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(The following is an excerpt quoted directly from the 1994 National Underwriter Company's book, The Annuity Handbook, p.p.65-67, by Darlene Chandler.)
Retirement Planning:
Although the nonqualified annuity can be used for many purposes, probably its best and most frequent use is retirement planning. Retirement has been the focus of much attention in recent years. Since people are generally living longer than at any time in history, there are more retirement years to be planned for and, particularly, to be paid for. Another reason for the focus on retirement planning is of course, the baby boomer generation. Born between 1945 and 1964, those on the older edge of the boomers are now entering their 50's and beginning to plan seriously for their retirement years. The recent down sizing of major American corporations also has called attention to the fact that employers cannot be counted on to finance the full cost of an employee's retirement years.
The result of these factors, and others, has been an increased interest in and focus on the financial aspects of retirement. Most Americans expect to receive Social Security benefits at retirement and many are fortunate enough to be participants in qualified retirement plans provided by their employers, although many who are self-employed do not have retirement plans. However, experts warn that if the baby boomer generation is to afford the retirement lifestyle it seems to want, these two sources of retirement income will not be sufficient. Personal savings must make up the difference.
One of the best vehicles to accumulate funds to supplement retirement income from Social Security and qualified retirement plans is a nonqualified annuity. The use of the labels, "qualified" and "nonqualified" have nothing to do with the qualification of the annuity or the insurance company issuing it. Instead, these terms refer to whether the annuity is being used as part of a retirement plan that is "qualified" under certain sections of the Internal Revenue Code. A "qualified" annuity is open which is used as part of or in connection with a qualified retirement plan. A "nonqualified" annuity is one which is not used as part of any qualified retirement plan. If the annuity is labeled as nonqualified, this simply means that it may be purchased by any individual or entity and is not associated with an employer-provided plan.
As with many financial planning strategies, earlier is better than later when deciding when to start saving for retirement. Figure 5.01 illustrates the difference in the benefits available at retirement depending upon when an annuity holder first begins to pay a regular monthly premium into a nonqualified annuity. If the annuity holder, Mrs. Green, begins saving for retirement at age 40, she will have accumulated a sum of $138,598 at age 65 by saving $200 each month. The same monthly amount started at age 50 would result in a retirement sum of $58,164. Waiting until age 60, with retirement only five years away, severely cuts down on the available funds, resulting in a sum of only $13,954. If Mrs. Green elected a life income settlement option under the annuity started at age 40, her monthly benefit payment would be $812. Under the annuity started at age 50, the benefit would be $341 while under an annuity started at age 60, she would receive only $82 each month.
Figure 5.01
Mrs. Green's Retirement Income
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Age When
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Amount
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Amount of
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(Taken from The Annuity Handbook)
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