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Longevity Risk In Annuities

Understanding Longevity Risk and Your Retirement Income:

With the advancements in medical care and standard of living worldwide, we are all fortunate to expect longer lives as a result.  On the plus side of more time is the opportunity to do and experience more in life.

From an economic and financial perspective, there are a lot of challenges we face globally.  Failure to prepare for a longer retirement could have serious consequences.

The article I’m recommending this week comes from the New York Times and describes the difficult issues government and social programs face.

The article… The Financial Time Bomb of Longer Lives

Social Security and Medicare are already over-burdened and the majority of retirees aren’t yet participating in the system.  Are benefits safe?  Where will we get the necessary funding to cover the promises these programs have made?

Regardless of what happens with social programs, it is important to control what you can and give yourself the best chance of living comfortably throughout retirement.t

Would safety, tax deferral and guaranteed lifetime income give you additional peace of mind?  Annuities were made to solve problems like this.

For ideas on how you can optimize you retirement income, call or email with questions about escaping the coming Financial Time Bomb.

Bryan J. Anderson

800.438.5121 [email protected]

Variable Annuities- Do they Make Sense?

I read this interesting article in the Journal about annuities.  Check it out here.

I think it’s hard to find a variable annuity that makes sense, but they are very popular- as always, do your homework and call me with any questions!

Choosing a Good Variable Annuity

Every insurance company will tout one of their variable annuity products as “the best variable annuity”. With many different insurance companies out there, that makes for many “best variable annuities”. In reality, the terms of each product will vary widely. You should understand the different features and risks to decide if a variable annuity is right for you, and only then select a particular variable annuity. 

Variable Annuity: Things to Consider

There are three main components to take into account when choosing a variable annuity.  1) Performance of the managed investment account options available to you,  2) Costs and Fees of the managed account and the annuity component of the contract, and 3) the optional riders you select. You may find that the risks to your principal, combined with the costs and fees, outweigh all the potential benefits of the Variable Annuity.

Variable Annuity: Separate Account Performance

Variable Annuities are ‘variable’ because the principal may be invested directly in the stock market through mutual funds or other managed accounts offered by the insurance company issuing the annuity.   The hope of higher returns makes variable annuities attractive, however these investment accounts  all add layers of risk, and layers of cost, and are the main reason that Variable Annuities ofter under-perform fixed annuities.

Variable Annuity: Administrative Costs

Obviously you will want to find a variable annuity with low administrative fees.  As variable annuities give you the potential for market upside through various investment options, they are more labor intensive for the Insurance companies to manage.  Consequently, their fees may be higher, and are another reason why variable annuities may under-perform fixed annuities.

Variable Annuity: Optional Customization

Variable annuities may also offer various riders so that the owner can customize the annuity to his or her own needs and goals.  As variable annuities have grown in popularity, so have the menu of add-ons and riders available.  Each of these comes with cost, so be careful and don’t buy  options you don’t need.

Variable Annuity: Where to Get Help

Variable Annuities are securities products, and are sold through broker-dealer networks.  As we do not believe variable annuities offer an acceptable combination of safety, profitability, and flexibility, we do not often recommend them. There are other, more appropriate products however, such as the Fixed Index Annuity, to do offer appreciation upside with the guarantees of an annuity and are worth consideration

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Variable Annuity Calculator

Your comprehensive annuity investment guide: Annuities.

Variable Annuity Calculator

Use this variable annuity calculator to see how a Variable Annuity might fit into your retirement plan. Contributing to a Variable Annuity creates long term tax-deferred growth.

View all our annuity calculators, or read on for a description of how this variable annuity calculator works.

Fixed Annuity Calculator

Variable Annuity Calculator

Immediate Annuity Calculator

Fixed Index Annuity Calculator

While we don’t sell variable annuities, this website would not be complete without some information on how variable annuities work and their pros and cons.  While variable annuities do make up the majority of annual annuity sales, we use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Hybrid Annuities, please Contact Us.

Variable Annuity Calculator: Definitions

Variable annuity

A variable annuity is an insurance product designed to provide long-term, tax-deferred savings. You do not receive a tax deduction on the money you deposit, however, you pay no taxes until you begin making withdrawals. There are no annual contribution limits or income limits. A Variable Annuity could be a good option if you wish to increase your tax-deferred savings. This calculator assumes that you make your contribution at the beginning of each year.

Variable annuity contracts will have different rules, restrictions and expenses that will vary by insurance company and by product within an insurance company. To fully understand a variable annuity, make sure you fully understand all options, restrictions and expenses for your specific variable annuity before you enter into such a contract. This variable annuity calculator is not designed to describe a specific insurance product and should be used as a general illustration of the tax-deferred feature of a variable annuity.

Surrender charges
    Press the “Enter Data” button to input surrender charges for this Variable Annuity calculator. You are allowed to enter the year and percent of the surrender charge. Surrender charges are a percent of the annuity balance you will be charged if you withdraw your annuity balance early. The actual surrender charges vary widely from annuity to annuity. Make sure to check with your investment advisor if you are unsure of the surrender charges that may apply to your particular annuity.

Current age
    Your current age. Enter into the variable annuity calculator.

Withdrawal age
Age you wish to start taking money out of the annuity. This calculator assumes that the year you begin withdrawals, you do not make any contributions to your annuity. So if you begin at age 65, your last contribution would have happened when you were actually age 64. Enter into the variable annuity calculator.

Annual contribution
The amount you will contribute to your variable annuity each year. Enter into the variable annuity calculator.

Expected rate of return
The annual rate of return you expect for your variable annuity. This calculator assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the type of investments you select. For example, from December 2000 to December 2010, the annual compounded rate of return for the S&P 500 was 0.899%, including reinvestment of dividends. From January 1970 to December 2010, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.05% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Insurance products may additionally include mortality, expense risk charges, cost of insurance, administrative, and surrender charges that will have a significant impact on the total rate of return for the investment.  Enter into the variable annuity calculator.

Current tax rate
Your current marginal tax rate you expect to pay on your taxable investments.  Enter into the variable annuity calculator.

Retirement tax rate

The marginal tax rate you expect to pay on your investments at retirement.  Enter into the variable annuity calculator.

Years until retirement
Number of years before retirement.  Enter into the variable annuity calculator.

Annuity total before taxes
Total value of your variable annuity at retirement before taxes.  Enter into the variable annuity calculator.

Annuity total after taxes
Total value of your variable annuity at retirement after taxes are paid. Enter into the variable annuity calculator.

Total taxable account
Total value of your savings, at retirement, if your annual contribution is deposited into a taxable account.  Enter into the variable annuity calculator.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

We hope you find this variable annuity calculator useful.

Pros and Cons of Variable Annuities

Understand The Pros and Cons of Variable Annuities

No other product in the Annuity business creates as much controversy as Variable Annuities.  Frankly, I’m getting kind of tired of all the loud opinions about the Pros and Cons of Variable Annuities- it’s either a table thumping BUY or a screaming SELL.  It’s  just like watching Jim Cramer on Mad Money.

There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy.  Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get.  So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.

Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons.  But I’ll tackle the variable annuity debate in this article.  Before I go further, let me say that even after my  research and experience in the industry, I am not overwhelmingly for or against variable annuities.  Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.

Also, while we don’t sell variable annuities, this website would not be complete without this  information on how variable annuities work and their pros and cons.  While variable annuities do make up the majority of annual annuity sales, we use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives please Contact Us.

Pros and Cons of Variable Annuities: Pros

Guaranteed Benefits:

  • Death Benefit This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value
  • Income– This allows the contract owner to lock in a predetermined level of future income regardless of account performance.
  • Principal This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.
  • Tax Deferral:  Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding.  Many critics suggest that excessive fees mitigate tax deferral benefits.  If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.
  • Unlimited Contributions: Retirement plans have contribution limits.  If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc.  Annuities have no contribution limits.

Pros and Cons of Variable Annuities: Cons

  • High Fees:  Many annuities have optional riders that push the overall fees to 3% or more.  Plenty of products allow an investor to elect out of the options but some don’t.  If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.
  • Limited Investment Choices: Asset allocation options are limited within an annuity.  Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.
  • Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.
  • Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

Pros and Cons of Variable Annuities: Summary

As you can see, the analysis is pretty simple.  If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. For most of my customers using the decisions tools we outline in the Annuity Report, available by free download to our members, most of the cons seem to be deal breakers if even if a few components are tolerable.  Overall, for me, the cons outweigh the pros most of the time.

Once you understand the pros and cons, Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t.  Make sure to seek solid advice from an open-minded advisor.

Variable Annuity

Curious about Variable Annuities?

This will be brief, for two main reasons.

One, variable annuities run counter to our central premise that retirees should secure a floor guarantee they can depend on for retirement.  Variable annuities do not provide this guarantee.  Sure, you can pay even more in fees to buy an income guarantee, but why bother when better cheaper alternatives exist? (See  Index Annuities)

Secondly, variable annuities are considered securities products by the SEC and are available from Securities firms.  Annuity Straight Talk does not sell securities or variable annuities.

So with that out of the way, we’ll offer a quick summary of variable annuities.

First and foremost, a Variable Annuity offers you the potential for gains thru market performance, but shifts the risk of investment loss to you, the investor.

A VA is similar to, but more expensive than, holding your assets in stocks or mutual funds. Most of the benefits of annuities such as guarantees and income are available at extra costs through riders or other add-ons to your contract.

A Variable Annuity is a tax deferred insurance wrapper around mutual funds or bonds.  The funds you can chose from to invest in may be limited in options by the insurance company.

Your returns will vary with the market, and your account value will be determined by the value of the investments selected in your portfolio. You could experience higher gains over traditional fixed annuities, CDs and savings plans, but the main variable annuity drawback is that you could also suffer losses.

As most people considering annuities in the first place are motivated to preserve capital and gain security, variable annuities don’t really fit the bill.

Variable Annuity Income Rider Options

To be fair, we do also consider variable annuities with an income rider to be a form of a hybrid annuity.  By hybrid, we mean it combines both the appreciation and the lifetime income components of a traditional annuity.

However the main drawback to variable annuities with income riders are the exorbitant fees that nearly all of them levy on you each and every year.

Read up on the Hybrid Annuity to understand the difference between an Account Value, and an Income Account or Benefits Base.  A variable annuity with a lifetime income rider operates exactly the same way, but at a higher cost.

Variable Annuity Fees

A typical variable annuity with income rider fee structure may look like this:

  • Annuity Fees (for Mortality and Expense Charges)
  • Early Surrender Charges
  • Mutual Fund Management Fees
  • Income and Death Benefit Rider charges

All together, these fees typically range from 3% on the low end to 6%, per year, regardless of your account performance!

In volatile markets where watered down mutual funds may lag the market, you could very easily capture losses on top of annual fees, and be subject to onerous surrender charges if you try to get out.

It’s no wonder that traditional money managers try to steer clients away from variable annuities…. but it’s borderline criminal to paint ALL annuities with the same brush.

Understand Variable Annuities In More Detail:

First and foremost, a Variable Annuity shifts the risk of investment loss, as well as the potential for gain thru market performance, to you, the investor.   It’s very similar to, but more expensive than, holding your assets in stocks or mutual funds. Most of the benefits of annuities such as guarantees and income are available, however, through riders or other add-ons to your variable annuity contract.

So what is a Variable Annuity? A Variable Annuity life insurance company product is a tax deferred insurance product just like a Fixed Annuity, but in a variable annuity product you give up guaranteed appreciation in exchange for the potential for higher returns.  Your returns will vary with the market, and your account value will be determined by the value of the investments selected in your portfolio. You could experience higher gains over traditional fixed annuities, CDs and savings plans, but the main variable annuity drawback is that you could also suffer losses.

As most people considering annuities in the first place are motivated to preserve capital and seek security with a modest rate of return, it’s imperative to get our Report in the signup box to the right, and learn more about the Pros and Cons of Variable Annuities.

Is a Variable Annuity For You?

  • If you are seeking immediate monthly guaranteed payments in exchange for a lump sum of cash today, you are looking for an Immediate Annuity
  • If you are looking to save over time, with a reasonable guaranteed rate of return and the maximum security, you are looking for a Fixed Annuity or a Fixed Index Annuity
  • If you’re willing to waive the guaranteed appreciation and safety of the other products for the potential for higher appreciation, read on.

During the accumulation phase of a Variable Annuity contract, your appreciation rate is determined by the performance of investments you select in your sub-accounts. Within Variable Annuities, you can enter and exit the market.  You are exposed to loss of principal while invested.

You are also generally limited in your investment selections within your sub accounts. As a result, there are more varieties of variable annuities than of Baskin Robbins ice cream.  The range of choices in the variable annuity universe is huge, and extra caution is needed to pick the best one for you. Many of these variables, options, and critical add-ons are contained in Optional Riders .

The value of a variable annuity changes with performance of the investment options chosen.  These investment options are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. The variable annuity differs from other investments in several important ways:

  • You can pick the mutual funds the insurance company invests your money into, all in separate accounts and subaccounts.
  • You specify the allocation of your annuity in each portion, and you control where your contract will be invested.
  • You, therefore, are responsible for your own gains and losses.  Studies often show individuals consider themselves better than average drivers, and better than average investors.  We can’t all be better than average….

Variable Annuity Summary:

Within individual company parameters, you can be as aggressive or as conservative as you would like. This gives a variable annuity the potential for higher returns, but it also requires you to assume a great risk of loss.

Presuming you are better than average and you’ve selected sub-accounts that have performed well, you may be ready to convert your account value into an income stream.  Options you selected at the beginning of your annuity contract have a significant effect at this time.

To properly select, manage, then annuitize a variable annuity requires skills.  While we don’t sell variable annuities, this website would not be complete without some information on how variable annuities work and their pros and cons.  And as variable annuities make up the majority of annual annuity sales,  many people have them.

We use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Hybrid Annuities, please Contact Us.

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Variable Annuities:  Pros and Cons
No other product in the Annuity business creates as much controversy as Variable Annuities.  Frankly, I’m getting kind of tired of all the loud opinions about variable annuities- it’s either a table thumping BUY or a screaming SELL.  It’s  just like watching Jim Cramer on Mad Money.   There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy.  Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get.  So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.

Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons.  But I’ll tackle the variable annuity debate in this article.  Before I go further, let me say that even after my  research and experience in the industry, I am not overwhelmingly for or against variable annuities.  Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.
Pros of Variable Annuities
Guaranteed Benefits:

Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value

Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.

Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.

Tax Deferral:  Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding.  Many critics suggest that excessive fees mitigate tax deferral benefits.  If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.

Unlimited Contributions: Retirement plans have contribution limits.  If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc.  Annuities have no contribution limits.
Cons of Variable Annuities

High Fees:  Many annuities have optional riders that push the overall fees to 3% or more.  Plenty of products allow an investor to elect out of the options but some don’t.  If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.

Limited Investment Choices: Asset allocation options are limited within an annuity.  Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.

Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.

Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

As you can see, the analysis is pretty simple.  If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you.

For most of my customers and following our decision tools to Buy Annuities, most of the cons seem to be deal breakers if even if a few components are tolerable.  Overall, for me, the cons outweigh the pros most of the time.  Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t.  Make sure to seek solid advice from an open-minded advisor.

Immediate Annuities have several names- Instant Annuity, Single Premium Annuity, Single Life Annuity, and Single Payment Annuity, among others.  All refer to the same thing- An Immediate Annuity is a contract with an insurance company that immediately converts savings into income.  In terms of Timing, the payments of income and principal commence immediately, in contrast to Deferred Annuities which build for some time before converting into payments.

The two types of Immediate annuities:

Immediate fixed annuity protects your retirement with steady, predictable income while the Immediate variable annuity permits investment flexibility and potential income growth, given that you can take the risks.

A wide array of options and riders add benefits and duration to an Immediate Annuity income stream.  For example, if you want to remove all the responsibilities and risks associated with managing your money thru retirement, the purchase of an immediate annuity can give you a guaranteed income stream for life, no matter how long you live.   Or, if you have assets that make you ineligible for Medicaid, an immediate annuity may allow you to remove the assets from your estate- please see our Medicaid Annuity section.

How an Immediate Annuity Works:

You can buy an immediate annuity with funds available from a 401k, IRA, savings account, life insurance policy, inheritance, or even the sale of a home or major asset. The insurance company you select promises to give you an income stream you select in exchange for an upfront premium expense.  The company assumes all investment risk and calculates the income amount based on you age-weighted life expectancy.

You can choose how often you receive a payment from the annuity, such as monthly, quarterly, or yearly. The amount of income you receive is based on the amount of money you initially contribute, plus a number of factors including your age, sex, income option selected, and interest rates at the time of purchase.

Get our Report to learn how an immediate annuity can help, if:

You want certainty that you won’t outlive your income,
Your retirement expenses are not covered by your monthly pension payment,
You want to eliminate management of your retirement savings,
You want to protect assets from high nursing home costs.

To Calculate your Immediate Annuity benefits, this Financial Calculator is a starting place, however the only accurate method is to obtain a quote from a licensed Annuity Expert. Please Contact Us to be connected to an Expert in your state.