When we sit down with clients today, the most important thing to them is not how much they have accumulated, it is how much income all that they have accumulated can create for them. One of the biggest challenges our clients face is making sure they have enough money to last for a 30-year retirement and to keep up with the rising cost of all that they will need.
As our clients get closer to retirement, they tend to be less comfortable with volatility in their world and they tend to dislike paying taxes even more at retirement than they did when they were working because they are no longer earning income and feel like they have lost control when taxes go up and their income doesn’t.
They are also very concerned about the rising costs of health care at retirement and want to be sure they maximize social security benefits as they paid into the system for many years.
One of the things we have found to be true over the years is that it is as important to diversify how things are taxed at distribution as it is to diversify the mixture of the kinds of investments we have in our client’s portfolio. Most of our new clients are between 50 and 55 and we help them take steps to benefit from all the things our other clients who are further along than them wish they had known or that they wished they had done more of or less of.
We help our clients strategically position some of their retirement dollars into cash value life insurance because of the efficiency it creates later in terms of access to basis first at retirement, ie tax efficiency at distribution as other retirement assets like 401(k) accounts and pensions are fully taxable at distribution. We always make sure there is a need for the insurance itself in our thorough fact-finding and we also know that as an asset it becomes very relevant in their world.
The other thing that having cash value as an asset at retirement is that our clients appreciate the guarantees that it has and it allows them to perhaps be more equity oriented elsewhere and not have to draw down from their volatile assets in a down turn because they have something that is guaranteed to grow in a way that they don’t pay tax year by year on the interest that is credited.
Imagine two clients with exactly the same amount of money at retirement, let’s say $3 million. The first client has only equity investments and the second client has $2 million of equity investments in $1 million in cash value in a general portfolio product with a highly rated carrier.
The first client can see her asset base drastically reduced as withdrawals continue even during years when there are downturns in the market of say 20-30 percent. The client who has all her assets in the market has no choice but to sell in a downturn and in recent years even the bond portion in a balanced portfolio is highly volatile and our clients are best suited not to liquidate their positions in a downturn.
The second client knows that her cash value is guaranteed to grow in good markets and bad markets and can simply choose not to withdraw any money from her equity portfolio during a downturn and can magnify the value of what is withdrawn from her cash value because she enjoys basis first treatment of withdrawals. Now the picture becomes, assets in the equity portfolio remain there until things recover, access to basis first from the cash value means if we with draw say $100,000, it will feel more like $150,000 or so if it had been withdrawn from a taxable account like a 401(k) which is where most people’s retirement dollars tend to be concentrated. Our clients also like the fact that they are not compelled to take money out of their cash value at age 70 ½ as they are in the IRA and 401(k) world. They also like that the life insurance itself can become highly valuable as an estate planning tool once they have decided they no longer wish to withdraw from it.
As we think about the major risks our clients face at retirement, the risk of skyrocketing health care costs and longevity are significant. One of the things we have observed is that even the wealthiest clients who have a net worth of $25 million and up, like to “check the box” on extended care planning and have an insurance company pay them tax free benefits so that they can spend more freely from their other assets versus having to ear mark them to pay for care they hope they never need. To further enhance the tax efficiency of this strategy, most of our clients put a few hundred thousand dollars in a non qualified variable annuity so they can have a tax free mechanism with which to pay the premiums. Let’s imagine that a couple has a long-term care premium of $20,000 total. They can invest $500,000 in a variable annuity with a highly rated carrier and simply withdraw 4 percent each year ($20,000) to pay the long term care premiums and they can take advantage of a tax free 1035 exchange to fund the premium each year without tax.
This alleviates a big and important concern many people have and that is, I understand how I am going to pay the $20,000 long-term care premium during my working years, but how will I ever be able to pay it during my retirement years when I am not working. In order to make this strategy even more efficient, many of our clients will choose strategically, to invest money in the annuity and let it grow for a few years before using it to fund the policy. This helps them maximize their various resources while being tax efficient.
Another thing we find consistently is that our clients like to match fixed expenses with guaranteed income. In the old days, many people relied on pensions to accomplish this. Today, very few people have pensions and social security simply doesn’t provide enough income for most client’s in today’s world, particularly those that earned significant incomes while they were working. In addition to using cash value as a resource to create income at retirement, most of our clients also like having guaranteed income streams that flow in each month to cover their fixed costs so that they can choose to draw down less money from their other sources during a down turn.
For our team, we focus on helping our clients with retirement income distribution planning and the way we fit all the pieces together is having a full understanding of the client’s financial situation and incorporating all the tools and strategies mentioned above to help them have the best outcome possible which allows them to enjoy retirement and take comfort knowing they are well taken care of and that we are paying close attention and staying up to date as new ideas and strategies become available.