#financialplanning

BFSG’s Retirement Planning Summer Webinar Series

Back by popular demand….BFSG’s Summer Webinar Series! BFSG is bringing together our CERTIFIED FINANCIAL PLANNERS™ and other subject matter experts in a series of thought-provoking retirement webinars to give you the tools to help you boost your financial literacy and help you make smarter financial decisions. Register today and feel free to share this unique opportunity with friends and family.

July 8, 2021: Retirement Q&A – Ask the Experts

July 15, 2021: Retirement Accounts – Traditional vs. Roth

July 22, 2021: Healthcare in Retirement

July 29, 2021: The Future of Retirement in America

“It’s Your Money” Workshop Series

BFSG’s Senior Portfolio Manager, Michael Allbee, CFP® and Senior Financial Planner, Paul Horn, CFP®, CPWA®, were invited to be guest speakers for the “It’s Your Money!” workshop series put on by Peter Kote for his not-for-profit Financial & Estate Literacy. These workshops educate seniors to take control of their financial, estate, and charitable giving decisions. You can check out the entire series HERE.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Is An Annuity Right For You?

By: Arash Navi, CFP®, CPA

It is estimated that half of all children born today in the United States and Europe will reach their Centennial birthday. The number of Americans living past their 90th birthday will triple in the next 30 years. Consequently, it makes sense that the number one worry of retirees is running out of money!

Unlike previous generations, many employers don’t offer traditional pensions and Social Security payments are estimated to equal only about 40% of pre-retirement income. There is also the uncertainty around whether or not Social Security will be available decades from now. So, it is natural that many people are looking for other “guaranteed” sources of income to supplement their retirement needs. This is where annuities come in to play.

What is an annuity?

An annuity is a long-term financial contract between an insurance company and an annuity owner whereby the insurance company guarantees a stream of future payments in exchange for an investment now.

Different types of annuities?

Immediate Annuity If you choose an immediate annuity, you typically begin to receive your stream of income shortly after your initial investment. Individuals nearing retirement tend to consider this option as a supplemental income to Social Security.

Deferred Annuity This type of annuity is structured to help investors accumulate capital over their working life and defer taxes on those earnings during that period. It offers the ability to turn these assets into a stream of income at retirement or later in life.

  • Fixed Annuity – A fixed annuity provides a guaranteed amount during the payout period with relatively low risk. For older contracts, the rate of return may be around 3% or more but new contracts are often under 1%.
  • Variable Annuity – A variable annuity provides a return that is generally tied to a performance of a portfolio of mutual funds that the annuity holder chooses. You carry the investment risk and have the potential to make or lose money. Often, they offer a guaranteed minimum rate of return but at the same time may cap the maximum amount of return as well.
  • Indexed Annuity – An indexed annuity is similar to a variable annuity, but the rate of return is tied to the performance of a stock index such as S&P 500. Therefore, you can benefit if the stock market is performing well. Depending on the insurance provider, your investment may be subject to a minimum and maximum rate of return.

Advantages of annuities?

The main advantage of annuities is that it allows you to defer incomes taxes on the earnings from your annuity investments until you begin receiving your stream of income. Also, there is no annual contribution limits, so an individual is able to put away more money for retirement. This may be particularly appealing to investors who have maxed out their annual 401(K) and IRA contributions and/or are nearing retirement. Another benefit is that you are not subject to mandatory withdrawals (unless the annuity is qualified – like a retirement account) at a certain age and have the flexibility to choose how you’d like to receive your payments. Finally, annuities’ insurance feature can be a great estate planning tool. The death benefits to the beneficiaries in most cases will not be subject to probate and estate taxes.

Disadvantages of annuities?

The main disadvantage of annuities are the fees involved. A typical annuity is sold by an insurance broker who makes hefty commissions on it. In addition, annuities are subject to surrender charges which means if you change your mind and decide to withdrawal your investment earlier than planned, you will have to pay a penalty (most annuities allow you to withdrawal 10% of the contract value per year without penalty). Depending on the type of annuity you choose, you may face high annual fees (and even higher if there are any rider guarantees) which will further erode the rate of return on your investment. Variable annuities typically have higher fees since the potential growth is uncapped and you have the underlying mutual fund fees. Finally, keep in mind that once you began receiving your payments, the annuity gains are taxed as ordinary income versus long term capital gains which may be less beneficial for wealthy investors.

Final thoughts

There are many factors to consider when deciding to purchase an annuity and it is important to discuss your specific financial situation with an advisor to help you make the right decision that best meets your needs. An annuity may not be suitable for a typical investor due to its illiquidity, high fees, surrender charges and low rates of return. However, the possibility of higher estate taxes and longer life expectancy could make this an appropriate retirement and an estate planning tool for some.

Recently, BFSG’s Senior Financial Planner, Paul Horn, CFP®, CPWA®, was invited to be a guest speaker for the “It’s Your Money!” workshop series put on by not-for-profit Financial & Estate Literacy. Learn more about annuities by clicking HERE. Feel free to reach out to us if you’d like to learn more!

Additional Sources:

https://www.nerdwallet.com/article/investing/annuities

https://www.aarp.org/retirement/retirement-savings/info-2020/longevity-annuities-explained.html#:~:text=A%20deferred%2Dincome%20annuity%2C%20also,you%20will%20get%20each%20month.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The Basics of Annuities & Mutual Funds Webinar

BFSG’s Senior Financial Planner, Paul Horn, CFP®, CPWA®, was invited to be a guest speaker for the “It’s Your Money!” workshop series put on by not-for-profit Financial & Estate Literacy. These workshops educate seniors to take control of their financial, estate, and charitable giving decisions. For this session, Paul focused on two of the most heavily sold products by financial brokers/dealers: annuities and mutual funds. Learn the basics and what to look for by clicking HERE.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Save for Retirement or Pay Off Debt

First Things First: Build an Emergency Fund

Experts agree you should have three to six months of living expenses set aside in a safe, interest-bearing account. What you earn on that money is irrelevant. The main goal or objective of this investment is liquidity. Not having an emergency fund can prove to be a very costly mistake. For example, if you need to replace the brakes in your car, if your rent increases, or if you even lose your job. None of this is predictable. Without an emergency fund most people reach for the high-interest rate credit cards to pay their expenses. This strategy is in conflict with your long-term goal of saving for retirement.

One consideration: A Roth IRA. The Roth is unique, in that any contributions you make to a Roth can be withdrawn without penalty or taxes. The caveat is that any earnings in the account need to remain for five years and you must be 59.5 years old or older (unless an exception applies) for it to be considered a qualified distribution to avoid taxes and a 10% penalty. In turn, you are technically saving for retirement and building a nest egg for any short-term unexpected expenses (i.e., emergency fund). Check out our Roth in Retirement Plans webinar to learn more.

Next: Prioritize Your Debt Load

Maybe you have a car payment, student loans and miscellaneous credit cards. Put together a budget that reflects balances, monthly payments, as well as the interest rate attached to each of the debts. Once you have a clear understanding of your debt load you can then develop a plan to paydown the debts. There are a couple different schools of thought on this. You can either begin by making a “monster” payment on the credit card with the highest interest rate after the minimum payments are made on other debts with lower interest rates. This is referred to as the “avalanche” method and ultimately saves you the most in interest payments.

Secondly, there is the “snowball” method. Here you make the “monster” payment on the account with the lowest account balance. How do you eat an elephant? One bite at a time. The same is true for your debt – break down the debt into bite-sized pieces to make it more attainable and less scary.

There is no right or wrong method because everyone has a unique approach to managing their finances. If you are someone who can sleep better knowing you have completely paid off a debt and no longer owe money to a given creditor then the “snowball” method probably makes sense. Whereas, if you are a numbers-driven person and feel saving more money on interest charges over the long-term makes more sense the “avalanche” method might be for you.

Watch our “Connecting the Dots to Your Financial Future (Part 1)” webinar for learning more about these strategies to pay off your debt.

Wait: My Company Matches My Retirement Plan Contributions

If you are fortunate to work for an employer who matches your retirement plan contributions, then that is free money you should grab. For example, if your company will put in 50 cents for every $1 you contribute that is a 50% return in your account immediately! This strategy should be prioritized over paying down anything above and beyond the minimum payments owed on any debts described above.

The Bottom Line

It really comes down to personal preference. The math would suggest that you should maximize retirement savings while taking advantage of the current low-interest rate environment and potentially refinance debt if possible. However, if you’re someone who sleeps better knowing you don’t owe money to others that works just as well.

A Certified Financial Planner™ at BFSG can work with you to develop a plan designed to help you save for retirement and pay-off debt to achieve your financial goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.