Government regulations dictate senior’s retirement income plans. The question; Is this government “retirement plan” the best option?
If they have a traditional IRA, 401(k) and/or any other qualified retirement plan they must take Required Minimum Distributions (RMD) upon reaching age 70- 1/2. If they do not take RMD as required the penalty is a harsh 50%. Most seniors follow the RMD plan so it must be the optimal way to receive retirement income… Right?
The new reality is nothing could be further from the truth. Expected longevity continues to increase well past the I.R.S. life tables used to calculate RMD withdrawals. This could set up a dangerous financial situation later in life.
The alternative solution and one most seniors have not considered is a Life Income Annuity. Rollovers from IRAs and 401(k)s are easy and there are no taxes due or 10% penalty even if income is started before age 59.
Advantages of Life Income Annuities are significant and perform better than RMD plans:
- After enduring a decade of sub economic performance, low interest rates, disappearing pensions and a decreasing Social Security trust fund seniors need protection from steep market swings. Income annuities eliminate market risk by providing a steady monthly pay check.
- Saves the golden decade of retirement; the 10 years from age 70 – 80. RMDs are scheduled to be lower during this time and increase later. The lifetime annuity has on average a 60% higher payout during the golden decade and guarantees these payments for life with any remaining principal paid to beneficiaries.
- Prevents the RMD crash. A typical life income annuity starts payments at age 70 about 60% higher than RMD withdrawals. It is true RMDs increase with age but assuming a 3% growth rate at their peak they will provide an income 15% lower than the annuity. After the RMD’s peak withdrawal years the annual income begins decreasing until the money runs out.
Lifetime annuities take the RMD drop off and longevity risk away while offering a higher payout.
For help you may ask questions in the comments
Or contact me privately: Tim Barton Chartered Financial Consultant
At what age do RMD’s typically peak?
An RMD’s largest withdrawal amount takes place about age 85.
For example, $200,000 in an IRA at age 70.5 the RMD would be $7547.
Income from a life annuity would be $13,052.
The RMD would peak at age 85 at $8910 and decrease each year after due to withdrawn principal. RMD at age 95 $7676. If the life annuity were used instead of the RMD a retiree’s income would remain at $13,052 for life with any remaining principal at death paid to their beneficiaries.
If you would like a personal calculation contact me here Tim Barton and I will email one to you.
Wouldn’t it be equally or more sensible to put money into a Roth IRA to avoid a RMD? Sure, the contributions are made after-tax, but with the government starved for revenue; wouldn’t it be a safer bet than a tax-deferred annuity?
If money is in a traditional IRA at 70.5 taking an RMD is mandatory. Doing a re-characterization is not advantageous because you must pay all taxes at that time. Some people with the advantage of 20/20 hindsight should have made Roth contributions during their working years instead of the traditional.
The life income annuity referred to in the post is not a “taxed deferred annuity” it is an annuity designed to pay lifetime income. The income it produces is fully taxable as it is received because it was funded with money which had not been previously taxed.
If a retiree’s goal is lifetime income an annuity is the only way to guarantee that income. Even Social Security payments are form of lifetime annuity payments.
You may be interested in my post regarding Roth IRA Enhancement.
Thanks for the clarification Tim. I’ll be checking out your Roth IRA Enhancement post.