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    Posted April 10, 2014 by
    kreemkramh
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    Brazil

    The Lexington Group Tokyo New York Asia Financial Services: Understanding Annuities

     

    Rethinking the role they play in retirement income planning.

    Protecting your retirement income security from life’s uncertainties.

    The retirement landscape has evolved significantly and today’s retirees face an entirely new set of risks. If you are near or in retirement, you may not be participating in an employer-sponsored defined benefit plan that provides a reliable source of monthly income. In addition, the stability of Social Security is in question so future recipients may receive a smaller income benefit once they become eligible—making it a smaller percentage of their retirement income.With the advances in modern medicine, people are living longer lives and thus are spending more years in retirement. For investors, this means that retirement savings intended to last for 10 or 15 years may need to now last for 20 or 25 years or more.While not everything about retirement can be predicted with certainty, this much is clear: failure to reflect a changing retirement landscape in your planning may restrict your ability to fulfill your retirement goals. With the challenging market and economic environment of the past few years, it is critical to protect the wealth you have created with a guaranteed income stream in the future. There is no time like the present to prepare for and manage the complexity and risks involved—your peace of mind in retirement is worth it.

    Changing attitudes, better planning tools

    Managing your assets to generate the right level of sustainable income once you retire is a challenge. And if you’re like many Americans, it may be one for which you feel somewhat unprepared. But be encouraged—investing in annuities is one way you can help ensure you can live the life you’ve envisioned for yourself in retirement.Annuities can be very useful in adding flexibility and control in retirement planning. They can also help bring peace of mind if you’re concerned about market volatility or the risk of outliving your assets. But it’s important to acknowledge that annuities often are not well understood. They have features of both investments and insurance, which make them more complex and often more costly than investing in, for example, a family of mutual funds.UBS can help to remove some of the mystery surrounding annuities and the role they can play in retirement planning. Your UBS Financial Advisor can take you beyond this conversation and help you explore whether annuities have a place in your retirement plans.

    Why consider annuities?

    Ideally, you want to know your retirement assets will produce the income you need for as long as you live to support the retirement you envision. You also want to maintain the financial agility to deal with the unexpected.

    Annuities offer a number of important benefits, some of which are optional and available for an additional fee including:

    • Income for life—if you choose, you can have the insurance company that issues your annuity guarantee you (and, if you like, your spouse or someone else you designate) income payments for the rest of your life. In the case of a joint annuitant, payments will last for as long as the surviving annuitant lives.

    Tax-deferred investment growth—contributions to an annuity, along with any earnings, grow tax deferred until you begin to receive annuity payments.

    • Choice of and easy exchange among professionally managed investments—typically, you may choose from an array of professionally managed portfolios (called sub-accounts) ranging from the most conservative investments, such as money market and government bond portfolios, to a variety of more aggressive equity investments.

    • Death benefits—usually equal to money left in the annuity contract, plus the interest accrued up until the annuitant’s death. For all types of annuities, contract add-ons, called “riders,” can be purchased to increase the death benefit.

    • Principal protection—may be obtained by a living benefit rider that guarantees to return your entire principal in cash after a defined holding period (regardless of market performance). Some variable annuities offer the ability to invest your premiums in portfolios that allow for upside participation in market indices while offering some downside protection of your investment.

    Because annuities can offer a unique combination of investment and protection features it’s worth learning a bit about these instruments. There are a variety of options, benefits, and costs involved with annuities and it’s important to carefully consider all of these before you invest. Your UBS Financial Advisor can help you (1) determine whether an annuity is right for you, and (2) choose the right annuity for your particular circumstances.

    First step: estimate your retirement income needs

    Everyone has a unique vision of retirement. Some people wish to work less and have more time to spend with grandchildren, pursue hobbies or travel the world. Others would rather change careers or start a new business. Whatever your vision, it’s important to estimate your income needs and your potential sources of income as you transition to this new phase of your life. You may find it helpful to differentiate your anticipated spending in retirement, which can be typically categorized as follows:

    • Needs: basic, nondiscretionary living expenses that must be met under all circumstances. This usually includes items such as food, shelter, utilities, clothing, taxes, medications, and similar types of expenses.

    • Wants: these are “nice to have” expenditures beyond basic needs. These types of expenses define a desired lifestyle and can include items such as new cars, vacations, or a second home.

    • Wishes: these are longer term aspirations such as leaving a legacy for your grandchildren or a bequest to your favorite charity.

    You’ll then want to consider the predictable sources of income you expect to receive to help meet your essential, non-negotiable needs. These may include Social Security income, your employer’s pension, or in some cases, rental income. By matching retirement income needs with predictable sources of income, you’re putting yourself on the right path to pursuing your vision of retirement.

    Minimizing risk, maintaining growth potentialIt’s common to become more risk averse toward investing as you get older—particularly after weathering a period of financial turmoil such as the 2008 financial crisis. It’s natural to want to shift into less risky assets such as bonds and cash. However, today’s annuities can offer upside potential through diversified portfolios, while also carrying the downside income protection that traditional investments may not provide.Converting a portion of your retirement assets into a guaranteed income stream via an annuity may, in combination with other reliable income sources, help assure that your basic, nondiscretionary spending needs will be covered. You can then have the ability to invest your remaining assets in other strategies designed to help provide growth and cash flows for “wants” and “wishes.”But what type of annuity should you choose? Let’s review some of the basics of annuities and then look at a few of the most popular living benefit annuity riders that can help make planning for your retirement income more predictable.

    A few annuity fundamentals

    At the most basic level, an annuity is simply a long-term contract between you and an insurance company. In exchange for a premium or series of premiums, the insurance company agrees to make payments to you at some time in the future.Annuities are of two types: immediate or deferred. Immediate annuities are purchased with a lump-sum payment and payout distributions begin almost immediately—that is, usually within the next year. You get to choose the term, or length of payments: It can be for your lifetime, for your and your spouse’s lifetimes for a designated number of years, or for some combination of lifetime plus a minimum number of years. With deferred annuities, the money you contribute accumulates over time and you postpone to some future date the point in time at which you will begin to receive payments. The amount of your payout is determined by how much you put into the contract, its term, your age and your investment results.

    Deferred annuities may be invested one of two ways: fixed or variable. With a fixed annuity, the insurance company assumes the investment risk, guarantees the security of your principal, and provides a guaranteed rate of interest on your investment for a predetermined period of time. At the end of this time you are generally given the option of renewing the contract at a new rate based on current market conditions. With a variable annuity, you assume the investment risk, because you select the investment options.

    The value of your contract may go up or down, depending on the performance of the investments you choose. The issuing insurance company typically offers investment portfolios in several different asset classes and a choice of several portfolio managers, and generally, you’re allowed to transfer among the different investment options available in the contract without tax implications. Thus, you have flexibility to change your asset allocation strategy over time as your objectives change. Recent innovations have produced variable annuities featuring minimum guarantees for lifetime income and withdrawals, as well as death benefit provisions.

    Deferred annuities typically have two phases: Accumulation and distribution. During the accumulation (sometimes called buildup) phase of the contract, you (the owner) make contributions to the annuity and build up the value of your account. During the distribution or annuitization phase, your earlier contributions plus any generated earnings are paid to you as an income stream, according to the terms of your contract. Your investment earnings are taxed as ordinary income when received.

    Source: https://medium.com/p/db6afd98bfc

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