Savings2Income Cautions on Accepting the“Conventional Wisdom” about Annuities and Your Retirement Planning

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Retirement planning expert, Savings2Income, discusses how the facts and fictions about variable annuities can have an impact on your retirement plan.

On March 25, 2013, Savings2Income releases a new installment to its facts and fictions series about annuities, and how they can have an impact on your retirement plan. This new installment covers Variable Annuities (VAs), the most popular type of annuity, with over $1 trillion in assets. In spite of their success, even advisors have questions as to how VAs can impact their clients’retirement planning.

Savings2Income developer Jerry Golden answers some key questions about VAs:

  • Are variable annuities expensive? While some VAs have an annual fee of 3% or higher, there are no load VAs that with well-diversified portfolios of mutual funds have an all-in cost of less than 1% per year. That’s about the cost of the average mutual fund. Higher priced VAs are broker-sold with commissions built into price, and often include an additional charge for “downside protection” for the VA living or death benefits. The most popular form is referred to as a VA with a Living Benefit Guarantee (LBG).
  • Do variable annuities tie your money up? While broker-sold VAs typically have back end surrender charges, no load VAs do not. Also, if a contract owner has a VA with a LBG that’s “in the money”, most contract owners often don’t want to cash them in for fear of losing that downside protection. Analyzing the value of the optional LBG feature, whether in or out of the money, is a complex process. No load VAs are typically offered without a LBG.
  • Are variable annuities tax breaks worth it? Surprisingly, most VAs are sold in the Rollover IRA market, and the tax rules for Rollover IRA accounts are the same whether a VA or mutual funds. The tax deferral benefit is for non-qualified sales of VAs. Our analysis shows dramatic benefits from tax deferral, provided – and this is important – an investor uses the VA for its intended purpose, i.e., delivery of retirement income in the future. Of course using a no load VA is important, since higher charges reduce any tax benefits.

•Are variable annuities complicated? If you separate the basic chassis from the living benefit guarantees, the non-qualified VA chassis is relatively simple:

-You invest money in a VA contract that has already been taxed either in a lump sum or in periodic contributions. You have a wide choice of mutual funds in which to invest your VA account.

-Investment returns from your mutual funds under a VA are not taxed as earned. You eventually have to transfer the VA account value to a payout annuity, and most contracts allow you to wait until age 90 to do so, at which point taxes on the payout are due.

-Withdrawals from the VA are taxed as ordinary income (with a penalty tax for withdrawals before 59 ½). Taxes are spread if you convert the VA account to a payout annuity.

Jerry Golden goes on to say, “My advice about the variable annuity business is to go back to its fundamentals, and offer what the contracts were originally designed for - a low cost way to grow retirement savings on a tax-deferred basis and to convert those savings into guaranteed income through a payout annuity.”

An innovative retirement planning method called Savings2Income (S2I) created by Jerry Golden seeks to provide a clear path to retirement security for those saving for retirement, soon to retire, and recently retired. S2I incorporates Rollover IRA savings, personal retirement savings held outside an IRA or 401(k) plan and Social Security into an integrated solution.

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