Managing Retirement Income And IRA Assets For Baby Boomers

One of the most popular advanced marketing topics is financial planning for baby boomers. Many commentators write about this topic and justifiably so. The baby boomers will begin reaching age 65 in 2011. A substantial market opportunity exists in helping baby boomer clients manage retirement income, and plan for retirement distribution and ultimate wealth transfer.

When it comes to retirement planning, many employers, financial planners, insurance agents and stockbrokers place an emphasis on the first half of the retirement income process: accumulation. That is, the process of saving enough to meet retirement needs. They focus on how much one needs to put away, and in what types of investment vehicles, in order to accomplish retirement income objectives. This approach, by itself, is shortsighted and hazardous for clients.

The key for financial advisors and insurance professionals today is to provide guidance that will synergistically combine both the accumulation and distribution phases of retirement income.

In helping clients make decisions about retirement income and distribution planning, the financial professional must, as always, identify the needs of the client and offer solutions for client problems.

Baby boomers have two major issues that impact planning for them: income planning and qualified plan asset management.

Income Planning. First, baby boomers will rely more on personal savings to establish streams of income for retirement purposes. The most fundamental first step in what we now call retirement income and distribution planning is determining whether the client has enough money to sustain his or her lifestyle.

With the decline in defined benefit and pension plans, contributions in personal investments and defined contribution plans have increased significantly. This trend is expected to continue into the future. These investments will become sources of retirement income for the majority of clients, and they also will be looking for assistance in determining ways to maximize their income and minimize the associated taxes.

One of the most valuable tools that can help accomplish this is the annuity, especially the immediate annuity. Clients need to know that there are two types of immediate annuities that may help them manage their incomethe fixed immediate annuity and the variable immediate annuity.

A fixed immediate annuity provides payments that remain the same regardless of market conditions, interest rates or the condition of the national economy. Therefore, immediate fixed annuities do not provide a hedge against inflation.

An immediate variable annuity, or IVA, produces a stream of lifetime income, or income for a designated period of years, from a single purchase payment. Depending on the income option chosen by your client, income payments may last as long as the client lives, no matter how long that might be. Since the single purchase payment may be invested in variable investment options, your clients income has the potential to outpace inflation.

For many years, annuitization was shunned by financial professionals because of the perceived loss of control over the assets. Some modern immediate annuity products, recognizing the needs of the baby boomers, are structured to allow some access and, therefore, allow for control over part of the principal. Such annuities may provide a key building block in managing retirement income.

Of course, other income management techniques exist. Managing different buckets of money with different time horizons is a long-standing technique. Such techniques may complement an immediate annuity.

Extended IRA Planning. The second major issue for baby boomers is the growth of their qualified plan portfoliosthis holds true even with the recent declines in the market. Many clients, especially high-net-worth clients, will be facing the issue of managing the distribution of their assets. This is especially true with respect to IRAs.

One popular wealth management technique is the extended IRA technique. This takes advantage of IRA distribution rules, which allow distribution of IRA proceeds over an individuals life expectancy.

The extended IRA can be an excellent estate planning tool. For example, Mr. Smith may have an IRA, but may not need the income and wishes to pass it to his son in a tax-efficient manner. Smith would take the minimum distribution required by law and preserve the maximum amount allowable to transfer to his son. Assuming Smith dies at age 73 when the IRAs value is $500,000, and his son is age 40, the first distribution will be required at his sons age 41.

Given a certain set of assumptions, if the son implements the extended IRA strategy and receives only minimum required distributions, the gross value of IRA payments over his life expectancy (until age 82) may exceed $4,000,000.

This is the case if we assume no distributions were taken from the IRA to pay estate taxes, and a flat growth rate of 8% is earned in the IRA.

Wealth Transfer. By helping baby boomer clients understand and manage their retirement income and IRA assets, financial professionals may help their baby boomer clients transition successfully into traditional estate planning using life insurance.

Clients who do not need IRA assets or other assets in their portfolios may choose to use those assets as sources of money for gifting programs to irrevocable life insurance trusts. Of course, the death benefit from the life insurance policy owned by the irrevocable life insurance trust is both income and estate tax-free. This provides the liquidity for the beneficiary to pay estate taxes due after the owner dies.

A retirement distribution strategy will be just as important to the baby boomers as the accumulation strategy. Financial advisors should focus on the value of annuities and life insurance in managing retirement income and transferring baby boom wealth.

A process of establishing a comfortable retirement income and plan for managing and transferring wealth, especially IRA assets, is and will continue to be an important part of a financial advisors business.

Brett W. Berg, JD, LLM, CLU, ChFC, is director of advanced sales for Nationwide Financial, Columbus, Ohio. He can be reached at bergb@nationwide.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.