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Fixed annuities, issued by insurance companies, are similar to CD investments insofar as they pay guaranteed rates of interest, and can help to stabilize retirement income. Retirees or soon-to-be retirees most commonly purchase fixed annuities, which guarantee stable payments starting at a certain designated age. These annuities are typically either purchased with a one time, lump sum payment or through consistent installments while the annuitant, an individual who owns an annuity, is still working. There are two types of fixed annuities, deferred and immediate annuities.

With deferred fixed annuities, the account collects money and grows – tax-deferred – during the accumulation phase. Once the accumulation phase ends, annuitants can begin to receive payments, either through one large payout or through smaller, monthly payouts.

Immediate fixed annuities, on the other hand, disburse payouts immediately. Investors typically start to receive regular payments as soon as 30 days after investment. Once the payments begin,  most do not increase regardless of inflation or in the case of an unexpected event. Although, some annuities offer an annual percentage increase in the income payment to help offset inflation. Also, annuitants who start receiving immediate fixed annuity payments no longer can access, the original principle.

Essentially, the main difference between immediate fixed annuities and deferred fixed annuities is whether or not the annuitant desires immediate income, or instead prefers to build his or her account value over time for future income.

Types of Fixed Annuities

Two main fixed annuity categories exist, life annuities and term certain annuities, with the former containing multiple product variations. With life annuities, the annuitant receives a predetermined, fixed amount paid periodically until his or her death. Therefore, it is considered a form of longevity insurance. The different types of life annuities include:

Life Annuities

1) Straight Life Annuities

Straight life annuities provide the annuitant with a fixed payout amount until his or her death, and this type of life annuity does not offer any sort of payout to surviving beneficiaries. Straight life annuities may be purchased with payments made over the course of the annuitant's working career, or they may be bought towards retirement with a lump sum.

2) Substandard Health Annuities

Substandard health annuities are solely for individuals with life-threatening health conditions whose life expectancies are shortened as a result. Annuitants typically receive higher payouts per period with this type of annuity because of their shorter life expectancies. However, substandard health annuities are also more expensive to purchase.

3) Life Annuities with Guaranteed Terms

Life annuities with guaranteed terms differ from straight life annuities because they allow annuitants to add beneficiaries to their policies. If the annuitant should die before their policy expires, then their designated beneficiaries will receive any money that has not yet been paid out.

4) Joint Life with Last Survivor Annuities

Joint life with last survivor annuities allow payouts to be continued to the annuitant's spouse if he or she should die. Adding a “Period Certain” provision, guarantees the monthly income payments to designated beneficiaries for a defined period of time.

Term Certain Annuities

The second category, term certain annuities, guarantees a predetermined, fixed payout over a specified term. This means that once the term agreement has expired, regardless of whether or not the annuitant is living, all payouts will end. If the annuitant should die before his or her policy ends, the insurance company keeps the remainder of the annuity’s worth.

If the annuitant's living expenses increase, their payouts will still remain the same. Due to term certain annuities' limiting options, they are inexpensive to purchase.

Who Should Invest in Fixed Annuities?

Generally speaking, retirees, soon-to-be retirees and/or conservative investors tend to gravitate towards fixed annuities due to their financial stability. Most fixed annuities provide purchasers with steady rates of interest and guaranteed principle amounts. Individuals who decide to invest in fixed annuities have low investment minimums ranging from $1,000 to $15,000, and the accumulated interest is tax-deferred until it is withdrawn. Those who are looking to secure their retirement nest eggs with stable income benefit most from investing in fixed annuities. Furthermore, individuals who wish to pass their assets onto their beneficiaries without probate should also consider investing.

Who Should not Invest in Fixed Annuities?

Individuals who are either too young or who are looking for short term investments should avoid investing in fixed annuities. Any annuity income that is withdrawn before age 59.5 is subject to a 10% IRS tax penalty. Therefore, fixed annuities should be planned so that income collection starts at age 60 or thereafter. Fixed annuities, with the exception of immediate fixed annuities, are also not ideal short term investments because they are not as liquid as stocks or bonds, and should therefore only be used for retirement funds.

The Advantages of Fixed Annuities

For those who are ideal candidates, fixed annuities offer a number of distinct advantages, including:

• Most fixed annuities are tax deferred, which means that investors are not required to pay tax on any earnings until they begin to withdrawal.  Investors end up earning additional interest compounding on the money that would have normally gone toward taxes.

• Unlike many investments, fixed annuities have no upfront sales charges or administrative charges. One hundred percent of the money goes to work right away.

• Currently, most fixed annuities offer competitive interest rates, often offering better rates than comparable bank CD’s. Some of them also provide additional benefits that stocks, mutual funds and other investments lack.

• Proceeds can be paid directly to a named beneficiary and may avoid the expense and delay of probate.

• Certain fixed annuities can guarantee retirement income for the entirety of the annuitant’s life, which means that they will never have to go back to work. Similar investments are unable to guarantee a fixed income until death.

• Some annuities also offer special benefits that allow for increased income should the annuitant become disabled. This aids in covering the costs of any additional medical care.

• Some annuities offer special withdrawal provisions that may be available to help in the case of confinement to a nursing home.

Fixed Annuity Drawbacks and Pitfalls

Although fixed annuities have the advantages of providing stable retirement income along with select insurance options, they also have a number of disadvantages – including pitfalls – which potential investors should be cautious about. These include:

• Some annuities have limited time fixed interest rates, which means that after a certain specified time, rates could decrease. If an annuitant does not approve of the new rates and withdrawals his or her money early, he or she could face heavy surrender charges.

• For individuals who choose fixed lifetime payments, those payments will not increase to compensate for higher living costs. This means that the value of money received will decline over time due to inflation.

• Once annuity money is withdrawn, individuals must pay federal, state and local income taxes. If an annuitant decides to receive a lump sum payment, it could be taxed as ordinary income, which means that he or she would not receive a capital gains tax break.

• Investors risk facing the possibility of lower returns on their investments in exchange for retirement income stability. This is because fixed annuities are conservative investments, unlike stocks, which fluctuate in value and have the capacity to gain significant earnings.

• Some fixed annuities, like immediate fixed annuities, do not allow investors to access their principle, which means that investors need to be committed to investing in those annuities.

Fixed Annuities: All Things Considered

Overall, fixed annuities can be a wise investment for retirees or soon-to-be retirees who are looking for conservative, long term investments. Fixed annuities offer stable income, guaranteed rates of interest, and even insurance options. Because of the many different types of fixed annuities on the market, investors are almost guaranteed to find one that fits their needs. However, potential investors should be mindful of the type of fixed annuity they choose, and the terms of the contract that they sign.

Disclaimer

Annuities are not a deposit in any bank. They are not FDIC insured by any Federal Government Agency. Guarantees are based on the claims paying ability of the issuing company. The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company. The principal amount of payments of an annuity purchased with funds from a qualified retirement plan may be taxable. With either systematic withdrawals or free withdrawals you will still be subject to regular income taxes, as well as the 10% tax penalty on early withdrawals prior to age 59 1/2. You may also incur surrender charges on amounts withdrawn in the early years of the contract.

An immediate annuity is a type of annuity that provides payment immediately after investment. Similar to monthly pension checks, immediate annuities provide a guaranteed stream of income well into retirement, and they are typically purchased with a lump sum payment. With immediate fixed annuities, payments are predetermined and do not increase with inflation or in the case of an unexpected event.

Types of Immediate Annuities

Immediate annuities, like other annuities, have several different product options. These include:

1)    Single Life Guaranteed Income

This type of immediate annuity guarantees that the annuitant will not outlive his or her income by providing regular payments until death. With this option, annuitants may choose to have their payments end upon death, designate a beneficiary or have it that their beneficiaries receive the remainder of the principal.

2)    Joint Life Guaranteed Income

A joint life immediate annuity provides steady income to joint annuitants as long as both are alive. Once one of them dies, the surviving annuitant still receives either partial or full payments depending on the contract’s terms.

3)    Period Certain Immediate Annuities

With this specific type of annuity, the annuitant is provided with guaranteed income for a certain time period. This means that there is a possibility the annuitant could outlive his or her payments. However, if death should occur before the payment period ends, any designated beneficiaries will receive payments until the term expires.

4)    Impaired Risk Immediate Annuities

These immediate annuities are specifically issued to medically impaired individuals whose life expectancies are shorter than the average person’s. Typically, it is cheaper for annuitants to purchase impaired risk immediate annuities, and the payments are larger. Individuals must provide proof of a medical illness before purchasing this option.

5)    Inflation Protected Immediate Annuities

With this plan, annuitants’ payments increase to keep up with inflation. Specifically, payments are designed to increase or decrease by a designated percentage yearly to correspond with changes in the Bureau of Labor Statistics’ Consumer Price Index.

Immediate Annuity Advantages

Immediate fixed annuities offer certain distinct advantages over other types of annuities and/or investments, including:

• Guaranteed income, either until death or for a specified period. This provides annuitants with stability throughout retirement, unlike stocks or bonds.

• Competitive rates of interest that are typically higher than bank CD’s. Greater amounts are also received than would be provided solely by interest, since the principal is returned with each payment.

• The fact that annuitants are not required to manage their own investments.

• Tax postponements on some of the earnings accrued when tax-deferred annuities are rolled into immediate annuities. Only the interest is taxable while the principal returns are nontaxable.

• Security of principal being that annuitants’ funds are backed by the issuing insurance companies and do not fluctuate with the financial market.

• Protection from creditors, since annuity payments are not under consideration when filing for bankruptcy.

That immediate annuity payments are not considered as part of an annuitant’s estate, which means that he or she may still be eligible to receive income-based government benefits, such as Medicaid.

Immediate Annuity Disadvantages

Although immediate fixed annuities offer conservative, guaranteed income investments, they also have a number of drawbacks that potential investors should be made aware of:

• Unless annuitants choose inflation protected plans, the fixed payments that they receive will erode with time and inflation.

• With straight life immediate annuities, if an annuitant dies relatively soon after investment, the issuing insurance company pockets the remaining money.

• Annuitants may not surrender their immediate annuities once they have made an investment. This type of investment requires a committed, long term investor. 

• With immediate annuities, annuitants are unable to increase their payments.

Who Should Invest in Immediate Annuities?

Individuals who are on the verge of retiring and have a large sum of money should consider investing in immediate annuities. Immediate annuities can provide retirees with a stable source of income for a certain amount of years or until death. Conservative investors should also consider investing in this type of annuity because their principal amounts are backed by the issuing insurance companies. Investors are also guaranteed steady returns and competitive rates of interest. Unlike stocks, immediate annuities are low risk for investors, with the issuing insurance companies being held responsible for any financial mishaps.

All Things Considered About Immediate Annuities

Immediate annuities can provide relief to those who are worried about running out of retirement income by providing them with guaranteed stable payments either for life or for a certain, predetermined amount of time. Before investing, however, individuals should consider:

Whether or not their selected payment options will cover their income needs.

The fact that with life only immediate annuities, it may take many years before annuitants receive their investment returns.

Regardless, with the guidance of a financial advisor, most individuals are able to choose an immediate annuity policy that suites their needs entirely. Before purchasing an annuity, prospective investors should consult their families along with conducting thorough research.

Disclaimer

Annuities are not a deposit in any bank. They are not FDIC insured by any Federal Government Agency. Guarantees are based on the claims paying ability of the issuing company. The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company. The principal amount of payments of an annuity purchased with funds from a qualified retirement plan may be taxable. With either systematic withdrawals or free withdrawals you will still be subject to regular income taxes, as well as the 10% tax penalty on early withdrawals prior to age 59 1/2. You may also incur surrender charges on amounts withdrawn in the early years of the contract.

Most people envision their retirement years as an opportunity to accomplish all of the things they dreamt about while still working. Given the recent economic downturn, and diminishing investment returns, it is necessary for individuals to start planning for their dream retirement at the beginning of their careers. Currently, many seniors have put off retirement – and ultimately their dreams – due to unforeseen medical expenses, decreased pensions, and inadequate retirement planning. In fact, the number of working seniors between the ages of 64 and 74 increased from 1 in 5 in 2000 to 1 in 4 in 2006. And, according to the U.S. Bureau of Labor Statistics, the number of seniors eligible for an employer retirement plan has decreased from 52 to 43 percent.

Your retirement dreams do not have to be shattered by harsh economic times,  if two golden rules are followed early on: planning and saving. It is crucial to first envision your retirement dreams and calculate corresponding expenses, and then take financial steps towards those dreams.

Planning For The Ultimate Retirement

During retirement, many seniors’ ultimate fantasies involve lavish luxuries , such as traveling, owning vacation homes, and buying luxury items. In order to do this, retirees need to have large nest eggs.  Retirement dream costs should be calculated out accordingly. For example on average, a vacation home costs anywhere from $300,000 to $900,000, luxury cars start at $30,000, and cruises range from $3,000 to $9,000 depending on the package. To have $1 million saved up by retirement age, workers need to start saving $550/month starting in their 20’s, or over $4,000/month starting in their 50’s. Most financial experts recommend saving and begin retirement planning as early as possible.

Retirement Planning in Advance

During their professional careers, individuals should start to explore the types of available retirement accounts, how they can maximize their savings, and how to manage their investments wisely.

1)    Types of available retirement accounts

Employees typically have several employer-sponsored retirement account options, including 401(k)s, 403(b)s, IRAs  and governmental 457(b)s. 401(k)s, offered by both for-profit and nonprofit organizations, are financial plans that allow workers to save for retirement. In order to qualify, employees must be 21 years of age or older and have at least one year of full employment. Currently, employees under the age of 50 may contribute up to $16,500 annually, and those over 50 may contribute $22,000 annually. Some companies offer to match 401(k) contributions, which means employees may potentially double their 401(k) funds.

403(b)s, only offered by nonprofits, hospital service organizations and public schools/universities, is a type of tax sheltered retirement savings plan that is similar to a 401(k) plan. In general, almost all employees of those sectors are eligible, and they may contribute $16,500 if over 21 years of age, or $22,000 yearly if over age 50. Certain employers also offer to match 403(b) contributions.

IRAs, or Individual Retirement Accounts, allow employees to receive significant tax advantages on retirement savings. IRAs, although not investments themselves, permit employees to invest their IRA account funds in stocks, CD’s, bonds or other similar investments. There are two different types of Individual Retirement Accounts – ROTH IRAs and Traditional IRAs. A crucial difference between the two is that ROTH IRAs are taxed when a contribution is made, but are not taxed later on in retirement. Traditional IRAs are tax deductible when contributions are made, but they are taxed later on in retirement. Any individual with earned income may contribute to a Traditional IRA up to age 70, and any individual who has taxable income or is self employed may open a ROTH IRA. For both IRA types, workers may only contribute $5,000 yearly if under age 50, and $6,000 annually if 50 or over.
 
Governmental 457(b)s are only available to individuals who work for non-profit, for-profit or governmental organizations with fewer than 100 employees. Governmental 457(b) plans allow employees to save money for retirement on a pre-tax basis. In return, employees agree to take salary reductions, and the money taken from their salaries is invested. The interest earned is tax free until the employees decide to collect it at retirement or change jobs. Employees are permitted to contribute $15,500 annually.

2)    How to Maximize Retirement Planning with Savings

The most essential component of building a well-endowed nest egg is having large retirement savings. Money saved early on has the potential to grow exponentially through wise investments, and by saving regularly, this ensures maximum returns on financial investments.

The first step towards maximizing savings is to contribute regularly to retirement plans. Dollar cost averaging, a popular investment strategy, requires a steady monthly, weekly or biannual investment of a fixed amount into a retirement account of your choosing. If this option is chosen, contributions must be consistent. Therefore, it is important to calculate a guaranteed amount that you will be able to contribute regularly to the account.

Another step towards building your dream retirement is to save as much money as possible, even when your salary increases. By placing $500 monthly into a retirement fund at 10% annual interest, over a million dollars will be yielded in 30 years. The more money that can be saved, the better retirement life will be.

Early withdrawals on IRAs, Social Security and 401(k)s should be avoided at all costs. Penalties for early 401(k) and 403(b) withdrawal before the age of 59.5 include a 10% IRS tax. Early simple IRA withdrawals made before age 59.5 are also given a 25% tax penalty for the first two years, and thereafter a 10% annual penalty. If individuals make over $13,560 and also collect social security, they must repay the Social Security Administration $1 on every $2 earned over the limit.

Another way to maximize retirement savings is to take advantage of employer matching programs. If an employer offers to match 401(k)s, then employees should contribute enough to receive that free benefit. Employer matching will enable individuals to maximize their 401(k)s, which means a cushier nest egg later on. Human resource departments typically offer extensive information on company 401(k) matching policies.

3)    Make Retirement Planning Easy with Wise Investment Management

Once your investments have been made, it is essential that they are managed regularly and wisely. This includes managing and adjusting any investment portfolios and IRAs.

Investment portfolios should be assessed regularly for any investment loss, and withdrawal rates should be adjusted accordingly. As a general guideline, financial advisors recommend that retirees withdrawal no more than 4% annually to prolong their retirement savings.

Managing IRAs involves reviewing investment  progress, setting regular financial targets, and taking advantage of employee benefits. All investments, should be assessed to see how successful they are. If need be, consider consulting a financial planner if your mutual funds are not growing enough. An IRA target growth number should also be  set quarterly, and IRA accounts should be assessed monthly for goal progress. To maximize Traditional IRA growth, employees should take full advantage of any employer retirement account matching programs or other retirement benefits. This allows for the potential of earning twice as much Traditional IRA funds.

Planning Right Before Retirement

A few years prior to retirement, individuals should start shifting their focus toward organizing their accounts, considering investing in longevity insurance and establishing a retirement age in addition to continuing to save for retirement.

1)    Organizing  and Updating Your Accounts

It is crucial that individuals are aware of all of their accounts, and how to access them. Accordingly, all account statements and previous tax forms should be collected, recorded and filed away. Each account record should contain its present value and instructions of how to access it. Soon-to-be retirees should also consider consolidating their accounts as a way to simplify their finances. Any beneficiaries listed on retirement accounts should also be reviewed and updated, especially after a death or divorce.

2)    Considering Longevity Insurance

At the onset or right before retirement is a good time to consider investing in longevity insurance.  Longevity insurance can help to cushion and extend your retirement years by providing regular monthly income.  All that is required is a down payment of anywhere from a few thousand dollars to tens of thousands of dollars, and starting at an age of your choosing, you will start to receive monthly payments until death. Extensive research should be done before choosing a company and a plan.

3)    Establishing a Retirement Age

Establishing a retirement age depends on how much money has been saved, how much will be spent, and your projected life expectancy. In order to reap the full benefits of IRAs and 401(k)s without any tax penalties, retirees should be at least 59.5 years old before collecting them. To also receive full Social Security benefits, retirees should wait until age 70 when they will receive the maximum payout allotted. The advantages of delaying retirement until age 65 or older include being able to still contribute to IRAs and 401(k)s, allowing assets to continue to grow, and not receiving any penalties or reduced benefits.

Manage Retirement Planning during Retirement

Even though individuals have spent time envisioning and planning their ideal retirement , they still need to manage their retirement funds while  living out their retirement dreams.  This includes establishing retirement budgets. appropriate withdrawal rates and factoring in healthcare expenses.

1)    Planning a Retirement Budget

At the onset of retirement, a retirement budget should be constructed that takes into account monthly expenses, future vacations or purchases, healthcare costs, and unexpected events.

Common regular expenditures include mortgages, utilities, insurance, entertainment, groceries, taxes, credit card and loan payments, and money allowances. Retirees should also research the costs of their dream vacations, purchases and healthcare.

2)    Establishing Appropriate Withdrawal Funds

At the beginning of retirement, retirees should calculate how much they can withdrawal from their savings without having it run out prematurely. Most financial advisors recommend a conservative withdrawal rate of 4%-5% for the first few years of retirement. However, each retiree’s financial situation is different, and their Social Security income, pension, personal savings, and investment returns must be assessed collectively before determining a withdrawal percentage. Retirees should consider discussing their retirement plans and withdrawal rates with a financial advisor to ensure that they are able to sustain their retirement and fulfill their dreams

3)    Factoring in Healthcare Expenses

Senior citizens are the most financially affected age group when it comes to medical expenses. This is due to unforeseen medical expenses and skyrocketing prescription drug costs. However, retirees do not have to lose their retirement savings to unexpected medical costs if they budget this factor while planning their retirement. On average, retirees who are insured spend approximately $5,000 annually on  out-of-pocket medical expenses, and older retirees end up spending $8,000 or more. For those who lack insurance, healthcare expenses have the potential to exceed hundreds of thousands of dollars. To reduce healthcare costs, retirees are encouraged to look into Medicare, Medicaid, health savings accounts and prescription discount programs.

Retirement Dreams Can Come True With Sound Retirement Planning

Despite lengthening life expectancies, increasing medical expenses, and dwindling investment returns, individuals still have the ability to plan and live out their dream retirement. If individuals are persistent about saving money, make wise financial decisions, and calculate a practical retirement budget, then they should be able to retire comfortably.

Equity-indexed annuities, in short, are a type of fixed annuity that is linked to a stock or other equity index, and accrues interest accordingly. The most commonly used index is the Standard & Poor's 500 Composite Priced Index (S&P500). Because of the way it credits interest to an annuity’s value, equity-indexed annuities differ considerably from other fixed annuities. Unlike most fixed annuities, equity-indexed annuities use a formula based on annuity-linked index changes to credit interest. How much interest is received, is based on each particular annuity’s features.

Like other fixed annuities, however, equity index annuities promise to pay a certain guaranteed minimum interest rate, meaning that an annuity’s value will not drop lower than the guaranteed specified minimum. Adjustments are also made to reflect index increases at the end of each term.

Equity-indexed Annuity Contract Features

Equity-indexed annuity contracts vary, and consist of several different components. It is advantageous for potential investors to understand certain contract features that may affect the index-linked formula used to calculate interest.

• Averaging

  This is where an average of an index’s value is used instead of an index’s actual, date-specific value. This index averaging may occur throughout the annuity’s entire term, or at the term’s beginning, middle or end.

• Participation Rates

  An annuity's participation rate determines the extent to which an index's increase will be used toward computing the index-linked interest rate. For example, if the participation rate is 70 percent and there is a 10 percent gain in the stock index over the year, then the equity index annuity would accumulate interest at 7 percent for that year.

• Indexing Method

  This is the approach used to measure the amount of change in an index. Common indexing methods include ratcheting, point-to-point and high water mark:

  • Ratcheting, or annual reset, determines an index’s amount of change by comparing the index’s value at the start of the contract year to the end of the contract year. Each year during the term, interest is added to the annuity.
  • The point-to-point method computes index change by determining the difference between the start of the term’s index value and the end of the term’s index value. Interest is then added at the term’s end.
  • The high-water mark method decides an index’s value by assessing the index value at different points during the term. The interest is then based on the difference between the highest index value and the index value at the beginning of the term, with interest being added at the end of the term.


• Interest Rate Caps

  Certain equity-indexed annuities set a maximum interest rate that an annuity may earn. It should be kept in mind, though, that not all annuities have interest caps.

• Interest Rate Floors

  Many equity-indexed annuity contracts guarantee a minimum interest rate that an annuity will earn, with the most common floor being 0%. This type of floor percentage will ensure that an annuity’s value will never be negative.

• Margin/Spread/Asset Fee

  With certain equity-indexed annuities, their interest rates are determined by subtracting a certain percentage from any calculated index change. This percentage may be used as a substitute for, or in addition to, the participation rate. For example, if the index growth is 10%, the annuity contract might specify that 2.50% will be subtracted from the 10 percent gain resulting in a return of 7.50 percent.

Advantages of Equity-indexed Annuities

Equity-indexed annuities offer distinct advantages over other types of investments being that they combine traditional annuity benefits with the potential to earn higher returns. Some of their highlights include:

• Equity-indexed annuities offer investors no-loss provisions, which means that once a payment or interest has been credit to the account, the account value will not go below that balance.
• Most annuity contracts have guaranteed minimum interest rates, meaning that investors are protected against money loss.
• Traditional annuity benefits still apply to equity-indexed annuities, including tax-deferred growth and, in some instances, penalty-free early withdrawals.
• Guaranteed death benefits for beneficiaries.
• Several income payment options so investors can receive income when and how they want it.
• Best of all, investors are able to participate in stock market growth, without being affected by stock market declines.

Equity-Indexed Annuity Disadvantages

Although there are a number of advantages to equity-indexed annuities, potential investors should also be wary of the fact that:

• Some equity index interest rates have a maximum cap, which could limit investors’ earning potentials.
• Some equity index contracts penalize annuitants for any money withdrawals that exceed the annual allotted limit.
• Withdrawals made before age 59.5 may be subject to a 10% penalty by the IRS.
• Investors may not receive the entire return of their linked market index with some equity index contracts.
• Several income payment options so investors can receive income when and how they want it.
• Some equity index contracts can have high surrender charges and long surrender periods.

Who Should Invest in Equity-indexed Annuities

Equity-indexed annuities are most ideal for long term investors who want to gain some of the benefits of a positive market, while protecting themselves from a down market. It’s important to note that the gains on equity indexed annuities may not be the same gains as seen against the index. Insurance companies can set limits on how much an investor can receive. For many, giving up some potential upside is a small price to pay for additional security – and a guaranteed return.

All Things Considered

For those who are suitable investment candidates for equity-indexed annuities, this type of annuity affords guaranteed minimum rates with the potential for higher returns. However, because equity-indexed annuity contracts can be complex, it is vital for all potential investors to understand the terms of the equity-indexed annuity being offered. Before deciding on an insurance company and a contract, investors should ask thorough questions, including:

1. What is the guaranteed floor interest rate?
2. What is the participation rate?
3. Which indexing method will be used?
4. How much are the surrender charges?
5. Are there any death benefits?
6. Is there a maximum interest rate that may be earned?
7. How is interest compounded?
8. What are some of the charges or fees? How are they deducted?
9. What are the penalties for early contract termination?
10. How much are withdrawal charges? In what circumstances are they waived?

As with any investment, investors must evaluate their own personal situation. It is important to understand the terms and trade-offs associated with equity indexed annuities prior to making any investment decisions.

Disclaimer
Many Equity Index Annuities ("Equity indexed annuities") are designed for long-term investing and have long vesting periods. Growth may not be realized prior to fulfillment of the vesting period. Potential returns are based on market fluctuations and calculation methods used for each individual index annuity. Earnings are taxable as ordinary income when withdrawn. Equity indexed annuities may have fees and expenses including surrender charges that will decrease performance. Annuities are not a deposit in any bank. They are not FDIC insured by any Federal Government Agency. Guarantees are based on the claims paying ability of the issuing company. Investors cannot invest directly in these indexes. Equity Indexed Annuities have limited liquidity and are not suitable for all investors. The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company. The principal amount of payments of an annuity purchased with funds from a qualified retirement plan may be taxable. With either systematic withdrawals or free withdrawals you will still be subject to regular income taxes, as well as the 10% tax penalty on early withdrawals prior to age 59 1/2. You may also incur surrender charges on amounts withdrawn in the early years of the contract.

Retirement Plans - Will You Outlive Your Retirement Plan?

Creating a retirement plan with a secure nest egg is a worry that most baby boomers share, especially given the dwindling economy, which is often compared to the 1930's Great Depression. With rising senior medical costs, lower returns on investments and plunging stocks, American retirees and even soon-to-be retirees face a unique socioeconomic climate that many have never previously experienced.  According to AARP, senior bankruptcy has risen by nearly 150% over the past 18 years, and seniors between the ages of 75 and 84 are most likely to file for it. This startling trend is mostly due to unforeseen out-of-pocket medical expenses, insufficient retirement plans, and static social security benefits that have been outpaced by inflation.

Another financial disadvantage that senior citizens face is longevity, and failing to save enough funds to cover their retirement plans. According to a CRS, Report for Congress, the life expectancy of the average U.S. citizen is 78 years, which is a significant increase from the 50 year life expectancy from the beginning of the 20th century. Given this sharp age increase, most senior citizens don't have enough savings to support retiring for 30 years or more. Even if seniors' nest eggs are substantial, and they have a sufficient retirement plan, there is still a strong possibility that they will either outlive or use up their retirement savings.

Taking all things into consideration, to get the most out of your retirement plan, it is important to take extra precautions, including small daily changes and larger financial adjustments. Below is a list of tips on how to make your retirement plan last longer in these difficult economic times.

Retirement Plan Longevity - Small Daily Changes Impact Retirement Plans In A Big Way

Even though making small daily changes, such as bargain hunting or cutting back on medical costs, might seem insignificant, the savings add up fast. Below is a list of simple tips that most retirees and/or senior citizens can engage in to make their dollars last.

1. Improve Your Retirement Plan By Cutting Back on Spending

   According to AARP, the cost of the 195 most commonly used senior citizen prescription drugs rose twice as fast as inflation in 2005. With medical treatments, insurance premiums, and prescription drug costs continually rising, it is important for seniors to take advantage of more affordable alternatives to brand name medications to help extend the life of their retirement plan. Retirees can take the initiative by first talking to their doctors about cheaper medications.  They can also save money by ordering their prescriptions through online pharmacies, which charge a fraction of the normal price. Seniors and retirees should also look at their local chain stores for prescription discounts – Target, Walmart and Walgreens all offer significant price reductions on generic medications.

2. Create A Healthy Retirement Plan By Lowering Prescription Costs

   According to AARP, the cost of the 195 most commonly used senior citizen prescription drugs rose twice as fast as inflation in 2005. With medical treatments, insurance premiums, and prescription drug costs continually rising, it is important for seniors to take advantage of more affordable alternatives to brand name medications to help extend the life of their retirement plan. Retirees can take the initiative by first talking to their doctors about cheaper medications.  They can also save money by ordering their prescriptions through online pharmacies, which charge a fraction of the normal price. Seniors and retirees should also look at their local chain stores for prescription discounts – Target, Walmart and Walgreens all offer significant price reductions on generic medications.

3. Avoid Discounting Your Retirement Plan By Taking Advantage of Senior Discounts

   Retirees can reap the benefits of significant savings by simply admitting that they are 50 years or older. Numerous restaurants, hotels, clothing stores and supermarkets offer senior discounts of between 5 to 10 percent, and airlines offer seniors savings of more than 40% off of standard ticket prices in some case, all of which will help increase the longevity of retirement plans.

4. Reduce The Strain On Your Retirement Plan By Working Part-Time

   Seniors and retirees should consider working part-time in order to further their retirement savings plan or to supplement their retirement plan's income. While many retailers offer part-time positions, seniors also have the option of posting items on eBay or similar sites or becoming pet sitters to make extra money. Once seniors reach retirement age, they are allowed to earn up to $37,680 annually without any government penalties.

Retirement Plan Security - Wise Financial Decisions Can Aid Retirement Plans

Along with taking simple steps to extend retirement plans, retirees can also make sound financial changes such as postponing withdrawals, to ensure the success of their nest eggs. Here is a list of tips on how to extend retirement plan funds through smart financial decisions:

1. Increase the Benefit Of Retirement Plans By Postponing Social Security Benefits

   If retirees delay withdrawing their social security benefits, their pay outs will rise by 7-8% each year from age 62 to 70. With that in mind, if they can wait until age 70 to withdrawal from their social security benefits, they will have received 83% more money than if they had withdrawal at age 62. These savings add up fast, and can make a large financial difference later in the longevity of a retirement plan.

2. For Retirement Plan Longevity Purchase Longevity Insurance

   Longevity insurance, a type of fixed annuity, provides guaranteed lifetime income payments to recipients at an age of their choosing, with age 85 being the most common starting age. Retirees can take advantage of this type of insurance by first choosing a desired age to start receiving payouts, followed by giving the insurance company an upfront payment of anywhere from a few thousand dollars to tens of thousands of dollars. Once the predetermined age has been reached, the insurance company provides the retiree with a fixed monthly payment amount. Longevity insurance does have some downsides, however, one being that the payments are not adjusted for inflation, meaning that retirees are at the mercy of inflation rates and may not be able to live on their insurance income alone. Retirees considering making longevity insurance a part of their retirement plan should do thorough research before choosing a company and a plan.

3. Invest In Your Retirement Plan By Monitoring Your Investment Portfolios

   Retirees who have investment portfolios should consider refraining from giving themselves regular raises. Instead, seniors and retirees should avoid raises altogether for at least a few years. This way, even the most conservative investment portfolios will last through the lifetime of a retirement plan. Retirees should also assess their investment portfolio withdrawal rates annually, ensuring that their withdrawals are only 4% of their total investment funds. By only withdrawing 4% annually, retirees should have enough investment funds to last them between 20 and 30 years.

4. Increase The Balance Of Retirement Plans By Postponing 401K, IRA and 403b Withdrawals

   Congress recently passed a bill that now allows seniors to postpone their 401K, IRA and 403b withdrawals beyond the mandatory 70 ½ years of age. This ensures that seniors will not be forced to withdrawal from their funds while investments are low.

Retirement Plan Final Thoughts

Retirees can ensure that they don't outlive their retirement plans by making small day-to-day changes and larger sound financial adjustments. Considering that life expectancy is rising and investments are diminishing, seniors can never be too prepared for when creating their retirement plan.