to die unexpectedly, any outstanding business debt would still need to be repaid, either through remaining business assets or by tapping into personal financial assets.

Let’s take a look at the mechanics of this insurance plan to understand how it works for a given business:

First, like many businesses, the business itself or its owner obtains a business loan or makes arrangements for an open line of credit. Lenders and creditors will require sole proprietor/sole partner businesses to personally guarantee repayment of the debt. Larger companies, such as multi-owner/multi-partner operations or corporations, may still have to provide assurances that the loan debt will be repaid.

To guarantee the funds needed to repay the loan debt in the case of an owner’s unexpected death, the business or business owner purchases a life insurance policy in an amount roughly equal to the outstanding loan. The business or owner pays the premiums on the policy, which are typically non-tax-deductible. For the purposes of this policy, the business is named as the beneficiary or the owner names a specific personal beneficiary, depending on the structure of the company and which entity actually owns the insurance policy. To summarize:

• The insured is the business owner
• The owner of the policy is the business itself or the business’ owner
• The beneficiary is the business or a specified personal beneficiary who is empowered to make financial decisions on behalf of the company.

In many cases, creditors/lenders may require the assignment of collateral benefits of the policy, as their financial interests are at stake.

At the business owner’s death, benefits of the insurance plan kick in. Proceeds from the policy are paid income-tax-free, and are used primarily to pay the outstanding loan debt and any interest that has accrued on the debt. If the policy was assigned to the creditor(s) as mentioned above (collateral benefits), then the proceed payments go directly from the insurer to the creditor(s). If the business is named as the beneficiary, or the owner assigns a personal beneficiary, proceed payments will be made to them for repayment of the loan debt.

Any policy proceeds in excess of the amount needed to satisfy the outstanding debt can be used by the beneficiary to cover any financial needs that may have arisen at the owner’s death. These excess proceeds can often be used to pay for surviving family member expenses or sometimes to indemnify the business against the loss of the owner and his or her experience and skill.

Potential Value of Business Loan Insurance Proceeds

Value of the Tax-Free Insurance Proceeds

There are many advantages to business loan insurance plans. Many companies can benefit from obtaining such an insurance policy to protect their interests and assets from creditors in the event of an unforeseen owner death. There are other benefits, particularly in the value these policies (and their proceeds) represent.

The value of insurance proceeds received tax-free upon the death of the owner can be quite significant, especially when compared to t pre-tax profits or their equivalents. An example to illustrate this value can be useful: imagine a company existing in the 25% tax bracket. With a business loan insurance policy in place, $100,000 of tax-free proceeds from that policy are equivalent to $133,333 in pre-tax profits.

To make this value even clearer, consider that depending on a company’s profit margin, the sales required to reach $133,333 in pre-tax profits can be substantial. A company with a 10% profit margin would have to have $1,333,333 in sales; a company with a 20% profit margin would expect $666,667 in sales, and a company with a 30% profit margin would need $444,444 in sales to reach that $133,333 pre-tax profits number. So, with a $100,000 business loan insurance policy in place, the proceeds from this policy resulting from the death of the business owner could replace $666,667 of sales or receipts that would have to be used to satisfy any outstanding loan debt. This is assuming a 20% profit margin for the example company.

A Checklist and Action Plan for Businesses

Smart businesses protect their assets, no matter the circumstances. Small business owners that carry business debt must also protect their personal assets, as many lenders require personal guarantees of business loan repayment. Business loan protection insurance can provide that critical asset protection. There are three steps business owners should take now, including:

• Selecting the appropriate life insurance policy and policy ownership arrangements to suit the unique needs of the company.
• Establishing insurability of the owner(s) and/or partner(s)
• Arranging for the business to make appropriate premium payments to the insurer.

In the short term, there are additional steps to take to ensure that this valuable and important insurance is ready to protect business assets. These short-term steps include:

Draft and execute a resolution to authorize the purchase of business loan protection insurance if appropriate for the needs of the company and its ownership.

Execute any collateral benefit assignments, particularly if required by lenders/creditors.

Review the issued insurance policy to make sure it meets all needs. Make adjustments with the insurer as necessary.

Finally, companies change from year to year, and their needs will also change. It is a good idea to establish an annual review of all insurance policies, including business loan protection insurance, to ensure they remain current to the specific needs and circumstances of the business and its owners. It is also a good idea for businesses to evaluate their business continuation planning needs, such as establishing a buy-sell plan in case of death or permanent disability of the owner or other key employees.

Source:
https://issuu.com/leaderscorner/docs/business_loan_insurance_plan.pptx

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Key Employee Indemnification Insurance Policies, Explained

Companies around the world insure their assets with business insurance. This is designed to protect from financial losses arising from property and equipment damage or destruction, such as in the case of certain natural disasters. Protecting key employees, however, is a commonly-overlooked area for many firms. Most people know that successful businesses are made up of more than just buildings and equipment, and the employees are a major contributor to the success or failure of a given business operation. In fact, it can be argued that employees are among a company’s most valuable assets.

To fill the gap, protecting both the company’s physical assets and its most valuable employees, key employee indemnification insurance policies are a great solution. In this two-part article series, we will investigate what may happen to a company if critical personnel should die, and the solution for protecting against financial losses associated with that death.

When Key Employees are Lost

Businesses are comprised of far more than physical assets like buildings, equipment, product inventory, and vehicles. Employees form the core of any business operation. As some of the most valuable assets a company can have, certain employees with extensive experience or unique talents tend to stand out. These are called “key employees”, and such employees can account for much of the success a business enjoys. Key employees include managers, department leaders, and directors, but are not limited to these categories. Such employees may be:

• Department heads
• IT specialists
• Sales directors
• Company directors
• Employees with years of experience, but no leadership role
• Forward-facing employees, such as customer service specialists or client care managers

What happens when key employees were to die unexpectedly? First, profits may suffer. Businesses may also have to face significant expenses in recruiting and training suitable replacements for the lost employee(s). There both tangible and intangible losses a company may experience, including:

• Disruption of Management/Leadership – if the key employee was responsible for much/all of managerial efforts, his or her loss can create confusion and inefficiency among the remaining employees.
• Loss/Reduction of Earnings – many companies can attribute their successes to a few select people; those people that are responsible for the bulk of sales and receipts. When one or more of these key players are lost unexpectedly, earnings may decline as a result.
• Credit Problems – some companies, especially small operations with only a few critical employees, may experience credit problems when creditors react to their loss.
• Erosion of Confidence – when a key employee is lost, other employees may react negatively. So too may suppliers, vendors, and customers, each who has depended on strong relationships with the key personnel.
• Replacement Costs – some of the significant expenses in the loss of a key employee are recruiting, hiring, and training a suitable replacement.

When a valued employee central to the operation is lost, it is clear that companies may face significant hurdles, both financially as well as in relationships with other employees or business partners. It is also clear that a logical move would be for a company to protect itself against these losses. How can companies protect themselves and their financial interests?

Key Employee Indemnification Insurance

A potential solution for protecting against the tangible financial losses of an unexpected death of critical employees is that of life insurance, specifically key employee indemnification insurance. In simple terms, this is an insurance policy purchased by a business to compensate that business for financial losses that would arise from the death or long-term disability of important company employees. This type of insurance is sometimes referred to as key man or key person insurance.

A key employee indemnification policy is typically a life insurance policy purchased on any employee who is considered a critical part of the business operation. Proceeds from such a policy can be used for a number of purposes, including:

• Costs associated with recruiting, hiring, and training replacement personnel.
• Replacement of lost profits.
• Indemnifying the business for the permanent loss of an employee’s experience, skills, and business relationships.
• Funding financial reserves for the company during the adjustment period associated with the loss of a key employee.
• Paying of benefits to the lost employee’s surviving family members.
• Funding the purchase of a deceased shareholder’s or employee’s ownership in the business.

There are many advantages in having these policies on critical employees. When a key employee dies unexpectedly or becomes permanently disabled and can no longer fulfill his or her duties, insurance proceeds work to maintain business continuity and to offset any potential financial hurdles the company may experience.

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We’ve learned what key employee indemnification insurance is and how it can protect a company from financial loss when a critical employee dies or becomes permanently disabled. We’ve also talked about how the proceeds may be used for a wide range of purposes. In our next article in this two-part series, we will go over the components of key employee indemnification policies and how they work, including tax implications. Finally, we will provide a summary of the benefits these financial protection solutions provide to companies that rely on their most valued employees.

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