An equity indexed annuity is simply a dated name for a fixed indexed annuity. Fixed index annuities came about in the mid-1990s.
They were intended as an option for retirement savers looking for alternatives to low-interest CDs and low-paying fixed-interest instruments, such as Treasury securities.
How the “Equity Indexed Annuity” Came About
Life insurance companies used different names in marketing fixed indexed annuities to the public. Since they are fixed insurance contracts and therefore under the authority of state insurance commissioners, the term “equity indexed annuity” eventually went out of vogue.
It made people think that a fixed index annuity was a securities product. However, it still remains a fixed insurance product regulated by the states to this day. There is no “equity” component at all to a fixed index annuity.
How can a fixed index annuity help you with health costs, specifically certain long-term care expenses? Nowadays, many fixed index annuity contracts come with a provision called a wellness benefit.
In some situations where you need certain kinds of long-term care, the income from your annuity can be “enhanced” for a certain time period. Your annuity income can increase, often double, in order to help you pay for long-term care and its high costs.
This enhanced income generally lasts for a certain period, such as up to 60 months (or five years). The benefit can vary from indexed annuity contract to contract, so your financial professional can go over the details, pros, and cons of any contracts you may be considering.
How Likely Is It that Someone Needs Long-Term Care?
Statistics show that over 50% of those aged 65 or over will need some form of long-term care at some point in retirement. Couples in this age group have over a 50% chance of one of them needing this type of care at some point.
The costs of long-term care can be staggering in many cases. A year of home healthcare can easily cost anywhere from $50,000 to $55,000 per year.
Yearly residence in an assisted living facility costs around the same. Then a semi-private room in a nursing care facility can cost as much as $90,000 to $100,000 per year, depending on where you are in the country.
Annuity laddering is a strategy in which someone buys or staggers several annuity contracts over some years. The goal is to maximize the benefits that you receive from the annuities, like guaranteed income streams, while managing risks such as interest rate risk.
Strategies for laddering annuities can give you more flexibility in your retirement plan. You can crack down on potential downsides, such as locking yourself into a reduced annuity payout while interest rates are low. That can be a helpful guard against inflation.
When you buy multiple annuities and then wait for some years to turn some of those contracts on, that gives them time for their contractual benefits to grow. You can have more higher lifetime income, or higher interest earnings for your money, as a result of this drawn-out strategy.
Depending on your situation, you may want to tap more than one annuity as part of a laddering strategy in order to maximize your benefits over time. Here are a few different laddering strategies that you can use with annuities to achieve this goal.
Most people would be thrilled at the prospect of 10% average annual returns or higher in retirement. But now that folks are living longer, they face more challenges than just adequate returns. With decades of retired living on the horizon, people must ensure their portfolios last as long as they might need them.
Sequence of returns risk can affect your long-term income the most in your early-retirement years. That is the timespan just before and right after you retire. You may have heard of that period called the “retirement red zone,” or generally the 10-year spread prior to and after retirement.
It’s true that average returns (including dividends) for the S&P 500 from 1928 to 2021 have exceeded 10%. But averages can be deceiving for long-term income planning. What matters just as much is the order of returns, or the actual timing of when a portfolio grows or loses value. As we will see, losses in those early years could make or break your income goals, setting up the risk of running out of retirement money.
This potential hazard is called sequence of returns risk, or just sequence risk. To illustrate it, we will talk about it in two formats: by analogy and then through two hypothetical portfolio scenarios. Read More
Editor’s note: This is part 2 of a series on different types of bonds. Here is part 1 of this series on government bonds.
Bonds and other fixed-interest assets play a valuable role in modern retirement planning. They help balance market risk, create retirement income streams, and keep overall volatility in a financial plan at bay.
Bonds assure that you will be paid interest during their term. Then once the term is over, they repay the original investment, or principal, back to the investor. The ability of a bond to meet these obligations is backed by the financial strength of the bond issuer.
In this article, we will go over different types of bonds offered by a municipality or a corporation. Before going into further detail about different kinds of bonds, here is a quick sum-up of a bond’s basic features.
Editor’s note: This is part 1 of a series on different types of bonds. Here is part 2 of this series on corporate and municipal bonds.
Bonds are a core staple of many financial strategies today. They are among the different types of fixed-interest instruments that can be used for generating retirement income, balancing out risks held by other assets, and smoothing out volatility in general.
With a bond, someone has a guarantee that they will be paid interest during its term. Once the bond matures, the principal is paid back to the bondholder. The ability to meet these obligations is backed by the financial strength of the issuer of the bond.
For this reason, government bonds are generally considered to be a type of bond with lower risk than others. After all, the government has the authority to raise taxes and print money to meet its obligations.
There are different types of bonds, and they vary in a number of ways: length of term, interest rates, and the type of issuer, to name a few. It’s helpful to know at a high level about these different bond types and how they might play out.
Here is a breakdown of the different types of bonds and what they involve. In this article, we will go over various types of government bonds available.
When planning for retirement income, the devil is in the details. Once you are retired, you want to be sure that you have more than enough income for your lifestyle expectations.
One way to get a good grip on this is by mapping and estimating what you expect your future spending to be.
This can give you a high-level perspective of how much income you will need for your idea of a comfortable retirement. Everyone has a different situation. Because of that, the amount of annual income that you will need will likely differ from others.
That being said, you can still have more clarity in your income planning and decisions by seeing what others’ financial experiences are in retirement. One helpful metric in this regard is understanding which expenses can dominate your retirement spending.
Here are four expenses that can take a bundle out of your retirement money if you don’t plan for them. Having strategies for these costs, and your overall expenses, can go a long way toward keeping your retirement goals on track. Read More
Note: With the passage of SECURE Act 2.0 in 2022, provisions of the SECURE Act from 2019 have been updated. For the most part, inherited IRAs and their RMD rules remain the same except for inherited special needs trusts. Talk to your financial professional for guidance on your personal situation and for any other changes coming from SECURE Act 2.0 that may affect you financially.
You may have heard of annuities and how they are the only thing besides Social Security that can pay you guaranteed lifetime income. But what happens to an annuity when someone passes away? The tax rules surrounding survivor or inherited annuities are already complex, but the SECURE Act and now SECURE Act 2.0, federal laws passed in 2019 and 2022, have made them even more complicated.
The proceeds in a survivor annuity are generally taxable when the heirs receive them. If the recipient isn’t a spouse of the original annuity owner who passed, that recipient will pay taxes on the money they receive from the annuity.
If the surviving recipient is a spouse, then there are some steps that they can take to defer the taxes on the annuity proceeds. How much of the proceeds are taxable will depend on what type of account the annuity was housed in.
Most annuities are bought with pre-tax qualified money, meaning the premiums often come from a traditional IRA, a 401(k) plan, or another qualified plan. Since most annuities are bought with this pre-tax money, we will talk about how the SECURE Act can affect an heir’s tax burden now.
You may have heard of capital preservation strategies at some point or another when planning for retirement. But what is capital preservation exactly? What could it mean for your overall financial plan?
Here’s a quick look at what capital preservation involves – and why it becomes more important as people move into retirement and beyond.
What Is Capital Preservation?
In a nutshell, capital preservation is a kind of financial strategy that aims to minimize the risk of loss in your investments. It emphasizes the protection of your money, or “principal protection,” as it’s known in more formal terms.
A well-known rule of thumb in finance is how there is an inverse relationship between risk and reward – or how much risk you take on in order for your money to have more growth potential.
Since capital preservation is focused on protecting your money, this brings up certain questions. By adopting a capital preservation strategy, does this mean that your portfolio won’t grow any more over time?
Thankfully, the answer to that is no. That said, the rate of growth will vary depending on what makes sense for your risk tolerance, personal situation, and timeline until retirement.
If you are at or near retirement, then you probably have thought somewhat about your estate plan. But what about different types of trusts, or other estate planning strategies for that matter, that you might use as part of your plan?
It’s natural to aim for as efficient and tax-advantaged of a wealth transfer to your loved ones as is possible. Of course, you may already have a will and even some powers of attorney. However, there is still the probate process to contend with, and some type of trust is one way to help your assets avoid this.
A trust can allow your assets to be passed directly to your heirs without going through the publicity and expense of probate. It can accomplish many other legal purposes as well. Note that this doesn’t mean that a trust necessarily is the best option for your situation.
You will want to review different estate planning options and types of trust with experienced estate planning counsel and other experts in this area. They can help guide you on the legal implications of various options available, each one’s pros and cons, and what might make sense for your situation and goals.
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