TLC: Taxation, Longevity and Control


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. 

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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.

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Tax Control and Longevity Risk: Retirement Strategies Worth a Conversation


As I have talked with clients and advisors over the last six weeks, there is renewed optimism revolving around our economy. I share the same view and have shared it for some time. I listened to a chief economist for an insurance carrier the last week of January. They had been lobbying for tax cuts for several years. It seems like the additional cash flow to corporations helps everyone’s view and, possibly, company financials. 


Risks of the Unknown

Tax control is really important in retirement planning. So much of our clients’ savings is tied to qualified plans, either in company-provided retirement plans or individually owned IRAs. Many of these IRAs are funded with former employer-owned retirement plans as well. So, the tax status of these funds makes it difficult to plan for tax control at retirement. Generally, Roth options were not available in qualified plans until recently, so the majority of assets in these plans become fully taxable. 


That’s why proper use of nonqualified assets can come into play. It’s important to consider taxes when making the plan. Even more important is the fact that longevity will put additional pressure on the taxation of the income as we age. Many income riders provide guaranteed income, but the income becomes fully taxable when the account value reaches zero. As longevity risks increase, nonqualified income can offset the impact of taxes later in life. 


Once we hit life expectancy, the need for medical coverage and long-term care increases. With means-tested medical premiums, it will become critical to make sure we provide clients the lowest possible premium for their health care. The use of nonqualified income can reduce the tax burden on income and lower the means-tested income levels. 


Take Control

You can control taxes and address longevity in multiple ways. Look toward innovate planning techniques and tools to help the client protect their income and tax advantage of tax benefits and thresholds to maximize net income. Below are some ideas you should consider when evaluating tax control and opportunities with your clients:


  • Look to convert Traditional IRAs to Roth IRAs in the lower tax rate environment. This current tax payment allows the client to access funds tax free later with more distribution control (no required distributions at age 70 ½). The tax-free access can help keep them under a certain threshold for means-tested premiums or benefits. 
  • Consider using Home Equity Conversion Mortgages (HECMs) to the shift some longevity risks. HECM lines of credit give clients tax-free access to large sums of capital based on the value of their home. New rules allow the client to stay in their home through nonrecourse loans, irrespective of the future value of the home. 
  • Use nonqualified single premium annuities to maximize Social Security income payments by pushing the election date to age 70. Over 20 years, this can increase Social Security income by $122,000.
  • Hedge longevity risks with nonqualified deferred income annuities. The exclusion ratio of DIAs can provide tax relief while supplying income later in life. 


There are many more ways to control taxes while addressing longevity. Take a look at how guaranteed income and HECM options allow you to have a more meaningful conversation with your clients. With more options, the client can rest easier knowing you have their best interests in mind. 


Winning Strategy

You have to consider the tax effects now (and in the future) of the decisions that your clients make for retirement. Down the line, tax control becomes important as you rely more on rider income. And, as means testing becomes more prevalent, tax thresholds will be a critical success factor to any retirement plan. 


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.”

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