Today, as before, the silent generation is still saving money, said John R. Mueller, CLU, MSFS, principal of John R Mueller Insurance, Brookfield, Wis., chartered financial consultants. They are in their 70s and 80s, and they are saving their money for their children and grandchildren.
“They are still a group of proud hard-working folks, secretive and independent. They don’t want their children to know everything–how and what they are doing. Nor be a burden to their children.”
A specialist in qualified plans and retirement planning, he spoke in a breakout session here at the annual meeting of Million Dollar Round Table in June. His goal, he said, was to offer ideas to advisors on how to open up a discussion with seniors–”not to scare them, rather to educate them”–and to introduce them to fixed guaranteed tax-deferred annuities, which he described as “a nest of dollars they do not want at risk.”
“Work is still the mantra of this generation. They shovel their own walks, cut their own lawns, and are proud of their homes. They are a generation that will drop off forms or a check at your office to save you the postage cost. They still make homemade bread and cookies for their neighbors. They take their savings passbook to the bank to make sure everything is added up correctly.
“Despite the computer and cell phone age we live in, they would rather visit one on one with someone–someone to educate them as to what they should do with their hard-earned savings,” Mueller said.
A sole practitioner for 30 years, Mueller said he has built his practice by focusing on qualified plans for small businesses and retirement planning for people ages 55 and up–assisting them, he said, with their “money in motion” decisions on where to invest their “safe” money.
If financial professionals learn to appreciate and listen to the stories this generation has to tell, the members “will trust us to educate them,” he said.
What do these seniors want and what are they worried about? A good fact-finding meeting with a senior, focused on suitability, is a good place to start, Mueller said. “Find out what they want for their money. Most seniors will tell you that they want their money to be safe, a good rate of return, and access to the money if needed.”
As for concerns, they worry about their health, legal issues, family, taxes they have to pay and their investments, he continued, noting that he gives particular focus to the worries about taxes and investments.
“I ask them: where do you invest your safe money?” he noted.
For many, he said, the majority of the safe money is in taxable bank certificates of deposit or in savings passbook accounts. “Seniors love to look at their bank account balances,” he explained.
“I confirm with them that it is important to have some safe money in the bank, but how much is enough?” he said.
“I ask them, ‘do you need interest income to live on, or are you simply renewing your CDs at the bank because it’s easy, or is it because of a seemingly favorable short-term advertised bank rate? Have you ever considered whether it makes good income tax sense to continue this?”
“They reply, ‘What do you mean, John?’”
Typically, he continued, their knowledge of the benefits of tax deferral is limited.
So he said he shows a chart of tax-equivalent yields, saying “here you can find your tax bracket based upon your current taxable income, whether single or married.”
He shows an example of clients with a taxable family income of over $65,100, who will be in a 25% federal and 6% state income tax bracket. “I ask, ‘What is the taxable interest rate you are earning at the bank on your CDs? In your 25% bracket, are you earning 5.8%? Are you earning a better taxable rate than a tax-deferred rate? This table compares those yields.’”
That discussion opens the door, he said, to say, ‘Let me show you why many of my senior clients find a fixed guaranteed tax-deferred annuity to be a very appealing place to invest some of their safe money.”
Then he said he recounts how the fixed annuity can help build wealth. First, he said, “The money is safe because there is no stock or bond market investment risk; it pays a guaranteed interest rate for the period of time selected, so they know exactly what they are earning.
Second, he said he notes that the client will receive double tax deferral and triple compounding. With double tax deferral, he explained, “the client doesn’t pay federal income tax or state income tax on the earnings while the money is growing.”
With a tax deferred annuity, the client will not receive a 1099 form for interest earned each year, he continued, pointing out how this differs from taxable CDs and money market accounts. “Ask your clients, ‘Did your estimated quarterly tax payments go up last year? Did you have to report more of your Social Security as taxable income?’ If the answers are yes, these are signals tax deferral should be considered.”
As for triple compounding of earnings, he said he points out that this occurs on money originally invested, on tax dollars that would have been paid but now aren’t, and on the previous years’ interest earnings. This allows faster growth on money with income tax efficiency, he added.
“Growing money in an annuity is like building a snowman when you were a kid: you pack a snowball and start rolling; it gets bigger and bigger.”
Here are some other advantages that he points out about fixed guaranteed tax-deferred annuities:
o There are no annual fees to pay.
o The client has access to the money if needed. “Most fixed guaranteed tax-deferred annuities permit withdrawals of money, but like a CD, there can be early withdrawal penalties,” Mueller said. “Remember, money is growing tax deferred; it’s not designed to be an ‘in and out account.’”
Annuities do allow liquidity, without penalty, he added. This liquidity may be available for one or more of these reasons: diagnosis of a terminal illness, confinement to a nursing facility, death of the owner, lump sum of up to 10% or 15% of annuity value per year for any reason, systematic withdrawals within a 10%-15% free corridor, interest earnings normally available after 30 days, unlimited withdrawals after the end of the surrender charge years, and upon lifetime annuitization.
o The insurance carrier will return the client’s money without penalty if the client is confined to a nursing facility.
o Annuities can avoid probate. This is important, said Mueller. “Ask your client, ‘how many of your friends have told you about the hassles of going through probate?’ When you die, if you have a named beneficiary such as a spouse, your children, or a relative, they will receive their inheritance directly from the annuity carrier without going through probate.” Avoiding probate means confidentiality, he noted, and the older generation is very conscientious about privacy–”They don’t want their neighbors to be able to access information about their finances.”
o Annuities can be creditor and Medicaid proof.
o Annuities use tax-favored exclusion ratios for the lifetime income payouts. Again, this is the case in Canada as well. This means part of your income is a return of your cost basis, and therefore not taxable. This often provides a higher tax-efficient stream of income.
o Annuities are the client’s private business, between the client and his/her spouse, children or grandchildren, said Mueller. “The client is in control and needs no approval from anyone on how to structure the annuity payouts to whom, when, how much. They can even control their money from their grave.”
o The surviving spouse can continue the ownership when the first owner/spouse dies, he added. The surviving spouse steps into the shoes of the deceased owner, and can continue the tax deferral or make claim for a payout of benefits, he explained.