Newsletter for November 2001

Annuities offer retirement investors a number of useful options. This issue's Featured Question takes a look at three of the most common types. The Article Briefings touch on other aspects of annuities, as well as income planning, 401(k) news, and recent developments with corporate pension funds.

Also, if you haven't received your federal income tax rebate, be sure to check out this month's Resource Link - a web site to help nearly 400,000 people claim their undeliverable IRS checks.

Article Briefings
Retire with Real Money: Income Stops, Outgo Rises
401 (k) Investors Seeking Balance
Betting on a Long Life
What Your 401(k) Needs Now
Immediate-Variable Annuities Beckon to Aging Baby Boomers
No More Free Rides to Pension Plan Managers
Retirement Plan Survey Shows Surprising Results

Featured Question
Annuities: What They Are, How They Work

Resource Links
Unclaimed Tax Rebates: Is Your Name Listed Here?

Retire With Money: Income Stops, Outgo Rises
Money [money.cnn.com] 10/01, Pg. 175; Fisher, Dan.

Retirement savings should not only cover about 80 to 90 percent of an individual's pre-retirement spending, it should also account for increased spending, especially if early retirement is an option. Medical insurance for early retirees rises because Medicare is not available to those under 65; travel expenses increase if you plan on vacationing often during early retirement; and periodic maintenance costs for home owners tend to increase. Additionally, what were once miscellaneous costs may now become regular expenses in a retiree's budget, such as golf, eating out, and other recreational activities. Retirement savings should allow retirees to live comfortably with enough of a safety net to mitigate emergency situations.

401(k) Investors Seeking Balance
Employee Benefit News [www.benefitnews.com] 10/01, Vol. 15, No. 10, Pg. 1; Gunsauley, Craig.

A weak economic outlook and the uncertainty surrounding the stock market have 401(k) plan participants seeking other means of savings. Twenty-eight percent of participants have shifted a portion of their retirement assets into less volatile investments such as bond and stable value funds, according to a recent survey of 1,200 participants by the Principal Financial Group. Principal reports that this asset flow to stable value is twice the rate seen in the first quarter of this year. Plan participants do remain bullish, however, with some 70 percent of contributions moving into equity investments.

Betting on a Long Life
U.S. News & World Report [www.usnews.com] 10/22/01, Pg. 65; Wiener, Leonard.

A single-premium immediate annuity can boost income because the payouts include a withdrawal of a portion of the funds you put in. While the principal is eliminated at the end of one's life expectancy, the insurance company will continue to provide full monthly payments if you live longer. In times such as these, a growing number of people are turning to investments that guarantee income for life with no investment decisions.

What Your 401(k) Needs Now
Smart Money [www.smartmoney.com] 10/01, Pg. 109; McGregor, Jena.

Companies do not always take the best care of their 401(k) plans, so that even the most conscientious of employees does not get the most benefits because the company does not let them diversify, max contributions, or know about all the fees charged. 401(k) plans are in better shape than they used to be, but they still need improving. Knowing this, investors can demand certain things of their employers. These might include such things as a reduction of the fees that nibble away at 401(k) plans; a selection of better funds rather than just additional funds; the ability to max out contributions; no delay in rolling over money; and matching contributions in cash rather than company stock.

Immediate-Variable Annuities Beckon to Aging Baby Boomers
Wall Street Journal [interactive.wsj.com] 10/23/01, Pg. C1; Clements, Jonathan.

As spendthrift baby boomers retire, they can look to immediate-variable annuities to provide income for life. With such an investment, you are able to spread your money across an array of mutual funds. After purchasing an immediate-variable annuity, you receive an initial monthly income. The size of this income depends on, among other things, the amount you invest, your age and sex, and the assumed investment return.

No More Free Rides for Pension Plan Managers
Boston Globe [www.boston.com/globe] 10/17/01, Pg. D1; Stein, Charles and Syre, Steven.

Corporate pension plans are starting to see their "free ride" of not having to fund their plans for years come to an end. Investment gains alone may no longer be enough to pay retirees. According to Malcolm Hodge, retirement practice leader at William M. Mercer in Boston, the downturn in the stock market is forcing some corporate pension plans to contribute new funds for the first time in 15 years. "The surpluses in their plans that built up in the late [1990s], in many cases, are close to being eliminated," says Hodge. In addition, corporate pensions, more so than government pensions, reaped the benefits on their investment gains. For example, companies were able to claim the excess income as their own under accounting rules. Still, most plans remain in good shape.

Retirement Fund Survey Shows Surprising Results
Pensions & Investments [www.pionline.com] 10/01, Vol. 29, No. 21, Pg. 4; Jacobius, Arleen.

Mercer's 2001 Survey on Employee Savings Plans shows plan sponsors that offer both defined benefit and defined contribution plans fare better among employees than companies that offer only a defined contribution plan. The survey suggests this is so because plan sponsors that offer defined benefit and defined contribution plans pay more attention to the investment options in both plans than companies with only a defined contribution plan. What is more, the survey found that sponsors with both plans have a more generously defined contribution plan.

Q. I've heard about annuities available through life insurance companies. How do they work? Can they be tied to an IRA, or must I invest directly through a life insurance company?

A. Annuities are life insurance products that may be purchased directly from a life insurance company or within an IRA. Any taxable profits will be treated as ordinary income rather than capital gains. However, taxes vary depending on how you purchase your annuity. If you work directly with the life insurance company, you will normally purchase the annuity with after-tax money. When you withdraw the annuity after age 59-1/2, you will pay tax on the profits, but not on the principal, which has already been taxed. (If you withdraw the annuity prior to age 59-1/2, however, you will pay tax on the profits plus a 10 percent penalty.) As you withdraw money from the annuity, you pay tax on the profit first and get a return on the principal last. If you purchase an annuity inside a traditional IRA, your initial investment is not taxed. When you withdraw the annuity, you will pay income tax on both the principal and the profit. A Roth IRA presents a third option. You invest with money that has already been taxed. Then, after five years, the Roth tax rules come into play and you will no longer pay tax on the profits when you withdraw. Of course, you'd still be subject to early withdrawal penalties of the annuity itself.

The management and the return on your annuity depend on which type you purchase. Some of the more common types are fixed annuities, variable annuities, or equity indexed annuities.

With a fixed annuity, your money is invested in the life insurance company itself; the company holds it as an asset. The annuity then serves as a basic savings vehicle. You will receive a fixed rate of return for a set number of years (for example, 6 percent for 5 years). At the end of that time, you can reset the rate, pull the money out, or roll it into a different fixed annuity. If you roll it over by doing a 1035 tax-free exchange, you might not have to pay any taxes on the transaction.

Variable annuities are managed by independent, mutual fund managers. It is still a life insurance product, but it is separate from the company's assets. This means that you can retrieve your money more easily if the company fails. Normally, you must leave your money in a variable annuity for a set period of time (often 7 to 10 years) to avoid penalties for early withdrawal. Variable annuities also offer some interesting riders. For example, they may guarantee your initial investment or even your initial investment plus 5 to 10 percent. A death benefit option can provide your beneficiaries with the highest value of your annuity over time, even if that value has decreased at the time of your death.

An equity indexed annuity generates returns that are tied to an index (Standard & Poor, Dow, etc.). You receive a percentage of the growth of that index. The percentage (such as 8 percent, 12 percent, or 18 percent) depends on the company from which you purchase the annuity. However, there is a guaranteed minimum rate of return (such as 3 percent), and there is normally a cap on the maximum, as well. Do your homework carefully before selecting an equity indexed annuity. There are usually long surrender periods (10 to 12 years), substantial penalties for early withdrawal (4 to 20 percent), and often high commissions and fees.

Unclaimed Federal Tax Rebates
http://www.tax.org/rebate

The IRS has been unable to reach 390,000 people who should receive tax rebates, including the recent $300 to $600 checks generated by the 2001 tax relief act. If you suspect your check may have been returned to the IRS as "undeliverable," visit this web site and search the list for your name. They also prove a "fuzzy" search, in case your name is misspelled in IRS records. If you find your name listed, a toll-free number is provided to tell you how to proceed. You only have until December 5th to request that your check be re-issued; after that, you can claim the rebate on your 2001 tax return.


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