One of the most critical times in most of our financial lives comes when we retire. We developed a very useful tool to help show if you are on track or not. Our one-page Retirement Income Summary is a tool where we can change hypothetical rates of return, inflation, portfolio allocations, death and long term care events and how adding additional guaranteed income sources change the portfolio withdrawal stress or can eliminate that stress entirely.
Call us or Click here to start the process – it is a FREE Service offered by Westland Wealth without any fluff – we’ll just gather the necessary information we need and go to work for you – Absolutely no obligation.
When we retire and face years of living on Social Security, our pension, if any, and the assets we have put aside for this purpose; there are two critical issues we must know:
- Will it be enough?
- Will it last as long as we are living?
The creation and maintenance of a financial portfolio is totally different for someone who must live off those assets versus someone who is still in the process of accumulating them. For the accumulator, time is his friend. For the spender, time can be the enemy; the unknown quantity that must be considered in each investment and withdrawal decision. The greatest asset to address the longevity issue for most Americans is Social Security, the ultimate pension plan, guaranteed by the federal government to pay monthly income for as long as you live.
While certainly not the desired total source of retirement income, the Social Security annuity provides a significant lifetime income base on which can be added additional income from personal assets.
While many investment advisors offer investment, strategies designed to provide income from your assets that will last your lifetime, all they can do on their own, is assure you they will do their best to be successful with your money to meet your objectives.
Ask them if they can guarantee results and of course they must step back and offer only assurances of best effort. The success or failure unfortunately will be totally on you because only institutions like insurance companies and governments can provide guaranteed results, but those are still subject to their claims paying ability.
All pension plans that are fully guaranteed must emanate from an institution and in the world of personal finance, only an insurance company has the investment resources and the unlimited time horizon combined with the actuarial resources to provide guaranteed income for your lifetime. Again, all subject to their claims paying ability now and in the future.
We are hearing more and more each day from people who sell annuities and from observers and professionals who try to minimize their value in comparison to properly invested and managed portfolio.
Many annuity salesmen promote high rates of return that are tax advantaged and tell us that this is the way to go. While the investment community tells us annuities are overpriced, over rated and over sold.
We believe this is wrong on both counts. There are many annuities that are priced fairly and provide results that cannot be achieved any other way and there are many in the investment community that embrace annuities as an option for consideration to help achieve client goals within their risk tolerance and time horizon. The key is to first understand the retiree’s needs and concerns then determine what financial strategies and products to employ to achieve them. If an annuity can help, then the proper one or two can be selected for the client to consider for a portion of their investment portfolio.
Options available for receiving income are:
Immediate annuity – Income starts now or within one year for life or for a period certain and is based on your age and amount of deposit. There are different options that we research to make sure you get the best value and the insurance company doesn’t get to keep any of your money.
Deferred Immediate Annuity – Income starts in the future just like the immediate annuity where payments begin after 1 year. These annuities are sometimes referred to as “longevity insurance”. For example: Deposit made at age 65 with income starting at age 80. This strategy could be a suitable alternative in many planning circumstances.
Lifetime Guaranteed Income Riders – These are added onto fixed indexed or variable annuities. The insurance company will pay a specific monthly income for the life of the annuitant without “annuitizing” the contract. They give the owner a little more flexibility but may come with some added costs that must be understood. They have become a very useful tool in retirement income planning today.
The Annuity Controversy
Annuities may be one of the most controversial financial instruments proposed to clients who are retiring. People who sell investment advice for a living often advise their clients that the guarantees provided by annuities come at too high a cost and point to the commissions earned when an annuity is purchased. On one level this is understandable as the criticism is coming from one who is competing with the insurance company for control of the client’s asset. What is not discussed are the earnings of the advisor on your assets over an extended period of time as compared to the commission earned on an annuity sale that is compensation from the insurance company and not paid by you. One may not be better than the other. Experts who provide you guidance deserve to be compensated and you must weigh that advice against any conflicts of interest that your advisor might be operating under. We at Westland Wealth will operate with full disclosure and transparency.
Note: Fixed annuities typically do not have any specific fees that are associated with advisor compensation to the principal of your account. Instead, it requires a commitment on the part of the owner to maintain the account in place for a specified period, generally 3 to 10 years. If liquidated prior to that period of commitment, a “surrender charge” is imposed that initially could be as high as 10% for a 10 year commitment and reduces over the “surrender charge period” by one or so percentage points per year to zero percent at the end of the surrender period. So, if the annuity remains in place for the full period of the commitment the compensation to the advisor is totally paid by the insurance carrier, not by you.
Fee-based planners on the other hand take an annual fee (usually 1% to 2%) of invested assets they manage. If you keep your account with them they are likely charging a fee for the entire duration. In other words, you pay the advisor for managing your money every year until you take it away from him/her. With an annuity where the life carrier compensates the agent, you could liquidate your account after the surrender period expires and never pay for any part of the agent’s commission.
The person who does not do complete financial planning or portfolio management but only sells annuities may be biased to a point and can only point out the advantages and disadvantage of the product offered to the exclusion of other financial alternatives. So, any advice should be considered carefully. There is seldom only one correct alternative when it comes to managing a portfolio or creating a retirement plan. The important thing is to have as much information as possible and be able to ask the important questions that matter to you. Then, you are better equipped to judge what portion of your retirement income (if any) should be derived from annuities and how your other investments should be arranged. We work both sides and embrace working with other financial professionals who may be advising you.