By Barry Goldwater
It used to be that you got a job with a U.S. company, worked for that company most of your life and then retired with a company pension and Social Security. This double annuity income was usually enough for a comfortable retirement.
Then in the 1970s companies started shifting retirement planning responsibility to the employee in the form of 401k plans, IRAs, profit sharing plans. The company defined benefit plans, conservative annuity payouts which were usually comprised of 80 percent of an employee’s salary were being phased out in favor of employee invested retirement programs, designed to grow their future retirement income by investing in the stock market.
Retirement shifted from conservative no risk annuity payments to risk based asset growth combined with the promise of Social Security annuity payouts. In the current political environment of debt burdens and reducing deficits, politicians are starting to sound the death knell for social security. They are preparing us for the eventuality of it going away. How will retirement planning adjust to this next reality which removes the only guaranteed income stream for a significant number of retirees?
For employees age 50 and older, addressing this question is essential. If older employees stay fully invested with their retirement assets in a 100 percent risk-based portfolio, then they may experience severe loss of wealth if the stock market goes down dramatically in the year they want to retire. The Future Income IRA Program was specifically created as a result of the stock market crash of 2007-2008, to give a 401k participants a choice to grow money but not lose money in. It is a non-stock market growth building account that is funded from existing 401k plans, it costs employees and employers nothing out of pocket and you cannot lose money in this account from market performance.
The Future Income IRA Program will provide participants a guaranteed lifetime income stream when they retire and this account will completely protect the integrity and growth of the asset from the volatility of the stock market. This Individual Retirement Account program is a dedicated income producing strategy.
Here is how it works:
Employees take an in-service distribution from their existing 401k account. This distribution in moved to an indexed annuity IRA. By design, this transfer immediately diversifies retirement assets from the 401k, positioning these assets for growth in two different accounts: one as a guaranteed lifetime income account (Future Income IRA) and the other in the existing equity positions of the stock market (current 401k). New contributions go into the 401k account, deductions and contribution numbers stay exactly the same.
The Future Income IRA program has two parts, a contract account and an income account. Once money is deposited in the Indexed Annuity, it receives a bonus, currently 10 percent and both the contract account and income account receive this bonus. Annual growth on the contract account can be tied to a major market index, like the S&P 500. If the index is positive at year’s end, then this accumulation account grows as high as the cap rate allows, currently between 4.25 percent -4.75 percent. The accumulation in the contract value will never decline, even in bear markets. There are no fees associated within this account. Diagram No.1 represents this process.
Alternatively, annual growth in the income account is fixed and contractually guaranteed, currently between 5 percent-7 percent. There can be a fee associated with this account of between 75 and 90 basis points if the 7 percent growth percentage is chosen by the participant. It is the fee that guarantees this 7 percent growth and not the returns of the stock market. These two methods of measuring the account’s value is how the account will grow in the accumulating phase and neither the contract account nor the income account in the Future Income IRA program can ever lose value due to market volatility. Diagram No.2 shows how the Future Income IRA Program works side by side with the existing 401K plan and becomes an essential component part to the retirement plan.
Lastly, and the most important feature to the Future Income IRA Program is that it provides the balance and safety that was not afforded to participants 50 years and older in their 401k plans, until now. The third graphic clearly shows how this balance is achieved. The line graph shows the movement of the S&P from 1998 – 2010. The bar graph shows the actual performance of an Indexed Annuity that is still performing today. The balance is achieved when the stock market is in a down cycle. At that point the indexed annuity stays flat, representing no loss of money or as we say “offering downside protection.” When the market cycle turns positive, both line and bar graph turn positive and take advantage together of the upside potential when the market cycles up.
When the market rises, both accounts rise, when the market cycles down, the indexed annuity protects your gains in that account, will not lose value and thus provides much more balance the risk aspect of the portfolio.
By having an annuity that is not affected by the stock market and which guarantees an income stream you cannot outlive, even in down market years, it becomes the hedge against retirement savings loss. Loss is of paramount concern for employee participants as they age within their retirement plans and because this IRA is beneficiary designated, it passes to the participants heirs along with the other assets of his.her estate and without any surrender charges. So the full value of your contribution goes to your estate.
Without the addition of a Future Income IRA alternative that protects and builds your wealth under any market conditions, older employees will again potentially suffer the risks of 2001- 2002 and 2007-2008. Now, 401k participants know they can have an alternative choice, to protect, preserve and grow their income for retirement with complete safety.
Barry Goldwater is an insurance specialist practicing in Newton, Mass. He works with CPAs and financial planners designing appropriate risk management strategies and ideas for their clients. He can be reached at 617-527-9736 and [email protected].
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