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How To Create A Secure Retirement Income For Life

With the stock market taking recent dives and bank and government bond interest rates at all time lows, certain types of annuities have never looked so good.


Annuities can be a great place to put your serious retirement money, but you need to make sure you’re buying the right kind of annuity…designed the way you need it to be so that you have flexibility and control.


For example, a Variable Annuity is a registered securities product…and this is what you’ll most likely be sold or pushed into by your stockbroker or financial salesperson because they get a large upfront commission and continuous trail commissions. Charging nearly 2-3% in total year after year annual fees, your stockbroker or financial salesperson will continue to receive annual back-end commissions.


So the only advantage to a Variable Annuity is an ‘lifetime income rider,’ you can elect to buy, which works well if you only need lifetime income and aren’t worried about leaving your heirs anything. But your actual investment value could tank if the stock market goes down.  And with 2-3% annual fees with these types of annuities, they are very expensive for not much benefit.


Then there are Immediate Annuities.  With Immediate Annuities, you give the insurance company a lump sum of money, and they give you an income for a period of years or life.  But you never have access to that lump of money again!  It’s like retiring at work from an employer’s pension plan…you give up the lump sum in the plan for a stream of income payments. In my opinion the Immediate Annuity is not a good option for most folks.  You have no inflation adjustment on the income stream and poor internal rates of return.


Finally we have the Fixed and Fixed Indexed Annuity.  I really like both of these for retirees and this is the type of annuity I use a lot with my retired clients.  On a purely ‘fixed’ annuity product, it functions like a bank CD and offers you a stated rate of interest.  Whatever the insurance company declares, that’s what you get.  However, there is a hybrid product called a ‘Fixed Index Annuity.’


With a ‘Fixed Index Annuity’ you don’t have to accept the insurance company’s stated rate of interest.  Instead you can opt to ‘link’ to a stock market index, typically the S&P 500.  If you ‘link’ your performance to a stock market index, you might do better than the stated interest rate the insurance company is declaring.   But the index could also go down.  However, with these products, unlike the Variable Annuity, you will not lose value or any previous year gains if the stock market goes down.  They are truly principal protected.


Any previous years gains are always locked in and ‘ratchet’ up.  The downside of a Fixed Index Annuity is that you will not get the full ride up of the market.  Typically you’re ‘capped’ on your stock market linked interest gain but there are different ‘crediting methods’ which allow you to perform differently depending on the volatility of the market. 


The worst performance you could see in a Fixed Index Annuity on any given year is a ‘zero percent gain’. But, that’s still great, considering that people who owned Fixed Index Annuities did not lose a single penny when the S&P 500 Index lost over 40% of value in 2008.  So a ‘zero’ year can become a ‘hero’ year in down stock markets.  These products are NOT registered securities and are NOT sold by prospectus.  The Fixed Index Annuity is just like buying a bank account that can link its interest rate to a stock market index’s performance.  But in this case the ‘bank’ is a life insurance company.  With a Fixed Index Annuity, you’re never actually in the stock market taking risk on your money or paying huge fees like the Variable Annuity.


You can also buy a ‘lifetime income’ rider on Fixed Index Annuities just like you can on the Variable Annuity.  But why pay 2-3% per year in steep fees on a Variable Annuity when you can buy a Fixed Indexed Annuity where there are no fees except for a small rider fee for the ‘lifetime income’ rider, generally .40% to .75% per year depending on the carrier.  This ‘lifetime income rider’ can also guarantee that your ‘income value’ of the annuity can increase at 6% to 8% per year no matter what the stock market or interest rate market does.  It’s like buying insurance on your account to make sure that you have a fighting chance to keep up with inflation even if the stock market does nothing or goes negative.


With the Fixed or Fixed Indexed Annuity there is liquidity…a person can take 10% per year, each and every year…without any penalty at all.  If you take 10% per year out of any account…you’ll be out of money before you die…pretty much guaranteed!  So 10% penalty free access per year is plenty of access to your money and is a lot more penalty free access than even a bank CD.


With the ‘lifetime income rider’ in place, even if the Fixed Index Annuity’s actual value runs to ‘zero’ balance when you begin taking income streams, you’ll still get the same income stream for the rest of your life as when you first started taking the income!  If properly structured, these income riders can also be setup to allow a spouse to take over the income stream when you die.

But, like anything, don’t put all your money in an annuity…just the serious money that you want to guarantee will be there to generate a lifetime income for you or that you want safety and principal protection on. 


Mark Kennedy is President of Kennedy Wealth Management LLC, a Registered Investment Advisor, . He has also hosted the Los Angeles Radio Show, “Retire in Style” on KRLA AM 870.

Disclosure: no positions