Kiplinger's Retirement Report - August 2017

RETIREMENT REPORT

Your Guide to a Richer Retirement

VOLUME 24 | NUMBER 8 | AUGUST 2017 | $5.00

Decode Annuities To Find the Best Fit

DO YOUR EYES GLAZE OVER WHEN YOU HEAR THE WORD

annuity? When you imagine handing over a large chunk of money to an insurance company in exchange for promised income, do those glazed eyes turn into a death stare? No doubt, annuities usually don't generate a lot of excitement. They can be shrouded in jargon, and when you look under the hood, you're confronted with a

complicated collection of moving parts. Making shop-

ping more difficult are all the choices to be made:

Do you need income now? Do you need income later?

Do you need lifetime income, or income for a certain

number of years? No wonder so many potential buyers

simply walk away.

But don't automatically turn your

IN THIS ISSUE

back. In some situations, the right product could be a good fit for a financial

INVESTING 6 | Rebalance in Bull Market 8 | Picking Dividend Payers

plan, particularly for MANAGING YOUR FINANCES

those who don't

9 | Plan for Special-Needs Child

have a pension. Having a stream of guaranteed income from

11 | Your Questions Answered 12 | Information to Act On

an annuity might provide peace of mind that essential

TAXES 14 | Moves to Make Midyear 15 | Estate Tax Deadline

expenses will be covered if you live

CHARITABLE GIVING 16 | Give Back to Hometown

well into your eighties or nineties.

If you're mulling

CAREGIVING 17 | Create a Caregiving Contract

an annuity purchase, RETIREMENT LIVING

this beginner's guide 18 | Improv Keeps Mind Sharp

will cut through the

jargon and look at

common options you'll come across. "One of the funda-

mental challenges is that annuities come in so many

different flavors and types," says Matt Sadowsky, direc-

tor of retirement and annuities at TD Ameritrade.

The first step: Pinpointing where you fall on the

JOHN W. TOMAC

401(K)

CERTAIN.

Retirement Income Planning

Retirement planning isn't just about saving. It's about making sure those savings can be turned into the income you'll need to live the life you've always envisioned. At Fidelity, we'll help you create: ? A guaranteed* income stream protected from changes in the market ? Investment growth potential to help with rising costs ? A balanced plan that's flexible enough to change when needed

To learn more, go to diversifiedplan or call a Fidelity Representative at 800.596.5053 to talk about your retirement income needs today.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. *Guarantees are subject to the claims-paying ability of the issuing insurance company. Fidelity Brokerage Services LLC, Member NYSE, SIPC. ? 2016 FMR LLC. All rights reserved. 775226.2.0

retirement-planning spectrum. Are you still squirreling away money for retirement? Or are you starting to spend your nest egg? Those answers can help you focus on which set of products might be right for you. "It's very important to distinguish between annuities," says annuity expert Jerry Golden, president of Golden Retirement, in New York City. "If you need to make an automobile claim, you don't tap life insurance."

Accumulation phase annuities are usually bought by people in their fifties and sixties, whereas payout phase products are more likely bought by those in their sixties and seventies, says Golden. Some accumulation products might work for those in their later years, but the payout phase products are meant for those who want guaranteed income. "Age is important, but time until income is received is the real driver," he says.

In either phase, it's not easy to comparison shop. The particular mechanics of a product can vary from insurer to insurer. Annuities can be costly, but costs often aren't transparent. Ask a lot of questions to delve into the details of products you are considering, and scour the fine print to make sure you understand the contract you are getting into.

Accumulation Phase Annuities Consider three types of accumulation annuities: fixed deferred, indexed and variable annuities. In comparing them, you can "look at a scale of how much exposure you want to the equity market," says Ray Caucci, senior vice president of product management, underwriting and advanced sales at Penn Mutual.

Fixed deferred annuities are one of the simpler products to understand. These offer a guaranteed interest rate for a certain term, such as five or 10 years. The rate is set by the insurer, based on market rates. Craig Simms, senior vice president of Vantis Life Insurance Co., says "2.6% is the best rate now for five-year contracts," which he says are popular now.

These products tend Fixed Deferred Annuities

to sell well when there

Interest rate guaranteed.

is a gap between certifi- Simple structure.

cate of deposit rates

and fixed annuity rates.

As with a CD, if you hold the money in the contract

to maturity, you will receive a scheduled amount of

interest. Unlike a CD, the annuity's interest isn't taxed

along the way. Tax is deferred until the earnings are

withdrawn.

If you pull your money out before the term ends,

you could incur a surrender charge. At the end of the

term, says Simms, the insurer will offer a renewal rate

with no new surrender charges. For example, he says

the company might offer a one-year rate with no sur-

render charges, or you could buy a new product with

a higher rate and a new surrender period.

Indexed annuities are a type of fixed deferred annui-

ties with a growth rate pegged to the performance of

an equity index over a certain term. But the money

isn't invested directly into the market, and you won't

get the full market gain. The key with these annuities

is understanding the formula behind your return,

says Golden.

For instance, you might have a "participation rate"

of 50% of Standard & Poor's 500-stock index gains

during the contract

term. If the market rises 10%, you're only

Indexed Annuities

going to get 5%. But if

Cap on gains, but downside

the contract also has a

also limited.

"cap rate," which lim-

Critical to understand

its the credited return,

formula behind your return.

perhaps to 4%, you'd

only get 4%.

If the market falls, "it has a floor, which is generally

zero," says Caucci. That limits the downside.

Ask how earnings are credited, because the method

EDITOR IN CHIEF AND PUBLISHER Knight A. Kiplinger

EDITOR Rachel L. Sheedy KiplingerRetire

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| AUGUST 2017 KIPLINGER'S RETIREMENT REPORT 3

FROM THE EDITOR

The looming crisis in long-term care has been a recurring theme at recent financial-planning conferences I've attended. No one likes to think about being unable to take care of himself or herself. But when age or disease takes its toll, having a support system is critical. And there's significant concern that too little attention is being paid to how to provide care to the nation's growing elderly population.

The fight in Congress over health care is shining a light on the role that Medicaid plays. Medicaid is the primary payer for long-term care, including $55 billion in 2015 for nursing homes, according to the Kaiser Family Foundation. But Medicaid helps cover care only for those with few assets.

Long-term-care insurance can protect a person's assets by helping to cover care costs, but that market faces significant challenges (see "LTC Insurers Steering Through Tough Times," June). And even finding a caregiver to hire can be problematic. It's a tough job that doesn't pay well, even though the demand is growing.

Whether it's by choice or by necessity, many families try to provide care for loved ones at home as long as possible. Drawing up a caregiving contract can help spell out who will do what (see our advice for creating one on page 17). And such a contract may even provide for some kind of compensation to a family member who takes on the role full-time.

Rachel L. Sheedy, Editor

can vary. Usually, earnings are credited on an annual basis, says Ken Nuss, founder of AnnuityAdvantage.

While some indexed annuities are tied to the performance of a well-known index, others are tied to one of the company's making. If you are unfamiliar with the index being used, ask what investments comprise the index. When shopping, "you have to compare the underlying indices," says Dylan Huang, senior vice president and head of retail annuities at New York Life.

Check the surrender period, which most commonly is seven or 10 years for indexed annuities. And read the Financial Industry Regulatory Authority's investor

alert on indexed annuities at to learn more

about how these complex products work.

Then, there are variable annuities. "With a traditional

variable annuity, you have unlimited upside but also

unlimited downside," says Caucci. You participate fully

in the market by investing your money in mutual-fund-

like subaccounts within

the annuity. You can buy some

Variable Annuities

downside protection by

Invest in mutual-fund-like

paying extra for a rider

accounts.

that offers a guaranteed

Can buy guaranteed income

minimum withdrawal benefit. Generally, with

riders.

this kind of contract,

your account has a cash value and a market value. The

cash value would increase, say, annually, giving you a

certain amount of guaranteed income if you follow the

rules of the contract. The market value would be what

your actual assets are worth, and that value could fall if

the market drops even though your cash value is rising.

Be aware of the rules for maintaining the guarantee;

for instance, if you withdraw too much from the ac-

count in one year, you may lose the guarantee.

You defer paying tax on earnings while your money

is invested. "A VA has traditionally been used for the

benefit of tax deferral and growth potential," says Sad-

owsky. Ask about surrender periods; you may have to

keep your money in the account for perhaps five or 10

years to avoid incurring a withdrawal penalty.

Variable annuities can bridge the accumulation and

payout phases. Generally, you can tap variable annui-

ties for cash after the surrender period and without

IRS penalties after age 59?, but the earnings would be

taxable at your ordinary income rate. You can choose

to "annuitize" the money--that is, turn the account into

guaranteed income for life. Part of the payouts would

then be considered a return of capital and not taxable.

If you have held a variable annuity for a while, don't

be quick to get rid of it. "Before the financial crisis,

some VA features were fairly liberal," says Caucci. The

guaranteed minimum withdrawal benefit on old vari-

able annuities could be as high as 6%, he says, while

today's guarantees are more likely just 4%.

As for costs, Caucci says there's a basic insurance

charge that comes out of the variable annuity's net as-

set value. The subaccount funds will have their own

fees. Riders for guaranteed income and death benefits

for beneficiaries come at an extra cost, and if you run

afoul of the surrender period, you'll incur a penalty.

|4 KIPLINGER'S RETIREMENT REPORT AUGUST 2017

"If there are no bells and whistles, the cost compari- A special kind of deferred income annuity, the

son is relatively easy," says Mark Cortazzo, founder and qualified longevity annuity contract (QLAC), is only a

senior partner of Macro Consulting Group, in Parsip- few years old. It's designed to be bought inside an IRA

pany, N.J. "When you add guaranteed riders, the provi- or employer retirement plan, such as a 401(k), to pro-

sions of that guarantee are not easy to compare--the

vide income for old-old age. You can invest up to

devil is in the details." Like a car, if you load the annu- $125,000 or one-fourth of your total retirement

ity up, it's going to be a lot more expensive, he says.

account assets, whichever is less. The amount is

Cortazzo offers a service to help determine if an an- ignored when figur-

nuity owner should switch out or keep an existing vari- ing required mini-

able annuity. "There might be gold hiding in that contract," he says. For $299, his firm will review up to two contracts; for more details, go to .

Payout Phase Products When entering your retirement spending years, addi-

mum distributions that start at age 70?, and you can postpone payouts as late as age 85. Invest $100,000 in a QLAC at 65 and you

Qualified Longevity Annuity Contracts

Invest only limited retirement account assets.

Defer required distributions.

tional annuity products come into the picture to pro- get monthly payouts

vide guaranteed income. You can choose between an of about $2,300 start-

immediate annuity or a deferred income annuity.

ing at age 85, according to a recent estimate at Golden's

With immediate annuities, you turn over a lump sum website .

to the insurer, who agrees to give you guaranteed pay-

Of course, many people aren't fans of the idea of

outs over a certain

handing over a large lump sum to an insurer when the

Immediate Annuities

term, say 10 to 20

threat of an early death could shortchange them. After

years, or as long as you all, payouts generally stop when you die. But the mar-

Buy with a lump sum.

live. "Once you buy a ket has evolved to offer more flexibility, such as infla-

Payouts guaranteed for life

payout annuity, it's set tion adjustments or death benefits. For example, you

or certain term. Start income within

13 months.

for life," says Caucci. The guarantees won't change. Payouts start anytime within 13

could buy a rider that provides five years of income to you or your beneficiaries, or lets you or your heirs receive at least your full investment.

These features can make income annuities "more

months.

palatable and less scary," Sadowsky says. But there's a

A 72-year-old man in Washington, D.C., who invests cost: "When you take some risk off the table, the pay-

$100,000 will receive $672 in immediate lifetime

out will be reduced." The immediate annuity payout of

monthly income, according to a recent quote on Imme- that D.C. 72-year-old, for instance, would be cut to $579

. Interest rates affect payouts, so if a month if he opted for an heir to receive a lump sum

you think rates will rise, you might break up an imme- of any premium balance at his death.

diate annuity purchase to hedge your bets. Age affects

Even if you're an ardent fan of annuities, don't lock

payouts, too: The older you are when you buy, the big- up your entire portfolio. Generally, experts say no more

ger the payout you'll get, all else being equal.

than 30% of your net worth should be in annuities.

When shopping, look for the highest payouts by the

A smart strategy: Add up your guaranteed income

highest-rated insurers. The insurer's creditworthiness sources, including Social Security. Then add up your

is critical. "It's very important because you are plan- basic expenses, such as housing costs and food. If

ning to get income for 20 to 30 years,

there's a gap between your steady

and you want to make sure the insurer will be around," says Huang.

Shopping for a deferred income

Deferred Income Annuities

income and essential costs, buy an income annuity to fill it. "If all your other investments don't perform,

annuity, for which you pay a smaller

Buy with smaller lump sum

you've got those needs covered," says

lump sum now for bigger payouts to

for bigger future payouts.

Simms. And if your investments do

start years later, is similar. Look at

Start payouts years or even

well, you'll have the means for more

the payout amounts and the insurer's rating.

decades down the road.

fun things, such as traveling or spoiling the grandkids. K RACHEL L. SHEEDY

| AUGUST 2017 KIPLINGER'S RETIREMENT REPORT 5

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