Vasilios “ Voss” Speros Tip of the day!

Vasilios “ Voss” Speros Tip of the day!
https://www.google.com/+VasiliosVossSperos 602-531-5141

Insurance Against Outliving Your Retirement Savings

A product that can guard against running out of money in later life will soon be available for retirement-savings plans. But investors need to weigh several issues before jumping in.

New federal tax rules, published in July, make it possible for individuals to buy so-called longevity annuities in their individual retirement accounts and 401(k) plans. Like a plain-vanilla immediate annuity, a longevity policy allows purchasers to convert a lump sum into a pension-like stream of income for life.

But while an immediate annuity starts issuing payments almost instantaneously, longevity policies require holders to pick an income start date that typically ranges from one to 40 or more years in the future. Why wait? Because when payments begin, they are bigger than what you'd get with a regular annuity.

Currently, for example, a 55-year-old man paying $100,000 for an immediate annuity can get about $5,772 a year for life. But with a longevity policy that starts issuing payments at age 75, his annual payout will be $24,192. And if he waits until age 85 to start collecting, he will receive $81,936 a year.

 

The concept has started to catch on with consumers, many of whom lack defined-benefit pension plans. In 2013, insurers sold $2.2 billion of these "deferred-income" annuities, up from $200 million in 2011, according to Limra, a nonprofit insurance and financial-services research organization.

Until now, longevity annuities have been hard to incorporate into traditional 401(k)s and traditional IRAs. The reason: Internal Revenue Service rules generally require the owners of these accounts to start taking withdrawals, known as required minimum distributions, on their full account balances at age 70½.

But in July, the Treasury Department granted those who purchase longevity annuities relief from these rules, provided they begin collecting income by age 85 and put no more than 25% of their traditional-IRA and 401(k) money into such an annuity, up to an overall maximum of $125,000.

As a result, someone who uses $100,000 of a $400,000 IRA to buy a longevity annuity can calculate RMDs only on the remaining $300,000. Insurers plan to introduce longevity annuities that conform to the new regulations as soon as September.

One benefit of longevity annuities is that they can take some of the guesswork out of retirement planning. For example, it's easier to figure out how to make a retirement nest egg last until these payments begin than it is to figure out how to stretch it over an uncertain lifetime.

But these policies have downsides. As with most immediate annuities, you must surrender your principal to the insurer—and if you die before payouts begin, the insurer keeps your money. If you are willing to settle for a lower income, you can ensure your heirs a death benefit either as a lump sum or a series of payments. But the most efficient way to use this type of annuity is to have life insurance in place, this will replenish the loss of principle upon an un-timely death.

 It’s suggested that before purchasing such an annuity you defer Social Security benefits, ideally to age 70. If that doesn't generate enough income, a longevity policy might make sense—but it's best if you forgo the death benefit on the annuity

Why? A 65-year-old couple who buys a longevity annuity that starts making payments at age 85 will realize an internal rate of return of 5.4%—before inflation—on that investment, assuming one spouse lives to 100. Add a death benefit, and the return falls to 4.6%.

(In contrast, a 62-year-old couple with one spouse who defers Social Security to 70 will realize an internal rate of return of 6.4% after inflation, assuming at least one lives to 100.)

To protect your investment, stick with insurers with triple-A or double-A ratings of claims-paying ability and keep purchases below your state guaranty fund's limit on coverage.

Because you will lose access to the principal, we recommend limiting such purchases to no more than the total amount of your permanent life insurance. We also favor purchasing inflation protection; some insurers allow policyholders to lock-in annual increases of 1% to 6% or more.

In part because payouts on annuities are near multi-year lows, advisers say it can make sense to spread purchases over a few years. That way, if interest rates rise, so will the payments received from future purchases.

Vasilios "Voss" Speros 602-531-5141
Spence Cassidy and Associates
#LifeInsurancePhoenix #RetirementStrategiesPhoenix
http://www.scaaz.com/
http://1lifeandretirementstrategies.blogspot.com/
https://www.linkedin.com/pub/vasilios-%22voss%22-speros/60/722/67b
vsperos@scaaz.com
85018