Ohio National and Constellation

[DHK]

When I can help someone spend $460,000 as though it was over $1.7 million... well, they're an ideal candidate for using CV insurance for income purposes.

And yes, I did the math with the current tax code.

 

[scagnt83]

When I can help someone spend $460,000 as though it was over $1.7 million... well, they're an ideal candidate for using CV insurance for income purposes.

And yes, I did the math with the current tax code.

Not without Dividends you dont.

Are you saying the $460k equals the income that $1.7m in assets does?

 

[DHK]

Yes, particularly when you incorporate the investment management fees, safe withdrawal rates, and income taxation from qualified plans.

 

[scagnt83]

Yes, particularly when you incorporate the investment management fees, safe withdrawal rates, and income taxation from qualified plans.

What kind of rate are you using for the management fees? Or better yet, what is the net rate of return you are using? Because that is all that really matters and all that management fees affect.

Im assuming you use 4% for the withdrawal rate.

Taxes are not a big issue for an income of $60k... especially when the standard deduction is $24k for a married couple. You are looking at somewhere around a 10% effective rate in that scenario.

 

[DHK]

I used 1.75% for management fees for a portfolio under $1m to keep it "apples to apples"(but it would still be shocking for 1-1.5%).

2.8% is the current safe withdrawal rate, but I'd still get a similar staggering number for 4%.

Try adding in the 85% inclusion of Social Security back into the taxable equation for a married couple and the corresponding tax bracket bump-up that's possible. Medicare/IRMAA won't be factored in for married couple unless taxable reported income was $170k+... but who knows how long these limits will be these limits?

Granted, the higher the income, the less that social security and IRMAA would really be a factor (such as $10 million a year?), but for affluent middle class (say $500k+ of retirement assets), it can be a real game changer.

 

[DHK]

Oh, I forgot to mention that part of it is including the funding of the Athene Agility 10 contract... using 10% withdrawals (based on original contribution, not anniversary values) to fund the life insurance... but there's still a residual lifetime income taxable benefit that's still LESS than the current standard deduction.

 

[Allen Trent]

Yes, particularly when you incorporate the investment management fees, safe withdrawal rates, and income taxation from qualified plans.

what about when you incorporate actual investment fees of an ETF (almost nothing), tax free on Roth, low capital gains rates on After tax funds?

I think most comparisons I have seen show worst case type investment fees, ordinary income taxes on everything, & lower than historic average returns

 

[DHK]

what about when you incorporate actual investment fees of an ETF (almost nothing), tax free on Roth, low capital gains rates on After tax funds?

I think most comparisons I have seen show worst case type investment fees, ordinary income taxes on everything, & lower than historic average returns

ETFs without advisor fees are going to be for the "Do-It-Yourself" investor. Granted, these fees were high, but this may not be the right kind of client.

Tax-free on Roth = if you're going to use the money, you have to withdraw it rather than collateralize it. This negates lifetime compounding

Low capital gains rates on after tax funds = since capital gains are based on other income, it really depends on what kind of client we're talking about.

As far as those comparisons... there are always variations for each client (obviously). However, as far as lower than historic average returns... the case of $460k spending like $1.7m... they'd have to earn 11.6% each and every year AFTER FEES (whatever they are) to equate what I could do on an almost guaranteed basis.

The lowest I've seen on this calculation is 10.5% (although I'm doing another calculation based on NQ SPIAs showing up at 8.8%). The highest I've seen is 27.58% (that's a huge massive premium and huge income). These numbers are each and every year for 10+ years.

What's an easier risk to manage? Market volatility or tax risk?

I've found nothing else that beats what we can do for tax-exempt planning once we see how punitive the tax code is.

 

[Allen Trent]

Granted, the higher the income, the less that social security and IRMAA would really be a factor (such as $10 million a year?), but for affluent middle class (say $500k+ of retirement assets), it can be a real game changer.

The SS impact is finite & defined amount that can be impacted & will help the lower middle class the most. IE: joint tax return where couple makes $50k SS. If they only have 7k of additional taxable income from other sources, they will be at a $32,000 provisional income & owe no taxes on SS. For every dollar of additional taxable income of the next $12,000, it will cause 50% of SS to be reported as taxable income, IE: 6k to be reported as taxable & they are still owing 0 federal tax because their standard deduction wipes away all of their $25k of taxable income (19k taxable income +$6k taxable SS). So, still in the 0% tax bracket.

Every dollar over this next amount exposes 85% of their remaining SS checks not yet counted($38,000). So, $38k x .85% is $32,300 added to their taxable income. that has them still in the 10% bracket with most & last few dollars in the 12% owing only a total of 8k in federal taxes on a total of $107,000 of income between $50k SS & $57k taxable---a 7% total federal tax rate on their 107k annual income. And this is if all $57k is ordinary income tax, not capital gains rates or qualified dividends or Roth income. Any income over & above this amount has no impact on the taxation of their SS because all of their SS has went through the 0% level, 50% level & 85%.

this is indeed a great strategy to help people minimize, but it definitely isnt exposing them to 25, 30 or 35% taxes on their SS unless they are already over $315k or more of annual taxable ordinary income taxes. Very few taxpayers are in those 24/32,35% brackets but this strategy can be great for them as part over overall planning------it is what I am doing for myself. the problem is when it is applied to the masses in my opinion instead of focused mainly on HI & HNW

 

[DHK]

Agreed. If someone is closer to or in retirement, I'm really looking for $500k+ of total qualified plan assets to make this strategy feasible along with other liquid money, etc.

I had another closed file of a guy who is probably retired already, and he already had a Ohio National term policy (preferred underwriting too). That could be an easy term conversion sale! But running through his numbers (even two years later)... this just didn't make sense for his situation - even if he hated paying taxes... there just wasn't enough to warrant even contacting him again to review (unless he received his parent's inheritance already - but that feels slimey to me). I think he only had about $250,000 in IRAs... and his home was paid off. I wasn't going to suggest that he take out a new mortgage and put his inheritance (if received) into life insurance. Doesn't feel right to me.

So no, it's not going to fit "everybody" and I must be sure that the client can be better off for doing it than not.