Tag Archives: Retirement

Annuities for Retirees: What to Consider Before You Invest

Annuities can be purchased directly from an insurance company or from other financial institutions (including banks) that act on behalf of the insurance company. In exchange for your investment, the insurer agrees to make periodic payments for a set time period. It’s important to remember that some annuities may lose value. These products are not insured by the FDIC or the FDIC-insured bank or savings institution that may offer them.

There are different types of annuities. A “fixed annuity” provides a fixed payment, often monthly, until the investor dies. It typically guarantees no loss of principal (the amount invested). A “variable annuity” also guarantees payment for a set period, but the payment amounts will fluctuate based on the market performance of the investment option you choose. With a variable annuity, you also risk losing principal as well as earnings, although some variable annuities guarantee the return of your initial investment for an additional fee.

If the income payments are deferred to some later date, the annuity is typically described as a “deferred annuity.” If the payments begin immediately and continue for life, the annuity may be referred to as an “immediate life annuity.”

On the plus side, annuities provide another investment option if you’ve reached your contribution limit on your other retirement accounts, such as 401(k) plans. And, at retirement, the guaranteed payments can provide extra income. But, as with any investment, be aware of the potential pitfalls and make an informed decision.

Know the key features and costs of the product and make sure they fit your needs. Read the literature to understand the most important facts and risks, including the potential for loss, if any.

“A sales representative who talks to you about purchasing an annuity is required by federal law to ask you questions about your investment goals, current finances and future retirement plans,” said Kara Ritchie, an FDIC Policy Analyst who specializes in consumer issues. “If the representative doesn’t discuss whether the product is suitable for your needs and goals, take your business elsewhere.”

Experts generally say that annuities with guaranteed principal and income are more suitable for older investors than annuities that may, through market performance, lose value. The latter include variable-rate, deferred-payment annuities and equity-indexed annuities (those tied to the stock market), which might not make sense for many investors close to or in retirement.

Also, before you sign a contract, make sure you understand the cost of getting your money back early. Many investors with variable annuities are surprised to learn that they must pay hefty “surrender charges” if they try to withdraw money early, cancel their contract, or replace an existing annuity with a new one.

Deal only with a competent, reputable sales representative. Most annuity sales representatives are trained professionals. However, there have been reports of sales representatives who have been poorly informed or have used false or misleading tactics to sell annuities. How can you improve your chances of getting good advice?

Work with a sales representative licensed by your state government’s insurance regulator. If the sales representative offers variable annuities, he or she also must be licensed to sell securities. For information on whether a sales representative is properly licensed or has a history of disciplinary problems, contact your state securities regulator and the National Association of Securities Dealers, a self-regulatory group for the securities industry.

“Annuities are generally sold on a commission basis, so it’s important to find a sales representative who puts your interests ahead of his or her own,” added Ritchie.

Proceed carefully before replacing an existing annuity with a new one. A sales representative may suggest investing in a new annuity paying a higher return or replacing a deferred annuity with an immediate life annuity to provide monthly income now instead of later. These actions may make sense for some people. However, it can be expensive to change annuities. Make sure you consider the contract terms as well as early withdrawal penalties and other charges prior to making a change.

What if, soon after purchasing an annuity, you have “buyer’s remorse” or find another annuity with better terms? Your annuity may have a “free look” period during which you can cancel without penalty. If yours doesn’t and you still want to cancel, determine all the surrender charges and penalties and proceed with caution.

Introduction to annuities

Those with fixed incomes or living on their retirement savings are often looking for a safe, low risk place to invest their money. They will often turn to annuities, which are sold through insurance companies. Basically, an annuity is a contract between you and the insurance company that provided for tax-deferred earnings.

There are several insurance guarantees that come with annuities, including the option to “annuitize,” or turn the principal into a lifetime stream of income. However, the fees are often quite high, and the earnings are taxed as ordinary income, not long-term capital gain.

The FDIC does not insure annuities, even if they are sold through a bank. The safety of your principal depends on the financial strength of the annuity provider. If the company fails, you might have $100,000 of coverage by your state’s guaranty association. But these associations operate under state law and vary on what they cover and how much they pay.

Fixed-rate annuities

With a fixed-rate annuity, you pay the insurance company a certain amount of money. The insurance company then guarantees you a certain periodic payment for the life of the annuity. This is often a way to se up a lifetime stream of income. The insurance company’s goal is to invest your deposit and make more money than they have promised to pay you.

There are often higher interest rates on annuities than on CDs. But fixed rate doesn’t mean the same thing for annuities as it does for a CD. With a CD, the rate is fixed for the full term of the CD. Fixed-rate annuities do not have a maturity date. The rate is usually only guaranteed for the first year. The rate will then drop after the guaranteed period, and then be adjusted annually.

There may be penalties charged if you withdraw money during the penalty period. You may have to pay an 8% penalty if you withdraw money during the first year. After that, the penalty is usually decreased by 1% each year.

Annuities have tax-deferred features, so if you withdraw money before the age of 59, you may have to pay a hefty 10% penalty to the IRS. The earnings on annuities are taxed as ordinary income by the IRS no matter how long you have invested.

Variable annuities

Variable annuities offer investors unique features, but they are quite complicated. They combine the elements of life insurance, mutual funds and tax-deferred savings planes. When you invest in a variable annuity, you select from a list of mutual funds to place your investment dollars. Your options may include balanced mutual funds, money market funds and several international funds.

Variable annuities have tax-deferred benefits, and they have income guarantees that you don’t find in other investments. For example, for a fee, your variable annuity will pay a death benefit.

Let’s look at how this works. You invest $100,000 in a variable annuity. In a few years, the value of the mutual funds in your account has fallen to $75,000. If this was a straight mutual fund, your heirs would only receive the $75,000. With this annuity, your beneficiaries are guaranteed the $100,000 if you pass away. If you have opted for the death benefits, the market value of the annuity may be as much as $125,000. Your beneficiaries would receive this amount.

Taxes are imposed in the same manner as for fixed-rate annuities. The earnings are taxed as ordinary income. You do not want to use the annuities inside of your 401(k) or IRA. These plans are built for accumulating money on a tax-deferred basis. You don’t want to pay the higher costs of an annuity when you can invest in a mutual fund that benefits you at less tax expense.

There are instances when variables are a good fit. If you’ve already reached the limit on your other retirement savings vehicles, you might investigate a variable annuity. You aren’t limited in the amount you can invest in an annuity. Many allow you to convert your investment to an annual income stream, for a slight fee. The insurance company will guarantee that you will receive income payments for a certain period or for life.

CD-type annuities

A CD annuity is a fixed-rate annuity with a guaranteed rate that matches the penalty period. For example, you buy a five-year CD annuity at 4%. If you hold the CD for five years, then you will receive the 4% annually. If rates rise, you are already locked in at the lower rate.

Insurance companies developed CD annuities to help prevent insurers from making empty promises to continue to pay a high interest rate after the guaranteed period. Rates were falling, and customers were not getting what they expected. Customers began to pay a penalty to get out of the investment.

There are usually higher interest rates offered on CD annuities than on traditional CDs. The investment is tax-deferred, but if you cash out your five-year CD before the age of 59, you will pay a 10% penalty on the gain to the IRS. Many contracts will allow you to take up to 10% of the balance or up to 100% of the interest annually without any insurance company penalties charged.

The surrender charges for a CD-type annuity are like those of fixed-rate annuities. There is no FDIC coverage on the investment. Some CD annuities have escape clauses in which the company penalty is waived if the customer allows the payments to be made over a five-year period or longer.

401k Retirement Plans Explained

401k retirement plans are special types of accounts, financed through pre-tax payroll deductions. The funds in your account are invested in various ways. Your funds can be invested through any number of stocks, mutual funds, and other ways, and it is not taxed on any capital gains or interest until the money is pulled out or withdrawn. Congress approved this retirement savings plan in 1981, and its name was rooted from the section of the Internal Revenue Code that contains it, which is obviously, section 401k. One great advantage of this retirement plan is that the tax treatment is complimentary. Moreover, capital gains, interest and dividends are not levied until they are pulled out or withdrawn.

In terms of its investment customization and flexibility, 401k retirement plans offer employees and workers an extensive array of options and preferences as to how their property and assets are invested through time. Moreover, many businesses and companies permit employees to obtain company stock for their 401k retirement plan at a cut rate. However, many pecuniary consultants and counselors are not in favor of holding a significant percentage of your 401k plan in the shares of your boss or manager.

So what are 401k plans? If you are like most people, you probably have questions about your 401k retirement plan. You may be wondering how a 401k actually takes place, precisely what a 401k retirement plan is, or how you can be capable of stimulating the diminishing balance in your 401k plan. So how does a 401k plan actually work? If your company offers a 401k retirement plan, you can agree to join. You can also have the selection option of choosing the amount of funds you wish to put in from an inventory of funds presented in the 401k plan. Your payment will routinely be deducted from your pay check before taxes.

Every worker can invest up to a defined proportion of his wage into a 401k plan. Your involvement, along with any coordinated contributions from your employer, are then endowed into your chosen funds. These funds will produce interest before being taxed, and can be withdrawn when you reach 60 years of age. At this point in time, you must pay the income tax on the withdrawn funds. Furthermore, there are methods and means wherein you can pull out your funds before age 60. However, these early withdrawals frequently call for a penalty in conjunction with the payment of taxes.

A 401k retirement plan is an employer-subsidized retirement plan, and it is categorized into two groups: defined benefit and defined contribution. With this defined benefit plan, the employer pledges to give a distinct sum to those who want to retire and those who meet specified eligibility standards and measures.

A 401(k) plan is an employer sponsored plan. The employer makes direct contributions to the account that are deducted from the employee’s paycheck. Most companies will match the paycheck contribution up to a certain percentage. In general, the contributions are before tax dollars and grow tax deferred until they are withdrawn. After-tax contributions are also allowed.

You should contribute as much as you can to your 401(k). Don’t overextend yourself, but you don’t want to waste the opportunity to deposit tax free, tax deferred money and have it matched. The amount the company matches you for is free money. Don’t let it go.

In 2005, the maximum before tax annual contribution that an employee can make is $14,000. If the employee is over 50 years of age, he or she can contribute $16,000. The limit is set to increase by $1,000 in 2006.

Your 401(k) is simply an account; you chose the investments within the account. There is usually an array of mutual funds presented to you, but you must decide the allocations. There is no one to advice you when it comes to role fees and expenses that will affect your overall returns.

First, decide how much risk you are willing to assume. How much volatility within the portfolio can you stand?

If you are in your 20’s and early 30’s you have the time to be aggressive with your investments. The time factor allows you to recover from slumps in the stock market. As you age, your investments should become more conservative to protect your earnings.

Many 401(k) plans have tools, such as online calculators and worksheets, which help you in determining how much risk you should accept. The best tool is often to seek the advice of a competent financial planner. It is worth it to hire a planner to evaluate your assets and earning ability if the end result is a comfortable retirement.

If you find that you are in need of money, most plans will allow you to borrow up to 50% of your vested balance, but not over $50,000. You usually have to repay the money with interest within five years. The interest payments go into your account, so you are paying yourself the interest. There are downsides, though.

The money you have withdrawn as a loan isn’t appreciating. The original contributions were made with pre-tax dollars, but the money you payback is after-tax. If you don’t pay back the money it will be considered a normal distribution, and taxed and penalized.

If you leave the company, in most cases you will want to take your 401(k) with you. You can role it over into another company’s 401(k) plan program or into your own IRA at a brokerage. With an IRA, you will have more control over your account, and better investment options.

Whatever you do with your IRA, make sure that you follow all procedures to the point. You don’t want to accidentally withdraw your money and have to pay the taxes and penalties. This is a very costly mistake.

If you are an entrepreneur, you can open an individual 401(k). This gives you the option of investing thousands of dollars more than in other kinds of self-employment retirement accounts. An individual, or solo, 401(k) is available to businesses that only have the owner and spouse as employees. This means that if you work for someone else and have a business on the side, you can open an individual 401(k).

10 Steps To Save Your Retirement

Many of the brightest and hardest-working marketing and advertising people in the country are obsessed with getting you to spend money and, if necessary, to go into debt to do so. Absolutely all the media that reach you every day are designed to get you to spend money. In order to save money in this environment, you will need determination to withstand the constant pressures to spend now.

What is it that separates those who are successful from those who are not?

Successful individuals have a strong personal vision of what they want and why they want it. That vision gives them the strength to stick to their strategies even when doing so is uncomfortable. It gives them the determination to persist when they are discouraged. This is the same characteristic of women entrepreneurs and is the reason their new, small businesses are successful.

The 401k Plan

Today, the 401(k) plan has become the main investment vehicle for working women to save for retirement. But many don’t take full advantage of their plan, and this could leave them with a lot less at retirement. Here are some steps we believe you can take to improve and eliminate any retirement worries about whether or not your retirement will be pleasurable or public charity; or whether you will have all the free time to spend with your family or friends.

  1. Increase your contributions to the maximum that you can manage. Many women contribute just enough to take advantage of their employer’s matching contributions, and then they stop. By adding more to your account, beyond the matching contributions, you’ll end up with more in retirement.
  2. Invest at the start of each year instead of taking a little bit out of each paycheck. Nothing in the law says you have to invest in a 401(k) plan a little at a time, from each paycheck. By investing early, you’ll put your money to work sooner for your benefit.
  3. A few years ago it was reported that more than 30 percent of the money in 401(k) plans was invested in money-market funds or similar accounts. For investors nearing retirement, that may be appropriate. But most workers in their 40’s and 50’s need growth in their retirement investments. Put more of your investment fund in equities and less in money-market funds.
  4. Research indicates that over long periods of time, small-company stocks outperform large-company stocks. Since 1926, In the equity part of your portfolio, shift some of your money into funds that invest in small companies. Don’t put your entire equity portfolio in small-company stocks. But consider investing at least 25 percent of your U.S. equity investments in that fund.
  5. Numerous studies have shown that value stocks outperform growth stocks. According to data going back to 1964, large U.S. value companies had a compound rate of return of 15.1 percent vs. only 11.4 percent for large U.S. growth companies. Among small U.S. companies, the difference was even more striking: a compound return of 17.4 percent for the value stocks vs. 12.1 percent for the growth stocks. Don’t put your entire equity portfolio into value stocks. But if there’s a value fund available to you, consider investing at least 25 percent of your U.S. equity investments in that fund.

6. Re-balance your portfolio once a year. Your asset allocation plan calls for a certain percentage to be invested in each of several kinds of assets. Re-balancing restores your asset balance and allows for the possibility that last year’s losers may be this year’s gainers. Diluting your diversification actually increases risk in your portfolio over time, which is a result that’s just the opposite of what most investors want.

7.Without compromising proper asset allocation use the funds in your plan that have the lowest operating expenses. Choose funds with low turnover in their portfolios.

  1. Don’t borrow or make early withdrawals from your 401(k) unless that is the only way to respond to a life-threatening emergency. Furthermore, if you take an early withdrawal before you are 59.5 years old, your withdrawals will be subject to a 10 percent tax penalty (in addition to regular taxes) unless you are disabled. Just don’t do it.
  2. If you leave your job, you’ll get a chance to roll over your 401(k) into an IRA. Take that chance. In an IRA, you have the same tax deferral as a 401(k), and you’ll have the flexibility to invest in virtually everything you can get in a 401(k), plus much more.
  3. Here’s the most important thing you can do to maximize your 401(k): Keep your contributions automatically payroll deducted, and make them no matter what. It’s simple, but it’s not easy. Half of the households in the United States have net worth of $25,000 or less. In a typical year, about two-thirds of U.S. households do not save money.

Remember, to be successful, first, imagine your early retirement; the Caribbean condo, the yacht, the new Lexus. Luxury and pleasure as far as your eyes can see. Create a strong vision, and then don’t let go. The power of a clear, strong vision applies to more than just your retirement savings. Let your vision shape your life, instead of the other way around, and all of the time in the world can be yours. You won’t be spending your Golden Years working at the Golden Arches.

15 Startling Reasons Why Your 401(k) May Be Your Riskiest Investment

Financial institutions have a distinct genius for marketing. They are able to get millions of Americans to hand over their money with very little thought taken, very little knowledge of the so-called investments offered, and even less control of their investments.

When the evidence is plainly presented, it becomes overwhelmingly clear that putting money into 401(k)s and similar qualified plans is not investing at all–it is one of the riskiest gambles for most individuals. Read the following reasons why I say this, and ask yourself if it’s time to reconsider your 401(k).

  1. Limited Opportunity For Cash Flow

Qualified retirement plans, such as 401(k)s and IRAs, do not provide immediate cash flow, which means that you cannot benefit from them through velocity and utilization. The theory is that letting the money sit allows it to compound, but for most people this really means that it stagnates. Most people will not choose to utilize these funds even when a particularly compelling opportunity arises that will make them far more than the 401(k) would, even accounting for the penalties. This means that numerous legitimate opportunities are passed by as people stay “in it for the long haul.”

  1. Lack of Liquidity

The money is tied up with penalties attached for early withdrawal. Although there are a few technicalities that allow penalty-free withdrawals, the restrictions are so numerous that very few know how to get around them.

  1. Market Dependency

The performance of the funds is dependent upon market factors that most individuals do not have the knowledge nor the ability to understand or mitigate. This means that your retirement plans are based on unknowable projections, making for a dangerous and uncertain planning environment. Uncertainty causes fear, and fear leads to mistakes, worry, scarcity, and ultimately lost hopes and dreams. Do you want to live your ideal life only if the market cooperates?

  1. The Match Myth

“Take the match–it’s a guaranteed 100 a year, based on an average return of 8 annually, but that means that some years will be lower, some will be higher. If in one year your fund is down 10%, you’re tapping into your principal to take your interest withdrawal. At that point, you have only two choices: 1) start withdrawing principal, or 2) leave the money alone until your funds are up again.

  1. No Holistic Plan

I’ve witnessed on many occasions people whose finances are in shambles and although they have much more pressing needs, they diligently contribute to their 401(k). They’ve been convinced to do so, of course, because of the match, tax deferral, etc. It’s like a person trying to take care of a scraped knee when their wrist is slit. What they really need is a macroeconomic approach to their finances that will help them identify, prioritize, and manage all pieces of their financial puzzle, with all pieces coordinated and working together.

  1. Neglect of Stewardship

Ultimately, the most destructive aspect of 401(k)s is that they cause many individuals to abdicate their responsibility, abandon self-reliance, and neglect their stewardship over their own prosperity. People think that if they just throw enough money at the “experts” that somehow, some way, and without their direct involvement they will end up thirty years later with a lot of money. And when things don’t turn out that way they think they can blame others–despite the fact that they only have themselves to blame.

Conclusion

Qualified plans are promoted on such a wide scale because those promoting it have vested interests–and their interests don’t necessarily coincide with yours.

If you currently contribute to a 401(k), stop and think about it for a minute. What is it really doing for you, now and in the future? The desire to save money for retirement is wise and prudent, but after reading the above, do you think it’s possible to find other investment philosophies, products, and strategies that would meet your financial objectives much more quickly and safely than a qualified plan? Are you really comfortable exposing yourself to this much risk? How can you mitigate your risk, increase your returns, and create safe and sustainable investments? How can you create more control and better exit strategies, reduce your tax burden, and increase your cash flow?

Your financial future depends on your answers to these questions.

Contrary to what is taught in popular financial media, 401(k)s and other qualified retirement plans are one of the riskiest investments for most people. Increase your wealth by learning 15 secrets that the media and conventional retirement planners don’t want you to know.

12 Tips to Build Wealth for Early Retirement

In theory, building retirement wealth is quite easy. 

There are three things involved:

  • How much you invest
  • How fast your money grows
  • The time you give it to grow

The reason why many people fail in wealth building is because it is not about understanding the principles. You need to act effectively. Have that in mind as you read the tips below. 

Have a Plan

Never underestimate the power of a written plan. Without it, how will you execute the financial success formula? 

A written plan is the first step and it acts as a roadmap to where you want to go. 

Lifestyle Lags Income

Many people are more concerned with looking wealthy instead of actually being wealthy. Lifestyle is preferred by the current generation over financial freedom. Rather than accumulate assets, they spend. Spending money will never make you rich. 

Financial Education

Your financial intelligence will determine how much your money grows. Before you invest, learn. Any market condition can offer you an opportunity to make a profit if you are an expert. Research, read and take courses. That will be money well spent. 

Don’t Procrastinate

Another thing that affects your accumulated wealth is the amount of time your capital has to compound and grow. The longer you wait to start investing, the less you will have when you retire. A little procrastination will cost you. 

Wealth Building on Auto-Pilot

Automatic actions are easy and less painful. Automate some actions to increase your assets. You don’t have to put in extra work or make an additional decision. It is a good way to ensure that you stay on track. 

Take Responsibility

Taking full responsibility for everything that concerns your wealth. It helps you take the necessary action. You decide when to start investing and what you spend money on. Make these decisions and own the results. 

Commit What You Have To

Under-commitment is a recipe for failure. If you want to attain your wealth goal you have to get all the resources required for that. 

Make Your Cash Hard to Access

If you can easily access your savings whenever you want, you are setting yourself up for failure. This is what makes government-sponsored plans great. Don’t go to your savings every time you need something. 

Risk Management

In investing, choose a smart strategy that reduces the risk of volatility and loss by use of different tools. Some of these tools include a sell discipline, valuation, careful asset selection and diversification. Note that defensive investing does not mean avoiding risk completely. 

Use Common Sense

Speculative frauds and manias will destroy your retirement plan if you are not keen. Whatever you choose to invest in must make business sense. 

Basic Estate Planning

Death is certain. It is important to leave things in order for your loved ones. This is not something that people love to think about it—but that’s just how it is. Plan who will get what. 

Live

Retirement planning is not just about money. Think about interesting activities, your health and relationships. You will be happier as a retiree if your life is fulfilling.