Clients often approach us seeking advice on how to choose from the dozens of financial products that are available for retirement. The second half of this question is often, “…and which products offer the greatest tax benefits?” With more than 55 years developing expertise in wealth maximization through annuities and life insurance, our answer is almost always going to differ from the answer that would be provided by a stockbroker or financial advisor.

Most retirement accounts, including 401(k)s, traditional IRAs, and tax-sheltered annuities, provide the income-planning benefit of taxes that are paid upon withdrawal during retirement when most people qualify for a lower tax bracket (and therefore will have a lower annual tax liability). But annuities, specifically, provide a number of unique benefits that can allow you to maintain your standard of living throughout retirement, regardless of how long you live.

Whether it is a lack of understanding of tax-sheltered annuity benefits or the recurring income derived from selling mutual funds and managed equity accounts, financial advisors often push higher-risk products that do not guarantee income or principal. But tax-deferred annuities represent a great alternative that many fail to appreciate as such. A mere 30% of financial advisors recommended fixed annuities to their clients in 2016, despite the many benefits I will detail below.

Guaranteed Retirement Income: A Tax-Sheltered Annuity Benefit

Running out of money is a major concern amongst many retirees. According to one survey, 41% of CPAs reported that this ranked as the most serious of their clients’ retirement fears.  

the benefits of tax-sheltered annuitiesPerhaps the greatest benefit to an annuity, then, when set up with the guidance of a trusted financial advisor, is their unique ability to create an income stream in retirement that you are guaranteed not to outlive.  

Other retirement accounts provide no such guarantee. You are at risk of outliving your 401(k) or IRA, even if these accounts are well-funded. Unexpected costs, such as medical expenses or home care, can be very difficult to predict. This type of expense can drain a traditional retirement account at a rate that’s much faster than anticipated. The net effect: you may find yourself unable to maintain your lifestyle throughout your retirement years. A trusted annuity advisor can help formulate a tax-sheltered annuity benefit strategy that provides for the unexpected while guaranteeing an annual income that allows you to live comfortably in retirement. In fact, some of today’s most attractive annuities will actually double your guaranteed income for up to 5 years for in home health care or skilled nursing care if you qualify.

Deferred Annuities: Lower-Risk Retirement Savings with Tax-Sheltered Benefits

Financial advisors that focus on mutual funds and other equity-based retirement accounts tend to highlight the potential growth that these investment vehicles can provide, but the flip side is the risk of losing principal. Advisors are required to inform you of risks, but the potential for high returns is often the focus of your consultations. For this reason, it’s vital that you inquire about and appreciate the risks when making any financial decision.

Advisors are required to inform you of risks, but the potential for high returns is often the focus of your consultations. For this reason, it’s vital that you inquire about and appreciate the risks when making any financial decision.

Fixed index annuities provide a tax-deferred accumulation of your capital, with the ultimate goal of providing a guaranteed fixed or increasing income when you begin to withdrawal funds in retirement. This income that you have set up with guidance from your insurance advisor in an annuity will represent the amount of income that you will receive in your retirement years. This money will be available regardless of the ups and downs of the stock market. In short, there is no risk that a sharp decline in the stock market could impact your retirement income, providing financial peace of mind.

Heir Protection as an Important Annuity Benefit

Annuities are complex products, which is why financial advisors often do not offer them as part of a broader financial plan. Your advisor may not tell you, for example, that an annuity can have a guaranteed return on the principal should you pass away before your retirement withdrawals begin. This is a significant retirement benefit that is unique to many deferred annuities; there are no such guarantees on equity-heavy portfolios subject to market volatility.

If you invest $250,000 into a deferred annuity at age 50, this principle remains in the accumulation phase until you reach retirement age. In the event that you unexpectedly pass away, many annuities will return the full principal to your heirs, without any penalties or early withdrawal fees. Any interest earned would also pass to your beneficiaries free of costly probate and “by contract” since they are named beneficiaries of the annuity. While a worst-case scenario, this benefit offers you the peace of mind that the money that you set aside for a lengthy retirement will provide a legacy for your family.

Flexible Tax Deferred Annuities Are a Benefit to Investors

The expectation of living a healthy retirement may have to be reevaluated if an unexpected illness, fall, or other health issue occurs. If you are suddenly faced with higher-than-expected healthcare costs, you may need to accelerate your withdrawals from a traditional retirement account in order to cover these expenses. The result: higher withdrawals that increase your risk of outliving your savings.

Your annuity advisor can structure your plan to include flexible options that would help you cover the costs of… unexpected events.

Your annuity advisor can structure your plan to include flexible options that would help you cover the costs of these unexpected events. Riders to cover long-term care and hospitalization can provide additional funds that may be used to pay for unexpected medical bills and other incidentals.

Your advisor may not tell you about this benefit because there’s no such health care benefit option in traditional accounts which they may manage, such as IRAs, stocks, or bonds. You would have to rely on the expected growth from your managed portfolio to help you cover these costs—growth that may not be there! An annuity, on the other hand, purchased with the guidance of an experienced advisor, can be flexible with your changing needs in retirement, whether that involves paying for a nursing home, a home health care professional, or other unexpected chronic care medical bills.

Consult With an Expert in Tax-Sheltered Annuity Benefits

While I don’t recommend firing your financial advisor, you should have all options presented to you when planning for something as important as your retirement. In fact, having a financial advisor does not preclude you from also consulting with a trusted expert in annuities and life insurance who can recommend products that your advisor may not fully understand as they really are separate disciplines.

Notably, not every financial advisor is licensed to sell all of the insurance and financial products that you may require. Some financial advisors are what the industry refers to as “casual producers” who do not specialize or often sell annuities or life insurance. They may not be up to date on industry trends, new product information, or important tax laws pertaining to such products. For that reason, we recommend dealing with a firm that truly specializes in these products and solutions, thereby helping you to make wise decisions that will benefit you throughout retirement—and ultimately even benefit your heirs.

…tax deferred annuities provide many benefits and features that other vehicles simply cannot match, while simultaneously eliminating investment risk.

The fact is, there is no such thing as the perfect, universal retirement planning solution because what may suit one investor may not be ideal for another. As the above review shows, tax deferred annuities provide many benefits and features that other vehicles simply cannot match, while simultaneously eliminating investment risk. This means that they may serve as an ideal component of your retirement portfolio if properly structured by a qualified advisor who can consult with your best interests in mind.

For over 55 years, the team at Howard Kaye Insurance has been actively advising clients on a broad range of insurance and financial solutions, including annuities, estate planning, and life insurance. We have developed strategies to maximize wealth transfer, while also providing you with peace of mind throughout your golden years. Our advisors are here to discuss your retirement savings goals. Contact our trusted advisors today by calling 1-800-DIE-RICH to discuss the benefits of tax-sheltered annuities.

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