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Show DAILY Sunday, August 21, 2005 HERALD WALL STREET JOURNAL SUNDAY. The Weekly Guide to Managing Your Money ©2005 DowJones & Company, Inc. All Rights Reserved. WSJ.com/Sunday Finding an Annuity That’sRight for You By ae D. Oppyke ore than $18 billion of anv nuities are sold each gressman who recently introduced legislation that would allow taxfree treatmentof a portion of the Annuity assets are growing rapidly. The chart shows the total amount ofassets held in variable andfixed annuities, by year. month, and sales abuses have becomeall too common. Now IN TRILLIONS 15 incomefrom an annuity. Immediate annuities tendnotto be smart for those still in their $1.66 $130 $128 $124 g109 working years, who generally don't need to create additional income. These people would be better off letting their cash accumulate in a deferred annuity that they can tap is enforcing a new law thatlimits when they need a guaranteed the length of time annuity sellers can impose so-called surrender charges, the often-onerousfees investors must pay to cancel an annuity contract early. Massachu- Stream of income in retirement. A Taxing Matter 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: National Association for Variable Annuities setts has takensteps this year that prompted Bankof Americato offer oneis right for you: that reason, deferred annuities annuity buyers who are 78 years old and up a chance to cancel the Different Needs tend not to be a good choice for retirees, particularly older retir- while, visited top executives of large insurance companies and delivered a stern warning: “I know what's goingon...andif I find your products inappropriately pushed, I'm climbing the ladder right to your office and holding you personally responsible.” For many, recognition that an annuity is inappropriate comes onlyafter the fact. At that point, consumers often are stuck with an investment contract that locks Broadly speaking, annuities are available in two types: deferred and immediate. Eachis appropriate for different needs and ees, who typically don't want to In general, deferred annuities are best suited to people still in their working years and who have surrender period expires. That's because during accumulation the moneyis locked away, as differentinvestors. at least a decade to save before retirement. Immediate annuities are best suited to retirees who don’t need to accumulate more assets over time but who wanta guar- anteed stream of income now, which they cannotoutlive. Here's why: Deferred annuities are either awaytheir moneyfor years, increases their tax obligation and can foul uptheir estate planning. This happensall the time because annuities are complexinvestments andinvestors aren't always sure about what they're buying. In too many cases, “these adequately explained,” says Jim Poolman, North Dakota's ‘insur- ance commissioner and chairman of the life insurance and annuity committee at the National Association of Insurance Commissioners. Here are waysto navigate annuities to determine if purchasing vestments, called “subaccounts,” erallydon’t have an accumulation fluctuate in value based on investments a saver chooses. Those inlook and act much like mutual funds, and invest in everything from cash to stocks and bonds. The accumulation phaseis typically long—a decade or more. For IN THE MARKET ‘SUMMERSLOG: July's rally faded this ‘month,leaving the Dow Jones Industrial ‘Average down 2.1% and the Nasdaq Composite off 1.8% so far in 2005, * 2] 6 ‘Source: Thomson/ the week to $65.35 a barrel. Crude oil has risen 50% year to date. may serve as a unifying goalfor Americanlabor, rocked last month whenthe AFL-CIO lost roughly onethird of its membership asthree unions decidedto leave the labor alliance. WalMart says its policy is to let employees decide about unions. 1 Google Is Back for More: Google said it plansto sell 14.2 million shares, an offering valued at more than $4 billion that would more than double its cash balance. Google shares declined slightly on the news,but are still more than three times theirinitial offering price. @ Eamings Patrol: WalMart said quarterly net income rose 5.8% from a year earlier and cut its forecasts, blaming energy prices; Home Depot's earnings rose 14%, helped by more sales to contractors and builders; Lowe's net income rose 20% despite higher gasoline prices LAST WEEK Stocks Sink: Stocks gave up Eround last week,with the Dow Jones Industrial Average slipping 0.4% and the Nasdaq Composite falling 1%. So far this year, the Dowis off 2.1% and the Nasdaqis 1.8% lower, Crudeoil pulled back from record highs, falling 2.3% for andinterest rates: Packard Teportedbetter-than-expected reSults and boosted forecastsfor the current quarter, but net incomefell 88% due to a tax adjustment. W Inflation Picks Up: Consumer prices rose 0.5% in July amid surg| | Fawrence Rout Sexton Error | Brian L. Cronk News Eorre ing gasoline prices. Wholesale David Crk Eprrow Mark Tyner ARF Dineeton | prices jumped 1%, the biggest rise in nine months. | Briefly: Merck was found negli gentin the death of a 59-year-old triathlete who used Vioxx, a prescription painkiller taken by more illiam E. Casey Je Vick Presi bill casey@donejones.com John R. Campbell ADtERTEsiNG Diecton (203) 966-7001 Johncampbell@dowjrie.com CORPORATE, Heange,ARTERS: 200 Liberty Street 10281 FoR 4 SPECIAL JOURNAL SUBSCRIPTION Orpen, Cabt: 1+800-527-2012 and younger, who canlet the ac- count grow for many years before tappinginto it in retirement, and push immediate annuities because the commissions aré low and the possibility of repeatsales is nonexistent. Yet this is the type of annuity current retirees should generally consider if they need income, “since the guaranteed payout creates a permanent source of in- come. Moreover, the same amount invested in an immediate annuity will pay out more than a CD, even if the ratesare identical. The reason: The CD returnsinterest income; the annuity also returns a part of the original principal. What keeps many retirees away from immediate annuities is the fear thatif they die soon after theyinvest,theirheirs will receive nothing. Thisis a risk. If you die early, the insurer keeps the money, though you can structure earnings, but not on the returned principal. The earnings are taxed as ordinary income, With deferred annuities, you pay no taxes on the earnings each year, but ultimately you will owe taxes when you withdraw the money. That can be a painful lesson to you or your heirs. If you live long enough to draw down the money yourself, you'll paytaxesonall the profits at ordinary-income rates, which generally are higher than capital-gains rates paid on mutual funds and stocks. If the annuity growslarge enough,the income could push you into a higher tax bracket. If you die first, then heirs in- herit a much larger tax burden than they might have otherwise. That's because deferred annuities have no “step up” provision. With stocks and mutualfunds,the value of the account at your death be- comesan heir's cost basis—evenif you started .with $100 that's now worth $100,000. With a deferred annuity, every penny of profit is taxed as ordinary income. Thus,investors who be fixed or variable. The majordifference: Immediate annuities gen- the payout ‘so that the insurer is required to pay your heirs for a certain numberof years. Butfor today's retirees, he big phase. Theystart paying out immediately, or within a year ofthe purchase date. They aren't designed to save for retirement, but to pro- tiving their retirement savings, essentially creating taxes that oth- for life can achieve that,” says Email: forum.sunday03@ws}.com vide immediate incomein retire- “and an immediate annuity means people whoneed income assurance late in life trade stocks or mutual funds for a deferred annuity are erwise don’t exist. than 20 million Americans before it was linked to heart attacks. The Texas statecourt jury awarded the man's widow $24 million in actual damages,plus $229 million in “exemplary” or punitive damages. Merck will appeal...Morgan Stanley Said it will keep its Discover credit- card unit, reversing an earlier deci- sion...Domestic auto makers began to lose market share in August, according to Edmunds.com, suggesting the incentives that spurred salesin July are losing appeal. efore you get behind the wheel this Labor Day weekend,check ‘out how much you'll spend on gasoline for the trip. More than 30 million Americans each year make joumeys of more than 50 miles over the Labor Day weekend, according to AAA. But this year, gasoTIP OF line prices are SCA 2 national THE WEEK average of $2.60 a gallon, up 39% from $1.87 a year ago. Prices have shot up 29 cents just in the past month, so the cost of this year’s trip may pinch. You can estimate the approximate cost up front by going to ifuelcostcalculator.com. The site lets you enter the make, year and modelof your vehicle, and the cities you are traveling between. A round trip from Denver to Los Angeles in a 2004 Dodge Ram pickup, for example, would cost about $305. Two-car families could consider squeezing into the smaller, more fuelefficient car and leaving the SUV in the garage. The same Denverto Los Angeles'trip in a Dodge Neon would run you an estimated cost of just $173. In some cases, you may be better off going by bus or plane, especially if you are traveling alone. A round trip from Tampa,Fla., to Richmond, Va., in a 2004 Ford Explorer, for example, would cost $215,according to the AAA site. The same trip on a Greyhound bus would cost just $138 if you boughtthe ticket seven days in advance. And Travelocity.com was recently advertising flights on the same route for as lit tle as $166 over Labor Day. If you end up going by car, however, you can find cheap fillup spots along the way at sites like .com oF watch. ‘com. Simple things such as inflat- ing tires properly, using less air conditioning or driving more slowly can also save you money on gasoline. By Andrew Blackman Getting Going / By Jonathan Clements See Howto Bridge the Retirement-Income Gap aybe retirement extra $100,000 ofretirement sav- isn’t ings. True, insteadof retiring and working one day a week, you could continue workingfull-time and eventually retire without any need for extra income. But before you go that route, think about how many years of full- Sure, if you want to spend your golden years taking ritzy vacationsand eating out every night, retirement will be darn expensive and you may need to sock away money for years to come. But what if you're a little flexible about your DA 4 2005 largestretailer in termsofsales, appropriate for those in their 50s ment. With this type of annuity, you trade a lump sum of cash for guaranteed monthly income that can last for a predetermined period, or for as long youlive. Annuity sellers typically don’t such a distant dream. 2h 0 8 to organize WalMart Stores workers, Taking on Wal-Mart, the world's charge. Those charges can last seven to 10 years, and sometimes muchlonger. cate of deposit. Variable annuities rate of return, muchlike a certifi- 12} Masdag > Fas ea ,FMAMI JA gathering in Chicago to draft a plan a few months ofinterest income. If the contract's value to a surrender will then have timein retirement to receive the income. Immediate annuities also can -10: Unions Seek Strategy: Labor leaders from around the world are you cash in a CD early, you'll lose you cancel an annuity contract, you can lose 10%, 15% or more of Fixed annuities carry a fixed THIS WEEK @ Surveying the Consumer: The University of Michigan releasesits consumer-confidence survey for August on Friday. Confidence has so far beenstronger over the summer after a drop in the spring, but a preliminary August report released midmonth showed high gasoline prices starting to take their toll. with a CD. The big difference: If Because of these characteris: tics, deferred annuities are more INVESTOR'S CALENDAR | Boom, Bubble or Bust: Asthe debate rages over whethera realestate bubbleexists and,if so, whetherit is popping, Tuesday's report on July existinghome sales should provide extra ammunition. Wednesdaybrings new-home sales data,also for July. A report last week showedthat construction of new homesremained strong in July. money—penalty free—before the fixed or variable. They're a tax-deferred investment/insurance contract designed to accumulate assets over a numberof years, then distribute the money as a lump sum orrecurring payments. things are noteven close to being wait too many years before drawing money from the account or may need access to all of their With immediate annuities, you Pay taxes on the portion of each month’s payment that represents time workit wouldtake to amass retirement dream? You could be another $100,000. Put that way, maybe little part-time work doesn't seem so bad. closer than you ever imagined. Falling Short Spending Less When youtote up your potential retirement income, you are probably looking at three key sources: Social Security, a traditional “defined-benefit” pension and your retirement savings. Suppose you won't receive a pension, but you are eligible for $15,000 a yearfrom Social Security. Meanwhile, you havea total of $200,000 tucked away in your individual retirement account, your 401(k) plan and your regular taxable account. Let's assumethat eachyear, you plan to cash out 5% of your portfolio’s beginning-of-year value. This withdrawal strategy, which strikes me as reasonably prudent, would give you $10,000 in annual pretax retirement income initially and hopefully more in subsequent years. Keep in mind that if you take your dividends and interest in cash, you should countthis investment income toward your portfolio's 5% withdrawal rate. Add it up, and you are looking at $25,000 in annualretirement income. Let's say your goal is $45,000. Your challenge: somehow bridging this gap. Leaving Home Randall Enos contract penalty-free—anoffer the bank has extended nationwide. California Insurance Commissioner John Garamendi, mean- Of Gas Cost Earl Pomeroy, a North Dakota Con- Growing Large many consumers are fighting back bycomplaining to state and federal regulators about having been sold an inappropriate investment. In response, more states are taking action. New Jersey,for one, Get an Idea “Bud” Hebeler, who runs a Web site devoted to retirement is‘sues, www. .COM. “The cost of living is so much lower. Theutility bills are lower, real estate is cheaper, property taxes are lower and staples are less expensive.” Relocating to the other side of the country probably isn’t a good idea, because you are likely to be far away from friends and family. But the change doesn’t have to be that radical, says Sheryl Garrett, founder of the Garrett Planning Network in Shawnee Mission, Kan., a group of 240 financial planners who charge by the hour. She says that if youlive in or near a major city, you may be able to find both cheaper housing and a lowercostofliving by moving just an hour or 90 minutes’ drive farther away. “The reality is, if all your wealth is tied up in your home, how else are you going to re- If you live in or near a rhajor city on the East or Westcoast, I am sure you have had the same thoughtI've had. Whynotsell at today’s eye-popping prices and tire?” Ms. Garrett asks. “You could take out a reverse mort- ing market, where you could probably buy a comparable homefor halfthe price? Not only would this give you sites such as www. net, www.homefair.com and www. where move to a less-exuberant hous- extra cash to fatten your retire- mentcoffers, but you would probably trim yourliving expenses. “Mybrother-in-law retired in Huntsville, Ala.,” says Henry gage. But I view that as a last resort. Before you do that, I would think about downsizing the cost.” To that end, head to you can explore the cost of living in other areas, Imagine you traded down from your $300,000 Pa to ‘ $150,000 townhouse. That free up $150,000 of home ous, which you could then add to your portfolio, bolstering your nest egg to $350,000. Using a 5% withdrawalrate, you are now looking at $17,500 a year in portfolio income. Tack on the $15,000 from Social Security, and you are upto $32,500. Working It Out Even at $32,500, you are still well short of your $45,000 goal. ‘To close the gap, you might work part-time in retirement. “I see more and more people doing that,” Mr. Hebeler says. “Typically, they're working one day a week. They need the extra in- come.” In earlier articles, when 1 have mentioned the possibility of working part-time in retire- ment, I have received scornful emails from readers. Their argument: Anybody workingisn't really retired. My hunch: This attitude will change—for two rea‘sons. First, research has found that seniors who work in retire- In our example, you still aren't hitting your $45,000 retirement-in come goal. To narrow the gap, you might squeeze more income out of your assets by, say, using part of your portfolio to buy an immediate annuity or by taking out a reverse mort- gage on your new townhouse. But also consider whether you could make do withless, especiallyif you plan to move to a cheaper part of the country. Clearly, you want sufficient in- cometo cover the basics, including medical costs, property taxes and occasional large expenses, such as replacing the car or putting a new roof on the hor use. For mostof us, however, our definition ‘of “enough” won't stop there.Partly, that's because we want the moneyto travel during retirement and to pursue new hobbies. Butalso, “enough” isn't a fixed dollar amount. Rather, research suggests that, when it comesto financial happiness,relative income and wealth are just as important. We probably won't be happy if our retirementincomeis a lot lower than the salary we used to col: lect. We are likely to be dissatis- fied if our friends and neighbors ment tend to be happier. “It's much more than just the in- have far more than we do. That doesn't mean you shouldn't bite the bullet and re- lated.” Second, earning little money tire at a lower standard of living. But before you say goodbye to your regular paycheck, make absolutely sure you will be content come,” Ms. Garrett says. “We need to be involved and stimucan make retirement a whole lot more aff total ment income upto $37,500. Based on a 5% withdrawal rate, that ‘$5,000 of income is like having an with your reduced income. Jonathan Clements also writes the “Getting Going” column that appears: in The Wall Street Journal. Write to him at: com |