Retirement Income Blog

Although there are several flavors of annuities, the term “retirement annuity” typically refers to an annuity taken from an employer pension plan (e.g. monthly payments for life) or a non-qualified annuity purchased by an investor with after tax funds in return for monthly payments from an insurance company.  Retirement annuity rates or monthly payments will depend on the amount you invest, your age and the term you select for payments (you can generally select payments over 5 years or lifetime).  If you select lifetime payments, both you and the insurance company share risk on your life expectancy.  If you get hit by a bus and killed tomorrow, payments stop, they keep all your money and they win.  If you live to age 110, you get a great retirement annuity rate and they will be sorry to have you as a client they must pay for life.

A retirement annuity provides dependable security–think of it like another social security check but likely better.  While the Social Security system is upside down (has more payments due than it will have assets), commercial insurance companies invest and preserve your money to pay your claim.

To purchase a retirement annuity from an insurance company, you make a one-time payment and distributions typically begin within a month. A retirement annuity can be fixed or variable–your payment can be the same every month, you can opt for smaller payments in the beginning that grow over time (i.e. inflation adjusted) or you can have your payments based on a menu of investment options and you take the risk of how well the investments perform.  In  the case of the variable annuity, retirement annuity rates cannot be forecasted although some annuity companies will provide a minimum guaranteed rate of return.

In the case of he income payments you receive from a “fixed” retirement annuity, these will never change and are based on the amount you deposit, the age when you start and the interest rate environment at the time of purchase.

You can check retirement annuity rates with the immediate annuity calculator.  For an even more current quotation, ask your retirement consultant to get quotes from a number of insurance companies.

Note that the quotes you receive will show the monthly payment you get.  You will likely not see any interest rate on these quotes because the total payments to you may be unknown in the case of a life annuity, i.e. no one knows how much you will receive.  But if you died at your life expectancy, you could calculate the retirement annuity rate and get an internal rate of return about 2%.  You may be surprised why anyone would buy a retirement annuity at such a low rate.  It’s because of the security involved–no matter how long you live, you cannot outlive the funds on a lifetime retirement annuity.  The insurance company takes a substantial risk and provides a relatively low rate when priced to life expectancy.

If you are age 70 or above, you will likely not find a source of cash flow larger or safer than what you can obtain from the retirement annuity, with the comfort of knowing your payments are quite secure from a AAA rated insurance company. Even though the retirement annuity rate may be low (because your principal is never recovered), the monthly payments cannot be matched by an alternative with the same degree of safety.

Additionally, under current tax law, a portion of each payment received from a retirement annuity is tax-free until your total premium is recovered. The remainder of each payment is taxed as ordinary income in the year received.

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If you don’t want to waste your dollars, its critical that you understand estate tax planning basics and how to avoid estate tax.

The Annual Report on the United States Government reports that Americans paid $26 Billion in estate taxes in 2006. Every dime of those taxes could have been avoided.  How do you think the kids felt when they wrote out a check for $300,000 for estate taxes and then learned from the attorney that mom and dad could have saved them every penny?

If you don’t like wasting money on taxes and don’t want your kids squandering money either, then these estate planning basics will explain what you need to do.

You must realistically answer these questions: 

1. Will your estate be worth more than $1 million ($2 million for a married couple) when you die?   If Congress does not change the estate tax rates and limits, from 2011 and later, estates above $1 million will be subject to estate tax.
 
2. Do you have any assets that could be double-taxed at your death (double taxed by income and estate taxes, which could consume 70% of the value) such as IRAs and annuities? Estate planning basics require that you plan now to avoid this double tax and there are many ways to do so.
 
3. Do you think that if you need to take action, that your attorney would call you up on the phone and tell you? (He probably won’t as many attorneys wait until you call them).  So an important estate planning basic is that no one will tell you what to do.  You need to ask.
 
4. Do you think you have plenty of time to take care of any estate tax problem–like the people who paid $26 billion last year?  Probably the most critical of the estate planning basics is to not procrastinate.  Death does not discriminate by age.  If you are 35 and have a family, get your estate planning in order now.
 
5. Do you incorrectly think that estate planning means giving up control of assets or making gifts or giving to charity?  (A fundamental of estate planning basics is that you can keep total control of assets yet still remove them from your taxable estate).
 
6. Do you have the false notion that a living trust will eliminate your estate taxes?(You will pay estate taxes on assets over the exempt threshold, living trust or not).
 
7. Do you think that you need to die in order to get your estate tax exemption? (You don’t, $1 million is available right now and many wealthy people use their exemptions when they can make the most of them, during their lifetimes).

If you answered “yes” to any of the above estate planning basics misunderstandings, you probably have an estate tax problem.

Your next step–ask your retirement consultant or your CPA what you need to do to get your estate in order.

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