|Posted on August 6, 2014 at 5:55 PM|
7.95% CASH FLOW
In a world of 0% interest rates, with little relief in sight, it's tough sledding for retirees trying to live on interest earnings. Even if they are withdrawing money each month from a portfolio mix of stocks and bonds a period of protracted low interest rates is troublesome. What can they do?
One option is to create they own type of pension. Everyone likes guaranteed income right? Try messing with someone's Social Security. Try negotiating with a union to lower pension benefits. Guaranteed lifetime income is like gold to a retiree. But, even the Social Security Administration tells us that at current benefit levels they will only be able to pay 77 cents on the dollar beginning in 2033. For most people, they don't have a pension. They have a 401k which means you're on your own.
Many, many people today NEED income or at least more income than they are currently receiving. Banks aren't paying any interest. They don't have faith in the stock market. So what can they do? They can buy a Guaranteed Income Contract. This type of contract can be for their lifetime, joint lifetime, a period of years or a combination of each. The example of 7.95% Cash Flow is for a male age 70 with income payable for his lifetime. His exchange of $100,000 will guarantee him $7,955.40 each year for the rest of his life. A nice tax advantage to this type of income is only 18% of this income or $1,432.97 is taxable assuming his $100k is non-qualified money. If this retiree is in the 15% tax bracket then his annual tax bill is $214.79. That leaves him with $7,740.61 AFTER taxes.
Who issues these types of contracts? Multi-billion dollar corporations who have been in the business of issuing these contracts for a hundred years. Call or email me if you have someone that needs more guaranteed lifetime income.
THE VALUE OF MORTALITY CREDITS
What are mortality credits you ask? It's the fact that the older you are the more income you get. Using the 70 year old example of 7.95% cash flow or $7,955 of lifetime income in exchange for $100,000. However, someone age 75 would receive $9,469 per year for life of which only 12% is taxable or $1,136.
That leaves him with $9,300 AFTER taxes.
An other way to look at this type of financial arrangement is the longer you live the more you gain from Longevity Credits. You get paid for living longer by using other people's money. The main objection that I hear from advisors and clients to this type of financial arrangement is this. "If I die early then the company keeps the rest of my money." My answer is this. #1 Only if you have a need for more income should you enter into this type of contract. #2 For those who die early, the company uses the rest of your money to pay to those who live a very long time. #3 Only use money that is not otherwise needed for lump sum needs or legacy desires.
FINAL REGS ON LONGEVITY ANNUITIES
The IRS and Treasury have issued final regulations that offer some significant tax and planning opportunities. A Longevity Annuity is an income stream that begins years in the future. The person puts money into one of these contracts today for a guaranteed income that begins in the future. There isn't access to these funds prior to the starting date of the income. The new regulations have allowed IRA or 401k funds that have been put into a Longevity Annuity are NOT subject to Required Minimum Distributions (RMD's) during this deferral period. The maximum allowable amount is the lesser of 25% of their account balance or $125,000.
In order to encourage longevity planning the IRS has seen the value of setting money aside for old age income without requiring the owner to take out the RMD on this money. For example, someone retires at age 65, has a 401k worth $500,000. He/she can put $125,000 into a Longevity Annuity that will start paying a lifetime income at age 80. If the person dies prior to age 80 the beneficiary will receive the $125,000.
RICH vs. NEVER POOR
Do you want to be rich, or would you like to be absolutely certain that you will never be poor?
That's an interesting question. So far, everyone I've asked that question has said, "never poor." Why is that? How would you answer that question? How would all of your clients, family, friends, employees and co-workers answer that question? Ask them. Let me know your results.
Here's my take on why most everyone will answer, "never poor." Being rich, to most people, means having enough money to buy stuff you want, ke big houses, extra houses, expensive cars, lavish vacations, etc. Maybe to you rich means never having to work again. Well, how rich must you be to never work again? How can you be sure your richness will last as long as you do?
The reason most everyone will answer, "never poor", is because we all know rich can be temporary. Markets can drop, real estate value can crater, businesses can go out of business. These things can and do happen. Just look at what's happen the past 14 years. To me and probably most of you, never being poor means you have a steady stream of guaranteed lifetime income that is enough to pay your living expenses for as long as you live. Sure, we have Social Security but even the government tells us it's underfunded. If you have a pension you're lucky. Now, nearly all employees have a 401k which doesn't guarantee an income.
The good news is, with proper planning, you can put a strategy in place today that will assure (guarantee) that you'll never be poor. I have this strategy in place for Jackie and I. I've helped design many, many such strategies for clients and other advisors. I'm absolutely certain that my wife and I will never be poor. Are you certain you'll never be poor? Would you like to be? Let's get together. I'll show you exactly what I'm doing and how you too can be certain of never being poor.
THE VALUE OF INCOME
If you're on Social Security how much would it take, in a lump sum, to give up that income? Economist Michael Finke did a study that showed the average was $250,000, or an amount that would be appropriate if your expected longevity was over 130 years! The reason is that most everyone is unable to value a stream of income. The unwillingness to sell something for a fair price once we own it is known as the endowment effect. Once we own something we place a higher value on that thing than it's really worth.
Even though Social Security and pensions are both annuities, people love them. But, many people are reluctant to trade something they have (a lump sum of money) for something that's a lot more abstract like an income stream for life. It didn't surprise me when I read about a study that showed retirees with an annuitized income through a pension were significantly more satisfied than retirees with non-annuitized retirement assets.
The problem is most everyone who is faced with the option to turn their 401k into an annuitized income for life (i.e. the lump sum is gone) rejects it. But, the good news is there is a way to set up a lifetime income stream without giving up the lump sum. Once understood, people find great value to a guaranteed income stream while retaining control of their lump sum. Frequently, once someone really understands this financial strategy they ask, "How do they do that?" That's when I explain it's guaranteed in a contract and backed by a large, highly rated insurance company. No other financial product can do this. None!
OVERVALUING LUMP SUMS
In my opinion, most people tent to overvalue the lump sum they've been fortunate enough to accumulate. For example, let's use someone age 65 is looking to retire. Assume he has $1,000,000 and begins taking an inflation-adjusted $45,000 annually from his stock and bond portfolio. According to Financial Research Corp. He has a 25% chance of running out of money before age 92. I don't know about you, but a 25% chance of going broke at age 92 isn't what I'd consider safe. Would you? Would you board an airplane if you were told there was a 25% chance of crashing? Didn't think so. However, if he gets the same income by investing $400,000 into an income annuity and withdrawing the rest from $600,000 invested in stocks and bonds (both inflation-adjusted), the chance of running out of money drops to 6%.
There have been two bear markets in the 2000's. With the stock market again at an all-time high, it's worth re-examining the value of living off lump sums. The right type of lifetime income product can be your Longevity Risk Hedge. It can be your insurance of outliving your money. We insure all of the potential big financial losses. Why not insure your retirement income? Use income products that are offered by insurance companies.
There are a few other things to take into consideration when managing a large lump sum as you age into retirement. I've observed all of these things. As you get older you are less sharp mentally. It's a slow process for most but it will happen to all of us. You are susceptible to using sizable withdrawals to buy things and/or give away money, primarily to family. It's nice to give, but if this money is for lifetime income you're increasing the risk of running out of money. You could "get stupid" for a moment. It happens. You do something costly that you realize too late to undo. You have a stroke and are not the same person you were before. Your financial advisor retires and leaves you with someone who is not as client focused as you'd like. The stock market tanks soon after you start taking withdrawals and if nothing is changed you have a high probability of running out of money.
YOU'RE IN CONTROL OF YOUR RETIREMENT
You're in control, not your broker, advisor or agent. It's your responsibility to have a financially secure retirement. The resources and advice are available today to put yourself on a plan to do just that. All someone like me can do is make recommendations. You have to decide. Whether you go with equities or guarantees you are in control. Just be sure you know the risks. Get a second or even a third opinion. Ask questions. Familiarize yourself with the plans offered. Know the basics of what you're choosing, then watch it and review it periodically.