Will You Outlive Your Retirement Nest Egg?
Negative market performance over the last few years has impacted the way people look at retirement planning. Significant loss of retirement funds created a common dilemma: will you have enough to live on during retirement? If this is a concern for you or any of your loved ones, ask yourself: Is there a way to create a guaranteed stream of income that cannot be outlived? Is there a way to enjoy tax deferred accumulation on my retirement assets? The answer is yes!
What is an FIA?
An FIA is a Fixed Indexed Annuity. Many people shudder when they hear the word “annuity” and immediately think: “Oh no, I’ve heard about those annuities and I know how terrible they are!” The reality is that many people are confused as to what an FIA is and what they can do for you and your family. An FIA is a tax deferred opportunity to enjoy all of the upsides of the market without the risks associated with market volatility. It is essentially an insurance contract designed to capture market gains while deflecting market losses. With an FIA, your money is protected from unexpected downturns in the market.
FIAs were introduced in 1995 but have become increasingly popular due to their inherent safety. They are a great vehicle for retirement asset accumulation because they cannot lose money due to market volatility and they can have potentially higher interest crediting when the markets are “up.” FIAs are intended to be long term, but they also generate long term benefits with a guaranteed minimum rate of return. Suitable candidates for FIAs will generally include individuals who are reluctant to invest directly in the markets but would like opportunities for market based returns.
“FIAs are intended to be long term, but they also generate long term benefits with a guaranteed minimum rate of return.”
Is an FIA Right For Everyone?
The answer is no. An FIA may not be the right choice for everybody and there are several FIAs available today to choose from. Determining whether an FIA is right for your own retirement planning needs will depend on your personal circumstances and retirement goals. If you would like to learn more about FIAs and the potential benefits, your retirement distribution planning specialist can assist you today!
FIA Basic Benefits:
- Guaranteed Stream of Income That You Cannot Outlive
- No Loss of Principal
- Lock in Gains
- Tax Advantaged Accumulation
- Crediting Options Allow You to Choose a Crediting Strategy Each Year
- Fixed Indexed Annuities are investments.
- The only annuity that is an “investment” is a variable annuity. Variable Annuities are securities subject to SEC regulations. FIAs are safe insurance products subject to regulation by the insurance commissioners in each of the 50 states.
- The value proposition of an FIA is sharing in the upside of stocks with no downside.
- The value proposition of an FIA is allowing the purchaser to have very limited participation in the market’s upside, while avoiding the downside risks associated with the market.
Preparing For Taxation During Retirement
Many retirees are surprised by the amount of taxes they pay. They once believed the myth that taxes decline in retirement. The truth is, without some planning, taxes can stay the same or even increase during retirement. Tax breaks specifically applicable to seniors are rare these days. Tax traps and a retirement tax ambush are much more likely. There was a time when income tax rates actually did decrease in retirement. When income tax rates were higher and there was a heavily graduated tax system, there were thirteen tax brackets. Many people received less income during retirement than during their working years so it did not take much of a drop in income to push a retiree into a lower bracket. Now, there are relatively few tax brackets and one would need to have a significant drop in income to drop into a lower tax bracket.
Do you believe your taxes will be higher in the future? If so, you may want to consider converting your Traditional IRA (or other qualified plan) into a Roth IRA. Once you have reached the age of 70½, the Required Minimum Distributions (RMDs) that you are required to take from an IRA are fully taxed as ordinary income. By converting to a Roth today and paying the taxes upon conversion now, you may be able to enjoy tax free distributions. Also, Roth IRA owners are not subject to RMD rules! It is important to emphasize that a Roth conversion is not for everyone. It is essential that you make an informed decision. So before converting, you may want to contact your retirement distribution specialist for an analysis of the benefits of doing a Roth conversion on your IRA. The analysis will show the differences between Roth and Traditional IRA growth and distributions in both a numeric and graph format.
Social Security Benefits and COLAs
Cost of living adjustments (COLAs) are designed to help retirees keep up with inflation. When COLAs are applied to the higher benefit available at age 70, the breakeven age gets younger. The longer a retiree lives, the higher the lifetime benefit will be due to theimpact of COLAs on the higher starting amount.
Social Security benefits were once exempt from income taxes. In 1981, the National Commission on Social Security Reform first introduced a tax on Social Security benefits of “upper income” recipients if the taxpayer’s income exceeded a threshold amount of $25,000 for an individual and $32,000 for a married couple filing jointly. This tax was first levied in 1984. It’s not surprising that a survey of retirees between ages 70½ and 75 with a net worth of at least $1,000,000 found taxes were the largest expense by a wide margin. In this particular survey, taxes in fact took about 4% of net worth each year – not 4% of annual income, but 4% of net worth was eroded by taxes each year!
Simple Mistakes Can Cost Beneficiaries Everything
Beneficiary designation forms are an often overlooked area of estate planning that can have dire consequences if not taken care of. For example, divorce is already an unpleasant event but imagine that your ex-spouse gets the proceeds of your life insurance policy and/or retirement accounts because you forgot to update your beneficiary designation forms. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, Kari Kennedy was the administrator of her father’s estate and tried to recover $402,000 that was paid to her father’s ex-spouse. As part of the divorce agreement, the soon to be ex-wife had given up her rights to Mr. Kennedy’s pension and other work-related benefits.
However, Mr. Kennedy failed to remove his ex-wife as the beneficiary of his investment plan assets and replace it with Kari’s name. Following his death, the funds went to his ex-spouse, not Kari as he had intended.
The case made it all the way to the Supreme Court but, unfortunately, Kari was not deemed the beneficiary because, under ERISA, the beneficiary designation form trumps a divorce decree. The Court made it clear that a former spouse can give up the right to retirement benefits as part of a divorce decree but the specific terms of an ERISA governed plan ultimately control what happens to the plan assets.
This is an extreme case but it illustrates the dire consequence of failing to review and update beneficiary designation forms whenever a life changing event occurs such as death, divorce, marriage or birth. A beneficiary review is an important part of your financial review process that your advisor can help guide you through.
Prepare to Minimize Your Income Tax Liability
Consider estimating your federal and state income tax liabilities periodically to ensure proper withholding levels and quarterly estimated tax payments. This will prove especially important if you sell significant assets during the year or experience large swings in your income level. Also, consider maximizing your deductible expenses and savings such as qualified retirement plans, charitable giving, deductible expenses, etc. Be careful to meet all IRS dates and deadlines for withholdings and filings.
It is a good idea to review your life insurance policies and obtain an in-force illustration on those policies. If you have assets that are hard to value and are not terribly liquid, you should consider life insurance. If set up correctly, the life insurance proceeds may be free of income and estate taxes for your loved ones. The proceeds may be used to pay any debts of the estate and taxes on the estate, which will prevent any hard to value assets and retirement funds from being liquidated to pay the taxes.
“If set up correctly, the life insurance proceeds may be free of income and estate taxes for your loved ones.”
Review Your Estate Plan This Year
Is your Will up to date? Does it reflect your personal wishes for the distribution of your assets? Since not all assets pass through a Will, have you reviewed your beneficiary designation forms lately? Have the personal or financial circumstances of your beneficiaries significantly changed over the past year? Have you considered a gifting program to move assets from your estate to those you wish to enrich? Have you reviewed your estate plan in light of changing estate tax laws or changes in your personal financial position? It’s important to regularly meet with your financial consultant to review these items, and make sure your estate plan is up-to date.