Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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Another Role for Life Insurance…

Another Role for Life Insurance…

The Wealth Replacement Trust

The Problem:

There can be significant tax advantages in giving appreciated assets to a charity. Examples include real estate and securities. If you were to sell an appreciated asset, the gain would be subject to capital gains tax. By donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.

For example, Donor A purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If she sells the stock, Donor A must pay capital gains tax on the $75,000 gain. Alternatively, Donor A can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.

When a donor makes substantial gifts to charity, however, the donor’s family is deprived of those assets that they might otherwise have received.

A Potential Life Insurance Solution:

In order to replace the value of the assets transferred to a charity, the donor establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on the donor’s life in an amount equal to the value of the charitable gift. Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, the donor makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At the donor’s death, the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.

 

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What’s the Problem with a Pile of 401(k) Money?

Smart retirement planning has become all about the income, as in how much and for how long.  Last year the Journal of Financial Planning conducted extensive research into retirement portfolio withdrawal rates. They concluded the traditional 4% rule was too risky because it leaves a retiree with an 18% chance of portfolio failure; that’s about a one in five failure rate.

Retirement income failure (running out of money before you die) is disastrous. In the financial planning business they call it “portfolio failure”

Portfolio failure is another way saying “sorry your money is all gone”.  Very bad news to someone in their 70’s potentially looking at many more years of life by surviving only on Social Security each month.

What is the problem with money in a 401 (k)?

It must be withdrawn and a safe withdrawal rate must be determined.

What is the new safe withdrawal rate?

  • 2.52% According to the Journal of Financial Planning.

Retirement income  money that is invested in equities; stock market, mutual funds, ETF, variable annuity etc. has an 18% chance of failure if the retiree withdraws more than 2.52% per year.

What is the solution?

With interest rates hovering around 1% certainly not bonds or certificates of deposit.

That leaves fixed annuities because they can insure a retirement income for life.  But their rates are also low and the income is sometimes level with no chance of increase.

Enter the time tested fixed index annuity with income options.  An indexed annuity can offer a guaranteed withdrawal percentage increase, meaning each year you own an indexed annuity the percentage you can withdraw goes up; some as high as 7%.

Let’s compare the recommended 2.52% equity withdrawal and 7% index annuity withdrawal using a nice round figure like $100,000.

2.52% of $100,000  provides a safe income of $2520 per year.

Whereas the annuity’s 7% withdrawal is $7000 per year guaranteed for life  and this $7000 could go up each year if there is an index interest credit and once it goes up, it is guaranteed to stay up.

3 choices are:

  • Unsafe withdrawal using the antiquated 4% rule and risk running out of money 1 out of 5 times. ($4000 per year)
  • The new “safe” 2.52% rule ($2520 per year)
  • The insured, guaranteed 7% index annuity ($7000 per year)

Which choice do you prefer?

For help you may ask questions in the comments

Or contact me privately: Tim Barton Chartered Financial Consultant

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Gifts of Life Insurance

Gifts of Life Insurance

InfoRegardless of your reasons for giving, a gift of life insurance can represent a substantial future gift to a favorite charity at relatively little cost to you. You can:

Make a Charity the Beneficiary of an Existing Policy: If you have a life insurance policy you no longer need, you can name the charity as the beneficiary of the policy, meaning that the charity will receive the policy’s death benefit after you die. While there are no current tax benefits to this approach, the value of the policy will be removed from your estate for federal estate tax purposes.

Make a Charity the Owner and Beneficiary of an Existing Policy: Instead of simply naming the charity as beneficiary of an existing life insurance policy, you transfer full ownership of the policy to the charity. The charity will then receive the policy’s death benefit after you die. In addition to removing the value of the policy from your estate for federal estate tax purposes, this approach also provides you with current federal income tax deductions.

Help a Charity Purchase a New Insurance Policy on Your Life: If you wish to make a substantial future gift to a charity at a relatively low cost to you, another alternative is to consider purchasing a new life insurance policy and name the charity as the policy owner and beneficiary. You then arrange to pay the premiums through gifts to the charity. This approach provides federal income tax deductions and the policy proceeds are not included in your estate for federal estate tax purposes.

Important Note: Most states through their “insurable interest” laws allow a charity to be the owner and/or beneficiary of an insurance policy on a donor’s life. Since state laws do vary, however, it is important to consult with a professional advisor before making a gift of life insurance to a charity. Please contact my office if we can be of assistance.

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Odds of Surviving Critical Illness Dramatically Increase

Odds of Surviving Critical Illness Dramatically Increase

With advances in medical treatment and technology, many people now survive critical illnesses that would have been fatal in the past.  As a result of this increased life expectancy senior Americans have the opportunity to watch grandkids grow into adulthood and start families of their own.  Enjoying some great grandkids is a real possibility.

Some unhappy news; many retirees will at some point become critically ill as the following statistics demonstrate.  The need for planning in order to avoid becoming destitute is more important than ever.

Cancer:

  • Men have a slightly less than 1 in 2 lifetime risk of developing some form of cancer. For women, the lifetime risk is a little more than 1 in 3.
  • Between 2002 and 2008, the 5-year relative survival rate for all cancers was 68%, up from 49% in 1975 – 1977.
  • It is estimated that over 1.6 million new cancer cases were diagnosed in 2013.

(Source: Cancer Facts and Figures 2013; American Cancer Society)

Heart Disease:

  • An estimated 80 million Americans have one or more types of heart disease.
  • Each year, an American will suffer a heart attack about every 34 seconds.
  • The lifetime risk for cardiovascular disease at age 40 is 2 in 3 for men and more than 1 in 2 for women.
  • It is estimated that the total costs of cardiovascular diseases in the U.S. was over $448 billion in 2008.

(Source: Heart Disease Facts, Centers for Disease Control and Prevention, July 2013)

Stroke:

  • Someone in the United States has a stroke every 40 seconds.
  • Stroke is a leading cause of serious, long-term disability in the U.S.
  • It is estimated that Americans paid about $38.6 billion in 2010 for stroke-related medical costs and lost productivity.

(Source: Stroke Fact Sheet, Centers for Disease Control and Prevention, July 2013)

Will you have sufficient funds available to pay for:

  • Any insurance co-payments and deductibles;
  • Alterations to your home and/or automobile to meet any special needs;
  • Out-of-town transportation and lodging for medical treatment;
  • Treatments not covered by traditional health insurance; and/or
  • Shorter-term home health care during your recuperation?

Surviving critical illnesses increase our life expectancies, we will live longer than ever before.  At the same time, fortunately annuity ownership is rising  An annuity is the only guaranteed financial  hedge against longevity.  More than ever a retiree’s goal should be lifetime income not just income for 20-30 years.

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Confirmed; Annuity Owners More Confident To Retire

 

The following IRI survey comes as no surprise to retirement income planners who witnessed their annuity client’s relief and security while they heard stories of large losses from their friends and associates in the aftermath of 2008’s financial meltdown.   Not only did these clients not lose any money or income; they experienced strong growth as the market indexes slowly recovered.

Insured Retirement Institute survey, by IALC

According to a recent survey by the Insured Retirement Institute (IRI)  of Americans aged 50-66, a majority (53%) of annuity owners are extremely or very confident that they will have adequate income in retirement, compared to less than a third (31%) of non-annuity owners who say the same.

And not only are these consumers more confident, they are also satisfied with their annuity purchases. A recent LIMRA study found that 83% of fixed indexed annuity buyers reported being satisfied with their annuities and five in six would recommend annuities to others.

So what’s driving people to buy fixed annuities, in particular? Certainly the 2008 crash taught consumers that their foundations are not as sturdy as they once thought. So in order to regain a sense of stability they are looking for sources that provide some minimum guaranteed income. In fact, when asked about the intended uses for indexed annuities in another recent LIMRA survey, respondents’ top three responses involved retirement planning, including supplementing Social Security or pension income, accumulating assets for retirement, and receiving guaranteed lifetime income.

For help you may ask questions in the comments

Or click here to contact me privately: Tim Barton Chartered Financial Consultant

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Winners of $1.4 Billion Lotto: What now? How to get your money?

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Once the initial euphoria wears down and you are “Snoopy Danced” out.  Sorry I have no idea how long that takes.  The moment will come when you have to make some decisions about how to receive your lottery winnings.

Everyone seems to assume the winner or winners, (yes brace yourself you are likely going to have share the jackpot with other winners) will take the jackpot as a lump sum.  The biggest winner of all is government at all levels.  Each state involved gets a cut of the ticket sales and the state or states where the jackpot winners live get to tax the jackpot.  Yesterday State Senator Tim Carpenter (D) WI put out a press release about his plans for spending the estimated $65,790,000 tax windfall if a Wisconsin resident won the $1.4 billion.   This windfall of state income tax pales in comparison to federal tax take at 39.6% ($343,728,000).

If the winner is a Wisconsin resident who decides to take the estimated lump sum payout $868,000,000 they would realize a net after tax payment of $458 million ($458,482,000.)  This is only 33% of the $1.4 Billion.  That’s right if a winner takes the jackpot in a lump sum they only get a check for 33% of the winnings.  Of course that is still a life changing amount of money.

Almost all financial advisors, lawyers, accountants, bankers and other investment advisors tell the winner to take the lump sum because they will quickly make back the annuity reduction and tax bite.  A client with $458 million is big in the financial and legal industry.  Inside they are referred to as whales or elephants.  So it’s hard for many advisors to tell this potential client to take the larger $1.4 Billion as an annuity payment over 30 years.

Annual annuity payment is about $46.7 million ($46,666,666) State and federal tax each year is $22,049,999 this nets the winner $24.6 million ($24,616,667) after taxes each year for 30 years.  That is a seriously nice income payment which would leave a substantial amount to invest each year after all the celebratory spending.  Best of all the winner will receive a total $738,500,000 compared to $$458 million net lump sum.

Advantages of annuity payments

  • Minimize taxes
  • Guarantees $24.6 million income for 30 years
  • No investment risk, all investments come with the risk of loss.
  • Helps prevent fraud
  • Spend thrift tendencies will not wipe out winnings in one year

One of the biggest arguments against an annuity is “your money is tied up.”  Wrong. Not these days.  There are investor groups who buy annuities.  They compete against each other because an annuity income is valuable.  If a winner changes their mind later and wants a lump sum for whatever reason they can sell the annuity payments to the highest bidder.  In the current economic conditions this would net the winner about 15-20% more than taking the lump sum payment immediately from the Powerball lottery.

A winner has 180 days to claim the Powerball before their ticket expires. Winner has  60 days from the date of their ticket claim to chose the lump sum.  Then the annuity payment  is mandatory and there is no  changing that from the lottery.  Historically only a handful of winners take the annuity option leaving a pile of cash on the table.  If many of these had waited 61 days they could have sold their annuity and had more money in their account.

How to stay anonymous:

Good luck with that.  These days it’s impossible to keep secrets.  Thanks to the internet and other technology  society gets more and more transparent everyday. So even in the handful of states have laws to allow jackpot winners to stay anonymous they’ll be found out.  Most states require winners to go public.

Changing your name to claim the prize and then changing back again will not work.   All states forbid changing a name when fraud is intended.  If a state requires disclosure of  the winner and they change their name… Sure looks like a fraud.  No reason to go there. Many states require name changes be published in the local newspapers for a period of time. Where are newspapers published these days? Online.

No hope of anonymity so it’s best to make plans to deal with your rock stardom should fate see fit to pick you. And that will be the topic of a future post.

 

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Wednesday Powerball Jackpot Hits $1.4 BILLION

Wisconsin Powerball Sales: More Than $21 Million Worth of Tickets Sold Last Week
The Powerball jackpot has hit an all-time high at $1.4 billion for Wednesday night’s drawing, or an estimated  $868 million cash payout. While this is the largest jackpot in U.S. history, weekly Powerball sales in Wisconsin also set a  new record. Last week’s Powerball sales in Wisconsin were $21,709,943. This closes in on the prior weekly Powerball  sales record of $22.3 million for the week of August 25, 2001, when the Powerball jackpot was $295 million.
The mission of Wisconsin Lottery is to provide property tax relief to Wisconsin homeowners. Since the sale of the first  lottery ticket in September 1988, the Lottery has generated:

  • More than $3.87 billion in property tax relief for Wisconsin homeowners
  • More than $7.14 billion in prizes for players
  • $766 million in commissions for Wisconsin businesses

Tickets must be purchased by 9:00 p.m. to be included in the Wednesday, January 13 drawing. Each ticket costs $2 per  play. You choose five different numbers 1-69 and one Powerball number 1-26. Be sure to sign your ticket and check it as soon as possible to avoid missing out on any prize you may have won.

The odds of winning the Powerball jackpot are approximately 1:292.2 million.

The above is a Press Release from Wisconsin Lottery WILottery.com

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Tips to Win the $1.3 BILLION Powerball Lotto?

A lot of people including those who never play a lottery are asking for tips to win the $1,300,000,000 lottery.  So why are people who have been firm members of the Never Buy a Lottery Ticket Club asking? Because a BILLION DOLLARS is a lot of head turning money no matter the astronomical odds of actually winning…leaving the Never Buy a Lottery Ticket Club with the fastest declining club membership in the world.

Playing a game this large gives every one an equal chance to win. No matter how many tickets one purchases the odds of winning stay the same for everyone of them. A lottery this big becomes a nationwide social event complete with all buzz and camaraderie. It’s human nature to want to be part of a historic event this large.  Even all the losers will have stories to tell about the time…

Much like when a big weather event strikes, people talk about their involvement or closeness to it for years to come.

Is there any way  I can  increase my odds of picking jackpot winning numbers? 

  • Sorry, there is no way to do that.
  • The odds of winning the jackpot are 1 in 292,201,338.00.
  • The odds of getting struck by lightning are about 1 in 280,000 roughly 10 times better than winning $1.3 billion Powerball lottery.
  • Go ahead and get out all your lucky charms or “feelings.”  They might make you feel good and at the very least give you a conversation starter.
Buying more tickets increases my odds, right?
  • This strategy is statistically insignificant.
  • Many people believe their chance of winning is substantially increased by purchasing more than one ticket.
  • A good example is the coin flip. The chance of winning each flip is 50-50. Every time the coin is flipped the chance of winning remains 50-50 no matter how many times it’s flipped.  At the start of each flip it’s 50-50. Same with each lotto ticket sold, each ticket has exactly the same odds 1 in 292,201,338.
  • Another example is the chance of being struck my lightning which is about 1 in 280,000.  No one thinks the chance of being struck increases with the number of times they walk out the door.

If my coworkers decide to pool money to buy a ticket should I participate?

  • Even though this does not increase your chance of winning you’d be foolish not too.  Imagine the feeling of  watching all your coworkers celebrating their winning of millions that you were only $2 away from participating in.  Besides with the lottery this big it’s transformed into a country wide  social event and the price for being a part of it is $2.
  • Also consider it’ll be awfully lonely when all your coworkers retire you are the only coming to work each day.
  • If you are the kill joy who constantly advises against the lottery as an utter waste of time and money.  Human nature being what is… In the very unlikely event a winning ticket is acquired by your coworkers, they are very unlikely to share with you.

 Only buy one ticket

  • Most of the 18,315,365  winners of Powerball lottery have been single ticket purchasers sometimes first time purchasers.  As discussed previously buying multiple tickets does not increase the chance of winning.
Whoa! Wait a minute there have been over 18 MILLION winning tickets!?
  • Yes, 18,315,365 people have won millions of Powerball dollars since the beginning.  So in spite of the steep odds against winning, someone or several people will eventually get a winning ticket.
  • Remember none of this increases anyone’s odds of winning the current lottery or any future lottery.

The only tip: Have fun. Buy a ticket and enjoy talking about all the what ifs. I’ve been doing retirement and financial planning for almost 40 years. I thought about pointing out if the average lottery player purchasing one ticket per week over 40 years saved that money with interest, they’d have more money in the end.  Does anyone really want to hear that now?

Instead read $100 Million Lottery Winner – Now How To Get Your Money this was my first post on AreaVoices regarding winning a lottery.  Have to admit it is the most read.  Thanks to this record Powerball an update is coming soon.

 

 

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2015 and 2016 Federal Income Tax Rate Tables for Individuals

Welcome to Tax Year  2016.  To prepare for the upcoming tax preparation season download these handy PDF Federal Income Tax Rate Tables for Individuals.
2016 Federal Income Tax Rates for Individuals
2016 Federal Tax Digest

The 2016 Tax Digest Includes:

  • Income tax rates, deductions, credits.
  • Kiddie tax, child tax credit
  • E education deductions and credits
  • Social Security/Medicare
  • Retirement Plan Contribution/Benefit Limits
2015 Federal Income Tax Rates for Individuals
2015 Federal Tax Digest

The 2015 Tax Digest Includes:

  • Income tax rates, deductions, credits.
  • Kiddie tax, child tax credit
  • E education deductions and credits
  • Social Security/Medicare
  • Retirement Plan Contribution/Benefit Limits

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What Is the Marital Deduction?

The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit.  The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer.  However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.

The 2010 Tax Relief Act, however, provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012.  The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent.  This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse (the equivalent of $5,000,000 as adjusted for inflation; $5,450,000 in 2016).  As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques.  Property transferred to the surviving spouse in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse.

If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,450,000 in 2016 as adjusted for inflation) or the unused exclusion of the last deceased spouse.

What Requirements Apply to the Marital Deduction?

To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of the U.S. at the time of death.

In addition, the property interest:

  1. Must be included in the decedent’s gross estate,
  2. Must pass from the decedent to his or her surviving spouse
  3. Cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).