The Perfect Retirement Investment
A perfect retirement investment would look something like this –
* You can’t lose money. Safety guaranteed.
* Your payouts can only go up. Never down. No matter what happens.
This retirement investment exists: variable annuities. Competition has made them better. Take a second look now, if you passed on them before.
There’s one type of variable annuity that has what you want. Don’t confuse it with the many other annuities out there. Here’s how it works –
* A state-regulated “Guaranty Fund” insures your money.
* $100K to $500K, depending on state.
* An insurance company guarantees your payouts.
* It must have the cash to pay you, by law.
* You get monthly payouts for the rest of your life, or until you withdraw your money.
* Your monthly payouts never go down.
* You can’t lose money.
* Your heirs get the balance, if you die before you get back what you put in.
* You can cash in your investment without penalty – typically after 8 years.
Insurance companies create annuities. You can buy from insurance companies, banks, brokers, insurance agents, and financial planners.
* Your retirement investment is made in a lump sum, or a series of payments over time.
* The annuity has a cash value which rises or falls with what it’s invested in, but
* You buy an annuity to get monthly payouts.
* Your monthly payout goes up if the annuity’s average cash value goes up over time.
* Some annuities offer a selection of “sub-accounts” like mutual funds. You can move your money among them.
* Your monthly payout can only go up with variable annuities. Never down.
* Payouts can last the rest of your life.
Safety from market volatility.
You can get monthly payouts right away. You can also defer payouts until sometime in the future.
* The longer payouts are deferred, the bigger they can get.
* Some companies grow your eventual payout as if the annuity’s cash value had grown at least 5% for each year you defer payouts,
* For example, if you buy an annuity for $100K, and a bear market drags the annuity’s cash value down to $80K the first year –
* Your eventual payout would still rise as if the annuity’s cash value had gone up 5% to $105K.
* This would happen every year, so long as you deferred payouts.
* If the annuity’s value rises to $110K the first year, your eventual payouts would reflect the 10% gain.
* If a 50-year old bought an annuity and deferred payouts until he was 60,
* His payouts would grow as if the annuity’s value had grown at least 50% (10 years X 5%), no matter what.
Things to Watch Out For
Sales Fees – Brokers and agents charge fees of 1% to 12% of your retirement investment. That’s huge. They’re paid by the insurance company, which is paid by you.
* Buy direct from “no load” insurance companies or from a financial planner to avoid sales fees.
Surrender Fees – Many annuities charge “surrender” fees if you withdraw more than a small part of your money before 8 years, on average. These fees can also be very high.
* “No load” companies usually don’t charge surrender fees.
* Big fees can crush your returns, so shop carefully.
Taxes – Annuities are taxed like IRAs.
* Payouts and withdrawals are regular income.
* Assets grow untaxed until they’re withdrawn.
* Withdrawals before you’re 59 get a 10% tax penalty.
* Don’t buy an annuity in an IRA.
* The IRA is already tax deferred, so you get no tax break for paying annuity fees.
Insurance Companies – The insurance company selling you the annuity must be solid.
* A.M. Best rates insurance companies.
* Find the A.M. Best books in the reference department of your library.
* Go with an A+ rating or better.
Inflation- Even with a variable annuity, your payout rises slowly with the average value of the annuity.
* Inflation can erode that income,
* So put only part of your retirement investments in an annuity.
Annuities are long-term investments.
They’re not made for fast trades.
* If you want guaranteed monthly payouts for life, variable annuities are a perfect retirement investment.
* You pay fees 1%+ above mutual funds to get this security.
* If you want tax-deferred capital gains, IRAs and 401Ks have lower fees.
Decide how much money you’ll need every month after retirement.
* Consider your Social Security, pensions, and any other retirement investment.
* With a variable annuity, you should be able to cover your basic expenses.
Don’t try for more with your annuity. Remember inflation risk.
I’ve described just variable annuities. There are many other kinds. Shop with care. Use advisers who work with several insurance companies.