February 25th, 2010 | 
Author: These are not good economic times for a lot of people. And if you are near retirement or are already there, your ‘nest egg’ probably has diminished. Consequently your current (or projected) income level has dropped and the length of time it will last is reduced.
If your fund sources are in securities, no doubt the values have decreased. And when market conditions start to turn around (historically they have), how long will it take to get back to where you were before securities or other investment values headed south?
If you’re young enough and have the time for your investments to recover, hopefully you’ll be able to regain your losses and head back up a path of respectable returns on your investments. If you don’t have the time, you may be searching for ways to make up losses including cutting expenses.
There are a number of financial products at your disposal to consider. Stocks, mutual funds (both of which over a period of time generally do perform well), bonds, precious metals and even real estate (although now is not the best of times), and numerous other options. Certificate of Deposits (CD’s) and money market vehicles may not provide much of a gain, but they are very popular and have their place in overall planning.
Another option to review is an annuity. These plans include variable or indexed annuities which have become popular as accumulation vehicles with options to withdraw money for retirement purposes. Both of these types of plans have the potential for gains or losses but also have features that can protect downside risk. Results are tied into various security options or indexes. Fixed annuities provide a return based on the investment results of the general account of the insurance company issuing the policy.
One annuity product that may be considered to some as being ‘ho-hum’ or ‘boring’ is the Single Premium Immediate Annuity (SPIA). The boring part is that there is generally no potential for increases in value, no access to cash values, and no increases in the levels of income it provides.*
However, what is not boring is that the income received from a SPIA has guaranteed life time income options (or for a specified period of time) for individuals or for two people under a joint income annuity. And if an individual (or even two people under a join annuity) have serious health issues, many insurance companies will actually increase the normal level of income compared to what a healthy person would have received.
So who might consider this type of an annuity? Anyone who wants or needs a guaranteed income in addition to their monthly check from Social Security or other income sources they may receive. The SPIA may be the ‘bond’ vehicle in a total portfolio of mixed investments. Depending on age and personal financial goals, some advisors may suggest 10% to 20% of investments used for retirement income might come from a SPIA. Each situation will be different and requires a review of personal goals, obligations, and other financial considerations. Longevity should also be considered.
Another feature of SPIA income is that due to a special formula called an ‘exclusion ratio’, federal income tax due on the income received can be less (over a number of years) than other types of investment income. This special tax treatment applied to money received from non-qualified money sources, not qualified funds (i.e. pension type plans).
We’re all getting older and generally living longer. One concern may be that of outliving your money. Another is the cost of long term care which many of us will require sometime in our lives. For a 65 year old retiring today, its estimated there will be an additional cost of $250,000 for health services needed over and above any benefit plans we may have in place, either personally owned or provided by the government.
Current Nursing Home care in North Carolina is $5,569 per month for a private room (and doesn’t included drugs and other incidentals). An Assisted Living facility (private room) is $2,395 per month. Most people, if in fairly good physical and mental health, would prefer to stay at home. If assistance is required, an un-certified aide’s fee is $18.00 per hour for their service. (Source: Genworth Financial 2008 Financial Cost of Care Survey)
These costs are increasing higher than the national inflation rate. If a family member or friend is going to assist at home, the cost of lost wages and their own well being can be greatly affected. Purchasing Long Term Care insurance while healthy is a good option to help pay for a major part of long term care expenses. These costs can run into many thousands of dollars (and that could be from your retirement/investment money).
A Single Premium Immediate Annuity (SPIA) can also be an option to pay for Long Term Care insurance premiums. A one time single premium is paid which equals the income level required to pay for the Long Term Care insurance premiums. ** For example, if two spouses each own a Long Term Care insurance policy (and are joint annuitants under one SPIA), and one of the spouses die before the need for long term care occurs, the addition income from the annuity (required to pay for the deceased Long Term Care insurance policy) is now available for other uses to the surviving spouse.
What ever type of saving vehicles you might be using for accumulation or income purposes, diversification of investment choices will generally be important, particular in today’s volatile markets. A Single Premium Immediate Annuity is an option to consider when guaranteed income is needed. And actuarially, people live longer who receive guaranteed income from annuities. What Will Rogers said in the 1930’s still applies considering today’s investment atmosphere. “I’m not so much interested in the return ON my money as I am in the return OF my money.” A SPIA may be the right option.
*Some companies offer SPIA’s with access to values and increased income levels.
** Long Term Care insurance premiums may be subject to future increase.
Article Source: Has Your Nest Egg Cracked?
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