When Your Annuity Value Is Not Your Money - earlebird.com

Let’s face it, Americans need income. Pension plans, unless you work for a state or local government entity, are things of the past. And, as pointed out here ad nauseum, your nest egg certainly isn’t generating enough income these days. You should realize, though, that all income streams are not equal. If you buy dividend-paying stocks, dividends can be cut or even eliminated. Also, your bond principal sinks if rates spike, and real estate yields suffer when folks stop paying their mortgages.

Annuities are the only products that allow you to collect a guaranteed income stream. They come at a cost, of course. When you receive a competitive guaranteed income stream, you give up complete access to your original principal. Hey, that’s the price you pay for guarantees. Remember, annuities make sense for a certain percentage of your investment portfolio.

Remember, though, not all annuity payouts are alike. I’m referring here to the hot-selling feature known as the guaranteed living withdrawal benefit (GLWB). With GLWBs, you are sold on an esoteric concept that doesn’t pertain to the “value” of your annuity contract but to a “separate or income account” that will affect your future withdrawal amounts only. You can’t withdraw this amount because it has no lump-sum significance. It just means your future income stream is based on the value of this separate account.  So a 7% withdrawal applies to the separate account, and if no withdrawals were made from the contract, the separate account’s value could be substantially higher than your accumulated value amount.

Furthermore, refrain from making any unscheduled partial withdrawals from your annuity contract. If withdrawals are made, the income account will be reduced substantially and, with some annuity contracts, may blow up the income account completely. My point is that GLWBs are tricky, and the accumulation and payout percentages apply to a separate account only. They will affect your future income, but there are many strings attached. Proceed with caution and make buying the simplest product your objective. Forgo some features for shorter penalties.

Below are questions readers have asked:

I’ve owned a fixed annuity since 2004 and my insurance agent wants me to transfer it to another annuity product? Is this a good idea?  Well, that’s hard to determine because I don’t have all the necessary information. I’d assume the annuity contract from 2004 has much higher guarantees than any current annuity being offered. You may have a 2% to 3% minimum guarantee, which is hard to match in today’s environment. I’d hold on to my older contract.

My agent said I can earn a 10% bonus in a new annuity product. I could really use that 10% bonus, so shouldn’t I move my money? Bonuses sound great, but you pay a price for everything, and bonuses are no exception. The insurer will find ways to make up for that 10% bonus cost by penalizing you with 14-year or longer surrender penalties or by paying you lower interest yields in the future. Bonuses don’t grow on trees!

How can an index annuity pay me 7% on my money when the banks can only pay me 1%? That’s the GLWB I spoke about earlier. If an agent said you’d receive 7%, is the agent wrong? Not technically.  But information often is lost in translation, and index annuities are no exception. The 7% applies to the annual withdrawal amount from the separate income account. You’re not earning 7%, you’re just taking 7% from the value of your money or separate account.

I heard I can get long-term care insurance (LTC) through annuity contracts now. Is this a good product to purchase? The jury is still out on annuities with long-term care riders attached. In my experience, it seems like you are buying a inferior annuity and an inferior LTC product. The LTC rider hasn’t caught on yet, and I’d suggest you look into Lincoln Financial’s MoneyGuard UL with the LTC rider, if you like this concept. If you already own an annuity, the annuity can pay for the LTC policy tax free. In other words, the accumulated annuity taxes are waived if the proceeds go toward paying LTC benefits. These transactions can get tricky, so check with your LTC adviser.

Pay-it Forward:

Everyone wants to work with children, but not enough young people are interested in spending time with the elderly. How about convincing your son or daughter to work at the local senior center?  I’ve done it, and I found it to be a blast. Seniors have great stories and offer experiences our youth may know nothing about. And maybe a senior has a son or daughter or relative who is hiring or who can be a good future reference. Seniors are interesting, and they know a lot of people!


Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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