Showing posts with label Planing. Show all posts
Showing posts with label Planing. Show all posts

Annuity Retirement Plans

When I started researching I did not realize that annuities still existed. Below I have put together some research as I develop my own personal retirement plan. Feel free to learn below, but realize I am a novice who is researching not a seasoned veteran with this investment product.

Annuities can play a significant role in a retirement plan. In the unsettled world of finance, they promise a return and source of regular income. By understanding what they are and how they work, people can use annuities to stabilize their retirement plan.

Annuities

Annuities are, in essence, contracts. In an annuity, the individual agrees to pay the premium for a specific period of time. After that time, the insurance company agrees to pay the individual a specific amount for a specific period of time. There are four primary items to look at in an annuity: the premium, the length the premium is paid, the interest rate and the period paid back to the individual.

There are two types of annuities. Both of them offer an interest rate, but the rate will differ significantly, as will the risk. Fixed-rate annuities are typically invested in secure bonds, government treasuries and good corporate debt. These promise a specific interest rate. With variable-rate annuities, the return can vary. This is because they are invested in riskier stocks, usually. However, even variable rate annuities often promise a minimal return.

Low Risk

One major attraction of annuities is their extremely low risk. Even variable annuities promise a minimum return, so individuals’ money is not completely lost. This cannot be guaranteed if one invests in the stock market.

When investing in annuities, the greatest risk is the insurance company’s bankruptcy. If the company providing the annuity fails, then the investment will be worthless. For this reason, people should at least diversify the insurance companies they have annuities with. This is an extremely unlikely scenario, but it is possible.

Regular Income

Many people who invest in annuity retirement plans are looking for a regular source of income when they retire. Investments in stocks, bonds, gold and real estate are unknown. They may go up. They may go down. What is known is they will not send a regular check in the mail.

With annuities, people receive a check regularly, which they can plan on. Even rental income cannot be guaranteed. One month’s rental income could be cancelled out by a broken appliance. Yet, annuities provide a hassle-free source of income. This allows retirees to have peace of mind, and it can be helpful when budgeting.

Stability

Annuities also provide a stability not seen in many other investments. Investments in the stock market are volatile, as are many others. They go up and down. Daily, the news reports on the stock market’s activity. It is difficult to find an investment that is not closely linked to the markets, but annuities provide a buffer. Even the returns received from variable annuities invested in stocks are not completely linked to the market.

Annuities have a role in retirement plans. They are not a get-rich-quick investment and will not double overnight. Annuity retirement plans are meant to provide stability, safety and security. Sure, everyone would like to earn a million dollars immediately. But, reality is that rarely happens. People who want a secure retirement, where they can live comfortably without worry, should consider annuity retirement plans.

Qualified vs. Non-Qualified Retirement Plans

As I started asking questions about retirement, I kept on hearing terminology like Qualified vs. Non-Qualified plans and I had no clue what the terms mean. Read below if you are trying to figure out the difference.

Retirement plans are a critical component of any savings strategy, and many people rely on their employer-sponsored retirement plan. Plans provided by employers fall into two classes: qualified and nonqualified.

While the rules in the International Revenue Code (IRC) and Employee Retirement Income Security Act of 1974 (ERISA) are technical and detailed, they can be summarized. If, a plan does not discriminate among employees, then it is qualified. “Qualified,” meaning it qualifies under the law for tax advantages. Nonqualified plans do not meet the specifications, because they do not treat all employees equally. Often, nonqualified plans are offered as benefits to senior members in a company, while entry-level workers do not have access to these savings plans

Qualified Retirement Plans

Qualified retirement plans, those that meet the government’s requirements for tax advantages, offer three benefits to participants. First, contributions made can be deducted from taxes in the year they were made. Secondly, employees can delay listing contributions to and earnings from the plan as taxable income, until they are withdrawn. Third, paying taxes on these contributions and earnings can usually be further delayed by rolling the account into another tax shelter, such as an IRA.

There are two types of qualified plans. The first is known as a defined benefit plan. The second is commonly referred to as a defined contribution plan.

Defined benefit plans are named such, because the benefit to be paid is a known, definite, amount. In this type of qualified retirement plan, the employer is responsible for managing the investments. It is the employer’s responsibility to handle the risk involved with investing, grow the investment and pay the amount promised. The benefit usually is determined from tenure, salary and age. The most common type of defined benefit plan is a pension.

A defined contribution plan is still a qualified plan, but it works differently than a defined benefit plan. With a defined contribution plan, the contribution is known. The benefit, or eventual value, however is unknown. In this type of plan, the responsibility usually lies with the employee. There is usually an option to contribute and a variety of investments to choose from. Employees have freedom in these plans, so they must also bear the responsibility of profit or loss. 401(k)s, 403(b)s, profit sharing and money purchase are all examples of defined contribution plans.

Nonqualified Retirement Plans

There is a wide array of nonqualified retirement plans. These are all devised to compensate specific employees. Often, they are part of a higher position’s benefit package and used to attract the best upper-level employees available. Because there is more freedom for companies to customize these to their needs, the government does not extend tax advantages to nonqualified retirement plans.

Whether an employee has a nonqualified or qualified retirement plan is rarely an individual choice. However, understanding which type of plan an employer offers can help the employee make wise decisions. It helps in the evaluation of an employee’s benefit plan, and it is necessary for wise retirement planning. Knowing how taxes impact one’s investments can significantly impact a retirement account.

Early Retirement Planning

Early retirement is the dream of many. I wanted to learn the steps on how to get there. Below I have put together 5 steps in the journey.

Retiring early is an attainable goal, which many people want. However, it does not happen magically. Only those who carefully plan for and work towards an early retirement will be able to stop working early. Here are five steps that can help people retire early. The first two are not financially related, but are necessary. The other three are financially geared.


Step 1: Determine A Goal

What is early retirement? Before anyone can work towards it, they must first define what it is. For some people, retiring early would mean not working after 60. For others, it would be ending their career at 45. Whatever it is, it must be defined. A vague idea, “I want to retire early,” is hard to achieve. A concrete goal, on the other hand, can be sought. Progress towards it can be measured.

Step 2: Develop Discipline

A goal will only be achieved through discipline and hard work. One the age of early retirement is determined, people must work towards it. This is done through saving, which requires discipline. The next step is to learn about the different methods of saving, or developing a plan. This is helpful, but no savings plan saves. People save, if they are disciplined.

Step 3: Create a Plan

Having a plan, or strategy, for saving is necessary. Here is where the financial aspect of early retirement begins. The adages, “Work smarter, not harder,” and, “Make your money work for you,” are essential to the early retiree. To grow as large an income stream or nest egg as possible, early retirees must understand the available investment options. Understanding the differences between an IRA, Roth IRA, 401(k) and brokerage account are important. Also, the types of investments, stocks, bonds, mutual funds, real estate, must be comprehended. Only after being well-versed in these financial investments, can someone earn as much as possible, as quickly as possible.

Step Four: Multiple Income Streams

The simplest understanding of a retirement account is a nest egg. It is a large sum of money, which is meant to meet one’s financial needs during retirement. However, amassing a large enough nest egg by the hoped-for retirement age can be a struggle.

Many early retirees rely on supplemental income, in addition to their nest egg. Having multiple income streams lowers the level of assets required for retirement. Their diversity also reduces risk. There are many possible sources for income: rental properties, business ownership, royalties, annuities and others.

Step Five: Reduce Expenses

Retiring early is nearly impossible, if one’s expenses are high. By lower expenses, the household cash flow’s stress is greatly eased. The quickest way to reduce expenses is by paying off debt. For the average family, a mortgage, credit card payments, car payments and student loans account for most of a month’s expenses. If these can be eliminated, then the need for income is greatly reduced.

Many people want to retire early, but there are generally three things that hold people back from doing it: a lack of discipline, a lack of knowledge and a lack of discipline. Early retirees are disciplined savers. They are wise investors. They are disciplined spenders. Anyone who wants to retire early should focus on these two areas. First, develop discipline and control. Second, learn how to invest.