This post More Planning Made Simple: How to Avoid Scrambling Your Retirement Nest Eggs appeared first on Daily Reckoning.
You know the value of diversifying your financial portfolio. For example, when your stock portfolio slips, your other investments—bonds, Treasury notes, etc.—shore up those temporary downticks before the stop loss or limit order directives kick in.
It’s about balance and minimizing risk.
Pause for a moment and inventory your retirement savings strategy. Your 401(k) and IRA are chugging along nicely. You contribute the maximum to each. You are satisfied that your stockbroker is looking after everything, and your investments in stocks are good for the long haul.
So, you are in your prime earning years and know the value of spending less than you earn. That means you are funneling that excess income somewhere and paying interest on its dividends and earnings.
What about your life insurance?
Did you know that annuities are a special kind of life insurance?
Purchasing an annuity from a reputable company is also another way to diversify your retirement planning.
When you open an annuity account, you pay a large lump-sum premium up front. At some agreed time in the future, you—the annuitant—will receive a payout on a scheduled basis. The remaining principal continues to earn interest. Anything left in the account after you die goes to your heirs.
Annuities come in two flavors…
The two categories of annuities are immediate and deferred. The latter two terms relate to the payout options in the annuity plan:
1. The immediate annuity is rather like a reverse mortgage without chipping away at your estate. You contribute a lump sum up front. After 30 days you receive monthly payments while the principal continues to earn interest.
2. The deferred annuity also requires an upfront payment. Over the agreed life of the annuity, your account accumulates interest—either fixed or variable, depending on the annuity you purchased.
At some future date, you start drawing the money as annuitized payments. It’s like a second paycheck.
Deferred annuities also come in two varieties…
Fixed annuities are like CD investments. They pay a guaranteed interest rate, frequently higher than a bank CD.
Variable annuities, on the other hand, pay interest based on the insurance company’s selection of financial market investments.
Annuities often get a bad rap…
Annuities have their drawbacks. They don’t have the big returns and dividends that other investment plans offer. You must have the cash to set aside and the patience to accrue their long-term value. There are setup fees and penalties for early withdrawal.
However, every investment has its drawbacks. The stock market is volatile and poses risk; bonds have low returns. Hoarding cash in the bank won’t keep up with inflation.
Moreover, when it comes time to start drawing down on the principal, you have no guarantee that your investments won’t expire before you do.
Annuities are the hedge against the emotion of fear that you will run out of funds before you die.
10 ways that annuities reduce risk to your retirement plans
Annuities are a piece in your retirement puzzle…
You have done your research. You know the risks. Your money market and stock portfolio have done well.
However, you are entering a stage in your life where risk reduction is quickly becoming more important than high returns.
So, an annuity—especially a fixed annuity—can contribute to your low-risk retirement strategy in the following ways:
1. With an annuity, you convert accumulated assets into a regular cash flow. Your annuity payout is similar to a paycheck, without liquidating your principal.
2. With a fixed annuity, you know exactly how much interest your savings will earn. Interest rates in fixed annuities are guaranteed.
3. For the bold: If you’re still into a bit of a risk, you could consider buying both fixed and variable annuities. The former will earn more when the stock market is doing well. The latter (the fixed annuity) will grow no matter what.
4. There is no upfront or annual limit to contribution to an annuity account. A variable annuity provides an instant tax shelter for your extra cash contributions.
5. The lifetime benefits of annuities accrue immediately. During the contribution phase, the account grows tax-free.
6. Annuities are tax deferred. You pay no tax on the annuity principal investment or the accrued earnings.
7. Taxes are only due when the payouts begin. The payouts typically come at a time when you are in a lower tax bracket.
8. Annuities offer a safe investment strategy. The biggest risk to annuities would be an insurer’s default because of bankruptcy, etc. So, it is important to choose a stable and reputable insurer.
9. As an insurance policy, the annuity provides survival benefits. Your heirs inherit the annuity without the delay of probate.
10. With a long-term care rider, you can receive both a retirement income and finance any long-term care expenses. This type of annuity does double duty without losing premium payments if you don’t need long-term care.
It’s about peace of mind…
A fixed annuity can be an ideal way to protect a large portion of your retirement savings. When you reach the limits of your contributions to your IRA and 401(k), you can put that money to work.
Annuities are safe and stable. You earn a guaranteed rate of growth and accrue compound savings advantages as well as tax deferrals.
Your savings are not exposed to the volatility of the stock market. If the market dips right before you retire, it could take a chunk of your portfolio with it.
As part of estate planning, fixed annuities are not subject to probate. You spouse has the option to assume uninterrupted ownership, or continue receiving your payments during the contract period.
So, if you are at a stage in your life where you would like to grow that retirement nest egg, do some research and find a reputable annuity vendor. Round out your portfolio with an annuity plan to make your nest egg into a tasty omelet.
To a richer life,
Editor, Rich Life Roadmap
The post More Planning Made Simple: How to Avoid Scrambling Your Retirement Nest Eggs appeared first on Daily Reckoning.
From:: Daily Reckoning