Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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What Do Pianos Have to Do With Annuities?

In the 1960s and 70s the nation’s largest keyboard company  Baldwin Piano & Organ Company began expanding into banking and insurance eventually creating a large conglomerate of financial services companies.  In 1977 Baldwin merged with United Corp., an investment company, and became Baldwin-United Corp.

Unfortunately for buyers, these contracts proved to be unsustainable and directly contributed to the bankruptcy of Baldwin-United in 1983.  In fact, the $9 billion in liabilities of Baldwin-United exceeded the combined debt of the four previous largest bankruptcies up to that point. 

In the 1983 the states of Indiana and Arkansas took over the majority of Baldwin-United’s assets and began the long process of rehabilitating the two insurance carriers and distributing assets to policyholders.

According to a recent Wall Street Journal article companies

“betting they can wring more profit from annuity contracts” than traditional insurance companies.

Another article in Bloomberg Business Week quotes Benjamin Lawsky, New York State superintendent of financial services

 “Their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders,”

Important questions to ask about insurance companies you are considering doing business with.

  • Are they controlled by outside entities that don’t have an insurance background or experience?
  • Do they offer products with features and rates that are far above what the competition is offering?

 The lessons from the past should be kept in mind.

Properly managed insurance companies are among the safest places for your retirement dollars even in the example of Baldwin-United the state guaranty associations made the policyholders whole.  This process is time consuming so it wise to research companies you are considering.

 

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Why Are Taxes Due On A Roth After Age 59 ½ ?

This is a common question.  Many believe there are no income taxes due on Roth withdrawals after reaching that magic age of 59 ½.   However there are conditions on nontaxable withdrawals.  The IRS has rules that define a withdrawal as qualified distributions. Qualified distributions from a Roth IRA are received free of income tax and are not subject to the 10% premature withdrawal penalty tax.

Roth IRA distributions that do not meet the qualified distribution requirements will be included in income to the extent that the distribution represents earnings on Roth IRA contributions and may be subject to a 10% premature withdrawal penalty tax. 

Qualified distributions from a Roth IRA are not included in gross income and are not subject to the additional 10% penalty tax for premature distributions.

To be a tax-free qualified distribution:

  • The distribution must occur more than five years after the individual first contributed to the Roth IRA;  and
  • The individual must be at least 59-1/2 years old, disabled, deceased or the funds must be used to purchase a first home ($10,000 lifetime limit). 

There is no requirement that distributions from a Roth IRA begin by age 70-1/2.

Unlike regular IRAs, contributions to a Roth IRA can be made after age 70-1/2.

For help you may ask questions in the comments or contact me privately here: Tim Barton Chartered Financial Consultant

 

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A One in Five Chance of Retirement Failure?

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.   

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 new safe withdrawal rate?

  • 2.52% According to the Journal of Financial Planning.

Let’s be clear retirement 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 in equities is $2520 per year.

Whereas the annuity’s 7% withdrawal is $7000 per year 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. 

The 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 would you prefer?

For help you may ask questions in the comments or contact me privately here:

Tim Barton

Chartered Financial Consultant

 

 

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My Retirement Budget is Being Squeezed: How does part time work affect Social Security Benefits?

Low yields on retirement savings and increasing costs are causing some retirees to consider part time or temporary work to make ends meet. 

If they work what happens to their Social Security benefit? 

Does it pay to work?

Continuing to work after you begin receiving Social Security retirement benefits may reduce the amount of those benefits ultimately available to support your retirement standard of living in two ways:

  1. Your earned income (wages and self-employment income) may cause your Social Security benefits to be subject to income tax. If your Social Security benefits are not currently exposed to income tax, you should evaluate whether your earned income will put you over the tax-free base amount of Social Security retirement benefits ($25,000 if single; $32,000 if married filing jointly).
  2. If you are between the ages of 62 and your full retirement age (age 66 in 2012), your 2012 Social Security benefits are reduced $1 for each $2 of your earned income in excess of the 2012 exempt amount of $14,640. The exempt amount is adjusted each year for inflation.

If you are receiving Social Security benefits and you have reached your full retirement age, there is no retirement earnings test for people who have reached their Social Security full retirement age (age 66 for people born between 1943 and 1954). Here’s how it works: 

  • In the year in which you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above a specific annual limit ($38,880 in 2012), but only counting earnings before the month in which you reach the full benefit retirement age. 
  • Starting with the month in which you reach full retirement age (age 66 for people born between 1943 and 1954), you will receive the full Social Security retirement benefit to which you are entitled, without regard for or limit on your earnings.

Also keep in mind some annuity payments do not count as taxable income allowing a retiree who is receiving these payments to earn more in wages before triggering any of the Social Security earning limits.

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

Tim Barton  Chartered Financial Consultant