We work with thousands of advisors across the country, so I see a lot of client statements and financial plans – the overwhelming majority focusing on gross retirement income. Most Americans don’t live on their gross income; however, they live on what’s left over. Or, as I like to remind my clients: It’s not what you earn – it’s what you keep.
So, when planning for retirement income, we need to look at what the client actually lives on and not what the highest income rider generates. After we determine the actual gap, we can attack it with a solution. Too often, I see the quick fix: “Here’s an income rider that meets your guaranteed income need.” It’s great to meet the client’s income need, but did we really look at best possible solution?
Understanding the tax drag on income payouts allows us to better estimate what the client will actually keep and be able to use for living expenses. If we don’t settle for the easy sale, we might look at a combination of tax-advantaged income involving single-premium immediate annuities, deferred income annuities and other lifetime income solutions. Today’s products allow you to ladder income with some first in, first out taxation and exclusion ratios, and others remain taxed as last in, first out.
More importantly, we can stagger income with the least amount of tax impact during life phases with the most income need. As Social Security increases, required minimum distributions and other income sources begin; fee and tax implications can be reduced with proper planning.
When the next income planning case comes across your desk, ask if you’ve taken a look at the tax impact of the proposed income solution. If the client wants more money for living expenses, think about leveraging annuities for reducing the tax drag on the income portfolio.
The Bottom Line: It’s not what you earn or what the income rider generates … It’s what the client gets to keep that matters.
© 2018 Ash Brokerage LLC.