Retirement Planning Archives - Drew Capital Group

Feb 22

7 Ways SECURE Act 2.0 Could Affect Your Retirement

By Drew Capital Group Legislation, Retirement Planning

SECURE Act 2.0 was signed into law at the end of 2022. Here are a few ways it could affect your retirement.

After consumers throughout America were forced to endure a harsh financial storm in 2022, the year came to a close with President Biden signing a bill intending to increase and enhance the capabilities of retirement accounts. The bill is commonly referred to as SECURE Act 2.0, and it is the follow up to the Setting Every Community Up for Retirement Enhancement Act of 2019. It is expected to assist retirees and pre-retirees even further in the pursuit of a comfortable and sustainable retirement. Let’s go over the biggest changes that have already taken effect as well as ones that will roll out over the course of the next decade.

Pushed Back RMDs^[1,2]

As of the beginning of 2023, the age at which retirees must begin taking required minimum distributions from their qualified retirement accounts is 73. Previously it was 72, meaning that retirees will now have an extra year to plan for the distribution of their accounts or enact a strategy to minimize taxes on tax-deferred accounts. Furthermore, the RMD age will move back to 75 in 2033; however, in all cases, if you have already begun taking RMDs, you must continue to take them.

Ed Slott, an American financial expert, a CPA and the president of Ed Slott & Co., looks to simplify dates a bit with a quick guide. He says those born in 1950 or earlier should use age 72 as their expected RMD age, while those born between 1951 and 1959 should use age 73, and those born in 1960 or later should use age 75.

Lowered Penalties for RMD Failures^[2]

Prior to SECURE Act 2.0, failure to take required minimum distributions 1) in the right amounts, 2) from the correct accounts 3) by the deadline of midnight, December 31st each year could cause you to incur an additional 50% penalty on the amount not withdrawn, a hefty price on what may be your most precious assets in retirement. Now, the penalty for not withdrawing the minimum amount has been reduced to just 25% with the potential to drop to 10% if corrected in a timely manner, which Ed Slott says typically means within a two-year timeframe.

Increased Catch-Up Contributions^[1,3,6]

Currently, those over the age of 50 can make catch-up contributions of $7,500—up from $6,500 in 2022—to employer-sponsored plans like 401(k)s, while catch-up contributions of $1,000 (above the total contribution limit of $6,500 for 2023) can be made to either traditional or Roth IRAs by those age 50-plus. It’s also important to know that individuals in higher income brackets may not be able to contribute to IRAs.

Beginning in 2025, those age 60 to 63 will be able to make catch-up contributions of $10,000 to employer-sponsored plans, and the limit will be indexed to inflation thereafter. Additionally, catch-up limits for individuals age 50 or older for both traditional and Roth IRAs will be indexed to inflation beginning in 2024. Ideally, this should give those nearing retirement a chance to grow their accounts as they close in on that important stage of their lives.

Increased Options for Employer Matches^[1]

Prior to SECURE Act 2.0, even if employers offered a Roth option for their 401(k) or similar plan, the employer match amount was required to be made on a pre-tax basis to a traditional account, meaning taxes would be owed when that portion of the money was withdrawn. The SECURE Act 2.0 allows employers to offer post-tax matches to Roth accounts, meaning employees pay taxes now but the match amounts can grow and distribute tax-free later.

Additionally, beginning in 2024, employers may match student loan payments with contributions into retirement accounts. For example, if a qualifying student makes a student loan payment of $500, that payment is able to be matched and contributed to a retirement account if it’s within the matching capabilities of the plan, allowing it to grow for the future. This allows students who may be buried deep in student debt to still achieve their employer match in a retirement account, meaning they won’t miss out on valuable contributions due to student loan obligations.

Auto-Enrollment into Employer-Sponsored Plans^[1]

Enrollment into new employer-sponsored plans, such as 401(k) and 403(b) plans, will be automatic beginning in 2025. Upon hiring or upon the inception of the 401(k) plan, employees will automatically be added at a rate of at least 3% but no higher than 10%. Despite automatic enrollment, employees will still have the ability to opt out of the plan.

Employers already have the right to remove former employees with low balances from their retirement plans by cutting them a check for the remaining amount if the employee has taken no action to move their money. Beginning in 2024, the definition of a low balance will be more than $1,000 but less than $7,000, and SECURE Act 2.0 portability provisions will allow employers to make a tax-free rollover distribution of a low balance account into an account in the former employee’s name at their new job without their permission.

Other SECURE 2.0 Act provisions include the establishment of the nation’s first lost-and-found database for retirement accounts which will be undertaken by the U.S. Labor Department at some point in the future.

Ideally, all of these changes could help people end up with higher savings when they retire.

New Options for 529 Plans^[4]

Beginning in 2024, unused funds from 529 plans, which are tax-advantaged accounts traditionally used by grandparents and parents to help a beneficiary pay for college, can now be rolled over into a Roth IRA on behalf of the plan’s beneficiary.

This could provide a small boost to an individual’s Roth IRA, but you may want to look out for a few distinct limitations to this new option. First and foremost, the 529 account must have been established and in place for at least 15 years. There is a $35,000 limit on funds able to be converted, and that is an overall total, not an annual total.

Furthermore, rollovers will be subject to the IRA contribution limit, which for 2023 is $6,500 (plus $1,000 if age 50 or older), and the beneficiary must have earned income of at least that amount in the year the rollover is completed.

There are still a lot of questions about this provision of SECURE Act 2.0 which must be clarified by lawmakers or the IRS, including the naming or changing of beneficiaries. Prior to SECURE Act 2.0, beneficiaries of 529 plans could easily be changed, and account owners could even name themselves as beneficiaries as long as funds were used for legitimate education expenses.

Increased Flexibility in Annuities^[1,5]

Annuities, which are a contract with an insurance company rather than a direct investment in the market, can offer principal protection and a rate of growth guaranteed by the issuing carrier. They have the potential to allow you to participate in stock market upside without experiencing market decline.

SECURE Act 2.0 offers a bit more flexibility in the purchase of qualified longevity annuity contracts, or QLACs, with funds held in qualified retirement accounts. Previous limits held premiums to 25% of an account’s balance and capped them at $145,000, but SECURE Act 2.0 has eliminated the 25% rule and increased the total cap to $200,000, giving retirees more options in the diversification of their portfolios.

If you have any questions about how SECURE Act 2.0 might affect your retirement, please give us a call. You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

Sources:

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

Add-on benefits are available for an extra charge in addition to the ongoing fees and expenses of the annuity and may be subject to conditions and limitations. There is no guarantee that an annuity with an add-on living benefit will provide sufficient supplemental retirement income.

An indexed annuity is for retirement or other long-term financial needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and not guaranteed by any bank or the FDIC.

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

Dec 01

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5 Common Mistakes to Avoid with Medicare

By Drew Capital Group Health Care Expenses, Retirement Planning

Medicare can be tricky. Here are some common mistakes to avoid!

The Medicare open enrollment period has begun, so we thought it would be a great time to discuss some of the most common mistakes retirees make when it comes to their healthcare. Along with your streams of income that you’ve created for yourself during your career, Medicare is one of your most important tools in retirement. It can protect you against medical emergencies that could be financially devastating, especially when you’re living on a fixed income.

It is, however, important to know that Medicare has its limitations, potentially making you susceptible to mistakes when signing up and choosing a plan. Far too often we visit with and hear about retirees who aren’t aware of how Medicare works or how to correctly utilize it as a tool for protection. We believe that many of the headaches could be avoided simply by knowing the obstacles that may present themselves along the way, thereby allowing you to prepare for what’s ahead. Let’s go over the five most common Medicare mistakes, as well as a few ways to avoid them.

Not Understanding What It Is

In 2021, two-thirds of Americans were covered by a private insurance plan, meaning that they were either part of a group plan through their employer, or they sought out coverage from an insurance company on their own^[1]. While private insurance plans may differ on a case-by-case basis, they generally function similarly with premiums, deductibles and various amounts of coverage in each plan. In comparison with the healthcare insurance you may have had during your career, Medicare has slight yet key differences.

For example, Medicare has four parts: A, B, C and D. Parts A and B are usually referred to as Original Medicare, with Part A covering visits to hospitals and skilled nursing facilities as well as hospice care and some home-based healthcare. It is free for those who qualify, which includes those age 65 and older who have contributed Medicare taxes for 10 years or longer.

There are, however, monthly premiums for Part B, the portion of Medicare that covers the cost of outpatient care, such as standard visits to a general practitioner.

Parts C and D can be a bit trickier for those first signing up for Medicare. Part C is commonly known as a Medicare Advantage or Medigap plan, and these plans generally replace Parts A and B (and often Part D) with a plan through a private insurance company which gets subsidized by the government. Part C Medicare Advantage or Medigap plans can also include extra coverage like dental, vision and hearing.

Part D is prescription drug coverage, which is not included in Original Medicare Parts A and B but can be added for an additional premium amount.

No matter which plans you choose, Medicare premiums typically come directly out of your Social Security benefit, and it is important to account for those deductions when figuring your Social Security benefit into your net income.

Overestimating Its Capabilities

As we mentioned above, Part A of Medicare is free to those who qualify, potentially generating the common misconception that Medicare as a whole is free for those in retirement. In reality, only premiums for Part A come at no cost to the insured, which still doesn’t include 2023’s $1,600 deductible for hospital visits^[2]. Part B comes with a standard monthly premium which will be $164.90 per month in 2023. Increasing and enhancing your coverage with a Medicare Advantage plan can also hike your rates, and the cost of Part D can increase with a penalty for missing your initial enrollment period.

When planning your retirement, it’s important to know that those with higher incomes pay more for Medicare, and there is a two-year look-back on your income per your tax returns when determining how much you will pay.

It’s also important to know that Medicare does not cover long-term care. While no one likes to think about the prospect of leaving their home, their possessions and their loved ones behind, 70% of today’s retirees will need some type of long-term care, and 20% will need it for longer than five years^[3]. When the national annual median cost of a private room in a nursing home can top $100,000^[4], it’s easy to see where the problem lies. It may be helpful to look elsewhere for long-term care coverage, including into a long-term care insurance policy or a life insurance hybrid policy that includes assistance to pay for long-term care if you need it or a death benefit for your beneficiaries if you don’t.

Signing Up Outside the Initial Enrollment Period

You are not automatically enrolled when you qualify for Medicare at age 65, you must enroll yourself. There is a seven-month enrollment window which starts from the three months before your 65^th birthday, the month of your 65^th birthday and the three months following your 65^th birthday.

Failure to enroll during that period could cause you to incur permanent surcharges.

For instance, with Part D prescription drug coverage, you may incur a penalty. That penalty is calculated by taking 1% of the “national base beneficiary premium,” which is $32.74 in 2023^[5], and multiplying it by the total number of full months you’ve gone beyond your initial enrollment period. For example, with next year’s national base beneficiary premium, if you delayed enrollment for Part D by 12 months, your premium would be an additional $3.93 per month.

Picking the Wrong Plan

In the same way that your healthcare plan during your career probably had limited coverage, Medicare Advantage plans and Medicare Part D plans cover different providers and prescription drugs^[6].

That’s why when you’re considering Medicare options, it’s important to have a list of your doctors and medications in hand. Consider working with a Medicare specialist who can help you choose between multiple carriers rather than going it alone.

Neglecting to Revisit the Plan During the Open Enrollment Period

Medicare open enrollment runs annually from Oct. 15 through Dec. 7, so now is the perfect time to review your options. And remember, as you get older, your needs will likely change. You may move. You may begin to see different specialists or healthcare providers. Almost certainly, your need for different prescription drugs will change. As those needs change, so can your Medicare plan.

The open enrollment period gives Medicare beneficiaries a plethora of options in changing their coverage to tailor it to their unique circumstances. For example, you can opt to change your Original Medicare plan to a Medicare Advantage plan, or vice versa. Furthermore, you can change your Medicare Advantage plan to a different one that offers more complete coverage for your care. Finally, it gives you the ability to customize your Part D coverage, whether you’re adding it to your current plan, removing it from your plan or changing it to accommodate your needs^[7].

Too often, Medicare beneficiaries have improper coverage, leaving them scrambling to pay for their care. You can revisit your plan each year during the open enrollment period to help ensure that you aren’t stuck with medical bills you could have avoided.

If you have any questions about retirement issues like Medicare, please give us a call! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

Sources:

Jul 21

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Inflation as a Risk in Retirement

By Drew Capital Group Inflation Risk, Retirement Planning

Inflation can be troubling, especially for those living on a fixed income. Here’s what you need to consider.

Exiting the work force and beginning the next chapter of your life can be infinitely exciting. After a long career, free time afforded by retirement offers a great opportunity to check off long-awaited bucket list items or develop those relationships with loved ones. You might also stop setting alarms in the morning, making sure that you get the right amount of sleep to propel you toward your dreams. There is, however, one area in which you might not want to hit the snooze button: your finances.

With improvements in science and medicine have come increases in life expectancy, extending the length of retirement for the modern worker. While it’s great to plan to be around longer to pursue passions and spend time with family, longer life expectancy does present a challenge. Retirees used to plan for 10 to 15 years of retirement, but it’s no longer strange for someone to live to 100, meaning that retirement could potentially last 30 years^[1].

Prolonged retirement can bring about longevity risk, which is the risk of running out of money while still alive, and inflation provides zero relief when it comes to making your money last. Inflation decreases the purchasing power of the dollar, which can create a serious problem for retirees living on fixed incomes and retirement accounts they’ve built over the course of their careers. Now inflation is at a 40-year peak ^[2], which can cause headaches, especially for those entering retirement as they’re forced to deplete savings faster than they might have under lower inflation rates.

Luckily, there are a few ways to alleviate some of the pain points when it comes to inflation in retirement. First, it can be beneficial to contribute to your retirement accounts early in your career. You can begin planning for retirement too late, but you can never begin too early. Some investment vehicles designed to build retirement assets for your future include employer-sponsored 401(k) plans, 403(b) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional 401(k) and IRA accounts grow tax-deferred, meaning that contributions will be made before taxes are taken from your paycheck then are taxed upon distribution. Roth accounts are distributed and grow tax-free if all IRS regulations are followed, but initial contributions are made with post-tax dollars. Both grow with compound interest; which Albert Einstein called the eighth wonder of the world. Compound interest means you will accrue more interest through time based on your growing account balance, so taking the time to feed those accounts when you’re younger can be extremely rewarding.

If you are getting close to retirement and don’t have decades of time on your side, there are a few more things about inflation that you should know.

Social Security considers inflation annually when calculating benefits, and some years it provides a cost-of-living adjustment, or COLA, based on one of the federal government’s consumer price indexes called the CPI-W. In 2021, Social Security beneficiaries received a 5.9% COLA, which was the highest increase since 1982, but it’s important to remember that COLA may not always cover increased costs. For example, beneficiaries received no increase in 2015^[3]despite an incremental 0.12% inflation rate^[4].

Some annuities are also specifically designed to combat inflation by offering a COLA. Annuities are contracts between buyers and issuing insurance companies which guarantee annuity payments based on the insurance carrier’s claims-paying ability^[5] as well as the terms of the contract. With annuities that offer a COLA, the pre-determined payments may be adjusted to account for inflation.

Lastly, it’s always important to consult your financial professional to find solutions to suit your unique, individual situation. The proper guidance can assist you in determining whether or not you’re placing enough money into various retirement accounts for potential future inflation without disrupting your desired lifestyle.

If you have any questions about how inflation may affect your retirement, please give us a call! You can reach Drew Capital Group Private Wealth Management in Tampa, Florida by calling (813) 820-0069.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Sources

Jul 15

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Christopher Drew Guest Contributes for Benzinga

By Drew Capital Group Financial Literacy, Retirement Planning

Christopher Drew, the founder of Drew Capital Group recently published an article for Benzinga to discuss 10 things he believes everyone should do to stay on track financially.

When mapping out a financial plan, it can be difficult to know where to begin. Now, with inflation at its highest in decades, only one-third of Americans expect their financial situation to improve in 2022. Nevertheless, Christopher Drew believes that anyone can act to improve, and he laid out a 10-step ongoing to-do list to guide anyone looking for a place to start. Here’s how to stay on top of your affairs.

Do a deep dive into your spending and recast your budget.

Eliminate excess spending and wasteful patterns that detract from your savings and retirement.

Evaluate your debts.

Commit to lowering your debt by paying the most expensive debts first. You can also renegotiate your interest rates or transfer debt to a card with 0% interest.

Increase your retirement contributions.

Eliminate debt and contribute to retirement accounts that potentially provide growth and help build your nest egg. If your company offers a 401(k) plan, contributing pre-tax income to a 401(k) can help build your retirement tax-deferred and with compound interest.

Consider opening an HSA.

A health savings account takes pre-tax contributions and allows you to use them on medical expenses not covered by your insurance plan. An HSA requires you to be enrolled in a high-deductible health plan. A High-Deductible Health Plan, which you are required to have to qualify for an HSA, can put a greater financial burden on you than other types of health insurance. There are advantages and disadvantages to HSA’s, and you should always consult your financial advisor regarding your own personal situation.

Review your estate plan.

A proper estate plan can help your family rather than burdening them with tasks. This can include drawing up wills and living wills, designating power of attorney, and making beneficiary designations.

Review your insurance plans.

Check your insurance plans like life, home and auto to determine if you need more coverage. Another important consideration is for the possibility that you may need long-term care insurance.

Plan for life events.

Everyone knows how important an emergency fund is for events like medical expenses and accidents, but it’s also necessary to plan before marriage, having a baby, purchasing a home or car, or changing jobs.

Consider a home office tax deduction.

Working remotely may have changed your ability to claim part of your home as a business expense. It is always helpful to consult a business or tax professional to see if you qualify.

Build an emergency fund.

We think your emergency fund should hold six months’ worth of expenses and be separate from your personal savings. Adding periodically can be the best way to watch it grow, contributing when you receive bonuses or tax refunds.

Evaluate your investments.

Assess your risk tolerance and rebalance your portfolio accordingly. You can work with a financial professional to set new goals and draw a map to reach them.

If you have any questions about financial health and how you can improve your situation, please give us a call! You can reach Drew Capital Management, in Tampa, Florida at (813) 820-0069.

To read the entire article and learn more about Christopher Drew’s financial to-do list, click here.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory services offered through Drew Capital Management, a Member of Advisory Services Network, LLC. Insurance products and services offered through Drew Capital Group. Advisory Services Network, LLC and Drew Capital Group are not affiliated.

Jun 14

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How Annuities Offer Protection and Growth Potential

By Drew Capital Group Financial Literacy, Retirement Planning

National Annuity Awareness Month is upon us! Let’s go over how annuities can be an important part of a retirement plan.

June is National Annuity Awareness Month, giving us the perfect reason to discuss how they can positively impact your retirement. Annuities have always played a role in retirement planning, but with growing uncertainty and market volatility, their importance has boomed. Certain annuities offer the chance for growth along with the protection of principal during market downturns which is guaranteed by the claims-paying ability of the issuing insurance carrier.

While they can be a vital part of the retirement-planning process, annuities can sometimes be overlooked by advisors who focus strictly on accumulation and stock market investments. For people getting close to retirement and those without the appetite or flexibility for stock market risk, annuities can be an attractive option to guarantee income for life.

In fact, annuities were created for retirement; they were first invented during ancient Roman times to compensate retired soldiers. They’re meant to help you generate income once you stop collecting wages. There are many different types of annuities, but fixed and fixed indexed annuities are different than retirement accounts like 401(k)s and IRAs in that they are not subject to market risk, and they offer guarantees.

In other words, fixed and fixed indexed annuities can offer a guaranteed income stream to eliminate some of the uncertainty that comes with retiring. It’s important to understand fixed and fixed indexed annuities are not investments, they are contracts. Even though they may credit interest based on market gains, they are not actually invested in the market at all. Fixed and fixed indexed annuities are contracts between you and the issuing insurance company, who again, based on their claims-paying ability, guarantee your principal and sometimes offer participation in stock market upside.

One of the main concerns of Americans on their way into their golden years is funding a secure retirement. In fact, a recent study showed that 56% were worried about running out of money in the next stage of their lives^[1]. That worry seems to be well-founded, as a 2019 study projected that over 40% of U.S. households will run out of money in retirement^[2].

One of the biggest reasons retirees run out of money is sequence of returns risk. This can happen when clients withdraw money from accounts early in retirement in a down market. The withdrawals can then out-pace the growth of the account, making it more likely that a person completely drains their funds while still living.

A fixed indexed annuity can counter sequence of returns risk by providing a guaranteed lifetime income option. Under a properly-structured fixed indexed annuity, the principal and the lifetime income benefit are both protected, which can be beneficial in a market crash. They also offer flexibility in diversifying your portfolio, as retirees with a guaranteed lifetime income benefit can keep other assets invested in the market, conceivably giving them a chance to wait out valleys and plateaus.

Some annuities are even designed to help combat inflation by offering a COLA, or cost of living adjustment. Considering the 2021 inflation rate was the highest America has seen since 1981^[3], it’s no wonder experts are expecting an increase in inflation-protected annuities^[4].

While annuities are popular among those looking for protection as well as growth potential, purchasing one can be treacherous without proper help. There are many different types of annuities, and they won’t all offer identical benefits or protections. For example, variable annuities are directly invested in the market and carry the same risk that any market investment would. There are pros and cons to each type, and innovative insurance companies are working to design new annuity products with enhanced benefits every single day.

If you have any questions about annuities or how to protect your retirement funds, please give us a call! You can reach Drew Capital Group Private Wealth Management in Tampa, Florida by calling (813) 820-0069.

Sources

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Variable annuities are offered only by prospectus. Carefully consider the investment objectives, risks, charges and expenses of variable annuities before investing. This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing. Guarantees are based upon the claims paying ability of the issuer.

Indexed annuities do not directly participate in any stock or equity investment. Clients who purchase indexed annuities are not directly investing in the financial market. Market indices may not include dividends paid on the underlying stocks and therefore may not reflect the total return of the underlying stocks; neither a market index nor any indexed annuity is comparable to a direct investment in the financial markets.

Mar 18

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How Big Events Like Ukraine Can Impact Your Retirement

By Drew Capital Group Economic Impacts, Retirement Planning

World events can impact your retirement, but you can be prepared!

The past few years have shown us that big world events can impact our lives at any moment. Sometimes we see them coming. Other times, we don’t have the ability to prepare and buckle in for the turmoil ahead.

The COVID-19 virus is one of the best recent examples of major world events impacting the economy. Now, the Russian invasion of Ukraine appears to be taking an immediate toll on Americans financially. It begs the question, can we prepare for these types of events so that we can, at least, soften the blow to our futures?

Well, the first step toward answering that question is knowing what to look out for when these major moments strike. Here are five ways big world events can impact your retirement:

Market Shifts

Reactions to global events often shift the market, and in times of crisis, that shift is typically negative. An article from ThinkAdvisor said a global recession because of a negative supply shock is now “highly likely,” especially when you tack on the fact that the world is still recovering from the spread of the COVID-19 virus.

Market downturns often hurt retirees, especially if they have to withdraw money from accounts like mutual funds, stocks or bond funds for retirement income while account values are down. For those in or approaching retirement, the situation can be dire if they have no other sources of income and have to keep taking money out of dropping accounts, especially at the beginning of their retirement (known as “sequence of returns risk”). Many people in retirement during the 2008 Great Recession were forced back to work when they lost everything.

It’s also worth noting that market crashes can actually help younger investors because they have a long time-horizon to retirement and can “buy and hold” bargains. In other words, if younger people are able to invest when the market bottoms out, it might be an opportunity to buy low in order to accrue higher long-term gains.

Inflation

Inflation can have a profound impact on finances, and those taking the brunt of the blow might be the ones who are no longer stockpiling resources. Inflation isn’t a new concept, but when your retirement money doesn’t go as far as you hoped, it can put your plans for your golden years in jeopardy. Over the course of the pandemic, the United States sent stimulus checks to qualifying Americans three different times. With more money in the pockets of consumers, prices rose, and they didn’t fall after people spent their stimulus checks. In fact, they continued to rocket upward. The Washington Post reported that inflation reached 40-year highs at the time of Russia’s invasion, posing major questions for the U.S., the Federal Reserve and retirees stretching their financial resources to their limits.

Gas Prices

This one is no secret. In fact, if you drive past a gas pump when supply is short, your jaw might drop. As the Russian invasion of Ukraine wages on, CNN reports the biggest jump in gas prices since Hurricane Katrina. Russia is not the only supplier of oil, but it is Europe’s largest, producing 10% of the global demand. The U.S. imports just 8% of its oil from Russia, but energy is a global commodity, meaning that a rise in one part of the world causes a rise in another part of the world. Bob Doll, the chief investment officer of Crossmark Global Investments, spoke to ThinkAdvisor to discuss the effects of the Russia-Ukraine war. He noted, several times, that oil prices can devastate the economy. He said the price surge is why the war should be investors’ chief concern in 2022. Doll went on to say that inflation is likely still yet to peak because of rising oil prices.

You might be wondering what that has to do with your retirement. The spike in oil costs and inflation drastically affect the purchasing power of a dollar, which could be most detrimental to those living on fixed incomes. If you’re in retirement, it could force you to spend more at the pump, taking away from valuable dollars you may need for other expenses.

Shifting of Retirement Ages and Plans

Uncertainty in markets, inflation and other results of a global crisis can also upset retirement plans decades in the making. In 2021, CNBC reported that 35% of Americans changed their retirement plans because of the pandemic. 68.5% of those who changed their plans said they moved their retirement expectations back by up to 10 years. Some did report that they planned to move retirement up, but the uncertainty forced others on the brink of finishing their careers to table their hopes and remain in the workforce to continue collecting paychecks.

General Panic

Major events, especially ones that have negative impacts on people, markets and finances, can cause panic. Common wisdom says to never make decisions in a panicked state, but it is easy to see how you might want to unload certain investments or liquidate assets out of fear that things might get worse. In his ThinkAdvisor feature, Bob Doll said advisors shouldn’t be recommending any major risks right now, arguing that investors have seen the market during wartime, and it typically bounces back. Oftentimes, approaching the situation from a more measured perspective could actually provide an opportunity. A Kiplinger article used The Great Recession as a teacher for retirees in a crisis, citing one investor who remained patient, even adding to his investments as stock prices hit the basement. He later said he was headed toward an early retirement and squashed his fear of volatility. With a calm, steady approach, retirees can take steps to fight market downturns.

If you have questions about how you can protect your retirement plan and weather global economic storms, please give us a call. You can reach Drew Financial Private Capital in Tampa, Florida by calling (813) 820-0069.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Sources:

https://www.thinkadvisor.com/2022/02/25/roubini-6-financial-economic-risks-of-russia-ukraine-war/

https://www.thinkadvisor.com/2022/03/07/bob-doll-10-talking-points-for-advisors-investors-amid-russia-ukraine-war/

https://www.nytimes.com/2022/02/23/business/economy/russia-ukraine-global-us-economy.html

https://www.washingtonpost.com/us-policy/2022/03/02/powell-testimony-inflation-fed/

https://finance.yahoo.com/news/russia-ukraine-crisis-what-can-prevent-150-oil-prices-112747924.html

https://www.cnbc.com/2021/10/12/pandemic-has-disrupted-retirement-plans-for-35percent-of-americans-study-says.html

https://www.aljazeera.com/news/2022/3/3/how-much-oil-does-the-us-import-from-russia

https://www.cnn.com/2022/03/04/energy/gas-prices/index.html

https://www.kiplinger.com/slideshow/retirement/t047-s004-5-retirement-lessons-learned-from-great-recession/index.html

https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_a.htm

Jun 24

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It’s Annuity Awareness Month. How much do you know about annuities?

By Drew Capital Group Financial Literacy, Retirement Planning

Because June is Annuity Awareness Month, here is an overview about them.

Annuity product designs and types continue to evolve, primarily to meet the demands of people nearing retirement. In addition to their original purpose of providing retirement income, insurance companies have developed hybrid policies, adding features to address the multiple risks consumers face as they get older.

The most important thing you should know about annuities is that they are insurance policies, or contracts between you and an insurance company. Guarantees in them are backed by the financial strength and claims-paying ability of the issuing insurance company.

As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand. (They are also the oldest—a simple form of the fixed annuity was originally created for Roman soldiers who grew too old to serve.) An insurance company will guarantee* a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years. You can usually purchase a fixed annuity with either a lump sum of money or a series of payments over time.

At the end of the contract term, you can take the money out, put it into another investment, or “annuitize,” meaning you can begin to take periodic payments over time to create income for retirement. This is called the “payout phase” of an annuity contract and it may last for a specified number of months, years, or be guaranteed* for as long as you live.

If you do choose to annuitize a fixed annuity policy, you can begin to receive periodic payments at once (called an immediate fixed) or you can wait until a certain age or time in the future to start receiving payments (called a deferred fixed).

If you purchase one of these annuities with non-qualified money (meaning you have already paid taxes on it), the interest in the annuity policy accrues on a tax-deferred basis. At the point where you take the money out of the annuity or begin taking periodic annuity payments, distributions are taxed based on an “exclusion ratio” so that you only pay taxes on the interest or gains.

If you purchase one of these annuities with qualified money, such as by rolling it over from a traditional 401(k) or IRA, distributions are 100% taxable, since you have not paid any taxes on any of the money yet. As with any qualified plan, if you take or withdraw money before age 59-1/2 you may owe additional tax penalties.

Variable Annuities

Variable annuities were developed in the 1950s. The best way to explain variable annuities is to compare them to fixed annuities. First of all, most variable annuities require a prospectus since part of your money will actually be invested in the stock market, called “sub-account investments.” That means that there is market risk involved with variable annuities, because you can either make money on the amount invested in sub-accounts, or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. These are called deferred variable annuity contracts. (You can also purchase an immediate variable annuity contract.)

The important thing to understand about the variable annuity contract is that your periodic annuity payments may fluctuate based on stock market performance, depending on policy terms. And it’s possible that some variable annuity policies can lose principal due to stock market losses.

Variable annuities often come with a death benefit for your beneficiaries based on the contract terms, but some specify that there must be enough money left in the policy after annuitization payments have been taken out and/or will pay the death benefit as long as the sub-accounts have not lost too much money.

Fixed Indexed Annuities

Fixed indexed annuities were first designed in 1995. The biggest difference between them and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. With fixed indexed annuities, after you have owned the policy for a specified number of years your principal is guaranteed*.

With fixed indexed annuities, any policy gains are credited and then locked in annually, bi-annually or at specified points in time. The gains credited to the policy are determined by the insurance company based on the performance of a selected index (for instance, the S&P 500) or multiple indexes. Some fixed indexed annuity gains are capped relative to index performance, meaning you can only be credited a certain percentage, but some are uncapped.

Index performance is used as a benchmark for policy gains or periodic crediting and lock-in. With fixed indexed annuities, you have the potential to participate in market gains. And if the benchmark index loses money, your policy is credited with 0%, keeping the most current locked-in principal value in place.

Fixed indexed annuities can be purchased on an immediate or deferred basis. They can be purchased with qualified or non-qualified money. And they can offer a lifetime income option and/or a death benefit.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor can help you compare and analyze policies.

This article is provided for information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Have questions about annuities? Please call us! You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

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