In the following commentary, I will provide a comparison between Roth IRAs and traditional IRAs in the hope of answering which one of these tools is best for you. While no one can accurately predict upcoming tax rates, numerous scenarios show the traditional IRA is not as good as the Roth IRA in terms of providing retirement income.

Before I can get into the meat of that discussion, I need to explain a blemish with the traditional IRA, which is generally praised for its tax-deductible contributions. The problem with a traditional IRA is when you have it without tax-deductible contributions. The misunderstood benefit of tax-deferred growth is offered by both IRA versions. There is no tax advantage on your contribution to the less popular tax-deductible IRA upfront, but you can still benefit from your earnings from the tax deferral. That particular benefit is generally lost on people who are unfamiliar with investing outside of their retirement plan. You will be subjected to capital gains taxes each year on your earnings if you invest outside of your retirement account.

The non-tax-deductible, traditional IRA is similar to the tax-deductible, traditional IRA in that it has required minimum distributions at 70 ½ years old. However, when it comes to taxes when you withdraw your money, the two IRAs differ. When you withdraw money or when you are required to take out money from a non-tax-deductible, traditional IRA, your contributions are not taxed since you already paid taxes on the contributions. When phased out of contributing to a Roth IRA or traditional IRA, this non-tax-deductible, traditional IRA can become an option for you.

The impact of taxes on IRAs

Numerous people, including you, may assume that their tax rate during retirement will significantly decrease from their current tax rate. However, even though it is natural to be hopeful about this, it is not necessarily true. The effect of taxes can be significant. Think about the 2018 federal tax rates, which are scheduled to expire in 2025 and increase to their previous marginal tax rates. Now, think about the effect of tax rates within states. As of now, the state of Illinois does not tax retirement accounts. However, will this be maintained in the future? 

Using Money Guide Pro’s IRA Contributions Calculator, I have created some hypothetical cases to explain the effects of taxes, whether you are participating in a 401(k), ERISA 403(B), or an Employee Retirement Income Security Plan (ERISA) through your place of employment. MoneyGuidePro is a software package used by a plethora of Certified Financial Planners. The 2025 income tax rate can be used to predict what will happen with tax rates in the future. The cases below are sectioned by income and active participant status in an ERISA retirement plan that demonstrates the effects that phase-outs have on your overall options. These are then broken down further into scheduled 2025 rates and current ones. Lastly, I will demonstrate how deep of a tax rate cut would be necessary in order to favor the traditional IRA. 

Basic scenario assumptions

A man who lives in the state of Illinois who is beginning to save at 45 years old. He makes $6,000 in yearly contributions into his savings account until he hits retirement. His hypothetical return rate is 7%. His distributions would begin at 65 years old and end at 94 years old. He makes a total adjusted gross income of $50,000 and is not currently participating in a retirement plan sponsored by his employer. His current state tax rate is 4.95%, and his federal tax rate is 22%. For the year of 2025, the scheduled retirement federal tax rate is 25%, and the state tax rate is 0%. 

Due to the income being less than the phase-out amounts for the traditional IRA and the Roth IRA with tax-deductible contributions, there is a possibility for both types of IRAs. He could withdraw $21,693 yearly between the ages of 65 and 94 using the Roth IRA. Using the assumptions we’ve previously talked about, that withdrawal amount would lessen to $20,179 if he saved the exact same amount in a traditional IRA. This means that the total traditional IRA withdrawals would be $605,378, and the Roth IRA retirement withdrawals would be $650,794. Take note that if he had used a taxable savings instrument and not one of the tax-advantaged retirement accounts we have discussed, he would have only amassed $435,184 based on current capital gains tax rates. 

Both the state and federal rate drop that is needed in retirement for Roth and IRA is 8.95%. The tax rates would need to be reduced to this amount before the traditional, tax-deductible IRA would be more beneficial over the Roth IRA. He could withdraw $21,896 per year from a traditional, tax-deductible IRA between the ages of 65 to 94 if that reduction was to happen.

Current State Tax Rate: 4.95%; Federal: 24%

Total Adjusted Gross Income: $100,000

2025 Scheduled Retirement State Tax Rate: 0%; Federal: 28%

In this scenario, all the IRA options remain open to use. The traditional IRA would only allow for annual withdrawals of $18,440, totaling a final withdrawal amount of $553,207 due to the higher marginal tax bracket. However, the Roth IRA results stay the same with annual withdrawals of $21,693 for a total withdrawal amount of $650,794. 

Necessary drop rate needed both federally and statewide for retirement for both the Best Roth and IRA: 9.95%. Using this figure, the joint tax rate would need to decrease to 19% from 28.95% before the traditional tax-deductible IRA would have an advantage over the Roth IRA. 

Current State Tax Rate: 4.95%; Federal: 24%

Total Adjusted Gross Income of $150,000

2025 Scheduled Retirement State Tax Rate: 0%; Federal: 28%

He is no longer allowed to contribute to a Roth IRA at this income level. At this point, he only has a choice between a taxable account and a non-tax-deductible IRA. The non-tax-deductible IRA would allow him to withdraw $589,770, where a taxable investment would only pay out $418,645. The IRA choice would give him $19,659 per year. If he elected to use a taxable investment instead, this number would drop dramatically to $13,955. The taxable account using the current tax rate on earnings is nowhere near as beneficial as the traditional IRA with non-deductible contributions. 

Total Adjusted Gross Income of $50,000

Current Federal Tax Rate: 22%; State: 4.95%

Scheduled 2025 Retirement Federal Tax Rate: 25%; State: 0%

Participating in an Employer-Sponsored Retirement Plan

For a person earning this income, the results are the same as someone not participating in a retirement plan sponsored by their employer. 

Total Adjusted Gross Income of $100,000

Current State Tax Rate: 4.95%; Federal: 24%

Scheduled 2025 Retirement Federal Tax Rate: 28%; State: 0%

For this scenario, the Roth IRA is still an option. For someone at this income level who is not participating in a retirement plan sponsored by their employer, the results would be the same as someone using the Roth IRA. They would get withdrawals of $21,693 per year from ages 65 to 94. His income is now above the income phase-out amount of $74,000 for a tax-deductible IRA. Because of this, he is now eligible for a non-tax-deductible IRA. Sadly, he can only withdraw $18,276 per year using the non-tax-deductible IRA. This ends up being a total of $503,852 for withdrawals from a traditional, non-tax-deductible IRA. For a total Roth IRA, the retirement withdrawals would be $650,794.

Total needed in state and federal rate drop in retirement for the IRA to Best Roth: 28.95%

Unfortunately, the tax rate would need to become 0%, which is highly unlikely to happen as that would mean a 28.95 percent drop. If it were, then her traditional, non-deductible IRA withdrawals would equal her Roth withdrawals of $21,693.

Total Adjusted Gross Income of $150,000

Current State Tax Rate: 4.95%; Federal: 24%

Retirement State Tax Rate Scheduled for 2025: 0%; Federal: 28%

For contributing to a Roth IRA, his income is now above the $137,000 phase out income amount. He will remain qualified for the non-tax-deductible IRA. Using this IRA, he could withdraw up to $18,276 per year. His withdrawal amount would drastically decrease to $13,955 if he were to go past this option and go down the taxable route. Theoretically, he could withdraw from his taxable account $418,645, whereas he could gain more from his traditional, non-tax-deductible IRA account. To reiterate, a traditional IRA with non-tax-deductible contribution is a better route to go down than the taxable account that uses current tax rates on earnings, such as capital gains taxes. 

Are your current hopes about retirement tax rates realistic?

In conclusion, the aforementioned analysis shows that there would have to be serious tax reductions for a traditional IRA to beat out a Roth IRA. Due to phase-outs, you cannot always contribute to a Roth IRA. Leaving a traditional IRA may be your only option. If you have already created a workplace plan, it might be a beneficial idea to ask your employer about adding on the Roth IRA feature. Active participants in retirement plans sponsored by their employers do not always have the option of a tax-deductible IRA. When this happens, the only IRA option is the non-tax-deductible, traditional IRA. This might appear to be a downside, but it still offers tax deferral on earnings, which is significantly better than a taxable investment due to not having to face capital gains taxes every year. 

A final option you may have for investing and saving is opening a health savings account. If the money is used in retirement for healthcare expenses, then there are no taxes or phase-outs. It is natural when you are in retirement to face healthcare-related expenses, which is why it becomes a triple tax-free option for paying those expenses. Check out articles on discounts regarding retirement healthcare to learn more. 

It is my hope that this information has given you a greater appreciation of available IRA options and the benefit of tax deferral. Use this information to help make better money-making decisions to go down the life path you want the most.

Obtaining the right insurance coverage provides valuable financial protection. Life insurance can provide protection for your family’s financial security. Protecting their family is a reason many people buy themselves a life insurance policy in the first place. Additionally, people can buy life insurance policies for other people, like if a child wants to purchase a policy for their parents and vice versa.

Finding the right policy that fits your budget and meets the coverage you need is essential. Here are some tips that will help you find the right fit:

Researching Policy Options

When researching rates, you want to try and find premium rates, which vary on the kind of insurance policy you select. The main two categories for life insurance policy are permanent and temporary. 

Permanent life insurance is made up of two categories: universal life and whole life. Both of these kinds of permanent life insurance routes accumulate cash value over time. The cash value accumulated can be used to pay premiums, purchase paid-up additions, or to be borrowed against. 

Temporary life insurance, also known as term life insurance, can provide a death benefit payout if the insured person passes away throughout the during of the policy coverage. 

Policyholders can select the term length and death benefit amount. Depending on the company, some offer additional coverage options, called rides, that can be added on to your policy. The benefits of these range from the return-of-premium riders to accelerated death benefit riders. These add on riders increase the value of the policy, which in turn affects the overall rates. Riders vary by company and can also affect your monthly premium. 

Whole life policies offer coverage that is permanent but also have the highest premiums, with a guaranteed cash value growth rate. Policyholders can choose the amount they want when they sign up for the policy, but most whole life policies also include high death benefit amounts. 

Final Expense insurance policies are an excellent option for those who need less coverage or only enough to cover funeral expenses. Final expense insurance is a type of whole life insurance that is specifically designed for seniors. That being said, the death benefit amounts are significantly lower. Premiums tend to be lower because the death benefit is only enough to cover funeral expenses generally. 

In regards to universal life insurance policies, there are only a few. The primary difference with these policies is how the funds are invested. The cash value of indexed universal policies is invested in indexes; these are diversified investments. The cash value of variable universal policies is invested in various accounts, which include bonds and stocks. 

Universal life insurance premium rates generally tend to be lower than whole life insurance premium rates because there is no guarantee of cash value growth over time in the investments. 

Hiring an Independent Agent

Even though there are a number of types of life insurance policies among life insurance companies, not every company carries every kind of policy. It is worth it to figure out what kind of life insurance policy you want before working with a company. 

Working with a life insurance agent to help you find an affordable policy that meets your coverage needs can help you if you are unsure of what kind of life insurance policy you want. A licensed agent can help you through the process of figuring out the type of policy you want, selecting, and applying for a policy. 

Working with a licensed independent agent has several other kinds of advantages. An agent can help you fully understand the underwriting process and find a policy that fits your specific needs for your situation. They can also help you compare coverage and terms across companies, as well as compare premium rates across policies. Riders and premium rates can vary between companies. An independent agent can sell policies from several companies, so they can help you compare similar policies across companies. 

Deciding to work with an independent agent can make the entire research process easier because you do not have to directly reach out to companies and instead can just work with one person to find the rates and company best for you.

Be Cautious When Using Quote Websites

Quote websites can be useful for several reasons. If you do not want to work with an agent, you can do your independent research. Additionally, quote websites allow you to quickly and easily view your options from the comfort of your own home. 

How do you know if you are working with a good company when there are so many life insurance quote websites to choose from?

To start, it is essential to understand the type of quote website you are using. Some sites, like bestow, HavenLife, and Ladder, only show quotes for the policies that those websites offer. A benefit of working with them is that these companies assist their clients through the application process. 

Then there are other websites, like Geico and Progressive, that can show you quotes from numerous life insurance companies. This allows visitors to their sites to quickly compare policy options across many companies. The downside is that these companies only show quotes and connect the visitors to the companies; they do not help with the application. 

Lastly, there are other sites, like Quotacy, that not only show quotes from multiple life insurance companies but also assist clients to understand the application process and help them apply. Agents from Quotacy even help their clients to make updates to their policy even after they buy one. 

Second, it’s essential to know what kinds of policies the website shows. The primary focus of most online tools is on term life insurance. Each one has unique features, even if there are many shared characteristics across quote websites. An excellent example of this is Ladder, which allows policyholders to adjust their coverage during their policy term as their needs and situations change. 

Then there are other quote websites that focus on showing quotes for various kinds of permanent life insurance. This is true for many sites that only offer quotes, like Progressive and Geico. However, sites like Policygenius and Quotacy that offer more comprehensive services also show quotes for permanent life insurance policies. 

Locating Inexpensive Life Insurance 

Life insurance provides many benefits, including paying off any debt you have, financial protection for your family, helping to replace lost income, and even cover funeral expenses. 

The first step is to determine what your individual needs are and what kind of life insurance policy best fits your situation. Even though protection is highly valuable, it is important to find a plan that suits you and your monthly budget. Then, you can find an independent life insurance agent to help you do your research into premium rates offered by various life insurance companies and their policies. 

Plan sponsors have slowed down on offering annuities to 401(k) plan holders.

Annuities and 401(k) plans have reached a plateau in their relationship, and a range of administrative and legal challenges can be attributed to this slowdown.

Principal and chief investment officer Philip Chao of Chao & Co., an advisory firm, says at his company, they’re “still at the margins.”

In 2014, the Treasury Department announced a set of rules designed to promote the use of longevity annuities within 401(k) plans. The plan was set up to increase access to a guaranteed source of income for retirees who had experienced a decline in access to pension plans. In that same year, the Treasury Department also authorized annuities to be used in target-date funds in 401(k) plans, regardless of whether or not that fund was a part of a plan’s default investment option.

Despite allowing individuals to access their 401(k) plans through regular withdrawals, and not just in one lump sum, and other retirement-income plan improvements, the rise in annuities has remained low.

Consulting firm Willis Towers Watson recently released a new survey that revealed that 30% of 401(k) plan sponsors offer some form of lifetime-income solution for their plan members. Nonetheless, the vast majority still didn’t use annuities. Instead, 70% offered education and planning tools, and nearly 90% offered systematic withdrawals.

Less than 20% of funds offer a built-in annuity element, including a TDF; 15% use a third-party platform to connect participants out-of-plan annuities, and 15% offer a deferred annuity as a separate investment option.

In the few years since the survey was released, the use of lifetime income options has actually increased by seven percentage points. Yet consultant at Willis Towers Watson Dana Hildebrandt says that the majority of that increase seems to have been from noninsurance options. She said it “seems like people have adopted the low-lying fruit and nothing in terms of meaty solutions.”

One of the biggest obstacles seems to be the safe harbor, a legal barrier perceived by sponsors to adding annuities to 401(k) plans. The safe harbor standard protects plan sponsors from legal risk while at the same time deeming them responsible for projecting an insurer’s wealth many years away.

The SECURE Act, current legislation in Congress, would make the safe harbor more appealing to plan sponsors. Despite overwhelming approval in the House, the SECURE Act stalled in the Senate, yet there is hope that it will pass in the fall after being attached to budget legislation. Mr. Chao says that many companies are waiting for the law pass to give them a safe harbor, but until then, nothing is going to change.

Target-date funds, or TDFs, are the most popular of the 401(k) plan investments. This popularity can be attributed to the safe harbor regulations around qualified default investment alternatives that were issued in 2007 by the Labor Department. According to Morningstar Inc., TDFs amounted to $1.7 trillion at the end of 2018.

Despite all of this, the safe harbor wouldn’t automatically cause an increase in annuities. There are other significant issues that the industry still needs to solve, such as the fact that plan holders can’t roll an annuity over to a new employer’s 401(k) plan, and record keepers can’t all administer annuity products.

According to the Willis Towers Watson survey, low demand from individuals and administrative complexities are two of the main challenges for insurance-backed 401(k) products offered by plan sponsors. Ranking third is a fiduciary risk, which would be remedied by a safe harbor.

Mr.Chao still believes that regardless of the challenges and less than ideal circumstances, annuities should be considered among the options for participants. Annuities would still be a valuable addition to the traditional plan design, which leaves retirees with two options; deal with limited options for distribution while leaving money in the plan or compile money into a more expensive retail annuity option.

The industry is not all in agreement over the potential benefits of annuities on the retirement-income situation, however. Director of the Pew Charitable Trusts retirement savings, John Scott, explains low median account balance to prove that annuities don’t always add value. According to Vanguard Group data, retirees who were over the age of 65 maintained a median account balance of $58,000 at the end of 2018. Mr. Scott says this is not a lot of money to annuitize when taking into consideration other retirement expenses such as unanticipated financial needs, health care, and long-term care. What would make more financial sense is for participants to withdraw from their 401(k) plan early on in retirement to delay claiming Social Security for as long as possible, said Mr.Scott. This is advised because this would allow retirees 8% more each year in Social Security payments. Because Social Security is a form of an annuity, 401(k) plan holders may not actually require any additional annuities.

He added that it’s not quite as simple as it may appear and that the decision to add an annuity to a plan is not one that should be taken lightly.

In 2013, approximately 62,000 people retired, and between 2000 and 2013, over 40,000 federal employees retired each year. To look into this further, last July, 14 % of all federal employees were eligible to retire. That number is expected to skyrocket by up to 30% by the year 2023. Because of the vast number of federal employees who are expected to enter retirement quickly, the Thrift Savings Plan (TSP), which is a 401(k)-style savings plan available to federal employees, was created to encourage employees to maintain their balance that they invested in their TSP when they retire.

The administrative board in charge of the Thrift Savings Plan has showcased some of its advantages, like the freedom to stay with the plan in retirement, the ability to transfer funds into the plan, and straightforward choices. However, these advantages can also create some investment setbacks that most federal employees are not aware of.

1. Insufficient Financial Amenities 

While the administrative board for the thrift savings plan insists that federal employees should keep their funds invested in their savings plan accounts during retirement, there are some disadvantages to doing so, including lack of critical investment management guidance, limited withdrawal options, and lack of financial planning support. Come September 15, all thrift savings plan participants will have increased flexibility due to a new law governing withdrawals. That being said, even with these new changes, all participants will still have relatively limited access to their funds. Investors with a financial advisor can call to request a distribution; however, for most people, you still need to provide notarized signatures and other important documents in paper form for any changes or withdrawal requests. 

Also, participants of the thrift savings plan are on their own when making any critical investment decisions because the savings plan board does not provide any investors with financial or investment management planning advice. Because of this, participants may be unaware of gaps in their financial plan because they do not have a professional financial advisor actively looking into their plan for any weaknesses that could leave them exposed to future problems.

2. Few Investment Opportunities

Even though federal employees have the advantage of having access to the cheapest employer-sponsored retirement plan in the United States (with the average cost on a balance of $1000 only being 30 cents), the plan only provides a small selection of five basic investment opportunities. Because of this, there is a significant lack of exposure to important asset classes, such as emerging markets, alternative investments, and medium-sized companies. Even though this keeps costs low, the benefit here does not outweigh the cons. By getting rid of asset classes, it leaves investors unprotected against fluctuations in the marketplace. 

Another way the administrative board for the thrift savings plan makes their plan so inexpensive is by making all available funds index funds, except the G Fund. Investors should be wary of having only index funds regardless of their positive attributes. In 2017, there were just six companies that were responsible for 25% of the S&P 500 return for that year. In 2018, there were only three companies that were responsible for almost half of the positive returns for the index. Due to such a limited number of companies having such a significant portion of your portfolio and then blindly following a market index while lacking professional guidance leaves investors exposed to greater market instability, particularly in negative or unpredictable market climates.

3. Inadequate Consolidation

One of the best pieces of advice I can give is to consolidate your investments within one financial institution with a financial expert. The advantages of consolidation include straightforward total returns for the portfolio, ease of estate planning administration, and simplified statements. Unfortunately, those who have thrift savings plans can only consolidate their retirement assets, which forces them to spread out their assets into different financial institutions.

To have the best financial consolidation, you should include all of your investment accounts and not just your retirement accounts. In doing so, you can build a comprehensive financial plan that will be much more beneficial. When weighing the options of investment accounts alone, investors might be exposed to estate and investment planning dangers. This risk is significantly reduced when consolidating all of your assets within one institution, as you can access all of them with ease. Consolidation brings feelings of peace and ease that can allow investors to feel empowered to spend time pursuing their passions or being with loved ones rather than being heavily involved in numerous financial relationships. 

Even though the thrift savings plan has some advantages, federal employees are not getting what they pay for. Due to the complicated nature of financial planning, investors are advised to go to a professional financial advisor to create a fully encompassed financial plan that includes all of the investor’s goals. Integrated wealth management has some advantages over the thrift savings plan, which include professional financial planning and investment advice, true consolidation, and expansive investment choices. 

Your thrift savings plan may not be the best choice for you, so consult with a financial expert to see if consolidating your savings plan account is an excellent option to help you and your family meet your needs and goals.

More isn’t always better. If the Senate passes the SECURE Act, employers who offer 401(k) plans will be required to integrate annuities in their already existing retirement plans.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act would reduce some of the burden for employers who will need to start offering them. So what exactly is an annuity, and why do employers need to add them into their employee retirement plans?

Virtually a contract between an individual and an insurance company, annuities require that you make a series of income payments for a set period of time in return for a premium already paid. While annuities can have many variations, the main goal is to provide individuals with a consistent stream of income during retirement. Founder of Wealth Compass Financial Steve Nuckols says that the primary function of the income payments are, so investors continue to get paid so long as the contract is in force, with minimizes the risk of them outliving their money.

In theory, this all makes sense, but annuities are actually quite complex. Author of RetireSmart!, Mark Anthony Grimaldi, says that outside of the fixed monthly income, individuals are not allowed to withdraw additional funds from an annuity. Annuities can also be costly, and because of the fixed nature of the monthly payment, inflation could impact your purchasing power.

Integrating annuities into 401(k) retirement plans is a great idea, but one that hasn’t been fully developed yet. President of Essential Advisory Services Matthew Schechner advises that professionals wait and see how employers handle this situation before trying it out.

An old economic theory resurfaced recently that stated an inevitable wave of baby boomers entering retirement could trigger a colossal shift to liquefying equity holdings.

The theory examples that such a massive exodus could plunge the stock market into a dark period for many years until younger generations can save enough funds to begin repurchasing the assets their grandparents sold.

Sean Darby, Jefferies Global Equity Strategist, explained that the generational shift does not necessarily spell out disaster for stocks due to foreign investors being able to plug that hole. Furthermore, foreign ownership of the United States equity market is growing, and investors should not be upset about being forced to sell retirement plans. The increases of assets under Sovereign Wealth Funds has created a significant shift towards global equities as capital controls have calmed down recently.

There is no denying that baby boomers will be the leading market force. What is not certain is how it will impact the markets. Additionally, it is not for sure that baby boomers will sell stocks or become more conservative due to retirees living longer than ever before. According to the BLS, currently, workers over the age of 55 years old represent approximately 24% of all U.S. employees.

A study cited by Darby that raises some alarms is from 2011 by the Federal Reserve Bank of San Francisco, which reported evidence that the U.S. equity values are tied to age dispersion throughout the population. The paper concluded that such a relationship could cause prices to slump until 2025, which is approximately around the time that millennials will be able to start buying back the stocks their grandparents and parents sold.

Federal researchers Mark Spiegel and Zheng Liu said, there is a significant correlation between the P/E ratio of the U.S. stock market and dependency ratios. This correlation foreshadows poor equity values in the context of the inevitable retirement of baby boomers over the next two decades. Participants of the stock market can expect that equities may do poorly in the future, which can potentially lower current stock prices.

The Jefferies strategist believes that the fears regarding a decade long depression of stocks is overdramatic as well as a possible increase in foreign investment.

Darby pointed out that a report from 2006 called the government Accountability Office report showed that financial factors and macroeconomics explained the variations in stock returns between 1948 to 2004 despite changes in the age of the population over the 56-year timeframe. He concluded that the 2006 study showed that retiring baby boomers are not likely to sell financial assets in a way that will cause an economic downturn in stock prices. Furthermore, greater life expectancy could extend retire asset sales over a greater period of time, even though numerous people may pick to continue working beyond the typical retirement age.

Would you be interested in an opportunity to increase cash value while simultaneously securing the flexibility of adjustable life insurance premiums and face value prices? What if you could obtain this without any of the downside risks of investing in the equities market? You can have all of this when you adopt an indexed universal life insurance policy. These policies are not for everyone, so please read on to find out if this unique combination of investment growth and flexibility fits your needs. 

What Does Indexed Universal Life Mean?

There are many variations of universal life insurance, including fixed-rate models and variable ones, where you choose certain equity accounts to invest in. In regards to indexed universal life (IUL), it is a policy that allows the policyholder to distribute cash value amounts to either an equity index account or a fixed account. Policies offer a spread of popular indexes, like the Nasdaq 100 or the S&P 500. There are pros and cons to each, for example, indexed universal life policies are more unpredictable than fixed universal life insurance policies, but have less risk than variable universal life policies due to there not being any money actually invested in equity positions.

Another benefit of indexed universal policies is that they offer tax-deferred cash accretion for retirement while simultaneously providing a death benefit. If an individual wants permanent life insurance protection while also taking advantage of cash accumulation via an equity index, then using an indexed universal life insurance policy might be the best option. This would be great for premium financing plans or estate-planning vehicles, along with insurance for business owners. Indexed universal life policies can be complex and difficult to explain, which is why they are considered an advanced life insurance product. 

How Does Indexed Universal Life Work?

When a premium is paid, the money disperses into several areas, including paying for annual renewable term insurance, and any fees are paid that are associated with the policy. The rest is added to the cash value. The total amount of cash value is added to by the increases in an equity index. However, this is not directly invested in the stock market. As a benefit, some policies allow the policy owner to have multiple indexes. Indexed universal life policies give a choice of indexes as well as guaranteeing minimum fixed interest rates. The policy owner can choose the percentage assigned to both indexed and fixed accounts. 

The value of the selected index changes each month. At the beginning of the month, the index is recorded and then compared to the value recorded at the end of the month. If there is an increase during the month, the interest is added to the overall cash value. The gains are then given back to the policy either on an annual or monthly basis. To demonstrate this, say an index gained 7% from the beginning of March to the end of that month, the 7% is multiplied by the overall cash value. Some policies calculate the index gains as the overall changes for that time period while other policies take an average of the daily gains for the entire month. The resulting interest is added to the cash value. However, if the indexes decrease instead of increase, then no interest is added to the overall cash value. 

The participation rate is the gains from the index that are added to the policy based on a certain percentage rate. The particular percentage rate is decided by the insurance company and can range from 25% to more than 100%. Then the total cash value that is added can be found by multiplying the gain percentage, participation rate, and the current cash value. 

Indexed universal life policies generally credit the gained interested to cash growths either once every five years or once a year. 

What Are Some Advantages of an Indexed Universal Life Policy?

Flexibility: The policy owner controls the amount to put into indexed accounts versus a fixed account. Death benefit amounts can also be modified as needed. The majority of indexed universal life policies offer add-on riders, from no-lapse guarantees to death benefit guarantees. 

Low price: The premiums are low because the policyholder bears all the risks involved.

Death benefit: Provides a permanent death benefit that is not subject to death taxes or income, and it is not required to go through any kind of probate. 

The cash value increases: Any amounts added to the cash value grow tax-deferred. The policyholder can reduce or stop making out of pocket premium payments due to the cash value being able to pay the insurance premiums.

Easier distribution: The cash value is accessible at any time without penalty and regardless of the individual’s age. 

Unlimited contribution: Indexed universal life policies have no annual contributions and no limitations. 

Less risk: There is a decreased disk involved due to the policy not directly being invested in the stock market. 

What Are the Downsides to the Indexed Universal Life Policy?

Superior for bigger face amounts: Lower face values offer limited to no advantages over regular universal life policies. 

Based on an equity index: No interest is added to the cash value if the index goes down. Some policies can offer a low guaranteed rate for a longer period of time, but not all of them do. As a benchmark for performance, investment vehicles use market indexes with the goal of outperforming the index. The goal for indexed universal life is to profit from upward movements within the index. 

Limitations on accumulation percentages: Maximum participation rates that are less than 100% are sometimes set by the insurance companies. 

Final Thoughts on Indexed Universal Life Policies 

Indexed universal life insurance policies are not for everyone. Still, they can provide a suitable option for those looking for the interest-earning potential of a variable policy with the security of a fixed universal life policy. 

If you continue to work, this means you can save more for retirement. When you delay making withdrawals, your retirement savings will keep growing. There are, nevertheless, several repercussions to consider if you work past 65, which may impede your retirement funds.

Here are some things to consider:

Federal workers, like everybody else, are eligible for Medicare Part B benefits at the age of 65. You will need to make some significant choices in regards to your future healthcare needs.

Medicare is a complex plan, and you’ll want to ensure you sign up at the correct time. When you are 65, there is a seven-month window for you to register. You have three options if you want to avoid penalties. You must register within three months prior to you turning 65. Another option is that you can choose to register in the month of your 65th birthday or three months after the month of your birthday. Be mindful that if you decide to sign up for Medicare Part B with the last four months of your registration period, your coverage will be postponed.

Enrolling in Part A and B of Medicare is an excellent source of information to understand more about the inner workings of the program.

The registration period only applies if you decide to retire before 65 years of age. If you are still employed and covered by FEHB once you reach 65 years of age, you may wait till you retire to register and will not be subject to any penalties if you are enrolled within eight months after retirement. If you do not register within the extended eight-month timeframe, this will cause a 10 percent increase for every 12 months that you could have registered for.

Secondly,⠀if you work longer than the expected retirement age, this can be helpful in regards to your Social Security benefit. Several federal employees, depending on when they were born, are not eligible for their entire Social Security benefit until 66 to 67. When you delay taking your SS until your full retirement age, you receive an increase of eight percent each year until you are 70 years old.

If you take your SS benefit before your full retirement age and keep working, some parts or all of your benefits will be reduced.

Retired federal workers receiving a Social Security pension prior to full retirement age can receive up to $17,640 per year as of this year. $1 is withheld for every $2 above that amount. Retirees achieving full retirement age could receive up to $46,920. $1 is withheld for every $3 above the cap. When you reach full retirement age, the income limit will no longer apply, and you will be able to earn as much as you wish. Benefits from SS are reassessed to give you credit for any benefits withheld

Your IRAs and TSP can be affected if you work beyond 65. Usually, IRAs mandate withdrawals one you are 70 and a half years of age. Income taxes are also subject to withdrawals from your TSP account. When you continue to work over 70 and a half, you do not have to withdraw from your TSP until you retire. You still need to take an RMD from other accounts like IRAs and 401(k)s.

There are definitely some financial advantages of working beyond 65, but there are downsides to be taken into account.

An effective retirement plan is one that not only needs to be developed and laid out on paper (or computer) but frequently reanalyzed to react accordingly to instances that may be in or out of our power. In Congress, three pending bills may alter the retirement savings and distribution system, as we know it. The objectives are to improve the flexibility of retirement savings, to fix the financial health of social security, and to provide additional protection to pension receivers. There are many benefits and some disadvantages that will negatively affect the small business owners, the average workers, and their beneficiaries.

It is essential to keep track of the progress of the bills. That way, you will have enough time to make necessary changes to adjust your retirement income in your plans and to see what your expected retirement date and savings will be with any of those changes. They also may be revised tax and estate planning for beneficiaries of retirement plans that are is not the spouse.

Setting Every Community Up for Retirement Enhancement Act

The primary goal of this tax legislation is to increase the access of the account holder to their own retirement savings accounts. Below are some of the main points to the act.

For the retirees: for minimum withdrawals required by law from your IRAs,401(k),403(b), and other employer-sponsored retirement plans, the age of when this goes into effect will be changed from 70 and a half to age 72. If you don’t need the extra income, this can be beneficial. It also encourages tax-efficiency strategies during the income years where they are the lowest. Think about making Roth IRA conversions, taking those funds to pay for life insurance, and seeking planned charitable opportunities during this 1 1/2 year stretch.

For the employees: It will enable401(k) program participants to have access to annuities and other lifetime income choices. This can be beneficial during this day and age, where employer-provided pensions are trending towards vanishing, leading to the demand to build your pension. Another reform would require eligible contributions over the age of 70 1/2 to retirement accounts. Traditional IRAs will be like Roth IRAs without an age limit. Certain IRS criteria must be fulfilled and remain constant at this point in order to allow eligible contributions.

For the employers: some of the expanded policies would also cost owners of the business. To maintain compliance with federal and state regulations, they will have to provide additional matching contributions and will have expenditures on revising documents.

Higher tax credits should be available up to 50 percent of the new retirement package for a small business. It rises from a maximum tax credit of $500 per year to $5,000.

For the beneficiaries: The law created a significant change that limits the capacity of inheriting a stretch for beneficiaries, which can be detrimental in regards to estate planning. A non-spousal beneficiary will have a 10-year limitation period to delay dividends and income taxes in regards to an inherited IRA. It will require taxation of retirement plans inherited in the first year or no more than a decade. There are exemptions for the impaired, a minor, or chronically ill that are non-spousal beneficiaries.

Distributions would occur during the course of their life expectancy for those with exemptions. Still, the exception for minors would terminate when they reach adulthood with the final payout to be collected within a decade.

Spousal recipients will still be able to extend and postpone the required minimum distributions of the inherited account until the completion of the deceased’s 72nd year. Before this new law proposal, the delay was up until 70 and a half years of age.

Social Security 2100 Act

Rep. Larson, D-Conn., presented this bill this year in July. The purpose of this tax act is to address the Social Security program’s solvency so that it can still be functional by the end of this century. If nothing is done about it, Social Security trust funds are estimated to be bankrupt by 2035. If this occurs, 80% of the current benefits are what will be paid out. This would adversely affect citizen’s retirement income for a lifetime, most of whom depend exclusively or partly on benefits from Social Security to fund their retirement.

For the employees and employers: In order to pay the solvency fix, the bill will be increasing payroll taxes. Both workers and employers must pay higher social security taxes. The rates of social security currently paid by a worker and equivalently paid by an employer can be about 6.2 percent for an annual salary of $132,900. The plan is to increase the tax by 1.2 percent more for a total of 7.4 percent for up to the maximum yearly wage of 400k. For example, if a worker earns $250,000 in income, their SS taxes will be increased by $10,260 a year.

The expenditure of the company would grow by the same amount. The added cost is going to probably result in lower-wage hikes and reduced employee contributions to their retirement plan.

For the recipients of Social Security: People currently receiving benefits from Social Security may expect a decrease in federal taxes on their earnings from Social Security. Taxation on up to 85% of Social Security benefits occurs if non-Social Security earnings are above $25,000 for singles and $32,000 for spouses. Under this proposed bill, the amounts will rise to $50,000 for singles and $100k for spouses.

Rehabilitation for Multi-Employer Pensions Act

A majority of 264-169 passed this bill at the House of Representatives in July of 2019. The aim of this new bill is to enable pension plans to borrow money for sustainability and so that it can continue to pay pensioners, If approved, a trust fund would be created by the new law which lends money to pensions as financial solvency continues to be a problem with a lot of public and private pension plans.

There could be many positive changes for workers, employers, and retirees if any of these three pending bills pass. Workers, small business owners, and beneficiaries must pay the costs of the SECURE Act, Social Security 2100 Act, and Rehabilitation of Multi-Employer Pensions Act. Monitoring the status of these measures and the always-changing tax code will be essential to allow time to plan your personal retirement plan, tax plan, and estate plan.

One of the daily habits I have been getting into lately is my practice of gratitude. It is something that has been uplifting during a part of my day. If this is something, you want to try out, here is a list of reasons why you may want to be grateful when it comes to your federal employment.

Pension. There is a defined benefit package for all federal employees. The FERS plan is what most current employees have, but there are some long-times that are on the older plan, CSRS. For those uniformed service members out there, they either have the Legacy Retirements System or the Blended Retirement System.

There was some data released recently that show that 11% of workers in the private sector have a pension of some sort. Only a few years ago, that number was about 25%, which shows a quick decline with this benefit for those that are in the private sector. A FERS worker who has been employed for 30 years will receive a pension of 30 to 33 percent of their top three earnings. After 20 years of uniformed service, LRS will pay 50 percent of the base pay. The BRS pays about 40 percent after 20 years of service. A pension is something that can definitely help you along through your retirement.to have a stable and comfortable retirement

Another thing to be thankful about? Social Security

Like most working Americans, we will be able to benefit from Social Security. Since the average federal wage is greater than the average salary of those that are non-federal, federal workers will receive a higher benefit than the average beneficiary of social security.

For this year, the average annual payout for SS is a few dollars over $17,530. Note that this incentive is the baseline for most workers because they do not have a pension to depend on. This generally means that they have to depend on other investments, if they have any, to have a stable retirement.

A Third Thing to Appreciate: The Thrift Saving Plan

A defined contribution program is not applicable for 35 percent of private-sector workers. For those that are eligible, only about 80% of employers will provide some type of matching contribution. In comparison, the 5 percent match offered for FERS and BRS members is greater than the average (at 4.17 percent) as well as the most common 3 percent match offered by other employers.

Another benefit to be grateful for?

Federal civil employees have the Federal Employees Health Benefits Program, also simply known as FEHB, and for those that are in the military, they have the TRICARE system. Both these health benefits programs can also be used during retirement and even beyond when you are eligible for Medicare, which is something that is not seen for those that are in the private sector.

And lastly (yet there are definitely more things to be grateful for that have not been mentioned), job security is much more stable than those that are non-federal or military employees. After you have completed your probationary period, you can only be released due to cause or cut in the labor force.

Maybe with a few of these reasons to be grateful for, it will put a pep in your step for the day.

Since Sept. 15 of this year, current and ex-federal workers and military employees have more options regarding accessing money from their Thrift Savings Plan.

The TSP executive director, Ravindra Deo, states that the TSP believes that the TSP members will enjoy these changes and also will meet the many demands for flexibility when it comes to withdrawing money from their accounts.

Before the new rules were implemented last month, the previous system was set up about three decades ago, since the TSP was born. And the old system was very restrictive when it came to withdrawals.

For those that are not aware of what the TSP is, it is a program for federal and uniformed employees that functions very similarly to a 401(k) plan. The TSP is the biggest employer-sponsored retirement savings program in the U.S. with almost $600,000,000,000 invested and about 5,700,000 participants in the program since July of this year.

Previously, when participants ended up leaving their federal or uniformed service, they were able to keep their TSP (until age 70 and a half) and were able to take funds from the account in the form of monthly installment payments or a lump sum.

Those limitations encouraged many participants to take the money and put it into an IRA or another eligible retirement savings program to have more flexibility when it came to accessing their savings.

With the new rules in place, those that choose to keep their TSP plan can take unlimited partial withdrawals as long as they are 30 days apart. Previously, only one partial withdrawal could be made in a lifetime.

For those that take installment payments are now able to change the amount and regularity of these payments at any time, instead of the once a year opportunity in October like before. They can select whether they wish to get paid every month, every quarter, or once a year.

For those that are actively working and have taken out hardship withdrawals, they are no longer applicable to the 6-month contribution suspension that was a standard system before Sept. 15. They are now able to continue investing in the TSP.

Also, employees that are still employed by the Federal Government can take up to 4 withdrawals without facing tax penalties every calendar year, as long as they are at least 59 and a half years old. This used to be only a once in a lifetime option.

These withdrawals used to take a proportional rate from your Roth balance and your traditional TPS balance. Now, participants can select what account they wish to withdraw from, or they can use them both as well.

Another significant change is that once you are 70 and a half years of age, you no longer have to elect on how you wish to withdraw your account completely. However, the IRS will notify you of a required minimum distribution amount that you will have to take.

The reason why the TSP has implemented these changes was due to an order by the TSP Modernization Law passed in 2017.

Another change that was added is that the TSP now allows withdrawal request forms to be done online along with changes, but the forms still need to be printed out, signed, and sent into the TSP. However, this is an improvement from the previous system of printing the forms, filling them out, and sending them in.

Last year, about 54,000 people out of 200,000 who withdrew during post-separation requested a transfer to another retirement savings account. Another 41,000 requested installed payments from their account, and another 2,000 participants purchased an annuity plan.

About 103,000 participants completely withdrew their savings from their account, which is very common among those that do not have a lot saved up. This action faces huge tax penalties for the tax year.

However, now with these new withdrawal options, this may encourage participants to keep their accounts and only to withdraw what they need when they need it, rather than large amounts. That way, they can continue to grow their savings in their TSP. Another reason to keep those funds in a TSP is due to low-cost admin fees and the ability to have higher interest rates accumulate with government bonds without the risk.

However, other reasons some participants leave the program is because there is a restricted range of options to invest in. There are only five basic finds that are linked to broad indexes. Five life cycle funds combine investments in those basic funds depending on the expected dates of withdrawals. Another reason that might still have participants move their funds is the long processing times for these withdrawals and also not receiving advice from the TSP, but only information. Many people wish to be able to have their money with a provider that will be able to help them navigate financial questions and challenges.

However, most people will say that these changes can be an excellent thing for many to have such flexibility to access their accounts when they need it.

According to analysts in an issue brief published by the National Institute on Retirement Security (NIRS), the financial asset gap within American citizens keeps rising and is coupled with meager savings for retirement for most families presents a real challenge of being able to retire.

The researchers claim that the imbalance of financial assets is compounded by regressive tax benefits for pension savings and disproportionate accessibility to retirement plans offered by employers

It was discovered that the top 5 percent of the richest Baby Boomer’s share of financial assets rose 8 percent within 12 years. It went from 54 percent in ’04 to 60 percent in 2016. Across the same timespan, the share of financial assets held by the highest 10 percent increased from 68 percent to 75 percent. The top 25 percent went from 86 percent to 91 percent. Baby Boomer households ‘ share of assets owned by the lower 50 percent dropped from 3 percent in 2004 with less than 2 percent in 2016.

The analysis shows that Generation X, as well as Millennials, at younger ages, seem to have achieved similar levels of financial assets among the wealthiest households in the Baby Boomers generation.

Last year, a study from NIRS evaluating the U.S. Statistics from the Census Bureau revealed that retirement savings for working-age Americans citizens were significantly insufficient. More precisely, the average retirement account balance across all employed adults is $0. Around 57 percent of working adults do not have retirement account funds in an employer-sponsored defined contribution program, an IRA, or a pension. In the current study, the researchers think that insufficient accessibility retirement planning is what is mostly at fault.

The latest brief also notes that for a vast majority of people, Social Security provides vital income during their retirement. The Social Security system has a progressive benefit model that assists lower-income citizens to live outside the poverty threshold and allows those that are retired to keep up with adjusting to the standard of living that continues to progress every generation. Nevertheless, throughout time, the tax structure of Social Security continues to be more regressive. The Social Security payroll tax limit on income, AKA, the “tax max,” has completely lost touch with the rising inequality in earnings. While the share of jobs paid above the tax max has stayed quite stable at around 6 percent for generations, the program collects a progressively smaller percentage of U.S. wages annually.

The analysts give ideas on how to improve the imbalance in financial assets created by problems with the retirement system. For one, Social Security could be improved by Congress and the President, himself. Eradicating the income cap will raise profits, which would significantly improve the budget deficit of the Social Security Trust Fund. Such increased revenues can also fund program changes, like larger retirement benefits to low-income earners and providing credits for citizens that have to take time outside the workplace to assist with caregiving.

Secondly, researchers believe states could be crucial in developing state-sponsored retirement savings programs for those not provided a package in their workplace. This will give workers who do not have accessibility to employer-sponsored programs a chance to grow their finances. As of now, only ten states have set up workers’ retirement savings plans who cannot acquire them. The Oregon workforce generated $2.5 million every month with the state’s auto-IRA system only after two years of existence.

But on the other hand, U.S. Attorneys lodged a Statement of Interest in a case, presenting proof that the Employee Retirement Income Security Act (ERISA) preempts California’s state-run auto-IRA program.

Ultimately, the researchers believe that perhaps the federal government should strive to enhance and encourage the Saver’s Credit. The analysts claim that the aggressive phase-out at low-income levels and the absence of reimbursement limit the efficacy of the credit. The median credit given in ’14 was $174, and the expense of the federal government was minuscule in comparison to the tax expenditures that help fund higher-income earners’ savings with 401(k) tax policies.

One of the most difficult federal retirement policies to understand involves the personnel or ex-personnel from the military. That’s because a law passed by Congress in 1982 gave personnel the ability to make a deposit or contribution into their civilian retirement system for active military service as time added to a federal annuity, raising that annuity’s value.

This article only applies to those that service after 1956.

Those who make the contribution are due to receive credit for military service under both the Social Security system and the civilian retirement system. If payment for military service is made within two years from the date you first started working, no interest will be applied. If the deposit is not done within the two-year timeframe, interest will be added to your account one year after. This gives you a period of 3 years sans one day for an interest-fee period.

If you are under FERS, you can earn military service retirement credit if a military service deposit was paid. During years of active duty service prior to January 1, 1999, the contribution was equivalent to 3% of the base salary received during the military service. Keep in mind that this does not include allowance. The deposit is proportional to 3.25% for service during 1999, 3.4% during 2000, and after the deposit is equal to 3% of the base salary.

If you were first hired covered under CSRS as of October 1 in 1982, you could obtain post-1956 military service retirement credit only if you make a military service deposit. Before 1999, 7% of the basic military salary you earned for the military service is what the deposit required. The deposit required for service periods during 1999 is 7.25%; for 2000, the deposit is 7.4%, and after, the deposit is 7%.

If you were first hired under CSRS before October 1 in 1982, you have two options: (1) depositing for post-56 military service; or (2) earning service credit or getting your annuity recalculated at the age of 62 to remove post-1956 military service — a reduction in annuity known as “catch-62.”

This only happens if you are eligible for Social Security. If you do not have enough quarters to qualify for Social Security benefits, and if you do not have enough by the age of 62, there is no value of having a military service deposit.

If you are retired from the military and you work in federal civil service, you may be able to integrate both your military and civilian service annuities into just one. It typically involves a deposit for the military service into the civilian retirement system, and you have to waive your retirement pay from the military when your civilian annuity goes into effect.

There are two exceptions to the rule of waiving your military retirement pay. You do not have if it is awarded for a disability sustained in combat or by warfare, or if awarded for service in the reserve under Titles 10, Chapter 67.

What do those working in the federal government have in common with the end of the month and the start of a two-week leave time frame? These become very good retirement days when these land on the same day.

If you plan to retire in 2020, here are a few dates in the year when the end of the month is on or near the end of a leave period: January 31, February 29, and July 31.

Why is retirement at the end of the month valuable? The retirement benefits will begin on the first day of the month following your retirement. To put it another way, if you retire on the 1st, 6th, 15th, or 31st, your first retirement check will be the first day of the next month. Your last paycheck will cover you until your ultimate day on payroll.

The justification that the last day of the month is perfect to retire is that you can get your salary paid at the very end of the month and your pension will start on the first day of the next month.

For instance, if you ended up retiring on January 24, 2020, your standard income will be paid up until that closing business day. You will also collect the annual and sick leave for the first leave timetable of next year. Your first pension payment will be paid for February but will be dated March 1. If you decided to retire on January 31, then your pension will be paid up to that date, and you will be subject to the retirement benefit in February. The downside is that if you resign on January 17, you will lose a salary worth ten days, one paid holiday, and another accumulation of leave. Plus, your retirement would start on February 1, with the first payment being on March 1.

Since annual and sick leave only accrue when you fulfill the 80 hours of work for a pay period, the end of the leave periods is quite relevant. You won’t get a partial leave accrual if you resign in the middle of a pay period. You lose that benefit altogether. On the day you leave for retirement, you will be paid the entire amount of what you have accumulated for annual leave.

So, are there just three good retirement dates in 2020? Not at all. Any month’s last day will be beneficial because you’re going to be paid through the end of the month, and your retirement will begin to accrue the very next day in the new month.

There are some other dates that have their own advantages this year. If you leave on the last day of March, you will have gained leave time through the 6th phase, which closes on March 28. April 30 can work for those that have more of a flexible schedule as it is on a Thursday, but you would end up receiving your last leave accumulation if that is the case. If it is not flexible, you would lose the accrual but still receive your month’s pay, and you retirement would start on Friday. For most that plan to retire in May, it would probably be a few days before since the last day of the month ends on a weekend, but that still allows you to accrue your leave time, and you get paid the following Monday for your retirement. Now there are a few months that are similar to June, which the last day ends in the middle of a workweek. It is crucial to leave on the last day and not a few days earlier so that you can receive your leave time, but also so that you don’t miss a few days of your salary. Other months that are like this are August, September, October, and lastly, November.

Now, I have saved the best for last. December 31 is the best date because it is the final date of the leave year. If you did not take any leave that is about 208 hours of time that you can be paid out. Also if your position has a pay adjustment every year or at least for 2021, you will get those hours paid at the 2021 rate, except for 8 hours due to the 2021 leave year not starting up until January 3. Also, you end up leaving on the last day of the year, and your retirement accrues on the first of the year, which can be a sign of your new start.

There isn’t a platform that one can say has no room for improvement, but the Thrift Savings Plan still stands to be one of the best programs that are simple and low-cost if comparing to other investment savings accounts. They also have just updated their system by providing more withdrawal options for account holders based on feedback throughout the years.

The system does have some critics, though.

Readers who saw the movie, The Big Short, may recall the character which was based on real-life portfolio manager Michael Burry who shorted the housing market at the height of the 2007 real estate bubble, which made him insanely profitable returns for not only his clients but for himself as well.

Now, Burry himself is calling that the index funds may just be the next crash. What may be to blame? Overvaluation and overvaluation and liquidity mismatch.

Except for the G Fund, all other funds in the TSP are index. So, should account holders of TSP be worried about this claim?

Well, Burry is one of many prolific investors that does not support the rapid growth of index funds. Since these funds came to fruition in the ’70s by Vanguard, fund managers high-priced fees have been quite critical of these less costly automatic rivals. The reason? Probably because these index funds have a strong record of eclipsing performance due to their much affordable costs, which had lead to taking much of the market share from high-charging mutual funds.

A small minority of these fund managers exceeded passive investments with their perfomances, but as most things, there are usually exceptions to the standard. Mostly, investing is a zero-sum game compared to a standard such as the S&P 500, and most fund managers try to match the benchmark before the fees. Most of them end up underperforming once you take away the fees of about 1% per year.

Numerous 401(k)s in the U.S., along with many contractors working for federal branches, tend to be carried out through high-fee mutual funds that are not able to beat low-cost index funds.

Fees of 1% annually may seem negligible, but compounding the funds at 8% every year for four decades increases your investment by more than 21 times the principal amount, whereas compounding at just 7% per year for the same duration yields in under a 15-fold rise. If investments  end up being hundreds of thousands of dollars over decades, fees are not negligible at all.

Nevertheless, since index funds comprise an increasingly large portion of U.S. assets, it is worth examining concerns from Burry as well as others. Burry’s claim regarding index funds centers on two key problems which are: possible overvaluation and inconsistencies in liquidity.

Let’s look at overvaluation.

TSP funds, such as most index funds, are weighted by market capitalization, which means moving greater weight on the biggest and highest-valued companies. For instance, AEX and Apple are included in the C Fund, but because Apple’s market capitalization is about ten times bigger, it also weighs about 10x more in the C Fund.

Burry’s issue is that if trillions pour into index funds without enough market analysis of each stock, the biggest companies could be overweighted, which would have them overvalued. Burry believes in particular that stocks of large-cap growth are typically overvalued, and stocks of small-cap value are possibly viable bargains in the current financial climate.

This is a legitimate concern to a degree, but this has happened in the stock market before the existence of index funds. The U.S. stock market hit a peak in 1929 that it needed 27 years to achieve new inflation-adjusted market peaks after the market crash and the subsequent Great Depression. Furthermore, it required the market 24 years to achieve new highs adjusted for inflation after the market peak in1968. Also, it took 14 years to gain new highs taking inflation into account after the peak of 2000.

Diversifying is the primary preventative measure against this risk. For example, the TSP Lifecycle funds hold U.S. shares, foreign stocks, bonds, and automatically restructures the assets, helping them from being overly concentrated in areas of capital concentration.

Moreover, a lot of TSP participants have an IRA or other investments and can supplement their TSP with asset classes such as variables, investment trusts in real estate, emerging markets, precious metals, and definitely more. For instance, there are several exchange-traded funds, which allow shareholders to emphasize a particular area. For example, the SPDR S&P 600 Small Cap Value ETF enables shareholders to exclusively allocate to stocks with small caps.

Now let’s talk about liquidity mismatches.

The second point that Burry makes is that there is a liquidity mismatch with the funds and the underlying stocks. Most shares have only a few million dollars in the average amount of daily trading, but trillions of dollars are invested in index funds holding such stocks. If a huge amount of shareholders sell their index funds all at once (due to algorithmic trading, or TSP investors all switching to the G Fund during a market slump), this might lead to a point where sellers massively surpass buyers in amount for some of the less-liquid stocks within the fund, which could manifest into a large price difference.

That’s a fair observation. A historical instance of this happening in a single day happened in October 1987, the S&P 500 lost more than 22 percent of its value due to volatility that unfolded all at the same time. However, the market was not connected to index funds during this period.

Since that 1987 crisis, a good thing that came out of it is that the stock market has protections in place to minimize future liquidity-driven price problems like before. For instance, if stocks fall by 5% or 15%, many of these preventative measures will activate a process that will temporarily stop trading. This allows fund managers time to sort out what is happening and potentially allow dip-buyers to join in.

In addition, TSP participants tend to own other accounts that they can implement to broaden their investments.

The TSP offers a robust set of index funds for investors to create a fairly varied portfolio, which includes big and small U.S. corporations, foreign companies, bonds, and even G Fund Treasury securities. Although this does not cover all classes of assets out ther, it’s doing a fine job for investors overall.

Policymakers and federal labor organizations both seemed to accept that to enhance the government’s ability to hire and keep employees, organizations need to do more to pay high-performance employees and provide flexibility in the office.

The House Oversight and Reform subcommittee on government operations had a hearing called NextGen Feds: Recruiting the Next Generation of Public Servants, looking for feedback on how the imminent and long-feared retirement surge could be handled. But with no surprise, there had been a debate about the best method to bring about change, with Republicans proposing a comprehensive restructuring of the General Schedule framework in pursuit of production-based compensation, and federal employee unions and Liberals supporting greater effective use of current services— and educating administrators to use them the best possible way.

A researcher for the Heritage Foundation, Rachel Grezler, stated that with ninety-nine percent of workers getting pay raises, the focus should be put only on providing a raise based on the performance of each individual. She also mentioned that the money saved from not giving everyone a raise could then be used to increase the salary jobs that are in high-demand, along with special and signing bonuses.

Yet Tony Reardon, president of the National Treasury Employees Union, said the current pay structure has opportunities, but a significant reduction in financing supervisor training and education has left administrators without any of the skills needed to implement them. He provided an example from the IRS, where during the Obama administration, the training spending was cut by 85 percent within one year.

He mentioned that up until about 2014, 14 percent of bargaining unit workers ended up getting a quality step raise rather than a regular step raise. “You became a Step 10, or whatever, instead of being a Grade 12 Step 9, you got an additional step.” He said that the only way that an employee receives the step is if the agency decides that they are a high performer and that they earned it. He believes that the estimates now are about 3 to 4 percent and that they are not using the resources available to them.

Greszler also proposed that the government should consider allowing new employees to elect to move pension contributions to their direct pay or their TSP accounts, especially since millennials tend to prefer staying flexible in a career through the years. Chairman of the subcommittee, Gerry Connolly, D-Va., was able to consider the possibility.

The Chairman mentioned that it was a fair assessment that the system could be more flexible, but also stated that it would be a good idea to save for retirement early as retirement ends up appearing far quicker than most would think.

Another approach to attracting younger workers into the federal sector is to enhance the non-salary compensation plan, especially in high-demand areas such as information systems and cybersecurity. Rep. Carolyn Maloney, D-N.Y., sought ongoing encouragement for her proposal, which would give any personnel, either gender, with 12 weeks of fully paid leave for the arrival or adoption of a child, as also to assist with the care of ill family members or personal health issues. The provision was part of the House version of the fiscal 2020 National Defense Authorization Act and is one of the conference committee’s main criteria for negotiation.

Maloney said that the laborforce at the federal level is getting old, and the economy is progressively different. She also said that women are primarily employed because they have to be, since sustaining a family generally requires multiple earnings. Looking further in a general spectrum, in 40 percent of citizens with kids under the age of 18, women are the sole or principal providers, and two-thirds of households rely on the income of these working mothers.  She also states that the federal labor force needs to be in a position to serve the needs of citizens of today and in the future much better.

Greszler said the Heritage Foundation is advocating the development of paid family leave at agencies but proposed that it must be compensated by removing other kinds of sick leave that federal employees currently have.

Robert Goldenkoff, director of strategic issues at the Government Accountability Office, said departments would have to do a superior job of telework integration, which is becoming progressively a key advantage that job candidates are seeking for in a career.

He said that even though organizations in some fields of work can be struggling to offer higher wages, they can utilize telework and other extensive work-life balance services to meet the demands of employees for versatility in jobs.

Despite repeated proclamations from the Personnel Management Office that telework not just boosts employee morale but also increases productivity. However, some agencies under the Trump administration have significantly reversed the procedure, notably in the departments of Education, Interior, and Agriculture.

Representative John Sarbanes, D-MD stated that statistics show that telework that used aggressively and sustainably creates some of the most efficient areas to work. When the culture of productivity is widely practiced, usually caused by telework, it actually inspires the rest of the labor force, whether they are using telework or not.

Planning your retirement is a very crucial step for everyone, but being efficient and successful is the aim. What may help people are drawdown strategies by going for a monthly stream of income throughout retirement, downsizing the amount of taxes, and maximizing the benefits from the government.

Nevertheless, being wealthy enough to have the resources to retire quite well for the rich brings additional financial obstacles and complexities in retirement planning than is usual of a retired middle-class or affluent person. The repercussions of gift and estate taxes may be regarded by wealthy retired people. They might own special assets or investments, and they tend to have problems with gifting and donating to charity. The rich don’t generally have different issues with the retirement drawdown; they tend to have extra problems.

Income drawdowns for the rich, tax efficiency is very important, but their assets may come with challenges to value. This is because these assets tend to be art, intellectual property, a brand, or small businesses. The rich also may have more income than this wish or need, which is why many gift or donate to charity as strategies.

Let’s take a look at a situation with a 59-year-old woman named Margaret, that has gained a lot of money through a sky-rocketing coffee chain. Her chain is valued at around $20 million, and she has it outlined to pass down the business to her family line. She also has property valued around $5 million and has about $7 million in her IRAs.

Margaret wishes to start the process of handing off her business to the next in line, which is why she has cultivated an exit strategy and is beginning to plan out her retirement with her financial advisors.

In regards to Margaret’s situation, just considering her income and employment taxes isn’t sufficient for her to be tax-efficient. She is facing extra hardship. Over the exemption amount, federal gift and estate tax is a straight 40 percent.

For Margaret, over $12 million of her assets may be subject to the tax. Also, due to sunsetting tax regulations, this could rise to another rate of 50 percent in the year 2026.

The equation is pretty simple. Margaret must do her best to stay away from those gift taxes, even though that would have her generate additional income taxes, which could be up to 37 percent. If she gives away her assets, she would not be hit with some extra income taxes. However, this move would require a 40 percent gift tax. Therefore, tax efficiency recommends lowering her exposure to transfer tax and choose to place additional taxes on her income. There are several avenues this approach can be achieved.

There will be some examples of widely used strategies of estate planning that require taking extra income though avoiding taxes in regards to gift and estate. The list does not cover every matter, but the planning problems and resources exclusive to wealthy Americans are highlighted. All of these strategies are examples of “estate freezes” that effectively secure the value of appraising assets for purposes of estate tax. For the asset, a value is calculated, and that value remains set for the purposes of estate and gift tax, even when the worth of the underlying asset subsequently rises.

To pass her business down to her children, Margaret’s advisors might have her implement a well-known estate freezing method called a Grantor Retained Annuity Trust (GRAT). The main concept is that several or even the entirety of the stock in her business would be gifted to a trust. After, the trust would send her disbursements of payments. IRS tables are used to calculate this annuity’s value back to the grantor, and this figure would be used to decrease the gift’s value for transfer tax reasons. If Margaret’s business values above the IRS average, so all the extra appreciation remains out of the estate portfolio.

The distinction in her business between the low government rate and the high ROI is a positive tax arbitration. Margaret may save millions of dollars in gift and estate taxes on valued property if she lives long enough. The trade-off for this strategy is that she will receive income taxes on the payouts sent from the trust, and if she does not use those payments, they reflect the extra wealth that would then be liable to property tax if Margaret passes away.

A different method for Margaret to freeze the valuation of her business interest is to sell it via payment installments. When she has sold her business to her children, the appreciating value of the business will no longer be included in her estate. The only that will be applied to her estate would be the sales profit from the sale. The benefit of doing an installment sale is to prorate the transaction’s taxes through the years that payments are made. Part of each payment is a non-taxable return for the coffee chain, capital gain on the selling price over the tax basis, and ordinary revenue on the transaction’s interest. From the perspective of transfer tax, her estate would only bear property tax on the money paid to her during her lifespan that has not been used along with the balance of payments that are remaining. The asset is now fixed loan payments and not a company of appreciation. Like the GRAT method, for estate and gift tax reasons, this method freezes the worth of the business interest.

There are many different strategies in which Margaret can switch the possession of both her real estate and coffee chain so that she stops the appreciating values of her assets or estate and gift tax reasons. ⠀Each strategy has its own nuances. However, the main point is to develop an asset value that is frozen for the estate that she has and allow the appreciating part of her assets be moved over to her children. ⠀This move, hopefully, will be done with a reduced assessment for gift tax reasons. For instance, in a limited family partnership, she can place a bit of her coffee chain or real estate properties into this partnership. Her role in this partnership would be general partner, and her children would be sold or gifted the limited partnership interests. It helps her to deduct the value of limited partnership interests for gift and income tax reasons and caps the value for purposes of the estate tax.

There is a different kind of entity change that would also provide a freeze in estate. Margaret could recapitalize the coffee chain into a mixture of preferred and common shares. She would keep the preferred stock, and her children would be gifted the common stock. Rather than holding the common shares that are gaining in value very quickly, Margaret would hold stock that has a set value, which is the preferred stock. This would eliminate the increasing value of the coffee chain from her estate with a discounted gifts tax. Now, she would probably have to take preferred stock distributions as revenue to have this transaction eligible with the Internal Revenue Service.

An unusual, yet popular, strategy that the rich use is to establish a defective grantor trust on purpose. For the benefit of her children, Margaret would allocate several of her appreciating assets into an irrevocable trust. The trust would be paid any revenue that the assets generate. If this is implemented just right, this move would freeze the gift’s value for gift tax reasons and delete the assets from her estate for property tax reasons. However, the trust is drawn up in such a way that Margaret is taxed on the revenue of these assets. This is what the purposeful defect would be. Therefore, although the money is paid to the trust, Margaret will be the one to pay the income tax.

So how is this technique efficient? The reality is that somebody needs to pay the income tax on the profits that result from Margaret’s coffee chain and properties. Here is why it would make sense for Margaret to pay the tax: even though she is wealthy, Margaret herself would not hit the income tax bracket for the top 37 percent, only if her earning go over $510,310. On the other hand, a trust will have to pay the top 37 percent rate on all revenue that goes over $12,750. To be straightforward, Margaret is trying to prevent having to pay estate taxes as a wealthy citizen. She also lowers the value of her taxable estate if she pays the asset’s income tax. Basically, this would allow Margaret to give more value to her children without being liable for estate taxes. For instance, if the trust earns $1,000,000 in revenue and then pays the income tax, that would be over a third of the profit, the government ends up taking. Therefore, due to the grantor trust, the tax is liable for Margaret to pay, which allows the trust (essentially the children) to receive the full $1,000,000.

Much of the U.S. wealth is correlated with ownership of assets in real estate and business, which is why Margaret is a prime example. Just like most people probably would, the rich want to stay away from paying the 40 percent transfer taxes. That’s why financial advisors that Margaret goes to will more than likely advise doing one or more of the above-mentioned strategies. However, keep in mind that a majority of these methods of estate freezing require Margaret to earn income that is liable to income tax.

Drawdown strategies typically aim to defer, spread out, or avoid income taxes while maximizing retirement cash flow. However, the estate freeze ideas mentioned earlier involve taking back taxable income. With the intentionally defective grantor trust concept, Margaret incurs taxable income on payments she wouldn’t even receive. And even with the techniques where she does receive payments, such as a GRAT or an installment sale, it’s questionable whether she really needs this money for retirement income. Since Margaret has $7 million in her IRA accounts, does she really need these other payments?

The objective is still to be efficient. Margaret seeks income during her retirement years, minimizing taxes liable, and also maximize the benefits from the government. Though, she must approach the obstacle accordingly because of her wealth. For illustration, she may change the sequence she earns her income during retirement. Normally, someone that is of affluency defers the time she collects most of her IRA distributions. Therefore, she would scale back some of her after-tax assets in the initial years following her retirement, and delay the taxation on her IRA income.

But, Margaret should change the order of withdrawals due to her how much she is worth. Using her IRA earnings first and only utilizing after-tax assets later, if necessary, would be more efficient for Margaret. She thus pays revenue tax on IRAs, thereby reducing her taxable estate. She also raises the net value her children will gain by using her tax-inefficient IRAs as her income during retirement. First off, they acquire after-tax assets and not IRAs, which are liable to income tax. Secondly, her children will benefit from the basic rules that are stepped up.

When Margaret passes down her capital assets such as stocks and bonds to her children after her death, the tax basis of the assets will step up to the date of death value. It implies that on the sale of these assets, her children will face less tax on capital gains.

Another illustration is how rich people handle RMDs, which are payments that the person must take by law. If Margaret earns more income than she wants due to the estate freeze strategies, RMDs are not efficient for her. The RMDs will increase her taxable income and subject her to other expenses like the surtax of Net Investment Income (NII) and the evaluation of Margaret’s premiums for Medicare. Using a qualified charitable contribution (QCD) can prevent the tax liability of RMDs for Margaret if she wishes to donate. This move would let her redirect her RMD to charity, which she can contribute up to $100k and prevent the additional expenses of RMDs becoming added revenue.

Though it may seem that it is very different for the rich in regards to maximizing their drawdown, but it really is not. The rich are still faced with IRA vs. Roth IRA matters when they should receive their SS benefits, investment allocation and position, and what the best decisions should be for Medicare choices. Given the idea of purposely receiving income taxes to save on property taxes. The wealthy would still want to look for methods to reduce their overall tax liability.

On September 15th, those in the Thrift Savings Plan program had access to new withdrawal and change options–and they were taking advantage of it. According to the board that runs the TSP, within approximately 24 hours of the newly implemented changes, there were at least 9,300 users that started or completed a new withdrawal request online.

According to the director of TSP participant services, the day after the change went live on a Sunday, the participant support centers for TSP were quite occupied with answering questions.

The Federal Retirement Investment Board, who governs the TSP, are unsure this early in time on whether the participants are acting on demands that have been pent up, or if they are just wanting to see what the new options are like.

These changes came from the heels of the TSP Modernization Act of 2017, which allowed the FRTIB to change things based on many feedback from account holders. The Act had a deadline of November 2019 to add these new changes to the system.

Check out what some of these new changes are below:

1. Installment payments can now be selected to be taken every month, every four months, or once a year.
2. It is now allowed to take partial withdrawals post-separation as many times as needed.
3. Installment payments and partial withdrawals can be taken at the same time.
4. Participants can now choose what account to pull money from, whether it is their traditional accounts, or Roth, or a mix of both.
5. For those that are still working and are at least 59 and a half years old can take up to 4 age-based, in-service withdrawals per year.

These changes are much-welcomed as the old regulations were restrictive for account holders. Many that were post-separation were forced to move their funds to another retirement account, such as an IRA, to have flexibility. Now with these new rules in the system, they won’t have to do this just for flexibility’s sake.

Unfortunately, because the old regulations were very limited and complex, many TSP account holders may not know what exactly has changed for them, specifically.

Check below to see what these new withdrawal options can do for those that are TSP account holders.

Since the new changes have been made, TSP participants are allowed to make one withdrawal monthly (every 30 days). Those are that are post-service no longer have restrictions on how many partial withdrawals can be made from their TSP.

For those that are still working for federal service and are at least 59 and a half, they are now able to make four partial withdrawals every year. Keep in mind that the 30 day time period will also apply to these withdrawals.

TSP account holders can select the option to take their payments every month, every four months, or once every year. They can also adjust the amount of the payments, stop, or start them whenever they need to.

Also, there is no longer a mandatory decision that participants have to make at age 70 and a half with what they wish to do with their balance. The TSP will pay the difference through required minimum distributions for those that do not know what they want to do with their account.

During this process of RMDs, the participants will be notified by the TSP that they have not selected an option for a complete withdrawal of their balance. They will also be notified that they need to take the RMDs. The amount will be calculated annually by the IRS as to what needs to be the required minimum amount.

Before the new withdrawal options, if a participant took a hardship withdrawal, they were not able to make contributions to their TSP for six months. This is no longer the case with the new rules.

About 63,000 account holders will be welcomed with the news that they will be able to continue their TSP contributions.

It is also now possible to take a partial withdrawal while receiving installed payments from the TSP. This can come in handy if there are unexpected expenses that may come up, and participants need access to their money quickly.

In the past, withdrawals took equal distributions from both the traditional accounts and Roth. Now, it is an option to specifically select one or the other, or exactly how much should be taken out from both accounts.

If no option is selected, the TSP will withdraw equal amounts from both accounts for you.

Another significant change is that these withdrawal forms can be accessed online. However, once completed, account holders will need to print these forms, sign them, and then send them off to the TSP by mail or fax.

The FRTIB is looking into whether they can remove the requirement for notarized signatures in some cases. They also are seeing if all requests can be made electronically. The board is looking into acquiring a recordkeeping service, which can further advance the TSP platform by automating many operations such as withdrawal requests.

If you wish to know more about these changes, check out TSP’s official website or even their Official Youtube Channel for more information.

I am sure you have read articles or hear a news story about how U.S. Citizens are afraid of outliving their savings during retirement. One of the reasons that may not be talked about as much is that it is because many retirees are not sure how much should be taken out annually out of their retirement savings.

Just this year, a questionnaire that was funded by the National Institute of Retirement Security revealed that about 73 percent of American citizens believe that they do not have the education to handle their retirement income. 79% also said that they did not have enough knowledge in investing to make sure that their savings make it through their lifetime.

Senior policy advisor from AARP Public Policy Institute and fellow at the Brookings Institute, David John, states that a majority of retirees do not know what they should do in regard to withdrawing their retirement funds.

This is mainly the reason why three colleagues from the Brookings Institute and John have released a report that introduces a proposal in regards to retirement income to help retirees convert their retirement balances into an automatic and flexible payment stream. The idea is to be easy, clear, and affordable while preventing retirees from running out of money.

The concept of automatic retirement income will require regulatory and maybe even legal approval. They would also need to have employers buy into the project. This proposal could really help out retirees that may be struggling with this issue. Let’s take a look at how this proposal would work if it becomes certain.

John says that the group wanted to create something that would make efficient choices for retirees by somehow using skilled professionals in the financial industry. That way, it would take away much of the uncertainty of many of these people.

The proposal consists of three facets: a pooled managed payout fund, a different fund that individuals can use to make withdrawals during emergencies or specific situations, and a longevity annuity.

So what is a pooled managed payout fund? It will function similarly to a 401(k) plan, where the fund manager will make appropriate investments in stocks and bonds. However, unlike a 401(k), this plan will work for you through your retirement.

This fund will be a diversified pool of investments that will be handled by a professional. It will be set up to make distributions regularly as an annual income with payouts every month or every quarter. Now, the revenue is not for sure, but the fund is created to minimize the losses with steady investment returns and possibly some increase in value in time.

The planned proposal would automatically register employees in the fund, in which the fund would then receive money from the retirement accounts they have with their previous employers or their IRAs.

Funds that function like this do exist, such as the Vanguard Managed Payout Fund, but these funds tend to be smaller in size and are for individuals and not an option in businesses for employees.

The group state that Vanguard has a target to pay their investors around 4 percent of their annual assets. Four percent is a very often used number that adviser will use to withdraw annually from their savings to prevent the issue of emptying out their savings.

Now about that different fund for emergencies and such: the group proposes to have about 10 percent squared away from the managed payout fund to be available for emergencies and other specific situations.

The researches cite studies from JP Morgan Chase Institute that reveal that retirees are more prone to have extra expenses on medical costs, repairs, and taxes than the younger generations. A lot of the times, when retirees take their retirement savings as annuities with installed payments, the system does not usually permit access to more money during emergencies.

John mentioned that the researchers wanted to develop something that was versatile so that if retirees realized that what they have set up is not enough for their cost of living, they would have access to emergency funds.

The third facet is a longevity annuity. This type of annuity has you put down a large amount of money upfront, and then the insurer will start the payments around the age of 85 and up until you pass away. And because the payouts are delayed for quite some time, this type of annuity has a higher payout than that of an immediate annuity, which pays usually pays out instantaneously. Now, if you pass away before receiving payments, the beneficiary of the annuity will either get a death benefit or a certain amount of lower monthly payouts.

The researchers are wanting a longevity annuity that begins about 20 years or so after the individual retires. This is sort of the back-up safety system for the seniors so that they do not outlive their income.

However, this proposal isn’t anywhere near ready to be implemented.

There is a hurdle in regards to most 401(k) plans only being able to be converted into an IRA or completely withdrawn. Another obstacle might be that there is a law called ERISA that might hinder employers from offering managed payout funds and annuities.

The Brookings report is seeking support from the U.S. Department of Labor to change the regulations to eliminate this problem.

The researchers also believe that things must be changed as soon as possible as more and more Baby Boomers are retiring as days go on, and very few of them know how to handle their savings.

For some of you, retiring is the last thing on your mind as it is a larger number of years away than what your current age is; and then many of you will be heading into retirement in less than a year or even a few weeks. However, everyone is pretty much going to experience the last decade of work before they retire.

During this time, it can be a bit challenging as you may still have to grow your investment portfolio, and that involves using the market which has its dangers, but at the same time, you need to save and maintain your funds for your retirement. It’s a bit of a paradox, but you can do both of these things by investing in a fixed index annuity.

Generally, it is a hard feat to have a vehicle that provides profits from market performances while keeping the risk at bay. This cannot be done with traditional accounts, bonds, or stocks. However, a fixed index annuity can help, but the profit gain will not be as high as a normal market gains investment platform as you will have a safeguard from a bad market.

For those that do not know, an annuity is an agreement between a buyer and an insurer in which the buyer provides either a lump-sum deposit or pays into an annuity over time. Once complete, the insurance company will provide a guaranteed income in the future after a waiting phase. The period of wait varies on the annuity as some can be immediate, and others may take a few years or so.

Specifically, an annuity with a fixed index is featured to disburse steady payments from interest. However, instead of it being completely “fixed,” the interest gained is attached to an index or possibly indices.

Because the annuity is attached to an index, you may be able to receive higher returns depending on the market performance. However, this is the same for variable annuities. What makes a fixed index annuity different is that your investment is protected when the market is bad.

A majority of these particular annuities will have a limit to how much you can gain on your return. There will also be a limit on how much you can lose to safeguard you from a bad market.

For instance, John, a general manager, age 55, purchases a fixed index annuity with an upside cap of 8 percent. Here is what could happen:

If the indices gain 15 percent in a year, you would only receive 8 percent as your limit is to this amount. If the gains percentage is lower than 8 percent, you would receive the entire amount. Now, if your annuity ends up with a loss of 5 percent, you just wouldn’t get a payment that year for interest. However, you wouldn’t lose anything on your initial investment. This is quite a unique set up as other investment vehicles that deal with the market do not have risk protection like a fixed index annuity does.

It seems that many people think that annuities are complicated and not worth the hassle, but these products can be pretty simple and can be easy to understand.

When you buy into an index annuity, the interest rates can vary depending on how the investment performs. However, if you by into an annuity that has a locked-in rate, this cannot be changed in any way.

Also, the limits of gains and losses should be pretty straightforward. If your gains limit is agreed to be five percent., then you will be able to receive a return up that amount if the indices earn 5 percent or higher. If there is a negative return on the indices, you do not take any losses. No other factors should conflict with this essential agreement in the contract. But make sure that you understand all guarantees and percentages before agreeing to the purchase on a fixed index annuity.

You may be seeking to limit your capital risk as you get close to retiring, but also may also have a need to boost the growth of your assets.

Revising and restructuring your current assets and investments into an indexed annuity may be something that can assist you with increasing your portfolio value, but also keep it safeguarded from economic trouble. ⠀