According to a study conducted by the Society of Actuaries, nearly two-thirds of retirees are worried about running out of money in retirement, but those who have immediate annuities have more confidence in their ability to cover basic living expenses. In fact, the study found that immediate annuities can provide a higher standard of living for retirees than traditional retirement savings strategies. (Source: Society of Actuaries, 'Retirement Income Adequacy at Large Companies: The Real Deal 2018 Study,' October 2018)
What Is an Immediate Annuity?
While there are numerous variations of immediate annuities, the basic terms are straightforward: you give a single lump sum of money to an annuity issuer (an insurance company) in exchange for a fixed income for a fixed period of time, for the remainder of your life, or for the joint lives of you and another individual. Immediate annuities are attractive to investors who desire a lifetime income guarantee.
Caution: Guarantees are contingent on the issuer's ability to pay claims.
Who Should Consider an Immediate Annuity?
A direct annuity can be a useful financial instrument. Lockheed Martin employees may wish to discuss immediate annuities with a financial advisor if:
- You desire a revenue stream that you cannot outlive.
- You have a sum of money that you would like to convert into a regular source of income, but you do not wish to leave it to your successors. If you wish to leave a portion of your wealth as a legacy, an immediate annuity might not be the best option. However, the guaranteed income provided by an immediate annuity may replace the income provided by other assets, permitting those other assets to be bequeathed.
- You are uneasy with investments that carry a substantial risk of loss. According to financial experts, the majority of retirees can make their savings last until death without purchasing an imminent annuity if they plan properly. However, you may need to invest at least a portion of your savings in equity investments to accomplish this. If the risk of loss associated with investing in stocks is unappealing, an immediate annuity allows you to delegate that risk to an insurance company. While the income guaranteed by an instantaneous annuity is contingent on the issuer's claims-paying ability, immediate annuity payments are not subject to stock market risk.
- You anticipate living a lengthy life. If you are in good health and your family has a history of longevity, an immediate annuity may be the best option for you.
Strengths
Some advantages of immediate annuities include:
- Safety and protection. An immediate annuity can provide a lifetime income stream that is guaranteed. If lifetime income is required for a fixed period of time, an immediate annuity can provide guaranteed lifetime income payments.
- Simplicity. You are not responsible for managing or worrying about your investments, monitoring markets, or reporting interest or dividends.
- Fiscal management. Due to the exclusion ratio used to determine the portion of your income payments that you consider as ordinary income, a portion of the payments you receive are treated as a return on investment and not as ordinary income.
Caution: Guarantees are contingent on the issuer's ability to pay claims.
Tradeoffs
- It is possible that you will not live long enough to obtain a full return on your investment if you select the life-only payout option. If payments cease upon your demise, your family may suffer from a lack of income.
- You surrender control of the funds used to pay the premium for an immediate annuity. If you require a significant sum due to an illness or other emergency, you may not have access to it. Consider the available immediate annuity options carefully.
Tip: Some annuity issuers permit you to accelerate payments due to ill health, or you may be able to receive a lump sum (commuted payment) during specific time periods and for specified amounts. Depending on the issuer, these features may be accessible for an additional fee.
- Your immediate annuity payments may not maintain pace with your expenditure requirements or inflation. Since immediate annuities are not designed to provide the highest possible investment return, you may find that alternative investments offer potentially higher yields for the same level of risk.
Tip: Lockheed Martin employees should weigh the potential risk of loss on the alternative investment due to adverse market conditions against the guaranteed income from the immediate annuity, which is paid regardless of market conditions.
Caution : Guarantees are contingent on the issuer's ability to pay claims.
How Does an Immediate Annuity Work?
As its name suggests, an immediate annuity begins paying you an income stream immediately. The quantity of income you receive depends on a variety of variables. Initially, actuarial formulae are utilized to calculate immediate annuity payments. These tables accommodate for the annuitant's expected lifespan. The timing and quantity of payments are dependent on the annuitant's life. Not always, but typically, the annuity proprietor is also the annuitant. In the case of joint and survivor annuity options, an actuarial formula incorporating the annuitant's age and the age of the designated survivor is used to determine the amount of periodic payments.
Second, the payments are based on the interest rate that the issuer of the annuity pays on the premium. The annuity payment will be greater the higher the interest rate.
Thirdly, immediate annuity payments are based on the distribution option you select. In general, longer payout periods, such as payments for life, result in lower payouts than shorter, fixed payout periods, such as five or ten years.
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A Note About Variable Annuities
Variable annuities are suitable long-term investments for funding retirement and are subject to market fluctuations, investment risk, and the prospect of principal loss. The fees and charges associated with variable annuities include, but are not limited to, mortality and expense risk charges, sales and renunciation (early withdrawal) charges, administrative fees, and fees for optional benefits and riders.
Caution: Prospectuses are used to sell variable annuities. Before investing, Lockheed Martin employees should carefully consider investment objectives, risk, fees, and expenses. You can obtain the prospectus, which contains this and other information about the variable annuity, from the issuing insurance company or from your financial advisor. Before investing, you should peruse the prospectus carefully.
Caution: Depending on the issuer, certain clauses and options related to immediate annuities may be available for an additional fee or cost. Employees of Lockheed Martin should review the annuity's prospectus or contract for a description of available options and any applicable fees and charges.
Immediate Annuity Payout Options
Life Only Annuity Option
This option provides a lifetime income guarantee. The income disbursements cease upon the demise of the annuitant. Although this option typically yields larger payments, it is possible that you will not survive long enough to receive the full return of your initial investment.
Installment Refund Annuity Option
If you are concerned that you will not live long enough to receive a full return on your investment, this alternative is available. Not only does the annuity issuer guarantee payments for the life of the annuitant, but it also guarantees that the total of these payments will never be less than the premium you paid to the issuer. If the annuitant passes away before your initial investment is repaid, the beneficiary you designate in the annuity contract will continue to receive payments until your initial investment is repaid in full.
Cash Refund Annuity Option
This option is very similar to the installment refund option, with the exception that if the total annuity payments received are less than the premium paid, your beneficiary will receive the difference in a flat sum (instead of periodic payments).
Life Annuity with Period Certain Option
With this option, the issuer of the annuity does not guarantee the rate of return on your investment, but it does guarantee a minimum payment period. If the annuitant dies before the end of the period you specified (typically between 5 and 50 years), payments will continue to be made to your beneficiary for the residue of the period, but no longer.
Joint and Survivor Annuity Options
This option provides a lifetime income guarantee for both joint annuitants. When one annuitant dies, payments continue for the remainder of the survivor's life. You may opt for these 'survivor' payments to remain the same or to be reduced to a proportion of the original payment, such as two-thirds. It is also possible to add the joint and survivor option to the life with period certain option. In this case, the annuity issuer will continue to make payments until both annuitants have passed away, or for the duration you specified, whichever is lengthier.
Joint and Contingent Survivor Annuity Option
This option provides a lifetime income guarantee for you and your joint contingent annuitant. In the event that you, the primary annuitant, pass away first, payments will continue. However, they will be reduced to 50% of the initial payment amount. If the joint contingent annuitant dies first, you will continue to receive your annuity payments without reduction for the remainder of your life.
Period Certain Annuity Option
This option provides a guaranteed payment for the period of time you specify (e.g. 5, 10, 15, or 20 years) as opposed to making payments for the annuitant's lifetime. If you pass away before the end of the specified period, your beneficiary will continue to receive payments for the remainder of the term.
Other Immediate Annuity Options
Cost of Living Adjustment (Inflation) Rider
This rider reduces the initial payment you would receive from the immediate annuity if the rider were not included, but subsequent payments increase by one to five percent annually. This provision is intended to mitigate the impact of inflation on the received income.
Impaired Risk (Medically Underwritten) Rider
This option may be added to an immediate annuity, or it may be sold separately. If you have a medical condition that reduces your 'actuarial' life expectancy, the impaired risk rider allows you to receive a larger income payment for the same premium or the same income payment for a reduced premium payment, based on your older, 'actuarial' age rather than your actual age.
Commuted Payout Rider
This rider permits you to withdraw a substantial sum from your immediate annuity in addition to the regular payments. This option is typically available for a limited time period and may be limited to a maximum dollar amount and/or percentage of the premium you paid to the annuity issuer.
Variable Payments
This feature enables you to withdraw a larger sum than your regular payment at specific times, such as the anniversary of your purchase.
Variable Immediate Annuity
Variable immediate annuities offer a variety of subaccounts, which are investment options. The value of your immediate annuity payments can rise or fall based on the performance of these subaccounts.
Immediate Annuity Strategies
While most financial experts recommend not investing all of your savings in an immediate annuity, there are a number of strategies involving immediate annuities that may be useful to you.
Fund Long-Term Care or Life Insurance Premiums
Many individuals have a need for long-term care and/or life insurance, but many of these individuals will not purchase either form of insurance due to its expense. For Lockheed Martin clients who do not intend to use or expend an asset such as a CD, stock, or mutual fund, we recommend that they consider liquidating the asset and investing it in a single premium immediate annuity. You may use the annuity payments to cover the cost of premiums for long-term care insurance, life insurance, or both. The quantity of the immediate annuity payments will depend on your age, the premium paid to purchase the annuity, and the payment option you choose. This strategy enables you to convert an unused asset into a required one.
Provide Income for a Child with Special Needs or a Spendthrift
Some families are required to provide care for a child with special needs. It is essential to provide financial support for the infant after death. Investing a portion of your estate proceeds in an immediate annuity can provide a child with a constant stream of income throughout his or her lifetime.
What if you wish to leave your child an inheritance comparable to that of your other children, but are concerned that he/she will waste or misappropriate the inheritance to his/her detriment? A direct annuity can be used to regulate the flow of income to a child who is prone to frivolous spending.
In either case, you can stipulate in your will or trust that a specified quantity of cash be used to purchase an immediate annuity for your child upon your passing. Typically, the income from an annuity is paid into a special form of trust, which is established upon your death. This 'special needs trust' (or supplementary needs trust) is a tool for estate planning that allows you to provide for a disabled person's needs without jeopardizing his or her eligibility for government benefits. A spendthrift trust protects the beneficiary of the trust from creditors or other parties (such as a divorcing spouse). A spendthrift trust prohibits the beneficiary from transferring his or her interest, thereby preventing a creditor from gaining access to the interest. Consequently, immediate annuity payments within the trust are shielded from the majority of the beneficiary's creditors. A qualified attorney can assist you in establishing and administering these trusts.
Caution: in some jurisdictions, spendthrift trusts are invalid.
The Split Annuity Strategy
This strategy is intended to provide a steady income while preserving capital. A portion of a bulk sum is invested in an immediate annuity with a single premium and the remainder is invested in a deferred annuity with a single premium. The immediate annuity pays a fixed amount over a predetermined time period. The deferred annuity accrues interest at a fixed rate, with the intention that by the time the immediate annuity payments cease, the deferred annuity will have returned to its original principal amount. Then, you can resume the process with the current interest rate or reevaluate your Lockheed Martin retirement and investment strategy as necessary.
The concept of a split annuity is a useful asset management instrument when fixed or regular payments must be made over a predetermined time period. For instance, the immediate annuity payments of a split annuity can be used to make mortgage payments while the deferred annuity grows back to the initial amount of your total investment.
In addition, a split-annuity strategy can be used in retirement to generate an immediate, consistent income stream while preserving a portion of retirement savings for the future. The deferred annuity is designed to grow to the initial amount of your investment; however, if you need access to your principal, the majority of deferred annuities permit penalty-free withdrawals.
Tax Treatment of Immediate Annuities
The payments received from a non-qualified annuity consist of a non-taxable portion representing the return of capital and a taxable portion representing the earnings on the annuity. As a consequence, only a portion (i.e., the portion representing premiums paid) is excluded from your gross income. Multiplying each annuity payment by an exclusion ratio yields the portion of each payment that is excludable. The exclusion ratio of a fixed annuity is equal to your investment in the contract multiplied by the expected return.
Example: You have an immediate fixed annuity that pays you $200 per month for twenty years. Your expected return is $48,000 based on $200 per month x 20 years x 12 months per year. If your contract investment is $24,000, then your exclusion ratio is $24,000/$48,000 = 50%. 100 percent of each $200 payment is therefore excluded from your gross income. The remaining $100 of the payment is considered ordinary income.
Caution: different principles apply to variable immediate annuities. Due to the fluctuating value of variable immediate annuity payments, it is impossible to estimate the expected return at the beginning of the annuity. Typically, the excludable portion is calculated by dividing the amount invested in the immediate annuity by the estimated number of years over which the annuity will be paid. This calculation may vary based on the annuitization option selected (e.g., life only, fixed period, etc.).
Estate Taxation of Immediate Annuities
If you choose a single-life payment option, your annuity payments will end upon your demise. As no portion of the annuity is transmitted, there are no estate tax ramifications.
If you purchase a joint and survivor immediate annuity, payments will continue for the remaining life of the surviving annuitant upon the demise of one of the joint annuitants. However, the value of the joint and survivor immediate annuity paid for by the deceased annuitant will be included in his or her estate. The included amount is the amount that the same annuity issuer would charge the survivor for a single life annuity as of the date of death of the first annuitant. If the survivor is the joint annuitant, the interest is eligible for the marital deduction. Additionally, the survivor receives a tax deduction for any estate tax attributable to the annuity.
Conclusion
An immediate annuity is like a steady paycheck that lasts as long as you live. It's like exchanging a lump sum of money for a reliable income stream that can cover your expenses during retirement. Just like a paycheck, the amount you receive depends on factors like interest rates and the payment option you choose. While an immediate annuity may not be the best option if you want to leave money to your heirs, it can provide a sense of financial security for those who prioritize a guaranteed income stream over potential investment returns.
How does Lockheed Martin determine the monthly pension benefit for employees nearing retirement, and what factors should employees consider when planning their retirement based on this calculation? Specifically, how do the concepts of "Final Average Pay" and "Credited Years of Service" interact in the pension calculation under Lockheed Martin’s retirement plan?
Lockheed Martin Pension Calculation: Lockheed Martin calculates monthly pension benefits using the "Final Average Pay" (FAP) and "Credited Years of Service" (CYS). The FAP is determined by averaging the three highest annual compensations prior to 2016, while CYS counts the years from employment start to December 31, 2019, when the pension was frozen. The benefit per year of service is calculated based on whether the FAP is less than or exceeds the Social Security Covered Compensation, with specific formulas applied for each scenario. These calculations directly affect the monthly pension benefit, which may also be reduced if retirement commences before a certain age due to early retirement penalties.
Given the recent changes in Lockheed Martin's pension policy, what implications could this have for employees who are planning to retire in the near future? How should these employees navigate their expectations regarding retirement income given that the pension has been frozen since 2020?
Implications of Pension Freeze: Since Lockheed Martin froze its pension plan in 2020, no future earnings or years of service will increase pension benefits. This freeze shifts the emphasis towards maximizing contributions to 401(k) plans, where Lockheed Martin increased its maximum contribution to 10% for non-represented employees. Employees planning for imminent retirement should recalibrate their financial planning to account for this change, prioritizing 401(k) growth and other retirement savings vehicles to compensate for the pension freeze.
What options does Lockheed Martin provide for employees regarding healthcare insurance as they approach retirement age? How do these options compare in terms of coverage and cost, particularly for those who will transition to Medicare upon reaching age 65?
Healthcare Options Near Retirement: As Lockheed Martin employees approach retirement, they can choose from several health insurance options. Before Medicare eligibility, they may use COBRA, a Lockheed Martin retiree plan, or the ACA's private marketplace. Post-65, they transition to Medicare, with the possibility of additional coverage through Medicare Advantage or Medigap plans. Lockheed Martin supports this transition with a Health Reimbursement Arrangement, providing an annual credit to help cover medical expenses.
Understanding the complex nature of Lockheed Martin's pension and retirement benefits, what resources are available to employees to help them navigate their choices regarding pension claiming options? In what ways can the insights from these resources aid employees in making informed decisions about their financial future?
Resources for Navigating Retirement Benefits: Lockheed Martin employees have access to resources like the LM Employee Service Center intranet, which includes robust tools such as a pension estimator. This tool allows for modeling different retirement scenarios and understanding the impacts of various pension claiming options. Additional support is provided through HR consultations and detailed plan descriptions to ensure employees make informed decisions about their retirement strategies.
For employees with varying years of service at Lockheed Martin, how can their employment history impact their pension benefits? What strategies should individuals explore to maximize their benefits given the different legacy systems that might influence their retirement payout?
Impact of Employment History on Pension Benefits: The length and nature of an employee’s service at Lockheed Martin significantly influence pension calculations. Historical changes in pension policies, particularly the transition points of the pension freeze, play critical roles in determining the final pension benefits. Employees must consider their entire career timeline, including any represented or non-represented periods, to understand and maximize their eligible pension benefits fully.
How does the Lockheed Martin retirement plan ensure that benefits are preserved for spouses or dependents after an employee's passing? How do different claiming options affect the long-term financial security of the employee's family post-retirement?
Benefit Preservation for Dependents: Lockheed Martin's pension plan includes options that consider the welfare of spouses or dependents after an employee's passing. Options like "Joint and Survivor" ensure ongoing benefits for surviving spouses, while choices like "Life with X-Year guarantee" provide continued payments for a defined period after the employee’s death. Understanding these options helps secure long-term financial stability for beneficiaries.
What steps can Lockheed Martin employees take to prepare financially for retirement, especially if they have outstanding loans or financial obligations? How crucial is it for employees to understand the conditions under which these loans must be settled before retirement?
Financial Preparation for Retirement: Employees approaching retirement should focus on clearing any outstanding loans and maximizing their contributions to tax-advantaged accounts like 401(k)s and Health Savings Accounts (HSAs). These steps are crucial for ensuring a smooth financial transition to retirement, minimizing potential tax impacts, and maximizing available retirement income streams.
With the evolution of Lockheed Martin's retirement initiatives, particularly the shift toward higher 401(k) contributions, how should employees balance contributions to their 401(k) with their overall retirement savings strategy? What factors should they consider in optimizing their investment choices post-retirement?
Balancing 401(k) Contributions: With the pension freeze, Lockheed Martin employees should increasingly rely on 401(k) plans, where the company has increased its contribution cap. Employees must balance these contributions with other savings strategies and consider their investment choices carefully to ensure a robust retirement fund that can support their post-retirement life.
How does Lockheed Martin's approach to retirement planning include the management of health savings accounts (HSAs) for retirees? What are the tax advantages of HSAs, and how can employees effectively utilize this resource when planning for healthcare expenses in retirement?
Management of HSAs for Retirees: Lockheed Martin encourages maximizing contributions to Health Savings Accounts (HSAs), which offer significant tax advantages. These accounts not only provide funds for current medical expenses but can also be used tax-free for healthcare costs in retirement, making them a critical component of retirement health expense planning.
What is the best way for employees to contact Lockheed Martin regarding specifics or questions about their retirement benefits? What channels of communication are available, and how can they access the most current and relevant information regarding their retirement planning? These questions aim to encourage thoughtful consideration and discussion about retirement planning within Lockheed Martin, addressing various aspects of the company's benefits while promoting engagement with internal resources.
Contacting Lockheed Martin for Retirement Benefit Queries: Employees should direct specific inquiries about their retirement benefits to Lockheed Martin's HR department or consult the benefits Summary Plan Descriptions available through company resources. These channels ensure employees receive accurate and comprehensive information tailored to their individual circumstances.
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