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.
No comments:
Post a Comment