Maximize the Wealth for Your Future Generations
Henry Montag, CFP, CLTC | March 30th, 2008In today’s volatile investment climate, which you may have noticed, an Immediate annuity may be an 
excellent investment vehicle for the individual who wants to assume absolutely no market risk yet be provided with a guaranteed income for the rest of their lives. With the assurance that it will be significantly higher than what could be earned in a CD. I suppose a favorable tax treatment wouldn’t hurt either right?
Lets run through some real life scenarios. You are a thoughtful parent or grandparent that would like to leave as much of an inheritance as possible for your children or grandchildren but at the same time you would like to maximize your income without taking too much risk. You know that you could purchase traditional stock or bond mutual funds but they are not guaranteed and you could lose your principle which would not be in anyone’s best interest.
Let’s look at another scenario based on the following set of assumptions: You are a single female, mid 70’s, average health and have a discretionary $100,000 to invest. Below are several different options for you to consider. Keep in mind while it may not seem like it, time flies.
Option 1: Invest the $100,000 into a 4.5% taxable certificate of deposit. Earnings, if you are in a 25% tax bracket, are approximately $3,200 annually, after taxes. At death, heirs would receive the original $100,000 principle.
Option 2: Purchase a $100,000 Immediate Annuity. Earnings for the rest of your life are $9,300 annually, after taxes. At death your heirs would receive nothig. You would have an additional $6,100 annually in your pocket.
Option 3: Purchase $100,000 Immediate Annuity. Purchase a $100,000 life insurance contract for a cost of $2,600 annually. $9,300 less $2,600= $6,700 net earnings after taxes. At your death, your heirs would receive $100,000. You would have an additional $3,500 in your pocket.
Option 4: Purchase a $100,000 Immediate Annuity. Purchase a $200,000 life insurance contract for a cost of $5,200 annually. $9,300 less $5,200= $4,100 net earnings after taxes. At your death your heirs would receive $200,000. You would have an additional $900 annually in your pocket. Your heirs would have an additional $100,000 in their pocket.
Regardless of which option you choose you are consistently far better off taking the ‘combannuity” approach tha just leaving your investment in a taxable certificate of deposit.
Another option not illustrated here is that if you’re married you could accomplish similar results while still maintaining an ongoing flow of income to your spouse. Keep in mind that when you buy an Immediate Annuity you’re betting that you will live a long life. When you purchase a Life Insurance contract you’re betting that you wont. Using the strategy of combining the two types of financial products, can result in additional income to you and your spouse while maintaining the option of an increased inheritance for your heirs.
Never plesant but important. Choose wisely.
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Tags: annuity, beneficiary, cd, certified financial planner, cfp, henry montag, immediate annutiy, inhertiance, investments, life insurance, Taxes
About the Author: Henry Montag is an Independent Certified Financial Planner as well as a CLTC. He’s been in practice since 1976 with offices on Long Island, New York. He is a contributing writer for The Moneypaper, a national financial publication, been my sourced by Investors business Daily, Long Island Business News, Newsday, Wall St Journal, The Moneypaper,Investment News, Senior Lifestyles and has held insurance and securities licenses for over thirty years.
