Last week we discussed four reasons why rolling employer-sponsored funds into annuities make sense and help consumers to better prepare for retirement. This week we bring you four more.
But first, let’s refresh our memories. The first four reasons were:
CONTROL: Annuities put the CONSUMER in control of savings choices, not employers.
CONSOLIDATION: Annuities allow funds to be consolidated and ease management burdens. With more and more Americans working multiple jobs in their carriers managing the plans from those jobs can become daunting.
COST: Annuities are typically less costly than many 401(k) plans. As we discovered from Joe Valletta, author of The 401k Averages Book, the base range of fees in a 401(k) from 0.87 percent for larger plans to 1.56 percent for smaller plans with individual investment decisions and distributions sending the numbers to 2 percent and higher.
Risk CERTAINTY: Annuities that protect savings from market losses insure that money is never lost in the market.
Here are four more reasons consumers should consider an Annuity IRA Rollover:
PROTECTION: The ever-increasing required minimum distributions (RMDs) from employer-sponsored plans can put a strain on retirement funds and potentially deplete them. Unless you are in an annuity, you are not protected from longevity or market risk.
A deferred annuity with an income rider, or for that matter, any levelized distribution from an annuity takes the RMD calculation off the table. Of course, for an income rider, if you turn the income off, the RMD is back on the table.
Granted, taking RMDs does not mean consumers have to spend the RMDs - the government just requires that taxes be paid. But, an income annuity protects consumers from bad spending behavior. To spend or not to spend is no longer a question because, the income stream will last a lifetime.
Depending on the state, annuities also provides protection from creditors. If someone falls into financial difficulties, the creditor-protected annuity will be left intact for income later or for beneficiaries.
PROBATE: Most annuity accounts will not go to probate because they have a named beneficiary. Assets with a named beneficiary, such as annuities and life insurance policies, typically bypass probate. The beneficiary receives the asset directly.
The reasons to avoid probate are time and money. The time the probate process takes depends on the procedures of each individual state and so, will be dictated by the state in which the annuity owner lives. Every state has its own laws on probate, with specified procedures and documents that must be filed.
Depending on the state and your estate, probate can take anywhere from three to six months to several years. According to freeadvice.com, in California the average estate takes seven to nine months to get through probate, if all goes well, but if there is something like a will contest or some other lawsuit, all bets are off. Some matters have taken decades to resolve.
The second reason to avoid probate is the costs. And, again, the costs will vary by state law and/or market-based rates. Freeadvice.com puts all probate costs between 3 to 7 percent of the total estate value, but warns it could be more. Probate costs can include personal representative fees, court costs, costs for a type of insurance policy known as a surety bond plus legal and accounting fees.
Costs keep piling up as the clock keeps ticking. And, if the will is contested or there is other litigation, the entire annuity value may have to be used to pay the fees.
PLANNED GIVING: Many people use annuities to give their money to loved ones, special interests, or charities. An annuity contract that is established as a “remainder gift annuity” and pays the designated charity at death allows individuals to transfer assets to the nonprofit organization in return for a partial tax deduction and a fixed income for the donor's lifetime. After the donor dies, the charity keeps the remainder of the gift.
Charitable gift annuities typically are a low-cost way to provide a legacy when you die. Depending on the sponsoring organization, you may be able to give the remainder to more than one charity.
Using annuities as planned giving can also provide education funds for a child or grandchild or business continuation income. Annuities used for planned giving also gives control of the payout from the grave. Billionaire Warren Buffett was famously quoted as saying that when it came to leaving your children money, the sweet spot is “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
Leaving an annuity contract to your heirs, ensures that they will receive fixed payments for a predetermined period of time, rather than a lump sum of cash. This can be an important option if the adult child is disabled, struggles with instability, or otherwise could benefit from regular payments from an annuity.
What all of these reasons add up to is PEACE OF MIND. With the IRA Annuity the annuity owner:
•Controls savings choices
•Minimizes management through consolidation
•Protects money from market losses
•Ensures savings last a lifetime
•Transfers funds efficiently and quickly
•Contractually controls legacy payments.
One of the most common “yeah buts” about annuities is that these protections are only as strong as the issuing company. At Americans for Annuity Protection, we respond with the irrefutable fact that insurers have been consistently and faithfully making payments on issued annuities through economic depressions, wars, market turmoil and out-of-control inflation.
According to The National Organization of Life And Health Insurance Guaranty Associations (NOLGHA), of the eight life companies that entered liquidation between 2008 and 2012, “almost all were comparatively tiny regional writers; none were remotely ‘systemically important’; and their aggregate liabilities to policyholders were approximately $900 million.
Compare that to, for example, the initial general creditor liability of Lehman Brothers alone, which was reported at the start of its bankruptcy filing as being approximately $765 billion.
We agree with Ben Stein who says:
“In the simplest terms, [an annuity is] buying insurance against indigence in old age for you and the spouse you love. I have them. I love them. They’re the difference between terror and relative calm (though I rarely have real calm because of that magic word — children). I don’t want that soft, loving look in my wife’s brown eyes to ever disappear because she’s about to run out of money while I am rotting in my grave.”
Thank you Mr. Stein, we couldn’t have said it better.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at [email protected]
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