An Annuity Alternative

First, if you need an absolute guaranteed regular income for retirement, then an Annuity is a good choice. However, please be aware that one still has to pay taxes on the income and deal with the effects of inflation. The money deposited into an Annuity at some point has to take a tax hit. I’m OK with that but have a tough time paying tax on the distributions.

So, if an annuity pays a max 3% return, which today is doubtful, on a $100,000 account, then the policy holder would actually make $3,000 growth in the account. However, taxes will need to be collected when the income is paid out. Let’s assume taxes at a low rate, say 20%. (In reality, the rate will probably be higher.) Let’s also assume 1½ % inflation. So, the net account value on the $100,000 is:

$100,000 x 1.03 = $103,000

After taxes of 20%... $3,000 x .80 + original 100K = $102,400

Inflation… $102,400 x .985 = $100,864

Conclusion? $100,000 of capital grew $864. For the person who absolutely needs a guaranteed income they have to take what they can get. Currently interest rates are so low that the principal amount needed for a decent income needs to be greater and greater as interest rates decrease. In all likelihood, the $100,000 will not provide much income. More money will be needed to secure any significant income stream. However, committing more and more money to this plan does have its risks. The main risks are purchasing power for the future and unforeseen medical events. The problem with retiring is that substantial income is shut off while, at the same time, those unforeseen costs creep up. For example, long-term care (LTC) will become a major concern for current retirees who live to a mature age and those future retirees following right behind. One LTC event can wipe out the assets of many estates. There is a plan I can suggest that can provide a solution for this serious concern. At age 57, I purchased such a product so as to guard my assets from the perils of LTC. I do not want to lose my house or stocks if assigned to nursing home or requiring in-home care. I want to leave as much to my family as possible, not to a nursing facility.

The product one can use to safeguard against this risk is an IUL (Indexed Universal Life). It will provide leverage, a death benefit, TAX diversification, and the chance at far more growth than any Annuity can offer. My suggestion for retirees who have some non-qualified money is to reposition that bucket of money and channel those monies into an IUL which will instantly offer $327,000 in death benefit and each year $78,000/yr in living benefits, which can be used for a LTC event.

Process:

Deposit $10,000/yr into the IUL each year for 10 years, and the IUL policy will be paid up in full. This instantly provides $327,000 of Death Benefit (DB).

There is no Annuity, or IRA for that matter, that can offer anyone access to $327,000 with a $10,000 deposit. Repositioning and phasing in $10,000/year offers a different kind of peace of mind. It offers:

1. DB $327K from day one. If legacy is a goal, this delivers a nice chunk of leverage that an Annuity or 401k can’t provide. To put a bow on this benefit, it’s tax free to beneficiary.

2. Access to 24% of the DB each year for an illness, a LTC event, etc. IMO, this is a ticking time bomb in our country but is too often swept under the rug of investment strategies.

3. Risk free potential growth far superior to any Annuity

4. Tax diversification. We know the tax rate today but do not know what the tax rate will be in the future. My instincts say it will increase to pay down the national debt we are leaving our children.

IUL’s are very versatile investment vehicles providing several solutions, even the solutions people do not consider. Annuities are the popular “go to” product for most retirees. I just hope you will consider looking into an IUL before you commit a huge bucket of money to an Annuity. Get the facts. Look at the comparisons, and then make the decision. Annuities may provide the solution of guaranteed income but at what cost? What other benefits are then sacrificed?

This strategy can be used with Qualified money, as well. After age 60, the withdrawal penalty is lifted and the government is ready to collect those deferred taxes. Problem is, those retirees will have to pay tax on those distributions. Consider phasing in $10,000/yr into an IUL, after you take the tax hit. By age 72 all IRA and 401k money has to start the withdrawal process. The tax bill is due. It’s pay day for Uncle Sam. Why not phase some of that money, after taxation, into an IUL that will offer so many solutions?

I’m not asking retirees to commit all of their IRA account values to an IUL; I’m just suggesting that they consider repositioning some of that money into an IUL. Get in touch with me, and I will show you an illustration that will show you all the benefits an IUL can provide. And please…do not commit to an Annuity until you have this information.

Thanks for reading, and I hope this was a valuable use of your time.