“The number one fear for those entering their Golden Years is the risk of running out of money, lack of longevity.” – Soeren Svendsen
It has been said that “Only God Knows when we will take our final breath.” How does that correlate with financial planning for your retirement? Well, if we only knew the exact day and time of our death, then planning for retirement would be relatively easy. It is the mystery of not knowing how long we have on the planet, coupled with the worry of running out of money in our final years, that complicates the process of planning for our retirement.
Many seniors fear the possibility of stepping out of the safe environment of Bank CDs, forced to take a risk in an uncertain market to combat the current inflation cost of 5.3% with rising food prices and gasoline costs. Everything seems to be going up in price, creating a realistic fear of paying individual tax expectations, especially with the enormous amount of new money being printed and the never-ending cost of the Covid19 pandemic.
Fixed Indexed Annuities (FIA) can combat many of these variables and concerns, which have become staggering for individual retirees. The FIA policy is the obvious solution for people who are a few years away from retirement and definitely for people who have already retired. However, the recommendation is often for only one Annuity, and then retirees proceed to deposit all of their savings into just that one policy.
A staggered system offers consumers many options, such as Roth Conversion, combating inflation strategies, and estate planning needs.
Instead of one significant annuity policy, a wise choice is to divide the funds into many small policies with or without the same carrier, reducing many tax concerns.
For instance, let’s take Mary and Bob:
Mary and Bob have concerns about taxes and required minimum distribution (RMD) in their qualified account and would like to start the converting process to a Roth IRA. Instead of one $500,000 qualified account policy, five separate $100,000 policies would be recommended. By staggering their policies, Mary and Bob can convert one policy each year while being mindful of their current income and tax obligations. By converting smaller portions each year, they will convert income at a lower tax rate.
This system of staggering their policies is also an ideal tool to combat inflation and other market costs of living. With this example, Mary and Bob’s policies could have an income rider attached, designed for lifetime income. However, with their current Social Security income and Mary’s pension, they may only need to activate two of their five policies for recurring income to make up for their monthly cost of living. The other three policies would simply sit idle and collect a handsome 7 – 8% compounded roll-up rate. When inflation is high, and Mary and Bob start to feel a financial pinch, all they have to do is turn on another policy rider with one of their extra policies, which have had additional time to compound. By purchasing several small policies, they can solve financial issues and move forward without further concerns.
By the time Mary and Bob have passed away, any non-activated policies would become part of their transferable estate to their beneficiaries.
This “staggering” system can provide a new way of maximizing retirement dollars and, in many cases, can afford retirees peace of mind through the process. Allowing more time for their money to grow in the roll-up phase of the policy rider, and with their growing age, they will significantly benefit from longevity credits on their payout rate. All in all, it helps ease the fear of longevity and running out of money.