Monday, October 13, 2014

How Lifetime Income Stemmed From Permanent Financial Changes

 Believe it or not, less than 20 years ago lifetime income did not exist; nor did the fixed indexed annuity (FIA). It wasn't until 1997 that the first FIA was launched, with lifetime income coming into the picture almost a decade later. Today these products are used for long term retirement planning, ensuring that your retirement income will not be dependent upon external market events. However, these products would have never come into the picture if it wasn't for the financial changes that started taking place in the late 1980's.

From the end of the Civil War to the late 1980's, pensions were the safety net that employees could rely on for their golden years. It was common for an employee to work for a firm for 20 plus years, get a gold watch, and enjoy a pension for life throughout retirement; a fair tradeoff to say the least. Then the inevitable happened. Through a combination of medical advancements and market turmoil from a deregulated financial system in the 1980's, retirees started living longer than expected and financial hardships started taking place for big business. The combination of these events caused the pension to vanish, giving birth to the deferred compensation plan. Now the obligation of retirement was placed on the employee, a burden that few ever saw coming. Because of the absence of these pensions, the insurance industry focused on the needs of the individual and brought forth a new hybrid product, the FIA.

The FIA gives all the flexibility that the traditional pension failed to provide. Now the employee can redirect a lump sum (401k, IRA, or non-qualified savings) of cash into a vehicle that will guarantee a lifetime income independent of market fluctuations, while still maintaining access to the cash value. The cash value in an FIA can earn interest through a variety of options while never losing value to market performance. This is a huge benefit compared to a pension. Pensions, in turn, were group annuities where employees would contribute gross monthly installments in exchange for an income stream after X amount of years. Once the income was activated there was no cash value and income usually stopped at death. Let's take a closer look at how the FIA can provide an income stream for life.

An FIA usually comes equipped with a lifetime income benefit rider (LIBR). Basically, an account known as an Income Account Value (IAV) grows within an LIBR at a set rate each and every year regardless of market performance. The IAV is a non-cash value used as a formula to calculate the income you will be eligible for in the future. This formula will tell you exactly what you can expect for an income stream up to 15 years down the road. For general purposes, the more you fund the FIA with the more guaranteed income you can have access to. For this reason alone, many investors are redirecting a portion of their nest egg into these products simply as a substitute to the pension.


Today, billions of dollars are being repositioned into FIAs each and every year for retirement income that is guaranteed for life. With the obligation falling now on the employee to prepare for retirement, a shift in annuity income planning moved from a group of participants (pensions) to the individual (FIAs). Change is inevitable in a growing and volatile market place, especially if you are in the 95% of working Americans that do not have a pension. This is why it is important to embrace these individual income planning tools. Understanding how these positive changes can help you achieve your retirement goals is monumental to your long term success. As always, I highly recommend that you explore these options with a trusted licensed professional to help understand how an FIA could be of benefit to you in your retirement years.

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