Category: Retirement - PFwise.com

Hit the Road to Retirement With Confidence

6/30/2020

With the powerful life insurance options that are available today, you can do much more than provide a death benefit to your loved ones.

An index universal life insurance (IUL) policy can help provide tax-free income over time allowing you to withdraw cash value or borrow against the policy for any reason.

Watch the “Road to Retirement” video below to understand how the modern day life insurance can be an important destination on your retirement journey – providing an extra source of cash while you are living.

Can I Still Have an IRA If I Don't Qualify for Tax-deductible Contribution?

6/28/2020

Q. I don't qualify for tax-deductible contributions, can I still have an IRA?

A. If you're covered by a retirement savings plan at work - like a 401(k) or 403(b) - and your modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.

But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA.

If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

How Can I Estimate My Tax Liability on an IRA Conversion?

6/27/2020

To figure out how much of a conversion from a traditional IRA to a Roth IRA may be taxable, you'll need to know the types of contributions you made to any one of your traditional IRAs (not just the one that's being converted). There are 2 types of contributions.

Deductible contributions. These are contributions that are deducted from your taxable income for the tax year in which the contributions were made.
Nondeductible contributions. Any contribution for which you do not take a tax deduction is known as a nondeductible contribution. Such contributions create what is sometimes called "basis" in your traditional IRA.

Your tax liability is based on 2 things:

the taxable income generated by the conversion, and
your applicable tax rate.

Estimating the taxable income from a conversion is straightforward if you've never made nondeductible contributions to any traditional IRA. If that is the case, whatever amount you convert will all be taxable income.

Note that earnings are always taxable when converted, whether they come from deductible or nondeductible contributions, so for purposes of figuring out taxes on a conversion, you can think of your balances as falling into just 2 categories:

nondeductible contributions, and
everything else

According to IRS rules, you cannot cherry-pick and convert just nondeductible contributions, leaving deductible contributions and earnings in the account, in order to avoid taxes. Instead, you must figure out the proportion of your total traditional IRA balances that is composed of nondeductible contributions, then use that percentage to find out how much of your conversion will not be taxable. Note that inherited IRAs are excluded in this calculation.

Keep state taxes in mind too. A Roth IRA conversion is a taxable event. If your state has an income tax, the conversion will generally be treated as taxable income by your state as well as by the federal government.

If your spouse has IRAs with mostly nondeductible contributions and you have IRAs with mostly deductible contributions, you might consider converting your spouse's IRAs before yours to reduce the potential tax impact of conversion.

How to Use Beneficiary Protection Plans to Protect Your Legacy

6/22/2020

You have a nonqualified deferred annuity policy, your goal is to control distributions to beneficiaries without expense of a trust. How to do it? You can use the beneficiary form to restrict beneficiaries' spending of their inheritances.

In fact, you have several options, including:
1. Full restriction

Life annuity
Life annuity with period certain
Period certain

2. Partial restriction (determined by percentage or dollar amount)

How to Use Annuities in Trusts to Create a Legacy and Save Taxes

6/21/2020

Irrevocable non-grantor trust is taxed at trust rates, see table below.

Benefits of Non-grantor irrevocable trusts –

Credit shelter trusts
Revocable living trusts upon death of the grantor

A case study
Ann Weston has two children

Jon – son of Ann’s second husband, Robert, and his first wife
Julie – daughter of Ann and her first husband
Wish to leave a legacy for their two children
Upon Robert’s death, trust was funded with $6M

Trustees discusses benefits of using a nonqualified deferred annuity.

What are the benefits?

Avoids higher trust income taxes until distributed
Avoids 3.8% net investment income tax, if applicable

How does it work?

Trustee buys nonqualified annuity contract to benefit trust beneficiary
Trust is owner and beneficiary of annuity
Trustee names annuitant

There are two options to consider.

Option 1. Purchase one nonqualified deferred annuity for $1M with Ann as the annuitant

Trust purchases one $1M annuity
50% of death benefit distributed and taxed to Jon at Ann's death
50% of death benefit distributed and taxed to Julie at Ann's death

Option 2. Purchase two nonqualified deferred annuities for $500K each

Jon named as annuitant on one
Julie named as annuitant on the other
Trust purchases two $500K annuities
Jon and Julie each is named as the annuitant of one annuity contract
Trustee distributes annuity contract to Jon and Julie respectively at Ann's death - no taxation

How to Use Nonqualified Stretch to Stretch Out An Annuity's Tax and Income

6/20/2020

Upon death of owner of Non-Qualified (NQ) deferred annuity, there are potentially four options –

Lump-sum payment
Annuitization
Five-year deferral
NQ stretch

Lump sum election –

Distribution of contract value: $248,000
$110,000 gain*: ($25,505)
Net after-tax benefit: $222,495

* Part taxed at 22% and the balance at 24%.

Five-year deferral –

Entire amount must be distributed before the fifth anniversary of date of owner’s death
Partial withdrawals or a full withdrawal permitted

NQ stretch –

Distributions taken over life or a period not longer than their life expectancy
Distributions must be taken at least annually
First distribution must begin within one year of owner’s death
No regulations under Section 72(s) • Only private letter rulings

PLR 200303016 – outlined three methods for satisfying requirements: 1) RMD calculation method 2) Amortization calculation method 3) Annuitization method
PLR 201330016 – permitted a non-spousal beneficiary to do a 1035 exchange of one inherited NQ deferred annuity for another one

How to Leave a Legacy? A Case Study

6/18/2020

How is legacy defined? There are two definitions:

Money or property left to a person by someone who has died
Something that is a result of events in the past

Life insurance can combine these two legacy definitions and make sure your plan is complete. But if leaving an IRA was part of the plan, the SECURE Act changed the ability of some beneficiaries to stretch the money in the account over their lifetime.

If your legacy plan involved a “stretch IRA”, it’s a good idea to do a beneficiary review and see how you might be affected by the SECURE Act.

Here is a case study about how to leave a legacy.

IRS Proposes New Rules for Retirement and Annuity Payments

6/17/2020

The Internal Revenue Service and the Treasury Department issued proposed regulations recently to update the income tax withholding rules for periodic retirement and annuity payments made after Dec. 31, 2020.

Before Congress passed the Tax Cuts and Jobs Act in late 2017, if no withholding certificate was in effect for a taxpayer’s periodic retirement and annuity payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions.

The TCJA changed that rule so the rate of withholding on periodic payments when no withholding certificate is in effect would instead be determined under rules prescribed by the Treasury.

Earlier this year, in Notice 2020-3, the IRS said that, for 2020 the default rate of withholding on periodic payments will continue to be based on treating the taxpayer as a married individual claiming three withholding allowances when no withholding certificate is in effect. But now, under the proposed regulation issued Wednesday for 2021 and future years, the Treasury and the IRS will be providing the rules and procedures for determining the default rate of withholding on periodic payments when a taxpayer has no withholding certificate in effect in applicable forms, instructions, publications and other guidance.

The Treasury and the IRS have issued several sets of regulations over the years going back to at least 1982 to provide guidance regarding withholding on periodic payments, non-periodic distributions and eligible rollover distributions under section 3405 of the Tax Code. This appears to be the latest iteration, and probably not the last as most of the individual tax provisions of the TCJA are set to expire in 2025.

6 Factors to Consider Before Taking a Lump-Sum Buyout Offer

5/10/2020

Q. What factors should I consider to evaluate a lump-sum pension buyout offer?

A. Here are 6 factors you should consider a lump-sum buyout offer:

Term of the buyout: you need to understand not only the amount of the lump sum, but also the amount of pension payments that would be forfeited. Although tempting, the lump sum amount may be less than the total of lifetime pension payments.
Employer's financial stability: although pension payments up to a certain amount are guaranteed by the PBGC, the PBGC's financial problems may make it risky to count on that insurance.
Interest rates: lump sums are calculated by taking into account interest rates. The lower the interest rate at the time of the buyout offer, the higher the lump sum.
Longevity: lump sums are calculated by considering life expectancy. A healthy person should consider retaining pension payments, while someone with medical issues should consider taking the lump sum.
Financial habits: if you are a spendthrift person, you are probably better off passing up a buyout offer. If you invest responsibly, you could take a lump sum.
IRA rollovers: pension payments cannot be rolled over to an IRA, but lump sums can be rolled over. IRAs require RMDs, but otherwise allow flexibility for withdrawals.

The "Bucket Strategy" For Retirement Portfolio May Not Be Positive

5/10/2020

Q. Does "bucket strategy" help retirees better deal with market volatilities?

A. First, what is the "bucket strategy"? It is a popular approach for financial advisors managing volatility for retired clients, where several years’ worth of cash is held in a side “bucket” to provide both a liquid reserve to tap for spending (without needing to withdraw from portfolios while they’re down) and a psychological buffer against the volatility.

However, despite their ongoing popularity, Tomlinson in Bucket Strategy - Challenging Previous Research notes that the actual academic research for bucketing strategies is not so positive. In fact, studies have long suggested that bucketing strategies don’t actually enhance the performance of portfolios in the aggregate during a bear market, and can actually result in less retirement spending simply due to the long-term drag of the cash itself.

A recent such study by Javier Estrada similarly found that bucket strategies didn’t necessarily help mitigate retirement plan failures (especially for those whose spending rates were reasonable in the first place), and instead was more damaging due to the drag of cash returns instead. In a follow-up analysis by Tomlinson himself, another version of rules-based bucket strategies (where withdrawals are taken from cash if stock returns are negative, and from stocks if their returns are positive, using excess returns if available to replenish the cash bucket) was tested looking in particular at the historically-challenging 1966 retiree and again found that bucket strategies performed worse than simple static balanced portfolios. Notably, in wider tests of the data – both internationally using Estrada’s data, and on a Monte Carlo basis with Tomlinson’s analysis – bucket strategies often at least performed ‘similarly’ to static allocations of balanced portfolios.

The bottom line - the results suggest that at best, bucket strategies produce ‘similar’ returns to simply holding balanced portfolios and that their value is only psychological (in the client comfort of having the cash reserves available), but that in practice bucket strategies may represent a scenario where clients are accepting the psychological benefits at a cost of what will actually be lower long-term retirement spending.

AIG Long-Term Care Infographic

5/9/2020

Why you should consider using life insurance with living benefits riders to plan for long term care in your retirement? The infographic below from AIG shows you the reasons.

How to Use Life Insurance to Protect From Retirement Risks?

5/5/2020

Retirees are concerned about market losses and health expenses associated with aging. They want assurances, such as financial flexibility for the years ahead and protection for their loved ones. That's what Sagicor's WealthCare Indexed Single Premium Universal Life Insurance is designed for.

Now more people across the nation can have a solution to help meet their changing needs — no matter what the future may bring.

Lifetime guaranteed financial protection
Cash value and death benefit growth opportunities with a choice of interest crediting strategies
Protection from market losses
A penalty-free return of premium
Chronic and terminal illness protection

How to Calculate the Benefits of Chronic Illness Benefits

5/4/2020

While Boomer may currently want to pass wealth to their children, grandchildren, or a favorite charity, their lives could change. Because their retirement has the potential last for 20 or more years, within that timeframe they could encounter an unexpected health event or a financial emergency and need access to cash.

That's why chronic illness benefits are important! Below is a document from Sagicor that explains this benefit well.

How to Use Life Insurance As a Financial Tool To Lower Taxes

4/30/2020

As you prepare for retirement, you’re probably concerned about protecting the value of your assets, retiring comfortably and leaving a legacy for your family. Many people think preparing for retirement involves saving as much money as possible and investing it wisely by diversifying. However, in addition to diversifying investments, smart retirement savers also consider how taxes will affect their retirement dollars.

Below is a brochure from Securian to shows you how to use life insurance policy as a financial tool to plan your retirement.

9 things to know about the COVID-19 stimulus bills - Part C

4/15/2020

We discussed 6 major reliefs here, now the last 3 below.

7. Federal student loan payments, interest waived
On March 13, the president announced that interest would be waived on federal student loans. Legislation codifying that order is retroactive to March 13. Learn more at Studentaid.govOpens in a new window.

The CARES Act suspends payments on federal student loans for 6 months. The act waives any interest on the loans for 6 months as well.

The missed months of payments will be recorded as if the borrower had made a payment for the purposes of loan forgiveness programs.

The act makes emergency financial aid available to some students, up to the amount of the maximum Federal Pell Grant for the year.

Federal work-study payments can be made to qualifying students who have been unable to complete their work under the program due to COVID-19.

Students who are forced to withdraw from school due to the outbreak may have the portion of their loan covering that semester canceled. Requirements to return portions of grants or loan assistance will be waived for students who had to withdraw from school as well.

A provision in the CARES Act provides an income tax exclusion for individuals who get student loan repayment assistance from their employer for a limited period of time.

At the K–12 level, states may apply to waive certain federal education requirements for this school year.

8. More funding available for health care and expanded coverage
Testing for COVID-19 must be covered by private health insurance without cost sharing. Any vaccines for COVID-19 must be covered as well without cost sharing.

The CARES Act provides funding for health care providers and suppliers, including extra Medicare payments to hospitals to cover COVID-19 treatment and extra funding to community health centers.

The act expands coverage of telehealth services under Medicare. It also allows high-deductible health plans with health savings accounts (HSAs) to cover telehealth services even if patients have not met their annual deductible.

For health savings accounts, health flexible spending accounts, and health reimbursement arrangements, the act includes over-the-counter (OTC) medicines (without a prescription) and feminine products as qualifying medical expenses that can be reimbursed by these accounts.

9. Above-the-line deduction for charitable contributions
The CARES Act allows for a $300 above-the-line deduction for cash charitable contributions made to 501(c)(3) organizations for taxpayers who take the standard deduction.

The act also relaxes the limit on charitable contributions for itemizers—increasing the amount that can be deducted from 60% of adjusted gross income to 100% of gross income.

These changes go into effect beginning in the 2020 tax year.

Both of these provisions explicitly exclude enhanced deductions for contributions to 509(a)(3) charitable organizations (commonly known as sponsoring organizations) or donor advised funds.

9 things to know about the COVID-19 stimulus bills - Part B

4/14/2020

We shared the first 3 reliefs in last blogpost, now more below.

4. Paid sick and family leave available for more workers
Paid leave is required for more employees by the Families First Coronavirus Response Act. These provisions apply to businesses of 500 employees or less. Businesses with 50 employees or less may be exempt from the paid leave provisions.

Eligible employees must be allowed up to 2 weeks (or 80 hours) of paid sick time:

At their regular rate of pay if the employee is unable to work due to quarantine or experiencing COVID-19 symptoms and seeking a medical diagnosis.
Or, at two-thirds their regular rate of pay to care for someone who is ill or to take care of a child whose school has been closed as a result of COVID-19.

The CARES Act caps these payments at $200 or $511 per day or an aggregate payment of $2,000 or $5,110, depending on the reason for leave.

Family leave was expanded under the Families First Coronavirus Response Act. Affected employees are entitled to up to 10 additional weeks of leave with job protection to recover from illness, at two-thirds their regular rate of pay, or to care for school-age children whose school has been closed.

The CARES Act capped family leave payments at $200 per day and $10,000 in aggregate.

For more information, visit DOL.govOpens in a new window.

5. Unemployment insurance has been expanded
The Families First Coronavirus Response Act provides up to $1 billion in aid to the unemployment insurance system.
The CARES Act also expands unemployment insurance. Under the provisions in the bill, more people will qualify for benefits and the amounts of weekly benefits will be increased.

6. Tax credits for the self-employed may be available
The Families First Coronavirus Response Act includes help for people who are self-employed. It includes a tax credit for sick leave and family leave of up to $200 a day or 67% of average daily pay.

It also allows for up to $500 a day for emergency paid sick leave for quarantine or testing for COVID-19, or 100% of average daily pay.

Keep reading here for the last 3 major reliefs.

9 things to know about the COVID-19 stimulus bills - Part A

4/13/2020

1. Deadlines have changed
The deadline for filing and payment of 2019 federal income taxes has been moved from April 15 to July 15, 2020, by the Internal Revenue Service (IRS).

The IRS confirmed that July 15, 2020, will also be the deadline to make 2019 contributions to IRAs and health savings accounts (HSAs). Deadlines associated with contributions to workplace savings plans are not affected.

2. Direct payments to many Americans
The CARES Act includes a provision to send most Americans direct payments of $1,200, or $2,400 for joint filers, plus $500 for each child.

The amount of the payments will be reduced for those with higher incomes. For individuals filing taxes as singles, the reduced amount begins at an adjusted gross income (AGI) of $75,000 per year and is completely phased out at $99,000. For joint filers, the reduced amount begins at $150,000 and payment is eliminated at $198,000.

Your AGI will be determined by your 2019 tax filing (or 2018, if 2019 is unavailable).

3. Some retirement account rules have been relaxed
The CARES Act offers some help to those with retirement accounts.

Required minimum distributions (RMDs) for 2020 are suspended for certain defined contribution plans and IRAs, including 401(k), 403(b), and governmental 457(b) plans as well as SEP IRAs, SIMPLE IRAs, and traditional IRAs. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.

Certain beneficiaries taking distributions from inherited IRAs may also skip the 2020 distribution when calculating their 5-year distribution period.

Affected, eligible participants in workplace retirement plans and IRA owners can take an aggregate distribution in 2020 of up to $100,000 from all retirement accounts without incurring the usual 10% early withdrawal penalty. The affected participant or IRA owner (including a spouse or dependent) would need to either be diagnosed with SARS-COV-2 or COVID-19 or experiencing adverse financial consequences as a result of an event, including but not limited to quarantine, furlough, lay-offs, reduced work hours, no available childcare, business closing or reduced business hours (self-employed), or other factors determined by the Secretary of the Treasury.

In addition, the income tax on the distributions may be spread evenly over 3 years. Or, the distribution may be repaid to an eligible retirement plan within a 3-year period.

Loan repayments for affected participants in workplace retirement plans may be delayed for one year. These changes will be in effect through 2020.

Note that your plan may offer other withdrawal options.

Keep reading here for other reliefs.

What Are the Changes in RMDs and Retirement Contributions in $2T Stimulus Plan?

4/12/2020

Below are the highlights of the most recent tax changes found in the $2 trillion coronavirus relief bill:

Extended deadline for 2019 IRA contributions
RMDs Waived for 2020
What it means for 2019 RMDs not yet taken?
IRA Beneficiaries subject to the 5-year rule
Can you undo RMDs already taken?
Additional relief provisions for retirement accounts

If you are interested in more details of the above highlights, this Financial-Planning.com article is a good read.

The Swiss Army Knife Approach to Retirement

3/25/2020

If you’re like most people, you want financial security. This means having protection from future uncertainty and the flexibility to make changes to your financial plan. And because you’re likely to spend 20 or more years in retirement, you probably want a smart way to potentially increase your savings to help pay for health-related expenses not paid for by Medicare.

Sagicor's WealthCare can help you feel confident about your future
By adding a WealthCare policy to your retirement portfolio, you’ll have the advantages and financial flexibility you’re looking for in one efficient solution. So, you can focus on enjoying your retirement because you have the following flexibility and benefits -

Why Life Insurance Trusts Are Better For Multi-generational Planning

3/24/2020

Q. Why life insurance trusts are better for multi-generational planning?

A. This is because the new Secure Act!

Consider this scenario
Someone is leaving a $1 million IRA to a conduit IRA trust for his grandchildren.

Under the old stretch IRA rules, if the trust qualified as a see-through trust, RMDs could be based on the age of the oldest grandchildren, say, 19-year old. RMDs would be paid to the trust and from the trust right through to the grandchildren over 64 years (the life expectancy of a 19-year old), leaving the bulk of the inherited IRA funds protected in trust for decades.

Meanwhile, the grandchildren receive only about 1.6% to 2% of the account for the first 14 years, with the percentage increasing very slightly each year. That percentage of IRA funds being released to the grandchildren would stay under 10% for 50 years. Those smaller RMDs would keep tax bills lower for many years and keep balance of the nondistributed trust funds protected.

Why it won't work anymore
But not anymore! Under the new Secure Act, if the plan stays as is, all the funds will be released to the grandchildren and taxed by the end of the 10th year after death. Even if a discretionary trust was used to keep more funds protected, the entire inherited IRA balance would still have to be paid out to the trust by the end of 10 years - and taxed at trust rates for any funds retained in the trust for continued protection.

That's why the person with $1 million IRA could instead withdraw the IRA funds over time using today's low tax rates and use them to buy a life insurance policy. Due to the life insurance leverage, the payout after death can far exceed the $1 million balance in the IRA, depending on the person's health and age.

The caveat?
In order for the new life insurance strategy works, the person has to qualify for life insurance.

5 Ways the SECURE Act Could Harm Retirees

3/14/2020

1. Less Wealth Passed to Heirs (and More Taxes Being Paid)
In the past, most beneficiaries could stretch out the RMDs of inherited IRAs and 401(k)s over their own life expectancy. This allowed inherited IRAs and 401(k)s to grow tax advantaged for heirs for many years. Additionally, RMDs were relatively small, since they were based off of their longer life expectancy.

Now, these non-spouse beneficiaries must cash out the entire IRA within 10 years. Because the withdrawals will be larger, they will likely force beneficiaries to pay higher tax rates on taxable distributions, and because the time period is limited, the opportunity for tax-deferred growth is also being shortened.

2. Confusion Leading to Possible Missed RMDs (and Penalties)

If you were born before July 1, 1948, you were already taking RMDs, and that continues unchanged going forward.
If you were born on July 1, 1948, through June 30, 1949, you turned 70.5 in 2019. Your first RMD is due by April 1, 2020. Your second one is due by Dec. 31, 2020. And then you continue to take RMDs by the end of each year going forward.
If you were born on July 1, 1949, or later, your first RMD is due by April 1 of the year after which you turn 72. Your second would be due by Dec. 31 of that same year, and then by Dec. 31 of each year thereafter.

3. Conduit or Pass-Through Trust RMD Failure (and a Big Tax Bill If Not Corrected)
In the past, many IRA and 401(k) owners have been encouraged to use conduit or “pass-through” trusts as beneficiaries of their retirement accounts to help qualify for the “stretch” provisions and provide creditor protections for their heirs. However, many of these trusts only gave access to the RMDs each year to the beneficiary of the trust.

With the new 10-year distribution period for many beneficiaries, there is actually no RMD for year one after the year of death of the account owner. In fact, the way the SECURE Act was drafted, the only year that has an RMD is year 10, as the act states all money must be distributed by the end of year 10 after the year of death of the IRA owner.

This means the trust provisions that were drafted prior to the SECURE Act could lock up money for heirs for up to a decade and then cause a full taxable distribution in one tax year for the full retirement account. This has potential for disaster, so trusts need to be reviewed as a consequence of the SECURE Act.

4. More Money Leaking Out of Retirement Accounts
A positive provision was added to the SECURE Act that allows those under the age of 59.5 to take out up to $5,000 from their IRA or 401(k) to cover costs within a year associated with childbirth or adoption and avoid the 10% penalty tax for early withdrawals. If both parents have their own retirement accounts, they could each withdraw $5,000, for a total of $10,000, without a penalty. Of course, they’d have to pay taxes on the money, though.

One issue with these types of additional access points, in regards to retirement money, is that they can encourage leakage — money leaving retirement plans and being used for other needs, instead of retirement.

5. Improper Annuity Ownership in Retirement Plans
A new rule in the SECURE Act lessened the standard of care and review that a retirement plan sponsor must use to vet insurance products going into the plan. As such, there will be a large push to add more annuities into 401(k)s. The reality is, more Americans need access to lifetime income options inside of their retirement plans. Because investment advice and help with financial planning in a 401(k) can be hard to receive, many investors are on their own when picking investment allocations within their employer retirement plans.

By adding more annuities into retirement plans, younger investors who do not yet need to be invested in an annuity might end up with large percentages of their wealth in this strategy. The reality is that annuities can add value, but they will not be the right investment option for all participants … and without quality guidance, education and advice, individuals could have improper ownership and investments in these assets.

9 Actions to Take When You Are 12 Months Before Retirement

3/11/2020

1. Review your retirement assets and expenses
You need to develop a truly comprehensive budget to be sure you understand what fixed expenses you are going to face in retirement, what your assets are, and how inflation may impact that budget.

Compiling such data should take a minimum of six months to give spending patterns time to emerge and to ensure any bills that get paid quarterly get factored into the budget. This will give you a chance to see trends, like how much you spend on dinners and vacations per year.

As you budget plan for the long haul, consider, too, which bills may disappear over the next five years, including perhaps your car loan or monthly mortgage. But also project for healthcare expenses, which tend to increase as you age.

Indeed, many retirees underestimate the cost of future medical expenses. The latest figures from Fidelity Benefits Consulting estimate that a 65-year old retiring today with traditional Medicare insurance coverage will need an average of $280,000 (in today’s dollars) to cover medical expenses throughout retirement, not including any costs associated with assisted living or long-term care.

2. Analyze your income stream
Once you’ve calculated your future expenses, determine how much money you will have coming in from guaranteed sources of income, such as Social Security and any pensions, annuities, or trusts.

Find out, too, whether those income streams include cost of living increases. If not, your future purchasing power may be far less than you bargained for.

The difference between your expenses and guaranteed income is the amount of money you will need to generate from your personal savings, IRAs, 401(k)s, and other investments to make ends meet.

A 4 percent withdrawal rate, adjusted annually for inflation, is often advised, as it may allow you to leave your principal untouched and minimize the likelihood you will deplete your savings, but rules of thumb don’t always apply. The ideal withdrawal rate for you will depend on your living expenses, the amount you have saved, and your portfolio’s annual rate of return.

If you can’t generate enough from your personal savings and investments to cover your bills, you face some tough decisions. You can potentially downsize to reduce your living expenses, assume more risk to chase higher investment returns, or simply work a few years longer to supplement your savings.

Remember, if you are age 50 or older by the end of the calendar year, you can potentially supercharge your savings by making additional catch-up contributions to your 401(k), 457 or 403(b) retirement plan.

Depending on the circumstances, some of these calculations get complicated. Some people opt to consult a financial professional to help determine an appropriate savings rate and withdrawal rate.

3. Stress-test your retirement budget
Before you bid farewell to the boss, it is also important to give your budget a test drive.

Try living off your projected income for a period of several months to make sure it meets your needs. Don’t forget that in the first decade of retirement, you are likely to spend more money than you did during your working years as free time allows for more travel, dining out, and spoiling the grandkids.

Your entertainment expenses may drop during the last decade of retirement, but your healthcare costs will likely rise.

4. Pay down your debt
If your budget looks tight, you may be in the position to lower your expenses by paying down some of your debt, such as your car loan or high interest credit card bills, before you retire. Indeed, minimizing debt is an important strategy when you move to a fixed income.

Don’t fret if you still have a mortgage. Unlike their parents’ generation, many retirees today still carry a mortgage. Some even “upsize” to nicer digs. Just be sure your income stream can support your future payments.

That said, it may make sense to refinance your mortgage loan to lower your monthly expenses if you can still secure a lower rate than you currently pay. Those who intend to renovate or relocate in the near-term may also wish to close on their new loan before they stop receiving a paycheck, as borrowing money in retirement can be more challenging,

5. Plan for healthcare costs
If you plan to retire before you are eligible for Medicare, the federal government’s health insurance program for those age 65 and older (and some younger people with disabilities), you’ll need to factor in the cost of private health insurance for the gap years until you are Medicare eligible.

Some employers allow retirees to continue on their plan at a much better rate (than you’d find on the private market), but for other companies, that’s not an option. You need to be sure you have a bridge.

Once you are Medicare-eligible, you’ll need to decide whether it makes sense to purchase a supplemental policy to cover some of the costs traditional Medicare doesn’t pay for, including copays and deductibles.

6. Strategize Social Security benefits
Nearly half of Americans aged 50 years or over failed a Social Security quiz in a nationwide MassMutual survey. That can be concerning because not knowing Social Security essentials could result in fewer benefits.

For instance, the age at which you begin taking Social Security benefits can have profound implications on your future income stream.

Those who claim benefits at the earliest opportunity, for example, which is age 62 for current retirees, get a reduced benefit for life, which may make sense if you do not expect to reach the average life expectancy due to family history or poor health.

By waiting until your full retirement age, however, which ranges from age 65 to 67 depending on the year you were born, you can increase your monthly benefits to the full amount to which you are entitled, as determined by your earnings record.
You can maximize your monthly benefit further still by delaying Social Security until age 70 — at which point the benefit of postponing any longer disappears. If your full retirement age is 66, for example, you would receive 132 percent of your monthly benefit by waiting until age 70.2

7. Consider longevity insurance
As you enter retirement, you may also potentially help insulate yourself from the threat of outliving your retirement savings by purchasing longevity insurance, or an annuity contract designed to pay a guaranteed income for life once the policyholder reaches a certain age.

If you buy an annuity in your mid— to late—70s, that’s when these products can offer a lot of value because you’re pooling mortality risk. If you live to 100, you get the resources of others you outlived, so it protects against longevity.

To that end, it may also make sense to purchase a deferred annuity when you retire that delivers an income stream at some point in the future – whatever age you select. That creates a much simpler financial problem. If you have an annuity that kicks in at age 85, now you only need to survive on your savings from now to then. An annuity allows you to hedge longevity risk.

8. Have an emergency fund
If you haven’t done so already, now is also the time to set up an emergency fund worth at least six months of living expenses in a liquid, interest-bearing account.

Why? A “cash stash” can help cover the bills when the market takes a tumble, minimizing the likelihood that you’ll have to liquidate a portion of your equity (stock) investments in a down market to generate income.

The other benefit of an emergency fund? A cash cushion may grant you the flexibility to keep a larger portion of your portfolio in growth-oriented investments, which could also help mitigate longevity risk.

You need some money in a ‘growth bucket,’ which is designed to add additional income for a few more years into your 70s, you can use the ‘Rule of 100.’ - “Take 100 and subtract your age. That’s the total amount of money a retirees could have at risk in a growth position.

9. Watch the Tax Man
When it comes to retirement, timing is everything. The last paycheck you collect is likely to be the biggest you’ve ever received. It may include unpaid vacation days, bonuses, and proceeds from stock options.

Picking the right retirement date is important. If you work the entire year and get that last check-in December, your entire salary could be subject to a higher tax bracket. It can pay big dividends to retire early into the new year so you’d be in a lower marginal tax bracket versus towards the end of the calendar year.

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part B

3/8/2020

In our last blogpost, we showed the first couple how they use term life and stuck in their current tax bracket.

Couple 2: Has tax-sensitive distribution strategy

The second married couple has the ability to design a tax-sensitive distribution strategy because they are using permanent life insurance to protect their family and their wealth.

Just like the previous couple, their desired income is $100,000 and their required income is $78,950. However, they have the flexibility to take out $21,050 from any of the three financial toolboxes.

This year, they decide they want to be as tax-efficient as possible and will take dollars from a tax-advantaged toolbox to fill their income gap.

Net worth: Includes assets from all three financial tools: capital assets, retirement income and tax-advantaged

Achieving desired income

The taxpayers with a tax-sensitive distribution strategy desire to be as tax-efficient as possible.

Desired income of $100,000 Sources of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with income from a tax-advantaged asset (cash value life insurance)

Taxes for tax-sensitive couple

This couple will pay taxes in the first two tax brackets only. Their total taxes due will be $9,086, and their effective tax rate is 9.1 percent.

Results

In this case, the second couple has a tax savings of $4,631 and a decrease in the effective tax rate of 4.6 percent compared to the other couple:

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part A

3/7/2020

This is a case study, we have two couples, each couple puts away the same amount for retirement, but they allocate assets differently among the tools. Some contributions were made to qualified plans.

Couple 1: Stuck in their tax bracket

The first couple chooses to protect their family’s dreams, aspirations and accumulated wealth with term life insurance until it runs out. They focus solely on capital assets and retirement income assets to fund their retirement.

Desired income: $100,000

Required income: $78,950; required income includes income clients are obligated to receive due to automatic payments, like pensions, or tax law (e.g., Required Minimum Distributions – RMDs, starting at age 70½)

Retirement income gap: $21,050; which will be filled using their capital asset or retirement income toolbox

Net worth: Includes only capital assets (e.g., investments and real estate) and retirement income assets, or qualified assets

Achieving desired income: The taxpayers stuck in their tax bracket decide to take dollars out of their retirement income toolbox to cover their income gap.

Desired income of $100,000 Source of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with only retirement income assets (taxed at ordinary income rates)

Taxes for “stuck” married couple: This couple will pay taxes on the first two tax brackets and some ($21,050) in the 22 percent brackets. Their total taxes due will be $13,717 and effective tax rate is 13.7 percent.

In our next blogpost, we will look at the second couple that uses permanent life insurance smartly.

The Power of Zero - Fixed Indexed Annuity From Lincoln National

3/4/2020

As you approach retirement, you want to protect your savings from market losses.

A Lincoln fixed indexed annuity offers the potential for growth beyond that of a traditional fixed annuity, since the indexed accounts have earnings tied to the performance of an outside index. When the index increases over the indexed term, the account will be credited with earnings determined by that account’s crediting method.

But what happens if the index performs poorly and has a negative return?

The “power of zero” gives the client protection – the indexed account will never decrease due to negative performance…the lowest return is 0%.

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IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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