Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Make Sustainable Income a Cornerstone of Your Portfolio Beginning at 45

A common theme I hear when I talk to retirees is “I wish I would have started saving sooner for retirement.”

There’s an underlying feeling of guilt that’s expressed each time this statement is uttered. The implication is that the individual had the ability to save more for retirement but chose not to do so.

While it’s ultimately the responsibility of each of us to make sure that we have sufficient funds to pay for our needs for the duration of retirement, it’s extremely difficult, if not impossible in many cases, to achieve this goal without proper guidance. Saving for retirement requires a totally different mindset than saving for any other financial goal.

It’s All about Income Replacement

Most financial goals require planning for the availability of a lump sum at a future date that will either be spent (a) one time, e.g., a down payment on a house or (b) over a specified number of years, e.g., college education. Retirement, on the other hand, typically requires you to replace one source of income, i.e., salary, or draw in the case of self-employed individuals, with multiple sources of income. Furthermore, the replacement income sources must be sustainable for the duration of retirement which is unknown.

You need to use the right tools for the job at hand if you want to achieve a successful result. Retirement is no exception. Given the fact that sustainable income is the name of the game, it makes sense that investments that are allocated for retirement are designed to provide you with a targeted amount of after-tax income that will meet your needs after other sources of sustainable income, e.g., Social Security, are taken into consideration.

Timing is Key

Fixed income annuities are well-suited for this purpose since they’re designed to provide sustainable income for the duration of retirement. Deferred fixed income annuities, including fixed index annuities (FIAs) with income riders and deferred income annuities (DIAs) make the most sense due to the fact that they require the least amount of funds to generate future known income amounts compared to other types of investments.

Even though FIAs with income riders and DIAs allow you to minimize initial and ongoing investment amounts compared to other types of investments, the potential length of retirement requires you to start early if you want to generate enough income to meet your needs.

You simply can’t begin saving a relatively small portion of your salary ten years before you plan to retire and expect your savings to provide you with adequate retirement income for 25 or more years. Age 45 isn’t too early to start in most cases.

FIAs with Income Riders vs. DIAs

If you establish a sustainable income plan before age 55, I generally recommend investing in one or more FIAs with income riders vs. DIAs to provide you with the most flexibility. For starters, unlike DIAs which generally have fixed income start dates, FIAs don’t require you to begin income withdrawals at a specified date. This is a distinct advantage when you don’t know if you’re going to retire at 60, 65, or 70 and you don’t necessarily know all of your potential sources, timing, and amounts of other retirement income.

Additional funds can periodically be added to flexible premium FIAs that generally isn’t possible with DIAs. Care must be taken, however, when researching these types of FIAs since some limit the number of years that additional premiums can be added or subsequent purchase amounts. See How Flexible are Flexible Premium Deferred Annuities?

Another benefit of FIAs is their accumulation value which can increase over time and provide a pre- and post-income withdrawal death benefit. In addition to the lack of an accumulation value, a death benefit with DIAs is generally optional and is limited to the amount of premium invested in exchange for a reduced income payout.

Finally, in addition to generating sustainable retirement income, investment in FIAs with income riders and DIAs reduces portfolio risk to the extent that funds from equity investments, e.g., stocks and equity exchange-traded and mutual funds, are used.

In conclusion, it’s not only about minimizing regrets regarding how soon you started saving for retirement when you’re retired. Making sustainable income a cornerstone of your portfolio using investments that are suited for this purpose, i.e., fixed income annuities, will help you sleep better at night – before and after you retire.

Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Pension with a Flexible Start Date?

If you want peace of mind when you retire, you need to have a plan that will generate sustainable income streams that will cover a large portion of your fixed and discretionary expenses. Income tax planning is critical since your income needs to be calculated net of income tax to determine the amount that will be available for spending.

A sustainable income stream is simply a regular series of payments that, once it begins, will continue for the rest of your life. An ideal sustainable income stream is one that’s calculated using life expectancy and has a flexible start date. The longer you wait to turn on your income, the greater the periodic payment.

Social Security is a great example of a sustainable income stream that meets these criteria. Although you can begin collecting as early as age 62, you can also delay your start date to as late as age 70. The longer you wait, the greater your monthly payment. Assuming a full retirement age of 67, your benefit will be 80% greater if you delay your start date from 62 to age 70, excluding cost of living adjustments.

While Social Security is an important cornerstone of most retirement income plans, it generally needs to be supplemented by other sources of sustainable income. Even if you qualify for the maximum monthly benefit of $2,663 assuming you reach full retirement age in 2015, your annual benefits of approximately $32,000 may be reduced to as little as $21,000 after income tax, depending on your other income and income tax bracket.

Fortunately, there’s another source of sustainable income beside Social Security that’s calculated using life expectancy and also features a flexible start date. It’s offered by life insurance companies and is called a fixed index annuity (FIA) with an income rider.

Unlike the start date of Social Security which is limited to a window of eight years (age 62 to 70), a FIA income rider start date is open-ended. Generally speaking, the only requirement is that you must be at least age 50 when you begin receiving income. Assuming you meet this condition, you can start your lifetime income stream at any age you choose.

Similar to Social Security, the longer you defer your start date, the greater your lifetime income payments will be. Other factors that will influence your income payment are the age at which you purchase your FIA, your original investment amount, additional investments if permitted, premium bonus when applicable, and non-income withdrawals. The calculation of your payment amount is defined by the income rider provision of your FIA’s contract.

Since the calculation of your payment amount is contractually defined, you can determine the amount of initial and ongoing investments required to provide you with a target amount of income beginning at one or more specified ages of your choice before you purchase a FIA. Furthermore, if you need different amounts of income beginning at different ages, you may want to consider investing in two or more FIAs with income riders.

In addition to meeting the criteria of an ideal sustainable income stream, i.e., one that’s calculated using life expectancy and has a flexible start date, a FIA with an income rider offers another benefit that can be important where there are potential beneficiaries. Unlike other types of fixed income annuities, i.e., immediate and deferred income annuities, a FIA has an accumulation, or cash, value.

The accumulation value increases by purchases and premium bonuses and decreases by income and non-income withdrawals and income rider and surrender charges. Any accumulation value remaining at the death of the contract owner(s) will be paid as a death benefit to the beneficiaries.

As stated at the beginning of this post, income tax planning is a critical part of the retirement income planning process since your income needs to be calculated net of income tax to determine the amount that will be available for spending. All income payments from FIAs with income riders are taxable as ordinary income. This is true whether they’re held in traditional IRAs and other types of retirement plans or as nonqualified, i.e., nonretirement, investments.

If you’re looking for a pension with a flexible start date to increase the amount of your fixed and discretionary expenses that are covered by sustainable income throughout your retirement, one or more FIAs with an income rider may meet your needs.

Social Security

3 Pitfalls of Social Security Optimizers

Social Security is an important source, and in many households, the largest source, of income for retirees. You can start collecting benefits at any time between age 62 and 70. Since Social Security is an income annuity, the longer you wait, the greater your monthly income will be for the rest of your life.

The Social Security start date decision is complicated by the fact that there are different types of retirement benefits for which you may be eligible. These include spousal, divorcee, and survivor options in addition to benefits based on your earnings. Furthermore, you may qualify for more than one type of benefit at a given time.

How do you learn about all the available strategies and choose the one that will provide you, and your spouse, if married, with the greatest amount of income during your lifetime? Recognizing the opportunity, a Social Security optimizer software industry has evolved with programs targeted for consumers and financial advisers.

Before using any Social Security optimizer, you need to be aware of three pitfalls.

1. Longevity

The results of all Social Security optimizers are dependent upon assumed longevity, i.e., how long you’re going to live. This is the most important assumption that will affect your results. Since it’s also the most difficult to forecast, multiple scenarios should be run with different assumed ages of death.

2. Inconsistent Results

Social Security optimizers vary as to the type and detail of requested data, including, but not limited to, summarized vs. detailed historical earnings, projected earnings, government pensions, and economic assumptions. Consequently, results and recommendations can vary from program to program.

3. Optimized Result May Not Optimize Retirement Cash Flow

Let’s assume that you or your financial adviser use a high-quality Social Security optimizer that captures all of the data points and assumptions needed to recommend the best strategy for your situation. Should you implement the recommended solution? Not necessarily.

It’s important to keep in mind that the overriding goal of retirement income planning is to optimize lifetime cash flow. You want to make sure that you have the right types of assets and income when needed to provide you with sufficient after-tax income to cover your projected inflation-adjusted expenses for the duration of your retirement. The key is timing.

None of the standalone Social Security optimizer programs consider the myriad of financial information and assumptions that are required to determine how the recommended results will impact your projected retirement cash flow. For this reason, an optimized Social Security strategy may not be the best plan of action for ensuring that sufficient cash is available when needed.

I’ve had situations where the recommendation from one of the leading Social Security optimizers was projected to result in earlier depletion of my clients’ retirement assets than would have been the case using another strategy. As an example, deferring the Social Security start date to age 70 to maximize monthly income may not be the best recommendation for a single individual who retires at age 65 with limited investments or other sources of sustainable income.


The Social Security start date determination is one of the most, if not the most, important retirement income planning decisions most people will make. You shouldn’t rely solely on the recommendation of a Social Security optimizer when choosing your start date given the fact that the decision is generally irrevocable and will have long-term consequences for you and your family. Multiple strategies, not simply the “optimal” one, need to be analyzed using comprehensive retirement income planning software to determine the one that’s projected to optimize your retirement cash flow.

Retirement Income Planning

Can We Still Plan to Retire at a Specific Age?

Not too long ago it was common for pre-retirees to depend on two sources of retirement income: Social Security and a private or public pension. Both began at age 65, were expected to last for life, and typically met 50% or more of retirees’ financial needs.

With two secure sources of lifetime income, age 65 was the standard retirement age for many years. Retirement income planning focused on closing or narrowing the gap between one’s projected retirement income needs and what would be provided by Social Security and pension income.

Retirement Planning Milestone

The decline of defined benefit pension plans over the past 30 years eliminated one source of dependable lifetime income for most retirees. The replacement of these plans with 401(k) defined contribution plans was a milestone in the retirement planning world since it transferred the responsibility for funding retirement from employers to employees.

Retirement income planning has dramatically increased in importance in recent years as employees have realized that it isn’t easy to (a) accumulate sufficient assets in 401(k) plans to generate adequate retirement income and (b) convert 401(k) plan assets into sustainable lifetime income streams beginning at a specified age.

The shift from employer defined benefit to employee defined contribution retirement plans, combined with longer life expectancies, has made it much more challenging to plan for retirement at a specific age. While it’s definitely possible, it requires a different mindset and the assistance of an experienced retirement income planning professional to increase one’s opportunity for success.

Retirement Income Plan is Essential

As part of the change in mindset, it’s important to understand and recognize that a retirement income plan is an essential tool for helping individuals close or reduce the gap between projected retirement income needs and what will be provided by one source of sustainable lifetime income in many cases, i.e., Social Security. Unlike other types of financial plans, a retirement income plan typically isn’t a “one-and-done” exercise.

A successful retirement income plan generally requires an ongoing disciplined, systematic, approach beginning at least 20 years prior to retirement and continuing for the duration of retirement. The purpose of such a plan should be to make sure that sufficient assets will be saved at specified times using tax-advantaged investment and protection strategies that will increase the likelihood of providing adequate and reliable after-tax income to cover one’s planned and unplanned expenses beginning at a specified age for the duration of retirement.

With the shift from employer to employee retirement funding, can we still plan to retire at a specific age? I believe that it’s possible provided that we understand (a) the burden for making this a reality has shifted from employers to employees, (b) a retirement income plan beginning at least 20 years prior to retirement in most situations is essential, and (c) a lifetime commitment is required to monitor and update the plan in order to reduce the risk of outliving one’s assets.

Roth IRA

5 Ways to Reduce Your Tax Liability Using Roth IRA Conversions

One of the most important financial goals for retirees is maximization of after-tax income. There are two ways to accomplish this: (a) maximize pre-tax income and (b) minimize income tax liability. A Roth IRA can go a long way toward helping you achieve the latter.

There are two ways to fund a Roth IRA: (a) annual contributions and (b) conversions. Annual contributions, in and of themselves, generally won’t result in a significant source of retirement income due to the relatively low limitation – currently $5,500 or $6,500 if you’re age 50 or older. In addition, eligibility to make Roth IRA contributions is limited to the extent that your income exceeds defined limits.

Roth IRA conversions, on the other hand, have the ability to generate substantial after-tax income while also reducing income tax liability for up to 20 to 30 years or more of retirement. Since income tax liability on the value of Roth IRA conversions will need to be paid, timing of conversions is key. See the May 10, 2010 post, Be on the Lookout for Roth IRA Conversion Opportunities, for a discussion of this topic.

There are five ways that you can potentially reduce your income tax liability and increase your after-tax income during your retirement years by doing Roth IRA conversions.

1. Never pay income tax on the growth of your Roth IRA

While you’re required to include the value of your IRA, 401(k) or other qualified plan assets that you convert to a Roth IRA in your taxable income in the year of conversion, 100% of the growth of your Roth IRA is excluded from taxation. This is true whether or not you ever take any distributions from your Roth IRA.

Individuals who did Roth IRA conversions in March, 2009 when the Dow dipped below 7,000 didn’t mind paying income tax on those conversions in retrospect given the fact that the Dow is currently hovering over 17,000 less than six years later. The income tax savings on the growth of the equity portion of their converted accounts over this period of time plus future potential growth is significant for those in this situation.

2. Roth IRA accounts aren’t subject to required minimum distribution rules

If you don’t do a Roth IRA conversion, 100% of the value of your traditional IRA, 401(k), and other qualified plan assets, including appreciation, will be subject to IRS’ required minimum distribution, or RMD, rules. These rules require you to take annual minimum distributions from your retirement plan accounts beginning by April 1st of the year following the year that you turn 70-1/2. 100% of distributions reduced by any allowable portion of nondeductible contributions are taxable.

As an example, suppose you were born on January 7, 1940 and you own a traditional IRA account with a value of $500,000 on December 31, 2013, you would be required to take a minimum distribution of $21,008.40 from your account by December 31, 2014 and include it in your 2014 taxable income. If instead you owned a Roth IRA account with the same value, you wouldn’t be required to take any distributions from your account.

3. Potentially reduce net investment income tax

The RMD rules sometimes force people to take distributions from their taxable IRA accounts that they don’t need. Often times, they transfer RMDs from their taxable IRA account to a nonretirement investment account and leave them there. For individuals with high levels of income, this can result in additional taxation as a result of subjecting the earnings on their nonretirement account to the net investment income tax of 3.8%. This isn’t an issue for Roth IRA account holders since the RMD rules don’t apply to them.

4. Roth IRA distributions aren’t included when calculating taxable Social Security benefits

The taxation of Social Security benefits is dependent upon your combined income and tax filing status. Combined income includes adjusted gross income, nontaxable interest, and 50% of Social Security benefits.

Single filers are subject to tax on 50% of their Social Security benefits for combined income between $25,000 and $34,000 and up to 85% of benefits when combined income exceeds $34,000. Married filing joint taxpayers are subject to tax on 50% of their Social Security benefits for combined income between $32,000 and $44,000 and up to 85% of benefits when combined income exceeds $44,000.

Roth IRA distributions aren’t included in adjusted gross income, therefore, they don’t affect taxation of Social Security benefits.

5. More opportunities for income tax bracket planning

For all taxpayers, taxable income is subject to seven different rates of tax ranging from 10% to 39.6% depending upon the amount of taxable income. Given the foregoing four potential ways of reducing taxable income and associated income tax liability, Roth IRA conversions can also reduce the income tax rates that are used to calculate income tax liability on other sources of income. This allows for more opportunities for income tax bracket planning to potentially further reduce income tax liability in one or more years.

Although it’s not income-tax related, one other potential benefit of Roth IRA conversions that shouldn’t be overlooked is their impact on the calculation of Medicare Part B premiums. Monthly Medicare Part B premiums currently range from $104.90 to $335.70 depending upon tax filing status and the amount of modified adjusted gross income from two years ago. Roth IRA distributions aren’t included in the calculation of adjusted gross income. As such, they don’t affect the amount of Medicare Part B premiums paid.

As you can see, assuming (a) you can get over the hurdle of prepaying a portion of your income tax liability when you do Roth IRA conversions and (b) you have sufficient nonretirement funds to pay the tax, this can create several tax reduction opportunities as well as a potential reduction of Medicare Part B premiums throughout your retirement years. These benefits, combined with the ability to eliminate taxation on the growth of Roth IRA accounts, can result in greater and longer-lasting after-tax retirement income compared to not doing any Roth IRA conversions.

Annuities Deferred Income Annuities

You Don’t Have to Wait Until 85 to Receive Your Annuity Payments

Longevity insurance was recently blessed again by the IRS with its finalization of a regulation allowing the inclusion of an advanced-age lifetime-income option in retirement plans such as 401(k) plans and IRAs.

As discussed in my July 25 MarketWatch article, 6 Ways a New Tax Law Benefits a Sustainable Retirement, “longevity insurance” isn’t an actual product that you can purchase from a life insurance carrier. It’s instead a term that refers to a deferred lifetime fixed income annuity with an advanced age start date, typically 80 to 85.

In a nutshell, IRS’ final regulation allows you to invest up to the lesser of $125,000 or 25% of your retirement plan balance in “qualifying longevity annuity contracts” (QLACs) provided that lifetime distributions begin at a specified date no later than age 85. Although the regulation leaves the door open for other types of fixed-income annuities in the future, QLAC investment vehicles are currently limited to lifetime deferred income annuities, or DIAs.

Suppose you’re concerned about the possibility of outliving your assets and you’re considering investing a portion of your retirement plan in a QLAC. Do you have to wait until age 85 to begin receiving your lifetime annuity payments? Absolutely not. So long as distributions begin no later than the first day of the month following the attainment of age 85, you will be in compliance with the regulation.

Although the regulation doesn’t define the earliest starting date of QLAC payments, based on previous legislation, it would seem to be April 2 of the year following the year that you turn 70-1/2. Why April 2? Per my MarketWatch article, regulations in effect before the new rule allow for inclusion of fixed income annuities without limit provided that the periodic annuity payments (a) begin by April 1 of the year following the year that the owner turns 70-1/2 and (b) are structured so that they will be completely distributed over the life expectancies of the owner and the owner’s beneficiary in compliance with IRS’ required minimum distribution, or RMD, rules.

Let’s suppose that you’re doing retirement income planning when you’re 60 and you’re planning on retiring at 67. In addition to your IRA which has a value of $600,000, you have a sizeable nonretirement portfolio that will not only enable you to defer your Social Security start date to age 70, there’s a high likelihood that you won’t need to withdraw from your IRA until 75.

Despite the fact that you don’t foresee needing income from your IRA until 75, IRS requires you to begin taking minimum annual distributions from your IRA beginning by April 1 of the year following the year that you turn 70-1/2. This is true, however, IRS now also allows you to circumvent the RMD rules by investing a portion of your retirement plan assets in a QLAC. Relying on these rules, you decide to invest $125,000 of your IRA in a QLAC with an income start date of 75. This enables you to longevitize, or extend the financial life of, your retirement using the six ways described in my MarketWatch article.

As you can see, there’s a lot of flexibility when it comes to selecting the start date of your lifetime income distributions from a QLAC. There’s approximately a 13- to 14-year window depending upon your birth date which falls between April 2 of the year following the year that you turn 70-1/2 and age 85. The key is that you must define your income start date at the time of applying for your QLAC. This is a requirement of all deferred income annuities, not just QLAC’s.

Finally, a QLAC may, but is not required to, offer an option to begin payments before the contract’s annuity starting date. While the amount of your periodic distributions will be greater the longer you defer your start date, you don’t have to wait until age 85 to begin receiving lifetime income.

Retirement Asset Planning Retirement Income Planning

Do You Want to RAP or Do You Prefer to RIP?

Retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Most goal-based planning is straight-forward, solving for the amount, and frequency, of payments that need to be made to accumulate a sum of money at a future date using two assumptions: rate of return and inflation rate.

College education planning is a good example of the use of this methodology with a twist. Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years. This complicates the planning since it requires the calculation of the present value of the future annual costs of college at the beginning of college, which in turn becomes the future value that must be accumulated.

Retirement Asset vs. Retirement Income Planning

Retirement planning is a whole other world. For starters, there are two stages of retirement planning, i.e., retirement asset planning (RAP) and retirement income planning (RIP). Until recent years, RAP was the only type of retirement planning and, as such, is what’s considered to be traditional retirement planning. RAP’s focus is the accumulation and “spending down” of assets. Although it’s more complicated, much of the methodology used is similar to other types of goal-oriented financial planning.

While RAP works well in the accumulation stage, it isn’t designed for calculating, and planning for, projected retirement income amounts that need to be available to pay for projected retirement expenses during various stages of retirement with unknown durations. As a result of the uncertainty of traditional RAP as a solution for providing a predictable income stream to match one’s financial needs in retirement, RIP was born.

Retirement Income Planning Issues

In addition to possessing the knowledge and experience of financial planners who specialize in RAP (RAPers?), retirement income planners (RIPers?) require an expanded skill set and associated knowledge to assist their clients with issues that are unique to RIP before and throughout a client’s retirement years. Planning issues extend well beyond asset accumulation and include, but aren’t limited to, the following:

  • Medicare
  • Long-term care
  • Social Security claiming strategies
  • Conversion of assets into sustainable income
  • Income tax minimization
  • Choosing strategies to address gaps in income
  • Retirement plan distribution options
  • Retirement housing decisions
  • Philanthropic
  • Estate transfer

Recommended Timeframe

Retirement planning is a time-sensitive and arduous task that requires a high level of discipline and commitment over the duration of one’s adult years, not to mention specialized expertise. Given the relatively short accumulation period compared to the potential duration of retirement complicated by an unknown escalating cost of living, the RAP phase should begin as soon as possible.

There are always competing goals, including saving for one’s first house and education planning, to mention a couple. All financial goals must be balanced against one another, keeping in mind that the ability to provide for your support – before and throughout retirement – supersedes all other goals.

RIP works best when it’s initiated long before you plan to retire. In addition to the nature and complexity of the various planning issues, this is very important given the fact that historically approximately 50% of all retirees retire before they plan on doing so. Given this reality, a 20-year pre-retirement RIP timeframe is recommended.

Finally, it’s important to keep in mind that RIP doesn’t end the day you retire. The success of your retirement years is dependent upon your ability to employ and adjust RIP strategies for the duration of your, and your spouse’s, if applicable, retirement years.

Do you want to RAP or do you prefer to RIP? As I hope you can appreciate, you need to do both at the appropriate time in your life in order to enjoy your retirement years on your terms.

See Planning to retire? Start with the right question

Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Sustainable Lifetime Income When You Need It – Part 2 of 2

Part 1 of this post made the point that if your goal is to receive sustainable lifetime income, in addition to Social Security, fixed income annuities offered by life insurance companies will meet your need. Please read Part 1 to learn about the three types of fixed income annuities, including each one’s income start date.

If you’re seeking total flexibility for your lifetime income start date, then a fixed index annuity (“FIA”) with an optional income rider is your best bet. Unlike single premium immediate annuities (“SPIA’s”) and deferred income annuities (“DIA’s”) where the sole purpose is to provide sustainable income, a FIA can fulfill multiple financial needs, a discussion of which is beyond the scope of this post. When you purchase a FIA, assuming your goal is sustainable lifetime income, you must purchase an optional income rider with an annual income rider fee.

Unlike the start date for SPIA’s and DIA’s which is contractually defined, it is much more flexible with FIA’s. Most FIA income riders, also known as guaranteed minimum withdrawal benefit (“GMWB”) riders, have two requirements when it comes to the income start date:

  1. You must wait at least one year after the contract is issued, and
  2. You must be at least age 50.

Assuming that you meet both requirements, the age at which you begin taking income withdrawals from a FIA is up to you. Unlike Social Security which has an eight-year window for choosing your income start date, i.e., between age 62 and 70, the start date with FIA’s is open-ended once the two requirements have been met.

Similar to Social Security, the longer you defer your start date, the greater your lifetime income payments will be. Unlike Social Security where your benefit amount will increase 7% – 8% each year that you defer your start date, the amount of increase is defined by the income rider provision of each FIA’s contract. Also, unlike Social Security, the percentage increase is generally significantly greater when you cross five-year milestones, e.g., age 60, 65, 70, 75, etc.

Here’s an example from a recent case for one of my clients who are currently in their early to mid 50’s and have invested approximately $250,000 in a FIA with an income rider. If they begin taking income at the younger spouse’s age 63, they will receive annual lifetime income of $20,479. At age 64, the amount increases 6% to $21,708. If they wait until age 65, it increases 19.3% from their age 64 amount to $25,886.

With a FIA with an income rider, in addition to having the security of receiving sustainable lifetime income, you have the luxury of starting your income when you need it. This is in addition to several other benefits offered by FIA’s, a discussion of which has been presented in various Retirement Income Visions™ posts.

Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Sustainable Lifetime Income When You Need It – Part 1 of 2

There have been many articles and blog posts over the last several years about the ability to delay your Social Security retirement benefit start date in order to increase your monthly benefit. I wrote about this in my March 4, 2013 post, Increase Your Longevity Risk with Social Security. Per the post, with a choice of start dates ranging between 62 through 70, you can increase your benefits 7% – 8% each year that your start date is deferred, excluding cost-of-living adjustments (“COLA’s”).

Sources of sustainable lifetime income are few and far between these days with the widespread elimination of monthly pension benefits. The ability to receive a stream of sustainable lifetime income throughout retirement while also choosing your income start date is a rare planning opportunity, the value of which shouldn’t be underestimated.

While the opportunity to receive sustainable lifetime income with a flexible start date is limited, Social Security isn’t the only game in town. If the security of sustainable lifetime income appeals to you and you want to create one or more income streams, fixed income annuities offered by life insurance companies, preferably ones that are highly rated, will also meet your need.

There are three types of fixed income annuities, all of which are contractually guaranteed by the life insurance company from which they are purchased. The three types are single premium immediate annuities (“SPIA’s”), deferred income annuities (“DIA’s”), and fixed index annuities (“FIA’s”) with income riders.

There are several important differences between the three types of fixed income annuities that have been discussed in several Retirement Income Visions™ posts. One of the differences that are relevant to this post is the income start date. SPIA’s and DIA’s have contractually defined income start dates, while the start date of FIA’s with income riders is flexible.

SPIA’s are the most restrictive with a start date that begins one month after the contract is issued, assuming a monthly payment mode is chosen. When you purchase DIA’s, you choose the income start date at the time of application. It is contractually defined with the provision that it cannot begin earlier than 13 months after your contract is issued.

Please read Part 2 of this post next week to learn about the income start date flexibility available with FIA’s with income riders that are designed to provide you with sustainable retirement income when you need it.

Retirement Asset Planning Retirement Income Planning

Don’t Plan to Squeak By Into Retirement

Let’s face it. We’re a “just in time” society. With our busy lives, we do a lot of things at the last minute. Many people thrive on the adrenaline rush that often accompanies completion of a project right before its deadline.

Retirement income planning lesson #1: Don’t plan to squeak by into retirement. We simply cannot apply our “just in time” thinking to retirement. Retirement income planning is complicated, with too many things that can go wrong, many of them beyond our control. It requires a totally different mindset that runs contrary to the way most of us are use to thinking.

While there are no guarantees, a retirement income plan that’s begun and frequently revisited well before and throughout retirement provides the best opportunity for success. The basic goal of any retirement income plan is for your money to outlive you. When you see headlines like “Boomers’ Retirement Confidence Sinks,” you know this isn’t an easy goal to achieve.

Retirement income planning is especially tricky. It is quite different from retirement planning where the primary objective is accumulation of assets to obtain financial security throughout one’s retirement years. Traditional retirement planning isn’t enough to get you to the finish line in most cases today.

It’s too easy to have a false sense of comfort that one’s accumulated assets are sufficient to last for the duration of retirement only to be unpleasantly blindsided by the “sequence of returns” in the first several years of retirement. For those of you who aren’t familiar with this term, it is a series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage. See The Sequence of Returns – The Roulette Wheel of Retirement that includes a comparison of three scenarios to help you better understand the importance of this risk to a retirement asset plan.

Retirement income planning takes retirement planning a step further. It requires planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement. This is a very important distinction. Locking in a predictable income stream in advance of one’s retirement reduces the impact of a down market in the early years of retirement.

A retirement income plan needs to have a secure floor of retirement income that will last for your, and, if applicable, your spouse’s lifetime. The timing and after-tax amount of the floor needs to correspond to ongoing and one-time predictable and unpredictable expenses that will fluctuate during different periods of retirement adjusted for inflation. To the extent that known income streams, e.g., Social Security, aren’t projected to be sufficient to cover expense needs, other sources of sustainable income need to be developed well in advance of retirement.

Don’t plan to squeak by into retirement. Trust me – there won’t be any adrenaline rush.


Retirement Income Visions Celebrates 4-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its four-year anniversary. Retirement Income Visions™ published a weekly post each Monday morning beginning four years ago through and including the March 11, 2013 post.

Beginning with the March 25, 2013 post, Retirement Income Visions™ changed to a biweekly publication schedule. This was in response to my acceptance of another retirement income planning writing gig as a Wall Street Journal MarketWatch RetireMentors contributor. I continue to do all my writing on Saturday mornings, enabling me to fulfill my primary goal of providing outstanding, timely service to my clients.

Even with its reduced publication schedule, Retirement Income Visions™ continues to boast a fair number of followers. It has had over 72,000 pageviews in its four years of publication, including over 4,000 in the last 30 days.

In addition to becoming a RetireMentors contributor, I further distinguished myself as a retirement income planning expert when I became one of the first recipients of the Retirement Income Certified Professional® (RICP®) designation from The American College on July 1st. The RICP® educational curricula is the most complete and comprehensive program available to professional financial advisors looking to help their clients create sustainable retirement income.

This past year, Retirement Income Visions™ deviated from its themed approach whereby it historically featured a long stretch of weekly posts focusing on a single retirement income planning strategy. After completing a lengthy series of weekly posts about fixed index and deferred income annuities from August 20, 2012 through November 5, 2012, I began mixing it up with a variety of educational topics.

The November 12, 2012 post, The Smooth COLA, straightened out some misconceptions about Social Security retirement benefit cost of living adjustments. The November 19, 2012 post, Black Friday – Think Roth IRA Conversion, proved to be a very timely post for those who did Roth IRA conversions at that time since they have benefited from a 23% increase in stock prices as of Friday, combined with a significant tax increase that went into effect on January 1st for higher income taxpayers.

The November 26, 2012 through December 17, 2012 posts featured two two-part miniseries about two important Social Security topics, Social Security as a deferred income annuity and considerations when choosing a Social Security starting age.

The January 7, 2013 post, The 2013 Tax Law Schizophrenic Definition of Income – Part 1, was timely, as it was quoted extensively and linked in Robert Powell’s MarketWatch January 11, 2013 Now is the Time for Tax-Efficient Investments article. The January 7th post and the January 14th, 21st, and February 4th posts, which included Part 2 of the January 7th post and a two-part miniseries, New Tax Law – Don’t Let the Tax Tail Wag the Dog, provided readers with a comprehensive understanding of the new tax laws that went into effect on January 1st.

The next four posts, beginning with the February 11, 2013 post, The Almost Irrevocable Retirement Income Planning Decision, through the March 4, 2013 post, Insure Your Longevity Risk with Social Security, featured a series of four timely Social Security topics.

Retirement Income Visions™ really began mixing it up, beginning with the March 11, 2013 post, Consider the Future Purchase Option When Buying Long-Term Care Insurance, through the July 29, 2013 post, Immediate Annuities – Where’s the Planning? The eleven posts in this stretch presented a number of different topics, including long-term care insurance, retirement income planning considerations and strategies, fixed index and immediate annuities, Medicare, longevity insurance, budgeting, and personal financial management systems.

As I’ve traditionally done in previous “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, a big thank you to Nira, my incredible wife, for her enduring support of my blog and MarketWatch RetireMentors writing and other professional activities.

Retirement Income Planning

Ladder Your Retirement Income

“Don’t put all of your eggs in one basket.” This is a saying that’s often tossed around when it comes to retirement income planning. Usually it’s brought into the conversation to address different types of investments one should consider to generate retirement income.

While diversification is a fundamental principle when it comes to both pre- and post-retirement investment planning, income timing is just as important in retirement. The first thing that needs to be recognized is that retirement isn’t a single financial event. It’s a process that includes multiple stages, each with its own financial demands.

There are unique types of expenses associated with each stage. For example, there may be an emphasis on travel in the initial stage of retirement, potentially requiring a large initial budget for this item that may decline, and ultimately be eliminated, in later stages. Another example may be a mortgage that gets paid off during retirement. Finally, health and long-term care expenses tend to dominate the final stage. Nonrecurring, or infrequently recurring, expenses, such as car purchases and home improvements, need to also be considered.

Given the fact that income needs to cover expenses and there will be various types and amounts of expenses with different durations associated with each of the various stages, different streams, or ladders, of income need to be planned for to match one’s needs. Several types of income need to be analyzed to determine which ones will be best suited to match the projected expense needs of each stage.

When considering income types, it must always be kept in mind that after-tax income is used to pay for expenses. If the income source to be used to pay for a particular expense is a retirement account such as a 401(k) plan, a larger distribution will generally need to be taken from the plan than would be required from a nonretirement money market fund or from a Roth IRA account. Income tax planning is essential when it comes to income ladder design.

Complicating the income ladder design process is the decision regarding when to begin receiving Social Security. While Social Security can provide a solid base, or floor, to meet income needs for the duration of retirement, the amount of income that you will receive is dependent upon the age when you begin to receive your income. Given the fact that the amount will increase by 8% per year plus cost of living adjustments between full retirement age and age 70, it may make sense to defer the start date depending upon one’s retirement age, marital status, health condition, and other potential sources of income. The types, timing, and amounts of income ladders are directly affected by the Social Security start date decision.

Keeping in mind that successful retirement income planning includes planning, managing, and protecting income, an analysis of one’s income protection plan is also essential to the income ladder design process. As an example, to the extent that long-term care insurance has been purchased, a large income stream won’t be needed to pay for long-term care expenses. Funds will generally be needed, however, to pay for long-term care insurance premiums throughout retirement unless a claim arises.

As you can see, retirement isn’t a smooth ride whereby you can plan for the same amount of expenses each year increased by an inflation factor. Given this fact, an analysis of different types of projected expenses, including amounts and timing of each, is critical, followed by the design of an after-tax income ladder plan to match your expense needs.

Annuities Fixed Index Annuities Social Security

Delayed Gratification is the Key to Maximizing Income with Fixed Index Annuities

When you’re planning for retirement, income is the name of the game. The more sustainable income that you can generate, the less you need to worry about things like sequence of returns and major stock market downturns – before and during retirement.

The idea is to build a base, or floor, of predictable income that will cover your day-to-day expenses. For most people doing retirement income planning, Social Security is the core element of an income floor. Although pre-retirees today can plan to receive a full Social Security benefit beginning somewhere between age 66 and 67 depending upon their year of birth, the benefit that they, and potentially their spouse, will receive will increase by 8% per year for each year that they defer their start date up until age 70. This equates to as much as a 24% – 32% greater benefit depending upon your year of birth and how long you defer your start date.

Assuming that your goal is to build a solid base of sustainable income with the ability to increase your lifetime income amount similar to Social Security, one of the best ways to do this is to invest in a flexible fixed index annuity (“FIA”) with an income rider. The reason that you want to use a flexible, vs. a single, premium FIA is to provide you with the ability to add to your investment should you choose to do so. In addition, you need to purchase an income rider, which is optional with most FIA’s, in order to receive guaranteed (subject to the claims-paying ability of individual insurance companies) income.

Like Social Security, the longer you wait to begin receiving your income, the greater it will be. Unlike Social Security benefits which are increased by cost of living adjustments (“COLA’s”), the lifetime income from the majority of FIA’s available today will remain unchanged once it’s started.

To demonstrate the benefit of deferring the start date of FIA income withdrawals, let’s use one of the contracts purchased by my wife and me two years ago when we were 55 and 48, respectively. I will use my wife’s age as a point of reference for the remainder of this post since income withdrawal amounts are always calculated using the younger spouse’s age.

Per our annuity contract, my wife and I are eligible to begin income withdrawals at least 12 months after our contract was issued provided that both of us are at least age 50. It generally doesn’t make sense to take withdrawals from a FIA income rider before age 60 since the formula used to calculate the withdrawal amount is less favorable and the withdrawals will be subject to a 10% IRS premature distribution penalty and potentially a state penalty. Assuming that we plan on retiring after my wife is 60, there would be no need to begin income withdrawals before this age.

I have prepared a spreadsheet with various starting ages in increments of five years beginning at 55 through 75. The spreadsheet shows the projected percentage increase in our annual income withdrawal amount that we will realize by deferring our income start age compared to ages that are 5, 10, 15, 20, and 25 years younger, depending upon the starting age chosen.

Using an example that’s comparable to the Social Security starting age decision, suppose that we decide to defer our income start age from 65 to 70. This would result in a 31.2% annual increase in lifetime income. We will receive 120.3% more income if we begin our income withdrawals at age 70 instead of at 60. The percentage increases are significant in many cases depending upon the chosen withdrawal starting age compared to another potential starting age.

Similar to the Social Security starting age decision, there are numerous factors that need to be considered when determining the optimal age to begin income withdrawals from a FIA with an income rider, a discussion of which is beyond the scope of this post. Like Social Security, when possible and it makes sense, delayed gratification is the key to maximizing lifetime income.

Retirement Income Planning

Plan for a Range of Retirement Ages

It’s widely agreed that age 65 is no longer the magic retirement age. According to the U.S. Bureau of the Census Current Population Survey, 65 or 66 was the average retirement age for men from the early 60’s through the mid 70’s. It dropped to age 64 in the late 70’s, 63 in the 80’s, and 62 from 1989 until 1995. It then increased to 63 from 1997 through 2007 before it returned to age 64 in 2009.

The average retirement age for women has historically been younger than for men. There was a 6 to 13-year age difference from the early 60’s through the mid 80’s when the average age for women ranged from 53 to 57. It wasn’t until 1989 that the average retirement age for women climbed to 59, then 60 in 1995, 61 in 2003, and 62 in 2007. Since 1989, the spread between men and women’s average retirement age has held steady between two and three years.

You may be thinking, that’s pretty good – men are retiring at age 64 and women at 62. There are several things to keep in mind, however, when digesting these statistics:

  • These are average ages, with 50% of individuals retiring at a later age.
  • When someone retires, it isn’t always by choice and instead is often dictated by layoffs or health issues.
  • Most people who retire don’t have a retirement income plan with multiple potential sources of sustainable income.
  • Many people who retire do so with minimal income with a reduced lifestyle compared to what they previously enjoyed.
  • The absence of a retirement income protection plan, including long-term care protection, is common.
  • With longer life expectancies, it’s becoming more challenging to not outlive your financial resources.

With traditional pension plans becoming rarer in the private sector, increasing starting age for collecting full Social Security benefits as well as other anticipated unfavorable changes to the Social Security system, the average retirement age for men and women is likely to continue its climb. Given this situation, planning to retire at age 65 isn’t realistic for most people.

Assuming that you want to do retirement income planning, what is the retirement age for which you should plan? I’m a firm believer, for many reasons which are beyond the scope of this post, that retirement income planning, more so than any other type of financial planning, needs to be dynamic and flexible. It’s important that you don’t pigeon hole yourself into one specific age and instead plan for a range of possible retirement ages. A five-year range is generally appropriate, e.g., 64 to 68. In addition, this isn’t a one-time exercise. It should be reviewed and adjusted on a regular basis, preferably annually.

Don’t be guided and mislead by statistics. There’s no magic age at which you should retire. If you haven’t done so already, you need to hire a professional retirement income planner to assist you with the analysis and recommendations. You don’t want to make a mistake when it comes to calculating your ability to retire at a certain age since you probably won’t get a second chance once you retire.

Long-Term Care Longevity Insurance

The Retirement Income Planning Sweet Spot

If you know me professionally, you know that I’m big on distinguishing between retirement income, vs. retirement asset, planning. This isn’t about semantics. It’s about being practical. Unless your lifestyle allows you to survive solely on Social Security or a comparable monthly benefit if you don’t qualify for Social Security, you need to create your own pension. This is, after all, the theme of this blog: Innovative strategies for creating and optimizing retirement income.

In order to create your own pension, you need assets. The question is, when should you transition from a retirement asset planning to a retirement income planning approach? Tied into this question is a related question: Is your current financial advisor trained, experienced, and equipped to offer solutions to assist you with making this change? If not, it may be time to look for a new adviser who specializes in retirement income planning.

See What Tools Does Your Financial Advisor Have in His or Her Toolbox

So when should you begin creating your own pension? This is a daunting task since the primary goal is to ensure that you won’t outlive your income while surrounded by many unknowns, including, how long you will live, potential health issues and timing and cost of same, as well as changing inflation and tax rates, to name a few. Given this situation, there ideally needs to be a significant amount of lead time to do the necessary planning.

As with all financial planning goals, you need to work backwards from your target date. By definition, the applicable date for retirement income planning would be the age at which you would like to retire. Given the complexity of the process together with the many unknowns, a 20-year lead time is generally advised. Assuming that you would like to retire at age 70, you should have an initial retirement income plan prepared at age 50.

This doesn’t mean that you need to transfer all of your nonretirement and retirement investment assets into income-producing assets on your 50th birthday. This is simply when the transition from a retirement asset planning to a retirement income planning process should begin. Strategies will generally be implemented gradually over the course of the years leading up to, as well as after, retirement as your situation changes and different opportunities present themselves. Your retirement income plan needs to be vibrant, proactive, and responsive to change since you will experience many of them at an increasing rate as you approach, and move into, your retirement years.

In addition to retirement income planning strategies, your plan should include income protection strategies for yourself and for your spouse if married. An unprotected, or under protected, life event such as disability, long-term care, or death can severely reduce the longevity of, and potentially prematurely deplete, your, or your survivor’s, investment assets. Income protection strategies should be included and implemented as part of an initial retirement income plan due to the fact that they become increasingly expensive and potentially cost prohibitive with age, not to mention the risk of being uninsurable as you get older.

So what if you’re within 20 years of retirement and you haven’t begun retirement income planning? No need to panic. While your strategies and potential opportunities may be more limited depending upon how close to retirement you are, it’s never too late to start a retirement income plan. As previously stated, retirement income planning strategies are generally implemented both before and during retirement as your situation changes and different opportunities present themselves.