WHAT I HAVE LEARNED ABOUT SAVING FOR RETIREMENT

It is stunning to me that annuities have such a bad reputation. Many consumers think of annuities as extremely complex financial vehicles with high fees and inflexible contracts. High profile financial gurus often tell their television viewers or telephone callers that annuity products are offered by shysters and should make you turn and run for the hills. Source: NLG


Truth be told, I bought into this viewpoint when I was less educated about what these products were and how they worked.

I have long had a 401(k) plan that offers me a wide variety of mutual funds. I had long held the opinion, like so many others, that mutual funds are great ways for me to invest in the stock market without having large amounts of capital to buy expensive, individual stocks and bonds. I blindly contributed the amount of my paycheck necessary to capitalize on my employer match and then selected a target date fund that was closest to when I expected to retire, and basically hoped and wished that everything would work out when I was ready to embark on retirement.

Then I actually started getting information and education about my retirement plans and my mode of retirement savings and all of the things that I used to think changed. This is what I discovered in the process of educating myself about my own retirement savings:

  1. Mutual funds can indeed be a great way to invest in the stock market, but they are not simple financial products. Just as performance varies from fund to fund, pricing can vary from fund to fund and target date funds are some of the most expensive funds in my plan. But, they seem simple so they are a popular choice for plan participants.

  2. Many types of annuities are simple, flexible and inexpensive financial products. For example, most fixed annuities have no upfront sales charges, credit guaranteed¹ interest rates, and give you the option to either withdraw money at retirement as you choose, or convert it into an income stream that you can’t outlive.

  3. One of the most significant factors to saving enough for a comfortable retirement is simply to save as much as you can for as long as you can. At the end of day, the different financial products that you choose for your savings will make less impact on your overall balance than choosing to save consistently over as long a period of time as possible.

  4. There is no single product that is the right one or the best one. The most sound retirement strategy is to save as much money as you’re able into financial products that fit into your risk tolerance, that give you tax-advantages, and that can help you create an income stream when you reach retirement.

  5. Annuities, specifically Fixed Indexed Annuities, can and should be an important tool in a balanced retirement strategy. This type of annuity product credits interest based in part on the movement of a major market index like the S&P 500 or Russell 2000, but is not directly invested in the stock market. Indexed annuities have the potential to earn higher interest than standard fixed annuities when the market performs well. The trade-off is that they can also credit no interest for any index period (typically a year) when the market performs poorly. However, crediting no interest when the market goes down is also a benefit. For most indexed annuities, the principal is guaranteed by the insurance carrier, so even if the market has significant negative performance, the accumulated value will not decrease due to the performance of the index. This feature of an indexed annuity is called a floor. In order to provide the guarantee, there are limits on the upper end that can be credited. The interest credited to the annuity may be subject to a “cap”, or a limit on the amount credited set by the insurance company. For example, if the cap is 4%, that is the most that can be credited during that index period. Another limit on interest is called the participation rate, which calculates interest based on a percent of the index change. If the participation rate is 50%, and the market returned 8%, the annuity would be credited 50% of the 8% or 4% interest for that indexing period.

  6. As far as flexibility, most long-term retirement products have restrictions to encourage people to leave the money there until retirement. Withdrawing interest earned from an annuity before age 59½ will incur a federal tax penalty of 10%. Fixed indexed annuities also have surrender charges during the early years of the contract, but most decline over the surrender period. Most also allow you to withdraw a certain amount after one year – typically 10% of the accumulation value–each year without a surrender charge. As I mentioned earlier, annuities give you the opportunity to turn your accumulated value into an income stream that will pay you for life, a valuable feature when you’re planning to recreate your income in retirement.

  7. When it comes to cost, fixed indexed annuities are very simple. Other than the surrender charges that would apply if you take money out in the early years of the contract, there are no other sales charges or expenses deducted from your accumulation value for most indexed annuities. Some riders–optional features that can be added to an annuity–may have expenses associated with them, so you’ll want to be aware of those costs if you opt to add a rider to your annuity policy.

The more I learn about retirement planning and retirement savings, the more confident I become about the prospect of being able to retire on the terms I choose. I still contribute to my 401(k), but I have consulted with a financial advisor to help me understand which funds to choose based on the goals I have set for myself. The small fee I paid for the advice is more than offset by the money I save on fees for expensive funds that aren’t right for me. Additionally, I increased my pre-tax contributions, and set-up auto increases so that every year I will save more.

I purchased a flexible premium fixed indexed annuity a year ago, and I make post-tax contributions to it on a monthly basis. It gives me peace of mind to know that I have additional savings outside of my 401(k) that are protected if the market goes down.

Take control of your future today—start to learn more about what you are saving, where you are putting your money and whether or not you are on track to meet your goals. Resources are available everywhere—including the National Life Group website that has information on a variety of retirement plans, products and calculators.

¹ Guarantees are subject to the claims paying ability of the issuing carrier.

Bryan Pritchard contributed to this article.

Mutual Funds are sold by prospectus. For more complete information, please request a prospectus from your registered representative. Please read it and consider carefully a Fund’s objectives, risks, charges, and expenses before you invest or send money. The prospectus contains this and other information about the investment company. Investing involves risk, including the potential for loss of principal. Past performance does not guarantee future performance. There is no guarantee that a “Target Date” investment will provide adequate retirement income. The participant may lose money by investing in the target date fund, including losses near and following retirement.


All withdrawals made from annuities with pre-tax contributions are taxed as ordinary income. All withdrawals from an annuity purchased with non-qualified monies are taxable as ordinary income only to the extent there is a gain in the policy. Indexed annuities do not directly participate in any stock or equity investments. An investment cannot be made directly into an index.


The Russell 2000 Index is a trademark of Russell Investment Group and has been licensed for use by Life Insurance Company of the Southwest. The Products are not sponsored, endorsed, sold or promoted by Russell Investment Group and Russell Investment Group makes no representation regarding the advisability of purchasing the product. “Standard & Poor’s®”, “S&P®”, and “S&P 500®”, “Standard & Poor’s 500″ and “500″ are trademarks of Standard & Poor’s, Inc. and have been licensed for use by Life Insurance Company of the Southwest. The product is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing the product.


Bryan Pritchard is a registered representative of Equity Services, Inc., Member FINRA/SIPC, a Broker/Dealer affiliate of National Life Insurance Company. One National Life Drive, Montpelier, Vermont 05604. (800) 344-7437. This information is intended to be educational in nature, and does not constitute an endorsement or recommendation of any financial product, service or the suitability thereof for you.


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