First, a few prefatory comments about this section of Retirement Security dot com.

This section is entitled “retirement security / philosophy”. I gave it that name because I like the work “philosophy” for its “broad sweep”, the way it encompasses or includes (at least to me) so many variations of “mind stuff”: transcendent stuff (hard to grasp, abstract, some call this realm BS – which at times it can/may be), attitude (most get that), principles, and more.

I’ve added the section because the word or concept “security” is itself a bit abstract: one man’s “security” is another woman’s nightmare or set up for failure. While you may have come here looking for solutions or practical advice I see retirement security a bit more broadly, on a larger scale or part of a larger context. (I’d use the word “wholistically” but it’s a bit overused and presumptuous at times to think any one of use “gets it all”.)

I would like to keep reminding all of us that while we are all struggling with the numbers – “Will I have enought?”, “I don’t have enough! What can I do?” – that we all, always, take the time to keep things in context or perspective.

No, I’m not here to advocate for lowering expectations, preparing to live with less – though a little less excess consumption might be a good idea – I am here to write about how life can be enjoyed by those “with less” just as life can be miserable for those with more, some who cling to the delusion that despite personal misery “I’m a winner, because I have more!” A secure retirement can be as much, if not more, about knowing you have the capacity to be happy and adjust and make the best of whatever comes.

From my perspective there’s the dream of a happy retirement, which is often mass produced and marketed – glossy images and all – and then there’s retirement as a project, an endeavor,  adventure, a stage of life or process, or however you choose to hold or contextualize the idea.

Ergo, I say “philosophy” – the philosophy of retirement security.

When buying an annuity, keep in mind the person you are purchasing it from sells them for a living. Annuities have many benefits; however, sellers will neglect to mention or gloss over in negatives aspects in order to make a sale.  Buyers should know the basics of annuity fees before purchasing an annuity.  Areas of particular concern should be charges to their deposits, fees for withdrawal, threat of inflation.

Load Charges

The largest things to overlook are the charges that an insurance company will impose on ones annuity.  Charges are normally weighted as one starts the annuity, or evened out as the annuity matures.  Charges called a ‘load’ are, “…deducted from each premium before any interest is added”, and greatly benefit the insurance company.

Loads accomplish two things for the insurance company.  Firstly, it gives the company a certain profit, even before the money is reinvested during ones pay period.  Second, it reduces the amount of principal in your account that is compounded.  This, in turn, reduces the overall amount an annuity is worth when it matures.

Formidable Surrender Charges

The money, while yours, cannot be withdrawn after being put into the annuity freely.  If one does, it will be at the expense of formidable surrender charges.  An annuity should only be taken if one is certain that they can do without that money until the annuity matures fully.  Otherwise it is a poor investment choice.

Annuity Risk and Benefits

One of the best annuity benefits is that annuities are tax-deferred growth of earnings. While this is true, an annuity offers more risk than a 401(k) or an IRA that one can get through their employers and an insurance company. Annuities should only be used as a tax-deferent if one has already invested as much as they desire in these other options.

Lastly, keep an eye on the market.  If the market takes a bad turn and inflation rises, the fixed dollar payouts of your annuity will become less valuable, and eventually not enough to ensure comfortable living when retired.

By – Domenic Gabriella for RetirementSecurity.com

Risks are inherent in an investment.  One large annuity risk is its length.  With your money tied up for years, annuity inflation can make the actual worth of your money, and the investment, a loss rather than a gain.

Pretend you have an annuity that pays out $1,000 a month for your lifetime.  The higher inflation is the less actual value the $1,000 has. Even small inflation, over the course of years will make one realize a steady decline of their purchasing power. (i.e. 1000<1000*[(1+K) ^n] where K is the inflation rate, and n is the number of years since the beginning of annuity payments).

Now, one could always think that if inflation did increase, one could just take ones money out of one annuity and purchase another more current annuity with a secured return more appropriate to current inflation.  This method, however, does not account for all of the surrender charges one must pay to withdraw money early.  Nor does it take into account the taxes one would have to pay on the money they withdrew.

Increasing Annuity

There are, however annuities that exist to help decrease, or eliminate completely, the risk of inflation.  The increasing annuity is an annuity where, “payments increase at a fixed rate determined at the time of purchase.”  This annuity can help maintain, or even increase one’s purchasing power over time, so long as the inflation rate remains below or at the rate increase on the annuity.

Inflation-Adjusted Annuity

Another annuity, to completely eliminate the risk of inflation to the annuity is the inflation-adjusted annuities.  These annuities have, “payments that increase with the rate of inflation actually experienced.”  This ensures that no matter what, the spending power you expect to have in retirement will remain, now matter high or low inflation.

Conclusion

For both the increasing annuity and inflation-adjusted annuity, there is a cost.  The prices of such annuities are much higher than for a nominal annuity.  Increasing annuities and inflation adjusted annuities have lower initial payments than the fixed annuity.

Annuities are for preparing for the future and ensuring for retirement or later in life income.  It seems logical to also prepare for inflation as a risk and be accurately prepared.

By – Domenic Gabriella for RetirementSecurity.com

With all of the recent uncertainties in the market, people are looking for safe places to invest their money.  Annuities provide a long-term investment that is a secure and stable form of income for retirees.  This will be increasingly important to the baby boomers whose golden years are almost here.  There are some annuity risks investors should be aware of before investing in annuities.

Annuity Risk

• Fees
• Costs of withdrawing prematurely
• Flexibility of interest rates
• Minimum guaranteed interest rates.

Annuities Fees

Whenever investing money, there will be costs.  For annuities, there are various fees and charges attached, normally structured one of two ways.  Fees tend to either be “front loaded” where costs are mostly charged initially or “back loaded” where charges are incurred over time as the annuity matures. There are penalty charges for removing the money early, as   Annuities are made to be long-term investments and thus, “…not liquid…and have ‘formidable’ surrender charges”. However, small portions are allowed to be removed without encountering these charges.  “Generally a 10% withdrawal,” or less can be taken without being charged a surrender penalty.

Premium charges, called a ‘load’ charges are fees that will be, “…deducted from each premium before any interest is added.”  This amount may eventually, “…reduce after the contract has been in force…or after the total premiums paid have reached a certain level.” There are also contract fees that are charged, “…once at the time of issue or charged once each year.”  Transactions fees are also charged for every premium payment or any other transaction.

The interest earned on an annuity is often variable.  While the rate will not drop below the minimum interest rate, all beginning rates are decided by the insurance company. The money is compounded over the time period at these various rates after the applicable charges are applied.

The minimum guaranteed rate is the lowest rate your annuity will earn, and is stated in the contract. There is no universal minimum for all annuities, because interest is at the mercy of the insurance company you purchase the annuity from, the number in the contract is important to know.

By – Domenic Gabriella for RetirementSecurity.com

Planning for retirement requires a lot of thought and planning.  For annuities, one would like to calculate the amount of income they can expect their annuity to generate.  There are many forms and shapes annuity calculations that make it complex.  If one breaks the process up piece by piece, then it is simpler to understand.

Calculating Annuity Returns

The beginning of the formula for an annuity is simple, calculating the future value of an investment.  You can take your investment; expect a percent return per year, for a certain amount of years.  The basic formula for this is

• FV=PV*(1+i) ­n
• PV is the present value of the money
• i is the interest rate on the annuity
• n is the number of years to maturity
• FV is the future value.

The University of Illinois at Chicago offers an online annuity calculator that allows you to compute both future and present values of money and annuities. Try your annuity calculations here.

Calculating Annuities when you add Money Annually

Now, for an annuity, many people put money into it each year, which doesn’t add much complication to calculating an annuity, but does make the calculation more tedious.  For each year, one must add the income

• FV=PV*(1+i)­ⁿ+ PV*(1+i)­^n-1 … PV*(1+i)­^n-m or ^­­?PV*(1+i)­^n-m
• m is the years since the first payment
• n represents the years since the first investment into the annuity

Each year you add more money, it adds more value that will compound itself until its maturity.

Calculating Taxes on Annuities

Now, the most complicated part of the annuity returns, is adding all of the taxes, insurance company fees, and premiums.  These are complicated because of there are many of them and they are computed at different times.  The first are the premiums and any transaction charges, which are deducted before the interest is compounded, and for simplicity we will combine into one lump sum,

• F; ? (PV-F)*(1+i) ­n^-m
• Many insurance companies also have annual charges, which one can denote as R; ? [(PV-F)*(1+i) ­n^-m]-R.

This formula represents what could be seen as a simple annuity.  In practice, the charges can be based on percentages of your deposit (easy fix, just change F to *(1-f), where f is %charge).  Also, for i, these rates will be is entirely up to the insurance company. The minimum guaranteed rate will give you the most conservative estimate, as well as a simpler one.

By – Domenic Gabriella for RetirementSecurity.com

An annuity is an investment in one’s longevity.  People buying annuities want security and comfort in the future.  Many from the baby boomer generation are rapidly approaching this future, or are already retired.  Younger workers with income to invest in ones future should consider such options seriously.

Who Should Buy Annuities

The first group of people who should consider investing in an annuity is the baby boomers.  One wants an income apart from social security for support in the future.  The risk of the insurance company failing is much less plausible then the market dropping several a hundred or so points across the board and costing near retiree’s large portions of their life savings, as it did in 2008 with several smaller dips since.

Another group of people who should look at annuity returns are those who will be working for years until they will need the payments.  Preparing far in advance, with that long for interest to compound will allow for a much larger payout. Visit UIC.edu for an annuity calculator.

Annuity Risk

Just because an annuity is safer than having ones money in the open market does not mean it is impervious to risk.  There is always risk of inflation diminishing the worth of an annuity.  There is also the risk of the insurance company failing (there is no evidence to show that insurance companies should be expected to fail in the foreseeable future.  If one did fail, the government may intervene and bail it out anyway).

Another point one should look at if they are considering annuities even before they look at the market is oneself.  People who buy annuities should reasonable expect to live long enough to fully collect the benefit of the annuity. It doesn’t make sense to invest in a future you do not think you will live to see. A UIC study found that “individuals who know themselves to have serious health impairments rarely, if ever, purchase annuities.

Annuity Benefits

The reward of an annuity is, of course, future security.  So long as one has the supplemental income, health to expect to see the payout, or just a desire to avoid market risk as retirement, an annuity can be a sound investment work looking into.

By – Domenic Gabriella for RetirementSecurity.com

The interest rate for annuities is typically at the discretion of the insurance company you purchase the annuity from.

You can control a few factors that will contribute to the rate you get on your annuities; these factors include:

• The time until the annuity matures
• How much they deposit
• How many deposits

Some, however, are beyond the control of the purchaser.  These include:

• Condition of the market
• Life expectancy of the purchaser (gender is important here)
• Company fees

The stock market is one thing beyond buyer control.  Anyone paying attention will see that the market is becoming more risky for investors.  Finding a company with steady growth is uncertain.  As the market uncertainty is on the rise the percent return will fall.

Life expectancy will determine how much the insurance company is willing to pay over the collection of an annuity.  For example, if one purchases a lifetime annuity, life expectancy of the purchaser is the payout period.

For life expectancy, gender is a large factor to an insurance company.  The large impact of gender is the much longer life expectancy of women compared to the longevity of men.  The projection for 2009 estimates the population of women to outlive men by 5 years on average.

Age of the one purchasing the annuity also plays into the annuity return for similar reasons.  Both life expectancy and gender help determine for how long a lifetime annuity would have to be paid out.  Similarly, age of the purchaser, tells the insurance company how many years they can invest the money received from an annuity before needing money to pay out.

These factors will change the return on investments of similar size.  There are many other ways and factors that insurance companies could look at, but these are the major areas of focus.  For an example of an annuity calculator, visit Sec.gov, which takes these basic inputs and shows either the cost or the payout of an annuity when the rate and time vary.

By – Domenic Gabriella for RetirementSecurity.com

Do you know what will happen to your annuity if the company goes belly up? Are you protected, and for how much? These are a main concerns of many annuity account holders. So you don’t leave anything up to chance, there are some things you should know about the pros and cons of annuities.

As always, before purchasing any type of investment, you must do your research on the company. Checking out how healthy the company is can save you a lot off pain and hassle. Companies such as A.M. Best and Standard & Poor’s provide ratings of insurance companies for consumers. Watch your back and make sure the company is stable to protect yourself against insolvency issues.

For fixed annuities, if a company becomes insolvent, you will be protected up to an amount determined by your State’s Guaranty system. There are 52 Guaranty associations in 50 states and District of Columbia and Puerto Rico. State Guaranty associations (GAs) provide annuity holders with a safety net against insolvency. You can find the maximum protection amount in your state through the National Organization of Life and Health Insurance Guaranty Associations’ (NOLHGA) website . NOLHGA by the state Guaranty associations to help them coordinate in providing protection to policyholders.

Your State Guaranty System will try two things:

• Either transfer your policy to another stable insurance company, or
• Provide coverage or a cash surrender through the state up to the allowed limit. This amount is $100000 for most states.

For variable annuities, the information on what happens to your money in case a company fails will be listed on your contract. Ask about grace periods you may have to review the contract and get your money back if you are unsatisfied. Read the fine print on the case of insolvency. Also, check out your State GA to see if you may be protected.  They don’t generally offer the same protection for variable and fixed annuities.

In both cases, you may be entitled to monies under the liquidation of the company before any involvement of the State. To further protect yourself, however, you may want to spread your investment through several companies. GAs will protect on a per-account basis. You could find out your state’s maximum protection amount and simply not open an annuity account in excess of that. But, it probably won’t be worth the hassle if you do your homework beforehand.

Annuities are typically part of a retirement plan to beneficiaries who want a steady income. Money can be invested either in installments or as a lump sum. There are two main types of annuities: fixed and variable. The question becomes finding the best annuities for you. Fixed annuities are considered a safer investment because variable annuities can change dependent on market conditions. They are both subject to different rules and regulated by different organizations.

Fixed annuities are regulated by the Insurance Department or Bureau in each individual state. The National Association of State Insurance Commissioners (NAIC) offers a list of each state department and its contact information. Insurance agencies selling these annuities must be licensed through their state. To be licensed, agencies must be legitimate and meet certain minimum requirements. Often states require insurance agencies to offer a “Free Look” or a “Right to return” policy on fixed annuities. This allows the buyer a designated number of days to review the contract after purchasing. If the buyer decides to change his mind during this period all his money is given back.

Variable annuities are considered securities and are regulated by the U.S. Securities & Exchange Commission (SEC) as well as the NAIC. They are also regulated by FINRA, an independent self-regulatory organization charged with regulating the securities industry endorsed by the SEC.

The Sale of Variable annuities:

Agencies must be licensed through their State, FINRA, and the SEC: Any agency selling a variable annuity must be registered with and possess a Series 6 or Series 7 license through FINRA and any required by the state.

All Federal Laws governing securities apply to Variable Annuities: Agencies must abide by both the National Securities Market Improvement Act of 1996  and the Securities Act of 1933 and other laws to sell variable annuities.

Any complaints about practices of agencies selling annuities should be reported to FINRA, the SEC, and the NAIC. They offer both web and telephone support for such problems.

The steady income generated through annuities can be very attractive. However, if you’re counting on those payouts for a long period of time, you should consider the effect of inflation. Annuity yields are often lower than the inflation rate which means that the value of your money may shrink over time. There are some strategies to protect yourself from this risk.

Inflation-protected annuity accounts and the like: As of late, companies are offering annuity accounts with inflation-adjusted yields. Some raise the payout according to changes in the Consumer Price Index. Others increase payments by a fixed amount– maybe 2-4% — every year for the rest of your life. Some companies offer both options, or some variation. The catch for these accounts versus a regular annuity account is usually a lower initial payout.

Spread out money put into immediate annuities: Make several lump sum deposits into immediate annuities rather than only one. This will allow you to get a guaranteed amount each month and then invest more when interest rates rise to get a better return. In the meantime you can grow your money by putting it into another (higher yield) investment vehicle.

Invest an amount to match inflation: This is an option for those simply want to guarantee a specified amount without going through any added trouble. The Bureau of Labor Statistics offers an Inflation calculator to show the effect of inflation on the dollar over time. If you know how much of a payout you will need each month, you can invest accordingly.

Many investors don’t realize the effect that interest can have on their savings. They may notice that their payouts are no longer covering what it used to. Taking precautions will protect consumers who depend on annuity payouts to pay bills. A fixed or immediate annuity will charge you for taking out money for a specified period of time before the maturity date. Hedging against inflation can help you avoid premature withdrawals that cause hefty Surrender charges, a 10% tax penalty, and a reduced payout.

Some people don’t have to go through the trouble of worrying about inflation protection. If you are getting money from other investments, inflation-adjusted pensions, and/or your bills won’t rise over time, a regular annuity may be all you need. If these apply to you, also consider looking into IRA’s which have considerably lower fees.