Snarr Financial & Insurance Services, Inc.
1640 Highland Falls Dr.
Leander, Texas 78641
CFF, LACP, NSSA
Annuities aren’t for everyone; you have seen me write about that often. But when you are putting together your “bedrock” foundation for your retirement plan, they can be essential to that planning. Think of layering, this is about safety and security as your foundation.
The very bottom of your retirement foundation is Social Security, a fully guaranteed income paid monthly. Next would come your pension (if you earned one), another layer of guaranteed income. On top of that should be your annuity, income payable for life, and available for use by your spouse should you die prematurely.
Annuities seem to draw lots of controversies, both good and bad. Even President Obama suggested an annuity should be considered for your retirement planning, and he isn’t the first one to say that. Many years ago Benjamin Franklin offered the same sort of advice, “an annuity for living in your elder years is a wise choice.” He thought so because he bought two of them, one naming the city of Philadelphia as the beneficiary that continued to receive benefits from Ben’s annuity until 1977.
Here are ten solid reasons to consider an annuity as part of your retirement foundation.
1: Outsource: When you buy an annuity, you are outsourcing the responsibility of financial management. The insurance company (for the benefit of getting to hold your money) promises to live up to their contractually guaranteed benefits. If they guarantee a specific interest rate, they will pay for it. If they guarantee income for a specific period of time, they will pay it. They assume the entire responsibility of the management of your funds in return for allowing them to hold your money. Insurance companies are professionally managed and highly regulated, let them keep your money and enjoy the benefits the annuity provides.
2: Two types of annuities: Be Aware: Ever buy an apple? Think about your choices at the market for apples, Delicious, Goldens, Jonathans, etc., and the list goes on. Fortunately, with annuities, you only have two options, those sold by insurance companies and those sold by security-licensed professionals. The annuity sold by security professionals is called a variable annuity and their sale I regulated by the securities industry. A variable annuity is a security wrapped in an annuity holder. Your funds are invested in a mutual fund type account (separate accounts). Your funds can grow, and they can shrink based on fund investment performance. Variable annuities have a myriad of fees, fees for asset management, fees for the annuity wrapper, and fees for additional riders attached to the annuity. The second type of annuity is those sold via insurance professionals. This kind of annuity has no fees and will pay a set rate of return. Fixed annuities are not regulated by the security industry but by your state of residence Department of Insurance. Be careful about which type of annuity you choose and always ask about fees. If the broker says the annuity has fees, it is likely a variable annuity, ask the broker how the benefit you are being charged for can help your retirement plan.
A good source for more information regarding variable annuities can be found at this link: http://www.finra.org/investors/annuities
3: Probate avoidance: According to AARP the cost of probate can be higher than the expense of an average car. Many assets naturally avoid probate, and an annuity is one as long as you declare a named beneficiary. It is a simple process, the owner of the annuity designates who will receive the proceeds (or remaining value) of the annuity if the annuitant should die. Probate can be both costly in time delay as well as financially expensive. Probate costs can be high, consider executor fees, attorney fees, court fees they all add up. If you name a beneficiary to receive the proceeds of your annuity, the funds (in most situations) are available in about ten days, and they are paid free of fees and expenses. How about Natalie Wood the beautiful film star who died so tragically at age 44. After she died it took 18 years for her estate to pass through probate and probate is public information. Anyone could have requested to look at her probate estate and would have been granted permission.
NOLO has more information about probate, fees, and expenses, here is the link: http://www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html
4: Tax deferral and triple compounding: Our old friend Albert Einstein once said the most potent formula on earth is the Theory of Compound Interest. He is also quoted as saying: “Compound interest is the Eighth Wonder of the World.” Those are powerful quotes from a brilliant man, but what does that mean? Let’s begin with compound interest and its definition. Compound interest is the interest added to a principal on deposit, interest paid on the original deposit plus interest on the accrued interest. Now add tax deferral, if earned interest is not taxed but instead sent ahead to some future date, then the interest earned would be paid on the entire earnings, interest on the deposit, interest on the accrued interest, and interest on the taxes not paid but deferred. That is the actual Eighth Wonder of the World.
5: Estate Planning: Increasingly annuities are used for advanced (and simple) estate planning. They can provide income in a trust for a particular need such as the funding of a life insurance policy, and they can be used as income for an heir outside of a trust. They can be used as a “longevity tool” to make sure heirs have income later in life. They can be used as a foundational asset in a trust to help offset a spendthrift issue by adding stability. Annuities are tax-deferred, and they can allow the beneficiary to continue with the tax deferral on an inheritance of the annuity for a fixed period that can allow for better tax management. Annuities can make excellent charitable gifts to ensure income for a specific gift that requires long-term funding such as a homeless shelter. Occasionally and only under the direction of an attorney, annuities can be used to help offset Nursing Home Expenses.
Here is a link for more information about nursing home expenses and options: www.elderlawanswers.com
6: Safety: Annuities issued by insurance companies are safe. In this world, nothing is for sure and the word guaranteed is used as often as anything. But annuities are safe, and they are….guaranteed. Annuities issued by insurance companies are some of the most highly regulated products in the financial world. Not only does each state department of insurance have authority over any insurance company operating in the state but they also have the right to examine the books at any time. Annuity companies are also required to keep in reserves enough money to cover 100% of the outstanding contractual promises. In other words, should the annuity company decide to quit, there is more than enough money to cover all obligations. Not only are annuities covered by state regulators, but they are also guaranteed. They are guaranteed by a little-known agency called the State Guarantee Fund. Each state has a limit of what they will guarantee, and it does differ from $100,000 per person to $500,000 in some states. Your insurance agent for some unknown bureaucratic reason is not allowed to share with you this guarantee until AFTER you buy the annuity.
Want more information about your state and the guarantees backing up the regulators backing up the insurance company backing up your annuity? Here is the link: https://www.nolhga.com/policyholderinfo/main.cfm
7: Social Security Taxation Relief: As spoken about above, annuities are allowed to tax defer interest earned until a later date chosen by the annuitant. Because of how our taxation system works in reference to earned income in the calculation of social security benefits, annuities can help reduce taxation on social security: Yes that is true; taxation on social security does have limits. Taxation on socials security depends on your overall income, income from pensions and investments count towards the calculation.
According to AARP Social Security Resources. If you and your spouse file a joint return with a combined income below $32,000, your benefits are not taxable. For income between $32,000 and $44,000, up to 50 percent of benefits may be taxable, and up to 85 percent if combined income is more than $44,000.Feb 10, 2014.
Here is the AARP link: http://www.aarp.org/work/social-security/info-2014/social-security-benefit-taxes.html
Here is how an annuity can assist in reducing taxation on social security. If a person has deposited in a bank account, the interest earned is included as ordinary income. Let’s assume a deposit in a bank CD is earning 3% that would become $3,000 in taxable income whether the person uses the funds or not if they just accumulate then the revenues and the deposit account are passive funds available for future use. BUT, if the same deposit is in an annuity and the earned interest is deferred, the earned interest is not included in the calculation for ordinary annual income. (When considering taxation issues, always consult your tax professional for information regarding your particular situation)
8: 1035 Tax-Free Exchange: Consider the situation where you have purchased a US Treasury, as long as you own that asset you are locked into it. You are not allowed to make any changes to it without selling it. There are no rules in place to take advantage of future circumstances. The same goes for other investments such as bonds and stocks. That rule does not include annuities. The IRA allows for you to keep your tax deferral intact and move from company to company, annuity contract to annuity contract all without exposure to taxation from your tax-deferred earnings. This provides the annuitant control over increasing future benefits and increasing future interest options. The 1035 Exchange gives you a perfect tool to manage your annuity retirement account. Even though the IRS allows the use of this exchange, rules still need to be followed.
Here is the IRS link for more info: http://www.irs.gov/pub/irs-drop/n-03-51.pdf
9: No Sales or Acquisition Expense: Annuities that are sold through insurance professionals do not charge the annuity buyer any acquisition fee. The cost of acquiring new annuity owners is built into the annuity itself, whatever interest you are guaranteed exactly what you will earn.
10: Income: For most of us, the best benefit offered in an annuity is income. Immediate income annuities provide an immediate income stream for almost any possible period, even a lifetime. The income is guaranteed by the insurance company and can be paid monthly via direct deposit to your bank account. The guaranteed income payment cannot be affected by market volatility, helping shield your retirement income from market risk. Also, most annuity products offer an income rider; the rider allows you to know in advance exactly how much income you will have available at almost any future time period.
You can also include your spouse in any income plans, plus income can be guaranteed for life. In the event, the annuitant (s) lives beyond their life expectancy the insurance company will continue the annuity benefits. If the opposite happens and a premature death occurs, any unused benefit will be inherited by the named beneficiary.
A solid resource is the Securities and Exchange Commission; here is a link to their annuity page: http://www.sec.gov/answers/annuity.htm
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