A Legacy with a Special Purpose

According to the 2010 census, people with special needs make up nearly 20% of the U.S. population.¹ Furthermore, nearly 20 million American families are raising children with disabilities.²

Taking care of a loved one with special needs can be an expensive proposition. For example, the lifetime care of a child with autism could cost an estimated $3.2 million.³

If you currently provide day-to-day assistance and/or financial support for a relative with special needs, you may also have specific estate planning concerns. Fortunately, a carefully crafted trust could be used to help manage the finances of individuals who may not be capable of handling their own affairs.

A trust could also be used to help preserve assets for minor children until they reach a particular age, spread out distributions over time, and even apply conditions that heirs must meet before receiving an inheritance.

Here are several examples of trusts that could help you control the distribution of estate assets.

Revocable living trust. When a living trust is created, legal ownership of personal assets is transferred to the trust. However, the trust maker maintains complete control of the assets in the trust, which can usually be amended or revoked. Most types of assets can be held in a trust, including real estate, life insurance policies, investment accounts, and valuable personal property such as jewelry, art, and antiques.

A living trust may replace a will as a family’s primary estate distribution document. Unlike a will, a properly established living trust remains private and avoids probate. Therefore, when the trust maker passes away, estate assets typically become available to trust beneficiaries without any of the delays or expensive court proceedings that may accompany the probate process.

Special-needs (or supplemental) trust. A disabled person who receives a life insurance payout or inheritance directly might be disqualified from government assistance programs. Placing assets in a trust could help keep the individual’s income or net worth within the eligibility limits for federal benefits.

Distributions from the trust can be made at the discretion of a trustee to pay for a beneficiary’s special needs. A special-needs trust may be established as a stand-alone trust or may be incorporated into a revocable living trust.

Incentive trust. Some people prefer to leave an inheritance that enhances family members’ quality of life without enabling beneficiaries to become unproductive or financially irresponsible adults. Incentive provisions outline requirements or milestones that must be met before a portion of the trust money is awarded. Provisions may be drafted to promote education, entrepreneurship, public service, or philanthropy; to supplement earned income; and even to discourage certain harmful behaviors.

If parents die without making the appropriate arrangements, the courts will decide what happens to their assets and who will become the physical and financial guardians of their underage or disabled children. Most families would prefer to make these potentially life-altering decisions for themselves.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing a trust strategy.

1) U.S. Census Bureau, 2012
2–3) DailyFinance.com, September 28, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Bouncing Back: The Recovering Housing Market

The collapse of the U.S. housing market helped drive the economy into the worst recession since the Great Depression. Unlike previous recessions, however, the housing sector lagged as the broader economy began to grow, holding back what might have been a stronger recovery.1

That may be changing. Residential fixed investment — a measure of private home purchases — has contributed to the growth of gross domestic product (GDP) for seven consecutive fiscal quarters, and U.S. median home prices rose by 10% in 2012, the largest annual gain since 2005.2–3 Although price gains varied widely across the country, 133 out of 152 metropolitan areas had gains while only 19 experienced losses.4

Residential investment and rising home prices alone do not always translate directly to broader economic growth. However, they could have far-reaching effects throughout the U.S. economy, not only for homeowners but also for consumers, businesses, and investors.

Supply and Demand
Although it may seem counter intuitive, the recent jump in housing prices is due in part to the issues that caused prices to fall in the first place. Large mortgage debt, reduced property values, and high unemployment pushed many homeowners “under water,” making it more difficult for them to sell their homes and shrinking the available inventory.5 As the economy has recovered, the combination of job creation and pent-up demand has pushed prices upward.6

In a sign that more buyers are returning to the market, mortgage applications rose by 1.8% in January 2013 over the previous month, the highest increase in 18 months. If this trend continues, it could bode well for a sustained recovery.7

New Homes, New Jobs
Driven by rising prices and lower inventory, new home starts grew 28% in 2012 and reached the highest level since 2008. Remodeling has also increased, in part because homeowners are more confident in the value of their homes.8

The construction industry added 28,000 jobs in January 2013 — about 18% of total job creation for the month and the fourth straight month of strong construction job growth. This is good news, but builders report that it has been challenging to find skilled construction workers to handle surging demand because many of them left the industry during the downturn.9

Corporate Gains
According to Morningstar, the top-performing industries in 2012 were housing-related: home-builders, the lumber industry, and home-improvement stores, with annual stock returns of 77%, 74%, and 55%, respectively (through early December). Some analysts believe that these gains represent an initial “snap back” from the housing collapse and that there may be more room for growth in these industries if the housing market continues to recover.10

Keep in mind that stocks are subject to market fluctuation, risk, and loss of principal. Shares, when sold, may be worth more or less than their original cost.

Consumer Spending
Rising home values increase the total value of consumer assets, which tends to stimulate spending — a relationship called the wealth effect.11 Considering that consumer spending accounts for about 70% of GDP, an increase in spending could have a broad economic impact.12

The retail industry may receive an additional boost from the transaction effect, the correlation between consumers moving and then spending on home furnishings — ranging from carpets and couches to pots and pans.13

Cautious Optimism
Although many signs point to a housing recovery, challenges remain. Bank repossessions and foreclosure activity declined in 2012, but the inventory of foreclosed properties rose, reflecting the slow pace of the foreclosure process. This could suppress prices until the inventory of homes in foreclosure is reduced.14

Despite increased buyer interest and low mortgage rates, strict lending standards could make it difficult for many would-be buyers to obtain financing. And even though the Federal Reserve intends to keep interest rates low for the foreseeable future, the Fed’s actions have not always translated directly to mortgages, and it’s not clear how the housing market may react if mortgage rates rise.15

Additionally, many homeowners still have high mortgage debt and low equity, even with rising prices. This could result in their holding back on spending — or moving — until values return to pre-recession levels.16

For now, the wisest outlook may be cautious optimism. If 2012 represents a turnaround, 2013 could reveal whether the housing recovery is sustainable and might continue to help power the U.S. economy.

1, 5, 16) WSJ.com, July 27, 2012
2, 12) U.S. Bureau of Economic Analysis, 2013
3–4, 6) WSJ.com, February 11, 2013
7) CNNMoney, February 8, 2013
8, 15) WSJ.com, January 27, 2013
9) CNNMoney, February 1, 2013
10) CNNMoney, February 14, 2013
11, 13) Forbes.com, February 5, 2013
14) Associated Press, January 17, 2013

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Sequester Under Way: What to Expect from Federal Budget Cuts

The Budget Control Act of 2011 mandated $1.2 trillion in automatic spending cuts, known as the sequester, if Congress failed to negotiate a more targeted deficit-reduction package. The blunt federal budget cuts — spread over nine years, 2013 to 2021, and divided evenly between defense and nondefense programs — were meant to be indiscriminate and painful as motivation for lawmakers to take action.¹

Because a deal to replace the cuts has yet to materialize, the sequester is moving forward. Federal agencies have received official orders to reduce their spending by a total of $85 billion from March 1 through September 30 (the end of fiscal year 2013).²

Here’s a closer look at the budget-cutting measures to be implemented across the federal government, and the potential effects they might eventually have on the broader U.S. economy.

What’s Under the Knife?

The sequester reduces the size and scale of existing federal programs without eliminating any of them. In fact, reduced funding must be applied evenly to every “program, project, and activity.”

Military salaries are not subject to the sequester. Most mandatory expenses — including Social Security and Medicare benefits and many safety-net programs for the poor (such as Medicaid and food stamps) — are also excluded.³

Here are some examples of the estimated FY 2013 amounts to be stripped from specific government programs.4–5

Defense (cut by 13%)

  • $13.5 billion from military operations across the services
  • $3.5 billion for cancelled or delayed aircraft purchases
  • $6.3 billion from military research

Nondefense (cut by 9%)

  • $1.6 billion from the National Institutes of Health
  • $1.94 billion from public housing support
  • $970 million from NASA
  • $904 million from border security and immigration enforcement
  • $840 million from special education
  • $480 million from the Federal Bureau of Investigation
  • $406 million from Head Start
  • $323 million from airport security
  • $323 million from the Centers for Disease Control and Prevention

Worker Furloughs

Even though federal employees will not have their pay rates reduced, most of the 2.1 million federal employees will be forced to take unpaid days off (furloughs). Civilians working for the Defense Department may lose as many as 22 workdays over the next five months.6

Workers at nondefense agencies are expected to face fewer furlough days. The implementation of furloughs may depend on each agency’s function and negotiations between unions and agency leaders.7 Workers at the IRS, for example, may sit out only five to seven days, and their furloughs will not begin until the summer after the tax filing season passes.8

Nevertheless, the general public may experience longer wait times for government services and reduced hours at national parks, museums, and other facilities staffed by federal workers.

Possible Spillover Effects

Federal workers coping with smaller paychecks may spend less on goods and services. In addition, companies (big or small) that rely on government contracts could receive fewer orders and may need to lay off employees.

Some experts have projected that the sequester could trim 0.5% to 0.7% from real U.S. gross domestic product (GDP) growth for 2013.9 However, if GDP growth picks up speed, it could temper some of the impact.

The effects of the budget cuts could be felt differently around the nation. Some individuals may not notice any direct changes, whereas people and businesses in communities with a significant military or federal agency presence could suffer more. For instance, in the region that includes Virginia, Maryland, and Washington, D.C., federal spending accounts for about 20% of economic output.10

One criticism of the sequester is that it largely ignores longer-term deficit drivers such as Social Security and the rising cost of government health-care programs (Medicare and Medicaid). Thus, it’s still possible that a more comprehensive deficit-reduction strategy could emerge during future budget negotiations.11

1, 2, 4, 9) Office of Management and Budget, 2013
3, 5) The Washington Post, February 20, 2013
6, 7) CNNMoney, March 5, 2013
8) CNNMoney, February 28, 2013
10–11) The Wall Street Journal, February 28, 2013

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Fraud Never Sleeps

The Federal Trade Commission received over 1.8 million consumer complaints in 2011 (see graph). More than half of these were for various types of fraud. Despite improved consumer education and tighter controls, criminals continue to come up with new ways to separate unwitting victims from their hard-earned money.

A list of potential scams would fill many pages, but here are three relatively new ones to watch out for.¹

  • Cut your credit-card rate! An unsolicited caller offers to help you reduce your credit-card interest rate for a fee, and you must fill out a financial profile with account numbers, Social Security numbers, and other personal information. The scammer may arrange a conference call with your credit-card company and ask for a fee reduction, which is usually refused and could have been requested yourself. You are out the fee and at risk for the misuse of your personal information.
  • You’ve won a free gift! You receive a call from a local store claiming that you have won a gift or a gift card but must go to the store to pick it up. The call could really be from a thief who wants to get you out of your home in order to break in while you’re gone. If you receive this type of offer, call the store immediately and contact your local police if the offer appears to be a ruse.
  • Enter this online auction! A pop-up window appears while you are online inviting you to bid on a popular item, typically electronics, but you have to provide your cellphone number to enter. When you submit your entry, you receive a text message to your phone that you have subscribed to a paid “service,” which you may not notice on your bill. This trick is called “cramming.” Protect your cellphone number just as you protect other account numbers.

Remember, fraud never sleeps, so consumers have to stay wide awake! For more information, visit the Federal Trade Commission’s website, http://www.ftc.gov.

1) Consumer Reports, October 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Businesses Face Health-Care Decisions

Although the Affordable Care Act does not require companies to provide employee health insurance, business owners may want to pay special attention to the law’s tax implications.

Large employers that do not offer workers a minimum level of essential health coverage could be hit with costly penalties. Meanwhile, financial incentives may be available to certain small employers that choose to provide employee health coverage.

For many businesses, the presence of certain staffing thresholds may also influence hiring decisions.

Penalty Phase Ahead

Starting in 2014, employers with 50 or more full-time workers (“full time” is considered 30 or more hours per week) may have to pay an annual nondeductible penalty for either not offering “minimum essential” health insurance or offering health plans that are more expensive than the coverage available through the government-run exchanges. (Part-timers’ hours are included in monthly calculations to determine whether the employer is a “large employer.”)

The penalty will amount to $2,000 per full-time employee, after the first 30 exempted employees. A business could be subject to the penalty if one worker obtains coverage on his or her own through an exchange and receives premium assistance or a tax credit — even if the employees had the opportunity to enroll in an employer-provided plan.

Claiming a Credit

Eligible small businesses that pay at least 50% of their employees’ health insurance premiums may be eligible for a temporary tax credit that could offset a portion of their costs.

2013: Firms that employ 10 or fewer workers and pay an average annual wage of less than $25,000 may be eligible for the maximum tax credit, which is equivalent to 35% of employer contributions toward employee health coverage. For firms with between 10 and 25 employees, the credit is reduced as the number of employees and/or average wages increase, and the credit disappears for firms with more than 25 workers or those that have an average annual wage exceeding $50,000. The credit does not apply to health coverage for owners or family members on staff, and they are not counted as employees.

2014–2015: The maximum tax credit increases to 50% of employer-paid health premiums.

Now more than ever, it could be important to consult your tax professional to navigate the rules and your options.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Sector Investing

Individual sectors of the U.S. economy often behave differently at various points in the business cycle. Therefore, changes in the direction or speed of economic growth can spur shifts in equity market performance.

Some industries tend to lead the pack when the economy is experiencing steady or rapid growth, whereas others are more likely to outperform during periods of recession or recovery. For this reason, spreading investments among the major sectors is one way to help diversify stock market holdings.

Sector funds, however, should generally play a smaller and more targeted role than the broader-based equity funds that often serve as the centerpiece of investors’ mutual fund portfolios.

Narrowing the Field

A sector fund is a mutual fund with stock holdings that are concentrated in a specific sector such as health care, technology, utilities, and financials. Sector funds are available in different styles and can vary according to market capitalization (small, medium, or large companies) and investment objective (growth, value, or blend). Because sector funds are less diversified than mixed equity funds, they typically carry a significant level of volatility and risk.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee against investment loss.

Strategic Uses

Sector funds can be selected to complement a core portfolio of diversified mutual funds, which can sometimes be over- or underweighted in one or more sectors. Investors may be able to fill market exposure gaps and strive for more precise sector allocations.

It may also be possible to moderate overall portfolio risk by investing in sectors that are historically less volatile or less economically sensitive than the stock market as a whole. Some types of sector investments may help mitigate market losses in troubled economic environments (such as inflation or recession).

Sector funds may be appropriate for some investors who are pursuing higher returns over time and can tolerate a higher level of risk. These investors should also have longer time horizons (5 to 10 years) so they can hold investments through the sector’s entire cyclical rise and fall.

Investors who “chase performance” and move assets into hot sectors may be too late to benefit from market gains and could suffer losses instead. In most cases, it is difficult to recognize turning points until after they have passed.

You may also want to keep in mind that every cycle is different from the last, and macroeconomic events or unexpected shocks can sometimes disrupt regular trends.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Signs That You May Not Be Ready to Retire

Proceed with Caution: Warning Signs That You May Not Be Ready to Retire

There’s plenty of guidance available to help you feel confident that it’s time to retire. But it could be just as important to recognize signs that you may not be ready. You might think of these as yellow caution lights, warning you to slow down and give further thought to your situation.

You’ve reached the eligibility age for Social Security. For some people, Social Security eligibility is synonymous with retirement. In fact, about 50% of those who are eligible for benefits file at the earliest age of 62, despite the fact that their monthly payments will be permanently reduced.¹

Even if you have reached full retirement age (age 66 for those born between 1943 and 1954), you may not be ready to retire unless you expect to receive substantial income from savings and/or other sources. Social Security is intended to replace only a portion of your pre-retirement income (see chart). Benefits increase at filing ages up to 70.

You need to work part-time. Sixty-five percent of older workers say they would like to continue working in some capacity during retirement.² That’s a worthwhile goal if you can do it by choice, but be careful if you expect to depend on part-time income. Jobs are not easy to find, and many part-time positions pay low wages. It might be wise to work in your current job a little longer to help build additional savings.

You’re counting on market growth. The rapid decline in stock values during the Great Recession and slow growth during the recovery suggest that it might not be wise to factor high returns into your retirement strategy. In fact, when you retire or are close to retirement, you may want to shift more of your assets to conservative investments. Doing so could help preserve principal but typically is associated with lower growth potential.

You’re not prepared for medical costs. In a recent poll, the high cost of medical care was retirees’ biggest surprise regarding retirement expenses.³ Even with current Medicare benefits, it’s estimated that a couple who retired in 2012 at age 65 would need $240,000 to pay their out-of-pocket medical expenses in retirement.4

Your spouse is not on board with your decision to retire. About three out of five married couples disagree on the timing of their retirements.5 Whether you decide to retire together or several years apart, it’s important for you and your spouse to be comfortable with the other’s choice to retire or continue working.

You have high debt or other financial obligations. Traditional formulas for determining retirement income needs often assume that retirees have paid off their mortgages. If you are still making payments on your home, have college loans or high credit-card debt, or are supporting your children or aging parents, you may not be ready to leave the workforce.

The road to retirement can have many twists and turns. A yellow light may be a timely warning that you are not quite ready to go full speed ahead.

1) SmartMoney.com, March 2, 2012
2) usnews.com, February 10, 2012
3) PRNewswire, July 11, 2012
4) NYTimes.com, May 9, 2012
5) WSJ.com, April 9, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Moving On and Rolling Over

Despite the uncertainties of the job market, today’s workers stay in a job for an average of only 4.4 years. Job-hopping is even more prevalent among younger workers: about nine out of 10 millennials (born between 1977 and 1997) expect to stay in a job for less than three years.¹

The impact of moving from job to job on a worker’s career depends on individual circumstances. However, any time you leave a job — whether you’ve been there for three years or 30 years — you could be faced with a decision about what to do with the savings in your employer-sponsored retirement plan. There are typically four options.

Leave the savings in the account. If your employer allows you to retain the account, this strategy might make sense as long as fees are low and you are satisfied with the investment options. Keep in mind that you will no longer be able to contribute to the account, and it could be bothersome to receive multiple retirement account statements.

Transfer assets in a former employer’s plan to a new employer-sponsored retirement plan (if allowed). This might be a better option than leaving assets in your former employer’s plan. Again, your decision may depend on the available investment options and expenses.

Roll the funds to an individual IRA. Moving your savings to your own IRA enables you to control the money, regardless of how many times you change jobs. It could also expand investment opportunities because IRAs typically have more investment options.

If you choose an IRA rollover, be sure it is executed properly if you want to preserve the tax-deferred status of the funds. You can generally do this through a direct rollover, also called a trustee-to-trustee transfer. You can arrange this by contacting the administrators of your old employer-sponsored account and your traditional IRA. There is no withholding, and the money never passes through your hands.

If you receive a check, you must roll the entire distribution (including 20% federal income tax withholding) to your IRA within 60 days or it will be considered a taxable distribution.

Withdraw the money. This is generally unwise because you would also lose out on potential tax-deferred growth that you might need for retirement. In one study, 55% of people who took distributions when changing jobs said they regretted the decision.² Distributions from employer-sponsored retirement plans and traditional IRAs are taxed as ordinary income and may be subject to a 10% federal income tax penalty if taken before age 59½ (with some exceptions).

Choosing what to do with the savings you have accumulated in your employer-sponsored plan can be complicated, and you may benefit from professional guidance. Although there is no assurance that working with a financial advisor will improve investment results, a professional who focuses on your overall objectives can help you consider options that could have a substantial effect on your long-term financial situation.

1) Forbes, August 14, 2012
2) AdvisorOne.com, January 26, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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Setting the Stage for Retirement Income

In a 2012 survey, 73% of annuity owners said annuity investments are a critical part of their retirement funding strategies, and 63% said market volatility makes them more likely to consider buying an annuity.¹

When saving for retirement, some workers who are concerned about stock market volatility may turn to fixed-income investments, but the current yields on these vehicles may not generate the income they will need.

For this reason, a variable annuity has become a popular option for pre-retirees and risk-averse investors. Using this hybrid insurance/investment product, they can set aside additional funds for retirement, defer taxes on earnings (until withdrawn), and potentially mitigate investment risk.

Investment Component
A variable annuity is an insurance-based contract that offers potential growth through market participation. The contract owner makes one or more payments to an insurance company during the accumulation phase in exchange for a regular income stream during the payout phase. These payouts could last for the rest of the owner’s lifetime (and/or the lifetimes of designated individuals), offering some protection from outliving assets.

The contract owner can invest the premiums among a variety of investment options, or “subaccounts,” according to his or her risk tolerance, long-term goals, and time horizon. Most contracts offer a range of stock, balanced, bond, and money market subaccounts, as well as a fixed account that pays a fixed rate of interest. The future value of the annuity and the amount of income available during retirement are determined by the performance of these selected subaccounts.

Because variable annuity sub-accounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered or annuitized. The investment return and principal value of an investment option are not guaranteed.

Insurance Features
Not only does a variable annuity offer a way to help pursue investment gains, but the contract owner may be able to purchase guarantees to help protect against the downside risks of investing in the markets. Optional benefits — such as a guaranteed minimum death benefit, a guarantee of minimum fixed income payments, or withdrawals of a specific amount over a lifetime, regardless of account value — may be available for an additional cost. Any annuity guarantees are contingent on the claims-paying ability of the issuing insurance company.

Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Taxes Can Wait
Annuities purchased with after-tax dollars could help supplement other sources of retirement income. Only the earnings portion of variable annuity withdrawals is taxed as ordinary income. Withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty and could reduce the death benefit and value.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits.

Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Insured Retirement Institute, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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How Much Do You Need To Save?

One common rule of thumb in developing a retirement savings strategy is that your accumulated savings and other sources of income will need to replace about 80% of your pre-retirement income.¹

This assumes that retirees may be able to maintain their standard of living with less income because their taxes could be lower, there would be no need for retirement salary deferrals, their mortgages may be paid off before or soon after they retire, and they would no longer have work-related expenses such as commuting and business clothing.2

Replacement Variables
Although an 80% income replacement ratio is a reasonable goal, it does not indicate how much you need to accumulate and what to expect from other income sources. That could depend on several factors.

  • Career earnings. If you have had high earnings over your career, Social Security may replace a lower proportion of your pre-retirement income. For example, a 65-year-old who retired in 2012 with a lifetime of “high” annual earnings (equivalent to about $68,800 in 2011) could expect Social Security to replace only 34% of his or her pre-retirement salary, compared with 41% for someone with a lifetime of “medium” earnings (about $43,000 in 2011).3
  • Rates of return. Higher investment returns might result in a higher income stream, but this also involves a higher degree of risk. Rates of return will vary over time, so it might be a good idea to use a moderate return rate for your long-term projections.
  • Age when you begin saving. The earlier you start, the less you may need to save out of each paycheck because compounding should enhance your overall savings accumulation.
  • Age of retirement. The earlier you retire, the less time you may have to accumulate savings and the longer your retirement might last. This generally means that you will need to increase your savings rate while you are working.

Salary Multiples
Another approach is to think in terms of saving a multiple of your final pre-retirement salary. One analysis that factored in inflation and post-retirement medical costs suggested that employees would need to accumulate assets equal to 11 times their final salaries to meet their retirement needs (beyond the income they would receive from Social Security).4

However, a study of more than 2 million employees discovered that workers who saved for retirement throughout their careers were on track to accumulate 8.8 times their final salaries (on average), resulting in a shortfall of 2.2 times salary.5 Yet the same study found that if workers increased their contributions by 1% of salary each year for five years, the number of people who could retire with sufficient assets would increase from 29% to 46%.6 For someone earning $70,000 annually, a 1% increase equates to saving less than $3 each workday.7

Of course, the amount you need to save for retirement will also depend on other variables such as your lifestyle, your post-retirement medical expenses, the length of your retirement, and your supplementary sources of income. The key is to develop a solid strategy and maintain a steady pace toward your savings goal.

1–2) Center for Retirement Research, 2011
3) National Academy of Social Insurance, 2012
4–6) Aon Hewitt, 2012
7) $70,000 x .01 = $700 ÷ 250 workdays = $2.80

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