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Annuities: The Swiss Army Knife of Financial Planning


Due to rising interest rates, and a more volatile stock market, annuities are once again becoming a part of the conversation for investors looking for safe-haven alternatives. Annuities are an attractive option for those looking for competitive rates and guarantees. However, their real value is their utility as financial planning vehicles.

Here are five financial planning strategies in which annuities can play a critical role:

Legacy Planning

According to the LIMRA LOMA Secure Retirement Institute, 95% of annuities are never annuitized—meaning they aren’t converted irrevocably to a guaranteed stream of income and are instead passed through to beneficiaries as a death benefit. If that is your intent, you could add a death benefit enhancement rider, which could boost the death benefit by as much as 90%. The only caveat, if you can call it that, is the beneficiary must take the proceeds over a five-year (or longer) payout.

Post-Retirement Health Care Planning

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple will need to come up with around $315,000 (after tax) to cover their health care expenses. While Medicare should cover most health care costs in retirement, it’s estimated that, on average, about 15% of a retiree’s annual expenses will go to health care. That includes Medicare premiums, copays, and deductibles.

The costs can be significantly higher for retirees earning more than $91,000 ($182,000 for married couples). The Income-Related Monthly Adjusted Amount (IRMAA) can increase monthly Medicare Part B premiums to as high as $578 or nearly triple the baseline premium. The IRMAA assessment is based on a two-year lookback of your Modified Adjusted Gross Income. That’s a nasty surprise many retirees don’t expect.

One of the more commonly used planning solutions for covering health care expenses in retirement is to carve out a lump sum of money and place it in a deferred annuity.

Long-Term Care Planning

Not included in that $315,000 health care expense figure for retirees is the cost of long-term care, which can boost out-of-pocket costs by more than $50,000 a year. You can use the same planning approach of setting up an annuity dedicated to health care costs, but what if you could leverage that annuity to create as much as four times the benefit? That’s what a Pension Protection Act (PPA)-compliant annuity can do for you.

For example, by purchasing a $100,000 PPA-compliant annuity—or converting an existing annuity through a 1035 exchange—you can create as much as $400,000 as a long-term care reserve that can pay for qualifying extended care expenses with tax-free distributions.

Social Security Planning

The other nasty surprise for retirees is the Social Security tax. That’s the provision that allows the IRS to tax up to 85% of Social Security benefits when your gross earnings from all sources exceed $34,000 ($44,000 for joint filers). Income sources include retirement plan distributions (except Roth’s), dividends, capital gains, and even tax-exempt income—but not income from an immediate annuity.

Immediate annuities also deserve a closer look as rising interest rates translate into higher income payout rates.

Charitable Planning

Charitable gift annuities (CGA) have long been a preferred method for the charitably inclined. A CGA is set up as a contract with a 501(c)(3) charitable organization that guarantees to pay the donor, or annuitant, a guaranteed lifetime income in exchange for the remainder of the annuity. The charity gets immediate use of the funds, and the donor receives a current tax deduction on a portion of the gift.

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This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, before making any decisions related to these matters, you should consult a qualified professional advisor.