Annuities

We use annuities as a means to give the average American a better chance at a more secure retirement. They are an example of a “structured settlement”, which we cover here. Annuities help to buy the pension that your employer has probably stopped offering; they help where social security leaves off. For example, you can use an annuity to fund a personal services contract. President Obama made the announcement to promote “annuities and other forms of guaranteed lifetime income” at his state of the union speech early this year. However, of the 15 to 25 percent of big employers that offer annuities, they have very few interested employees willing to hand over their earnings.

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According to a 2014 report from I.B.M., only 1 percent of the employees on the precipice of retirement opted for an annuity. So why are there so few interested annuity contenders and how can the White House promote change? Often so, many people worry they might not receive their money in their lifetime and that their heirs might not receive anything at all. Others focus on inflation as another detrimental effect on their annuity. In response to these concerns, the industry has developed riders to the existing policies. Furthermore, many do not have enough saved in their 401(k) or individual retirement account to purchase a decent monthly annuity payout.

Also, many stockbrokers and financial planners will often talk a client out of putting their money into an annuity because they cannot collect commissions from trading it anymore. They argue that insurance companies can die. Some clients often have a difficult time of seeing a big number suddenly turn small, watching their largest amount of money become small annuity payments. Not to mention, some find it difficult to just hand over their money to an entity that will keep it all. In order to ensure the American public that their money is safe, a possible new Senate bill would give account holders an annual estimate of the type of annuity check their savings would buy, illustrating how their lump sum will now become a monthly payment.

In hopes that tax incentives will urge people to choose annuities, a recent House Bill has called for waiving 50 percent of the taxes on the first $10,000 in annuity payouts each year. Craig Hemke, president of BuyaPension.com, proposes that companies automatically deposit half of new retirees’ lump sums into a basic annuity unless they opt out. They could have a trial run for two years to see how they like their monthly paycheck and could continue it or cancel it and get the rest of their money back penalty free. Annuities will probably not benefit those in poor health or those unwilling to put all of their money into one single investment, but for those who want to cover the basic expenses that Social Security does not cover or want to buy long-term care insurance, an annuity is an optimal choice. As President Obama notes, the irrevocable life insurance trust ILIT, and may one day become a financial cushion we can access later in life.