What is an ANNUITY?
An annuity is a contract from an insurance company that offers to pay income to you at regular intervals, for a period of time you specify, all in exchange for your contribution (premium). These contracts may contain other features as well.
Why buy the ELM INCOME ANNUITY?
This contract, issued by Principal Life Insurance Company, is for your consideration…
Why buy the ELM INDEX ANNUITY?
This contract is for your consideration if you are not yet ready to turn your assets…
Questions & Answers
- » What risks should I anticipate when planning for a more financially secure retirement?
- » Is living longer than life expectancy likely?
- » How do poor investment choices affect my retirement savings?
- » How does inflation figure into retirement income planning?
- » Is there a “safe” spending level to guarantee that assets will never run out?
- » What can I do to manage or control the risks to retirement income that are mentioned here?
- » I already own a diversified portfolio of stocks and bonds. Why isn’t that enough?
- » Who should consider purchasing annuities?
- » How do I decide when to buy to an income annuity?
- » What sources of money can be used to pay premiums for annuity contracts?
- » Should I take a lump sum from my employer’s qualified defined benefit plan and use the cash to buy an Income Annuity from an insurance company?
What risks should I anticipate when planning for a more financially secure retirement?
There are several risks including losses, inflation, unplanned emergency expenses and health care costs, and, of course, living longer than expected.
Is living longer than life expectancy likely?
It is much more likely than many people think. According to the Annuity 2000 mortality table relied upon by some insurance companies to price annuity contracts, for a husband and wife, both age 65, there’s a 60% chance that one will survive beyond age 90.
How do poor investment choices affect my retirement savings?
When investments perform poorly during or just before retirement, we can experience damage to our future lifetime income. This is because these reduced assets, which may be further reduced for income withdrawals, may no longer be large enough to generate the earnings needed to maintain your original income plan.
How does inflation figure into retirement income planning?
Inflation needs to be anticipated because, over a period of time, it can cause prices to increase significantly. Thus it may force you to make larger withdrawals from your retirement assets than you expected to pay for expenses. As a result, your assets may be depleted much earlier than anticipated.
Is there a “safe” spending level to guarantee that assets will never run out?
There’s no easy answer to this question. Many professionals suggest a 4% spending rate, adjusted annually for inflation, but there are no guarantees. It depends on many variables including how you’ve invested your retirement assets and how long you live in retirement. Lastly the “safe” level of spending needs to be re-estimated regularly as time goes on in your retirement.
What can I do to manage or control the risks to retirement income that are mentioned here?
One critical control is to keep spending to a level that is realistic for your assets. We also recommend you consider the advantages of the protections and guarantees in an Income Annuity and a Fixed Index Annuity. For many individuals in or near retirement, these contracts can strengthen the security of retirement assets and their ability to generate a sustainable lifelong income.
I already own a diversified portfolio of stocks and bonds. Why isn’t that enough?
Planning for secure retirement income, once you’re actually retired (or nearing retirement) is fundamentally different than saving “for” retirement. There are advantages to adding fixed annuities that offer “protection” against asset losses and protection against market volatility and income for life.
Who should consider purchasing annuities?
Those of us in or near retirement that have savings we want to protect from downside market risks and/or convert into guaranteed income for life.
How do I decide when to buy to an income annuity?
The time to buy an income annuity is when you’re ready to start converting a portion of your assets into guaranteed income. For example, that could happen at age 60 with your income starting at age 70. Of course, you can wait until you’re about to retire so that your annuity becomes the “extra paycheck” you need each month to maintain your lifestyle.
What sources of money can be used to pay premiums for annuity contracts?
Premiums can be paid by check or a transfer of funds from other sources like a 401(k) plan or a brokerage account. Some transfers of funds may be tax free.
Money transferred from qualified savings sources (for example, IRA, 401(k), 457, and 403(b) plans) can be rolled over without triggering a taxable event. You can also transfer funds without triggering a taxable event from another annuity contract through a process called a “1035 exchange.” Before you do, however, you’ll want to check to see if your current annuity has surrender charges, and whether the benefits of the new annuity justify an exchange. Note, the new annuity may expose you to a new surrender charge schedule. It’s even possible to exchange a life insurance policy for an annuity contract without triggering a taxable event.
Of course, premiums can also be paid with assets from other sources (for example, bank accounts and money market or cash funds in your brokerage account).
Should I take a lump sum from my employer’s qualified defined benefit plan and use the cash to buy an Income Annuity from an insurance company?
The short answer is to always carefully consider the qualified annuity that may be available to you through your employer’s plan, before taking a lump sum to purchase an individual annuity from an insurance company.
Why? Because the qualified plan annuity may be less expensive than an individual annuity due to lower administrative charges and different methods and assumptions used to calculate the annuity benefit. Also at least part of the qualified plan annuity likely will be guaranteed by the Pension Benefit Guaranty Corporation, a government agency.
Still, you might find an individual annuity attractive if (a) you desire to purchase your annuity benefits gradually, using a “dollar-cost” average* strategy over time, after your retirement (and most qualified plans require that the annuity option elected begin as of one specific date, not several dates), (b) you desire to purchase inflation protection for the annuity, not always available from a pension plan, (c) you prefer a death benefit that is not available in the qualified plan, (d) after careful comparison, an individual annuity is less expensive, and (e) you prefer the investment flexibility offered by the lump sum.
Note some qualified plans permit “partial lump sums.” So, in these plans, you may elect to receive some part of your plan benefit in the form of a plan annuity and the remainder in a lump sum.
*Dollar-cost averaging does not assure a profit or protect against a loss in declining markets. It involves continuous investing regardless of fluctuating price levels. The investor should consider his or her financial ability to continue investing through periods of low price levels.