Will You Outlive Your Retirement Savings???

Many planned to have a nest egg that would supplement Social Security and see them through their retirement years in a manner that would help them maintain their life style.

HOWEVER, the great economic depression descended on those dreams, reducing the value of those nest eggs. 

During the 2008-2009 recession, stock portfolios lost 40 to 60% of their value, as did 401K plans invested in mutual funds.

2010 saw a resurgence of the stock values and most portfolios regained about 70% of their lost values. How kind 2011 will be to our portfolios remains to be seen.  So far, the slide has continued for the first 8 months of the year.  

IRAs were a mixed bag.  Some were in annuities, some in bank savings accounts, and some in mutual funds.

The only financial vehicles that did not lose value were the annuities.  Annuities have a guaranteed minimum rate of return; but, the current rate is a floating rate. It floats above the minimum rate one or two points as a rule. For example, the annuity contract promises a minimum rate of 4%. The current rate may be 5 or 6%. Remember: while the money is in the annuity, it is tax sheltered. For comprehensive tax advise, consult your accountant.

We still have Annuities and Universal life policies that are paying a MINIMUM of 4.5%.

This beats the rate offered by the bank savings accounts that they call IRAs.  Those accounts pay the bank interest which may be anywhere from ½ of 1% up to two or 3%.  Most are at the lower end of the scale. These accounts only become true IRAs when they are converted to an annuity at retirement age. But there is a downside to these bank savings account IRAs. The money accumulates tax free as it would in annuity until you reach 70 1/2, at which point you must annuitize it. This means you must file a liquidation plan with the IRS, or you must buy an annuity.  Banks like to have you do the latter as they will now get a commission on the entire transfer of principal and interest instead of just the principal if it had been put in an annuity at the beginning of the savings cycle.  Again, you lose ground.

 Only the annuity provides you an income you cannot outlive.

If you had purchased an annuity from an insurance company in the first place, your interest earnings on the money would have been tax sheltered, and your rate of return would have been about 4 or 5 times greater. This means you would have had about twice as much money to retire on if you had had the annuity for 20 years and put the same amount of money in it as you have been giving the bank.

 One point should be repeated:

 The bank savings account gives you no protection if you live a long life. At 70 1/2 you must file a plan to liquidate it in ten years. By age 81, you will have exhausted the account. An annuity company not only pays you a guaranteed 3, 4, or 5% interest, depending on the company, but they also take the risk of your living a long life. IF YOU PUT THE PAYOUT ON A TEN YEARS CERTAIN AND LIFE THEREAFTER, YOUR INCOME WILL CONTINUE AS LONG AS YOU LIVE, EVEN IF YOU LIVE AS LONG AS MUTHUSALA. 

 That is worth repeating:

Annuities provide you a guaranteed monthly income. If you put the payout on a ten years certain and life thereafter, you can never outlive the return of capital and interest. The annuity company takes the risk of your longevity. 

On the other hand, if you left the funds in the bank and paid to have an actuarial plan drawn up to liquidate the fund in ten years, you would run out of funds in ten years.  No one but you is taking the risk of your longevity.  The same is true of most mutual funds accounts.  Only the annuity guarantees you an income for LIFE. Even if you live to be 150 years old, they would still be paying you.

Food for thought:  Longivity is steadily increasing for both men and women. As the average age approaches 80 years, half of the population has a serious problem. Half will outlive the average age. If bank vehicles are used, many will run out of money when they need it most.

If your savings for retirement are spread all over, as most people do, it may be time to take inventory and find out what the result would be if those funds were transferred into an annuity, or, perhaps, several annuities. You see, if they are tax sheltered funds, you must start a withdrawal program at 70 ½.  Funds held outside the tax shelters should not be commingled with the sheltered funds. If they are, you create a tax problem that is expensive. This is brought up because there are two types of annuity plans: those that are tax sheltered which you must start drawing money out of at 70 ½, and those that you can wait on for a longer period without tax consequences. 

Interest earnings in both the tax sheltered IRA type of account and the so called "non qualified account" are sheltered from taxes until you withdraw the funds.  There is one difference:  all the withdrawals from tax sheltered IRA types of accounts are fully taxable when received. The reason: the fund was created with BEFORE TAX dollars.

Withdrawals from the non-qualified annuities are treated differently by the tax man. Since these are created with after tax dollars, the tax man will only tax you on the interest portion of the withdrawals.  This feature gives you a few more dollars to spend in retirement years.

A word about leverage is in order. The money in annuities, regardless of the type of annuity, accumulates free of taxation until you take it out. Then it is ordinary income on the tax sheltered accounts. Non tax sheltered accounts are taxed on only a portion of the withdrawn funds, the balance being deemed return of capital. The money contributed was after tax dollars. The interest it earned was sheltered from taxation until you withdraw it. Your taxes in retirement should be much less than when your earnings were at their peak.

So what are your nest eggs going to hatch?  

Review your accounts and think about what we have said.  If you would like us to give you an analysis and get you some sound proposals for consolidating and guaranteeing future income, please call to make an appointment.  We will review all your holdings, think about them, ask for proposals, and then meet with you to discuss what we have learned about how to achieve your goals.

Claude E. Stephenson, CLU

CLAUDE E. STEPHENSON LIFE AND HEALTH INSURANCE SERVICES

9335 Reseda Blvd. #800

Northridge, CA 91324

CA Insurance License 0F17081

PH 818-407-3838

      877-958-5433 Toll Free