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What Every Investor Should Know About Planning And Saving For Retirement
I wanted to talk about One More Annuity Mistake.
In fact this actually might be one of the biggest mistakes and one of the mistakes that I see probably more often than almost anything else. What I’m referring to is not taking advantage of an income or a withdrawal benefit on an annuity that you already own.
Many annuities are actually keeping track of two separate account values. One is what I like to refer to as the true account value or the walk away value. And that’s actually what your account is doing based off of whatever investments or crediting method might be part of the annuity that you own. And the 2nd account value is actually what’s referred to as the living benefit account value. And that’s what your future income or withdrawal benefit is going to be based off of. Sometimes these future benefit bases grow by a certain amount every year. Sometimes that’s 5%.
So it can be pretty tempting to watch that income account value grow, but I think there’s a big mistake that some people make by letting that go too long and not turning that income on soon enough and then essentially not living long enough to reap the benefits of what that income or withdrawal feature was designed to do. A great article that I just read recently from Moshe Milevsky PhD. a professor of finance at York University in Toronto, and he’s written several books and articles about annuities and what he essential said is the best way to take advantage of an annuity that you own is to get into the insurance company’s pocket as soon as possible. So in other words, these income or withdrawal features, they’re going to essentially pay that money out for as long as you live. If you tied that benefit to your spouse as well, it’s going to pay that benefit as long as either you or your spouse are alive. Even if that account value goes to zero, they’re going to continue making those payments. So he says the best way to get the value out of an annuity is to basically let that go to zero and have the annuity company continue to pay you out. That’s actually one of the best features that these annuities have. But unfortunately, a lot of people aren’t taking advantage of that.
These annuity withdrawal benefits or income benefits, they’re not free. They usually come with a rider, typically cost 1% or more to add that on. So if you’re not doing anything with that, you’re really adding up a lot of additional expenses that you don’t really need. So what is the right time to turn this income out? Well, what you want to look at is the withdrawal or the income schedule. They all have this, and it’s usually age bracketed. If you take your withdrawals under age 60 you might only get a 3% guaranteed income or withdrawal for life, but if you wait until 60 or 65 that might jump up to four or four and a half percent. Typically, I think that’s the sweet spot. Usually where you get that income ratcheted up at 60 or 65 tends to be where you’re getting what I believe to be the maximum value. Because even though you might get a little bit higher withdrawal rate if you wait until 70 or 75 or even 80, you might not have the chance of necessarily living long enough to get all of that benefit back out.
It’s kind of a race against time, how long are you going to live, versus how long are you going to be able to collect that benefit. So, look at the withdrawal schedule, turn that income on, as soon as you hit that number. Also remember if you are taking a spousal benefit as well, that it’s usually based off of the age of the younger spouse. So even if you’re 65 and you’re hitting that magic age, if your spouse is 64, you might have to wait an additional year. So be very careful about that. Even if you don’t need the money right away, you could always take that withdrawal from the annuity and then reinvest it in something else. And even if it’s coming out of an IRA account, you can just shift it over to another IRA account and then you won’t have to pay taxes on that money as long as it goes back into another IRA.
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I help individuals make the transition from working to retirement.
As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.
My goal is to help you get the most out of your retirement resources. I do this by coordinating and optimizing what I call the 7 Core Elements of Retirement Planning.
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We use advanced financial planning software to help you understand your retirement cash flow so you know where the gaps are.
Understanding your retirement gap is the foundation to getting the most out out of your retirement resources and avoiding costly mistakes.