ROTH annuity options

[DHK]

My guess is that if he took the Strengthsfinder profiles, he would test with an extremely strong BELIEF. That is a great trait, but on occasion it causes those of us with it to zero in on an idea that we won't let go of easily

First, thank you. (I purposefully ignored this thread for a few days.) I did take StrengthsFinders before I entered into this industry (back at my Wells Fargo days), so it's been 18 years or so now.

My Top 5 (I believe were in this order):
- Maximizer
- Responsibility
- Relator
- Focus
- Individualization

(I wonder if my top 5 would change at this point in my life?)

I don't have the original report, but belief wasn't there for the top 5. It took me a long time to build and develop my belief system. Writing my blog was certainly a part of that process (over 150 articles now).

Once I saw the tax system in retirement through the eyes of a CPA who could then show the equivalent values using life insurance... it was 'game over' for me. I knew exactly how I could help the more affluent middle-class retire with dignity. (Generally the top 10% of income earners earning over $100k a year - which is rather common for California.)

I created my own spreadsheet 2-pager to outline not just the math, but the source links of everything I'm trying to represent in the math - including safe withdrawal rates and investment management fees, etc. (No, I won't share that.)

When I can show people how to spend $460,000 as though it was over $1.7 million... and I did it for my own parents, yeah... I have a strong belief system about it.

My parent's are not wealthy people. My family does not come from wealth. But when I saw how we could stretch these funds to increase the efficiency of retirement income, with only dividends being the varying factor... I was sold.

It can help just about anybody - assuming they can qualify for it. Even if not (and we can't 'borrow a life'), NQ SPIAs with lifetime pays can be bought instead of the life policy. Got one case where that's the direction we'll be going.

I won't go back to doing business or retirement planning any other way. Either they also believe as I do and just want to see how it can work for them... or they don't. It's the client's journey of discovery - just as I had to take a journey to learn it myself. But in the meantime, my job is to show what's possible and help my clients to understand the decisions they've previously made and what they can do along with the consequences of those decisions.

We let them decide.

Anyway, my latest article is the cognitive dissonance believing that you can just take out RMD's and your retirement would be okay using traditional planning methods. The math... doesn't add up.

https://www.dynamicadvancedwealth.c...ng-to-be-in-a-lower-tax-bracket-when-i-retire

And I wrote that two days before this article from ThinkAdvisor and Dr. Michael Finke published their recommendations for retirees:

The 4% Rule Is Dead. What's an Advisor to Do? | ThinkAdvisor

Key recommendations from that article when using AUM portfolios:

What You Need to Know

• Fixed withdrawal rates aren't really that realistic.
• The retiree has to be willing and able to cut back.
• Clients must be prepared to spend less if they invest in risky assets and get unlucky.

There's a better way.

 

[Allen Trent]

My Top 5 (I believe were in this order):
- Maximizer
- Responsibility

Can definitely see Responsibility be a great strength for you & a driver for you

 

[scagnt83]

Did you run the numbers incorporating a safe withdrawal rate?

The numbers absolutely make sense.

Saying that 4% is not a safe withdrawal rate is devoid of reality. Makes for great academic fodder... but that is not living in reality.

The academic papers claiming 4% is no longer a safe number are using Treasuries for 50% of the portfolio's allocation. And if someone is dumb enough to do that with half their retirement savings... then yeah, they wont be able to pull out 4%.

The number of advisors putting half a clients portfolio into Treasuries is probably less than 1%. Most utilize corporate bonds, which yield double what Treasuries do.

For those using Corporate Bonds instead of Treasury Bonds, the 4% rule still remains firm (not that a more customized solution should not be sought). Especially taking into account the above average equity returns over the past decade.

The ONLY way for the numbers to "make sense" is by using withdrawal rate assumptions that are not realistic, and portfolio allocations that are not realistic.

---

And the whole RMD debate on if its "bad" is total bs. Yes you are forced to take distributions and be taxed on funds that you havent paid any taxes on in 30 years... but you are not forced to SPEND those distributions.

So just looking at the drawdown rate of an IRA because of RMDs is not telling the entire financial picture. You must also look at the non-qualified account increase as the excess income goes into for future savings.

 

[Allen Trent]

And the whole RMD debate on if its "bad" is total bs. Yes you are forced to take distributions and be taxed on funds that you havent paid anyt taxes on in 30 years... but you are not forced to SPEND those distributions.

agree. The reality is that the 3 or 4 times that RMD calculations have been relaxed over the last 20 years under the impression of helping the taxpayer have all in reality been a calculation by the Goverment to collect more tax.

in about 2000, a person turning 70 had to take out 1/16th (6%) of their IRA & then the factor changed every year by 1 until at age 86 they had to empty their final IRA dollars because the factor was 1 at age 86. Very few taxes are ever paid by this age bracket, so most taxpayers deducted contributions during their working years at a higher tax bracket & collected in the 0% tax bracket as the standard deductions wiped away most of their IRA distributions for the majority of senior taxpayers.

Soon after, the IRS changed the RMD tables to allow taxpayers to not be forced to take as much RMD, like 1/26 at age 70 & instead of the factor changing by a whole number 1 each year it changed fractionally. This meant, more of these non-income tax paying seniors took less from their IRAs when they should have been taking more. This has been leaving larger balances in the IRA accounts for the younger generation beneficiaries to pay at a higher tax rate. not saying it is wrong, just pointing out the benefit to the federal govt with these changes.

Fast forward to today, the RMD has now been pushed back to 72 & the table even further modified to a point where a 72 year old only has to take about 3% at 72 more than half what they used to. This again keeps the IRA holding higher balances than past decades. Couple that with the elimination of inherited IRA RMD table & much more in taxes will be collected from IRA beneficiaries than will from senior IRA owners. Especially considering somewhere around 70%+ of seniors are in the 0% federal tax bracket.

More no/lower tax bracket seniors should be working with their CPA to at a minimum take IRA distributions each year to utilize the space in the 0% bracket & even consider additional distributions at some of those lower brackets.

 

[DHK]

Fair enough, but I prefer control.

Government 'relaxing' things still shows who is in control of the arrangement: they are.

It's like being a teenager at home and still being told when your curfew is and other rules at home... because that's where you live.

It's little to no difference because of where your MONEY lives and when your money lives under 'their roof'... it's their rules.

That's why I usually refer to them as IRS Regulated Plans, not "qualified' plans.


Not everyone has enough tax-diversification where it wouldn't be a problem.

Think about some of these union retirees: they have a pension and 401(k)... and not much else (other than their home equity). They'll probably retire well into just the 12% tax bracket, but all of their retirement cash flow comes from IRS regulated plans.

 

[scagnt83]

Fair enough, but I prefer control.

Government 'relaxing' things still shows who is in control of the arrangement: they are.

It's like being a teenager at home and still being told when your curfew is and other rules at home... because that's where you live.

It's little to no difference because of where your MONEY lives and when your money lives under 'their roof'... it's their rules.

That's why I usually refer to them as IRS Regulated Plans, not "qualified' plans.


Not everyone has enough tax-diversification where it wouldn't be a problem.

Think about some of these union retirees: they have a pension and 401(k)... and not much else (other than their home equity). They'll probably retire well into just the 12% tax bracket, but all of their retirement cash flow comes from IRS regulated plans.

The IRS or State Tax Collectors "regulate" every appreciable asset in the US.

You are saying the IRS decides how and when you pay taxes. No different than any other taxable asset Owned by a tax paying US Citizen. The method of taxation varies from asset to asset, but how they are taxed is dictated by the IRS.

Now I agree that tax-diversification is important and can be very valuable. But saying one type of investment is "IRS regulated" and others aren't, is not truthful.

 

[DHK]

Now I agree that tax-diversification is important and can be very valuable. But saying one type of investment is "IRS regulated" and others aren't, is not truthful

Please show me the IRS publication on life insurance.

Yes, there are rules for everything. But other than keeping the policy in force, avoiding a MEC, and adhering to the 7 pay rules, it's not that regulated in terms of the contract holders behavior regarding it compared to qualified plans.

 

[Allen Trent]

Please show me the IRS publication on life insurance.

while only a small component of the tax code relatively, these 7 pages are literally in the tax code & define what is & isnt life insurance. USCODE-2011-title26-subtitleF-chap79-sec7702.pdf (govinfo.gov)

I think it is somewhat fair to say Qualified plans are more regulated than life insurance, but a few of those qualified regulations might also provide a consumer with added protection like a qualified employer plan having greater creditor protections & those plans also require a fiduciary standard that can include reasonable fees & costs. Life insurance plans dont have fiduciary requirements on the plan provider as to costs, fees, etc.

I go back to "all in moderation" There is more than enough high income/high net worth consumers that need supplemental savings in addition to qualified employer plans/after tax investments. We likely dont need agents in our industry telling people with $10k in a 401k at age 35 to stop saving in qualified plans & they should put everything in life insurance. I have seen way, way more people start & stop "max funded life insurance plans" than I have seen people empty their 401k at work. The consequence of putting $1,000 a month in a 401k for 3 years & stopping compared to putting $1,000 per month in IUL/VUL/WL for 3 years are night & day.

I like it as a supplemental added play rather than "instead of or versus". But, that tends to be my personal/professional take on it rather than "what does a perfect spreadsheet show if all goes perfect for 20-70 years.

 

[DHK]

I think it is somewhat fair to say Qualified plans are more regulated than life insurance, but a few of those qualified regulations might also provide a consumer with added protection like a qualified employer plan having greater creditor protections & those plans also require a fiduciary standard that can include reasonable fees & costs. Life insurance plans dont have fiduciary requirements on the plan provider as to costs, fees, etc.

Creditor protections... aren't all what they're cracked up to be, even and especially for qualified plans.

I had a client many years ago who wanted to move his $300k IRA into a variable annuity. (Okay, I obviously presented the option and he wanted it.) When I submitted the request to ACAT the account, the transfer desk contacted me regarding a child support court order for $16k and that it would have to be paid before the account could be moved. The client agreed and we still did it.

Creditor protection only means that no one can get at the money. If you want to access it, you'd still have to deal with the creditor who may have a claim before you can access it.

(The good news was that the VA was a 'bonus' annuity from Met Life. He got more than enough 'bonus' on the remaining amount to offset the child support balance paid.)

...

Regarding fiduciaries: they are too expensive regarding fees and costs. All cloaked by the term 'fiduciary'.

Clip from The Baby Boomer Dilemma regarding 1-2% fees:



While I agree that the life insurance plan provider does not have requirements called 'fiduciary', they do have requirements on how they manage their general investment account, managing underwriting risks, business compliance, etc. All of which impact their overall operation and continued business operations.

If we really think about it: every life insurance and annuity company is in the trust business. All managed by contracts. The contract is the primary document. Contracts of adhesion. And it's up to the drafting party to ensure that they can honor the terms of the contract as it is written.

It may not say 'fiduciary'... but there's certainly legal trust and contract language involved.

We likely dont need agents in our industry telling people with $10k in a 401k at age 35 to stop saving in qualified plans & they should put everything in life insurance.

Generally I agree on a level dollar for dollar basis. But if it's a fully comprehensive life insurance plan, the savings velocity or amount should be higher.

https://www.dynamicadvancedwealth.c...and-fund-retirement-using-only-life-insurance

The consequence of putting $1,000 a month in a 401k for 3 years & stopping compared to putting $1,000 per month in IUL/VUL/WL for 3 years are night & day.

Agreed. That time frame is way too short and we both know that cash value life policies are long-term plays.

Granted, I could see how we can secure the contract with 3 years of funding and then letting APLs take over for a while... so that when a lump-sum comes in, you have somewhere to put it. But it's not meant to be a "3-pay" and I won't sell it as such. Only that there is more flexibility for limited-pay policies than is commonly understood.

I like it as a supplemental added play rather than "instead of or versus". But, that tends to be my personal/professional take on it rather than "what does a perfect spreadsheet show if all goes perfect for 20-70 years.

We all have a compass within us and based on our experience, training, and study how we can best serve our clients.

I did write up my own view on the "financial planning pyramid" where I put cash value policies earlier in the priorities than most do and why.
https://www.dynamicadvancedwealth.com/post/2018/11/07/is-your-financial-planning-pyramid-upside-down

 

[DHK]

while only a small component of the tax code relatively, these 7 pages are literally in the tax code & define what is & isnt life insurance. USCODE-2011-title26-subtitleF-chap79-sec7702.pdf (govinfo.gov)

Thanks for providing that!

I'm told that this link from Shaw-American is also very good. (I haven't had a chance to read it yet, but it was sent to me by one of the CPAs in my group.)
https://2pgypa2uun1qymzbw1m91bg1-wp...21/11/Income-Taxation-of-Life-Insurance-2.pdf