Interesting Articles

New York Times Story on Annuities Offers More Balanced Reporting

I recently forwarded a relative of mine a link to a July 13 NY Times article on annuities by Paul Sullivan in which I was quoted about an alternative to variable annuities – buy fixed annuities over time to accomplish that same goal, and have guaranteed income in retirement. So in that article I favored one type of annuity over another.
My relative thanked me for the article, and then told me that a pop-up ad from a well- known advisor had just appeared on his screen with the headline, “I Hate Annuities”. He asked me what I thought of the statement and the advisor. More

Part 2 – How to Optimize Your Spendable Income in Retirement

In Part 1, I mentioned that I was interviewed by Ed Tyll, on TalkRadioX.com and gave his audience a few simple ideas on how to maximize an investor’s after tax income in retirement.

One of these ideas is that wherever possible withdraw principal rather than interest. Withdrawal of principal is not taxed; interest is taxed at the highest rates. However, to accomplish that, there are two important conditions: avoid incurring any capital loss on the withdrawal of principal, and the interest earned has to be in a tax deferred account, such as a variable annuity. A no load variable annuity works best because of its lower fee structure.

I also mentioned that while certain income sources are potentially taxable, they can be offset by certain deductions, such as mortgage interest if you decide to continue carrying a mortgage into retirement.

You can use this idea as part of a broader strategy to create your own Plan for Retirement Income that takes into consideration all sources of income, and categorize these sources of income by tax attributes as follows:

• Full Tax
  • Social Security (as much as 85% can be taxable – see note below)
  • Rollover IRA distributions
  • Wages and deferred compensation payments
  • Pension plan income payments and distributions from 401(k) plans
  • Interest on corporate and U.S. Treasury Bonds, and personal savings accounts
• Reduced Tax
  • Variable and Fixed Payout Annuities ( portion of payments treated as return of principal are not taxable)
  • Dividends
  • Realized capital gains
• No Tax
  • Roth IRAs
  • Municipal bonds
  • Withdrawal of principal

Note: Nothing about Social Security taxation is simple – essentially, depending on the adjusted base amount for your filing status for that tax year’s total income, up to 85% of your Social Security benefits for that that year would be included when determining the total taxes due.

The key to an efficient Plan for Retirement Income is how one assembles these elements, based on an individual’s personal circumstances. As a conservative investor, my own plan produces an after tax yield of over 5%, and still, with an opportunity for growth of both income and capital.

You can learn more about low cost tax deferred savings and the Plan for Retirement Income methodology at Savings2Income.com

Part 1 – What a Planning Approach Can Do to Optimize Your Spendable Income in Retirement

Recently, I was interviewed by Ed Tyll, on TalkRadioX.com about a CNBC.com article that discussed ways to generate tax free retirement income.

One of the key interview points I made was that the over-riding issue should be maximizing a retiree’s after tax spendable income rather than simply minimizing taxes. Here is a comparison:

• Investor A with $1 million invested receives $30,000 in tax free interest that he can spend.
• Investor B with $1 million invested receives $50,000 in cash flow from a combination of investments, $20,000 of which is taxable, and pays $5,000 in taxes, leaving $45,000 to spend.

Which of these investors would you rather be?

The CNBC.com article focused purely on specific “product solutions”. While I’ve been known as a product guy, optimizing spendable income is best addressed through a planning approach which integrates product solutions to reflect individual circumstances. A product only approach addresses the problem too late; planning should start at least 10 years before retirement. And tax-driven solutions don’t address the characteristics of the income you get. For example, is that income stable? COLA-protected? And perhaps most important, will it last a lifetime?

Here’s the approach you should consider:

• Create a Plan for Retirement Income (Plan) that lasts over your entire lifetime and that of your spouse.
• Start the planning process by age 60 at the latest, or 10 years before you expects to drawdown from any Rollover IRA, or claim Social Security. This gives you the opportunity to take a number of critical steps:
  • Implement any Roth conversions under optimal tax circumstances
  • Move taxable account into tax deferred account, and add after-tax savings to those new accounts
  • Gradually reposition investment portfolio, e.g., move to higher dividend stocks
  • Purchase any life and/or long term care insurance, while younger and still healthy. At the same time, evaluate trading in existing life insurance or annuity contracts for ones that can deliver more income
• Focus on maximizing after tax income that is predictable – certainty of income could well be more important than any tax attributes.
• Minimize all fees. A 1% fee on a 5% retirement income yield reduces income by 20%: a 1% fee on a 10% compounding return reduces results by 10%.
• Decide whether to pay down principal on any mortgage or to increase investment in tax deferred accounts.

In Part 2 that will follow in a few days, I’ll provide specific ideas that you can start using immediately. Be sure to watch for it.