TLC: Taxation, Longevity and Control

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.