Annuities

The Value of Tax Planning for Retirement


Annuities

When I look at our industry today, I see a lot of commoditization. Our clients are driving transparency and asking for lower fees with more service. This combination makes it difficult to sustain a healthy business model, whether you’re commission-based or advisory-based.

 

Asset allocation and rebalancing can be done online, which has driven down value in the eyes of the consumer. Now, you may provide exceptional service and other planning around asset allocation to add value, but the value of asset allocation has been driven downward.

 

What is the key to driving value and making sure that you can earn a sustainable revenue stream? Generally, you need to lead the pack for those services and products that consumers find the most valuable. Keep in mind that price is a dollar amount. Value is how the client perceives it in their own eyes.

 

Prioritize Your Focus

Understanding today’s retirees and developing strategies to deliver value in a few critical areas allows you to build a long-term, sustainable business model. A 2017 poll uncovered some of Americans’ greatest fears about retirement: 1

 

  • 71 percent worry about health care costs. Government health plans are means tested and based on Modified Adjusted Gross Income levels. It’s important to have a strategy for keeping costs at a minimum through proper taxable income planning.
  • 52 percent worry about future tax rates. Even with the Tax Cuts and Jobs Act, marginal tax brackets did not drop significantly. With Social Security and Medicare struggling financially past 2035, it’s easy to see a potential increase in taxes – payroll, FICA and income tax rates.
  • 81 percent worry about running out of money and having to go back into the workforce. Guaranteed income could help alleviate that pressure.

 

These three areas of service – health care, tax planning and guaranteed income – can provide significant lift for your business over the next few years. They are highly valued in the consumer’s eyes.

 

According to a report from Capital Sigma, comprehensive financial planning, which would include retirement income planning and health care planning, is valued at more than 50 additional basis points. Tax management is perceived to be 100 basis points in value to the consumer. Those two services are valued at 150 basis points, whereas asset allocation is perceived to have a value of just 28 basis points.2

 

To increase the value of your business and drive revenue through your firm, you need to meet the changing demands of the American population. People will always pay for value.

 

Winning Strategy

Think about what your clients want more and design your firm and practice around those ideas.

Winning Strategies

Craving More?

In this episode, Mike McGlothlin shares not one, but five Winning Strategies to create a tax-efficient retirement portfolio. These strategies will set you apart from the competition by adding value to your clients.

Watch Now

 

1American Institute of CPAs (AICPA) / Harris Poll, March 2017

2Capital Sigma: The Sources of Advisor-Created Value, 2016: https://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

 

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Tax Planning Health Care Guaranteed Income

TLC: Taxation, Longevity and Control


Annuities

Health care might be one of the most expensive risks in retirement. Today, and most likely to continue for the foreseeable future, government health care premiums are based on means testing based on income levels. It’s important to understand the components of the income calculations. And, it’s equally important to determine how to control that income.

 

In general, less taxable income translates to less health care premium. The goal for the retiree should not be to lower taxes, but increase net income. Net income can be positively affected by reducing taxes, lowering premiums and other costs, and increasing the gross income to the client. Let’s look at some techniques that can add control to the financial plan that might also increase the net after-tax income to your client.

 

Asset Location Vs. Allocation

Many people tell me that purchasing a single-premium immediate annuity (SPIA) in today’s low interest rate environment is one of the worst decisions they could recommend. However, I think a SPIA can be the most effective tool in raising after-tax income for our clients. With today’s interest rates, a nonqualified SPIA can provide a high exclusion ratio for every payment received. This excluded amount is a non-taxable event and does not go into the calculations against Social Security taxation and health care means testing. 

 

Housing Wealth

In the United States today,there is as much housing wealth as the industry has in assets under management. The use of housing wealth might be the most underutilized strategy for any retiree. We ran simulations using housing wealth as a noncorrelated investment strategy during retirement. Every year that the markets ended down, the home equity was used to generate the income needed instead of the investment portfolio. This provided some time for the investment portfolio to recover.

 

With a traditional systematic withdrawal strategy and no noncorrelated assets, the portfolio failed at age 95 in 26 percent of the simulations. The client would run out of income in more than one out of four situations. By using a withdrawal from the noncorrelated asset (home equity conversion mortgage), the failure rate dropped to just 2 percent. We decreased the risk of failure from one in four to one in 50. That’s a significant change in confidence for the American retiree.

 

Other Noncorrelated Assets

Noncorrelated assets don’t have to be just housing wealth. Fixed annuities with liquidity, cash and permanent life insurance are all noncorrelated assets. Life insurance and housing wealth provide access to these funds on a tax-free basis. Noncorrelated assets can be a great tool to control the tax on the retiree’s income and create flexibility of when to pay the tax based on the source of the income.

 

Winning Strategy

Instead of looking at rates of return, look at your client’s net after-tax income as a benchmark for performance. Look for solutions to increase gross income while managing taxes and expenses to increase the funds available for the retiree to spend. 

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

Catch the Replay Here

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Health Care Home Equity Conversion Mortgage