Transitioning Live On Assets To Leave On Assets Producers can provide a valuable service to their clients
By Dan Munroe and David Bruckman
Every successful producer knows that simplicity is paramount when explaining concepts to clients. Even in the complex world of financial planning, one might divide assets into those that clients use to “live on” and those that clients plan to “leave on.”
Producers who understand how to maximize the value of “live on” assets can create “leave on” assets, thus providing a valuable service to their clients and economic rewards to themselves.
What Your Peers Are Reading
To that end, producers might do well to recommend a single premium immediate annuity (SPIA) and a life insurance policy. While no technique is perfect, the combination of the SPIA and life insurance may provide a superior option to relying on required minimum distributions (RMDs) from an IRA.
A Hypothetical Client
The client profile of this sales concept has a moderate net worth and is concerned about outliving her money. Like many of her peers, she is in good health, active, and hopes to live a long and productive life.
The client’s assets may be subject to estate taxes. In addition to an unencumbered home, most of her money is in a rollover IRA. The client is 75 years old, has an IRA valued at $500,000, and is in a combined federal and state 37% tax bracket. Assume further that she has two grown children, both of whom are her sole beneficiaries.
The client’s primary concern is to maintain her lifestyle. While other nonqualified assets support her lifestyle, she wants distributions from her IRA to generate at least $35,000 (after tax) until she is 100 years of age.
She also wishes to ensure that, upon her death, a $500,000 estate will be left for her heirs. And she desires to have a guaranteed annual income of at least $18,000 for discretionary spending.
Producers may approach the client with three options:
Option 1 Withdraw RMDs Only
If the client chooses to only take her RMDs each year until death, she will be disappointed with the results. Assuming a rate of return of 5%, her RMDs will never reach a net (after-tax) amount of $35,000.
Assuming death occurs at age 95, her heirs would inherit the IRA, but its balance would only total $309,941. This amount is subject to income tax and possible estate tax.
This approach is advantageous in that the client knows the entire IRA can be used immediately. However, she doesn?t know the amount her heirs will receive. Indeed, the only certainty is that her heirs will not receive the full $500,000.
Option 2 Level Distributions Approach
Under this approach, the client recognizes that the RMDs do not supply the needed immediate cash flow. She therefore opts to take a higher distribution each year from the IRA.
Assuming the same 5% annual growth, the IRA could yield $32,526 (pre-tax) each year for 30 years until the client is 105. The client would receive more money each year during the first 11 years than if she took the RMDs.
However, the amount is still considerably less than the $35,000 after-tax (or $55,500 pre-tax) amount she desires. If she wants to take annual distributions of the $35,000, she greatly increases the chance of outliving the IRA money.