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Will you outlive your money?

By Hal Rogers

The National Institute on Aging (NIA) says that after remaining constant for most of human history, life expectancy (theretirement average number of years a person can expect to live) has nearly doubled in the last century. The maximum life span has increased spectacularly as well.

Although from 1996 through 2006, the Consumer Price Index (CPI) on all items increased less than 3 percent, housing costs increased more than 30 percent, medical costs almost 50 percent, and gas prices — well, oil companies have taken us on a roller-coaster ride, and prices are inching up again. High energy prices, as you know, end up increasing the cost of almost everything else!

So, if Americans are living longer and things are costing more, there is a chance your money won’t last as long as you do once you decide to retire.

As you think about living in your retirement, consider: If you were to retire today, could you live on Social Security and distributions from your pension or 401(k)? Probably not — at least not in the style to which you are accustomed.

It stands to reason, then, that moderate increases in Social Security and income from a pension or 401(k) will probably not be sufficient for retirement. So, regardless of your current age, it makes sense to think about options for retirement, to assure that you won’t run out of money when you decide to stop practicing. Here are several to consider:

• Lifetime annuities. The conventional solution to making certain your income lasts as long as you do is to purchase an immediate lifetime annuity. In this type of plan, you give money to an insurance company; the insurance company gives you money for the rest of your life, even if you live to age 100 or older, and even if it pays you more than you gave them.

The downside to a lifetime annuity: Your income will not increase with inflation, and your heirs will not get any of that money when you die.

• Stock market investments. The growth potential of the stock market can increase your investment income over time. The more aggressively you invest the more potential you have for either gains or losses.

The downside to stocks: The market doesn’t’ provide any guarantees. If the market declines when you need to withdraw, you can lose.

• Insured variable annuity accounts. Insured accounts allow you to participate in the stock market while protecting your income and/or death benefits. While account values aren’t guaranteed, since you can’t guarantee that the stock market won’t go down, withdrawals and/or death benefits are guaranteed (subject to the claims-paying ability of the carrier.) These accounts, called variable annuities, help you sustain income during retirement.

With a variable annuity, your income amount may increase over time. With the right account, structured the right way, market performance can cause your income to go up, but it can’t make it go down.

The underlying investments in a variable annuity are sub-accounts, accounts that are similar to mutual funds, holding stocks, bonds, or money-market instruments. Therefore, the market value of the account is subject to the ups and downs of the market, but the insured benefits guarantee your income or lump-sum death benefit payout. Unlike lifetime annuities (which provide income but no survivor benefits), variable annuities also provide death benefits, typically at least the amount of your purchase payments, less withdrawals. Some companies and some products increase the guaranteed death benefit with market increases without lowering it in case of market declines.

Finally, like lifetime annuities, variable annuities are tax-deferred, which means that you do not pay any taxes on the income and investment gains until you withdraw it.

The downside to variable annuities: Many different types of variable-annuity accounts exist, and that means you and your financial advisor need to do a lot of homework to select the best for you. Even if an advisor makes a recommendation, request a list of all the companies included in your advisor’s research and read the fine print. Remember, the marketing piece giveth and the fine print taketh away! 

Because variable annuities are invested in the market, they are subject to market variations. Also, when you begin to take distributions from a variable annuity, you will be taxed on the earnings at ordinary income-tax rates instead of capital-gains rates, which are generally lower.

Costs are generally considered a downside to variable annuities; however, properly structured, variable annuities can allow you to participate in a more aggressive portfolio than you might without the insured benefits, since they can provide downside protection that mutual funds do not offer. However you should never invest more aggressively than the risk-tolerance with which you are comfortable.

• Indexed annuities. Indexed annuities, often erroneously marketed as stock market alternatives, are more appropriately considered bond alternatives because of their cap on upside performance, which is based on a calculation connected to an index, such as the Standard & Poor 500 Composite Stock Price Index. With their relationship to stock indices, they can give you a little more upside potential than you might generally expect from bonds.

The rate of return on indexed annuities is based on a calculation connected to an index, such as the Standard & Poor 500 Composite Stock Price Index, but generally subject to a cap.  Typically indexed annuities do not have internal costs; however, they almost always have severe, long-term early-surrender penalties.   

The downside to indexed annuities: The downside to indexed annuities is their performance limitations due to the caps, and the amount and term of their surrender penalties.

What to do

You want your money to last as long as you do. But, before buying any financial product:

• Do your homework. Consult a retirement strategist; obtain and review the prospectus; understand what you are buying.

• Understand costs and benefits. Read the annuity contract carefully and be sure you understand fees and charges, investment options, death benefits, and payout options.

• Compare. Carefully consider the benefits, drawbacks, and costs of all types of financial vehicles. Compare them side by side.

In addition to insuring that your money lasts as long as you do, make certain you address liquidity needs, tax planning, and asset protection issues. A dollar bill in your birthday card won’t be nearly as satisfying when you are age 100 as it was when you were six.

 

 

hal-rogersHal Rogers, CFP, CSA is chief retirement strategist with Jacksonville-based Retirement Services, advisory services and securities offered through ProEquities, Inc., member of Financial Industry Regulatory Agency (FINRA) and Security Investor Protection Corporation (SIPC). He can be reached at 888 720-0556 or at office@retserv.net.

DISCLAIMER: Information is for informational purposes and should not be construed to be specific tax, legal, or investment advice. Decisions regarding individual circumstances should include consultation with a professional who understands your situation. All investment purchases are to be preceded by a current investment prospectus.

 

SIDEBAR

Your best weapon: Retirement strategies

Perhaps the greatest weapon available in your battle to assure your money lasts longer than you do is retirement strategies. Proper structure and integration of specific financial products make those products work harder. 

As you move through the financial phases of your life, accumulation (saving and investing), distribution (taking income from your accounts), and transfer (leaving assets to your heirs), the effects of the tax laws reverse. 

For example: An IRA or a 401(k) account gives you tax advantages when you are in the accumulation phase, but results in taxation in the distribution phase and greater taxation in the transfer phase.

Strategic planning, which looks at your current financial state and your financial goals, can help you prevent the unnecessary negative effects of this reversal effect.

 

 

 

 


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