As Annuities Get Attention in Washington, It’s Worth Reviewing the Basics
June 17, 2010 by Tom Licciardello, CFP · Leave a Comment
Recent research from the Financial Planning Association® (FPA®) shows that planners are embracing annuity products to help a more conservative generation of clients protect assets and reach their retirement goals. Apparently the White House is getting in on the annuity bandwagon as well.
The question is, should you? First, start with the definition. An annuity is a financial product that accepts funds from an individual with a plan to grow them, and then at a specific time begins a stream of regular payments to guarantee a steady flow of inflation-protected cash to that individual until they die. Annuities come with various features, which will be detailed below.
The whole notion of guaranteed payments after an economic crisis seems to be more attractive these days.
A report in the April FPA Journal of Financial Planning stated that 35 percent of advisers surveyed said the recent financial crisis had changed the way they viewed annuities and as a result, they were more likely to use or recommend them than they were before the crisis. Washington also appears to be getting friendly with annuities as a conservative solution for those in retirement. In January, the Obama Administration released a report from its Middle Class Task Force favoring annuities as one of a series of tools that might offer guaranteed life income to millions of Americans.
Annuities have plenty of promoters and detractors, and it’s best to start by reading as much about them as possible first, and then discussing your retirement savings choices with your tax professional and an experienced financial adviser. Some basics:
Annuities come in two flavors – fixed and variable: Fixed annuities offer a return that are tied to interest rates or a particular index, meaning these are “fixed” investments your money will always be tied to. Variable annuities are invested in a series of investments — including mutual funds — that allow the investor to change their investment allocations. If you are willing to pay heftier fees, you may be able to receive a guarantee that your variable annuity will not dip below the value of the initial principal.
Tax-deferred growth, but payments are taxed as ordinary income: Just like a 401(k) or IRA, the contributions and earnings within an annuity grow tax-deferred until the funds start coming out. But also like a 401(k) or IRA, you pay a 10 percent penalty for early withdrawals if you are younger than age 59 ½. Yet there’s a tradeoff for a lifetime guaranteed payment, and that’s the taxman. All withdrawals are treated as ordinary income and don’t qualify for more favorable long-term capital gains treatment.
Money for life, but check the company thoroughly: The number one selling point of any annuity is that the issuer – typically an insurance company that writes up an annuity contract – guarantees that you will receive money for as long as you live. Of course, you need to make sure the insurance company behind the annuity contract is financially healthy. Check its Comdex ranking, which is an average percentile ranking of credit ratings provided for life and health insurance companies by firms such as Moody’s Investors Service, A.M. Best Company and Standard & Poor’s Corporation.
Fees and commissions can be steep: Always ask how much commission an agent makes – and planners can be agents if they are properly licensed – when they sell you an annuity. And be sure to compare commissions and ongoing fees on any annuity products you consider. Also keep in mind that some annuities can charge a surrender fee if you withdraw your money before age 59 ½ in addition to the 10 percent penalty.
Compare promised returns: We’re still in a low interest-rate environment. Understand how any annuity you’re considering will react in various interest rate scenarios.
Check out consequences of transferring an annuity: Find out what the tax and economic ramifications might be for transferring an annuity to spouses or other family members when you die. This effort should be part of an overall review of your personal finances and the creation of an estate plan.
Stay diversified: Keep in mind that putting everything you have into an annuity is not good financial planning. Discuss how you should allocate all your assets as you head into your retirement years.
This is the Year for Your Estate Plan
June 8, 2010 by Tom Licciardello, CFP · Leave a Comment
Why 2010 is the Year You Should Pay Closer Attention to Your Estate Plan
Estate planning is an essential part of anyone’s personal finances — no matter how wealthy you are. But even for those who have been diligent about planning for their spouses and heirs, this is a year when it may make particular sense to re-examine your strategy.
With the nonstop flurry of legislative activity in Washington, Congress has still not acted on the phase-out this year of the estate tax. If nothing is done this year, the heirs of any person who dies in 2010 won’t be liable for any federal estate taxes, no matter how big the estate. (The carryover basis rules for 2010, however, may give rise to additional planning considerations.)
Yet the potential bad news will come next year when the estate tax is scheduled to return with a vengeance on all estates over $1 million in size (the threshold was $3.5 million for individuals in 2009) with a potential return to a 55 percent top tax rate..
It’s worth a trip to your estate planning attorney and your financial planner to help ensure your paperwork is in order and the previous plans you’ve made won’t cause problems.
Family trusts – also called bypass or credit shelter trusts – are of particular concern. These trusts work this way: Individuals add what’s known as a formula clause to their will or revocable trust that distributes up to the maximum amount of assets that can pass free of estate tax to the trust if the individual dies before their spouse. The creation of the trust helps ensure that once your spouse dies, neither these assets nor any appreciation on them will be subject to estate tax. But if you die this year, a failure to address the formula clause could potentially cause you to unintentionally disinherit your spouse.
The bottom line: It’s worth making a call to a financial planner and your estate attorney to make sure your plans are still in order.
And what if you’ve never made an estate plan? Even if you’re not particularly wealthy, you definitely need one. Here are some specific things you should do and make sure you have in place:
Make a financial plan: You can’t have a very effective estate plan without a full grip on your finances. First, sit down with us to create a financial plan so you can gain an understanding of all the various aspects of your finances from your income and investments to your debt. Add various facts about your family situation to the mix, and that’s the starting point for an estate plan.
Make a will your first priority: Unless you have a very complicated estate, a standard will with wording common to your state may be satisfactory to properly dispose of your assets, but it’s generally a good idea to get feedback from an estate attorney to make sure your will fits you and your financial structure.
How Much Term Life Insurance Should You Own?
June 8, 2010 by Tom Licciardello, CFP · Leave a Comment
You may have read that term life insurance rates are at historic lows and that now is the time to buy. It’s worth a quick primer on why life insurance is necessary and who should buy it before getting to specific amounts that individuals should own.
First, a quick definition of what term life insurance is. A term policy is a policy with a set duration on the coverage period – anywhere from one to 30 years – and when it reaches the end of that term, the policyholder decides whether or not to renew it. Term policies provide no cash buildup like whole or universal life insurance – it only provides a death benefit at the time the insured dies. Because term doesn’t provide that investment component – the cash value that can be borrowed against – term is generally cheaper to buy than whole or universal life.
There is plenty of debate whether consumers should buy term or whole life. Some critics argue that whole life is a poor choice because you arguably could get a better return from other investments. Though limited, there are good purposes for these investment-feature policies – generally as part of an estate-planning strategy.
But the first point is to decide whether you need insurance. People without dependents generally don’t, while people with spouses and families generally do. The primary point of life insurance is to replace income or eliminate debt if a breadwinner dies.
As for the decision on what kind to buy, it helps to get some advice. A well drafted plan can help you determine the right insurance products to buy based on your needs and other assets.
Through our planning process we can help you decide how much life insurance to buy and over how long a period. Some critical questions that should be asked when purchasing insurance:
- How much income would your spouse and your children need to replace your income over a period of years based on your current age?
- Will your spouse or guardian need to provide childcare support?
- Is there a mortgage to pay off?
- Are there substantial short-term debts, like credit cards or auto loans, to pay off?
- What are estimated college expenses for children and spouses, and when will those expenses start?
- How much will burial expenses be?
- Do you have any other life insurance?
- Are there anticipated expenses for care giving for elderly relatives or children or family members with special needs?
- Do you anticipate substantial estate taxes when you die?
- Do you have any other assets that can be liquidated sensibly or will bring in income?
Keep in mind that youth and health will also be factors in how much insurance you can afford to buy. And keep in mind that life insurers will investigate suspicious claims, so be honest about all facts you report.
Many term life policies are both “renewable” and “convertible.” Renewable means you can renew your coverage without a medical exam. The latter allows you to convert your term life policy into an equivalent cash value policy from the same carrier, should this make sense during the term of the policy. Again, the kind of coverage you choose should depend on your own personal needs and we can help you determine what those are.
Not only can we shop numerous life insurance carriers for the best rates, we also know it’s important to work with the most financially healthy carriers.
One more thing. Don’t buy insurance and forget about it. Make sure that every few years you are reviewing your insurance purchases as part of your overall financial plan. Life circumstances change – incomes rise and fall and family size changes. Your insurance holdings always need to reflect current needs and conditions.
Why U.S. Investors Should Care About the Euro
June 6, 2010 by Tom Licciardello, CFP · Leave a Comment
Sovereign debt troubles continue to persist in Greece and other parts of peripheral Europe, resulting in volatile global markets and heighted anxiety. Despite the unveiling of a Greek bailout package by the European Union and the International Monetary Fund, investors are still signaling a lack of confidence by sending European markets lower. As uncertainty about the situation grows, it has begun to affect the European banking system as well. In response, the euro has fallen against the U.S. dollar from $1.33 on April 30 to $1.22 on May 26. The Euro’s Decent.
Investment Update: Market Volatility Continues
June 5, 2010 by Tom Licciardello, CFP · Leave a Comment
From a market perspective, the month of May had more than its fair share of challenges. The Dow Jones Industrial Average fell 7.92% for the month, the worst percentage decline for the month of May since 1940. In addition, markets have been highly volatile, as shown by the Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index;” it rose from 22 at the end of April to 33 by the end of May. From continued gloom cast by the sovereign-debt crisis in peripheral Europe to the “Flash Crash” on May 6, when U.S. blue-chip stocks made a staggering 1,000-point decline before recovering a majority of the drop by the end of the day, it is easy to see why investors remain cautious.
Kevin P. Barr, Head of SEI Investment Management Unit, presents the Market Volatility.