In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time, until the death of the person or persons named in the contract or until a final date, whichever comes first. However, the majority of modern annuity customers use annuities only to accumulate funds free of income and capital gains taxes and to later take lump-sum withdrawals without using the guaranteed-income-for-life feature.

Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states. Variable annuities have features of both life insurance and investment products. In the U.S., annuity insurance may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others. Their federal tax treatment, however, is governed by the Internal Revenue Code. Variable annuities are regulated by the Securities and Exchange Commission and the sale of variable annuities is overseen by the Financial Industry Regulatory Authority (FINRA) (the largest non-governmental regulator for all securities firms doing business in the United States).
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There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and another phase in which customers receive payments for some period of time (the annuity or income phase). During this latter phase, the insurance company makes income payments that may be set for a stated period of time, such as five years, or continue until the death of the customer(s) (the “annuitant(s)”) named in the contract. Annuitization over a lifetime can have a death benefit guarantee over a certain period of time, such as ten years. Annuity contracts with a deferral phase always have an annuity phase and are called deferred annuities. An annuity contract may also be structured so that it has only the annuity phase; such a contract is called an immediate annuity. Note this is not always the case.

Immediate annuity

The term “annuity,” as used in financial theory, is most closely related to what is today called an immediate annuity. This is an insurance policy which, in exchange for a sum of money, guarantees that the issuer will make a series of payments. These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer. It is also possible to structure the payments under an immediate annuity so that they vary with the performance of a specified set of investments, usually bond and equity mutual funds. Such a contract is called a variable immediate annuity. See also life annuity, below.

The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings with a tax-deferred growth factor. A common use for an immediate annuity might be to provide a pension income. In the U.S., the tax treatment of a non-qualified immediate annuity is that every payment is a combination of a return of principal (which part is not taxed) and income (which is taxed at ordinary income rates, not capital gain rates). Immediate annuities funded as an IRA do not have any tax advantages, but typically the distribution satisfies the IRS RMD requirement and may satisfy the RMD requirement for other IRA accounts of the owner (see IRS Sec 1.401(a)(9)-6.)

When a deferred annuity is annuitized, it works like an immediate annuity from that point on, but with a lower cost basis and thus more of the payment is taxed.

Annuity with period certain

This type of immediate annuity pays the annuitant for a designated number of years (i.e., a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy). Thus this option is not necessarily suitable for an individual’s retirement income, as the person may outlive the number of years the annuity will pay.

Life annuity

A life or lifetime immediate annuity is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan.

A life annuity works somewhat like a loan that is made by the purchaser (contract owner) to the issuing (insurance) company, which pays back the original capital or principal (which isn’t taxed) with interest and/or gains (which is taxed as ordinary income) to the annuitant on whose life the annuity is based. The assumed period of the loan is based on the life expectancy of the annuitant. In order to guarantee that the income continues for life, the insurance company relies on a concept called cross-subsidy or the “law of large numbers”. Because an annuity population can be expected to have a distribution of lifespans around the population’s mean (average) age, those dying earlier will give up income to support those living longer whose money would otherwise run out. Thus it is a form of longevity insurance.

A life annuity, ideally, can reduce the “problem” faced by a person that he/she doesn’t know how long he/she will live, and so he/she doesn’t know the optimal speed at which to spend his/her savings. Life annuities with payments indexed to the Consumer Price Index might be an acceptable solution to this problem, but there is only a thin market for them in North America.

Life annuity variants

For an additional expense (either by way of an increase in payments (premium) or a decrease in benefits), an annuity or benefit rider can be purchased on another life such as a spouse, family member or friend for the duration of whose life the annuity is wholly or partly guaranteed. For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after death, for so long as the spouse survives. The annuity paid to the spouse is called a reversionary annuity or survivorship annuity. However, if the annuitant is in good health, it may be more advantageous to select the higher payout option on his or her life only and purchase a life insurance policy that would pay income to the survivor.

The pure life annuity can have harsh consequences for the annuitant who dies before recovering his or her investment in the contract. Such a situation, called a forfeiture, can be mitigated by the addition of a period-certain feature under which the annuity issuer is required to make annuity payments for at least a certain number of years; if the annuitant outlives the specified period certain, annuity payments continue until the annuitant’s death, and if the annuitant dies before the expiration of the period certain, the annuitant’s estate or beneficiary is entitled to the remaining payments certain. The tradeoff between the pure life annuity and the life-with-period-certain annuity is that the annuity payment for the latter is smaller. A viable alternative to the life-with-period-certain annuity is to purchase a single-premium life policy that would cover the lost premium in the annuity.

Impaired-life annuities for smokers or those with a particular illness are also available from some insurance companies. Since the life expectancy is reduced, the annual payment to the purchaser is raised.

Life annuities are priced based on the probability of the annuitant surviving to receive the payments. Longevity insurance is a form of annuity that defers commencement of the payments until very late in life. A common longevity contract would be purchased at or before retirement but would not commence payments until 20 years after retirement. If the nominee dies before payments commence there is no payable benefit. This drastically reduces the cost of the annuity while still providing protection against outliving one’s resources.

Deferred annuity

The second usage for the term annuity came into being during the 1970s. Such a contract is more properly referred to as a deferred annuity and is chiefly a vehicle for accumulating savings with a view to eventually distributing them either in the manner of an immediate annuity or as a lump-sum payment.

All varieties of deferred annuities owned by individuals have one thing in common: any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth.

A deferred annuity which grows by interest rate earnings alone is called a fixed deferred annuity (FA). A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is called a variable annuity (VA).

A new category of deferred annuity, called the fixed indexed annuity (FIA) emerged in 1995 (originally called an Equity-Indexed Annuity). Fixed indexed annuities may have features of both fixed and variable deferred annuities. The insurance company typically guarantees a minimum return for EIA. An investor can still lose money if he or she cancels (or surrenders) the policy early, before a “break even” period. An oversimplified expression of a typical EIA’s rate of return might be that it is equal to a stated “participation rate” multiplied by a target stock market index’s performance excluding dividends. Interest rate caps or an administrative fee may be applicable.

Deferred annuities in the United States have the advantage that taxation of all capital gains and ordinary income is deferred until withdrawn. In theory, such tax-deferred compounding allows more money to be put to work while the savings are accumulating, leading to higher returns. A disadvantage, however, is that when amounts held under a deferred annuity are withdrawn or inherited, the interest/gains are immediately taxed as ordinary income.

Features

A variety of features and guarantees have been developed by insurance companies in order to make annuity products more attractive. These include death and living benefit options, extra credit options, account guarantees, spousal continuation benefits, reduced contingent deferred sales charges (or surrender charges), and various combinations thereof. Each feature or benefit added to a contract will typically be accompanied by an additional expense either directly (billed to client) or indirectly (inside product).

Deferred annuities are usually divided into two different kinds:

Fixed annuities offer some sort of guaranteed rate of return over the life of the contract. In general such contracts are often positioned to be somewhat like bank CDs and offer a rate of return competitive with those of CDs of similar time frames. Many fixed annuities, however, do not have a fixed rate of return over the life of the contract, offering instead a guaranteed minimum rate and a first year introductory rate. The rate after the first year is often an amount that may be set at the insurance company’s discretion subject, however, to the minimum amount (typically 3%). There are usually some provisions in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (usually the interest earned in a 12-month period or 10%), unlike most CDs. Fixed annuities normally become fully liquid depending on the surrender schedule or upon the owner’s death. Most equity index annuities are properly categorized as fixed annuities and their performance is typically tied to a stock market index (usually the S&P 500 or the Dow Jones Industrial Average). These products are guaranteed but are not as easy to understand as standard fixed annuities as there are usually caps, spreads, margins, and crediting methods that can reduce returns. These products also don’t pay any of the participating market indices’ dividends; the trade-off is that contract holder can never earn less than 0% in a negative year.

Variable annuities allow money to be invested in insurance company “separate accounts” (which are sometimes referred to as “subaccounts” and in any case are functionally similar to mutual funds) in a tax-deferred manner. Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans. In addition, many variable annuity contracts offer a guaranteed minimum rate of return (either for a future withdrawal and/or in the case of the owner’s death), even if the underlying separate account investments perform poorly. This can be attractive to people uncomfortable investing in the equity markets without the guarantees. Of course, an investor will pay for each benefit provided by a variable annuity, since insurance companies must charge a premium to cover the insurance guarantees of such benefits. Variable annuities are regulated both by the individual states (as insurance products) and by the Securities and Exchange Commission (as securities under the federal securities laws). The SEC requires that all of the charges under variable annuities be described in great detail in the prospectus that is offered to each variable annuity customer. Of course, potential customers should review these charges carefully, just as one would in purchasing mutual fund shares. People who sell variable annuities are usually regulated by FINRA, whose rules of conduct require a careful analysis of the suitability of variable annuities (and other securities products) to those to whom they recommend such products. These products are often criticized as being sold to the wrong persons, who could have done better investing in a more suitable alternative, since the commissions paid under this product are often high relative to other investment products.

There are several types of performance guarantees, and one may often choose them à la carte, with higher risk charges for guarantees that are riskier for the insurance companies. The first type is a guaranteed minimum death benefit (GMDB), which can be received only if the owner of the annuity contract, or the covered annuitant, dies.

GMDBs come in various flavors, in order of increasing risk to the insurance company:

Return of premium (a guarantee that you will not have a negative return)
Roll-up of premium at a particular rate (a guarantee that you will achieve a minimum rate of return, greater than 0)
Maximum anniversary value (looks back at account value on the anniversaries, and guarantees you will get at least as much as the highest values upon death)
Greater of maximum anniversary value or particular roll-up

Insurance companies provide even greater insurance coverage on guaranteed living benefits, which tend to be elective. Unlike death benefits, which the contractholder generally can’t time, living benefits pose significant risk for insurance companies as contractholders will likely exercise these benefits when they are worth the most. Annuities with guaranteed living benefits (GLBs) tend to have high fees commensurate with the additional risks underwritten by the issuing insurer.

Some GLB examples, in no particular order:

Guaranteed minimum income benefit (GMIB, a guarantee that one will get a minimum income stream upon annuitization at a particular point in the future)
Guaranteed minimum accumulation benefit (GMAB, a guarantee that the account value will be at a certain amount at a certain point in the future)
Guaranteed minimum withdrawal benefit (GMWB, a guarantee similar to the income benefit, but one that doesn’t require annuitizing)
Guaranteed-for-life income benefit (a guarantee similar to a withdrawal benefit, where withdrawals begin and continue until cash value becomes zero, withdrawals stop when cash value is zero and then annuitization occurs on the guaranteed benefit amount for a payment amount that is not determined until annuitization date.)

Recently, insurance companies developed asset-transfer programs that operate at the contract level or the fund level. In the former, a percentage of client’s account value will be transferred to a designated low-risk fund when the contract has poor investment performance. On the fund level, certain investment options have a target volatility built within the fund (usually about 10%) and will re-balance to maintain that target. In both cases, they are stated to help buffer poor investment performance until markets perform better (where they will transition back to normal allocations to catch an upswing). However, there are criticisms of these programs including, but not limited to, often mandating these programs on clients, restricting flexibility of investing, and not catching the upswing of markets fast enough due to the underlying design of such programs.

Be careful in regard to using GLB riders in non-qualified contracts as most of the products in the annuity marketplace today create a 100% taxable income benefit whereas income generated from an immediate annuity in a non-qualified contract would partially be a return of principal and therefore non-taxable.

Criticisms of deferred annuities

Deferred annuities are generally sold by financial professionals, some of whom may work directly for an insurance company. Most financial professionals, however, are independent agents of the insurance company, not employees. The financial professional who sells an annuity collects a commission from the insurance company. This commission will be a percentage of the total premium paid by the investor. This percentage can be as little as 1% and as high as 12%; the average is 6%. Since these commissions appear high and there are deferred sales charges on annuities, many financial gurus have criticized annuity products.

The investor will, generally, not pay any of this commission directly to the financial professional; the commission is paid by the insurance company to the financial professional up front. The insurance company will recapture the commission paid to the financial professional through the fees charged to the customer (in a variable or fixed indexed annuity) or the spread in the interest rate market (for a fixed annuity). There are also deferred back-end charges that will be applied if the investor closes out his or her contract before the agreed-upon time frame, usually 8 years. These charges can last for as little as 1 year or as many as 20 years, depending on the type of annuity and issuing company. These back-end charges concern many financial professionals and financial gurus.

Some annuities do not have any deferred surrender charges and do not pay the financial professional a commission, although the financial professional may charge a fee for his or her advice. These contracts are called “no-load” variable annuity products and are usually available from a fee-based financial planner or directly from a no-load mutual fund company. Of course various charges are still imposed on these contracts, but they are less than those sold by commissioned brokers. It is important that potential purchasers—of annuities, mutual funds, tax-exempt municipal bonds, commodities futures, interest rate swaps, in short, any financial instrument—understand the fees on the product and the fees a financial planner may charge.

Variable annuities are controversial because many believe the extra fees (i.e., the fees above and beyond those charged for similar retail mutual funds that offer no principal protection or guarantees of any kind) may reduce the rate of return compared to what the investor could make by investing directly in similar investments outside of the variable annuity. A big selling point for variable annuities is the guarantees many have, such as the guarantee that the customer will not lose his or her principal. Critics say that these guarantees are not necessary because over the long term the market has always been positive, while others say that with the uncertainty of the financial markets many investors simply will not invest without guarantees. Past returns are no guarantee of future performance, of course, and different investors have different risk tolerances, different investment horizons, different family situations, and so on. The sale of any security product should involve a careful analysis of the suitability of the product for a given individual.

A controversial practice of insurance sales is the selling of insurance contracts within an IRA or 401(k) plan. Since these investment vehicles are already tax deferred, investors do not receive additional tax shelters from the annuities. The benefit of the annuity contract is the guaranteed lifetime income that all annuity contracts must have by state law. Approximately 90% of annuitants, however, have not taken the life annuity upon retirement. If an investor does not intend to take the life income option from an annuity contract at retirement he or she may want to consider a low-cost deferred annuity.

If an investor needs to take lifetime income at retirement, on the other hand, he or she may want to try to buy an annuity upon retirement or might consider selecting a 401(k) plan account with an option to buy the annuity just before retirement.

Taxation

In the U.S. Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax-deferred, that is, not subject to current income tax, for annuities owned by individuals. The tax deferred status of deferred annuities has led to their common usage in the United States. Under the U.S. tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of annuity contracts are bought primarily for the tax benefits rather than to receive a fixed stream of income. If an annuity is used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution (because the taxpayer has no tax basis in any of the money in the annuity). If the annuity contract is purchased with after-tax dollars, then the contract holder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value, according to the tax regulation Section 1.72-5. (This is commonly referred to as the exclusion ratio.) After the taxpayer has recovered all of his basis, then 100% of the payments thereafter are subject to ordinary income tax.

Since the Jobs and Growth Tax Relief Reconciliation Act of 2003, the use of variable annuities as a tax shelter has greatly diminished, because the growth of mutual funds and now most of the dividends of the fund are taxed at long term capital gains rates. This taxation, contrasted with the taxation of all the growth of variable annuities at income rates, means that in most cases, variable annuities shouldn’t be used for tax shelters unless very long holding periods apply (for example, more than 20 years).

Also, any withdrawals before an investor reaches the age of 59 are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.

In the October 2003 edition of Wealth Manager, an article titled “Photo Finish” by W. McAfee, Jr. examined the effects of taxation on annuities relative to other investment vehicles. The author found that annuities are generally not effective as a tax deferral vehicle and that there are significant flaws in the use of annuities for financial planning during the accumulation phase.
[edit] Insurance company default risk and state guaranty associations.

An investor should consider the financial strength of the insurance company that writes annuity contracts. Major insolvencies have occurred at least 62 times since the conspicuous collapse of the Executive Life Insurance Company in 1991.

Insurance company defaults are governed by state law. The laws are, however, broadly similar in most states. Annuity contracts are protected against insurance company insolvency up to a specific dollar limit, often $100,000, but as high as $500,000 in New York, New Jersey, and the state of Washington. This protection is not insurance and is not provided by a government agency. It is provided by an entity called the state Guaranty Association. When an insolvency occurs, the Guaranty Association steps in to protect annuity holders, and decides what to do on a case-by-case basis. Sometimes the contracts will be taken over and fulfilled by a solvent insurance company.

The state Guaranty Association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The Guaranty Associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance(e.g.). Presumably this is a response to concerns by stronger insurance companies about moral hazard.

How much money should I withdraw annually from my portfolio when I retire?

I get that question a lot from friends and family. (Occupational hazard.) It’s also one of the most hotly debated issues in financial planning. Why? First, it’s important; we all hope to live happily in retirement. Second, every person’s situation is unique, so there’s no standard set of spending assumptions for retirement planning. Third, market returns may be mean-reverting over long time periods, but a person’s retirement happens over a specific time period, parts of which may deviate significantly from longer-term average returns that are used to forecast future asset values.

Let’s start with why the question is so critical. Ideally, you’ve been saving for four to five decades to build your nest egg. Now that you’ve stopped working, you want to use that hard-earned money for daily expenses, health care and the things you wanted to do while you were working — like taking a month-long African safari. But you also want to make sure your money lasts until you or your spouse dies, whichever comes later. Often, you want it to last even longer: Many people hope to pass along some of their assets to their children, grandchildren and other loved ones.

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Now, if we all had the same assets, spent roughly the same amount each year and died at the same age, figuring out how to budget for retirement would be a relatively simple process. Of course, we don’t. So the retirement planning equation involves many variables, such as: At what age do you want to retire? Do you have a pension or expect to receive Social Security? What are your fixed expenses and how much will they increase with inflation? Do you have a family history of longevity? Do you want to pass money down to subsequent generations?

This is a just a sample of typical retirement planning questions, but it makes the point: We all have different starting assumptions, needs and desires. Yet, many people of different means often get the same answer when they ask how much money to withdraw annually from a retirement portfolio: Usethe 4% rule.

Originally articulated in a 1998 paperbythreeprofessorsatTrinityCollege in Texas (a paper now known as the TrinityStudy), the rule recommends that you withdraw 4% of your retirement savings in your first year of retirement. Every following year, withdraw the same amount plus an adjustment for inflation. Historically, retirees who follow that schedule have had a high chance that their portfolio will last at least 30 years. In the original study, the success rate varied slightly depending on the ratio of stocks to bonds in a portfolio, with a 50-50 stock to bond ratio producing a 95% success rate. (Subsequent studies have examined how to add a variable component to the formula based on previous year portfolio returns with the goal of increasing the success rate to 100%.)

The 4% rule is a simple one and easy to remember, which I think is one reason why it’s become so popular in my business — it’s a little like a doctor telling a patient to take two aspirin and call in the morning. Another is its high estimated success rates; again, like doctors, financial planners first want to do no harm.

But in the years since the rule was introduced, skeptics have raised a number of objections to it. Some say that it’s too conservative and that it will cause those who follow it to live less well than they would like to, particularly in their early retirement years when people are more likely to travel and spend more. Others say it’s too aggressive: What happens if we’re in an extended period of stock market stagnation or decline — like, say, the last decade? Shouldn’t you then be withdrawing less than 4% when 10-year government bonds are paying less than 2%? Put simply, should your withdrawal rate remain constant when your returns don’t?

Nobody wants to be a member of the unlucky 5% of retirees who follow the 4% rule but still run out of money. In my next post I’ll look at some of the ways economists and financial planners have suggested amending the rule to prevent that from happening.

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The good news for women: they live longer, so they will have longer to enjoy their retirement. The bad news: they live longer, and so their retirement will be much more expensive than for their male counterparts.

The fly in the ointment: As a woman, you may have to put in more effort before you get to enjoy a worry-free, financially secure retirement.

Women earn an average of 76 percent of men’s salaries. Does that shock you? Yes, even now, women are still way behind the earning curve in corporate America. But rather than get into a discussion of the fairness or unfairness of it all, let’s concentrate on just what women can do to ensure that they aren’t left out to dry in their retirement age!

After all, because women typically live longer than men, combined with the skyrocketing divorce rate, many women will find themselves alone in their older years. (Statistics show that most women are alone by age 56!) And the figures show us that if a woman took out any time from her career to have children (about seven years) she will pay for it later with only 50% of what her male counterparts will receive in retirement benefits.

So, what can a woman do to ensure that she can retire in style? Start by taking a look at some of our suggestions below.

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Most experts advise us to save about 10 percent of our income in order to have a sufficient amount to retire one, but if you are a woman, you should be saving closer to 12 percent. Because of the reasons listed above, you simply won’t receive the same amount in retirement pensions. What’s more, the way that social security figures your monthly payment is based on the top 35 years of your work history. But guess what? If you were out for seven or so of those years having children, they will be counted as “O,” and the overall amount will be reduced.

Wiser since you will need to save more by retirement age, you will have to more careful with your . Know your risk level, and then don’t exceed it under any circumstances!

Join the Team Many employers offer investment and savings strategies such as 401K plans and savings matching programs, and if you are a woman, you should plan to participate in all of them that you can.

Use Cash, Not Credit

An alarming number of Americans today are in serious financial trouble. This was made evident recently with the passing of the new bankruptcy bill that will make it more difficult to file. A record number of people filed for bankruptcy in anticipation of it.

It’s easy to get into when people today spend an average of $1.21 for every dollar they earn, but don’t be tempted to fall into that trap. Instead, plan to put as much money away for the future as you can.

Don’t Go It Alone : While it is important for all women to step up to the plate and get serious about their finances, it’s equally important for them to get advice from professionals. Talk to planners, investment specialists and budget planners to get all the advice that you can.

When people discuss retiring or having a sea change or chasing their passion, the different reactions usually involve money: “I’d love to do it but I don’t have enough money.”

You reach retirement age and don’t have enough to retire on, you’ll be left with two options, either to delay your retirement or reduce your standard of living in retirement. Which one would you choose?

It always helps to know what you are aiming at and wealth creation is no different. I will assume that you want to build wealth in order to be able to retire and still live well. How much money will you really need?

I was attending a wealth building conference and one of the other speakers, a financial planner, made a statement that when you retire you only need about 50% of you pre-retirement income. I was amazed at this statement and I asked him back stage how he came to that conclusion. He told me that all retired people do is sit around and watch television all day.

My response to him was that this was a description of what broke people do (namely his clients). Retired people who have successfully built a decent wealth portfolio are living the time of their life! What are you aiming at? The lifestyle of the television watching clients of our financial planning friend or the time of your life lifestyle that comes with wealth?

How much will you need for a good lifestyle in retirement?

The short answer is that, if you want to maintain the lifestyle that you are accustomed to then you will need a monthly income equal to your monthly income one month before you retired. Anything less and there is something that you will have to give up.

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When I say this I often hear the following argument. If you were investing money prior to retirement and you no longer need to do this after retirement then you don’t need as large an income as you did before retirement.

I don’t know why so many people are so determined to aim at reducing their income but I will answer the question anyway, Firstly it depends on what age you are retiring at. If you are young or at least plan to live a long time after retirement then you may well need to keep investing.

Secondly, even if it is true that you don’t need to invest any longer then let me ask you what you plan to do in retirement. You see the biggest difference that retirement makes in your life is that you suddenly have a lot more free time to fill. How do you plan to fill it and what will that cost you?

If you plan to do some traveling then you will need to fund it. I don’t know too many retired people who would prefer roughing it in low quality accommodation of last resort. The retired people I know prefer high quality accommodation of a five star resort.

Realistically determining your financial needs in retirement is the first step to actually achieving the income that will provide for those needs. The only thing worse than aiming too high and missing it is aiming too low and getting it.

I would like to suggest that you put pen to paper and answer a few simple questions.

1. What age do you want to retire at?
2. How many years do you expect (considering today’s life expectancy) to live after retiring?
3. What lifestyle would you like to live in retirement?
4. What will that lifestyle cost per month?
5. Am I doing enough now to provide for that?

Please don’t make the mistake of aiming too low; there are too many people at that end of the retirement economy now!

There has always been a need for retirement planning and today is certainly no different. There are many other types of retirement plans that are available to you. You will need to take the time needed to evaluate what your current financial needs are and what you expect the future to hold.

You must keep in mind that your planning today is not just for the ideal future, but the future that will be reality for you if things turn out to not be ideal or according to your plans today. By starting early and contributing the maximum that you can afford, you will have a better chance of being prepared for the unforeseen.

Unsure of what you will need for retirement? Are you on track or not? Don’t forget that life expectancy is getting longer. Today you can expect to live 20-30 years past retirement and, suddenly, the amount you need to retire comfortably with a major change in lifestyle gets very large.

Lets say that today you need $40,000 to live on and you retire in 20 years, you will need a minimum of $850,000 to carry you through retirement. That is assuming that you will live an additional 20 years after you retire and are in good health.

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There is something to be said for debt reduction as being part of your retirement planning, as well, since the last thing you want to do is go into retirement with a ton of debt still hanging over your head.

Having $40,000 a year to live on with little to no debt will obviously go farther than if you still have the same debt load as you do now. If you reduce your debt load by the same amount that you save for retirement, you double your retirement savings.

If at all possible, do not make any early withdrawals from your retirement account, since most people have found that in addition to the heavy penalties for doing so, the prospect of paying it back, even with good intentions, is tougher than it seems. An early withdrawal is a sure way of defeating the purpose of your retirement PLAN.

There has always been a need for retirement planning and today is certainly no different. There are many types of retirement plans that are available to you. You will need to take the time needed to evaluate what your current financial needs are and what you expect the future to hold.

You must keep in mind that your planning today is not just for the ideal future, but the future that will be reality for you if things turn out to not be ideal or according to your plans today. By starting early and contributing the maximum that you can afford, you will have a better chance of being prepared for the unforeseen.

Unsure of what you will need for retirement? Are you on track or not? Don’t forget that life expectancy is getting longer. Today you can expect to live 20-30 years past retirement and, suddenly, the amount you need to retire comfortably with a major change in lifestyle gets very large.

Lets say that today you need $40,000 to live on and you retire in 20 years, you will need a minimum of $800,000 to carry you through retirement. That is assuming that you will live an additional 20 years after you retire and are in good health.

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There is something to be said for debt reduction as being part of your retirement planning, as well, since the last thing you want to do is go into retirement with a ton of debt still hanging over your head.

Having $40,000 a year to live on with little to no debt will obviously go farther than if you still have the same debt load as you do now. If you reduce your debt load by the same amount that you save for retirement, you double your retirement savings.

If at all possible, do not make any early withdrawals from your retirement account, since most people have found that in addition to the heavy penalties for doing so, the prospect of paying it back, even with good intentions, is tougher than it seems. An early withdrawal is a sure way of defeating the purpose of your retirement PLAN

Don’t fall behind. Finance charges, interest payments, getting discouraged about your finances… all problems that can occur if you let yourself fall behind. Whether it’s bills, credit cards, or student loan payments, falling behind can be a very difficult problem to come back from. The more you have to pay out in charges, the less you will have to invest in your future.

Set goals. If you don’t know where you are headed, how do you get there? In order to accumulate wealth you need a plan. Write out your goals, a way to achieve them, and you’ll be on your way to an early retirement.

Invest early. The greatest thing you can do to build wealth is start early. Even if you can’t invest much, start with what you can and let your money grow over time. As Albert Einstein said, “compound interest is the greatest mathematical discovery of all time.”

Invest in what you know. Whether you are looking to invest in real estate, stocks, or anything else, make sure you know how the investment works. The great Warren Buffett was often criticized for not investing in technology during the dot-com boom. His answer was simple. If you don’t know the business model, what the company does on a day to day basis, or how it generates revenue now, and in the future, then stay away from it. This principle can be applied to all types of investing.

Don’t do what the crowd is doing. When everyone is starting to get into an investment, that is generally when the smart investors are getting out. If everybody knows a stock is hot, or that their real estate market is booming, it generally indicates a bubble and that it’s time to cash out. Investors make money buying low and selling high. If an investment is hot and lots of money is flowing into it, you can’t buy low.

Don’t try get rich quick schemes. Don’t get greedy. This is easier said then done, but don’t try to gain too much too fast. Building wealth takes time and hard work… there is no easy way to get rich.

Save more. This is another one that sounds pretty basic, but can be difficult to achieve. Often times people want the instant gratification and go out and treat themselves. If you have some money burning a hole in your pocket at the end of the month, save it. Think about how nice it will be when that money is working for you rather than heading out shopping.

For many people, the closer they get to retirement, the more concerned they get about whether they have saved enough or not. And it’s understandable. With life expectancy climbing and the ability to not only live longer but to do so with a higher quality of life growing as well, it stands to reason that some people will be a little uneasy when their last pay check gets ever closer. Are you one of those people?

The first thing you should do if you find yourself close to retirement with no savings is to calculate the amount of money you will need during retirement as well as what age you plan on retiring. You will find many resources online that will help you come up with this number such as retirement calculators.

Identify Needs: There are many financial needs to think about when getting close to retirement, from wondering what your Old Age Security benefit will look like. You may even think about what it will be like to live on a fixed income for the rest of your life.

But before you do anything, just relax. Don’t try to think about everything at once. Just because you’re close to retirement doesn’t mean you stop planning. As a matter of fact, it’s a great time to refine your plan, or even put one in place for your golden years.
Now that you know how much money you will need on average you can set some savings goals for yourself. There are plenty of ways you can save money from shopping with coupons to taking your lunch to work with you to not buying a new car every year. Wherever you are spending money and can scale back, do. It will mean the difference between a happy retirement and a stressful one.

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While making sure your basic needs will be covered when you retire is important, you should be thinking about estate planning issues and insurance as well. It’s also good to start understanding how your tax situation will change when you retire. That way you won’t be surprised and can take any action that may be necessary to avoid any additional or unnecessary tax.

If you have some investments, consider getting a little aggressive with them, depending of course on the time your time horizon to retirement. Diversified mutual funds can offer decent returns.

If you are still concerned about making it during retirement consider downsizing to a smaller home, less expensive car, fewer vacations, and less shopping sprees. This might take some effort, but it will be worthwhile to be able to retire happily and not continue working when you are 75 years old.

And finally, eliminate any debt you have. Do this as quickly and aggressively as possible because the longer you wait the more money you will have to pay. So, if you pay it off quickly it might be difficult, but it will allow you to save more money for retirement in the long run.

Dollar-cost averaging is a strategy in which a person invests a fixed dollar amount on a regular basis, usually monthly purchase of shares in a mutual fund. When the fund’s price declines, the investor receives slightly more shares for the fixed investment amount, and slightly fewer when the share price is up. It turns out that this strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down

Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares.

When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. It’s a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don’t have to invest the time and effort to monitor market movements and strategically time your investments.

Dollar-cost averaging – the basic premise behind employer-sponsored savings plans like is the practice of investing a set amount each month in a particular investment vehicle. As the share price of your investment fluctuates, so will the number of shares your set amount buys. Sometimes you’ll pay more and sometimes the stock or mutual fund will decrease in value, allowing you to purchase additional shares.

With the vast and varied information available on investing, many have chosen to stop chasing yesterday’s high returns. Using dollar-cost averaging helps them ride out the ups and downs of the market.

Dollar cost averaging involves continuous investment in securities, regardless of fluctuating price levels. Investors should consider their ability to continue purchases through periods of low price levels r chancing economic conditions. Dollar cost average does not assure a profit and does not protect against a loss in a declining market.

Dollar-cost averaging isn’t for everyone. Short-term investors and those concerned about market volatility won’t benefit from the slow and steady pace of dollar-cost averaging. Always meet with a financial professional before investing. For those who want to invest a consistent amount each month and potentially lessen the effects of market volatility, it might be an option.

The main conclusion I can draw that one should not delay investing. If you want to invest, say, $100 in a mutual fund in a year, you should start invest immediately. If you have $1,200 spare money to invest on the first work day of January, split it to quarterly or monthly, as the markets could be on a high on 1st January and you are stuck with the same purchase price. It also helps make investing easier to budget, as the same dollar amount will be purchased at regular, predictable intervals.

You’re young, you just landed a new job and you’re going to be getting a decent pay check. You also have bills and student loans to pay and there are also a few items that you’ve always wanted so now you can finally afford them.

Investing for your retirement may be the last thing on your mind at the start of a new career. Especially being so young. Take some advice from those with a little more experience: Start investing early in your career. Start from day one and you will never miss that money you’re setting aside. Even if it’s only a few dollars a week. They add up to millions by the time retirement age rolls around.

It really does make a difference when you start contributing. It is important to invest in your retirement account early in your career for two reasons. First, if you’re fortunate to receive matching contributions, you don-t want to miss out on those added contributions that are a significant part of your benefit. Second, the longer contributions stay in your account, the more you stand to gain. Your money makes money in the form of earnings, and those earnings in turn make money, and so on. This is what is known as the “miracle of compounding.” As money grows in your account over time, the proportion resulting from earnings will become larger compared to the proportion resulting from contributions. And the best part is you don’t have to pay taxes on the earnings until you with draw them.

By investing the money wisely, typically starting off with investments that build slowly but steadily, you are able to better ensure you have money for your later years. And just because your later years are far away doesn’t mean you should wait to invest. The thing is that the best investments are the ones that take time to pay off. The ones that make you rich over night are few and far between and are also the ones that are risky enough to make you broke overnight as well.

The size of your account balance is going to depend on how much you (and your company if they match funds up to a certain percentage) contribute to your account and how your account grows as a result of earnings on your investments. To get an idea of what your retirement account could be in the future, look at the following projection.

A starts putting away $100 a month when she’s 22. Her money grows at 8 percent a year, and after ten years she stops contributing – and lets her stake grow. B waits until he’s 32 to set aside $100 a month, also growing at 8 percent a year, and he keeps it up until he hits 64. When they both retire at 64, she will have $234,600, and he’ll have only $177,400. Need I say more?

Looking at the numbers, it’s hard to imagine why someone wouldn’t start investing immediately!