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After you’ve saved for retirement, annuities can help put your nest egg to work

June 8, 2016 by Pat Frederiksen Leave a Comment

from the Washington Post

By Rodney Brooks Columnist June 3

Most of us worry about running out of money in retirement. Surveys by many financial companies have shown how big that concern is, no matter how much you earn or have saved.

And with good reason. We haven’t saved enough for retirement, especially considering that life expectancies make it not only possible, but probable, that we will live into our 90s.

For those who have pensions, it’s less of a worry. We know that we’ll have a monthly stream of income, some of us for life.

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But these days, only 22 percent of full-time private industry workers have a pension, the Bureau of Labor Statistics estimates. In this new, do-it-yourself world of retirement, most of us save in a company-sponsored 401(k), an IRA, or another plan. Even if we have accumulated a big nest egg, we are left to ourselves to figure out how to turn that money into a stream of income to last a lifetime.

An annuity is one of the only ways to do that if you don’t have a pension. Nearly every financial planner recommends that you put at least a portion of your retirement savings into an annuity. But because they are not liquid, you should limit the portion of your portfolio invested in them.

“If you put in $100,000 and get income for the rest of your life, you don’t get that money back,” says Ken Moraif, financial adviser at Money Matters. “You don’t have access to that money. You need an emergency fund to cover over and above what could happen.”

Matthew Sadowsky, director of retirement and annuities at TD Ameritrade, says annuities are misunderstood.

“Part of the reason is the word ‘annuities’ encompasses so many kinds of products — variable annuities, fixed annuities, immediate annuities,” he says. “Each is so different. There is an annuity that looks like a CD. Another looks like a pension, another has tax-deferred growth. That’s part of the confusion.”

First, let’s cover the basics. An annuity is a contract with an insurance company generally purchased for future income in retirement. In return, the owner receives payments at regular intervals. The basic types are:

  • V ariable annuity: This is invested in mutual funds or a pool of managed investments. The advantage is that you benefit if the market rises. The disadvantages are that you pay fees and can lose principal in a down market.
  • F ixed annuity: This has no fees and will pay you a guaranteed rate of return — for example, 5 percent a year.
  • Fixed-index annuity: This gives you exposure to the market but at no risk of loss to your principal. It is basically a fixed annuity with a variable rate of return based on an index, such as the Standard & Poor’s 500-stock index. The disadvantage: The upside is capped.
  • I mmediate annuity: The investor gives the insurer a lump sum in return for a set rate of return and regular income payments until death, or for a specified period. There are no fees.

“Annuities lower the risk of investment portfolios,” says Pete Lang, president of Lang Capital in Hilton Head, S.C. “There are no investment expenses and typically no fees, unless you get a variable annuity.

“For most annuities, the primary purpose is tax deferral,” he says. “But they can also provide guaranteed lifetime income. They all don’t, especially variable annuities, which are notorious for some exemptions that will cut off lifetime income.”

Moraif says the annuity is what pension plans use to generate income to pay their participants. It is something you might want to consider if you need an income higher than what your investments can support, he says.

“It’s like a mortgage payment in reverse,” he says. “The principal and interest are paid to you. The payment can be 6 percent or more per year, depending on age and the prevailing interest rate, and it goes on as long as you live. And you can structure it so it continues with your spouse upon your death.”

But let’s face it. Annuities have gotten a bad reputation over the years because of some unscrupulous salespeople who pushed them on people who didn’t understand them and racked up fees and commissions.

Variable annuities, in which you can lose principal, got the bad rap, says Craig Ferrantino, president of Craig James Financial Services in New York.

“There are instances where an annuity is critical for people’s retirement,” he says. “In cases where someone needs a constant stream of payments for the rest of their lives. Another is if they want market participation and yet some protection for their principal.”

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“If you need the money to live on, don’t risk it,” Lang says. “Keep it safe. Annuities mirror the benefits of a pension. Don’t risk what you don’t have to lose. Once you set it up, then I see more retirees are willing to risk some of their remaining money because they know they have that guaranteed income.”

The industry has grown more flexible in recent years, Sadowsky says. “It used to be if you buy a single premium annuity, the insurance company is obligated to pay you for the rest of your life, but if you step out of the house and get hit by a bus, they don’t pay out. Now you can get a minimum pay-out or get cash refunded to your beneficiaries. It is not necessarily the case that you are forfeiting whatever you put in.”

When a person is 50 or older, Sadowsky says, it’s time to determine whether an annuity is appropriate. By then, people are thinking about how to live off their nest eggs.

Find an insurance company you want to be with for 10, 20 or 30 years, one that not only will make good on its payments, he says, but will also provide good customer service.

“This is probably something you would like to get a little more guidance [on],” he says. “You don’t want to purchase it online without a lot of research.

Filed Under: Featured, For Retirement Tagged With: annuity, finances, money, pension

Many Adult Children Wreck Their Parents’ Finances by Doing This

June 8, 2016 by Pat Frederiksen Leave a Comment

Published: June 6, 2016 10:07 a.m. ET
‘My kid isn’t paying the loan I cosigned?’

By CateyHill
It’s hard to say no to your children, but in the case of cosigning a loan for them, it’s sometimes prudent.
Nearly half (45%) of the people who have cosigned a loan — a cosigner agrees to pay the loan should the main borrower default on it — are parents who have done it on behalf of their children or stepchildren, according to a survey of roughly 2,000 adults released Monday by CreditCards.com. (This is by far the most common cosigning scenario, with cosigning for a friend a distant second.)
Parents often do this to help their adult children — who may have a short or even shoddy credit history — buy something like a car (this is the most common), qualify for a mortgage, or get a credit card or private student loan, that the child might not have been able to get on his own.
“Parents do it because they want to give their kid a leg up,” says Matt Schulz, senior industry analyst at CreditCards.com, a credit card comparison site. “They’re hoping everything is going to go great, but it doesn’t always.” Here are three major risks of cosigning a loan for your kids.
You’ll foot the bill yourself
Nearly four in 10 people who cosigned a loan ended up having to pay some or all of the bill because the primary borrower didn’t pay it, the survey revealed. That’s because “when you cosign a loan, you are 100% responsible for that loan,” says David Hryck, a New York City tax lawyer and partner at Reed Smith. “Should there be a failure to pay the loan, the lender can now come after you for the entire amount.”
For parents of adult children, having an additional monthly payment can derail their ability to save enough for retirement. Already, people ages 55 to 64 (many of whom have adult children who might need a cosigner on a loan) have just over $100,000 on average in retirement savings, according to a report from the Government Accountability Office; that’s too little, at least according to Fidelity, which recommends that by age 50, Americans should have six times their salary saved for retirement.
You’ll damage your credit
More than one in four cosigners (28%) experienced a drop in their credit score because the main borrower paid late or not at all. That’s thanks to the fact that if the person paid their loan late, even if you didn’t know about the late payment as a cosigner, that late payment appears on your credit report. (Furthermore, even if they don’t pay late but do max out the card, that can hurt your credit utilization, which is part of your credit score.)
“Late or missed payments will be ugly stains on your credit report, says financial writer Valerie Rind, the author of “Gold Diggers and Deadbeat Dads: True Stories of Friends, Family, and Financial Ruin.” Furthermore, those stains “can cost you thousands of dollars because of higher interest rates so you’ll pay more on mortgages, car loans, credit cards, etc.,” says Schulz. “It’s a big deal.”
You’ll harm your relationship with your child
Fully 26% of cosigners say their relationship was damaged because of cosigning. “You would expect that the parent goes in with the best of intentions so it would be a pretty big breach of trust if the child did not handle business properly on something mom and dad cosigned for,” says Schulz. “It’s clear that cosigning is causing some awkward conversations around the dinner table.”
That said, there are some compelling reasons to cosign a loan for a child. It can help the child get a better interest rate on a loan (assuming your credit is great), saving him potentially thousands of dollars down the road, and to buy something he needs that he couldn’t otherwise get.
Still, parents have to be careful. First, “if you are going to cosign a loan for someone, you need to be sure that you can afford to take over the loan payments if the other party stops paying,” says attorney Sonya Smith-Valentine, the president of financial wellness firm Financially Fierce.
Next, you must have an “in-depth conversation with the other party” before you cosign, says Hryck. Talk about your child’s responsibilities when it comes to the loan, what will happen if issues arise, and more.
You also want as much information as you can get both before you cosign (ask for their credit report and talk about their past payment history and other loans and financial issues) and after. “My biggest piece of advice for someone considering cosigning is to live by the motto ‘trust but verify,’” says Schulz. In other words, make sure you have a lot of access to the account such as the balance information, monthly statements and notifications on things like late payments, so you can deal with potential problems before they become actual problems.

Filed Under: Featured Tagged With: cosign, finances, loans

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