Ken Nuss

It’s time to do a year-end financial review and set your path for 2021. You’ll make sure your savings and investments are aligned with your goals, reduce income taxes, and ensure you’ve dotted your i’s and crossed your t’s.

Review IRA, 401(k), and other retirement-plan contributions

. If you haven’t fully funded your retirement plan(s) this year, consider what you can afford to salt away. Contributions to 401(k) plans reduce your taxable wages. They are due by December 31, and many employers will let you make an additional one-time contribution up to the IRS limit.

You may be able to save on 2020 taxes by making deductible contributions to an IRA by April 15, 2021. If your income is too high to get a deduction because you or your spouse are also covered by a retirement plan at work, consider socking away money in a Roth IRA, which has more liberal income limits.

 need to take required minimum distributions (RMDs) this year. Congress waived them for all types of retirement plans in 2020.

Review your asset allocation and rebalance if needed.

 Confounding expectations, the stock market has boomed this year. As a result, you may find that your asset allocation has gotten out of whack.

Suppose a few years ago you set your allocation as 50% equities (stocks and stock funds) and 50% in fixed-income (bonds, CDs, fixed annuities, money markets and similar instruments). Thanks to strong market performance, you’re now 65% in equities and 35% in fixed income.

You’ve done well! Now it’s time to start reallocating to get back to 50-50. Reallocating money in retirement plans as well as annuities and life insurance policies takes less planning because gains here are not taxed until withdrawn.

Some people have enough money in their retirement plans so that they can accomplish their overall rebalancing using only them. Remember, it’s your 

 asset allocation that counts, not the allocation in any one account.

If you do need to rebalance your taxable investments, be aware of tax strategy. For instance, if you have unrealized losses, you can sell off losing investments to offset gains from selling your winners. If you’re rebalancing a lot of taxable money, you may want to consult a CFP or CPA for help.

When rebalancing or reinvesting money coming due from maturing CDs or bonds, consider all your options. You may be able to get a much better rate than you expect.

 To boost the economy, the Federal Reserve has slashed short-term interest rates close to zero. Today, most savings instruments like money market accounts, CDs, and bonds pay very low rates, even if you’re willing to tie up your money for a few or several years. If you’ve got CDs or bonds that are about to mature, it pays to consider other options.

If you can afford to tie up your money till age 59½ or are already that old, there’s another choice that typically pays a higher rate: a fixed-rate annuity. Your age is important because If you withdraw money from your annuity before age 59½, you’ll owe the IRS a 10% penalty on the interest earnings you’ve withdrawn.

Also known as a multi-year guarantee annuity or a CD-type annuity, a fixed-rate annuity behaves a lot like a bank certificate of deposit, with some notable differences.

Like a CD, it pays a guaranteed interest rate for a set period, usually 3-10 years. Unlike a CD, the interest credited to the annuity is tax-deferred until you withdraw it.

While CDs today pay less than 1%, a 3-year fixed annuity pays up to 2.40% and a 5-year contract up to 3.00% annually. Annuities are not FDIC-insured but are covered by state guaranty associations, up to certain limits, that vary by state.

A fixed indexed annuity is another choice if you don’t mind a fluctuating interest rate. It credits interest based on the growth of a market index, such as the S&P 500.

In up years, you’ll profit. In down years, you’ll lose nothing but won’t earn anything. Indexed annuities are suited for people who want to save for the long term while limiting risk without precluding growth.

Make sure your beneficiaries are up to date.

 The listed beneficiaries on annuities, life insurance policies, and retirement plans will receive the proceeds on your death. Check that they’re up to date. Life changes such as marriage, divorce, the birth of children or grandchildren, and the death of a loved one may require updating your beneficiaries.

If you’re married, your spouse is normally your primary beneficiary and your child or children are contingent. If you’ve been divorced and remarried, make sure your ex-spouse isn’t still the beneficiary.

, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites. 

A free quote comparison service with interest rates from dozens of insurers is available at 

Articles

A year-end review helps you cut taxes, build retirement savings, rebalance your portfolio, and earn more interest.

Review Your Finances Now to Keep on Track in 2021

Rates on bank certificates of deposit are dismal. The best you can do as of early November 2020 is a mere 0.65% for a one-year CD, 0.85% for a 30-year CD, and 1.00% for a 5-year certificate, according to Bankrate.com.

While you’re certain to get your money back because CDs are insured by the FDIC, you’re also virtually certain to 

There’s a better way to save money for many people. It’s a fixed-rate annuity—also known as a multi-year guarantee annuity or a CD-type annuity. You can earn up to 2.40% for a three-year fixed annuity and up to 3.05% annually for a five-year contract, according to AnnuityAdvantage’s large database of annuity rates.

Like a CD, a fixed annuity pays a guaranteed interest rate for a set period, usually 3-10 years. There’s no sales charge, so all of your money goes to work for you immediately. The interest is tax-deferred.

While annuities are not FDIC-insured, they 

 insured by state guaranty associations, up to certain limits, that vary by state. While this is a valuable backstop, the odds that you’ll ever need to rely on the guaranty association are very small. Annuities are issued and guaranteed by life insurance companies, which are strictly regulated by the states to ensure their solvency. This system has worked well. 

Besides higher rates, here are the additional ways fixed-rate annuities beat CDs.

 All CD interest is subject to federal and state income tax annually, even when it’s reinvested and compounded in the CD (unless the CD is in an IRA or other retirement account).

A fixed annuity is tax-deferred. You won’t receive an annual 1099 and you won’t pay tax on the interest until you withdraw it. At the end of the annuity’s initial guarantee period, you may renew it for another term or roll it over into another annuity.

Tax deferral isn’t an advantage when you hold an annuity in an IRA or other retirement account. However, since you get a guaranteed, competitive rate, a fixed annuity is still a top choice for the portion of your retirement-plan assets you want to shelter from stock-market risk while earning an attractive rate of interest.

For certain retirees, lower taxes on Social Security benefits.

 About 40% of retirees who receive Social Security pay taxes on at least a portion of their benefits. By moving some of your money from a CD into an annuity, you’ll reduce income that may trigger the tax on Social Security benefits.

Most people who are taxed on their Social Security benefits will profit from this strategy, but not high-income retirees who are well past the threshold. Consult 

https://www.ssa.gov/benefits/retirement/planner/taxes.html

to see how you may be taxed and if this strategy may work for you.

 Banks impose substantial penalties on all early withdrawals from CDs. Most fixed-rate annuities let you withdraw interest or up to 10 percent of the value annually without penalty. You will owe income taxes on any interest withdrawn.

 Once the fixed term is up, you may renew or can roll over the proceeds tax-free into a new annuity of any type and continue to postpone taxes. When you get closer to retirement, you may decide to annuitize the contract. That means you would convert the fixed annuity into an income annuity. You will get a guaranteed lifetime monthly income that begins either immediately or at a future date you select.

 If you withdraw money from your annuity before age 59½, you’ll owe the IRS a 10% penalty on the interest earnings you’ve withdrawn, plus regular income tax on it, as you would at any age. If you’re sure you won’t need the money in the annuity before that age, you’re good to go. If not, it might be wiser to delay purchasing one until you’re older.

This caution doesn’t apply to a fixed annuity in an IRA since you normally won’t take money out of an IRA until you’re past 59½ anyway.

, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites. 

CD rates are under 1%, but comparable annuities can pay more than 2% to 3% guaranteed and are tax-deferred.

Turned off by Low CD Rates?  Consider a Fixed Annuity

Retirees have always worried about running out of money and becoming dependent on others. Today, most are more anxious about it because interest rates are so low. 

The days when you could get a decent stream of income from Treasury bonds and certificates of deposit are gone. That doesn’t mean that Treasuries and bank CDs aren’t options. But you can no longer rely on them exclusively.

Furthermore, many companies have done away with traditional pension plans that used to protect retirees. Social Security is invaluable, but it makes up only 40 percent of the average wage earner's pre-retirement income.

several years ago found that retirees who have a guaranteed monthly income for the rest of their lives are happier than those who don’t. They also live longer on average.

So, how can you get more guaranteed income to remove the financial worry from retirement? 

It’s simple: create your own pension. A lifetime annuity produces guaranteed lifetime income, like a traditional pension. Many insurance companies offer them.

You can make a one-time cash payment to buy an annuity. Alternatively, you can roll over the funds from an IRA, 401(k), or other retirement account. Either way, you’re buying a single-premium annuity. Or you may choose to make a series of smaller regular deposits to a flexible- premium annuity.

A lifetime annuity hedges against the financial risk of living a very long life. Independent experts and economists say most people should allocate a significant portion of their savings to this type of annuity. The right amount depends on your circumstances.

A deferred income annuity combines a future stream of income with tax-deferral since you pay no taxes until you begin receiving income. Even then, the payments you’ll receive (unless from an annuity in an IRA or other retirement plan) are only partially taxable because some of the income is considered a nontaxable return of premium.

A deferred income annuity postpones income payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older.

You’ll know the exact amount of monthly lifetime income you’ll receive and the exact date when it begins. You can buy either a single-life annuity or a joint-life annuity, which typically covers both spouses.

It’s the most efficient way to protect against outliving your assets—whether you live to 88 or 98 or 108.

The power of the approach results from two things. First, the insurer invests your money for many years, enabling it to compound until you begin receiving income. Second, buyers who do not live to an advanced old age in effect subsidize those who do. That’s the magic of insurance.

The longer you delay taking payments and the more advanced age you start taking them, the greater the monthly payout.

A different way to plan for retirement income

The deferred income annuity, sometimes called a longevity annuity, offers a different way to plan for retirement.

Let’s say you’ll retire at 65. You can use part of your money to buy a longevity annuity that will provide substantial lifetime income starting at 85, for example. Then, with the balance of your retirement money, you only need to create an income plan that gets you from 65 to 85 instead of indefinitely.

Also, you might be able to delay taking Social Security and thus get bigger payments later on.

You won’t have to deal with the uncertainty of trying to make your money last for your entire lifetime. And since you know you’ll have assured lifetime income later on, you can feel less constrained about spending money in the early years of your retirement.

Another option is to buy an annuity within an IRA—a qualified longevity annuity contract (QLAC). QLAC is an income annuity that meets IRS requirements. Over your lifetime, you can allocate 25% of the total of all your IRAs or $135,000, whichever is less, towards the purchase of a QLAC. In future years, the $135,000 limit will be adjusted for inflation.

It lets you defer up to 25% of required minimum distributions and thus reduce your taxes until payments begin. Unlike other annuity income, QLAC income is 100% taxable, but it’s money you’d eventually have to withdraw from your IRA anyway.

Lifetime annuity income reduces retiree anxiety and promotes wellbeing. You can create your own pension.

, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly. 

More information, including updated interest rates from dozens of insurers, is available at 

An annuity can yield guaranteed lifetime income—a private pension that helps you sleep at night.

Remove Financial Worries from Retirement

Fixed indexed annuities made up nearly 57% of total annuity sales in 2019, and they’re hot in 2020. But are they a good idea?

Because they offer a chance to get a good portion of the stock market’s gains while offering complete protection from loss, they’re appealing in a time of unprecedented uncertainty. 

Indexed annuities credit interest based on the growth of a market index, such as the S&P 500 index. In up years, you’ll profit. In down years, you’ll lose nothing but won’t earn anything. Indexed annuities thus can be a great idea, especially for pre-retirees and retirees who want to save for the long term while limiting risk without precluding growth. 

However, there are a lot of moving parts, with different crediting methodologies and caps. It can be difficult to compare and determine which one is best suited for you.

In exchange for downside market protection, you’ll usually receive less than 100% of the index’s gains. How much you’ll get depends on the limiting factor(s) used.

 is the maximum rate of interest the annuity can earn during the index term. For instance, the annuity may stipulate a limit of 6% annually. If the index performance does not exceed the cap, you’ll get the full return.

 determines what percentage of the increase in the underlying market index will be used to calculate the interest credits during the index term. For instance, it may say you’ll get 60% of the index’s rise. 

 is the percentage that’s deducted from the change in the underlying index value to determine the net amount of index-linked interest credited to the annuity. For example, if the underlying index grew by 11% and the annuity has a spread/margin of 4%, you would net 7%.

So, where do you begin? I recommend first clearly defining your needs and goals. Think of three primary goals to choose from:

 If this is your primary goal, you are looking for indexed annuities that have a good likelihood of performing well by crediting the most interest possible over time. You’ll be less concerned with guaranteed-income options and other bells and whistles. All extra features have a cost to the insurance company, which usually passes the cost onto the annuity owner in the form of reduced earnings potential. They can work against your goal of maximizing the growth of your money.

Besides choosing a simpler product, what can you do to increase the odds you’ll get the best long-term return? You can start by ranking indexed annuities by their current cap rates or participation rates, but that doesn’t provide a complete picture.

Another way to compare is to run back-testing based on historical index performance to try and get an idea of how a particular indexed annuity sub-account might perform in the future. Of course, past performance is not a guarantee of future performance, but it’s a good starting point.

Some annuity agents have proprietary software and tools to help consumers make these comparisons. However, most back-testing assumes that the current cap rates and participation rates remain unchanged for the entire test period. This is a bit deceptive because insurance companies can adjust cap and participation rates annually, and many do. Understanding a particular insurance company’s history on cap and participation rate adjustments can be helpful.

 If this is your main goal, you are looking for an indexed annuity that has strong future income guarantees, typically via an income rider. You may be less concerned with account value growth as long as the maximum future income goal is achieved.

This is the easiest goal to research. Again, some agencies, such as AnnuityAdvantage, have proprietary tools to compare and rank all indexed annuity income riders for easy comparison.

But you should not make your decision based solely on the amount of guaranteed future income. Since you’ll be relying on the insurance company to provide income payments for your lifetime, you should also consider their financial strength.

What if two income riders produce the same income payments? Look at other factors to break the tie. Which underlying annuity has higher cap or participation rates? Which issuing company is financially stronger and better rated? Which annuity offers indexes that you like—is the S&P 500 the only choice, or are there other options? Which one has better liquidity provisions? 

Get both reasonable growth potential and future income guarantees

 With this balanced approach, you will probably not get the very best growth potential or the best future income guarantees. By comparing for the best combination of growth and income, you should be able to do well in both areas. This will let you take advantage of both growth potential and guaranteed income depending on how your needs develop in the future. This gives you the most flexibility. 

A competent, trustworthy and ethical annuity agency can help you sort through the complexities of indexed annuities and make the best choice. If an agent starts to ramp up sales pressure, look elsewhere.

Three approaches to deciphering a valuable but sometimes complex annuity product.