Annuities

Take Advantage of Today’s Tax Laws


Annuities

Looks can be deceiving. Nowhere is that more true than in retirement planning. The client who drives a modest car, wears jeans and eats at Bob Evans ends up being the millionaire next door, while the flashy dresser with the fancy watch has a pile of debt and little to no nest egg to fall back on.  

 

Looks can also be deceiving when it comes to investments. All too often, clients get caught up in seeking the highest rate of return they can find in an investment. Unfortunately, many don’t always walk away with the best net return because of what’s hidden underneath: taxes and fees.  

 

Just like a fancy watch, those attractive, high interest rates do not tell the whole story. Within many typical, non-annuity-type investments, there are certain pieces of drag embedded in the total return. 

  • There are sales charges with the purchase or redemption of the asset
  • There may be annual fees for overall investment and planning 
  • Perhaps the most harmful are capital gains and ordinary income taxes – those can cost clients more than a third of return on an annual basis

 

So the initial high interest rate that enticed the client ends up being irrelevant after taxes and charges eat into it.    

 

Don’t Miss Out by Misunderstanding

Like I said, sometimes you will find the modest, jeans-wearing client ends up having the highest net worth. In the same vein, annuities are plain and simple but offer surprisingly essential benefits. One of the strongest reasons to position part of a portfolio with annuities is to take advantage of the tax-deferred growth. During the accumulation phase, the asset grows without the drag of either capital gain or ordinary income tax. 

 

Now, some will argue that the deferral creates a larger tax bill at distribution. But, that’s only true if you completely liquidate the annuity. If the goal is to live off the annuity with just interest and systematic withdrawals during retirement, you will have created a much larger nest egg during accumulation rather than paying taxes annually. After all, “It’s not what you earn – it’s what you keep,” and annuities are instrumental in helping the client do just that.

 

Build a Bridge

Additionally, the low interest rate and favorable tax treatment of annuities creates a unique planning opportunity to help maximize Social Security benefits. By bridging early income at age 62 with a non-qualified single premium immediate annuity (SPIA) rather than starting Social Security, as much as 96 percent of the client’s income is tax-free. This bridge allows the client to minimize tax drag on their income and wait to maximize their Social Security benefits at age 70.  

 

The difference in Social Security income at age 62 versus age 70 might be as high as a 50 percent. That increase might translate to more travel, more time with family, or a larger cushion for necessities like medication. More importantly, this strategy affords the client to have more of their money linked to income that keeps pace with inflation. And, inflation might be the cruelest tax of all. 

 

Today, the average younger baby boomer (aged 50-59) has only saved $130,1001, so it’s critical to create as much asset value as possible in the future. Tax laws are always changing – in fact, there have been 31 changes in U.S. tax rates in the 34 years between 1979 and 2013.2 So you have to take advantage of what's available now. It’s important to help your clients remove their “interest rate blinders” and see the many benefits of annuities – benefits they might miss on first glance. 

 

Winning Strategy

Many people do not realize the powerful tax advantages of annuities. Plan how you can help your clients seize the opportunity of the current tax laws governing annuities. The disparity between annuities and other investments may not last long.  

 

Learn More

1LIMRA, “Fact Book on Retirement Income 2016”: https://www.limra.com/bookstore/item_details.aspx?sku=23518-001

 

2Tax Policy Center, Statistics: http://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-household

 

 

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 Taxes Tax Efficiency Financial Planning

The 4 Key Advantages of HECMs in Income Planning


Annuities

I spend a lot of time on the road. Not just for my job, but also because my wife and I both have families who live within four hours driving distance of my house. Making sure everyone’s favorite Uncle Mike makes it to the latest family event requires some flexibility. On many of those long drives through Indiana, I have found the GPS route that delivers me to my destination changes from one day to the next. Because of traffic, weather or construction, I end up taking alternate routes on roads I’m not familiar with. But sometimes the alternate route is best.

 

Helping clients navigate the ever-changing retirement income market means you have to be innovative. Maybe you’ve never heard of using Home Equity Conversion Mortgages (HECMs) as part of an income planning strategy. But, with almost $31 trillion dollars of unused housing wealth available right now, it’s time to talk to clients about this alternative vehicle.  

 

There are unique advantages to using housing wealth as part of the income planning process. This tool does not work in every situation, but it can provide added income and flexibility for many clients. Here are some key advantages:

 

  • Income from HECMs is received tax-free. I talk a lot about the importance of what you keep verses what you earn. The use of tax-free income can be beneficial in many ways. First, it reduces combined income for Social Security taxation, which can provide relief for many middle Americans. With means testing on Medicare, a slight reduction under a tax threshold can create as much as a $1,800 difference in medical premiums. Paying attention to client incomes and potential thresholds will become an important planning criteria as health care becomes more difficult to predict. 

 

  • HECM lines of credit grow annually. If set up properly, a HECM credit line grows between 4 percent and 6 percent annually under current interest rate environments. If you qualify for a $200,000 credit line at age 62, it will grow to more than $525,000 at age 82. That pool of money is available for any purpose, at any time, with no taxation, regardless of the value of the home. Because the newer HECM products are non-recourse loans, the client does not risk losing their home if the local real estate market doesn’t grow accordingly.  

 

 

  • HECM for Purchase strategies can allow retirees to move to a more appropriate home without increasing their mortgage payments. One of the most neglected client conversations is the discussion around where they will live in retirement. With longevity increasing, many of our clients will not want to live in the same multi-story home where they raised their kids. At the same time, they are not willing to add more expense to an already compressed income after their working years. So, a HECM for Purchase allows a new home to be purchased without a traditional amortization schedule. 

 

 

As our clients age and navigate multiple longevity-related issues, it’s important to maintain flexibility in their plans. Home Equity Conversion Mortgages can provide liquidity when they need it most. And, these tools can take pressure off existing assets under management during the income distribution phase.  

 

Winning Strategy

There’s more than one path to a successful retirement plan. Look at alternatives to relieve pressure from assets under management – tools like HECMs can provide flexibility and put your clients in suitable housing. You can help your clients be in the driver’s seat as they retire and face longevity risks. 

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the e-Book Here!

 

*The American College RICP® Retirement Income Literacy Survey, September 2014, p. 88: http://retirement.theamericancollege.edu/sites/retirement/files/Retirement_Income_Literacy_Survey_Full_Report_0.pdf 

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.”

HECM Retirement Housing Wealth

Why Now is the Time to Talk About Pension Risk Transfers


Annuities

When it comes to corporate decisions, tax considerations are always in play. Given the current and potential tax laws, now is a good time to talk to your corporate clients about taking their pension obligations off the table. Aside from the tax impact, there are several good reasons, to have the conversation with your clients. 

 

Pension plans continue to lose their status in retirement planning for a lot of small to mid-size corporations. While defined benefit plans can make sense for a lot of single-employer plans, they largely are not helping recruit talent for many businesses in America. Small pension contributions don’t seem to entice younger workers or recent college graduates as much as profit sharing or stock option incentives. That’s because the value of guaranteed income is lost on many of workers younger than 45 years old. 

 

The cost of administering a defined plan continues to escalate as well. Even for fully funded plans, the cost of Pension Benefit Guaranty Corporation (PBGC) premiums will increase 25 percent by 2019.1  So, even if your corporate client makes no changes in their plan, it will cost more to simply have the plan – even if it is not being offered to new employees. 

 

One solution could be a Pension Risk Transfer (PRT). A PRT gives a corporation multiple benefits:

  • Transfers the risk of longevity from the plan to an insurer
  • Eliminates future administration and shifts the service to a third party
  • Frees up existing corporate resources dedicated to the plan
  • Provides a potential current deduction to make plan assets whole
  • Guarantees the commitment made to employees is honored, without leveraging company cash flow

 

By transferring plan assets to an insurer, the corporation shifts many of its pension obligation risks. And, as many believe that tax reform might happen in the next 18-24 months, corporate assets can be used to bring plan obligations to 100 percent funding levels. In doing so, those contributions receive a tax deduction in today’s higher corporate tax brackets. 

 

For too long, corporations have ignored their defined benefit plan obligations. Now, we find that many employers have underfunded plans, which is putting many retirees’ guaranteed income plans at risk. With today’s tax rates, it’s a prime time to engage corporate clients in using stale and underperforming assets to complete the obligations that were made to so many current and past employees. 

 

Honor the Intent

When talking about pensions, it is rarely about interest rates or performance of the plan assets. Without a doubt, the valuation of the assets comes into play. But, in reality, executives want to honor the commitment they made to the employees that helped build the company. For decades, pensions have been the way to reward employees. Now, it’s time to make sure that actually happens. 

 

Tax rates, interest rate risk, and longevity risks all play into managing pension assets. Our tax policy favors contributing to plan assets now. There is considerable uncertainty in the world today, and the potential rise or fall of interest rates will affect bond values. Bonds continue to make up large portions of corporate pension plans, so our retirees are truly at risk.  

 

Even with plans that are wholly funded, the assumptions from two decades ago do not account for today’s longer life expectancies. We increase our life span by 2.5 years for every decade in America.2 Therefore, with a normal, 20-year retirement, pension plans really need to have 25 percent more assets than they do today. It’s time to pay attention to this retirement risk and make it an opportunity to help corporations meet the obligations they promised. 

 

Winning Strategy

Even with a fully funded pension plan, increased longevity has likely not been accounted for. With changes in tax policy and asset performance, transferring pension risk from a corporate balance sheet to an insurer makes perfect sense today. Take the chance to talk with employers about how they can benefit from PRT. 

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the Whitepaper Here!

 

1Society for Human Resource Management, “Study: Pension Plans Overpay PBGC Premiums by Millions,” April 12, 2017: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/pensions-overpay-pbgc-premiums.aspx

 

2Population Health Metrics, “Changes in Life Expectancy 1950–2010: Contributions from Age- and Disease-Specific Mortality in Selected Countries,” 2016: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4877984/

 

 

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.”

 

Pension Funds Pension Risk Transfer Retirement

Taking Control of Taxes in Retirement


Annuities

One of the definitions for control is “to hold in check.”  Another is, “to exercise restraint or direction over.” I think both are applicable when it comes to the goals of many retirement investors. No one wants to completely avoid their obligation to support our shared services, i.e., pay their share of taxes. However, everyone I talk to wants to reduce their portion or make sure the tax is used appropriately.  

 

Let me give you an example of control. As I drive to my in-laws with my wife, many times during the three-hour drive, our definition of comfortable is different. She tends to set the passenger side of the car much cooler than I like it. In our car, each vent allows the air flow to be reduced or completely shut off. The car’s fan continues to push air through, but, when blocked, the air gets pushed out of another vent – on the driver’s side. When the temperature gets too warm, the air flow can be opened again on the passenger side. The air flow has changed direction while being held in check on one side of the car. The vent (or, I suppose, my wife) has exercised control. 

 

Pulling the Levers

In retirement, tax control vehicles such as annuities allow investors to decide when and how they pay tax. The flexibility of annuities provides a mechanism to turn income on and off, and choose how to distribute the tax consequences associated with the income. Annuities can also provide a tool to distribute assets to the next generation or second generation, which can provide additional tax control. 

 

Having tax control in your retirement vehicles creates an important lever for income planning. Just like the vents in the car, investors can exercise control over their income and tax consequences. You can elect to turn on income when you need it and decide how much you need. Additionally, the manner that you accept the cash flow dictates how you pay tax. Distributions may be taxed as gain first or with an exclusion ratio. You may want to tax your distributions as gain first if you are in a lower tax bracket when you begin income. Otherwise, you may want to spread the tax consequences over the rest of your life. What’s important is that an annuity gives you choice and control.  

 

Looking at More Options

The stretch IRA (individual retirement arrangement) provision is now being challenged in Congress. IRA holders may only be able to stretch $450,000 to the next generation. Non-qualified annuities allow for multiple distribution options that include skipping generations. The beneficiary designations of annuities provide greater flexibility and control versus institutional IRAs. While those designations add no value in the accumulation phase, the tax control at death and during the income phase can add several basis points to the overall return of the annuity. There is additional value to tax control vehicles beyond the simple interest rate. 

 

Between “holding in check” and “exercising restraint and direction over,” controlling taxes remains an important part of the retirement income discussion. Make sure you have the appropriate control over income and taxes as you plan your clients’ strategy. Tax laws change often – in fact, there have been 31 changes in U.S. tax rates in the 34 years between 1979 and 2013.* So it’s important to create flexibility and control in the financial plan. 

 

Winning Strategy

Have tax control embedded in your financial plans. Choosing when and how you pay tax is an important discussion point for clients looking to retire. Tax deferral is important during the accumulation phase, but can add basis points to your income and distribution strategy at death. 

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the Whitepaper Here!

 

*Tax Policy Center, Statistics: http://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-household

 

 

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 Taxes Annuities

Quant-Run Wall Street: Why You Need to Pay Attention


Annuities

At the end of May, I read a Wall Street Journal article* about how many quants run Wall Street now. The article focused on bonus payments and regulation around algorithmic-driven trading. However, it made me think of the impact of the transformations on Wall Street. 

 

The impact of algorithmic-driven trading can be swift, steep and game-changing. As an advisor, you’ll need to adapt to the way Wall Street trades – even if you remain in the fixed, indexed and income annuity marketplace. Clients should have a balanced portfolio with guaranteed income, equities and bonds. But, equity trading is rapidly changing. With quants driving performance and trading, large blocks of business are likely to change hands quickly going forward.  

 

How does that affect you? A quant-driven Wall Street will likely see wider and steeper movements during corrections. In past corrections, investors have moved to conservative positions when they “see” the first signs of a downward correction. In the future, with algorithms dictating trades, it’s entirely possible to get caught in the tsunami of a correction and never “see” the signs like old times. 

 

You need to recognize that the markets are driven more by technology and formulas and less by emotions and human behavior. That means your clients, who still make decisions on emotions and behavior, will likely be left in the dust in market downturns. Your clients are at a disadvantage versus a quant.  

 

Winning Strategy

Be proactive. The lack of urgency in our economy troubles me. Talk to your clients about the changes on Wall Street how they will be affected – secondarily, not just by investments. Create urgency to protect their wealth that has increased over the last eight years, while remaining bullish on equities through an FIA.  

 

Learn More

The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.

Download the Whitepaper Here!

 

*Wall Street Journal, “The Quants Run Wall Street Now,” May 21, 2017: https://www.wsj.com/articles/the-quants-run-wall-street-now-1495389108 

  

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.”

Financial Planning Retirement Annuities