I realize you’ve heard about the opportunity with baby boomers more than a thousand times, but it’s vital that boomers be adequately prepared for retirement. With one misstep, years of planning could be jeopardized. Not safeguarding their life’s work from a market downturn while transitioning into retirement could be devastating.
Your clients’ 401(k)s need some level of principal protection, and now may be the perfect opportunity to educate them about aged-based, in-service withdrawals at market highs. The strategy works by completing a direct rollover with a portion of their employer’s retirement plan into a fixed index annuity within an Individual Retirement Account. Keep in mind the IRS allows age-based, in-service withdrawals; however, each plan may have its own particular restrictions. In some cases, withdrawals may be based on service credits or subject to a vesting schedule. The benefits of an in-service withdrawal include more control over assets, additional income and wealth transfer options, and the opportunity for more investment strategies.
It may be the perfect time for this strategy considering history and today’s market levels. Take a look at the S&P 500 index, for example. In the last 14 years, the S&P was nearly cut in half twice. According to the Federal Reserve, U.S. median household net worth decreased by 39 percent between 2007 and 2010, consequently reducing 18 years of gains during that time period.
The Bottom Line: Help protect your clients’ nest eggs and create the retirement lifestyle they hoped for. Ash Brokerage will help you in selecting an appropriate fixed indexed annuity with the latest crediting strategies and cutting-edge GLWB’s to help maximize lifetime income while keeping the nest egg intact in the event of a market downturn.
Today’s income riders available with fixed indexed annuities (FIAs) have evolved tremendously over the past several years, based upon what clients want, as well as what they need. Ten years ago, clients had to turn to variable annuities if they wanted a compelling income rider, but insurance companies have heard clients’ demands and have stepped up to deliver.
Clients want guarantees, flexibility, liquidity and control. Not every income rider or annuity has all four components, but you can customize an annuity plan based on your client’s personal priorities.
Let’s discuss guarantees, flexibility, liquidity and control. FIAs always have a guarantee on the downside, and now a rider may be added to guarantee that a client will never run out of income. These are not annuitized riders, they are guaranteed minimum withdraw benefits. Yes, if the contract value does go to zero, there is no cash value left, but the income continues until death of the client(s).
This approach also gives the client much more flexibility in how they receive the income and take the withdrawals. The withdrawals may be stopped and started, and in some cases, the deferral will go back into the contract or be held in a separate “bucket” for future use. This may be useful from a tax liability standpoint if a client is close to moving into a higher bracket.
Because the withdrawals are not annuitized and the client can turn them on or off, this also gives them control. It enables them to maintain contract value for a longer period of time if the value does start to decline and they do not wish to take all of the income available. The degree of control varies between carriers – some allow the income to start immediately while some require at least a year of waiting and also restrict the client as to when they can turn on the rider (anniversary date only or daily rollup).
All insurance companies reward clients who wait by offering rollups and/or age-based withdrawal factors. Find out when and how the client plans to use the rider, and we will find the best fit.
Most annuities have more-than-adequate liquidity provisions as well. With FIAs, it is generally 10 percent – this is either 10 percent of the premium or contract value. If it is the contract value, the client usually must wait a year. Some carriers even allow withdrawals without triggering the income rider.
The best recommendation I can make is to ask your client what they feel is most important. When do they want to start taking income? How much flexibility do they want with those withdrawals?
The Bottom Line: Know your clients and their hot buttons – drill down and find the best match for them. It may even make sense to split your client’s funds between two carriers, based on what they are trying to achieve.
It’s an old rule of thumb (emphasis on the word old) that investors shouldn’t buy annuities in their retirement accounts. It was a good rule when tax deferral was the only goal. But these days, clients most often buy annuities for their retirement income or principal guarantees —these guarantees can make sense anywhere clients are worried about their retirement assets, including IRAs.
The guarantees might either provide for current guaranteed income or secure a guaranteed base of lifetime income for future distributions.
In fact, it appears consumers were already figuring out the irrelevance of the “don’t buy annuities inside of retirement accounts” rule all by themselves. According to LIMRA, in 2012 more than 60 percent of deferred variable and fixed indexed annuity purchases were being funded with IRA dollars!
Similarly, the emergence of guaranteed living benefit riders on fixed indexed annuities has arguably made them even more popular as a potential fit within retirement accounts, both for the risk/return characteristics of the annuity as an investment and the guaranteed income features for retirement income.
Nonetheless, the reality — as evidenced by the incredibly high election rate for buyers of annuities with guaranteed living benefit riders, and the rise of fixed indexed annuities as well — is that the majority of annuity purchases are still about buying access to guarantees and/or for unique investment opportunities (e.g., the risk/return profile of an equity-indexed annuity or a compelling yield in a fixed annuity). They’re NOT for tax deferral!
The Bottom Line: Given these changes, it is perhaps time to abolish the “annuities should never go into an IRA” rule and recognize that it has become more a myth than sound advice in today’s environment.
When looking for safe investment options, many investors look to CDs, especially when equity investments are on the downturn. Many seem to think CDs are the only option that can provide safety and guaranteed growth. However, tax-deferred annuities compare very favorably to CDs, and investors should review both products’ features to help determine which is best suited for their financial situation:
Tax Savings – Annuity gains grow tax-deferred, while interest earned on CDs is taxed and reported annually as ordinary income. Taking advantage of tax deferral will increase your earning power by continued annual earnings on your tax savings.
Earnings on annuities are taxed as ordinary income when withdrawals are made. However, you do have an option to spread out the tax burden for non-qualified money through guaranteed income payments, where payments are partly return of non-taxed cost basis.
Earning Power – As of October 2014, the average return on a one-year CD was 0.26 percent, and the average for a five-year CD was 0.83 percent. 1 At the same time, the average five-year fixed annuity rate was 1.63 percent2 – a tax equivalent yield of 2.26 percent, based on a 28 percent tax bracket.
Investors could also take advantage of tax-deferred indexed annuities to provide even more earning potential. These products include many indexing options, including un-capped strategies, with no downside risk to principal.
Lifetime Income Options – Tax-deferred annuities offer guaranteed lifetime income payments through annuitization or lifetime income riders. These are great retirement planning tools that generate income that you can’t outlive. CDs can be liquidated as they mature, but there’s no guarantee the funds will last a lifetime.
Liquidity – Annuities allow up to 10 percent of the value to be withdrawn without penalty. With CDs, withdrawals prior to maturity are generally subject to penalties.
Payment at Death – Annuities can help avoid probate by paying funds directly to the beneficiary. CDs, however, are subject to probate, along with possible costs and delays.
The Bottom Line: CDs aren’t the only safe investment option available. Make sure your clients see how the features of an annuity compare and can potentially offer them more benefits.
© 2018 Ash Brokerage LLC.