Annuities

Taking Control of Taxes in Retirement


Annuities

One of the definitions for control is “to hold in check.”  Another is, “to exercise restraint or direction over.” I think both are applicable when it comes to the goals of many retirement investors. No one wants to completely avoid their obligation to support our shared services, i.e., pay their share of taxes. However, everyone I talk to wants to reduce their portion or make sure the tax is used appropriately.  

 

Let me give you an example of control. As I drive to my in-laws with my wife, many times during the three-hour drive, our definition of comfortable is different. She tends to set the passenger side of the car much cooler than I like it. In our car, each vent allows the air flow to be reduced or completely shut off. The car’s fan continues to push air through, but, when blocked, the air gets pushed out of another vent – on the driver’s side. When the temperature gets too warm, the air flow can be opened again on the passenger side. The air flow has changed direction while being held in check on one side of the car. The vent (or, I suppose, my wife) has exercised control. 

 

Pulling the Levers

In retirement, tax control vehicles such as annuities allow investors to decide when and how they pay tax. The flexibility of annuities provides a mechanism to turn income on and off, and choose how to distribute the tax consequences associated with the income. Annuities can also provide a tool to distribute assets to the next generation or second generation, which can provide additional tax control. 

 

Having tax control in your retirement vehicles creates an important lever for income planning. Just like the vents in the car, investors can exercise control over their income and tax consequences. You can elect to turn on income when you need it and decide how much you need. Additionally, the manner that you accept the cash flow dictates how you pay tax. Distributions may be taxed as gain first or with an exclusion ratio. You may want to tax your distributions as gain first if you are in a lower tax bracket when you begin income. Otherwise, you may want to spread the tax consequences over the rest of your life. What’s important is that an annuity gives you choice and control.  

 

Looking at More Options

The stretch IRA (individual retirement arrangement) provision is now being challenged in Congress. IRA holders may only be able to stretch $450,000 to the next generation. Non-qualified annuities allow for multiple distribution options that include skipping generations. The beneficiary designations of annuities provide greater flexibility and control versus institutional IRAs. While those designations add no value in the accumulation phase, the tax control at death and during the income phase can add several basis points to the overall return of the annuity. There is additional value to tax control vehicles beyond the simple interest rate. 

 

Between “holding in check” and “exercising restraint and direction over,” controlling taxes remains an important part of the retirement income discussion. Make sure you have the appropriate control over income and taxes as you plan your clients’ strategy. Tax laws change often – in fact, there have been 31 changes in U.S. tax rates in the 34 years between 1979 and 2013.* So it’s important to create flexibility and control in the financial plan. 

 

Winning Strategy

Have tax control embedded in your financial plans. Choosing when and how you pay tax is an important discussion point for clients looking to retire. Tax deferral is important during the accumulation phase, but can add basis points to your income and distribution strategy at death. 

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the Whitepaper Here!

 

*Tax Policy Center, Statistics: http://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-household

 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Taxes Annuities

Quant-Run Wall Street: Why You Need to Pay Attention


Annuities

At the end of May, I read a Wall Street Journal article* about how many quants run Wall Street now. The article focused on bonus payments and regulation around algorithmic-driven trading. However, it made me think of the impact of the transformations on Wall Street. 

 

The impact of algorithmic-driven trading can be swift, steep and game-changing. As an advisor, you’ll need to adapt to the way Wall Street trades – even if you remain in the fixed, indexed and income annuity marketplace. Clients should have a balanced portfolio with guaranteed income, equities and bonds. But, equity trading is rapidly changing. With quants driving performance and trading, large blocks of business are likely to change hands quickly going forward.  

 

How does that affect you? A quant-driven Wall Street will likely see wider and steeper movements during corrections. In past corrections, investors have moved to conservative positions when they “see” the first signs of a downward correction. In the future, with algorithms dictating trades, it’s entirely possible to get caught in the tsunami of a correction and never “see” the signs like old times. 

 

You need to recognize that the markets are driven more by technology and formulas and less by emotions and human behavior. That means your clients, who still make decisions on emotions and behavior, will likely be left in the dust in market downturns. Your clients are at a disadvantage versus a quant.  

 

Winning Strategy

Be proactive. The lack of urgency in our economy troubles me. Talk to your clients about the changes on Wall Street how they will be affected – secondarily, not just by investments. Create urgency to protect their wealth that has increased over the last eight years, while remaining bullish on equities through an FIA.  

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the Whitepaper Here!

 

*Wall Street Journal, “The Quants Run Wall Street Now,” May 21, 2017: https://www.wsj.com/articles/the-quants-run-wall-street-now-1495389108 

  

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Financial Planning Retirement Annuities

Why Annuities? Why Now?


Annuities

Annuity Awareness Month allows me to continue to talk about why I remain bullish on annuities after June 9’s implementation of the Impartial Conduct Standard. Many advisors said they planned to stop writing annuities after the rule went into effect. I argue that annuities should become a larger part of the product mix for many Americans, especially today.  

 

Close the Gap

A recent Merrill Lynch study indicated that the average American would need more than $700,000 in income for their retirement years.1 At the same time, LIMRA’s 2016 Fact Book reported the median long-term savings in the United States is $130,100.2  As planners, we will have to make more income with fewer assets than ever before. Using mortality credits to boost the yield in our income vehicles will provide additional income to close the retirement gap. 

 

Don’t Wait for Tomorrow’s Rates

We live in one of the safest economies in the world.  As our world becomes even more unsettled, global investors continue to drive the 10-year treasury lower as more money flows to the U.S. Treasuries. Too often, I hear people are waiting for the final 2-3 percent of growth in this long bull stock market. The reality is we are a few world events, such as last year’s Brexit, from having interest rates near 125-150 bps. Now, not later, is the time to consider protecting our clients’ wealth with guaranteed products and income.  

 

Don’t Miss Out on Today’s Credits

Life expectancies continue to increase and carriers will be forced to change their mortality crediting tables as more people live longer. Like waiting for interest rates, we are more likely to see a shift downward toward lower payout rates than we have today. The industry will eventually be forced to adapt to the changing demographics in the next 10-15 years. At that time, guaranteed income payouts will likely drop significantly. So, talking to your clients about locking into today’s pricing will likely secure higher payouts than waiting for rates or other events.  

 

Turn Savings Into Income

Our society continue to transition to defined contribution plans for convenience and tax-deferred growth. The loss of guaranteed income from employer sponsored plans will be felt for the next two or three decades as we look to stabilize income planning for near retirees. It’s rare that I talk to a plan sponsor who has significant education about converting assets to income. The current working generation has been taught to follow the green line or sit on the orange bench and calculate their asset value. Few retirees know the complexities of retirement income and the proper use of guaranteed incomes.  

 

All of the above create challenges for our industry and clients, but they also offer opportunities for holistic planners to add value to their practice. The Fiduciary Rule may scare some of the income planners away from annuities, which will create a void in the marketplace for the planning community to fill. I suggest we take advantage of the situation and add value to our clients’ plans.  

 

Winning Strategy

Now is the right time to look at annuities and guaranteed income. Economic conditions and mortality may work against future product pricing, so take the opportunity to lock in today’s great environment and bring value to your clients.  

 

Learn More

1Merrill Lynch/Age Wave: “Finances in Retirement: New Challenges, New Solutions,” https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_Finance-Study-Report_2017.pdf

2LIMRA, “Fact Book on Retirement Income 2016,” https://www.limra.com/bookstore/item_details.aspx?sku=23518-001

 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Annuities Retirement

The Low Interest Rate Opportunity You’re Missing


Annuities

Annuity Awareness Month means different things to different people. Personally, I like to concentrate on the proper uses of annuities, regardless of the economic environment. 

 

Too often, especially lately, I hear advisors talking about rates being too low to consider annuities. But, I think low interest rates provide a unique opportunity to show how annuities create tax efficiencies in income planning.  

 

As planners, one of the obstacles we face is the misuse of social systems for income. Today, only 4 percent of women and 2 percent of men elect to take Social Security at age 70 so they gain the maximum income for life on an inflation-adjusted basis. I talk to many advisors and clients about maximizing the government’s programs as a base income level. Single premium annuities can be a perfect fit for bridging that gap between early retirement and higher income levels for life. 

 

Take a Closer Look

With today’s “low interest rate environment,” annuities generate a more tax-efficient income than ever before. If you position a single premium immediate annuity with an eight-year period certain, 95.6 percent of the income is tax free (return of basis). This allows you to position income with non-qualified assets between ages 62 and 70 equal to what would have been early retirement income levels. With tax-free distributions, you have lowered the client’s tax bracket, allowing you to convert pre-tax dollars in an IRA to after-tax dollars using Roth conversions. 

 

The net effect is that your client …

  • Has converted more of their qualified funds at the lowest possible tax bracket
  • Maximized their Social Security benefits
  • Gained a higher lifetime income 
  • Is more likely to receive tax-free distributions after five years from the Roth conversions

 

All along, the income annuity (as of May 2017) earns a 1.16 percent rate of return, which is typically higher than most certificate of deposit rates and comparable to U.S. Treasury rates for similar durations.  

 

So, if you ask your clients if they would like to maximize their Social Security, reduce the tax on their qualified money, and create more lifetime income, how many do you think would say, “Tell me more”? My guess is that will start a conversation with a client or prospect. And, that’s why I get excited about making your clients aware of annuities during low interest rate period – tax efficiency. 

 

Winning Strategy

Talk to your clients who have indicated that they want to retire early, at 62 or 65. Give them options that create tax efficiency in their portfolio, regardless of the interest rate environment. Make your clients aware of the possibilities with annuities. That’s real #AnnuityAwareness. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Annuities Financial Planning

Crossing the Threshold to Fiduciary


Annuities

Implementation is here. The U.S. Department of Labor did not pursue another delay to its fiduciary rule, and the deadline has come to pass. Even though many people in our industry would have preferred more time, I believe now is the right time to refocus our attention on our clients. The fiduciary rule will be a change, but the transitionary period offers relaxed rules in order to comply.  

 

For the past 14 months, I have been writing about redefining your business. Now that we are crossing the threshold to the rule, my message is the same. This transitionary period offers a chance to continue the thought pattern around how your business should look in 24-36 months.

 

I have always thought there are two key questions that you need to ask yourself:

  • Do you want to move up market?
  • Do you want to remain in the same market and become more efficient?

 

Regardless of the final rule, revisions or revocations, your business will need to look differently than it does today. The marketplace is demanding more holistic planning and a fiduciary mandate. The real question is:

How do you rise above the other fiduciaries who are born out of regulation?

 

I think you separate yourself by the way you segment your client base, the services you provide, and frequency of services you provide to your top clients. If you move up market, you will need to really concentrate on segmenting your business and making sure there is a successor to your less than “A” clients. Additionally, you will need to make sure you have the right resources around you in order to compete in the higher net worth market place. 

 

According to an American Institute of CPAs/Harris Poll in March 2017, 88 percent of Americans worry about running out of money have having to return to the workforce. If you redefine your business to focus on guaranteed income and longevity issues, I think you will have an opportunity to thrive in a fiduciary world and create differentiation between you and other planners. 

 

Winning Strategy

Take the transitionary period of the DOL to redefine your business and shape it to how you want it to look in 24-36 months. Take steps now to differentiate yourself based on our aging population’s concerns.  

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

DOL Retirement Financial Planning