Us­ing an­nu­ities in your re­tire­ment plan­ning

The Covington News - - BUSINESS - Mike Las­siter is a Char­tered Life Un­der­writer and Char­tered Fi­nan­cial Con­sul­tant. He is a Li­censed In­sur­ance Coun­selor and a Reg­is­tered In­vest­ment Ad­vi­sor. He can be reached lo­cally at 770786-2781.

As we move into April, I had planned to start a se­ries of ar­ti­cles on In­vest­ing in Eq­ui­ties. In­stead, I want to pro­vide in­for­ma­tion on us­ing an­nu­ities in your re­tire­ment plan­ning, in­clud­ing benefits and risks. My mo­ti­va­tion was learn­ing that a long time in­sured who has moved out of state has run out of money and is be­ing sup­ported by her chil­dren. Stud­ies show that the con­sis­tent #1 con­cern of the baby boomers is run­ning out of money.

The last 10 years has seen very ex­treme swings in the fi­nan­cial mar­kets. To go along with this volatil­ity, tra­di­tional re­tire­ment plans such as De­fined Ben­e­fit Pen­sions, con­tinue to fade away. This places a greater re­spon­si­bil­ity on us to save for re­tire­ment and pro­tect our sav­ings at the same time. An­nu­ities can be very ben­e­fi­cial to you in your re­tire­ment plan­ning.

Sim­ply stated, an an­nu­ity protects against the risk of living too long and po­ten­tially out­liv­ing your money. An­nu­ities can be pur­chased with ei­ther a sin­gle pre­mium or a se­ries of pre­mi­ums. They can be used to fund IRA’s, other tax-qual­i­fied plan and also non-qual­i­fied plans.

One of the ma­jor benefits of an an­nu­ity, par­tic­u­larly non-qual­i­fied, is how it is de­signed to work. The an­nu­ity will pro­vide triple com­pound­ing:

1. In­ter­est on your prin­ci­pal 2. In­ter­est on in­ter­est 3. In­ter­est on taxes de­ferred into the fu­ture

No less an author­ity than Al­bert Ein­stein de­clared that “com­pound in­ter­est is the most pow­er­ful force in the uni­verse”. My sus­pi­cion is that he would have done quite well in Mrs. Burke’s se­nior math class at New­ton back in the 1960s.

IRA’s can also ben­e­fit from an an­nu­ity be­ing a part of the ac­count, par­tic­u­larly if you want to leave a le­gacy, whether it is for your spouse, chil­dren or grand­chil­dren. If funds aren’t needed, us­ing dis­tri­bu­tions or RMDs to fund a life in­sur­ance pol­icy will change a fully tax­able as­set into a tax-free ben­e­fit in the fu­ture.

One of the lead­ing busi­ness schools, the Whar­ton School at the Uni­ver­sity of Penn­syl­va­nia, has determined that life­time in­come an­nu­ities “are the most cost-ef­fec­tive and least risky in­vest­ment for cre­at­ing re­tire­ment in­come for life”. That’s a very solid en­dorse­ment for us­ing an­nu­ities as part of your re­tire­ment plan.

Hav­ing out­lined sev­eral of the very strong benefits of an­nu­ities, you’re prob­a­bly think­ing that I rec­om­mend noth­ing but an­nu­ities in re­tire­ment plans. Nope! While th­ese prod­ucts bring some great benefits to the ta­ble, other prod­ucts have some very strong points also.

In fu­ture ar­ti­cles, I’ll re­view the var­i­ous an­nu­ities cur­rently avail­able along with the pos­i­tives and neg­a­tives of own­ing a par­tic­u­lar type.

MIKE LAS­SITER

COLUM­NIST

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