Preservation of Tax Advantages
Just like your 401k or IRA, rolling over you funds into an annuity will maintain the same tax advantages that you currently enjoy. Your investment will still grow tax deferred and you can still contribute on a tax free basis.
The benefits of a 401k or IRA are great, but let’s face it; the IRS puts a pretty tight lid on how you can access your money and has strict limits on how much you can contribute in a given year. If you decide to roll over your funds into an annuity, some of those restrictions are lifted. First off, you can contribute as much as you want to the account in a given year, there is no limit. This can be very beneficial if you are getting closer to retirement and feel as if you need to catch up in saving. In addition, if you need access to your money before 59 ½, companies usually allow either a 10% withdrawal option of your entire account value in a given year, or all of the gains, without any penalty.
Access to Greater Investment Options
Let me ask you a few questions. How much experience do you have investing? How much time do you spend choosing where to invest your money? How much is this time worth to you? Do you think you can outperform someone who does this for a living every day, all day long, and has decades of experience? If you are like the majority of people who work for a living you do not want to spend your free time researching and analyzing the market.
Instead of guessing on how to invest, why not let a seasoned professional assist you, or manage the investment entirely? If a client chooses to do so, a professional money manager will select and manage your investment for you. He will be the one who monitors the investment and chooses the mutual funds. We will take into account your risk tolerance and investment objectives, then structure a plan to help suite your needs. As time goes on, so do fluctuations in the market. Money managers will keep your portfolio up to date and make sure that you are getting the most out of your investment.
Guessing in the market is essentially gambling and not the optimal way to go about building a solid portfolio. This is supposed to be money for your future, so let’s be smart about it.
Diversification & Automatic Asset Reallocation
If you ask someone who has a lot of investment experience what are the most important factors for success, they will tell you 3 things: time in the market, diversification, and asset allocation.
Diversification speaks for itself, you don’t want all your eggs in one basket, but it is a much more complicated thing to do than most people realize. With the help of an experienced advisor, you can learn more about this process and begin to invest your money in a much more safe and efficient way.
A good company will allow their clients to have the assets in their investment automatically reallocated periodically. Well, what does this mean? As you invest in the market, you will have your money split into different asset categories, typically equity and bonds. The more equity you have, the more aggressive the portfolio is. Respectively, the more bonds you have, the more conservative the portfolio. When analyzing your risk tolerance, a ratio of these two categories will be formed depending on your time horizon, economic situation, and overall preference on how you want to invest your money.
Undoubtedly over time this ratio becomes unbalanced and will be different from when you started. If one asset class outperforms or underperforms the other, your ratio will become distorted and your investment objective falls off track. The ratio should always stay balanced so your money is being invested the way it was meant to be.
Save some gold for retirement days.
Premium Based Fee Structure
Although we hate to pay them, fees are unavoidable in the world of investing. When choosing an investment many people overlook the annual fees which can be a huge mistake, as they can be devastating to the overall performance of your investment. In the end it’s about what you NET, not how much GAINS you had. Traditional fees are usually based on the value of your account. For example, if the fees associated with your current investment are 2% of the account value, then you are paying 2% of the total value of your account to invest in that vehicle every year. With this “traditional” fee structure, the amount of money an individual pays in fees increases as their investment increases. Let’s say your investment starts at $100,000, in this example your fees will start at $2,000. Now let’s say the investment doubles to $200,000. You are now paying $4,000 in fees.
An investor should have options on how they would like to be charged. Along with the traditional fee structure, some companies also offer the option to calculate fees based on the initial investment amount. To better illustrate this let’s look at someone who rolls over a 401K that has a current value of $100,000 and the fee to manage that account is again, 2%. If this individual decides to utilize the premium based fee structure, the fees that they will pay each year are based on that initial investment (which would equal $2,000) and will not change throughout the years. Therefore, as the account increases in value they are still paying the same amount in fees, essentially paying less and less of a percentage annually. Again let’s say the account doubles to $200,000. This individual is still paying $2,000 in annual fees and that initial 2% charge has shrunk to 1%.
Based on your initial investment, most companies will give you a bonus credit similar to those offered by mutual funds. It depends on the amount that you want to invest, but some bonuses can be very large.
You insure your house, you insure your car, and you insure your health. Why are you not insuring your retirement? Some companies have an option that can guarantee against the loss of your investment. If you are like most, you have seen your investments hit hard with the recent recession. In these unsure times guarantees are more valuable than ever, and they are available.
With theses riders a “floor” is set under your investment that protects against market declines. If your account declines and is below the “floor”, the company will restore your investment to its original amount after a certain period of time.
In addition, if your account increases in value the client has the option to reset this “floor” and lock in these new gains. This also resets the period in which you have to wait to utilize the rider.
An Income Stream for Life
With an annuity there are two phases, the accumulation phase and the distribution phase. The accumulation phase is the stage of the investment in which money is accumulated. But what happens when an individual wants to turn that money into an income in retirement. With an annuity, this person can turn the value of their investment into an income stream for life. This is called annuitizing; the insurance company takes your investment and pays you back, with interest, even if you outlive the value of your account. The paychecks will keep coming until the day you die.
There are many options on how you can annuitize, and discussing this with an advisor is very important. People use annuities because it is the only way to guarantee against the possible outcome of outliving living their money. We are all living longer today, that’s a fact, and the number one fear of people retiring is running out of money.
Maybe this doesn’t sound good to you. You don’t want to give up your investment just to be paid back. That’s fine, you do not have to annuitize, it’s just an option. You can annuitize some, all, or none of your investment if you wish.
By Michael Brown
Retirement planning expert and rollover IRA to gold adviser.