Retirement Planning Blog

How Do Interest Rates Affect Annuities?

Interest rates affect annuities in sometimes strikingly different ways. The interest rate that most annuity companies follow is the 10-year Treasury rate. When it rises, most types of annuities are better off (but not all of them). When it falls, it often hurts many annuities.

Again, interest rates don’t affect all annuities the same way. So, let’s start by looking at annuity types and then how interest rates impact them. That will help you decide what annuity might be best for your needs.

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How Are Annuities Taxed?

Taxes are a top retirement concern, and as annuities are the only financial vehicle that can pay a guaranteed lifetime income, you might wonder about annuities and taxes. To understand how annuities are taxed, you should first understand the different types of annuities and how they can be used.

Basic Annuity Types

There are a few basic types of annuities in the market today. It’s good to note that all annuities are capable of paying a guaranteed lifetime income. But some annuity kinds are better equipped to pay you lifetime income while others are stronger for growth.

That being said, these basic types of annuities are:

Fixed Annuity­ – A fixed annuity typically provides a guaranteed rate of growth for a specified period. The longer the term is for your fixed annuity, the higher that interest rate tends to be. So, it’s vital to select the company from which you buy an annuity carefully.

Fixed Indexed Annuity – A fixed indexed annuity offers growth potential that is tied to an underlying financial benchmark index. The annuity allows the contract holder to have their money earn interest, based on what the index does, without downside exposure.  

Variable Annuity – A variable annuity allows someone to place money in various mutual fund-like accounts for investment purposes. Legally, it’s both an insurance policy and a security. However, a variable annuity does expose the annuity assets to the full risk of loss in the market.

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Roth Conversions – When You Should Consider One?

With growing government debt and the prospect of increasing taxes, you may wonder if a Roth conversion is right for you. But there are many nuances to deciding on a Roth conversion and then following through on the conversion process.

You will pay taxes on the converted amount. In some cases, a Roth conversion can move you into a higher tax bracket, depending on your other taxable income. If you will need the money in five years or less, this tax planning strategy might not be a good fit for your situation.

Understanding your options can help in making a confident decision. That being said, here are a few quick factors to keep in mind as you explore whether a Roth conversion might make sense for your financial situation. You will also want to speak with your tax advisor and any other experienced professionals as needed for further guidance on your personal situation.

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The Baby Boomer Dilemma — What You Should Know

Baby Boomer Dilemma Movie

Retirement planning covers lots of areas. But have you heard of a situation where someone with $500k – $600k in retirement savings might be ‘richer’ than someone who has $1 million? Economic paradoxes like this and other insights are discussed in a new film, ‘The Baby Boomer Dilemma.’

You may have heard of The Baby Boomer Dilemma documentary, which takes a close look at the retirement landscape in America and how it’s being funded. The movie centers around the fictional story of a Florida couple, who have concerns about their future financial security.

An 85-min film, The Baby Boomer Dilemma ends with the wife distraught about not having a guaranteed source of income for their retirement, whether a pension or an annuity. Here’s a little bit more information about the film’s content. If you have any questions about the movie or would like to request a personal retirement consultant based on the movie’s principles, please fill out the contact form for more information.

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Annuity vs. Pension — Key Differences to Know

If you are one of the lucky few with a defined-benefit pension, then you might have wondered about what your options are with a pension versus an annuity. But while pensions were a common thing of the past, they aren’t around as much anymore.

In the days before smartphones and social media, many people had only one employer. Throughout their career, folks worked for one company and received a pension when they retired. From there, they would receive payments for the rest of their lives.

Today, unless you have a government job of some sort, pension benefits are rare. An annuity may be a good option for you if you don’t have a pension but like the idea of receiving income for the rest of your life.

As you consider the pros and cons of annuities vs. pensions for retirement, here are some key factors to consider.

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Using Life Insurance in a Survivorship Retirement Income Strategy

You may think of life insurance as a way for people to protect assets or provide a windfall for heirs. But it’s also useful for survivorship strategies in retirement. When one spouse passes, the other is left with more than loss of love and support.

The survivor loses income from a second Social Security benefit. If their spouse had a pension or other benefit that paid income while they were alive, chances are it also goes away. Even so, there are steps you can take to protect against these risks.

One example financial plan with such strategies was once presented by Zach Parker, senior vice president of wealth management and product strategy at The Advisor Group. At one industry event, he showed how a combination of term life insurance and universal life insurance can provide income protection for both spouses.

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What Is a 457(b) Retirement Plan?

What is a 457(b) retirement plan?

As a public employee, you could contribute to your 457(b) retirement plan to save for your future. In many ways, a 457(b) plan is similar to a 403(b) or 401(k) plan. A 457(b) plan is offered through your employer and is designed to help you save money for retirement.

Also known as a deferred compensation plan, a 457(b) plan is commonly offered to government employees – especially those working for local and state governments.

A few examples of who might have this plan are:

  • Government officials
  • Police officers
  • Firefighters
  • Emergency medical technicians
  • Public school teachers
  • Those who work for a city, like sanitation workers

Using this employer-sponsored retirement account, you can contribute pre-tax dollars. Also, you won’t pay taxes on that money until you withdraw it, usually during retirement. In this way, your contributions can grow tax-deferred until withdrawals are taken.

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Non-Qualified Annuities — What You Need to Know About Them

A non-qualified annuity is a contract designed to provide you with regular, guaranteed income during your retirement years. Non-qualified annuity policies are started with money which has already been taxed.

Non-qualified annuities can be a nice addition to a well-rounded portfolio. They can ensure that you have regular, predictable income on top of your Social Security benefits during retirement.

While they are funded with after-tax money, non-qualified annuities give the benefit of letting your money grow tax-deferred. In certain situations, they may also help reduce your overall taxable income in retirement, which can lower how much of your Social Security benefits might be taxed.

Another use for a non-qualified annuity is if you wished to retire early (say in your early 60s). It can fill in any income gaps between your monthly expenses in retirement and what your other assets may generate for cash-flow.

Here’s a closer look at how non-qualified annuities work and how they can be adapted for different situations in a retirement financial plan.

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How to Retire with Safety and Security

Dr. Wade Pfau is a leading expert on the subject of retirement. He is the Professor of Retirement Income at The American College of Financial Services and is also Co-Director at the New York Life Center for Retirement Income.

Dr. Pfau has made many powerful contributions in the field of retirement income planning. One is adding insights to the ‘safety-first’ school of retirement planning thought, or where a retirement plan is built on a safety-first approach.

How a Safety-First Approach Can Help with Financial Stress

In an interview with Wharton School of Business podcast knowledge@wharton, Dr. Pfau talked about how retirees can reduce the amount of financial stress that they feel after they stop working.

Here are some highlights from that interview. It’s good to keep these things in mind as we plan for our own financial futures.

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Why Run-of-the-Mill Retirement Planning Advice Doesn’t Work for Federal Employees

Image Contributor: Anthony Ricci

As a federal employee, you have spent years in your career and want a comfortable retirement. But it’s often tough to find advice in this area that fits your situation with government employment.

If you read the newspaper or surf the web, chances are you have come across some articles with retirement advice. For many people, these insights can be quite helpful: catching up on retirement savings, estimating how much retirement income that you will need, deciding when to retire, and so on.

But in many cases, these insights don’t matter as much to federal government employees. In fact, a great deal of the advice may not apply at all. Why?

Federal Employees Need Tailored Retirement Guidance

As a government employee, you need information that covers your unique federal employee benefits and they fit into your financial picture. One big question: how you can optimize your employee benefits for a comfortable and secure retirement after you separate from service?

It’s important to be able to answer questions such as this, so that you can make confident and well-informed decisions for your family and yourself.

Here’s a few reasons why generic retirement planning advice doesn’t cut it for federal employees – and, instead, how tailored guidance can make a world of difference for their unique employee benefit programs.

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