Mar 19, 2013
By Rick Law, Senior Estate Planner and Elder Law Attorney in Illinois.
Most retirees have finished accumulating assets and now must turn those assets into an income stream. Converting assets into income helps retirees move from an accumulation mindset to an income mindset – which is essential.
Not long ago, people usually would work their entire lives for just one employer. That employer would provide a pension plan that would offer at least some amount of security to the retiree.
But over the last 20 years or so, the need to save for retirement has shifted from the employer to the employee. And, although 401(k) plans are popular savings vehicles, these plans do not provide the lifetime income stream that pensions did.
Financial advisors have for years sought various programs to provide their clients with products that protect an investor’s principal have evolved to help address the needs of many risk-averse consumers by providing them with a safety net for their investment and savings capital.
In some cases, retirees have not saved nearly enough to live the retirement lifestyle they had dreamed of. While there isn’t an easy fix for lack of savings, the only real way to help retirees guarantee themselves a lifetime income stream that can’t be outlived is through annuities.
In fact, it seems that the number one thing that financial advisors are talking about with their retiree clients is the ability to guarantee lifetime income. As we talked about earlier, retirees of today and in the future will live longer and expect to have a better lifestyle during their retirement years.
As a result, the insurance industry has responded with a number of products that can provide the lifetime income guarantees required by retirees. Annuities, in general, offer tax advantages as well.
They offer tax deferral, meaning that the contract holder does not pay taxes on the gain in the year that interest is earned. This is different from a CD, for example, where the interest is taxed the same year that it’s earned. With annuities, tax is payed only when income generated from the annuity is used.
By deferring the tax on the annuity, investors can essentially reduce their taxes – this refers not only to reducing current income tax, but also the potential tax on a retiree’s Social Security income.
Annuity products have come up with other innovations that help meet people’s needs. For example, not only do annuities offer some type of guaranteed lifetime income that the investor knows they are going to get, but they can also offer features whereby if the investor gets in a situation where they can’t perform two out of six “activities of daily living” (ADLs), the income they receive from the annuity doubles to help pay for nursing home or other long-term care costs.
Despite the opponents of these products, indexed annuities do a better job of meeting the needs of many moderate and strongly risk-averse investors, particularly compared with various combinations of stocks and bonds.
Retirees like these products for their guarantees and their safety. In fact, the insurance industry, because of some of the reserve requirements, can be one of the absolute safest places for retirees to put their money.
Lead Elder Law Attorney at Law Elder Law, LLP
Rick was named the #1 Illinois elder law estate planning attorney by Leading Lawyer Magazine. He has been quoted in the Wall Street Journal, AARP Magazine, TheStreet.com, and numerous newspapers and articles. Rick is the lead attorney for Law Elder Law, LLP, focusing in Estate Planning, Guardianship, and Nursing Home Solutions. His goal is to give retirees an informed edge when it comes to dealing with an uncertain future. Get flexible retirement strategies that work during good times and bad, plus information on how you can save your home and assets from being used to pay for long term care. Appointments available in Chicago, Aurora, Oak Brook, Schaumburg, and Joliet. Call 800-310-3100 for your free consultation now!
My wife and I had our first child three years ago. That’s when we decided to set up a trust, should anything happen to either of us. We reached out to Zach Hesselbaum to help us out. He was very thorough and professional throughout the whole process. Zach went above and beyond to make sure that we understood every detail of setting it up and he did an excellent job. We recently had our second child a few months ago. With the new baby, he helped us make the necessary revisions to the trust. Zach made this process great for us! I would definitely recommend using him for any of your estate planning needs!
Tom G., Naperville, IL