Provide a guaranteed income that retirees can’t outliveArticle added by Lew Nason on October 11, 2010
Lew Nason

Lew Nason

Dallas, GA

Joined: October 13, 2006

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Great news. The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams, following a collapse in retiree accounts when the stock market plunged.

In these very uncertain times, when most retirees’ biggest concern is the fear of outliving their money, a tried-and-true solution is finally being recognized and endorsed by President Obama and his administration. Immediate annuities are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement, according to a report from the administration’s Middle Class Task Force that came out in January of 2010.

“The Administration is: Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation,” the report says.

In addition, the New York Times reported, “If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. In effect, it allows you to buy the pension that your employer has probably stopped offering, and it can help pick up where Social Security leaves off.”

Annuities generally guarantee income until the retiree's death, as well as that of a surviving spouse, and are intended to protect against the risk that retirees outlive their savings, David Certner, legislative counsel for AARP, said in a recent interview.

"There's a real desire on a lot of people's parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime," said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.

Over the past two years, Cathy Weatherford, the president and chief executive officer of the Insured Retirement Institute has been advocating this type of measure. The “value of a guarantee has never been greater,” she said.

“The dependable, guaranteed stream of retirement income that annuities provide to people later in life is being noticed at the highest levels,” Weatherford continued. “We are pleased that President Obama and Vice President Biden today called for increasing the awareness of guaranteed lifetime income, by ‘promoting the availability of annuities.’”

Immediate annuities: A little understood tax saver and income booster

An immediate annuity is simply the payment of a premium to an insurance company. In exchange, the company converts the premium to a monthly income for life. The retiree cannot outlive this income. Monthly payments are based on the claims-paying ability of the insurer, so picking a financially solid insurance company is important. Note that immediate annuity payments may incur premium taxes in some states, and may contain fees and expenses. Additionally, each annuity payment is partially excluded from taxation — the “exclusion ratio” — as described in IRS Pub. 17.

Here’s a hypothetical example: A 76-year-old gentleman paid $50,000 in premiums to an insurance company. He now receives $388 per month, every month. That’s checks in the mail worth a total of $4,656 each year. Where else could he get a guaranteed $4,656 every year for the rest of his life for $50,000?

Regardless of how long a person lives, he gets his check every month. If he dies early, his beneficiaries will receive the $388 on a monthly basis until $50,000 in payments have been received in total. This is called the “installment refund” provision. If the owner does not need or does not elect the installment refund provision for his beneficiaries, the monthly payments would be even higher, at $473 per month. If you are not discussing the incredible advantages of a lifetime immediate annuity (or a split funded annuity) with your clients, you are missing a great opportunity to help them guarantee they won't outlive their income. And it's also quite possible that you're missing the sale!
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