LIBR: benefits above and beyond the traditional pension plan
By Cal Burgess
Retirement Servicing Group PLLC
Many insurance companies have designed lifetime income benefit riders within fixed indexed annuities to provide all of the benefits above and beyond both the traditional pension plan and today’s typical deferred compensation plan.
For many retirees today, the word pension conjures up images of a gold watch and a guaranteed income for life. The traditional pension was a reward for a lifetime of hard work (usually working at one company) in exchange for an income stream during retirement.
Back in the 1960s and 1970s, employees who retired received a set amount of income depending on the number of years worked. Pension plan employers and employees alike did not worry about the market for two main reasons. One, there was no cash value associated with these pensions, so volatility was not an issue. And two, there was very little volatility from the end of the Great Depression through the 1970s.
Unfortunately, the traditional pension has become a thing of the past. There is no gold watch, working for the same company your entire career is uncommon, and the reward for a lifetime of hard work is getting to work even longer and delay retirement, thanks to the volatility of the market that has wreaked havoc on many portfolios.
Outside of a few government jobs, the traditional pension is pretty much non-existent. Today, many employees’ hopes of retirement are directly associated with market performance through some sort of deferred compensation plan (e.g., 401k, 403B, SEP, etc). It’s quite simple; the better the market does, the sooner you’re able to retire.
Or, like we are seeing today, the more volatility the market has, the further out retirement becomes.
These plans are usually funded by monthly pretax distributions, and up until a couple of years ago were often matched by the employer as a job perk (typically ranging from 1 percent to 4 percent of total contributions). Employers offered distribution matches to help jumpstart the employees’ retirement (commonly referred to as “free money”).
Because of the global recession, many employers have stopped matching their employees deferred compensation plans. The financial incentives to contribute to these plans have been taken away.
For these reasons, many insurance companies have designed lifetime income benefit riders within fixed indexed annuities to provide all of the benefits above and beyond both the traditional pension plan and today’s typical deferred compensation plan.
Funds rolled into this plan can also be matched for up to several years by the issuing financial institution without the employer coming out of pocket one penny, not to mention being able to eliminate all future market losses. This is a win-win for both the employee and the employer.
With respect to income distribution, the primary benefit is liquidity. Unlike the traditional pension plan, many versions of the LIBR will allow the policy owner to stop and restart the income at their discretion. With this capability, the owner can stop the payment cycle and choose to take out a partial withdrawal instead, allowing for total control during the distribution phase.
Additionally, many FIAs today have long term care and terminal illness riders allowing withdrawals to exceed 70 percent of the cash value after the second or third policy year in the event of an emergency.
Another benefit of the LIBR is interest accumulation. While the owner is electing a lifetime income, many FIAs will allow the cash value to earn interest simultaneously. In fact, it is possible to earn more interest on your cash value than you received as income from the LIBR, a feature offered in no other financial vehicle today.
Finally, unlike the traditional pension plan, your cash value will be passed on to your loved ones in the event of death. For pretax dollar money, your beneficiaries will even have the capability to receive the funds as a stretch IRA, which will transfer tax deferred.
The traditional pension plan would not allow a lump sum to transfer on to your heirs because there was no cash value. Thanks to one of the worst financial decades in history, the fear of the average investor has shifted from dying too soon to outliving their money. In response, the insurance industry has provided the perfect flexible alternative to the traditional pension plan and the typical deferred compensation plan.
The LIBR has brought financial security to thousands of investors and will continue to do so for thousands more.
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