Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

by Leave a Comment

9 Facts of Life Insurance

9 Facts of Life Insurance

Interesting life insurance facts you can share with your friends and family

Some of the facts and statistics from a recent LIMRA report, “The Facts of Life and Annuities, ”1 are real eye-openers and help tell the story of how important life insurance is.

Facts shared in the report:

Life insurance

  • Most individual life insurance policies in force are permanent rather than a term policy,
  • Permanent life insurance benefits Americans of all income levels, not just the affluent (those with a household income of $100,000 or more).
  • Ninety-five percent of life insurance beneficiaries are satisfied with the overall service provided by the insuring company.

The life insurance industry

  • Life insurers infused $63 billion into the U.S. economy in 2012 through death benefits paid to beneficiaries.
  • Life insurers infused $72 billion of annuity benefits into the U.S. economy in 2012.
  • The life insurance industry generates approximately 2.5 million jobs in the U.S., including direct employees, those who sell life insurance products, and non-insurance jobs supported by the industry.
  • One of every five dollars of Americans’ long-term savings is in life insurance and annuities.
  • Life insurers provide a significant source of funding to consumers and businesses. As of the end of 2012, life insurers held $322 billion in commercial and residential property loans.
  • Life insurers have $4.5 trillion invested in the U.S. economy, making them one of the most significant sources of capital in the nation.

by Leave a Comment

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

by Leave a Comment

Teaching Grandkids about Money… Money Does Not Grow on Trees

At this point in our lives we’ve raised our own kids and hopefully, the values we struggled to impart before they left home have become part of their family lives.  Now they’re raising our grandchildren and like us when we were new parents our kids will try to bring all of their life lessons into the mix.  The hard part, at times,  at least for me, is to keep my mouth shut not give unasked for advice.  Does anyone else have that problem?

This narrows my options to just setting the best example I can no matter the subject matter.  When it comes to money and finances.  Money does not grow on trees.

  • Young children can understand the concept of money.  When I take them out and we’re going to buy a little something like an ice cream I give them the money to pay for it.   This teaches them money is exchanged for things we want.
  • Save all my “change” for grandkids. I split up this money into 3 coin purses for each kid marked 20% for savings,  10% sharing, and all the rest for whatever they want. (with parent’s permission of course)   The savings are used for their bigger desires/wants. The sharing can be used to buy things like ice cream, candy bars and other treats for the family on outings or they will deposit it into Salvation Army kettles or other charitable containers found at the checkouts.  Elementary school age is a good time to start.
  • Demonstrate to the grandkids how to reach a savings goal.  Show them how saving X amount of their money each month and in how many months this money will equal an amount needed to buy a computer game, book or whatever.
  • When the grandkids are coming for a barbeque, a couple like to help cook.  We plan a menu, make a list of needed ingredients, figure out the budget (money to purchase listed items) and go to the store.  As we pick things out we discuss pricing,  brand names and how to evaluate the best deal.
  • Needs versus wants concept is very important throughout life for all of us.  As they age and gain understanding there are things associated with my hobbies that reflect needs versus wants which make good subject matter for discussion with my grandkids. Particularly an activity they have an interest in, like fishing for example.

These are just a few examples of actions and conversation points  I use to demonstrate how to use money with my grandkids.  Actually, I did the same things with their parents as they grew up and remember how I appreciated any support from other adults.  As a grandpa, I just wait for the “teachable” moment or when the conversation flows that way.  To be effective today’s kids are no different than yesterday’s kids- the brains shut off during “the talk”.

Need more ideas?  Download my PDF booklet

“Money Doesn’t Grow on Trees…  Teaching Kids about Money”

Download Teaching Kids about Money booklet here

by Leave a Comment

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

by Leave a Comment

Will IRA Payouts be Mandated?

Will IRA Payouts be Mandated?

Will there soon be a law mandating how a retiree must take money from their IRAs?  Perhaps. Since 2006 some congressional members and government agencies have discussed the idea of encouraging personal 401 (k) and IRA funds be converted into lifetime annuities.

In June 2015 Dr. Mark Warshawsky, visiting scholar at Mercatus Center of George Mason published a study designed to influence government policy on individual retirement accounts (IRA).  The title is Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees.

Study’s conclusion;

“I judge the life annuity an effective instrument to produce lifetime retirement income–generally somewhat better than the commonly used withdrawal rules” 

Proposes government policy be used to:

  • Mandate minimum level in dollars or percentage of all qualified plans be automatically converted to life annuity payments for all qualified plans.
  • Make lifetime annuity payments the default option for defined contribution plans.  (401 k and IRAs)
  • Mandate that retirement plan sponsors offer a life annuity option.
  • Encourage retirees to take a lifetime annuity option through favorable tax treatment.  For example, a portion of the annuity income payment would be free from taxation.
  • Create a government-sponsored source of life annuities provided by private insurers. Similar to Healthcare.gov.

 

by Leave a Comment

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.

 

by Leave a Comment

2016 Gross Income Adjustments

2016 Gross Income Adjustments

What Adjustments to 2016 Gross Income Are Available?

Once total or gross income from all sources has been determined, certain adjustments to income are available.  These adjustments amount to a reduction in gross income and generally are granted to achieve tax fairness or in recognition of a desirable social objective.  Adjustments to income are available regardless of whether a taxpayer itemizes deductions or takes the standard deduction.

The available adjustments to income include:

IRA Contributions Eligible individuals can contribute and deduct up to $5,500 to an IRA; $11,000 for an eligible married couple, even if one spouse has no earned income.  For workers age 50 and older, the IRA contribution limit is $6,500 for 2016.
Education Savings Account Contributions Subject to income limitations, up to $2,000 per beneficiary (generally a child under age 18) per year may be contributed to an Education Savings Account and deducted; subject to income limitations.
Student Loan Interest Deduction Up to $2,500 of the interest paid in 2016 on a loan for qualified higher education expenses may be deducted, subject to income limitations.
Health Savings Account Deduction Contributions to a Health Savings Account, up to specified maximums, may be deducted.
One-Half of Self-Employment Tax Self-employed taxpayers generally deduct one-half of their self-employment tax, as determined on Schedule SE.
Self-Employed Health Insurance Deduction Self-employed taxpayers can deduct 100 percent of the health insurance premiums (including long-term care insurance premiums) they pay for themselves, their spouses and dependents.

by Leave a Comment

Capital Gains & Dividend Taxation

Capital Gains & Dividend Taxation

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) provided capital gains tax relief for long-term capital gains realized after May 5, 2003 and extended capital gains tax rates to qualified dividends, beginning with dividends paid by corporations to individuals in 2003, but only through December 31, 2008.  The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), signed into law in May 2006, extended the lower JGTRRA capital gains and dividend tax rates through December 31, 2010.  The 2010 Tax Relief Act further extended the favorable tax treatment through December 31, 2012.  The American Taxpayer Relief Act of 2012 made permanent the lower capital gains and dividend tax rates for all but higher-income taxpayers.

Long-Term Capital Gains and Dividend Tax Rates

A capital gain results when an asset is sold or exchanged for more than its cost basis. Capital gains realized on assets held for one year or less are short-term capital gains and are taxed at ordinary income tax rates. Long-term capital gains resulting from the sale or exchange or an asset held more than one year, however, receive more favorable tax treatment.taxes

2015 Tax Brackets 2015 Tax Rate
10%, 15% 0%
25%, 28%, 33%, 35% 15%
39.6% 20%

Medicare Contribution Tax

Higher-income taxpayers are subject to a 3.8% Medicare contribution tax on unearned or net investment income, which includes interest, dividends, rents, royalties, gain from disposing of property, and income earned from a trade or business that is a passive activity.  The tax applies to single taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and to married taxpayers filing jointly with a MAGI in excess of $250,000.

by Leave a Comment

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.

 

by Leave a Comment

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