Future Financial Images

“Markets can remain irrational longer than you can remain solvent”  Keynes.

History has demonstrated the accuracy of this statement time and time again. 

Don’t look now but rising prices and falling rates are burning your
 candle at both ends.

Consider: If an investment that once threw off $1,000 income each month now generates only $700 — and monthly spending that previously totaled $1,000 a month now tops $1,100 — your  accustomed standard of living is feeling the heat from two directions. And that’s an especially uncomfortable position for someone who’s near or in retirement, averse to market risk and faced with money coming up for renewal any day.

• Equities attract most of the buzz but diversification requires a broader perspective. What are you doing for the fixed income portion of your portfolio?
• How are your finances protected against renewal rate risk, namely, that assets may be coming due for renewal in a much less favorable interest rate environment than when they were last invested?
• The Federal Reserve now has cut rates 11 times since August 2007. How confident are you that rates will reverse direction any time soon? Take steps to lock in a favorable long-term rate today.

Keep in mind: As of November 12, 2008 a 10-year Treasury was yielding 3.67%. If a rate 148 basis points higher earned in half the time would interest you, seize the opportunity contact me about getting more return with less risk.

In spite of all the frightening economic news and stories about horrible losses, this couple has not lost a penny.  I can help you design a plan like this that not only protects your principal, provides guaranteed return and income. 

Financial planning in retirement usually has two primary goals. Create a steady, dependable stream of income and preserve retirement savings. One idea which may assist in achieving these retirement objectives is the split annuity concept.

What is a split annuity?

An annuity is a contract purchased from an insurance company that can be used to accumulate money on a tax deferred basis for retirement and or to convert retirement assets into a stream of income. A split annuity isn’t really one annuity, but a combination of two or more annuities funded with a single sum of money. A portion of the money is placed in an immediate annuity that makes a fixed payment to you for a fixed period of time, such as ten years. The balance of the money is invested in a fixed-interest deferred annuity, which accrues sufficient interest to equal the beginning sum used to fund both annuities by the time the immediate annuities stop. The amount of income you receive depends on the amount of money paid into each annuity, and the terms and interest rates applicable to each contract.

Split annuity benefits

Fixed income–The immediate annuity makes fixed payments to you for a fixed period of time, regardless of changing interest rates or stock market fluctuations.

Possible tax-advantaged payments–The tax code treats payments received as an annuity as being divided into two parts a nontaxable portion that represents the return of premiums paid into the annuity, and a taxable portion that corresponds to the earnings in the annuity. As a result, only a portion (i.e., the earnings) of each payment is included in your gross income. The remainder is a return of principal and not taxed.

Tax-deferred accumulations-the earnings on a fixed-interest
deferred annuity (i.e., the interest earned on your money) are tax deferred until
withdrawn. Unlike most taxable investments, you pay no taxes on your annuity
earnings until you begin to take payments or receive income. Income tax deferral
allows your money to potentially grow faster than in a taxable account, because
earnings that otherwise would be subject to taxes are available for growth.

Flexibility–The fixed-interest deferred annuity can provide a new income stream at its maturity. Also, most fixed-interest deferred annuities allow you to withdraw a portion of the annuity’s cash value without penalty. This option provides you with access to additional money should you need it in addition to the immediate annuity payments.

Return of principal–At the end of the immediate annuity payout period, the fixed-interest deferred annuity is worth the original amount of your investment in both annuities. At that time, you can use the money from the fixed-interest deferred annuity however you wish, including another split annuity.

Split annuity limitations

Surrender or early withdrawal charges–The fixed-interest deferred annuity usually has early withdrawal or surrender withdrawal exceeding any applicable penalty-free amount allowed in the annuity contract. Most fixed-interest deferred annuities include some exceptions to the withdrawal charge, including withdrawals due to disability, loss of employment, long-term care, and death of the annuity owner. Fixed annuity payments–While knowing that you will receive a fixed payment for a fixed period of time may be comforting, it may also prove inconvenient if you need or want more income. Typically, immediate annuity payments

are fixed once they’ve begun, although there are some exceptions (such as inflation adjustments and commuted payment options) that allow for withdrawals from the balance of the immediate annuity in addition to the fixed payments. Lower deferred annuity interest rates–The appeal of the split annuity idea is knowing that at the end of the immediate annuity payout period, the fixed-interest deferred annuity will have earned enough interest to equal the principal amount used to fund both annuities. The growth of the fixed-interest

deferred annuity portion of the split annuity is based on the interest rate paid by the annuity issuer. The immediate annuity payments are based, in part, on the amount apportioned to the immediate annuity. The more money allocated to the immediate annuity, the larger the income payments. If more money is

allocated to the fixed-interest deferred annuity because of lower interest rates, then less money is allocated to the immediate annuity, decreasing the payments to you.

Split annuity uses
While the split annuity concept is not the only alternative for pursuing a particular financial objective, it may be useful in a number of situations.

Dependable income and savings–Many people, especially retirees, want a dependable income coupled with preservation of retirement funds. The split annuity concept may offer a means to both objectives. Not only does the immediate annuity pay a fixed income for a fixed period of time, but a portion of each payment received from the immediate annuity may not be subject to income tax because it is considered a return of

premium. Immediate annuity payments are fixed and don’t fluctuate during the payout period, regardless of changing interest rates. Moreover, the deferred annuity part of the concept offers a fixed interest rate on that portion of the money allocated to it. Most deferred annuities also allow for a portion of the account value to be withdrawn without penalty, so if you need more money in addition to the immediate annuity payments,

you can withdraw it from the deferred annuity.

For retirement plan income–Say your only retirement income is Social Security. You have savings but you’re concerned that if you take out too much, you may run out too soon. The split annuity can provide a steady source of income without exhausting your principal. It’s also flexible enough that if you need more income, you can take some from the fixed-interest deferred annuity (subject to early withdrawal penalties).

At the end of the fixed income period, you can reevaluate your finances and determine whether you need more, less, or the same income, and adjust accordingly.

Bridge the gap between retirement and Social Security—You have some savings in the bank and you want to retire, but you don’t want to (or are too young to) apply for Social Security retirement benefits. The income payments from the immediate annuity part of the split annuity concept may provide the income

you want between retirement and Social Security. The fixed-interest deferred annuity preserves your principal by earning interest on the money you apportion to it. When you’re ready to begin receiving Social Security retirement benefits, the fixed interest deferred annuity will have earned enough interest to equal your original principal investment.

The split annuity can help
With company pensions vanishing and the cost of living rising, you likely will have to rely on your own savings to provide the majority of your retirement income. The split annuity concept can be a useful part of your retirement income plan by supplying fixed income while preserving funds for later use.

An estimated 75 million Americans will retire over the next few decades, many of them with larger balances in their retirement accounts and fewer sources of longevity protection to ensure their retirement resources last throughout their lifetime than current retirees. The paper highlights the benefits of lifetime income in helping retirees manage their retirement funds to maximize benefits. Consumers purchasing lifetime income typically exchange a portion of their retirement savings for guaranteed periodic payments from a provider. With lifetime guaranteed income, consumers never have to worry about outliving their funds if they live longer than expected or about actively managing their resources to ensure they do not consume too much or save more than necessary over time. Annuity providers assume the risk that any consumer will live longer than expected (which would require longer-than-expected payments) by diversifying and spreading this risk across a large pool of consumers with different survival probabilities.
Read entire study   

With all the bank and market headlines you may be wondering what exactly is a safe place for my money.

FDIC insured accounts are certainly safe, the federal government will do what ever it takes to keep those accounts sound. What needs to be understood and considered is exactly what are the limits and what accounts are covered?

In an effort to increase revenue streams and provide customers with more service many financial institutions have become more diversified by offering additional financial products from outside establishments.

For example, a bank may offer equity based money market funds via their securities division. A customer not understanding the nuances of the financial industry could wrongly assume that since they are making the deposit in a FDIC insured bank those funds in the equity linked money market account are in fact insured. This assumption would be wrong, if the bank is acting as broker and depositing the funds in an outside brokerage account.

What is covered? Bank deposits up to $100,000 for deposit accounts and up to $250,000 for retirement accounts.

$100,000 FDIC coverage is the total of all accounts in any one bank. If you have $65,000 in savings account and $50,000 in a checking account. The combined total is $115,000 in these two accounts. FDIC insures only $100,000 which leaves $15,000 covered by the strength of the bank or lack of strength.

On the other hand if you keep $65,000 in local bank A and $50,000 in local bank B the entire sum is covered by FDIC.

Bank failures sound horrible and of course they are not pleasant if you are the going through one. Actually the process for the customer is quite simple. When FDIC took over IndyMac bank customers were able to access their funds via ATM cards and checks drawn on IndyMac accounts are still accepted and processed normally.

According to the regulators’ plan, uninsured deposits with IndyMac will be paid a dividend equal to 50% of the uninsured amount. Any additional payments by the FDIC will depend on how the asset sale goes.