Seniors love ‘em—and lawyers hate ‘em: annuities. Based on ample experience with both senior citizens and lawyers, I am always amazed at the depths of both the affection and the rage that are evoked by the subject of annuities. Mentioning the word “annuities’ at an attorney meeting is like yelling, “Attack!” They immediately launch into a review of the sins of annuities. Nonetheless, annuities remains one of the most frequent investments purchased in America. In fact, since the most recent 40%-plus stock market slump, annuities have risen in popularity. If annuities are so bad, how can it be that the majority of seniors own at least one annuity? What is an annuity, anyway? Annuities are an investment contract between a buyer and an insurance company. The word “annuity” is like the words “ice cream.” Ice cream comes in strawberry, vanilla, chocolate-marshmallow, moose-tracks, and many more. Well, annuities come in more “flavors” than the combined ice cream choices of Baskin-Robbins, Ben & Jerry’s, and Cold Stone Creamery. You really cannot tell a good annuity from a bad annuity without a very careful review. Annuities are backed by insurance companies and their reserves. Although annuities are not federally insured, it was interesting to see that our federal government chose to prop up AIG but let Lehman Brothers brokerage fail. AIG is the major seller and reinsurer of a large portion of the annuities sold in this country. Evidently, the government was unwilling to allow one of our largest insurance companies fail. Immediate annuities are a contract wherein an insurance company promises to pay monthly payments for a term of years or based on one’s lifetime. Lifetime payments are often very attractive to retirees, because nobody wants to be out of money before they are out of breath. Lifetime immediate annuities start paying monthly checks in the first year of the investment. They act like pensions. In fact, almost all employer-sponsored pension plans purchase immediate annuities to pay the monthly checks to company plan retirees. What makes an immediate annuity attractive to a retiree? Usually, the insurance company offers an initial interest rate above Certificate of Deposit rates. In addition, some insurance companies offer the purchaser a ‘bump’ in the imputed value of the money invested. Although these incentives look very attractive, please have the annuity contract reviewed by an independent professional who can interpret the true value of the investment. It’s also important to know what will happen after the initial ‘teaser interest rate’ has ended. What does the annuity actually guarantee as the minimum future interest rate? A good place to compare actual returns on annuities is at www.immediateannuities.com. You can get a fast, free annuity quote online. Immediateannuities.com is reputedly the number one website for evaluating immediate annuities. There are lots of other resources available at their website to acquaint you with annuity language and insurance company ratings. Don’t buy any investment without some research and/or independent advice.
It is a common human paradox that we often treat money from different sources as if it had different value. For example, money from an inheritance or the lottery is almost always spent on luxuries and frivolous things—it’s typically gone within 18 months. Money from a bonus is blown on those extras that you feel that you “deserve.” One source of money seems to be treated as far more valuable than any other source—IRA funds. In our practice we talk to senior after senior who would rather die than spend their IRA and/or 401(k) money. When we do estate planning, gift planning, and long-term care planning, we often find that our clients are willing to use almost any other source of money except spending their IRA funds. Why is that? The answer is that they spent a lifetime accumulating those funds through their working years. This money means much more to them than “phony-baloney” capital gains increases in the house that they bought for $30,000 which is now valued at $300,000. To them, that’s not “real money.” But there is no question in their minds that the money that’s in their IRA is something that they sweated to accumulate. Now in their retirement years they don’t want to let that money go. Like a legendary dragon who safeguards his hoard of treasure against all attackers, our senior citizen clients hoard their IRAs. We have had many clients tell us with anger in their voices that “they [the IRS] make me take so much money out of my IRA every year!” They have forgotten why they saved that money in the first place. Kathy Motley, our Executive VP of Operations, often tells people, “You forgot why you got your IRA!” She reminds them that they accumulated that money over their working years so that they could spend the money in their retirement years. The reason to accumulate this money in a tax-deferred manner is so that when they reach their retirement years, they are able to use that money and pay income taxes at a lower rate of taxation. She goes on to say that they have developed a habit over the years of thinking about this money as “untouchable.” They have developed a habit of using all other sources of money except their IRAs. We have to ask our clients what would actually benefit the IRS more—our seniors taking the money out and using it for the things they need?—or forcing their children to take the money out at higher tax rates? Our clients have seldom considered the fact that if they don’t spend the dollars, it will be spent by their children after paying a higher tax rate. Of course, there’s always the argument that if the client dies with the IRA, then the child could stretch the benefits of the IRA over a lifetime. But most of our seniors say to us, “I know my kids could save the money, but they won’t… They’ll spend it and spend it fast!” So the question that we have to analyze with our senior citizen clients is this: who should pay the taxes on the IRA? Would it be better for them to use their taxable money now, or leave it for their children? Many of the senior clients that we talk to are people who have already begun to incur sizeable out-of-pocket medical care costs. There is a substantial deduction for our seniors who must incur large, unreimbursed health care costs. We try to show them that they’re often much better off using taxable IRA dollars to pay for deductable medical care expenses. It’s always a better idea to spend tax dollars when you have an offsetting deduction. So as you think about that IRA—don’t forget why you got it!
“Like millions of boomers, I chose not to marry or have children. But I don’t think that we unmarried boomers fully realize that there’s a lot more to worry about now than just long term care for our geriatric parents.”