Look Before You Leap


Look Before You Leap

By Bren Sheriff, CSA

It’s been a minute since I have written a column on financial planning. So, this week I want to return to the original reason I committed to writing this column.  Yes, it is my intent to always provide you, the readers, with information intended to increase your knowledge about a specific subject or at least provoke you into thinking about what I present.  This week is no different.

Returning to my wheelhouse as a financial planner, I hope this week, those of you without a spouse or children find this column helpful.

 So, if you are a widow or widower who has spent a lifetime working, saving, investing, and accumulating wealth, but have no children to depend on or leave money to or know someone that this applies to – read on.

For older adults with substantial funds in brokerage accounts, stocks, bonds, real estate investment trusts (REITs), and individual retirement accounts (IRAs), annuitization is one strategy worth examining. Annuitization means converting money into regular payments, potentially guaranteed for life. An annuity is an insurance contract that can provide income now or later, depending on its terms.

For a childless elder, a dependable payment can make monthly budgeting easier, reduce the need to sell investments during market downturns, and lessen the risk of outliving savings. It may also simplify financial management as you age. Annuitization need not be all or nothing: you can use part of your assets for income and keep other funds available for emergencies, growth, and charitable giving.    

Longevity matters. Retirement may last 25 or 30 years, and living expenses, inflation, health care, and poor investment returns can reduce even a substantial portfolio. A lifetime income annuity can help protect against this risk. Meanwhile, childless elders should decide who or what they want to benefit from their wealth—nieces and nephews, friends, other relatives, a church, or charitable causes. Other assets can be preserved for those beneficiaries.

Several annuity types deserve comparison. A single-premium immediate annuity (SPIA) exchanges a lump sum for payments that begin soon. A life-only option generally pays more than options with beneficiary protections, but payments usually stop at death. A life annuity with a period-certain guarantee provides lifetime income and continues payments to a beneficiary if you die during the guaranteed period. A deferred income annuity starts payments at a future date, while a fixed deferred annuity can accumulate interest for future use.

Fixed indexed and variable annuities are more complex. Caps, participation rates, fees, investment risks, and optional-benefit costs can affect results. Do not assume that a complicated product is better because it promises both growth and protection.

Taxes are critical. An annuity purchased inside a traditional IRA generally does not provide an extra layer of tax deferral. Payments from untaxed IRA funds are generally taxable as ordinary income, and required minimum distribution rules still apply. The main reason to use an IRA annuity should be income planning—not tax avoidance.

A nonqualified annuity bought with after-tax money in a taxable account generally grows tax-deferred. When payments begin, part may be treated as a return of your investment and part as taxable ordinary income, depending on the contract and tax rules. Selling appreciated stocks, bonds, or REITs to buy an annuity can trigger capital gains taxes. Before selling, ask a tax professional to compare the tax cost with the proposed benefits.

Annuities are not savings accounts. Some have surrender charges, withdrawal limits, fees, and restrictions. Fixed payments may lose purchasing power as prices rise. Guarantees depend on the insurance company’s ability to pay claims. Keep enough liquid money for emergencies, home repairs, taxes, and unexpected care needs. Compare insurers, payout choices, fees, beneficiary provisions, and any inflation protection.

For childless elders, the objective is not simply to accumulate wealth. It is to make that wealth serve you throughout your lifetime and, if you choose, leave a meaningful legacy.

Before annuitizing, ask an independent fiduciary financial adviser and a tax professional to compare your current investments with several annuity options. Determine how much guaranteed income you need, how much money must remain accessible, and which assets should be preserved for beneficiaries, if any.

You worked hard to accumulate your resources. Make certain your retirement income strategy works just as hard for you.

The goal is not to annuitize everything. It is to make informed decisions that help ensure your money supports the life you want to live. Look before you leap: get two or more opinions from licensed financial professionals. And always look before you leap.

THIS WEEK'S QUIZ:  When planning for retirement, what is usually the main thing to consider before purchasing an annuity?

Answer to Last Week's Quiz:  The purpose of candidate petitions is to give candidates a legal pathway to get their names on the ballot. .

For Questions or Help: 773-817-0601 basheriff1@gmail.com  Watch, like and subscribe to “Conversations With the Citizen” on YouTube, IHeart, Spotify, iTunes or watch it by visiting: www.citizennewspapergroup.com

Disclaimer: The illustrations and examples presented in this column are not, nor are they intended to be, legal, financial, tax, insurance, or other licensed professional advice. Readers should consult the licensed professional of their choice regarding their individual circumstances.


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