The following are some of the most common investment options for retirement planning and how they may be suitable to your unique situation. You have a variety of different options that are available to you and we think that you should make an informed decision.
Frequently Asked Questions About Retirement Planning
- Should my retirement funds be insured?
- What safe money options are insured?
- When may an annuity be better than a bank CD?
- When may a bank CD be more suitable than an annuity?
- When may whole life insurance be a good idea?
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1. Should my Retirement Plan Funds be Insured?
Let’s approach the matter this way:
If your house is worth $500,000, for how much should you insure it?
Most people will say $500,000, the replacement value, because we would want to replace the house if it were destroyed.
Most of us want to, or need to treat our retirement funds the same way.
2. What Safe Money Options are Insured?
Annuities are insured by the Insurance Company.
Bank CDs are insured by the FDIC.
Cash Value Life Insurance is insured by the Insurance Company.
While an annuity is inherently insured, because it’s actually an insurance policy, there is yet another level of security added to an annuity by the fact that State Guarantee Associations are required in each state. More information on State Guaranty Associations can be found at Safe Money Places.
It’s very important to understand how much of the value of a Bank CD is FDIC insured. The insured amount can vary and can change as the value of the Bank CD grows.
3. When may an Annuity be better than a Bank CD?
When you’d rather not pay income taxes on your accumulated earnings every year.1
When you’d like to earn interest on:
a) You’re principal,
b) On your earnings and
c) On the money that you’re not paying in income taxes every year (as with a Bank CD)1 because you’re leaving your earnings in the annuity to accumulate.
When you don’t need to withdraw most of your money during the surrender period (anywhere from 5 to10 years, depending on the annuity contract), and you’d like penalty free access to all of your money after the surrender period.
When you’d like the opportunity to grow your investment as an external index (such as the S&P 500) grows without the downside risk of the same index.
If you’re wondering what objective experts with no axe to grind think about annuities for retirement, read the extracts below from David F Babbel, Professor of Finance from the Wharton School of Finance.
a) Earnings on CDs are taxed as income every year, even if you don’t withdraw the earnings and receive them as income.
b) According to the rules regarding Individual Retirement Accounts, there may be a penalty charged by the Internal Revenue Service on any funds withdrawn from an Individual Retirement Account before the owner of the account reaches age 59 ½.
Extracts from David F Babbel
1) George Bernard Shaw once quipped, “If you laid all the economists end to end, they still wouldn’t reach a conclusion.” Well, that time-honored adage has changed, at least in one area, because economists have come to agreement from Germany to New Zealand, and from Israel to Canada, that annuitization of a substantial portion of retirement wealth is the best way to go. The list of economists who have discovered this includes some of the most prominent in the world, among whom are Nobel Prize winners.1
2) Trying to replicate this advantage of a secure lifetime income, but without the risk pooling of a life annuity, will cost you from 25% to 40% more money, because you would need to set aside enough money to last throughout your entire possible lifetime, instead of simply enough to last throughout your expected lifetime. Even at this higher cost, you cannot be sure you will achieve a secure lifetime income, because interest rates could change over the next 30-50 years while you are in retirement.1
1 Investing Your Lump Sum at Retirement David F Babbel, The Wharton School of Finance
4. When may a Bank CD be more suitable than an Annuity?
When you expect to need access to a large portion of your money right at the end of the guarantee period.1
When you are more likely to need access to most of your money before the Annuity Initial Surrender Charge Period of an annuity (usually 5, 8 or 10 years).
1Bank CDs can present a liquidity problem, since penalty free liquidity is available for the entire CD amount only after the guarantee period. The liquidity problem inherent to bank CDs is often addressed placing the funds in multiple CDs with guarantee periods that end at different times).
5. When may whole life insurance be a good idea?
When you would like to pass an amount that is much larger than your premium as a tax-free legacy to your heirs, a charity or institution.
When you would like an amount that is much larger than your premium to be available to pay for Long Term Care, or available as a wealth transfer to your heirs if you don’t encounter Long Term Care Expenses.
When you would like to withdraw the accumulated value of a Whole Life Policy as Tax Free Retirement Income.
A Life Insurance contract policy is likely to require that the insured under undergo underwriting so the Insurer can manage the risk. Typically, the advantages of a whole life policy are not available if the insured is not in good health.
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