Our philosophy at Statewide Retirement Planning Co. is to work with our clients through education and information. We feel strongly that this approach will enable our clients to make better and more informed decisions. With this in mind, we have decided to send out a regular newsletter filled with information regarding all aspects of retirement and the retirement planning process. We hope that you enjoy reading these newsletters and are able to use the information to make your retirement years more secure and enjoyable than it otherwise might be.
Please feel free to forward copies to your family and friends.

Making IRAs Last Two Lifetimes

Baby boomers will turn age 65 at a rate of nearly 8,000 per day for the next 17 years.i In the past, retirement planning was centered on maximizing contributions and investment allocations. Now more Americans than ever before will be transitioning from the accumulation phase of retirement planning to the distribution phase. Since most retired couples can no longer solely rely on retirement plans such as Company Pensions or Social Security to provide guaranteed monthly income, they will have develop a retirement income model that will transform their retirement accounts, such as IRAs and 401(k) plans, into a steady stream of income that will last two lives. Note: In order to keep control of their money, many people roll over their 401K’s into an IRA. It is very easy to do, there is no tax liability if done correctly, and allows the retiree to make their own investment decisions.

When approaching retirement age, couples will need to determine the investments, withdrawal rate and order of withdrawals that will create the most sustainable income stream. Retirees who incorrectly structure their retirement assets could face a reduction in retirement income, possibly later in life, when only one of the spouses is still alive. Unfortunately, you only get 1 chance to get it right.

Longevity Risks

Once a healthy married couple reaches age 65, there is a nearly 50 percent chance that one of the two spouses will live to age 92.ii Accordingly, most baby boomers need to plan for 30 years in retirement. To plan for that longevity, financial experts suggest withdrawing no more than 4 percent of retirement assets annually. (Note: because of our current low interest environment, many experts are now lowering that to 3% or even 2%). However, the Required Minimum Distribution (RMD) rules for IRAs and 401(k) plans will eventually require annual withdrawals in excess of 4 percent. Per the IRS distribution tables, the initial RMD withdrawal rate is 3.65 percent. As the account owner ages, the RMD withdrawal rate quickly climbs, exceeding 4 percent by age 73, 5 percent by age 79, 6 percent by age 83, 7 percent by age 86 and 8 percent by age 89.iii

Market Risks and the Variability of Returns

Additionally, IRA owners over age 70–and-a-half may find that they are required to begin taking distributions at a time when the IRA has had poor performance. The sequence of returns is more important than the average rate of return for sustainability purposes. For instance, assume we have an IRA that had annual returns of –20 percent, –10 percent, +15 percent, +20 percent and +10 percent. The rate of return for the five-year period would be 9.29 percent. However, if the IRA owner were forced to take RMDs in the years when the IRA experiences negative performance, by the time the IRA experiences positive investment returns, the value of the IRA would have been greatly reduced. IRAs are particularly vulnerable to this type of risk since the IRS rules regarding Required Minimum Distribution dictate the timing of withdrawals and not the IRA owner.

Risks of Spousal Impoverishment

To help address this concern, some insurance companies have created annuity products that provides spousal protection. Some annuities will offer certain protective riders, that can address the market, inflation, longevity and timing risks inherent in all IRAs, as well as provide guaranteed income over the lives of both spouses. For instance, a Guaranteed Minimum Withdrawal Benefit (GMWB) with a “spousal” rider could guarantee a withdrawal rate over the lives of both spouses. Guaranteed withdrawals can be started at any time at the discretion of the policyholder. The longer the withdrawal is delayed, however, the larger it will be. The withdrawal rate is guaranteed regardless of market performance and regardless of how long the IRA owner and his or her spouse live. In other words, the IRA owner and his or her spouse will be assured to receive the guaranteed withdrawal amount each and every year for the rest of their lives.

When considering an annuity for use in an IRA or other tax-qualified retirement plan (i.e., 401(k), Keogh or profit sharing plan), it is important to note that there is no additional tax-deferral benefit, since these plans are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if some of the other features of the annuity are of value, such as the ability to have guaranteed payments for life and other guaranteed benefits relative to other IRA investments, and the policyholder is willing to incur any additional costs associated with the annuity to receive such benefits.

Another popular feature of some GMWBs is an automatic “step-up” feature that locks in potential market gains periodically for retirement income purposes. These step-up features help IRA owners keep up with the inevitable increase in the cost of living.
Finally, some GMWBs also offer a deferral credit feature that increases the guaranteed withdrawal balance each year a withdrawal is not taken during the initial years. Should the IRA perform well, future step-ups could increase the IRA owner’s guaranteed withdrawal balance and since the deferral credits and step-ups work together, any available credits could be based off of the higher stepped-up amount. This annuity strategy may allow IRA investors to maintain a structured withdrawal program while addressing the longevity, timing, market and inflation risks faced by many retirees. Most importantly, this income protection continues even after the first spouse dies.

Before making any election regarding retirement distributions, make sure consideration is given as to how the election could affect the surviving spouse’s standard of retirement living.

Footnotes:
i America Association of Retired Persons, 2011
ii U.S. Annuity 2000 Mortality table, Society of Actuaries
iii (Source- IRS Publication 590 Section III).
iv S. Rep. No. 98-575, 98th Cong., 2d Sess. 12 (1984)
v Id.

Statewide Retirement Planning Co., its representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant.

Call Statewide Retirement Planning Co. at (954) 781-2220 or email us at: StatewideRetirementPlanning@gmail.com for details specific to your situation.

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