Most people who have saved for retirement, college, or just an emergency fund, have assets in several different investments, I like to think of each of these as buckets. Buckets of money.
Once the time comes to consider which bucket to use first, many options arise. If you have qualified money in a bucket (IRA 401(k)), you might consider sending those funds ahead for use later in life and using assets that have less tax liability first. The reason. Simple, assets sent ahead that are either qualified or are on deposit in an annuity, grow tax-deferred. In other words, the benefit of carrying tax liability forward allows you to earn a return on funds that would have been taxable, thus increasing your future available funds.
Many times, when meeting a client and completing a fact finder, we find the client has done well and has at least two buckets of money and sometimes more than two, especially over the last ten years or so.
In thinking about these buckets of money and the types of buckets they represent, “qualified and or non-qualified.” Then I consider the respective ages of the clients, and when they wish to start taking money out of the buckets. The thought should come to mind regarding which bucket should they start taking money from or drawing from, first.
I’ll use a real-life example of a client. Mr. Client is 65; his wife is going to be 60 in a few months, they gave me a set of assumptions to go by which are:
Use a $300,000. Or + annuity to start taking out $1500. Per month or $18,000, each year starting a year from now. The facts are that together they have a net estate of over a million, with many buckets from which to choose from, she wants to retire early, 62, preceding the 8% per year S.S. growth until normal retirement. Mr. Client has some $718,000. In qualified monies and Ms. will have a monthly income of $ 1311 on 10-1-18, without any Social Security, and another $35,000.
The $35,000 could be used to fund another annuity. Because Mr. has done well over the past nine years or so, including the “over-the-top 2017 year, he feels comfortable managing his almost $390,000. This is the future value of the account, guaranteed when designated for income.
If we put $330,000 in an annuity, it will pay out the required $18,000, per year, and more downstream, for the remainder of both their lives. This, however, leaves some $390,000. in Mr.’s personally managed accounts which are of course “unprotected”, as well as the earnings/interest credits on the amount also being “unprotected.” The client wants to take from the annuity on a joint survivor basis starting a year from now.
It brings up the question, of where to take the $1500 each month for the next 5 or 6 years, from the “protected” funds or the “at risk” funds? Both principal and interest are at risk. The correct answer is, of course, to take the needed income from the “at risk” funds first… allowing the protected funds to grow and accumulate in a safe, secure, and protected manner. Then as the “at risk” funds are being used monthly, possibly with growth, the fully protected annuity contract continues to grow undisturbed, safely, and securely for as long as they wish or until needed.
To reiterate, the annuity has principal protection, earnings and credits are “locked in” annually, tax deferral until RMD is required, and growing guaranteed lifetime incomes for both husband and wife for their respective lifetimes.
It certainly makes sense to use the “at risk” portion of one’s assets to begin providing income for a time, while allowing the guaranteed annuity contract to do what it does best… provide guarantees for as long as people may live.