How to Pay Less Taxes on your RMDs (Required Minimum Distributions from IRA) and what is a QLAC? by Natalie Choate

Age 70 1/2: Think Through Your RMD Choices

Buying a qualified longevity annuity and tactically timing the first RMD could reduce the tax hit.

Natalie Choate, 05/08/2015

In 2015, we are looking at planning ideas for different life stages. This month: The year the IRA owner reaches age 70 1/2. 

The year the IRA owner reaches age 70 1/2 is his or her first "distribution year." It's the first year for which there is a required distribution. Unlike with later years, however, the IRA owner gets a one-time special break in the age 70 1/2 year: The minimum distribution for that year is not required to be taken until April 1 of the following year. In all other years for which there is a required minimum distribution, or RMD, it must be taken by Dec. 31 of the distribution year. 

If the client's income is still "too high," and he or she doesn't want or need to take the RMD to pay living expenses, continue to look for ways to reduce the RMD, such as rolling into an employer plan if still working, Roth conversions, or purchasing a qualified longevity annuity (QLAC), discussed below. (This tactic could also be used in years prior to the age 70 1/2 year.) 

Buy a QLAC?A longevity annuity is an annuity contract that does not start paying you until you reach age 85. It eventually pays you a life income, but the income does not start until that later age, meaning that your investment (if made when you are many years younger than 85) has many years to accumulate and grow, so the income you eventually get will be larger. The purpose is to insure against "living too long"--outliving your income. 

Normally such delayed annuities are not "legal" investments for IRAs, because the minimum distribution rules require IRA-owned annuities to start paying out no later than age 70 1/2. 

But the IRS has made an exception to permit IRAs to purchase "qualified" longevity annuities (QLACs) with up to $125,000 of the IRA balance, or 25% of the IRA owner's total IRA balance if less. When the QLAC is purchased, the purchase price and value of the QLAC cease to be counted as part of the IRA balance for purposes of computing the IRA's annual RMD, beginning the year after the year of the purchase.

Suki Example: Suki is turning age 70 1/2 and age 71 in 2015. She plans to keep working (and therefore expects to continue to be in a high tax bracket) for at least another five years. Her projections show she will have a comfortable income even after retirement, though if she lives to a very old age, it could become questionable. She finds a QLAC that will pay her a good income starting at age 85, in about 15 years. She buys it inside her IRA for $125,000. By removing $125,000 from her account value "base" in 2015, this move will reduce her next year's IRA RMD (i.e., 2016) by $4,883, saving her about $1,900 of income taxes that year. Equivalent savings will accrue each year thereafter until the QLAC starts paying out. If the contract makes sense for her, the tax savings is a nice little bonus. Of course her income (and taxes) will go up when she reaches age 85 and starts collecting on the QLAC, but she won't be working then (she figures), so she won't mind the taxable income as much. 

You can also buy a QLAC in your IRA earlier or later than the year you reach age 70 1/2. The earlier you buy it, the longer your $125,000 investment has to accumulate and thus reduce your RMDs pre-age 85 by an even larger amount. The longer you wait to buy it, the less of a good deal it is and the less value it has for reducing RMDs. 

Take the RMD This Year or Next Year?Since you have a choice, which is better? Take the age 70 1/2 year RMD in the age 70 1/2 year? Or postpone it until the age 71 1/2 year? Despite a magazine article that said "never postpone the first year's RMD!" this is actually something that needs to be decided on a case-by-case basis. 

In a few cases, the choice will be easy. 

Don't postpone the first year's RMD if…Someone who needs the age 70 1/2 year distribution to pay immediate living expenses will obviously not postpone. A person who is in a more or less steady income tax bracket, but whose RMDs are large enough that bunching two of them into one year would push him into a higher bracket in the age 71 1/2 year, should presumably not postpone. Postponement will not be possible if the participant desires to do a rollover or conversion from the plan in 2015: The RMD must be distributed before the account can distribute money for a rollover or conversion. 

Do postpone the first year's RMD if… Someone is still working and earning a high income, but plans to retire later in the age 70 1/2 year, so expects to have a substantially lower income next year. Someone who is leaving his entire IRA to charity will probably postpone, since if he happens to die before taking the RMD that is just a little more money that will go the charity at his death income tax-free. Anyone who wants to maximize the amount of the IRA that will pass to her beneficiaries upon death should postpone taking the RMD as long as possible, in case he or she dies prior to the postponed distribution deadline. 

The close cases…For others, the choice is not so easy. A client who expects to be in the same bracket next year as this year might decide based on personal preference: "Jack" takes his RMD early in his age 70 1/2 year, to "get it over with." His sister "Jill" postpones because, even though it looks like her bracket will be just as high next year as it is this year, you never know--she might get lucky and be really poor next year after all, making postponement profitable. 

The person who thinks that postponing is always a good idea because you defer the taxes a little longer should remember that postponing actually increases the amount of the second year's RMD … because the age 70 1/2 year RMD that you did not take in the age 70 1/2 year is still part of the account balance at the end of the year! 

One thing is sure: Postponing the RMD to the age 71 1/2 year creates complications. If the first year's RMD is postponed, two RMDs are required in the second year, and the two RMDs in the second year will have different deadlines, be based on different account balances, and use different divisors! 

Bernie Example: Bernie turns age 70 1/2 in 2015, so 2015 is the first distribution year for his IRA. To calculate the 2015 RMD, he uses the 2014 year-end account balance and the Uniform Lifetime Table divisor for the age he attains on his 2015 birthday, which will be 70 if he was born before July 1, or 71 if he was born after June 30. He can take the 2015 RMD at any time from Jan. 1, 2015, through April 1, 2016. There will then beanother RMD for the year 2016, which must be taken between Jan. 1, 2016, and Dec. 31, 2016. The 2016 RMD will be based on the Dec. 31, 2015, account balance and will use the Uniform Lifetime Table factor applicable for the age he attains on his 2016 birthday. 

Resources: See Natalie Choate's book Life and Death Planning for Retirement Benefits(7th ed. 2011) for full details on the required beginning date and the first distribution year. The book is available as a paperbound "real" book at http://www.ataxplan.com/ or in an electronic (online) edition by subscription athttp://www.retirementbenefitsplanning.com/.

6 ways to pay less taxes in retirement (Fidelity)

Manage your tax brackets in retirement

A mix of taxable and nontaxable income sources may help boost retirement income.

• FIDELITY VIEWPOINTS 
• – 01/15/2015

 

 
 
 
 

When planning for retirement, many people make the mistake of thinking that what they see in their retirement accounts is what they will have to spend in retirement. What they sometimes forget: the taxes they will need to pay on certain withdrawals, like those from traditional 401(k)s and IRAs.

“It’s not what you earn that counts, but how much you get to keep after tax,” says Matthew Kenigsberg, vice president in Fidelity’s Strategic Advisers. “In addition, managing your tax brackets in retirement can help preserve more of your assets for the next generation.”

To do so effectively, you’ll want to build a suite of taxable and nontaxable income sources, ideally at least five to 10 years before you retire. That way, you will have the flexibility to pull withdrawals from different sources in order to help reduce your taxes overall.

To do that you will want to keep your ordinary income, which is taxed at the highest rates, in the lowest possible tax bracket. The biggest benefit comes for those who can remain in the 15% bracket.

For 2015, the 15% bracket tops out at $74,900 for joint filers ($37,450 for single filers). The next bracket is 25%, so bumping up a bracket costs you 10% more on your next taxable dollar. See IRS tax brackets.

What to do if your taxable income is about to push you into a higher tax bracket? The easy answer is to substitute available income sources that are not taxed as ordinary income to help you stay within the lower income tax bracket.

Here are six nontaxable income sources to consider setting up before you retire—so you’ll have tax-smart choices afterward:

1. Qualified Roth distributions

Qualified withdrawals from Roth accounts won’t be subject to federal income tax, making them a useful vehicle to help manage tax brackets in retirement. For example, if you need money to pay for unanticipated expenses, you can withdraw money from the Roth account without triggering a federal tax liability as long as you meet the qualifying criteria. Moreover, Roth accounts can be effective estate-planning vehicles, because currently any heirs who inherit them generally won’t owe federal income taxes on their distributions.

2. Liquidation of taxable assets at or below cost basis

Even if the assets in your taxable account are at an overall gain, there may be tax lots that are at or below your cost basis. If you sell those, you won’t pay taxes. And if they represent losses, you can use them to offset capital gains, and up to $3,000 a year in ordinary income. Consult with your accountant or financial representative.

3. Tapping home equity

There are several ways investors can access the equity locked up in their homes, including HELOCs (home equity lines of credit) and reverse mortgages. All come with various downsides and costs, so caution and careful consideration are important, but in some instances using one of these techniques may be a reasonable way to generate supplemental income. Reverse mortgages, for example, are home loans that provide cash payments based on the equity in your home. In a reverse mortgage, distributions are technically considered borrowing rather than income, so they typically are not taxable.

Reverse mortgages are complex, however, and involve taking on debt. So, investors should study the pros and cons carefully before using them. Homeowners typically defer payment of the loan until their death. Upon their death, the heirs either give up ownership of the home or must repay the loan from the reverse mortgage company. Rules can vary from state to state.

4. Cash-value life insurance

Cash-value life insurance—sometimes known as permanent life insurance--is a form of whole life or universal life that pays out upon the policyholder’s death, but that also accumulates value during the policyholder’s lifetime. Many life insurance policies include cash value that can be borrowed against without incurring taxes. Be careful when using cash values; if the policy lapses, this could cause some unintended consequences, such as losing the death benefit coverage and causing any gains to become immediately taxable.

5. Health Savings Accounts (HSAs)

HSAs are individual accounts typically offered by employers in conjunction with a high-deductible health care plan to cover qualified medical expenses. However, contributions to HSAs can accumulate tax free and can be withdrawn tax free to pay for qualified medical expenses, including those in retirement.

Note that the medical expenses need not be from the current year. It’s important to keep good records of past expenses so that they can be applied to future HSA withdrawals if needed.

6. Annuity income

Annuitized income (i.e., annuities purchased with taxable assets) consists of both taxable income and nontaxable return of principal. The amount of taxable income generated depends on your life expectancy. For those who purchase an immediate income annuity at a relatively late age, the cash flows may be mostly nontaxable return of principal.

Managing brackets in practice

Now, let’s look at how managing tax brackets might work in practice. Consider the Smiths, a hypothetical married couple who have their assets in a variety of different account types and whose annual expenses total $100,000. They expect $42,000 in gross income (all taxable) before tapping their retirement accounts, so their gross income gap (i.e., before considering taxes) is $58,000. They also anticipate $20,000 in deductions and exemptions, so their expected taxable income before withdrawals is $22,000.

If they withdraw $52,900 from their traditional IRAs, it would bring their taxable income to $74,900—the top of the 15% bracket for 2015. They could then withdraw the remaining $5,100 that they need to cover their income gap plus $10,313 to cover their tax bill, for a total of $15,413, from a Roth IRA, which does not generate taxable income as long as the withdrawal is qualified. If the Smiths could get some or all of the $15,413 from a taxable account without generating capital gains taxes – for example, from a bank account – that would work as well.

As the chart below shows, this strategy saves the Smiths $5,137 in taxes this year compared with just withdrawing everything they’ll need from the traditional IRA, thus preserving their ability to withdraw the traditional IRA money in a future year when their tax bracket may be lower. The picture would be similar with any of the other tax-free income sources listed above. If, for example, they had cash-value life insurance, they might have been able to use a policy loan instead of a withdrawal from a Roth IRA (assuming that wouldn’t cause a lapse in their policy, or other problems).

Example: How to help manage taxes on withdrawals for retirement accounts

This hypothetical example is for illustrative purposes only.
*The taxes of $10,313 on $74,900 of taxable income are composed of two parts: $1,845 in tax on the first $18,450 of taxable income, which is taxed at a 10% rate, plus $8,468 in tax on the next $56,450 of taxable income, which is taxed at a rate of 15%. Any taxable income above this point would be taxed at a 25% rate.
†If the Smiths are able to take some or all of this withdrawal from a taxable source without capital gains (such as a bank account) instead of a Roth IRA, that would work as well.
‡The $20,550 figure is the amount that would need to be withdrawn from the IRA in order to get the $15,413 needed to get to $100,000, and the money to cover the tax on the withdrawal, $5,137. This is how the calculation would work: 15413/(1-.25) = $20,550 - 15413 = $5,137.

Please note that the diagram illustrates only the current year, but a tax bracket management strategy should consider the preceding and following years as well. Sometimes the impact of events in those years can meaningfully affect the strategy and its results. Also, the use of a tax bracket management strategy is not appropriate for all investors, so be sure to consult with a tax professional before implementing one.

Finally, be sure to keep abreast of your state’s tax laws. Some states offer favorable tax treatment for certain sources of retirement income, such as some 401(k) plans and pensions (and several states have no state income tax at all). So you will want to make the most of state tax law as well.

How to Create a Paycheck in Retirement (moneywatch)

By

Steve Vernon /

MoneyWatch/ October 22, 2012, 6:45 AM

3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck

     

(MoneyWatch) I recently offered an overall financial strategy to help you avoid going broke in your retirement years: Don't spend your retirement savings!
Instead, you should think of your savings as "retirement income generators," or RIGs, that deliver a monthly paycheck that lasts for the rest of your life. The goal then becomes to spend no more than the amount of your monthly paycheck.
There are essentially only three ways to generate a monthly paycheck from your retirement savings:

• Invest your savings and spend just the investment earnings, which typically consist of interest and dividends. Don't touch the principal.
• Invest your savings, and draw down the principal cautiously so you don't outlive your assets. (In this post and future posts, I'll call this method "systematic withdrawals.")
• Buy an "immediate annuity" from an insurance company and live off the monthly benefit the insurance company pays you.

These methods are all designed to generate a lifetime retirement income, no matter how long you live. Achieving this goal will help you relax and enjoy your retirement. These methods might also provide protection against inflation, another important goal for many people.

Although these represent the three basic approaches to ensuring steady retirement income, each method has many variations. Here are just a few examples:

• If you decide to invest your money and only spend your investment earnings, you can invest in a variety of mutual funds, bank accounts, individual stocks and bonds, real estate investment trusts, or rental real estate.
• If you decide to use the systematic withdrawal method, you can invest your savings on your own and decide how much to draw down, or you can use a managed payout fund that does the investing and withdrawing for you.
• If you decide to purchase an immediate annuity, you have options. For example, you can buy an annuity that's fixed in dollar amounts, one that's adjusted for inflation, or a variable annuity that's adjusted according to an underlying portfolio of stocks and bonds. You can also buy an annuity that starts at a later age, or you can purchase a hybrid annuity that includes some of the features of systematic withdrawals.

These RIGS each have their advantages and disadvantages; there's not one magic bullet that works best for everybody. Most important, each type of RIG generates a different amount of retirement income:

• RIG #1, interest and dividends, typically pays an annual income ranging from 2 percent to 3.5 percent of your savings, depending on the specific investments you select and the allocation between stocks, bonds, cash and real estate investments.
• RIG #2, systematic withdrawals, typically pays an annual income from 3.5 percent to 5 percent of your savings, depending on your investments and how worried you are about exhausting your savings before you die.
• RIG #3, immediate annuities, can range from 4 percent to 6.5 percent of your savings, depending on the type of annuity you buy and your age, sex and whether you continue income to a beneficiary after your death.

You don't need to use just one type of RIG to generate the income you need. In fact, it might be best to use a combination of a few different types. In addition, there can be good reasons to change your RIGs as you get older. And some financial institutions have been introducing hybrid products and solutions that combine features of two or more of these basic RIGs.
 

© 2012 CBS Interactive Inc.. All Rights Reserved.

How to Create Your Own Pension ( NY Times, Sunday Business Section)

June 4, 2011
The Annuity Puzzle
By RICHARD H. THALER

IMAGINE a set of 65-year-old identical twins who plan to retire this summer after long careers. We’ll call them Dave and Ron. They have worked for different employers and have accumulated retirement benefits worth the same amount in dollars, but the benefits won’t be paid out the same way.

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.


Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.

When is an annuity a good retirement strategy? SPIA advice (Forbes.com)

For Some Retirees, This Annuity Makes Sense
Mel Lindauer, 07.30.10, 12:00 PM ET

We've talked about a number of different types of annuities in our previous columns. We discussed nonqualified deferred variable annuities in the first and second columns in this series on annuities. We covered qualified deferred variable annuities in our third column, and in our fourth column we talked about fixed deferred annuities.

Based on these previous columns, you might be getting the feeling that Bogleheads are against all types of annuities, but you'd be wrong. We're against high-cost annuities that trap investors into substandard investments for long periods of time using often-hidden surrender periods and the associated high surrender fees. We're also against annuities that are sold by unscrupulous salespersons who sometimes "hoodwink" (often older) investors into investing with them by providing false or misleading information about the annuity products they're selling.

However, despite all the negatives and cautions we've mentioned in our previous columns, we do feel that annuities can be appropriate in certain situations. In earlier columns we listed some situations where a low-cost variable annuity may make sense in both non-qualified and qualified situations.

In this column, we'll talk about another type of annuity which could play a role in some retirees' overall investment planning, and that's a single premium immediate annuity or SPIA.

A single premium immediate annuity offers an income stream that will last as long as the annuitant (or joint annuitant, if that option is selected) lives or for a predetermined period, depending on the option selected at the time of purchase. The fixed immediate annuities include nominal, graded and inflation-adjusted payment options. There is also a variable option in which the payout is determined by the returns on the investments chosen by the investor.

In exchange for these payments, the annuitant surrenders a specific amount of money to the insurance company. These payments can be based on a single or joint life. Normally this purchase is irrevocable, and the money used to make the SPIA purchase is not available to one's heirs, even if the annuitant dies shortly after purchasing the annuity, unless a predetermined payment period was selected. However, selecting one of the available term-certain payment options will result in lower payments.

An SPIA is probably one of the easiest annuity products to understand. You give the insurance company a specific sum of money in exchange for an income stream that you can't outlive. The SPIA can offer peace of mind in bridging income shortages. For example, if a retired couple needs $4,000 per month to cover their living expenses, and Social Security and pensions provide $3,000 per month, they could purchase an SPIA that would pay out the needed $1,000 per month for as long as either one of them lived. However, they would need to keep in mind that most annuity payments aren't indexed for inflation, so over the long term, the spending power of that $1,000 would decrease.


Should the couple choose to purchase one of the few inflation-indexed SPIAs available, they'd have to either pay a higher premium or receive a lower initial payment. And since inflation-indexed annuities are only offered by a few insurance companies, there's not a lot of competition to help make those rates attractive for the annuitant. Finally, it's important to remember that the return of your principal is included in the promised payment stream.

An SPIA can also provide a "bridge" that could allow an investor to delay taking Social Security until later in life. Doing so could mean larger Social Security payments to both the recipient and his/her spouse. Boglehead Ron explained his use of an SPIA this way: "In our case, we used it as ‘SS gap insurance' since I retired at 59 but will not claim SS till age 70 (primarily for the benefit of my wife)."


Using a period-certain SPIA as a bridge to Social Security may be a valid strategy for some folks like Ron. However, for many relatively young retirees, the period-certain option is probably not the best choice. Remember, the insurance company has to plan to pay for the rest of your longer-expected life, so that means you'll receive lower payments. In addition, because of the longer expected payout period, you magnify default and inflation risks since the insurance company has to remain solvent for a very long period of time and inflation will almost surely erode the yield over those longer periods. As an alternative to taking the inflation-indexed option, consider purchasing TIPs at the Treasury auctions and holding them to maturity, since TIPS both preserve capital and protect against inflation.

In another recent Bogleheads.org forum post, author and forum leader Taylor Larimore listed a number of valid reasons why he and his wife, Pat, purchased an SPIA. He stated that "The primary reason we bought our lifetime annuities was so that we could give our heirs their inheritance while we're living. The annuities assure us (and them) that we will not run out of money no matter how long we live." Taylor then went on to list a number of other reasons that he and Pat considered important in their decision to annuitize a portion of their savings:

"Our annuities give us a guaranteed income of approximately 10% of premium (using interest and principal). This is more than we could get from any other safe investment.
"Our annuities immediately reduced our estate for tax purposes and offered protection from lawsuits.
"It was very comforting to have a steady income and protection of principal during the recent bear market.
"Our annuity income is only partially taxable.
"It will be much easier for survivors to not worry about this part of our portfolio." Here are some situations where an SPIA may make sense:

For someone who is in good health and has a family history of longevity.
For folks who are afraid of running out of money before running out of breath.
For investors who don't know how to properly manage their assets or who don't care to do so.
For an investor who is concerned about a surviving spouse who has no knowledge of, or interest in, investing.
For people who have no heirs or who have no desire to leave the funds used to purchase the annuity as part of their estate.

There is no one rule that covers every situation or every investor. However, if one or more of the above situations apply to you, then there's a good possibility that an SPIA may be appropriate for you

Guaranteeing Lifetime Income (Yahoo.com , Forbes)

by Scott Woolley
Wednesday, May 13, 2009


If your assets are barely sufficient for your own needs, stiff your heirs. Put your money into an annuity.


As a purely financial matter, it's difficult to die at just the right time. Pop off unexpectedly young and you could rob your family of paychecks it was counting on. Hang on too long and you could exhaust your savings, impoverishing your family or consigning yourself to a decrepit retirement home.

One unexpected side effect of the recent financial crisis: a boom in sales of fixed immediate annuities, which dispense guaranteed income for life. Sales at New York Life, the largest issuer, hit $425 million in the first quarter, up 82% from last year.


For most clients those new annuities are likely to be a good deal. A 65-year-old man who pays New York Life $100,000 today will receive $650 a month for life. That's equal to taking out 7.8% of the total each year, which is double what long-term Treasurys yield. (Because of her longer life expectancy, a woman of the same age would receive $600, or 7.2%.) Wait longer to buy an annuity and the payout is, of course, higher (see table).

Part of the sales surge is because of the crash. Fixed-annuity buyers sailed peacefully through the recent market turmoil with monthly checks intact. Another factor: Many older Americans now find themselves planning for retirement with shrunken portfolios. Instead of living off dividends and leaving the principal to heirs, they need to consume the whole sum for their own needs.
Annuities offer the best way to lock in guaranteed lifetime income, argues Christopher Blunt, who runs New York Life's retirement division. Retirement income generated from a stock-and-bond portfolio requires keeping plenty of assets in reserve in case they're needed to fund a long life or contend with a nasty bear market. Blunt's pitch: Get the same retirement income as you could from a stock-and-bond portfolio, with 25% to 40% less principal.Annuities' ability to generate superior retirement income is conjured by pooling risk. The annuities transfer savings from people who don't need it (because they're dead) to those who do.

This ability to match assets to future liabilities sends academic hearts aflutter. Economists who study the retirement market have long been sold on the merits of annuities and frustrated by consumers' aversion to them. U.S. vendors sold a piddling $6 billion worth of immediate fixed annuities last year. The 2008 figure will likely be around $10 billion. This in a country with $2.7 trillion tucked away in 401(k)s.

One explanation for poor sales is that immediate fixed annuities aren't very profitable for the salesperson. A 70-year-old client who plunks down $500,000 for an annuity and cashes a $3,600 monthly check probably doesn't need much else.

Another impediment to sales has been crummy marketing by insurers. Fixed immediate annuities have gotten a bad rap in part for sharing an association with their deferred-annuity cousins. These are complex vehicles that promise a tax deferral but subject buyers to a multiyear "accumulation phase," during which assets are subjected to all manner of surrender penalties, commissions, fees and insurance charges, before paying out a dime. Most are great deals for the sales reps and lousy ones for clients.

Unlike fee-laden deferred annuities, immediate ones are likely to be a square deal for buyers. The typical buyer receives a string of payments worth (at discounted present value) 95 cents for every premium dollar he pays in. The obvious reason for the efficiency in the pricing is that prices are easy to compare. Someone with $1 million to put in gets quotes from several vendors and takes the best payout.

Insurers do the best they can to make the product more opaque and complicated. Responding to customers' fear that they'll get a really bad deal (by dying young and leaving heirs nothing), vendors offer such features as a guaranteed minimum payout. A 65-year-old man who buys an annuity with a "ten-year period certain" feature has the right to checks for ten years, even if his heirs are the ones to cash them. For this he cuts his annual payout from 7.8% to 7.5%. That might seem like a small price to pay, but the drop-off is so tiny only because the guarantee is unlikely to cost the insurer much. Almost all 65-year-olds live at least into their early seventies.

Assuming you're in good health and keep your product features simple, there aren't a lot of downsides to fixed immediate annuities. One to think about is the risk that the insurer will go bust in your lifetime. However, there are segregated asset pools as well as state-run guarantee funds to make a loss unlikely. In the bankruptcy of Executive Life, some annuity holders lost 20% of their payout. Try to buy from a company with a rating of double-a or better from A.M. Best. New York Life, tiaa and Northwestern Mutual qualify.
A bigger risk is inflation. New York Life offers a rider that increases payouts at a set rate of between 1% and 5% annually but is not pegged to actual price rises. More in keeping with the buy-it-and-forget-it philosophy are payouts linked to the Consumer Price Index, which are available from Lincoln Life Insurance and others. For a 65-year-old man an inflation-indexing feature would cut his initial annual payout from 8% to 5% of his original principal. If inflation averages 4%, the indexed payout would surpass the conventional one in year 12.

Do you want to protect a spouse? That will cost you. If our hypothetical 65-year-old man is married to a 60-year-old woman, he'll cut the annual payout to 6.3% if it has to last until they are both dead.

Immediate annuities aren't a great fit for everyone. If your annual retirement living expenses (including income taxes) come to less than 3% of your assets, you should be able to safely fund your lifestyle by owning a conservative mix of securities, without effectively handing over 7% to an insurer to cover your longevity risk. For everyone else the standard advice is to annuitize the portion of your nest egg you'll need to cover living expenses, including supplemental health insurance. The rest you can invest as you please.
One way or the other, an immediate annuity is an investment you're unlikely to regret buying. If it turns out that the insurer got the better deal, you won't be around to fret about it.


Income for Life

Buy a fixed annuity for $100,000 and what you get depends on your age and gender. Adding a guarantee of ten years of payments (even if you die tomorrow) is surprisingly cheap.

Plain annuity (life)/With 10-year guarantee/With cash refund
Buyer would receive Monthly Check ( Yield )

65-year-old man $650 (7.8%) / $629 (7.5%) / $601 (7.2%)
65-year-old woman 600 (7.2) / 592 (7.1) / 571 (6.9)
70-year-old man 723 (8.7) / 691 (8.3) / 654 (7.8)
70-year-old woman 667 (8.0) / 650 (7.8) / 619 (7.4)
80-year-old man 1,026 (12.3) / 858 (10.3) / 836 (10.0)
80-year-old woman 960 (11.5) / 818 (9.8) / 785 (9.4)


Source: New York Life.

Copyrighted, Forbes.com. All rights reserved.

Smart Ways to Get Cash from your Life Insurance (from Kiplingers)

A New Lease on Life Insurance
That term or cash-value policy you bought to protect your young family could cushion your retirement as well.

By Kimberly Lankford

From Kiplinger's Personal Finance magazine, September 2009

You're 53 or 56 or 61, the kids are out of the house,the mortgage is nearly paid off, and before long you'll be eligible to retire and take your pension -- and so will your better half. Life insurance? At 60, you can expect to live another 20 to 25 years, if you're in good health.

You'll have more than enough money, or at least your house will be worth a million. So surely you won't need to pay insurance premiums for much longer, right? Dropping your policy would be like getting a bonus worth hundreds or thousands of dollars a year.



Nice try. After the real estate collapse and the stock-market crash, the finances of preretirees are far more challenging. Your mortgage payments may now be more of a burden, you can't borrow against home equity, and your retirement accounts have shrunk so much that you hope to hang on to your job and continue to contribute until you're old enough to collect your full Social Security benefit. That's crucial because your pension isn't getting any bigger -- and it may in fact shrink if your company can't keep the plan solvent or the investments perform poorly.

Here's the unpleasant dilemma if you have a term-life-insurance policy that is about to expire: Renew the coverage and your premiums are almost certain to soar. Drop all coverage and your family could be in a financial bind if you die prematurely.

If you own permanent, or cash-value, life insurance, you have other decisions to make. Premiums may be level but high. You may be tempted to take out money to compensate for a smaller pension or a tighter budget, especially if you are forced into early retirement. Or you might cash it in altogether to be done with premiums. That could make sense----or it could be a major financial-planning error.

Term-life policies
Millions of Americans bought low-cost, multiyear term policies ten to 20 years ago when their kids were young, and they expected to drop the coverage when the term -- and low rates -- expired. But if you go without now, you could be missing some special opportunities to extend your coverage for less than you think and retain tax-free death benefits that will make up for the damage to your retirement funds and pension.
Dane and Susan Swenson of Gainesville, Va., both 58, thought they'd be finished with life insurance by now. Dane retired from the Army in 1998 and currently works as a civilian for the U.S. Department of Defense. He has life insurance through work until he retires, which he plans to do in the next few years. He has a military pension and will qualify for a small federal-employee pension. But if he were to die and Susan collected only reduced survivorUs benefits, sheUd be short of money to live on.

The couple originally thought their retirement savings would allow Susan to go without life-insurance benefits. "I planned to be self-insured, but then the market dropped," says Dane. His retirement accounts fell by as much as 40%, so he started to reconsider the idea of going without insurance.

Early in 2009, Dane bought a $200,000, 15-year term policy from Genworth for $600 a year. "The policy covers the difference between being self-insured and the decrease in our portfolio," he says.

That may sound like a low price for a policy that will cover Dane until he turns 73, but it's hardly unusual. Term-insurance rates have plummeted over the past 15 years because of intense competition and longer life expectancies. So you may actually pay less now for the same coverage even though you're older, or lock in a longer rate guarantee with little impact on your premiums.
In 1994, a healthy 40-year-old man would have paid at least $995 per year for a 20-year, fixed-rate term policy with a $500,000 death benefit. Today, the same man -- now age 55 -- could buy ten more years of comparable coverage for $880 a year, as long as he's still physically fit. (In most cases you'll be asked to answer a few questions about your health, provide the insurer with doctors' references, and agree to a brief physical exam at home.)



If you have health issues, find an agent who deals with several insurance companies and can help you present a strong case for a fair deal. Also, check whether the expiring policy has conversion features. Most term-insurance policies come with the option to convert to a permanent life-insurance policy so that you can be covered for the rest of your life, regardless of what happens to your health. The premiums will be high: They are based on your age at conversion, which means the older you are when you convert, the more you pay. But the rates will also reflect your medical condition when you originally signed up for the insurance -- and unless you're a marathon runner, you were probably lighter and healthier then. And, in case you didnUt look, term insurance gets very expensive in old age.

Cash-value policies
Cash-value life-insurance policies, such as whole-life and universal life, don't expire. They can lapse if you don't keep up the premiums; but as long as there's enough money in the policy, the insurance will live on with you through age 100. Cash-value insurance is often criticized because it's hard to follow where all your premiums go and how your value builds. But as you get older, you may find that this complexity translates into more ways to pull money out and still preserve your life-insurance coverage.

Tom Arenberg of Mequon, Wis., bought a whole-life policy from Northwestern Mutual when he was just 22 years old. In addition to its value as protection, says Arenberg, now 57, he "considered it savings that would be harder to get at than if the money were in a bank."

A whole-life policy involves trading higher out-of-pocket costs for some guarantees. You pay a fixed annual premium that depends on your age, health and the size of the policy, and in return you know what your minimum cash value and death benefit are worth every year. If the insurance company invests well (usually in bonds and mortgage securities) and controls other expenses, youUll receive policy dividends, which can further build up your cash value and death benefits. There's no guarantee that you'll receive a dividend every year, but you're not in the position of a stockholder who knows the company may cut cash payments if it so desires. Policyholders virtually always get something. If yours is a mutual insurance company, you're legally considered an owner of the company and share in its gains.

There are two ways to extract cash from a permanent life policy: a withdrawal or a policy loan. Both moves reduce your death benefit, but you don't have to forfeit your coverage.
Arenberg borrowed from his policy's cash value a few times in the early years, for what he calls "growing-up stuff," such as buying his first home. He quickly repaid the loans so he could restore the full death benefit. He had the option to increase the size of the death benefit every three years by paying more premiums, and did.

But now that the Arenbergs' three daughters are 19, 21 and 24, and Tom has retired after 34 years at Accenture, the couple's needs for the policy are gradually shifting from family protection to helping Tom and his wife, Diane, with retirement. "It's become a safe, low-maintenance investment," Arenberg says. "I didn't care if it had the best return -- I wanted to be the least unhappy guy in the room if there were a downturn," he says. Like everyone else's investments, his have taken a hit. But, he says, "We're hurting a lot less than others."

He uses some cash from the life-insurance policy to pay for long-term-care-insurance premiums, and he may use more of it, eventually, to pay for his daughters' graduate-school expenses and to donate to charity. He likens the policy to a chess piece in a commanding position -- there's no rush to make any moves except to ensure that the policy stays in force so his heirs can collect a death benefit tax-free.

How you access your cash value while you're alive matters in terms of your coverage and your tax bill. If you simply cash in the policy, which is known as surrender, you take back the cash value all at once, minus any outstanding loans. But that means you give up the death benefit and owe income tax on the policy's gains over and above the premiums you've paid. If you bought the policy at, say, age 25 and you're now 60, that's an enormous tax hit. It would be smarter to withdraw up to the amount you've paid in premiums, your basis, which you may do without paying tax.

If you need occasional cash, the best way to claim it is a policy loan. You reduce your death benefit by the amount of the loan plus interest (which is generally low, perhaps 6%), but you never have to pay it back. If the policy is still in force when you die, your heirs get the remaining reduced death benefit tax-free. The downside of a policy loan is that you need to be very careful not to let your policy lapse, or else you'll owe taxes on the loan, even though you've spent the money and may think you borrowed the cash from your own savings. Although you can have the interest deducted from the remaining cash value, that's dangerous. It's wise to at least pay the annual interest as it accumulates.

Another option is to make a tax-free conversion into an income annuity (see Guaranteed Income for Life). You'll give up the death benefit and owe taxes on a portion of each annuity payout. But in exchange for paying taxes, you stop paying premiums and can be assured of a steady stream of income for life or for a specified number of years.

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A Fresh Look at Variable Annuities (from the Wall Street Journal)

JULY 22, 2009

Long Derided, This Investment Now Looks Wise

Thanks to Guarantees, Variable Annuities Paid Even When Stocks Didn’t
By LESLIE SCISM

One of the best investments of the past decade was one of the most derided: the variable annuity. But investors who want in on the action now are in for a shock, as the juiciest deals have disappeared from the market.

Variable annuities, a tax-advantaged investment account that holds a type of mutual fund, are sold by insurers, and most offer some form of investment guarantee for an additional fee. For years, they were attacked for being too expensive. Why pay for a guarantee to protect against a stock-market decline, the argument went, when stocks continued their inexorable march upward?

From Loathed To Loved
Guaranteed-minimum variable annuities have turned out to be a smart buy for many investors. Here are some key considerations:

The issuer is on the hook to make up for investment losses. Investors can’t withdraw the guaranteed amount in a lump sum. It is paid out over years.Investors should buy from insurers with high ratings.Then stocks plunged, and variable-annuity guarantees no longer looked expensive. In fact, insurers, in a move to build market share, had underpriced many of them. Suppose an investor owned a variable annuity that tanked in value last year. No matter. Under the most-generous contracts, insurers pledged to pay customers lifetime retirement income based on past market gains in their underlying funds, plus minimum annual increases in years the market is sluggish or down.

Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poor’s 500-stock index dropped nearly 39%.

“When I watch friends bemoaning the market, I feel guilty saying anything, actually,” says Amy White, a 67-year-old retired accountant in Dallas. She and her late husband invested hundreds of thousands of dollars in variable annuities early this decade, and their funds rose as the market neared its 2007 peak. While they fell last year, the guaranteed amount—on which Ms. White’s retirement-income checks will be based—is still more than double the invested amount.

“I know that I’m doing quite well,” she says, while her friends are “experiencing real pain.”

An estimated $300 billion of these retirement-income guarantees are outstanding, compared with $3.7 trillion in stock mutual funds.

Variable annuities still have some notable drawbacks. Among the biggest: There is no lump-sum option for cashing out the guaranteed amount. Instead, the higher guaranteed amount is payable by the insurer over time, with 5%-a-year payouts common for those in their 60s when they start receiving checks. If you cash out all at once, you get only the shrunken sum that remains in your funds. Another concern: The insurers have to stay healthy enough to cut all those checks.

So far, though, it is the issuers’ stockholders who are getting the raw end of the deal. To meet their annuity obligations, the roughly two dozen insurers who dominate the field have boosted their claims reserves, which has hurt earnings, and have raised fresh capital, which dilutes existing shareholders. Hartford Financial Services Group Inc. and Lincoln National Corp., two big issuers of variable annuities, also have accepted money from the U.S. government’s Troubled Asset Relief Program.
Variable-annuity sales were down 27% in the first quarter, as stock investments of many sorts took a dive. Those buying typically are in their 60s, says Thomas Hamlin, a top broker at Raymond James Financial Inc., though 40- and 50-year-olds are increasingly interested. “People are sick of sliding back down to the base camp after they felt like they were about to put their flag in the top of the mountain,” Mr. Hamlin says, and the guarantees are the investment-world equivalent of “rope and ice spikes.”

The guarantees are no longer as sweet, yet what is still for sale is “better than the alternative: mutual funds with no downside protection,” says Mr. Hamlin.

In scaling back the products, many insurers are reducing the size of the minimum annual boosts to the guaranteed income base—or the value of the underlying investments combined with any investment gains and minimum annual boosts. For instance, the “Accumulator” variable annuity of AXA SA’s AXA Equitable Life Insurance Co., a year ago offered an income-base guarantee calculated with a 6.5% minimum annual-growth factor, while the new version uses 5%. Many also are reducing the annual withdrawal payouts by about one percentage point, while fees are up about a fifth of a percentage point, according to Milliman Inc.

Some formerly big players have suspended sales of guaranteed variable annuities entirely. Of those still available, MetLife, like AXA Equitable, promises to boost the income base by 5% a year in most states, if there aren’t investment gains greater than that on contract anniversary dates. Ohio National Life Insurance Co. also has an offering with a 5% minimum annual income-base boost, and 6% versions still for sale in some states.

Around since the 1950s, variable annuities originally were pitched for their tax-deferred buildup of investment earnings; they’re akin to 401(k) plans in that taxes are paid as the money is withdrawn. Insurers in the 1980s began tossing in a “death benefit”: If your underlying funds perform badly, your heirs will receive at least your original principal, less withdrawals.

Critics included Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto, who crunched data in the 1990s and concluded that consumers were being “grossly overcharged.” At the time, variable-annuity fees approached 3% of the account balance, more than twice that of a typical mutual fund.

His findings were widely circulated among consumer advocates, financial commentators, regulators and plaintiff lawyers. One of the big beefs has been that many insurers pay big commissions to salespeople, which may encourage them to push the products regardless of their suitability, including to many elderly people who would need access to their money during periods when surrender penalties apply.

In recent years, the landscape has shifted. In a bid to cash in on baby boomers’ fears of outliving their savings, insurers were adding “living benefits”—investment guarantees that kick in while the owner is still alive. So two and a half years ago, Prof. Milevsky updated his research, making an about-face: “Some insurance companies are not charging enough,” given the cost of risk-management instruments that insurers can buy to protect themselves, he wrote in 2007 in Research Magazine.

Some on Wall Street, seeing a bargain, bought annuities for their personal portfolios. Consider Colin Devine, an insurance-stock analyst at Citigroup Global Markets. He has been bearish on some insurers as stock investments because of the guarantees, even as he owns guaranteed variable annuities from MetLife Inc., Lincoln, ING Groep NV, Manulife Financial Corp.’s John Hancock Life Insurance Co. unit and Pacific Life Insurance Co.
Prof. Milevsky recommends that individuals who lack old-fashioned pensions put a portion of their savings into the products to create personal pension plans. Even with the cutbacks, “overall, I still believe that these products make sense for individuals approaching retirement,” he says.

Many in the industry are eager to see consumers’ response to John Hancock’s newly launched “AnnuityNote.” The investor’s money is invested in an indexed stock and bond portfolio. After five years, the contract guarantees a 5%-a-year lifetime withdrawal based on the total amount invested or the value of the fund investments at the fifth contract anniversary, whichever is higher. There is no automatic income-base boost in bad market years. Total annual fees: 1.74%.

Such streamlined guarantees are expected to proliferate. Just this week, MetLife introduced “Simple Solutions,” to be sold through banks, which similarly locks in investment gains annually but promises no minimum income-base boost.

Erin Botsford, president of Botsford Group in Frisco, Texas, used to be an “anti-variable-annuity person,” but became a convert after the tech-stock crash. Advisers often focus on performance and fees, she says, when the client really wants to know: “Where should I invest my hard-earned savings in order to ensure I can have a comfortable retirement that I cannot outlive?”

Write to Leslie Scism at leslie.scism@wsj.com

Morningstar Advisor on Immediate Annuities

Immediate Annuities: The Key to Retirement


by Judith A. Hasenauer | 04-02-09


We love the cartoon of the family gathered around the lawyer's office for the reading of the will with the lawyer stating the will's contents: "Being of sound mind, I spent it all." Unfortunately, this joke begs the question of how can we guarantee that we and our money expire at the same time? Or, at the very least to make sure that the money does not end before we do. Although we all would like to be able to leave some of our hard-earned nest egg to our children, our first obligation is to ensure that what we have gathered lasts us for the remainder of our lives once we retire--particularly with ever increasing longevity and the financial instability rampant in the world economy. After all, it is better to have "spent it all" rather than having to move in with our children because we outlived our assets.

For the very wealthy, longevity is usually not a problem. However, for the vast majority of people, even those we like to refer to as the "working affluent," outliving funds for retirement is a matter of great concern (some politicians and the news media like to refer to the "working affluent" as "rich," but the term "rich" is, in our opinion, very relative). At the time the Social Security system was initiated in 1937 the life expectancy of the average recipient was only a few short years. Today, increased longevity has everyone expecting many times the expected longevity of 1937. It is not unusual for a working person today to expect to spend longer in retirement than she did working! Thus, fewer years are available to garner assets than there will be to spend the same assets in retirement. The actuaries tell us that it is likely that a married couple, with a 10-year disparity in age, where one reaches age 65, have a probability that one of the two will still be alive in 30 years! Thus, the need for longevity planning.

We have all read about the problems faced by the under-funding of the Social Security system and the problems we will all face when the 77 million "baby boomers" retire. It should be obvious to any serious observer that everyone needs to plan for funding their own retirement rather than to expect that employers or the government will handle it for them--particularly not in view of ever-increasing longevity.

So, how do we handle the problem of increasing longevity? How do we ensure that we and our money end at the same time? The only sure answer is with a payout annuity.

Annuities take many forms. Variable annuities are designed to provide a hedge against inflation because of the vast choice of investment options that underlie them. Fixed annuities provide a certainty because of the guaranteed amount of regular annuity payments. Unfortunately, few provide inflation protection. Index annuities provide both the certainty of guarantees plus a potential hedge against inflation because of the availability of an index that can provide for investment growth. Annuities also take different forms relating to premium payment modes and relating to when payouts begin. We are all familiar with the deferred annuities that have become such an important element in the financial market in recent years. Payout annuities--often referred to as "immediate" annuities are less well known, but of great importance in longevity planning.

Virtually all commercial annuities offered by life insurance companies in the United States have annuity payout options that are guaranteed for so long as the annuitant lives. This is true whether the annuity is deferred or immediate. The basic payout option is simple. The insurer guarantees payments for the life of the annuitant and they stop with the payment immediately prior to death. This "straight life annuity" is rarely selected because it does not provide for hedged alternatives that are appealing to retirees. Thus, payout options often include payments for joint lives, or for life and a period certain with payments guaranteed to a beneficiary if the annuitant dies prior to a specified term of five, 10 or 20 years.

Generally speaking, payout annuities used in connection with qualified pension plans provide for payments for the joint lives of the retiree and his spouse. This is to ensure the spouse is not left destitute on the death of the retiree. Annuities used with qualified pension plans can take two forms: They can be "individual retirement annuities" that are treated similar to IRA Rollovers, or, if the pension plan permits, they can be regular annuities purchased by the retirement plan's trustees for the benefit of the retiree. Annuities should be an important component of any qualified retirement plan because most qualified retirement plans do not provide payments that are guaranteed for the life of the retiree. Instead, they merely distribute the proceeds from the retirement plan to the retiree and leave it to her to determine how to invest it and to plan for longevity. Without a payout annuity, there is a significant risk that retirees will outlive the funds they have accumulated for their retirement.

The federal government, in the legislation covering retirement plans, has dictated that distributions from such plans must be for life or for "life expectancy," as determined by the mortality tables published by the Internal Revenue Service. Unfortunately, "life expectancy" is not "life." There is no requirement that retirement plans guarantee that a retiree will not outlive her retirement funds. Moreover, even if a retiree establishes a payout scheme that makes payments for her IRS determined "life expectancy," there is still a better than 50/50 chance she will live longer than the life expectancy established by the IRS mortality tables. The IRS mortality tables state that, at the end of any life expectancy for any age group, half of the group will still be alive. This half will have outlived their retirement funds if they chose to take them for their life expectancies.

The IRS mortality tables also can mislead a retiree because they are based on the total American population--not just those of us fortunate enough to retire with a qualified pension plan. Thus, it is more likely that employed persons participating in a qualified retirement plan will, as a group, live longer than will the general American population that includes drug addicts, homeless persons and those with no employer-sponsored medical plans. This means that the likelihood if people retiring with qualified retirement plans have an even greater risk of outliving their retirement funds--unless they take distribution of some part of their retirement funds in the form of a payout annuity guaranteed for life.

The retirement crisis facing our country for the next 15 years is profound. The Social Security system is under great pressure, lifetime pensions guaranteed by employers have virtually disappeared from the landscape and it is up to everyone to ensure that their funds last for their lives. Immediate payout annuities are the easiest way to ensure that you and your retirement funds expire at the same time. The alternative is not a comfortable one to contemplate.

//
from morningstar.com

protecting your assets from creditors

FLORIDA ASSET PROTECTION - Statutory Protection

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Much of the asset protection benefits for Florida residents is contained within the Florida Statutes. These exemptions are available to people who permanently reside in Florida.

Salary or Wages

Wages, earnings or compensation of the head of household which are due for personal labor or services, including wages deposited into a bank account (provided they are traceable and identified as such) are exempt from garnishment under Section 222.11 of the Florida Statutes.

Life Insurance Policies and Annuity Contracts

Cash value in insurance and all annuities are protected from creditors’ claims by Florida Statutes. While a Florida resident is alive, the cash value of any insurance policy he owns on his life or on other Florida residents is exempt from creditors claims. The protection afforded to the cash surrender value of a life insurance policy is only for the benefit of the owner/insured. Death benefits are not protected from the creditors of the policy beneficiary.

Perhaps the most popular financial product for asset protection planning is annuities. Florida courts have liberally construed this statutory exemption to include the broadest range of annuity contracts and arrangements. Private annuities between family members are entitled to the exemption as are the proceeds of personal injury settlements structured as an annuity. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors for outside countries including the United States

The protection of cash value insurance and annuities extends to proceeds withdrawn by the owner. Florida courts have held that funds withdrawn from a cash value insurance policy and annuity payments received by a debtor remain protected as long as the funds can be accurately traced to a bank account readily accessible to the debtor.

Pension and Profit Sharing Plans, IRAs

To prepare for retirement and to defer income taxation more and more individuals direct significant wealth into IRA accounts and other tax qualified retirement plans. In Florida, retirement money not only defers income taxation, but is protected from creditors as well. Florida Statute 222.21(2)(a) provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan is exempt from all claims from creditors of the beneficiary or participant. Florida Statutes specifically include under the protection umbrella pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters. Disability Income

Disability income benefits under any disability insurance policy are exempt from legal process in Florida.

Automobile Exemption

Florida residents may protect up to $1,000 of equity in an automobile. The fact that a debtor need his automobile to go to work does not protect the vehicle from creditors to the extent that the debtor's equity (value less loan amount) exceeds $1,000.

Prepaid College Plans

Florida prepaid college tuition plans and Florida's 529 college saving plan are protected from creditors by Florida Statute 222.22.

Miscellaneous Exemptions

Florida Statutes include several narrow asset exemptions such as professionallly prescribed health aids, qualified prepaid college tuition, hurricane savings accounts, medical savings accounts, and unemployment benefits.