There are ways that you can save for retirement without relying upon plans like 401ks, Individual Retirement Accounts (IRAs), and Roth IRAs. To be honest, these plans are not a very good deal for most Americans, and they could be subject to government confiscation at some point in the near future. That means that the lack of a 401k or IRA should not be an excuse to not to save for retirement.
The truth is that Americans had little or no trouble saving for retirement before these plans existed. In fact, many Americans who are doing a good job of saving for retirement don’t take advantage of the plans the politicians have created for us. They take advantage of other superior products that are created and maintained by private industry. These products are what the rich—including the members of Congress planning to steal our IRAs—use to stash money for their retirement.
So how should you put away money for your retirement without an IRA or a 401k? The best and most logical answer is to take a look at what the rich do and what our grandparents and great-grandparents did before Social Security and private pensions.
Save For Retirement Like The Rich Do—Buy An Annuity
An annuity is actually a contract between an individual and an insurance company. Under the terms of the contractor, the insurer is required to make regular payments to a person for a specific period of time. Basically, the insurer has to send the recipient, or annuitant, a specific cash payment on a regular basis (usually once a month) as long as the contract is in force.
Most of the annuities available on the market today are designed for retirement. There are even life annuities that will keep sending a beneficiary a cash payment until he or she dies, even if the amount paid out exceeds what was originally paid into the contract.
Annuities are a great retirement income option for a person with a lot of extra cash, but there’s a good chance you haven’t heard about them. The investment industry deliberately suppresses information about them and sometimes spreads misinformation about annuities because it can make more money peddling other kinds of investments, such as mutual funds. Many of the horror stories you’ve probably heard about annuities are actually lies spread by “investment advisors” that don’t want you to know about them.
Part of the reason why annuities are a good deal is that they are maintained by major insurance companies such as New York Life, Met Life, John Hancock, Northwest Mutual, and the like. These companies have been around for generations—in some cases for centuries—and they are not regulated by the federal government. The truth is that insurance companies with a AAA or higher rating from the “big four” ratings firms—Standard & Poor’s (S&P), Moody’s, A.M. Best, and Fitch’s—are actually more secure than the federal government because they are held to a higher standard.
Here’s something you probably didn’t know: many wealthy investors are dumping U.S. savings bonds and buying aftermarket annuities instead because they are more secure and pay a higher rate of return than bonds. The aftermarket annuity market is growing by leaps and bounds because the wealthy are looking for alternatives to stocks and bonds.
Annuities were also the main means of saving for retirement before the Great Depression. Until the 1930s, many older people relied on annuity income to pay bills. The system actually worked very well because it ensured that income that was set aside for retirees actually reached the retirees. There was little or no way that politicians could divert it as they did with Social Security.
Another reason why annuities are such a good deal is that they are what wealthy people will use for their retirement income. Many wealthy executives receive an annuity as part of their compensation package. The reason the wealthy buy annuities is that they know that the federal government will never touch them. So what kind of annuities are there and which should you buy?
Popular Retirement Annuities
Here are some annuity plans that can help an average person save for retirement or protect an existing savings.
- Deferred annuity. This works much like a 401k. A person puts money into a plan; both the money and any interest it acquires is saved up in the plan until he retires. Once he or she retires, the plan starts making payments. The big advantage to deferred annuities is that all income in one is tax deferred. Income in one does not have be reported to the IRS until it is taken out. Deferred annuities are a better deal than a 401K because there is no limit on the funds you can place in them. They can also be fully insured so an annuitant is more likely to get the money.
- A single premium immediate annuity. A SPIA is a plan designed for a person or couple retiring with a lot of cash. The funds are insured and payment can be guaranteed for life with a life-contingent payment option. Not only are the funds in a SPIA tax deferred in some cases; the payments from a SPIA can be tax exempt. The difference between the SPIA and the deferred plan is that it is purchased all at once for cash, hence the term single premium.
- Variable annuity. This is a plan that invests part of the funds in a traditional annuity that pays interest and part in subaccounts that invest in mutual funds or stocks. The reason for this is to generate a rate of return that is higher than inflation. Variable annuities are a good alternative to 401ks and mutual funds because they provide some guaranteed income. A variable annuity can be purchased as either a deferred or immediate annuity similar to a SPIA.
- Indexed annuity. This is an annuity in which the subaccount is invested in a stock market index, usually the S&P 500. Indexed investment limits risks by diversifying investments and usually provides a return that is two or three times higher than inflation. Some indexed annuities even have mechanisms that lock in market gains.
- Life annuity. This is any annuity that makes payments for life. Most life annuities will make payments until a person dies, even if they outlive the initial investment.
There are several reasons why persons with additional cash should look into annuities as they approach retirement. The first is that the plans are insured, so the recipients will get the money. More importantly, the payments are usually automatic, so funds will be paid out even if the recipient is incapacitated. If an annuity recipient gets Alzheimer’s and ends up in the nursing home, the annuity will keep making payments to his or her bank account to cover her bills.
What Should A Person In His Or Her Forties Or Fifties Do?
Anybody who is in his or her forties or fifties should start saving for retirement right now. If you think you’ll be able to live without your retirement savings until you retire, you should look into a deferred annuity. If you think you might need that money at some point before retirement, think about buying an immediate annuity, such as a SPIA, when you reach retirement.
You should do this because the IRS charges a 10 percent tax penalty on all withdrawals from retirement accounts made by people under age 59½. This includes annuities, most IRAs, and 401ks. It is why most so-called retirement options are actually a bad deal for a lot of people. The IRS actually charges that 10 percent penalty on top of the regular income tax on the funds withdrawn.
What this basically means is that a traditional savings account, a CD, or a money market account is often a better deal for an average person than a retirement account. Even with the additional taxes you’ll pay, you might save money because you can avoid the 10 percent penalty. Something to remember is that a lot of people can keep their income tax rate manageable with sensible deductions and tax planning.
There are some other alternatives that you can pursue, such as real estate investment. You can write off the mortgage interest on your primary residence under current law. If you have a large mortgage, you can get a large deduction.
A rental property can also be a great deal for a couple with a lot of cash. Not only can you get additional income from a rental; you can also write off most of the expenses related to a rental property and take depreciation on it as well.
So don’t panic when you see warnings that the government might steal your 401k. There are many good alternatives to such retirement accounts available that you can take advantage of. Annuities appear to be at the top of the list, but they are simply one choice.
What should people with an existing IRA or 401k do? The best course of action is to leave the money in it and create a second retirement plan outside of an IRA. Then start putting your retirement money into that. Even if it is just a traditional savings account, you’ll have at least some money for your retirement.
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