Tuesday, June 15, 2010

Make Your Nest Egg Last Longer Without Shortchanging Your Love Ones

Immediate annuities are getting a lot of publicity lately. And it’s the good kind … First, a quick background on immediate annuities: You put a lump sum of money into an immediate annuity contract, and the insurance company guarantees you’ll receive a fixed income for the rest of your life. When you die, the payments stop. The size of the payments depends on the amount you deposit and your age. The older you are, the higher the payments since the insurance company is betting you won’t beat their life expectancy tables. There are other versions available that pay for a set number of years and options that will make sure a survivor, like your spouse, continues to get an income. But let’s just stay with the basic annuity today. For years, immediate annuities were portrayed as low-yielding, boring investments. Stocks and real estate left annuity returns in the dust. Then the dot-com bubble broke. Then real estate blew up. And most recently, financials have taken a bloody beating. Through it all, though, annuity holders have been getting their checks month, after month, after month. And now annuities have become the belle of the ball! Even President Obama has endorsed the importance of an immediate annuity. Without saying so, I imagine he realizes that Social Security will spend more than it takes in by 2016, and will be broke by 2037. Plus he must know that pension plans are on their way out. So it’s up to you to do everything you can to fill the gap that the government and your employer cannot. And an immediate annuity could be just what you need. For instance, you might consider an immediate annuity for paying fixed expenses, like your homeowners insurance, real estate taxes and utilities. Suppose that comes out to $1,000 per month. According to immediateannuities.com, a 65-year old male in Florida would need to come up with $158,019 to guarantee he’d get $1,000 a month for the rest of his life. Granted, that’s a hefty chuck of change. But that $1,000 will come in regardless of what’s happening to stocks, bonds, real estate or gold. Plus it’ll continue as long as he lives … even if that’s another 65 years! If you like this idea so far, great. Yet there’s a potential problem: Your love ones. Because once you pay for the annuity contract, the money belongs to the insurance company. There is, however, a way to make sure your need for a safe source of income doesn’t leave your heirs out in the cold … and that’s with life insurance. You could use part of the annuity income to buy an insurance policy with a death benefit equal to the amount you put into the annuity. Another idea is to liquidate a poor performing investment you’ve been holding forever, and buy a single-premium life insurance policy. There are other strategies you can use, too. So it’s a good idea to get with a financial planner or an insurance agent who can help you find what will work best for you and your nest egg. Best wishes, George

2 comments:

  1. I AM COMTEMPLATING AN IMMEDIATE ANNUITY AS SOON AS I CAN SURRENDER MY VARIABLE IRA ANNUITY IN 2014. BUT CAN I COMBINE ALREADY TAXED MONEY WITH THE IRA ANNUITY THAT WILL BE SURRENDERED TO MAKE THE LUMP SUM FOR THE IMMEDIATE ANNUITY? ANY SUGGESTION ON HOW TO DO THIS? DO I GET TWO DIFF. ANNUITIES? RIGHT NOW I DON'T EVEN HAVE TO FILE A IRS RETURN

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  2. When you surrender the variable annuity in your IRA and buy an immediate annuity, it will be an IRA immediate annuity. All of the income paid out will be taxable.

    By “taxed money” I assume you mean money outside of your IRA.

    If you have money outside the IRA that you want to put into an immediate annuity, part of the income will be taxable. The remainder will be tax free since it represents a return of your principal.
    In other words, based on what you told me, you’ll have to purchase two annuities.

    Hope that helps.

    George

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