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Financial Freedom

Join me to my first goal of $1 000 000

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I started Hacked.com with an intense desire to help our members in understanding finance and give them tools and analysis to take better trading decisions. Our core goal is to help our members become financially independent, either by investing, trading or starting a business. What is important to know is that there are no get rich quick schemes that work. If you truly want to become financially independent, you have to take your time and be patient. Never rush, and never lose money.

This is so important. I can’t make myself clearer. If you want financial freedom: NEVER RUSH. Please read this sentence at least three times over. Professional investors and entrepreneurs know that to create a diamond, you have to apply extreme pressure over a long period of time. That’s the same for building wealth, you need extreme focus over a longer period of time. Newbies that enter the finance game always tend to rush for the profits, but ends up with losing way more than they originally invested.

Read 2. lesson: Never Lose Money

My own finances

In the coming months, I will share my own finances and my own plan in order to reach my longterm goal that I’ve written about here. What I already got is the following:

  • CryptoCoinsNews.com which generates around $50 000 in profit each year. This fluctuates quite a lot since the income source is advertisers. The cost does also fluctuate depending on how many journalists we have writing for the site.
  • Hacked.com, which I started a couple of months ago, generates around $2000 in profit each month, BUT: I bought the domain Hacked.com for $50 000 in 2014 and I’ve spent more than 2 years on creating the site you see today. I’ve lost more money on Hacked.com than I’ve earned (including some failed concepts), but with a longterm focus I believe the site will be catching up within a few years.
  • In January I got a fulltime job and that helps me create a more stable income with around $4000 in monthly profits after tax. (I’m based in Norway and we have around 35% to 45% in tax.) I can also share that my wife and I just had a daughter and I need at least one stable income source.

I will create a budget in the coming weeks to give you the full details of my income and what I could expect from both CCN and Hacked.com. I have also suggested for our members that they should set aside 10% of their income and invest it in an index fund. That is what I’m planning to do, but I’m a bit hesitant of entering the current record markets. I believe that we will see a recession soon, and it would be better to start investing once the market has stabilized, yet again.

For the coming years, I want to put aside at least $1000 a month for investing in index funds, stocks, commodities, or similar. I want to start right away with $1000 and I’m open for suggestion from our members what I should do with my initial $1000. The options are:

  1. Have them in a savings account until the market seems more prosperous
  2. Invest them right away in an index fund (what index fund?)
  3. Invest them in a commodity like Gold?
  4. Invest them in a cryptocurrency like Bitcoin?

I do not want to trade with my money as I do not have the time, I’m looking for a longterm investment. My initial thought is to have them in my savings account.

Please leave your comment below with your thoughts on where I should place my initial $1000.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 56 rated postsFounder of Hacked.com and CryptoCoinsNews




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31 Comments

31 Comments

  1. jedadoo

    April 17, 2017 at 7:01 pm

    I follow Jim’s advice, so no recommendations from me…

    • Jonas Borchgrevink

      April 17, 2017 at 7:06 pm

      Hello,

      Jim’s advices are great, but that’s for trading mostly and not investing. I do not have the time to trade like Jim and other traders.

  2. bitstine

    April 17, 2017 at 7:06 pm

    Great approach. Thank you for sharing.
    I personally thought of investing them in Cryptocurrency in my saving account.
    That what I’d do.

  3. Parentesi

    April 17, 2017 at 7:18 pm

    Hi Jonas
    First of all, thank you for all your insight you are sharing here with your viewers. I see it as very valuable and precise information.
    I started having a closer look into cryptocurrency ´s since about 4 weeks, and reading all you have to offer made me learn much quicker than I would have without hacked.com
    Up to now I had a 30% gain in all my investment, and I may not have taken all your advice, or lets say prediction, but it helped a lot to get my focus in the right direction.
    I also have to admit I had a lot of luck and also made some mistakes I learned quick from.
    So here my thoughts on your initial 1000$:
    cryptocurrency´s
    Bitcoin, Ethereum, Litecoin mix: 25/25/50%
    Bitcoin, Ethereum as the more save option, Litecoin with an option for a gain. At some 10% gain in Litecoin, transfer 50/50 to Bitcoin, Ethereum

    • Jonas Borchgrevink

      April 17, 2017 at 8:11 pm

      Thank you for your inputs!

  4. ialkeilani

    April 17, 2017 at 7:34 pm

    Thanks for sharing those private numbers about your businesses! I do have a regular full time job and I’m in constant debate with myself over quitting and starting my own business…those numbers do give me a good indication of what to expect. Thanks again!

    I consider myself a student of yours so I cannot really give any recommendations. But I share the same view that the current equity market is due for a correction and it’s best to hold off right now till the next entry point reveals itself

    Given that the upcoming crisis smells like it’s going to be triggered by sovereign over-indebtedness, weak fiat currency and hence collapse confidence in governments (esp. Europe!), I do like Gold (and honestly more silver given the current skewed gold/silver price ratio), I think those would be the best asset classes to park your hard earned money. I’ve set aside 25% of my net-worth for precious metals investing, while I rely on advice, tips and recommendations in this site for investing another 25% of my net-worth

    • Jonas Borchgrevink

      April 17, 2017 at 8:12 pm

      Thank you, I didn’t really consider silver. I’ll definitely check it closer.

  5. Sjmstables@gmail.com

    April 17, 2017 at 8:37 pm

    I would buy Factom (fct). Future in securing 20,000,000,000 devices connected to the internet . Upside is tremendous Good Luck

  6. gullyfoyle

    April 17, 2017 at 8:42 pm

    I’m no gold bug, but I think gold is good long term (1-3 years) based on some basic TA and would serve in place of a regular savings account provided you do not require instant liquidity:

    https://www.tradingview.com/chart/GLD/ScfAQynY-Golden-opportunities/

    I think Silver will out perform based on my analysis of the gold/silver ratio and the simple fact that silver is more volatile. Making it a riskier but potentially more profitable option- see the related trade ideas I’ve published.

  7. tadej

    April 17, 2017 at 9:29 pm

    Hi Jonas,
    I’m new to this investing world and also looking for the ways to enrich my hard earned money. Fortunately I’m 28 so Im looking for the long run on the other hand I would like to reach certain level while I’m still young and enjoy life while I still can!

    About a month ago I was reading about Lithium in one scientific magazin. According to them this metal is very very rare with only few mines in the whole world more over its use is increasing dramatically every year (see Li-ion batteries, Tesla).

    The price of this metal is more than 40% up from 2015!! I’m considering to invest either into stock of the companies directly involved in extraction or Lithium ETF which had +30% in one year.

    I did not decided yet as if there is a global recession coming this market can also be in trouble as the demand will go down I think…

    I would like to hear the opinion of other investors here.

    • Jonas Borchgrevink

      April 17, 2017 at 9:33 pm

      Damn! Lithium is exploding. Thanks for the heads up. I’ll look into investing in Lithium. The one problem I see with Lithium is: What if someone develops a better way to produce batteries that does not need Lithium? Have to do more research on it.

  8. acotph

    April 17, 2017 at 10:51 pm

    Hi Jonas,

    Medical marijuana is taking off in many countries around the world. I’m not sure what the situation is like in Norway, but if you take a look at how the companies in this sector performed in the US and Canada, it’s obvious that there is huge potential here. I recently moved to Australia, where the government is currently opening the doors to medical cannabis cultivation, research, and importation.

    These companies are still very young, so the potential gains are huge, but so is the risk. They may be too young to suit your criteria of investing vs trading, but markets like this don’t open up often.

    Cheers!

    • Jonas Borchgrevink

      April 17, 2017 at 11:38 pm

      That’s an interesting idea. I’ll see what kind of investment I can make into those companies.

  9. dufc1983

    April 17, 2017 at 11:35 pm

    Hi,
    In lithium: Just finished reading FT (uk) and an article covered lithium. Majority of the worlds lithium comes from Chile. There are only 2 x companies in chile who are authorised to extract lithium. Happy hunting 🙂

    R.e. Investment strategy: bitcoin/gold/ripple/tech stock

    • Jonas Borchgrevink

      April 17, 2017 at 11:40 pm

      Great comment.

  10. jacobss

    April 18, 2017 at 3:12 am

    Hi Jonas, I was allways in the understanding that you were the expert.
    Funny do you ask for advice now.
    I can saymone that makes everybody a millionaire.
    Ripple with XRP or with XLM. You can’t go wrong.
    These crypto currencies will go to 10 cents this year and have 3 to 5 years outlook for 1 Dollar and more.
    Your 1000 $ in XLM will become a million and 5-8 years.
    Don’t hesitate and good luck.
    A fan of your site, Jack

    • P. H. Madore

      April 18, 2017 at 5:27 am

      Ripple cannot go wrong? Get out of here. Ripple is eternally weak, centrally controlled, and does nothing Bitcoin cannot.

      Jonas would have been better holding the massive amounts of Bitcoin he had in early 2015. He’d already be a millionaire, like as not.

      • jacobss

        April 18, 2017 at 8:24 am

        I believe you immediately, but I’m not getting out of here as I need all the information I can get.
        I allways advice to bet on both horses. XRP and bitcoin (or altcoins).
        The reason I have XRP is the fact it is controlled by the awesome company Ripple and banks love their system and need them to survive.
        The XRP will carry a lot of dollars in the future.
        Bottom line I believe in crypto currency ???

      • dufc1983

        April 18, 2017 at 9:17 am

        So why are all the big banks in Asia ripple fans?

  11. P. H. Madore

    April 18, 2017 at 5:26 am

    Daughter? Hey congratulates. I just had Maggie this month as well.

    Do not want to trade your money? Long-term investment of $1m? What reasonable expectation of return can you have! You MUST trade in order to win. No risk, no reward. There are low-risk options, but they will not yield. Short-term investments are where all the billionaires are minted.

    • Jonas Borchgrevink

      April 18, 2017 at 4:02 pm

      Thank you! Congrats yourself. I’m working on a plan. Will update here once I’m happy with it..

  12. tmjaswani

    April 18, 2017 at 5:42 am

    Hi Jonas,

    First of all congratulations! No trading ..thats like having little faith in your own creation and we as readers are paying to be part of it, thats a bit of a hyperbole 🙂 However I appreciate your honesty, very few founders would have courage to post something like this..Best of luck

    Tarun

  13. DamonEvans

    April 18, 2017 at 2:00 pm

    Definitely a mix of crypto currencies. Plus gold and silver. Jim Rickards book “the new case for gold” is well worth a read. Thanks for your articles, very interesting.

    • Jonas Borchgrevink

      April 18, 2017 at 3:53 pm

      Thank you! Will have a look.

  14. sambkf

    April 18, 2017 at 10:52 pm

    So what is the biggest market on earth ?
    Energy. By far. Every single dollar of sale is powered by energy. Of all kind but mostly fossil fuel. With all the negative image and effect.
    Hybrid car are just engineering tinkering with old tech. Combustion engines, electric motor, batteries. Even lithion Ion batteries, as great as they are, won’t make a city bus run longer than an hour or two.. at a high cost.

    Fortunatly. There is one company that worked in the shadow of its privated investors wing for decades.. to release Q1 2018 a revolutionary energy generation process. Their technology will, in the 5y range, shock wave the petrol industry, the PV industry (more to say, I’ll come later) and the battery industry. Why ? They will make all these power generation apparatus look obselete. Because their product, the suncell, can produce in 26inchx26inchx26inch the equivalent of a soccer field of PV panels. 24/7 no fuel. Enough to make a 18to city bus run days and nights. No fuel but water (yes you heard it), and ridiculously little amout.
    No bullshit, no “missing inventor conspiracies”. Just plain science.

    Skipping on the science, go look their website (www.billiantlightpower.com).

    The key information: It relies on hight tech multi-junction solar cell. The kind german companies produces for space satelites. (see https://en.wikipedia.org/wiki/Multi-junction_solar_cell) It just needs a few. However the suncell with scale up this segment of the solar industry manifold in the next 5y.

    I’ve not done the stock reseach yet. but if anyone want to share their stock investigation regarding the lucky winners, please share !

    Don’t disregarding this piece of information as some did with bitcoin in 2010. This company (privatly owned, not publicly traded) is set to become the giant corporation of iRobot movie. Their buisness model: http://brilliantlightpower.com/about/
    “BrLP plans to maintain ownership of SunCells® while outsourcing the manufacturing, supply chain management, installation, maintenance and repairs, and billing. The SunCell® reduces all historic forms of power to a single fungible commodity enabling a fluid market with power sources being interchangeable and capable of multitasks wherein the traditional market distinctions dissolve.”

    Many traditional tenet will lose, and much, to this revolution. Even windmill manufacturers may be seriously threatened, not only oil. But many will emerge and thrive inthis new era.

  15. kansasfarmer

    May 25, 2017 at 10:11 pm

    Don’t want to lead anyone astray so I can only say what is looking attractive to me right now and that is The Token Fund. You might take a look at it.

  16. johnathankelly

    June 4, 2017 at 6:43 pm

    Thanks Jonas for putting this site together. It is hard finding good sites to learn how to become financially independent. I have been working on becoming a millionaire for the past 5.5 years and learned a lot on the way. I would have loved having your site to help but I am glad I found it now.

    The book by Robert Allen called “Multiple Streams of Income” has been my guide in planning my roadmap. Each year I learn something new that gets me further along. One of the things no one has mentioned is dividend stock investing. Dividends are paid out and can then be reinvested to buy more stocks. When I first found out about them, I spent 2 months reading to make sure I totally understood the concept. Now I am making $400 per month from my dividends. Warren Buffet is also a big dividend fan and talks about how by investing in dividend stocks, you want the stock market to crash because then you can buy more shares cheaply. There is a great book to start with, “Get Rich with Dividends” by Marc Lichtenfeld. You wont get rich fast but it is a good steady growth that you can keep investing in over time as your stocks have corrections.

    I also discovered the medical marijuana stocks in the US and Canada and have make huge gains. This sector of the stock market is seeing amazing growth and will see more over the coming years. I have been following the market since 2014 and know that it will make me a millionaire in the next 5 years or less.

    And now crypto-currencies and app coins. Yes, they are fantastic and will continue to provide incredible growth over the coming years. Thanks for Cryptocoinsnews! I have referred all my friends into crypto to it. I thought my marijuana stocks were growing incredibly fast but after May, crypto beats it hands down. With the number of countries, Fortune 500 companies, and banks joining in, we have an incredible opportunity to become millionaires and more.

    I will suggest that becoming wealthy is going to require you to invest multiple ways. One, your steady, stable growth – dividend stocks and real estate. Two, something that provides cash for other investments – job, business, and/or trading. Three, your speculation that provides explosive growth potential – crypto and marijuana stocks. And finally, investing in yourself. As you have said, everyone wants to get rich quick. The problem is that as they are, the person is not ready for it. They will need to change their mindset about money, value, and many other things. This is a journey. One of the financial questions I ask people is if time and money were not an issue, what would they do? Most have no clue and this is one of the big reasons people are not wealth. They have no reason to become wealthy. If people knew that they would find their soulmate once they became a millionaire, almost everyone would get there quickly because they would be motivated to do so. So find big reasons to become wealthy and you will get there. I am listening to a book by Grant Cardone called “Be Obsessed or Be Average”. It takes a lot of energy to go from one economic level to another. You will need to become obsessed if you want to get there in 10 years or less.

    I know I am long winded. As you can see, I am obsessed about reaching the goal of becoming a multi-millionaire in 10 years or less. I hope this information helps. And thanks again for your two great sites.

    • Jonas Borchgrevink

      June 4, 2017 at 7:26 pm

      Good suggestions! I’ll buy the books you mentioned and make a review of them on Hacked.com. Yes, I need to invest in multiple assets and increase my own cashflow. Join the 33% club on workplace, maybe you can share some of your insights there 🙂

  17. panoptica

    July 19, 2017 at 11:40 am

    Hi Jonas, thanks for the info. I am really enjoying the site. For me I’d be trying to reduce my tax liability. It is pretty hefty in Norway and I am not sure what governments do in terms of tax relief on pensions/investments. Generally I try to put a lot into a pension at the outset as it will give me a 40% boost immediately here in the UK. (22% from employer not taxing and the other 18% through the HMRC). Not a very exciting investment though it gives me a lot of pleasure to see my fund increase around 30% this year. The fund is comprised of around 66% UK equities and 34% global equities.Of course, aware this can go down as well ;).

  18. kennymeyer

    August 27, 2017 at 8:40 pm

    I guess you would have been very well off if you had invested that money in cryptos back then 🙂 loving your journey so far.

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Financial Freedom

Interview: Tax Strategies for Crypto Traders

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Crypto taxes

With cryptocurrencies going mainstream, more and more people are asking how trading and holding of it should be reported to the tax authorities in their respective countries. And not only are people wondering, even the tax authorities themselves sometimes seem to have a hard time figuring out how they should deal with it.

Although guidelines in many countries remain unclear, we do know that the authorities have stepped up their efforts in uncovering unreported crypto fortunes with new measures. One recent example is from California where a judge last year ordered Coinbase to turn over personal details on all accounts worth over $20,000 between the years 2013 and 2015, to the US Internal Revenue Service.

According to current regulations in the US, the IRS considers cryptocurrency as “property” for tax purposes, meaning each and every transaction is in fact reportable and taxable. This includes trading from fiat to crypto as well as from one crypto to another crypto.

For active traders and day traders, manually reporting this on forms to the IRS obviously involves a lot of work, something many people have complained loudly about in online discussion forums:

crypto taxes

The early days – “see no evil, hear no evil”

In the early days of bitcoin and crypto trading, the number of people involved, and the amount of money it represented, was so small that the tax authorities didn’t bother looking much after it. Although everyone was, of course, technically required to report their holdings and profits, very few did.

The tax authorities didn’t know anything about bitcoin, and the risk of getting caught was small.

This first started to change after the dark web marketplace Silk Road was shut down, most recently in 2014. That’s when the IRS in particular first started to become aware of bitcoin, and became interested in figuring out ways to trace bitcoin payments that were used for illegal activities and tax evasion.

Then came the extreme bull market of 2017, a lot more people got involved with crypto, and a lot of money was made in the market. And as always when someone is making a lot of money, the government wants its share of it.

The tax situation today

Today, taxes are again a hot topic of discussion among cryptocurrency investors, with many feeling anxious about previously unreported gains made in the crypto market.

Andrew Henderson, founder of Nomad Capitalist, told Hacked.com that there is indeed a lot of confusion among crypto traders these days, in particular with regards to the new Trump tax reform in the US.

“The number one issue people come to me with is obviously taxation. The new Trump tax reform in the US really screwed a lot of people, and now even intra-crypto trades are taxable,” Andrew explained.

“The second problem I typically hear about from people in the crypto community is that they cannot participate in ICOs because they are living in the US.”

“Many of these people say they are missing out on a lot of good investment opportunities because of that, and they want to find out what they can do to no longer be considered US Persons,” he added.

Andrew, who has been advising people on offshore tax strategies since 2013, explains that the solution for most of these people is to go out and set up a base of operations somewhere outside of their home country.

Unfortunately, he said, the old strategy of leaving one’s home country only to “become a resident of nowhere” is increasingly not working. In other words, people who want to invest in certain ICOs or lower their crypto tax bill therefore need to find a new country that is accepting of crypto and have low or zero capital gains tax.

Is not reporting an option?

When asked if crypto traders should even bother reporting all of their transactions and profits to the tax authorities, Andrew is pretty clear that at least people from Western countries, and the US in particular, should respect the taxman.

He explains that the IRS in the US is “really aggressive,” and that there is a real risk they will bust anyone who tries to evade taxes. In addition, Andrew said, “you’re probably going to want to spend the money some day. If your crypto holdings by this time has grown into a lot of dollars, you’ll have a problem explaining where all that money came from if the tax man asks.”

Going offshore

Given the fact that US citizens are liable to pay taxes on their worldwide income, Andrew’s advise to big crypto traders is clear:

“I think if you’re a US citizen, you might just want to consider not being one anymore.”

Although this measure may sound extreme to a lot of people, the suggestion appears to be backed up by statistics. Each quarter, the IRS publishes a list of Americans who have renounced their citizenship in the quarter. According to the statistic, there has been a steady increase in the number of people who have renounced over the past decade, with 2017 being the first year to show a slight decline from the previous year since 2013.

The United States is one of very few countries in the world that taxes its non-resident citizens on their global income.

Unfortunately for many of the readers, non-US citizens will therefore have an easier time implementing some of the strategies for lowering their crypto tax bill.

Residents of other high-tax countries such as the EU countries or Australia can in most cases simply declare themselves a tax non-resident in their home country by moving overseas and making sure they spend no more than a specified number of days each year in their home country.

While some countries require their citizens to continue to file and pay taxes for a number of years after they moved out, other countries will consider those who have moved a non-resident for tax purposes right away.

Because of all this, it’s important to distinguish between US citizens and citizens of other high-tax countries when it comes to regulations and taxes related to crypto.

If you’re a US citizen, what it all comes down to is basically how big of a problem it is for you not to be able to participate in a lot of the ICOs that are coming out. If this means a significant monetary loss to you, it may well be worth it exploring options for relocating yourself. For citizens of other countries, moving abroad for a period of time can be an effective way to slash your crypto tax bill without having to completely cut ties with your home country and give up your passport.

Featured image from VCG.com.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Financial Freedom

Considerations For Choosing An Immediate Annuity

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When it comes time to retire, one method for receiving income from your savings is to purchase an immediate annuity. The purpose of an immediate annuity is to provide a regular payment over a certain period of time or over the investor’s lifetime.

 

An immediate annuity can preserve a minimum level of income that you cannot outlive. Allocating a portion of your retirement money to an option that will provide income for life can make sense for many retirees.

So how does an investor decide what immediate annuity to purchase?

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

It’s also important to consider that when earnings from an annuity are withdrawn, they will be taxed as ordinary income, no matter how long the owner has owned the account.

Different Types Of Immediate Annuities

Steve Vernon, a research scholar for the Stanford Center on Longevity, writing for CBS News’ “Money Watch,” noted that immediate annuities can be fixed, inflation adjusted and variable and guaranteed lifetime withdrawal benefit (GLWB). GLWB combines the features of traditional annuities and systematic withdrawals.

Once you purchase a fixed or inflation adjusted immediate annuity, your payout is locked in, Vernon noted. Your payments will not be adjusted based on changes in capital markets.

The monthly payout on a variable annuity, by contrast, will change based on the annuity’s stock and bond portfolio. The owner can modify the portfolio even after they start receiving payments. Vernon recommends keeping the stock allocation between one third and two thirds.

When shopping for GMWB annuities, Vernon recommends annuities with management fees around 50 basis points or lower, and insurance fees round 100 basis points.

Vernon encourages people to use online annuity purchase services like www.immediateannuities.com and Income Solutions and Immediateannuities.com to compare different immediate annuities.

Immediate Fixed Annuity Considerations

Steve Goldberg, an investment adviser writing in Kiplinger, thinks of an immediate fixed annuity as term life insurance in reverse, the longer you live, the better you do.

The insurance company pools the premiums from thousands of its annuities and invests them primarily in bonds. The company also makes educated guesses about how long its annuity buyers will live. It then makes monthly payments to policyholders each month based upon both expected longevity and expected investment returns.

In today’s low-interest-rate environment, that’s much better than an investor can do in all but the riskiest bonds, according to Goldberg. It’s also likely better than an investor can do if he put all his money into stocks.

But there is a catch: With an annuity, you don’t get your money back, unless the buyer opts for what’s known as a “certain period annuity” or similar option. Additional features, however, usually bring additional costs.

Goldberg believes immediate fixed annuities usually make sense only for retirees. The older the retiree, the fewer years the insurance company will have to pay the benefits – so the bigger the monthly checks.

Immediate annuities seldom make sense for all of an investor’s money, Goldberg notes.

Like Vernon, Goldberg suggests going to ImmediateAnnuities.com to compare different immediate annuities. Plug in the state you live in, your age and your gender, and the website provides quotes from numerous companies.

How Immediate Annuities Are Bought

There are three typical ways to purchase immediate annuities, according to Rich White, a financial writer writing in Investopedia.

One method is the annuitization of a tax-deferred annuity. The purpose of a tax-deferred annuity, unlike an immediate annuity, is to build funds to create an income stream at a later date. Most tax-deferred annuities permit the account to be converted at some point in time to a guaranteed income stream.

Another method is the lump sum payment, in which the investor’s funds are transferred to an insurance company to purchase a revenue stream. Oftentimes, the investor is using cash from a retirement plan distribution, lottery winnings or an award from a personal injury settlement.

A third method is the terminal funding of a retirement plan. Some retirement plans offer annuity payouts. The plan in this case terminates its liability to the participant by transferring the participant’s funds to an insurance company. When retirement plans “pay out” in this manner, a “qualified immediate” annuity of offered for tax efficiency.

These choices all present options. The owner of a tax-deferred annuity who wants to annuitize is not limited to the payout offered by the insurance company, White notes. The policyholder can shop payouts offered by competing companies and conduct a tax-free transfer to the company offering the best terms. This is known as a Section 1035 exchange.

If a retirement plan offers a particular insurance company for terminal funding, the policyholder can shop for others and select the plan they find most suitable.

An annuity payout over a fixed number of years that is purchased with a single sum can be converted to an annual interest rate equivalent, White noted.

If, for example, the policyholder is quoted an annuity of $600 per month for 20 years in exchange for paying a premium of $10,000, an annuity rate calculator will find this payout converts to an annual interest rate of 3.96%. This rate can then be compared to other fixed-period annuity payouts, perhaps over longer or shorter periods, and also to rates available on bonds, money market funds or CDs.

For a lifetime annuity payout, there is no fixed period to evaluate. Death could occur at any time, and the payments would discontinue. White recommends a good starting point is to use the annuitant’s life expectancy as the payout period.

If a 67-year-old female is offered a lifetime payment of $600 per month for a $100,000 premium, her life expectancy would be 17.67 years, based on the 2007 Period Life Table published by the Social Security Administration.

Immediate Annuity Payout Options

One payout option for immediate annuities is income for a guaranteed period, which is also called “certain period annuity,” according to CNN Money, as noted in a previous article on annuities’ role in financial planning. This guarantees a specific payment for a specific time period. If the owner dies before the period ends, their beneficiary receives the remainder of the payments.

Another option is lifetime payments that guarantee a payout for the owner as long as they are alive, but there is no survivor benefit. The payouts can be variable or fixed, depending on the type of annuity selected. The amount of the payout depends on the amount invested and the owner’s life expectancy.

Still another payout option is life with a guaranteed period certain benefit, also known as “life with certain period.” The owner receives a guaranteed payout for life along with a period certain phase. If the owner dies during the certain period, the beneficiary continues to receive the payment for the remainder of that period.

Joint and survivor annuity is one in which the beneficiary continues receiving payments for the rest of their life after the owner dies.

Do Your Homework

It is important to buy an annuity from a company that holds a top credit rating from the three leading agencies of U.S. insurance companies: A.M. Best, Moody’s and Standard & Poor’s.

The considerations for shopping for an immediate annuity are extensive. Investors must spend their time comparing options. Many retirees will find it worth their time to work with a financial adviser.

Those who seek the assistance of an insurance agent must keep in mind that insurance agents are paid commissions by the insurance companies offering the annuities. Investors have the option of working with a non-commissioned financial adviser.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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Annuities Versus Mutual Funds: What’s Best For Retirement Planning?

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An annuity, a long-term contract between a buyer and an insurance company that allows the accumulation of funds on a tax-deferred basis for later payout in the form of a guaranteed income, can be part of a retirement plan, as discussed in last month’s article, “Do Annuities Have A Role In Retirement Planning?

However, it is important to weigh the advantages and disadvantages of owning an annuity against other investment options for retirement, such as mutual funds.

Before investing, one should compare the annuity fee structure with regular no-load mutual funds. No-load mutual funds levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% for index funds or around 1.5% for actively managed funds.

It’s also important to consider that earnings from an annuity will be taxed as ordinary income when the earnings are withdrawn, no matter how long the policyholder has owned the account.

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

Annuities’ Advantages

Annuities do have some important advantages over other investments in retirement planning. Payouts can be guaranteed for life, regardless of how much the account actually earns, and they often include a guaranteed death benefit.

Income from stocks and mutual funds is not guaranteed, and there is no death benefit.

With mutual funds, the investor pays in an amount that is invested in a number of stocks, bonds, or a mixture of both, to create a stream of retirement income from stock dividends and bond interest.

While mutual funds use investment diversity to limit market risk, this is not a guarantee, according to Howard Kaye of Howard Kaye Insurance. Earnings can fluctuate significantly, and it is possible that no dividends or earnings will be paid out, especially if the principal is reduced.

Annuities have other advantages as well.

Unlike investments in tax-deferred retirement accounts, there is no limit on the amount that can be invested tax-deferred in an annuity, unless it is held inside a tax-deferred account, such as an IRA or a 401(k).

Variable annuities offer the opportunity to earn more than the guaranteed payment, depending on the performance of the investments. A variable annuity is essentially a mutual fund inside of a tax-deferred insurance policy, according to Trust Point, a Wisconsin based wealth management firm. Investments are made within mutual funds or mutual-fund-type accounts offered by the particular annuity, and the earnings grow tax deferred until they’re withdrawn.

Variable annuity investors can also switch from one investment to another within the annuity’s menu of choices without paying taxes. A mutual fund investor cannot switch among taxable mutual funds. Hence, annuity investors have more flexibility in adjusting their portfolios.

Annuities’ Disadvantages

Annuities are not without their disadvantages, however.

The earnings from an annuity, when withdrawn, are subject to the ordinary income tax rate, which for many is higher than the long-term capital gains rate that one incurs in owning a mutual fund, according to Daniel Kurt, writing in Investopedia.

If you buy a qualified annuity – that is, one you purchase with pretax dollars – you’ll have to pay ordinary income taxes on 100% of the disbursements you receive, Kurt noted. With a non-qualified annuity, some of the payment is considered a tax-free return of principal; only the earnings portion is subject to tax.

Stock dividends, by contrast, will be taxed at the capital gains rate rather than as ordinary income.

Trust Point offers the example of someone in a high-ticket tax bracket, who pays 39.6% on gains when they withdraw their money from their variable annuity, instead of the lower 15% or 20% long-term capital gains rates. This will be true regardless of whether the withdrawn dollars are a result of income dividends or capital gains distributions.

In addition, variable annuities can hit the policyholders’ heirs with a big unexpected income tax bill. If a $25,000 investment grows to $100,000 over the years and the policyholder dies, their heirs will owe income taxes on $75,000. If the policyholder is in a lower tax bracket than their heirs, it might make sense for a retiree to take distributions before death if there are no surrender charges.

In contrast, if they owned taxable mutual funds or other securities, the heirs would not have to pay taxes on the $75,000 in gains because taxable mutual funds enjoy a “stepped-up” basis at death for tax purposes, Trust Point noted.

The tax treatment of annuities is one reason why Kurt encourages people to buy as much income protection as needed – that is, expenses minus whatever they receive from Social Security or a pension. That way, you can invest the rest of your assets in an account that benefits from the capital gains rate.

The income guarantees of variable annuities add an expense that can clip the total return earned by the variable annuity investor, according to Trust Point.

As with mutual funds, payments from variable annuities fluctuate up or down depending on the performance of the underlying investments.

Fixed Indexed Annuities

Another choice investors have is the fixed indexed annuity. These annuities use financial indexes as a benchmark for earnings. The funds in the annuity are not directly invested in the stock market. Instead, the earnings are based on the earnings within an index, such as S&P 500, Dow Jones Industrial Average, etc.

(A fixed indexed annuity should not be confused with a fixed annuity, which provides a fixed amount every month for the rest of the annuitant’s life.)

While fixed indexed annuities use stock market indexes as benchmarks for earnings, the investor’s funds are not directly invested in the stock market. Instead, the earnings are based on the earnings within an index.

Like variable annuities, fixed index annuities have both advantages and disadvantages compared to mutual funds and other investments.

While they offer a market-risk-free opportunity, fixed indexed annuities aren’t as liquid as cash, noted Kaye of Howard Kay Insurance.

They are, however, more liquid than most CDs or bonds, Kaye noted. In fact, nearly all offer “free withdrawals” every year. Once the surrender period is over, all of the funds are fully liquid.

Should the policy holder die during the annuity period, it’s possible that there won’t be much left for heirs. Such products are best suited for someone looking to supplement income and already has an estate plan in place for their heirs.

The decision of whether to invest in a variable annuity, fixed indexed annuity or a taxable mutual fund will depend on individual factors such as age, expected lifetime, the reason for the investment, liquidity needs, fees, estate plan and the overall portfolio.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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