What Is an Annuity?

Individuals hold more than $1.7 trillion in annuity contracts; a tidy sum considering an estimated $5.4 trillion is held in all types of IRAs.¹
Annuity contracts are purchased from an insurance company. The insurance company will then make regular payments — either immediately or at some date in the future. These payments can be made monthly, quarterly, annually, or as a single lump-sum. Annuity contract holders can opt to receive payments for the rest of their lives or for a set number of years.
The money invested in an annuity grows tax-deferred. When the money is withdrawn, the amount contributed to the annuity will not be taxed, but earnings will be taxed as regular income. There is no contribution limit for an annuity.
There are two main types of annuities.
Fixed annuities offer a guaranteed payout, usually a set dollar amount or a set percentage of the assets in the annuity.
Variable annuities offer the possibility to allocate premiums between various subaccounts. This gives annuity owners the ability to participate in the potentially higher returns these subaccounts have to offer. It also means that the annuity account may fluctuate in value.
Indexed annuities are specialized variable annuities. During the accumulation period, the rate of return is based on an index.
Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.
Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested when the annuity expires.

Case Study: Robert’s Fixed Annuity

Robert is a 52-year-old business owner. He uses $100,000 to purchase a deferred fixed annuity contract with a 4% guaranteed return.
Over the next 15 years, the contract will accumulate interest tax free. By the time Robert is ready to retire, the contract should be worth just over $180,000.
At that point the contract will begin making annual payments of $13,250. Only $7,358 of each payment will be taxable; the rest will be considered a return of principal.
These payments will last the rest of Robert’s life. Assuming he lives to age 85, he’ll eventually receive over $265,000 in payments.
Robert’s annuity may have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. His annuity also may have surrender fees that would be highest if Robert takes out the money in the initial years of the annuity contact. Robert’s withdrawals and income payments are taxed as ordinary income. If he makes a withdrawal prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

Two Phases

Deferred annuity contracts go through two distinct phases: accumulation and payout. During the accumulation phase, the account grows tax deferred. When it reaches the payout phase, it begins making regular payments to the contract owner — in this case annually.

1. Insured Retirement Institute, 2013

Resource: http://www.authenticcounsel.com/resource-center/retirement/what-is-an-annuity

9 Facts About Social Security

Social Security’s been a fact of retirement life ever since it was established in 1935. We all think we know how it works, but how much do you really know? Here are nine things that might surprise you.

1. The Social Security trust fund is huge. At $2.52 trillion at the end of 2011, it exceeds the gross domestic product (GDP) of every country in the world except the five largest: the U.S., China, India, Japan, and Germany.¹
2. Most workers are eligible for Social Security benefits, but not all. For example, until 1984, federal government employees were part of the Civil Service Retirement System and were not covered by Social Security.²
3. You don’t have to work long to be eligible. If you were born in 1929 or later, you need to work for 10 or more years to be eligible for benefits.³
4. Benefits are based on an individual’s average earnings during a lifetime of work under the Social Security system. The calculation is based on the 35 highest years of earnings. If an individual has years of low earnings or no earnings, Social Security may count those years to bring the total years to 35.⁴
5. There haven’t always been cost-of-living adjustments (COLA) in Social Security benefits. Before 1975, increasing benefits required an act of Congress; now increases happen automatically, based on the Consumer Price Index. There were COLA increases in 2009, 2010, and 2012, but not in 2011.⁵
6. Social Security is a major source of retirement income for 68% of current retirees.⁶
7. Social Security benefits are subject to federal income taxes — but it wasn’t always that way. In 1983, Amendments to the Social Security Act made benefits taxable, starting with the 1984 tax year.⁷
8. Social Security recipients received a single, lump-sum payment from 1937 until 1940. One-time payments were considered “payback” to those people who contributed to the program. Social Security administrators believed these people would not participate long enough to be vested for monthly benefits.⁸
9. In January 1937, Earnest Ackerman became the first person in the U.S. to receive a Social Security benefit—a lump sum of 17 cents.⁹

By the Numbers

The first three digits of a Social Security number indicate the state where the individual applied for the number. The lowest numbers are allocated to states in the Northeast; the highest numbers are assigned to the West Coast.

Source: Social Security Administration, 2011. To protect the integrity of Social Security numbers, the Social Security Administration began randomizing Social Security numbers for all those issued after June 25, 2011.

Resource: http://www.authenticcounsel.com/resource-center/retirement/9-facts-about-social-security

Retirement Income and the Traditional Portfolio

The challenge with taking withdrawals from a traditional portfolio is the “sequence of returns” danger. Experiencing negative returns early in retirement can potentially undermine the sustainability of your assets. So you may want to consider a couple of strategies to help mitigate this concern.
The first is to have a pool of very liquid assets to fund two-to-three years of retirement spending; this may keep you from selling longer-term assets at an inopportune time. Through time, and depending upon market conditions, you may have the opportunity to replenish this cash reserve using gains from your retirement portfolio.
Another complementary strategy is to integrate annuities into your retirement strategy.

Taxed As Ordinary Income

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxes as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
Until now, portfolio optimization has largely focused on the blending of different asset classes in the appropriate measure to create optimal portfolios. What is often overlooked is how to integrate different retirement investment vehicles to enhance asset optimization.
One of the industry’s leading thinkers, Ibottson Associates, has done a great deal of research around this very idea.

Retirement-Income Challenge

In a landmark study, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,” Ibottson’s research came to several key conclusions that hold important ramifications for meeting the retirement-income challenge.
One of the study’s conclusions was the addition of variable annuity with a guaranteed minimum withdrawal benefits to retirement portfolios—replacing cash or fixed-income allocations—increases total income while it decreases income risk.”¹
A successful retirement is so much more than undertaking sound investment strategies.
It’s also about developing an approach to help protecting you, your spouse, and your heirs. Consider the benefits of extended medical insurance and Medigap insurance. Review your estate strategy to ensure that it reflects your wishes and is positioned to execute on them.
Finally, stay active—physically and mentally—so that you can fully enjoy your
retirement years.

1. The Ibbotson study assumed the investor had a retirement income period of 25 years or longer. For an investor with a shorter horizon, the strategy may not be as beneficial. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested if the annuity is surrendered.

Resource: http://www.authenticcounsel.com/resource-center/retirement/retirement-income-and-the-traditional-portfolio

Retirement Income and the Traditional Portfolio

The challenge with taking withdrawals from a traditional portfolio is the “sequence of returns” danger. Experiencing negative returns early in retirement can potentially undermine the sustainability of your assets. So you may want to consider a couple of strategies to help mitigate this concern.
The first is to have a pool of very liquid assets to fund two-to-three years of retirement spending; this may keep you from selling longer-term assets at an inopportune time. Through time, and depending upon market conditions, you may have the opportunity to replenish this cash reserve using gains from your retirement portfolio.
Another complementary strategy is to integrate annuities into your retirement strategy.

Taxed As Ordinary Income

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxes as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
Until now, portfolio optimization has largely focused on the blending of different asset classes in the appropriate measure to create optimal portfolios. What is often overlooked is how to integrate different retirement investment vehicles to enhance asset optimization.
One of the industry’s leading thinkers, Ibottson Associates, has done a great deal of research around this very idea.

Retirement-Income Challenge

In a landmark study, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,” Ibottson’s research came to several key conclusions that hold important ramifications for meeting the retirement-income challenge.
One of the study’s conclusions was the addition of variable annuity with a guaranteed minimum withdrawal benefits to retirement portfolios—replacing cash or fixed-income allocations—increases total income while it decreases income risk.”¹
A successful retirement is so much more than undertaking sound investment strategies.
It’s also about developing an approach to help protecting you, your spouse, and your heirs. Consider the benefits of extended medical insurance and Medigap insurance. Review your estate strategy to ensure that it reflects your wishes and is positioned to execute on them.
Finally, stay active—physically and mentally—so that you can fully enjoy your
retirement years.

Resource: http://www.authenticcounsel.com/resource-center/retirement/retirement-income-and-the-traditional-portfolio

Are Women and Financial Strategies a Mismatch?

Although 90% of women say they are the chief bill-payer and shopper at home, more than 70% believe they are behind schedule when it comes to saving for retirement.^1,2 And a full 60% say they haven’t tried to calculate how much they need to save in order to live comfortably in retirement.

These figures suggest that most women don’t shy away from the day-to-day financial decisions needed to run a household, but when it comes to projecting and strategizing for retirement, some women may be leaving their future to chance.

Women and College

The reason behind this disparity isn’t a lack of education or independence. Women today account for 60% of college students in the U.S., and they earn more master’s degrees and doctorates than men.⁴ So what keeps them from taking charge of their long-term financial picture?
Research suggests that one reason may be a lack of confidence.Sixty percent of women believe their investing skills are below average.⁵ Women may shy away from discussing retirement because they don’t want to appear uneducated or naïve and hesitate to ask questions as a result.

Insider language

Since Wall Street traditionally has been a male-dominated field, women whose expertise lies in other areas may feel uneasy amidst complex calculations and long-term financial projections. Just the jargon of personal finance can be intimidating: 401(k), 403(b), fixed, variable.⁶ To someone inexperienced in the field of personal finance, it may seem like an entirely different language.
But women need to keep one eye looking toward retirement since they may live longer and could potentially face higher health-care expenses.
If you have left your long-term financial strategy to chance, now is the time to pick up the reins and retake control. Consider talking with a financial professional about your goals and ambitions for retirement. Don’t be afraid to ask for clarification if the conversation turns to something unfamiliar. No one was born knowing the ins-and-outs of compound interest, but it’s important to understand in order to make informed decisions.

Compound Interest: What’s the Hype?

Compound interest may be one of the greatest secrets of smart investing. And time is the key to making the most of it. If you invested $250,000 in an account earning 6%, at the end of 20 years your account would be worth $801,784. However, if you waited 10 years, then started your investment program, you would end up with only $447,712.

This is a hypothetical example used for illustrative purposes only. It does not represent any specific investment or combination of investments.

Resource: http://www.authenticcounsel.com/resource-center/retirement/are-women-and-financial-strategies-a-mismatch