Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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What is a Qualified Retirement Plan?

What is a Qualified Retirement Plan?
What is a Qualified Retirement Plan?

A qualified retirement plan is a program implemented and maintained by an employer or individual for the primary purpose of providing retirement benefits and which meets specific rules spelled out in the Internal Revenue Code. For an employer-sponsored qualified retirement plan, these rules include:

  • The plan must be established by the employer for the exclusive benefit of the employees and their beneficiaries, the plan must be in writing and it must be communicated to all company employees.
  • Plan assets cannot be used for purposes other than the exclusive benefit of the employees or their beneficiaries until the plan is terminated and all obligations to employees and their beneficiaries have been satisfied.
  • Plan contributions or benefits cannot exceed specified amounts.
  • The plan benefits and/or contributions cannot discriminate in favor of highly-compensated employees.
  • The plan must meet certain eligibility, coverage, vesting and/or minimum funding standards.
  • The plan must provide for distributions that meet specified distribution requirements.
  • The plan must prohibit the assignment or alienation of plan benefits.
  • Death benefits may be included in the plan, but only to the extent that they are “incidental,” as defined by law.

 

Question Why do employers comply with these requirements and establish qualified retirement plans?
Answer To benefit from the tax advantages offered by qualified retirement plans.

Qualified Retirement Plan Tax Advantages:

In order to encourage saving for retirement, qualified retirement plans offer a variety of tax advantages to businesses and their employees. The most significant tax breaks offered by all qualified retirement plans are:

  • Contributions by an employer to a qualified retirement plan are immediately tax deductible as a business expense, up to specified maximum amounts.
  • Employer contributions are not taxed to the employee until actually distributed.
  • Investment earnings and gains on qualified retirement plan contributions grow on a tax-deferred basis, meaning that they are not taxed until distributed from the plan.

Depending on the type of qualified retirement plan used, other tax incentives may also be available:

  • Certain types of qualified retirement plans allow employees to defer a portion of their compensation, which the employer then contributes to the qualified retirement plan. Unless the Roth 401(k) option is selected, these elective employee deferrals are not included in the employee’s taxable income, meaning that they are made with before-tax dollars (see page 13 for information on the Roth 401(k) option).
  • Qualified retirement plan distributions may qualify for special tax treatment.
  • Depending on the type of qualified retirement plan, employees age 50 and over may be able to make additional “catch-up” contributions.
  • Low- and moderate-income employees who make contributions to certain qualified retirement plans may be eligible for a tax credit.
  • Small employers may be able to claim a tax credit for part of the costs in establishing certain types of qualified retirement plans.

The bottom line is that the primary qualified retirement plan tax advantages – before-tax contributions and tax-deferred growth – provide the opportunity to accumulate substantially more money for retirement when compared to saving with after-tax contributions, the earnings on which are taxed each year

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She Solved Her Retirement Needs. And So Can You

Need retirement income you can’t outlive? Have coffee with Meg. Take a video break and learn how Meg uses a single premium immediate annuity (SPIA) to alleviate concerns about outliving her retirement assets and being unable to meet monthly expenses.

Retire with Confidence

People are living longer than ever before, meaning that unpredictable market performance, higher health care costs, and rising inflation could impact your retirement nest egg. Social Security is in question, and you may or may not have a pension.
The reality is, many individuals may not be able to maintain their standard of living — or worse  — may run out of money during retirement.

Live Comfortably with Retirement Income- Consider the risks that can affect your retirement and life:

  • Lifespan – Living longer and outliving your retirement money.
  • Inflation – Cost of living increases that erode your retirement buying power.
  • Fluctuation – Market volatility that impacts your retirement assets.
  • Experience – Life events that require retirement plan flexibility.

At what rate can you safely withdraw from your portfolio to address these risks?

  • According to the Journal of Financial Planning, the safe withdrawal is 2.52%.

Contact www.TimBarton.net

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8 Ways to Payday

Retirees like income. So they want to know the many ways an annuity may pay. Confidence comes with knowing how an annuity may pay to help meet your financial needs.

  1. Withdrawals. You can access your money any time.  Beginning immediately, up to 10% of the accumulated value annually without a surrender charge.
  2. Annuitization. Convert a lump sum into income guaranteed for your life, or your life and another person’s.
  3. Payout Options. Immediate annuities offer payout options for specific amounts or periods; plus, increasing payout options to help address inflation over time.
  4. SEPPs. Substantially Equal Periodic Payments taken at least annually for 5 years and to the age of 59 1/2 are not subject to the 10% IRS penalty tax on withdrawals before age 59 1/2.
  5. Combination Plans. Pair two annuities–one generates immediate income, one pursues accumulation.
  6. RMDs. Required Minimum Distribution programs pay the amount IRA owners and qualified plan participants must take yearly from accounts starting by age 70 1/2.
  7. Death Benefit. Distributions upon death provide payouts and may extend tax-deferral benefits for a beneficiary’s life.

Commutation. Provides a lump sum from an immediate annuity for unforeseen life events while continuing reduced regular payments.

For confidence, it pays to plan for retirement with an annuity.

 

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Tips for Managing an Inheritance

Tips for Managing an Inheritance

 

Take your time. This is an emotional time…not the best time to be making important financial decisions. Short of meeting any required tax or legal deadlines, don’t make hasty decisions concerning your inheritance.

Identify a team of reputable, trusted advisors (attorney, accountant, financial/insurance advisors). There are complicated tax laws and requirements related to certain inherited assets. Without accurate, reliable advice, you may find an unnecessarily large chunk of your inheritance going to pay taxes.

Park the money. Deposit any inherited money or investments in a bank or brokerage account until you’re in a position to make definitive decisions on what you want to do with your inheritance.

Understand the tax consequences of inherited assets. If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Otherwise, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration.

Treat inherited retirement assets with care. The tax treatment of inherited retirement assets is a complex subject. Make sure the retirement plan administrator does not send you a check for the retirement plan proceeds until you have made a distribution decision. Get sound professional financial and tax advice before taking any money from an inherited retirement plan…otherwise you may find yourself liable for paying income taxes on the entire value of the retirement account.

If you received an interest in a trust, familiarize yourself with the trust document and the terms under which you receive distributions from the trust, as well as with the trustee and trust administration fees.

Take stock. Create a financial inventory of your assets and your debts. Start with a clean slate and reassess your financial needs, objectives and goals.

Develop a financial plan. Consider working with a financial advisor to “test drive” various scenarios and determine how your funds should be invested to accomplish your financial goals.

Evaluate your insurance needs. If you inherited valuable personal property, you will probably need to increase your property and casualty coverage or purchase new coverage. If your inheritance is substantial, consider increasing your liability insurance to protect against lawsuits. Finally, evaluate whether your life insurance needs have changed as a result of your inheritance.

Review your estate plan. Your inheritance, together with your experience in managing it, may lead you to make changes in your estate plan. Your experience in receiving an inheritance may prompt you to want to do a better job of how your estate is structured and administered for the benefit of your heirs.

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Considerations for a Reverse Mortgage

Considerations for a Reverse Mortgage

A reverse mortgage is a loan against the value of your home that does not have to be paid back for as long as you live in the home. Simply put, a reverse mortgage converts some of the equity in your home into income.

In Evaluating a Reverse Mortgage, Consider…

  • Typically, a reverse mortgage must be a “first” mortgage, meaning that if you still owe money on your home, you must pay off the existing mortgage before you can get a reverse mortgage (note: an initial lump sum payment from a reverse mortgage can be used to pay off an existing mortgage).
  • Keep in mind that, while you don’t have to repay a reverse mortgage for as long as you live in the house, the amount that ultimately has to be repaid does grow over time.
  • While the amount of debt grows over time, the reverse mortgage repayment cannot exceed the value of your home at the time it is ultimately sold.
  • If you take out a reverse mortgage, you continue to own your home. This means that you continue to be responsible for expenses such as property taxes, hazard insurance and home maintenance and repair.
  • Reverse mortgage proceeds may affect eligibility for assistance under state and federal programs.
  • The upfront costs associated with a reverse mortgage, such as an origination fee, closing costs and mortgage insurance premium, can be significant. This means that a reverse mortgage may be expensive if the loan is repaid within a few years of closing. As a result, if you anticipate moving within a few years, you should explore another alternative, such as a home equity loan.
  • Repayment of a reverse mortgage when your home is sold will mean less equity left to pass to your heirs.

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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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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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Medical Annuities Pay More

You are wondering what to do after your doctor explains you have a serious medical condition.  Not only is the thought of living out your remaining time, perhaps a bit impaired disturbing,  you and your spouse are wondering how to make your money last.  With the possibility of a future filled with increased medical bills and current yields at record lows,  you fear your savings are going to have to be drawn down to the point of depletion.

A possible solution is the medically underwritten annuity.  When applying for a medical annuity you provide your medical records to the insurance company who will then review them to determine your actuarial age.

After determining  the actuarial age it is compared to your chronological age and if  actuarial age is greater the annuity’s monthly income is increased accordingly.  This adjustment can be done jointly  even if your spouse’s health is good.

It has always been important and more so in this low interest rate environment to make sure a retiree’s savings lasts the rest of their and their spouse’s life.  The effort put into getting quotes on a medical annuity can bring a welcome peace of mind making it time well spent

On the positive side; medical science continues to advance at a fast pace so the initial prognosis could  in the end, turn out to be wrong, in which case you get to enjoy good health and a higher than normal lifetime income stream.

You may ask questions in the comments or contact me privately:

Tim Barton

Chartered Financial Consultant

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The 3 Sources of Retirement Income

  What Are the Available Sources of Retirement Income?

When you retire and your earning power ceases, you will have to depend on three primary sources for your retirement income:

 

Social Security

  • According to the Social Security Administration, the average retired worker in 2015 receives an estimated $1,328 monthly benefit, about 40% of average preretirement income. As pre-retirement income increases, however, the percentage replaced by Social Security declines.

Employer Sponsored Plans and IRAs

  • You may be eligible to participate in a retirement plan established by your employer and receive pension income at your retirement. You may also be able to contribute to an individual retirement account (IRA) to supplement Social Security and pension benefits.

Home Ownership and Personal Retirement

  • For many people, there is a gap between the retirement income they can expect from Social Security and employer-sponsored plans/IRAs and their retirement income objectives. Home equity can be used to bolster retirement security.
  • Personal retirement savings, including bank and brokerage accounts and insurance and annuity contracts, can be used to bridge a retirement income gap.

If sufficient retirement income is not available, will you defer your retirement age, or will you choose to reduce your standard of living?