Eric Henderson (Credit: Nationwide) Eric Henderson (Credit: Nationwide)

Many retirement savers know they should have a mix of different types of stocks and bonds in their investment portfolios, not just a big block of stock in XYZ Current Tech Sizzler Inc.

Some savers have a vague idea that they should look at their investment assets together with other assets and resources, such as their homes, their life insurance policies, and their ability to earn a paycheck.

Nationwide Financial is trying to draw savers’ attention to another type of diversification: tax rule diversification.

The company is working to spread the idea that savers should consider having different parts of their financial assets come under different types of tax rules, to reduce the odds that changes in one state or federal rule, or set of rules, will wipe out their retirement income.

Resources

  • A link to the Nationwide retirement income tax survey is available here.
  • An article about Insured Retirement Institute ideas for putting the yolk back in the nest eggs is available here.

Eric Henderson, president of Nationwide’s Nationwide Annuity unit, talked about tax rule diversification Tuesday, in an interview.

Even if the current tax environment is friendly toward a saver’s assets now, “what are the chances it’s going to look the same in 10 or 20 years?” Henderson asked.

Henderson said that the uncertainty about tax rules may be even greater this year, given all of the uncertainty surrounding the COVID-19 crisis, and the nature of presidential and congressional election politics.

“There’s always a difference between the two major parties,” Henderson said.

But, this year, he said, “it seems like the difference is widening some.”

Nationwide has supported the retirement income tax awareness campaign by having a think affiliate, the Nationwide Retirement Institute, commission an online survey. The survey took place from April 18 through May 7. The participants were 1,301 adults ages 50 and older. All participants currently collect or plan to collect Social Security benefits, have at least $150,000 in investable assets, and are either currently retired or plan to retire within the next 10 years.

Here are five things to know about what Henderson and Nationwide are seeing in connection with annuity prospects and taxes, based on the interview and the survey results

1. The COVID-19 crisis has not sparked an immediate raid on individual annuities.

Henderson personally has direct interactions with Nationwide’s individual life and annuity operations. At this point, he said, he has not seen any noticeable increases in surrenders or withdrawals.

He speculated that this may be partly because many people are sitting on the sidelines and thinking about what to do next.

2. Many near retirees are hungry for information about retirement tax planning.

The survey team found, for example, that 77% of the near retirees who participated in the survey want to know how taxes on Social Security will affect post-retirement income, and 58% want to know about how taxes will affect annuity income.

The effect of taxes on life insurance is the least popular topic the survey team tested, and 50% of the near retirees wanted to know more about that.

3. A significant minority of high-asset survey participants have little understanding of how U.S. income taxes work.

The survey team broke participants into three categories: $150,000 to $499,999 in investable assets; $500,000 to $999,999 in investable assets; and $1 million or more in investable assets.

About 18% of all of those participants think, incorrectly, that the United States already has a flat income tax system.

Higher-asset participants were more likely to get that basic question correct, but 10% of the participants in the $1 million-and-over category got the question wrong.

Similarly, 20% of all participants, and $12% of the highest-asset participants, did not understand that Social Security benefits can be taxed.

4. About 20% of the near retirees are not getting much, or any, outside help with understanding retirement planning tax considerations.

About 14% of the near retirees said they do not get information about that topic.

Another 6% depend on sources such as online research, personal research, the employer’s human resources department, or general reading materials.

About 50% have a financial advisor.

Just 31% have a tax accountant.

5. Near retirees actually care more about health care costs, health insurance and long-term care planning than taxes.

About 59% rate taxes as a top retirement planning return.

That ranks ahead of topics such as budgeting, emergency savings and Social Security.

But tax planning comes in fourth on the concern list.

The percentages of near retirees citing something as a top concern are 66% for health insurance, 70% for long-term care, and 76% for health care costs.

This is something financial professionals who are not tax professionals can talk to clients about.

Henderson noted that financial professionals work at all kinds of different firms and have all different kinds of knowledge about taxes.

Just about all licensed insurance agents who work with annuities can talk, generally, about how the rules work, and about the characteristics of different products, Henderson said.

Henderson said financial professionals can turn to insurance carriers’ advanced sales teams for answers to more complicated questions, and they can encourage clients to talk to their own tax advisors.

Other sources of advice could include financial professionals’ own tax and compliance advisors, marketing organization team support teams, and the IRS and state tax agency websites.

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