Annuities

Tax Control and Longevity Risk: Retirement Strategies Worth a Conversation


Annuities

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.”

Retirement Tax Control Home Equity Conversion Mortgages Longevity

4 Reasons You Should Focus on Retirement Income Planning


Annuities

Over the next several decades, retirement income planning will only grow. Planners have so much opportunity to concentrate on income planning as a core competency. I spend a lot of time talking about Americans’ behavior over the last 20 years and why income planning will be paramount for the next 20. Here are four reasons:

 

  • Our savings rate continues to decline. In December 2017, our savings rate dropped to 2.4 percent.1 If you look at the past 20-year trend, you will see a steady decline in savings, with the exception of high inflation periods or around the dot-com bubble and financial crisis. This has left most people ill-equipped for their retirement. Therefore, we will be asked to create more income from fewer assets than ever before in our careers. We have to get our clients to think differently, and the planning community will have to act differently to accomplish this. 

 

  • We continue to misuse social programs. As I travel around the country, I always talk to clients who want to get their hands on their Social Security as soon as possible. They fear that the program will be bankrupt in the 2030s. There are some fixes to Social Security that will likely be addressed in future Congresses. For now, the bigger problem is the fact that we completely misuse the system. More than 50 percent of Americans take Social Security retirement early.2 That makes your benefit smaller, and you lose the valuable 8 percent growth of your income between full retirement age and age 70. For some people, that equates to a 76 percent reduction in income. Only 2 percent of men and 4 percent of women take Social Security at age 70, so there is a lot of education that needs to happen in order to secure more guaranteed income.2 With just a 20-year time frame, the difference could be as much as $122,000 in additional income. That makes a big difference for the typical retiree. 

 

  • Employers remained focus on shifting defined benefit plans to defined contribution plans. That’s good for many employees – low cost investing, multiple subaccounts to choose, tax deferral and matching employer contributions. But, the loss of guaranteed income creates a gap that needs to be filled. When I sit in a plan sponsor’s office, I see a litany of risk-tolerance tests, return sheets and asset allocation brochures. But, when I ask the sponsor to tell me how their participants are going to turn these assets into income, their faces turn blank. Turning assets into dependable income is a priority and makes a baseline for many Americans to be able to buy the things they are accustomed to buying. 

 

  • In many minds, longevity grows as the most troubling risk for retirees. The uncertainty around how long you will need income remains a fear for many Americans. Providing a plan to address this allows the client piece of mind and, if done properly, enhances the systematic withdrawal strategy. We are living longer at times at the expense of our quality of life. Clients need to plan to make sure they have not only lifetime income but also a plan if a long-term care emergency happens. The odds continue to increase that we will have a care event as we age. Shifting longevity risks for lifetime income and long-term care make sense in many cases. And, the shift of those risks is generally done for pennies on the dollar. 

 

Income planning should be thought of as a great spot to be in as a financial planner. There are large numbers of people retiring and needing planning for many decades to come. Our past behaviors create a reason to change our clients’ perspectives and create value for them. I’m looking forward to the challenge and the growth opportunities in this space. 

 

Winning Strategy

Income is the ultimate outcome for many retirees. You can’t spend assets but you can spend income. Add retirement income planning to your discussions, and you’ll add value to the client experience. 

 

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.”

 

1Bureau of Economic Analysis, “Personal Income and Outlays, December 2017”: https://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

 

2The Motley Fool, “When Does the Average American Start Collecting Social Security?” April 19, 2016: https://www.fool.com/retirement/general/2016/04/19/when-does-the-average-american-start-collecting-so.aspx

 

 

Retirement Income Financial Planning Practice Enhancement

How Guaranteed Income Drastically Changes Retirement Distribution


Annuities

As I’m writing this (January 2018), it’s hard to think about safety in a portfolio. The equity markets continue to rage with double-digit growth for the past several years. There seems to be a new stock market high just about every week, if not every day. 

 

But accumulation and income are two different animals. So they require two unique approaches to solve the client’s problem. 

 

Accumulation

Take a look at systematic contributions to a qualified plan like a 401(k) plan or a nonqualified systematic investment plan. As you’re making ongoing contributions, you buy more shares of the investment when the market (or, specifically, the investment) is down. As the value of the investment increases, you have purchased more shares and gain exponential value. The math phenomenon is called dollar cost averaging (DCA). By being disciplined and consistent, your average cost per share is less than the average paid per share, due to your ability to buy more when the investment is down.

 

Distribution

If you are relying on systematic withdrawals during retirement, the opposite math phenomenon works against you. As you withdraw funds for income, you are liquidating more shares when the market corrects. Therefore, you lose more shares for when the market recovers. It multiplies your losses in a way. After the correction and recovery, you will have less units or shares than you would have with a steady market. 

 

Guaranteed Income

Guaranteed income options provide stability in retirement income planning. Having a protected baseline of income reduces the pressure the portfolio might otherwise take on during the distribution phase. With guaranteed income, there is no need to reduce your unit holdings in order to generate the same level of income; thus, you have a better chance of protecting your assets for the long haul. The less you have to take out in a down market keeps more of the shares, or units, in assets under management for growth, inflation protection and capital gains treatment. There is nothing worse than paying tax on a liquidation that has corrected but still has embedded gains. 

 

Take a look at using a guaranteed income tool to provide a floor for distribution planning. You client benefits not only from the peace of mind, but also the ability to make their assets last longer during retirement. 

 

Winning Strategy

Give guaranteed income options a look. By shifting the downside distribution risk to a guaranteed stream of income, the client can likely maintain their asset base longer in retirement. 

 

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.”

Accumulation Distribution Guaranteed Income Retirement Planning

Digging Deeper: 3 Ways to Generate Revenue from your Existing Book of Business


Annuities

As I travel around the country on business, I enjoy talking with advisors from different channels – banks, broker-dealers, independent agents, registered investment advisors. Regardless of business model or channel, one consistent topic always comes up: 

 

“I need to find more clients. Can you help me with a seminar or dinner so I can find new clients?”

 

But, I like to think of the question in a different way and ask: 

 

“Are you interested in finding more clients? Or more revenue for your practice?”

 

Usually, the answer is revenue. But advisors tend to think that new clients are the source of new sales and revenue. Which is partly true. However, there’s a goldmine of existing opportunities with your existing clients. 

 

Mine Your Book

According to LIMRA’s 2016 Fact Book (its most recent edition), there are $486 billion of assets in nonqualified annuities – both variable and fixed – on carriers’ books right now. Some facts to consider: 

  • These contracts are NOT being annuitized and the owners are NOT electing to receive income from the rider
  • Approximately 33 percent of those owners are older than 75. Of those owners, 65 percent are classified as affluent, high-net-worth or mega-millionaires – those are all the clients that you either have in your book of business or are already recruiting to the firm. 

 

To make a difference with the people you’re already working with, I suggest that you dig deeper. Look at those older contracts and find a better use than just tax-deferred accumulation. Here are three suggestions:

  • Talk to your clients about putting the IRS in the back of the line, and your clients and their beneficiaries in front. Products today offer an exclusion ratio with the ability to access the cost basis first, without incurring the ordinary income tax immediately at time of death. Then, the beneficiary can spread out the tax consequences for a longer period. 
  • Turn tax-deferred assets into tax-free benefits for long-term care purposes. Only 7 percent of Americans have shifted their risk to an insurer. Asset-based long-term care products allow you to transact an exchange without current taxes and continue the tax-deferred growth. If the client uses the funds for qualified long-term care expenses, the cost basis and gains are returned to the client tax-free. You’ve taken a future tax consequence and turned it into useful and timely tax-free capital. 
  • Lock in the gains. We’ve seen an unprecedented bull market since the financial crisis. Many clients may do not want to take as much investment risk as they did 10 years ago. And, when asked about it, they probably don’t want to feel the same pain they felt in 2009. Sweep the variable contracts with no downside protection to a more secure vehicle that qualifies for a tax-free exchange, either fixed or fixed indexed. You might want to look at an income rider to provide options for the client if the market does correct and they wish to take income from another source besides their systematic withdrawal from equities and bonds. 

 

I think if you were to talk to your prospective clients about these ideas, they would find more benefit to working with you. You might even speed up the sales process. More importantly, you provide a valuable benefit for those clients. 

 

Winning Strategy

Dig deep into your client base. Ask more questions about assets held outside of your firm. Provide solutions that defer taxes and put your clients and their beneficiaries first. 

 

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 Practice Enhancement Revenue

Asset Location Over Allocation


Annuities

As I travel back from a business trip in Portland, I’m reminded how important location is on an airplane. Flying four and a half hours in the middle seat is not fun, especially when you don’t sleep on an airliner like me. 

 

Over the past few years, the location of assets has become more important in the financial planning arena. The biggest reason is the continued shift to income versus accumulation. During distribution, income is more important than the rate of return, which is largely driven by the allocation of assets. Let’s look at an example where location can improve your chances of success. 

 

Average Couple, Average Approach

A typical American couple approaches your firm. They have done a nice job of creating a nest egg for their retirement and would like to receive $50,000 a year in retirement income. They anticipate receiving $20,000 of annual Social Security income. So, they need to take $30,000 a year from their accumulated assets of $750,000. In other words, they will need to sustain a 4 percent withdrawal strategy from their assets under management. 

 

While the 4 percent rule worked during higher interest rate periods, most economists believe the safe withdrawal rate is around 2.8 percent to 3.5 percent. Without a doubt, this couple is in jeopardy of a significant failure in retirement, especially if they were to have a significant drop in asset value early in their retirement years. This is where asset location can make a huge difference over asset allocation. Because allocation doesn’t fully protect the clients from a loss in their account – it might make the ride smoother or reduce their losses and gains, but it will not provide protection from losses. 

 

What worked for clients during the accumulation phase will not work for them during the distribution phase. In fact, in many cases, the strategies that clients used to accumulate assets will hurt them in retirement.

 

New Approach, Better Outcomes

Let’s look at using different products to sure up their retirement income.

  • First, the couple buys a single premium immediate annuity (SPIA) to secure $9,000 of annual income. In today’s interest rate environment, that will cost just under $170,000 of the account value. The SPIA’s income is protected for both the couples’ lives, and if they both die before using up the $170,000, their beneficiaries get the balance of the unused funds. 
  • Next, the couple purchases a fixed indexed annuity (FIA). The $100,000 FIA generates $5,000 of guaranteed annual income. The clients remain in control of the assets and can change the annuity if something happens. 
  • Their remaining $480,000 is invested in their asset allocation strategy according to their risk tolerance. The assets only need to create $16,000 of annual income off the $480,000 in assets. That means that the use of two additional products reduces the withdrawal percentage to 3.3 percent. Most would agree the 3.3 percent is a significant improvement to the withdrawal percentage and increases the probability of success. 

 

The result is that the clients begin their retirement with the same $50,000 of targeted income: 

  • $20,000 from Social Security 
  • $16,000 from the systematic withdrawal strategy
  • $9,000 from the SPIA
  • $5,000 front the FIA

 

Notice that between Social Security and the annuities that $34,000 of their $50,000 annual income is guaranteed for the rest of their lives. That’s makes a powerful impact on their retirement income strategy.

 

Check out our one-page sales idea on this concept, and I think you will see that the location of assets is far more important than the allocation of the assets. The location strategy provides more consistent income with less volatility in income. Your clients will appreciate the guarantees and the unique location of their assets. 

 

Winning Strategy

Asset location is more important than allocation during the income phase. Look at using alternative income-producing assets to reduce pressure on assets and provide a more secure retirement income. 

 

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.”

Asset Allocation Retirement Income Annuities Social Security