Retire Safe & Tax Free - Traversing the New Retirement Landscape


The recent economic downturn and slow recovery have had a significant impact on Americans' plans for retirement.

Having experienced the reduction or elimination of retirement plan contributions due to job loss and a decline in the value of the existing retirement savings, workers have changed their expectations about when they'll retire.

According to the Employee Benefit Research Institute (EBRI), 25% of workers report that the age at which they expect to retire has changed. Of those, the vast majority, 88%, report their expected retirement age has increased. In 2012, 37% of workers reported they plan to retire at age 65 or later - a figure that has been on the rise over the past 20+ years. In 1991, only 11% of workers planned to stay in the workforce that long. However, expectation isn't reality. The same EBRI research reveals that 50% of all current retirees left the labor force earlier than expected. Most often the early departure was due to unforeseen or unplanned events - health problems, a debilitating injury or company downsizing.

Clearly, clients need to be prepared to retire earlier than planned.

As research shows, in half of all cases the timing of retirement is likely to be beyond their control.

With large numbers of Baby Boomers approaching retirement age, it's no wonder that fixed index annuity sales have skyrocketed, enjoying record sales for four straight years and reaching a new high of $32.3 billion in 2011.

Today's typical fixed index annuity product is designed to optimize income at a specific date in the future, usually 10 years from purchase, with the addition of an optional guaranteed lifetime withdrawal benefit rider at an additional cost. Unfortunately, the majority of these riders credit growth to the benefit base on an annual basis and may not optimize retirement income for those clients who may be forced to retire unexpectedly and prematurely, less than 10 years in the future. Given EBRI's findings regarding the unpredictable nature of retirement dates, clients may be better served by income riders which credit growth to the benefit base on a daily basis. Genworth's SecureLiving Index Annuities are among a select few fixed index annuities whose optional income rider credits growth to the benefit base daily. As a result, SecureLiving Index Annuities help optimize the guaranteed retirement income of all clients, including the 50% leaving the work force sooner than expected.

A significant number of clients who purchase index annuity products designed for a 10-year deferral period act in a way that may be contrary to the maximization to their benefit.

When a client is ready to begin receiving guaranteed income from a fixed index annuity with optional guaranteed lifetime withdrawal benefits, the amount is determined by this formula: Benefit Base X Withdrawal Factor (based on current age) = Annual Guaranteed Withdrawal Amount The “benefit base� is generally based on the premiums used to purchase the contract.

Depending on product design, this amount may grow periodically based on a declared roll-up rate or it may step up with the contract value at specific times throughout the contract's life. In most cases, the benefit base is increased on an annual basis – once a year on the anniversary date of the contract. As a result, the benefit base grows only on the contract anniversary. Fixed index annuities with annual benefit base crediting force the client to wait until the contract anniversary to make sure they are taking full advantage of their benefit base growth opportunities and optimizing their guaranteed income withdrawals.

However, waiting isn't always an option.

The unpredictable nature of retirement dates is further confirmed by recent data on the actual timing of guaranteed income withdrawals from index annuities. Recent findings from AnnuitySpecs.com show that although withdrawal benefits on index annuities have been broadly available for less than five years, more than 15% of clients have already exercised their lifetime income benefits. In fact, the average wait time for beginning withdrawals is only 1.5 years from contract inception.

This means a significant number of clients who purchase products designed for a 10-year deferral period act in a way contrary to the maximization of their benefit. What's the solution for optimizing guaranteed income payments based on a deferral period other than a full 10 years? One solution is a product with a "daily rollup difference." Rather than using an annual basis for crediting, a select number of fixed index annuities credit growth to the benefit base on a daily basis. So, for every day that a client's contract is in deferral, their income benefit base grows.

Genworth's SecureLiving Index Annuities are one of a select few fixed index annuities that offer a daily roll-up on their guaranteed lifetime withdrawal benefit rider. The contract's optional Income Protection rider provides a benefit base that is immediately 4% higher due to the benefit base enhancement and then grows at an 8% simple roll-up rate each year for 10 years or until income withdrawals begin, whichever comes first. The difference between this and the majority of lifetime withdrawal benefit riders is the benefit base grows each day—not just on the contract anniversary. In other words, the 8% annual simple roll-up earned is divided into 365 pieces of interest and a piece is added to the benefit base each day.

A Hypothetical Example:

The following hypothetical example illustrates the impact of the daily roll-up credit on a client's guaranteed retirement income.

Meet Adam and Maria. . .

Both Adam and Maria are 60 years old and expect to retire in the next 10 years. Both have used $100,000 to purchase an index annuity with optional lifetime withdrawal rider, which includes a 4% benefit base enhancement and an 8% simple interest roll-up. Adam purchases a SecureLiving Indexed Annuity that credits the benefit base daily, and Maria decides to purchase a fixed index annuity with annual benefit base crediting.

Each year their contracts credit $8,320 (4%*$104,000 = $8,320) to the benefit base of their respective contracts. At the end of the first contract year when they are both age 61, the benefit base on both contracts has grown to $112,320. If they wait to begin income on their contract date when they are age 65 - the end of contract year five - both will have a guaranteed benefit base equal to $145,600. If they waited for 10 years on their contract anniversary when they are age 70, their guaranteed benefit base will be $187,200, regardless of market volatility. But, what happens if they decide to retire when they each turn age 63 1/2, halfway through their third contract year?

As previously stated, at the end of the first contract year, both benefit base values will be $112,320; at the end of the second year, $120,640; at the end of the third year, $128,960. When Maria and Adam each turn age 63 1/2 and decide that they would like to retire, Maria's benefit base will still be $128,960. Remember, her contract credits the roll-up on her anniversary date each year. Adam's benefit base, however, will be $133,120, Adam gets to take advantage of six additional months of guaranteed growth, adding $4,160 more to his benefit base. Daily roll-up crediting means his benefit base is growing every day and he will receive a greater income each year. Adam's benefit base increases every day, not just one day a year.

Please remember that we are here to help advise and counsel you with the better solutions to your Exit Strategy during retirement.

Marc H. Weiss, Archer Weiss Insurance & Financial Services, Inc. Please Call Toll free: 1-800-831-2901 or (818) 610-8560