Retirement Income Visions

Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck

As stressed in the last three week's posts, Where Have All the Pensions Gone?, A Retirement Paycheck is Essential, and No Pension? Create Your Own, we need to know that when we stop working, we will receive a predetermined monthly payment, i.e., a retirement paycheck, for the rest of our life, and, if married, our spouse's life. Furthermore, due to its inadequacy and uncertainty, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Per last week's post, No Pension? Create Your Own, a retirement income planning strategy that's becoming more widely used the last few years is the addition of a rider, or endorsement, to a fixed index annuity to generate a retirement paycheck. The concept of fixed index annuities isn't new to readers of Retirement Income Visions™. This topic has been featured for the last five months, beginning with the July 11, 2011 post, Shelter a Portion of Your Portfolio From the Next Stock Market Freefall.

No Pension? Create Your Own

Last week's post, A Retirement Paycheck is Essential, emphasized that it's imperative for each and every one of us to have a retirement income plan. The cornerstone of a retirement income plan is a retirement paycheck. Specifically, we need to know that when we stop working, we will receive a predetermined monthly payment for the rest of our life, and, if married, our spouse's life. Furthermore, this monthly payment needs to be in addition to whatever Social Security benefits we may receive.

Given the fact that the majority of us won't receive a pension from an employer's defined benefit plan that our parents' generation took for granted (see the November 21, 2011 post, Where Have All the Pensions Gone?), it's incumbent upon us to create our own retirement paycheck. This isn't an task and generally requires the assistance of an experienced retirement income planner.

A Retirement Paycheck is Essential

Last week's post, Where Have All the Pensions Gone? made the point that given (a) the scarcity of traditional defined benefit pension plans, (b) the inability of 401(k) plans, employee and self-employed retirement plans, and many nonretirement investment vehicles to provide for a predetermined monthly lifetime income beginning at a specified age, and (c) the inadequacy and uncertainty of the Social Security system, it behooves each and every one of us to create our own pension plan.

With this week's post, I want to expand upon and clarify the conclusion in last week's post. I understated the point when I said that it behooves each and every one of us to create our own pension plan. It isn't simply beneficial or worthwhile to create our own pension plan – it's imperative that we do so. To do otherwise is to leave our retirement exposed to too many variables beyond our control and, in turn, risk that we will outlive our retirement assets.

Where Have All the Pensions Gone?

If you aren't receiving a pension from a former private sector employer, there's a pretty good chance that your employee benefit package doesn't include this once-cherished perk. According to a study by Towers Watson & Co., as of May 31, 2011, only 30% of Fortune 100 companies offered a defined benefit plan to new salaried employees. That's down from 37% at the end of 2010, 43% in 2009, 47% in 2008, and 83% as recently as 2002. This is a far cry from 1985 when 90% of Fortune 100 companies offered a traditional pension plan to new employees.

While defined contribution plans, predominantly 401(k) plans, have replaced defined benefit plans in the private sector, the pension aspect is lacking in the majority of such plans today. Specifically, with limited exceptions, these plans generally don't provide for a predetermined monthly payment that an employee can expect to receive beginning at a specified age for the rest of his/her life and his/her spouse's life if married.

Retirement Income Visions™ Celebrates 2-Year Anniversary!

Thanks to all of my subscribers and other readers, Retirement Income Visions™ is celebrating its two-year anniversary. Since its debut on August 16, 2009, Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post two years ago, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Although the stock market experienced three positive and encouraging days this past week, the market volatility the last three weeks has only served to emphasize the need for a comprehensive retirement income plan.

Is Your Retirement Income Portfolio Tax-Efficient?

Last week's blog post posed the question, Do You Have a Retirement Income Portfolio? Beginning with the premise that projected retirement expenses should be the focus of every retirement plan and income is required to pay for expenses, there are basically two sources of retirement income that need to be considered. The first is non-asset sources, i.e., income that is independent of assets that you own and are projected to own, e.g., Social Security, private pensions, government pensions, etc.

Since expenses, by definition, include income tax, to the extent that you will receive taxable non-asset sources of retirement income, the income tax liability attributable to such income needs to be calculated and included in total projected retirement expenses. Per the January 10, 2011 post, Say Goodbye to Up to 30% of Your Social Security Benefits – Part 1 of 2, while it isn't the norm, it's possible to lose up to 30% of Social Security benefits to federal income tax. The tax bite is typically higher for pension income since, unlike Social Security, other than income attributable to employee contributions, there's generally no tax relief for any portion of pension income.

Do You Have a Retirement Income Portfolio?

Investopedia® defines a portfolio as "a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts." It completes the definition by saying that "portfolios are held directly by investors and/or managed by financial professionals."

In other words, an investment portfolio consists of a mixture, or collection, of financial assets. During our working years, we typically finance our fixed and discretionary expenses from current sources of employment income, including salary, if we're employed, and from draws, if we're self-employed or a partner. Employment income is also used to fund an investment portfolio, including retirement and nonretirement investment plans through, and independent of, employers.

Sizeable Capital Loss Carryover? Rethink Your Retirement Plan Contributions

Last week's post answered the question, "What is the right mix of retirement vs. nonretirement investments in a retirement income plan?" with a simple, but correct, answer: "It depends." It pointed out that each scenario is different, requiring a professional analysis by a qualified retirement income planner of the interaction between a host of many variables unique to that situation.

One of the variables mentioned last week was income tax carryover losses. There are limitations on the amount of losses arising from various types of transactions that may be deducted on the tax return for the year in which the loss incurred. The portion of the loss that isn't deductible in the year of origin of the loss must instead be carried forward to the following year, and potentially to additional future years, until the requisite type and amount of income becomes available to absorb the loss.

Nonretirement vs. Retirement Plan Investments – What is the Right Mix?

Last week's post made the point that retirement plans, in and of themselves, generally aren't sufficient for meeting most people's retirement needs and, therefore, it's important to include nonretirement investments in most retirement income plans. The question is, what is the right mix of retirement vs. nonretirement investments?

Like the answer to many financial planning questions, the correct response is, "It depends." Each situation is different. It all revolves around the interaction between a host of many variables, including, but not limited to, current age, projected retirement age, retirement income goals, insurance coverage, current investments, access to and participation in employer retirement plans, availability of other types of retirement plans, other assets owned, liabilities, current disposable income, projected sources of retirement income, income tax carryover losses, and current and projected income tax rates.

Nonretirement Investments – The Key to a Successful Retirement Income Plan

When was the last time someone asked you, "Hey, did you make your nonretirement investment plan contribution this year?" When we think of a retirement income plan, the first thing that typically comes to mind is retirement investments. This includes 401(k), 403(b), SEP-IRA, traditional IRA, Roth IRA, SIMPLE IRA, defined contribution, defined benefit, and other retirement plans. While the maximum allowable contribution varies by plan, the inherent goal of each of them is to provide a source of retirement funds.

With the exception of the Roth and nondeductible traditional IRA's, both of which receive nondeductible contributions that grow tax-free provided certain rules are followed, all of the other plans enjoy tax-deferred growth. The reason that the growth isn't nontaxable, and is instead tax-deferred, is because the source of funds for each of these plans is tax-deductible contributions. Whenever this is the case, although plan income, including interest and dividend income and capital gains aren't taxed, plan distributions are taxable as ordinary income.

Your Social Security Retirement Asset – Part 2 of 3

Part 1 of this post last week made the point that Social Security, which has historically been taken for granted as a retirement income source, is also a retirement asset, specifically, an annuity. The post explained how Social Security, while not in strict compliance, comes pretty close to fulfilling most of the various attributes of an annuity.

If Social Security is, in fact, an annuity, then why isn't it included as such on personal financial statements? If you own a variable or fixed annuity that hasn't been annuitized, the life insurance company from whom you purchased your annuity periodically makes available to you a statement that includes the current value of your investment as of a specific date. The annuity and its value is routinely included as an asset in the nonretirement or retirement section of your personal financial statement, depending upon whether it's nonqualified or qualified. Nonqualified annuities are generally owned by individuals whereas qualified annuities are owned by retirement plans, including 401(k) plans, traditional IRA's, SEP-IRA's, Roth IRA's, etc.

Your Social Security Retirement Asset – Part 1 of 3

This is Part 1 of 3 of the final post in Retirement Income Visions™ series about Social Security. Since its inception on September 27, 2010, the series has focused on Social Security retirement income planning strategies. What most people don't realize is that Social Security is more than an income stream. It's an asset - perhaps your most important retirement asset.

Increase Your After-Tax Social Security Benefits – Part 1 of 4

The last two posts, Say Goodbye to Up to 30% of Your Social Security Benefits – Parts 1 and 2 discussed taxation of Social Security benefits. As explained in both posts, up to 50% or 85% of Social Security benefits can be taxable depending upon the amount of one's "combined income" (50% of Social Security benefits plus adjusted gross income increased by tax-exempt income) compared to specified thresholds that are dependent upon one's tax filing status (i.e., single, head of household, married filing separate, or married filing joint) and one's tax rates.

Although, as pointed out in last week's post, taxation of Social Security benefits has been a thorn in Congress' side ever since it came into being in 1984, it appears that it's here to stay. Income taxation of Social Security benefits can be reduced or, in some cases, eliminated, in one or more years with proper planning. While much of the planning is ongoing throughout the years that one is collecting benefits, there are several opportunities that should be analyzed and potentially implemented beginning in one's 40's, many years before the receipt of one's first Social Security check. This post focuses on pre-benefit receipt planning and Parts 2, 3, and 4 address planning strategies during the Social Security benefit receipt years.

Retirement Income Visions™ Celebrates 1-Year Anniversary!

It's hard to believe that a whole year has gone by since Retirement Income Visions™ initial blog post, but it has! This marks Retirement Income Visions™ 52^nd post since it debuted on August 16, 2009 as a weekly blog, with new posts published each Monday morning.

As stated in the initial post, Retirement Income Visions™ Makes Its Debut, the blog, and the associated importance of retirement income planning as a separate and distinct niche, was inspired and motivated by my clients' experience during the October, 2007 – March, 2009 stock market decline.

What Tools Does Your Financial Advisor Have In His or Her Toolbox?

I want to wish all of my readers a very Happy New Year! The theme of the last eight blogs, beginning with the November 9^th post, Using Fixed Income Annuities to Build Your Income Portfolio Ladder, through last week's post, The Thrive® Income Distribution System – A Revolutionary Retirement Income Planning System, was creating and optimizing retirement income with fixed income annuities. To summarize, the strategic implementation of single premium immediate ("SPIA's") and deferred income ("DIA's") annuities by trained and experienced professionals as part of a comprehensive retirement income plan can be a powerful solution for generating guaranteed (subject to individual insurers' claims-paying ability), inflation-protected, and tax-efficient income that, when combined with other sources of income, e.g., Social Security, is designed to match a client's projected retirement income needs.

If you're within ten years of retiring or if you retired within the last ten years, you may be wondering why your financial advisor hasn't talked to you about any of the strategies discussed in the last eight blogs. Rest assured, you're not alone. A 2009 Fidelity study found that 83% of investors between the ages of 55 and 70 who are working with a fee-based adviser believe it's more important for them to generate guaranteed (subject to individual insurers' claims paying ability) income for retirement than to deliver above-average returns.

The Thrive® Income Distribution System – A Revolutionary Retirement Income Planning System

Talk about innovative strategies for creating and optimizing retirement income! Today, I have the distinct pleasure and good fortune to be interviewing Curtis Cloke, the inventor of the Thrive® Income Distribution System ("Thrive®"), one of the leading retirement income planning solutions available to financial advisors. I personally use the Thrive® system with my clients who have been receptive and enthusiastic. The following are eight questions I asked Curtis about the system together with Curtis' answers.

1. What is the Thrive® Income Distribution System?
   
   

   Thrive® is a retirement income solution that helps advisors utilize the least amount of a client's portfolio to provide for their income gap needs with a known and precise amount of their retirement assets. This creates contractually-guaranteed and inflation-adjusted income that allows the client to invest the portion of their portfolio not needed to generate their income needs in traditional accumulation investments providing a significant horizon appropriate for longer-term strategies without being concerned about the sequence of returns. Thrive® is a turnkey web-based platform, including educational tools, marketing materials, client presentations and a calculation system that trains and helps advisors implement the strategy using a compliance-approved action plan and report for the client. The system is designed to help implement the purchase of income products that will create solid and authentic retirement income solutions for which advisors will never have to apologize.

Designing Your Income Annuity Plan

While one of the benefits of income annuities as stated in Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan is reduced dependence on ongoing investment management, anyone considering the purchase of an annuity should first engage the services of a professional retirement income planner.

A professional retirement income planner, after discussing your retirement income needs with you and analyzing your financial situation, will prepare an income annuity plan that includes a comprehensive analysis and recommendations. The analysis should include multi-year cash flow, income tax, and portfolio projections that illustrate the following:

Mirror Your Retirement Income Needs With Period Certain Annuities

One of the most difficult financial planning challenges for any financial planner when planning for any goal, retirement or otherwise, is screening, performing due diligence on, and selecting, financial products that have the greatest potential for helping a client attain his/her goals while being suited to the client's investment temperament. This is especially true when it comes to retirement income planning given the fact that the planner's mission is to (1) find a way to use assets to create predictable, inflation-protected, and whenever possible, tax-efficient, income streams that, (2) when combined with other sources of income (Social Security, pensions, etc.), are designed to match a client's projected and unknown (e.g., potential uninsured long-term care expense) retirement income needs for an unknown period of time (i.e., the remainder of one or more lives), (3) while also retaining a portion of those assets to pay for lump-sum expenses (e.g., car purchases, home improvements, weddings, etc.), and (4) to also accomplish the client's estate planning (e.g., leave money to children and/or to charitable organizations) and other objectives. Suffice it to say, this isn't an easy task, to say the least!

Lifetime Annuity Payout – Watch Out!

Using Fixed Income Annuities to Build Your Income Portfolio Ladder introduced two types of fixed income annuities: single premium immediate annuities, or "SPIAs," and deferred income annuities, or "DIAs." As stated in that blog post, while the use of SPIAs is widespread, DIAs are currently offered by only a handful of life insurance companies.

SPIAs and DIAs come in two flavors insofar as the length of time that life insurance companies are on the hook for making payments to you: life annuities and period certain annuities. While SPIAs have traditionally been favored over DIAs, life annuity payment modes have generally been chosen over period certain annuities. This is understandable since most people don't want to run out of money, with married couples preferring income to last for the remainder of both individuals' lifetimes.

Annuitization Payment Option: The Financial Decision You Will Live With for the Rest of Your Life

Using Fixed Income Annuities to Build Your Portfolio Ladder, in addition to introducing the fixed income annuity strategy, was intended to be a primer on annuities in general. Although, as we learned in Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan, fixed income annuities have a long history, tracing their roots to Roman times with private sector annuities being available in the United States for over two centuries, they are an often misunderstood and misused investment tool.

Unlike CD's to which they're often compared, fixed annuities offer many more potential benefits, including generally higher rates of return over comparable terms, tax-deferral when used in nonretirement settings, potential death benefit, and availability of annuitization with guaranteed (subject to individual insurers' claims-paying ability) and tax-favored (when used in nonretirement accounts) income, often for life. Annuitization, the last potential benefit, is the one that is the most misunderstood and misused, especially when the purpose of the annuity purchase is to produce retirement income.

Deferred Income Annuities: The Sizzle in a Retirement Income Plan

The blog post two weeks ago, Using Fixed Income Annuities to Build Your Income Portfolio Ladder, introduced a powerful income laddering strategy using a customized blend of two types of fixed income annuities to create and optimize retirement income. The purpose of the strategy bears repeating since it is the catalyst for this week's blog. As discussed two weeks ago, this strategy offers retirees the benefit of predictable inflation-adjusted income streams to close projected income gaps as well as generate tax efficiency for the nonretirement portion of one's portfolio while reducing exposure to the gyrations of the stock market.

The two types of fixed income annuities that are used to implement this strategy are immediate and deferred. Immediate income annuities, or "SPIAs" (the acronym for single premium immediate annuities) was the subject of last week's blog. I encourage you to read this post if you haven't done so already. It discussed the unique characteristics and benefits of SPIAs that often position them as the cornerstone of retirement income plans. This week's blog focuses on the second type of fixed income annuity that is used to create and optimize retirement income – deferred income annuities, or "DIAs."

Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan

Last week's blog post introduced a powerful income laddering strategy using a customized blend of fixed income annuities to create and optimize retirement income. As discussed, this strategy offers retirees the benefit of predictable inflation-adjusted income streams to close projected income gaps as well as generate tax efficiency for the nonretirement portion of one's portfolio while reducing exposure to the gyrations of the stock market. Two types of fixed income annuities were introduced: immediate and deferred, with the former being the subject of this week's blog.

Annuities have a long history, tracing their roots to Roman times. Contracts during the Emperor's time were known as annua, or "annual stipends" in Latin. Roman citizens made a one-time payment in exchange for a stream of payments for a fixed term or for life.

Using Fixed Income Annuities to Build Your Income Portfolio Ladder

The previous two blog posts introduced the income portfolio plan strategy and the importance of designing laddered income streams to fund a retirement income plan. If you haven't read these two posts yet, I would recommend that you do so before reading this one. This post introduces a powerful income laddering strategy that can be used to create and optimize your retirement income.

As stated in last week's post, due to the fact that our financial situation and needs will change at different stages of our retirement years, a retirement income plan must provide for different and distinct income streams to match our expense needs associated with each stage. One of the most efficient ways to do this is through the use of a customized blend of fixed income annuities. Before discussing this technique, let's first review some basics of annuity investing for those of you who may not be familiar with this often misunderstood type of investment.

Is Your Income Portfolio Plan Laddered?

After ten previous posts, last week's blog introduced the first strategy for creating and optimizing retirement income – an income portfolio plan. It explained that an income portfolio uses streams of income to close the gap between projected income needs and projected income sources while accomplishing the same objective as a traditional investment portfolio, i.e., minimization of investment risk. It also stated that the investments used to generate the income streams include, but are not limited to, CD's, bonds, life insurance, and annuities.

Generally speaking, no single investment can be used to fund a financial plan. The success of any plan is dependent upon a combination of investments, each serving a specific purpose, working together to achieve the goals of the plan. In the case of an income portfolio plan, streams of income from several investments are used to achieve the goal of the plan, i.e., to close the income gap, or difference between projected income needs and projected income sources. While the income streams can occur simultaneously, this post discusses sequential, or laddered, income streams.

Do You Have An Income Portfolio Plan?

We're all familiar with the concept of an investment portfolio. Wikipedia defines it as "an appropriate mix or collection of investments held by institutions or a private individual." It explains that "holding a portfolio is part of an investment and risk-limiting strategy called diversification."

A well-diversified, professionally-managed investment portfolio can enable you to pursue various financial goals, including financial independence, in the accumulation stage of your life. As you approach, and move into, retirement, a customized income portfolio plan is essential for enabling you to close the gap between your projected income needs and your projected income sources without worrying about, and being dependent upon, the gyrations of the stock market.

Retirement Income Planning – The End Game

If you're a subscriber to Retirement Income Visions™, you may have noticed that, although there have been nine posts prior to this one, none of them has stayed true to the theme of this blog, i.e., Innovative strategies for creating and optimizing retirement income. This post will be no exception. As the saying goes, there's a method to my madness. In order to understand and appreciate the strategies and apply them to your situation, it's important to understand the origin of retirement income planning, including the limitations of the retirement asset planning approach.

As explained in The Retirement Planning Paradigm Shift – Part 2, retirement planning is undergoing a paradigm shift. Instead of relying on retirement asset planning as a solution for both the accumulation and withdrawal phases of retirement, people are beginning to recognize, understand, and appreciate the need for, and value of, employing retirement income planning strategies during the withdrawal phase. No doubt about it, per Retirement Asset Planning – The Foundation, retirement asset planning is the way to go in the accumulation stage to build a solid foundation for a successful retirement plan. However, as discussed in The Retirement Planning Shift – Part 2, as a result of the uncertainty of traditional retirement asset planning as a solution for providing a predictable income stream to match one's financial needs in retirement, retirement income planning was born.

The Sequence of Returns – The Roulette Wheel of Retirement

So here you are, crossing the threshold from earning a living to going into retirement. You worked hard for many years. You built a sizeable, diversified investment portfolio. You hedged your bet by purchasing life insurance and long-term care insurance. Your will and other estate planning documents have been updated to reflect your current goals and financial situation. Everything's in place, or so you think.

Welcome to the roulette wheel of retirement, otherwise known as the "sequence of returns." If you haven't planned for this financial phenomenon, your retirement could be quite different than you envisioned. To illustrate this important concept, let's take a look at three hypothetical scenarios. In each one we'll use the following five assumptions:

Withdrawal Drag – The Silent Killer

As you approach retirement, are you aware of the silent killer lurking on the horizon? Let's call our silent killer "W.D." When you enter the retirement zone, W.D. will be right behind you, looking over your shoulder, waiting to spring into action. When you dare to take your first withdrawal from your portfolio, W.D. will pounce – only you won't know it. You will continue on, as if nothing happened, innocently taking your withdrawals each month. As each deposit hits your checking account, W.D. will extract a toll on your portfolio, one that will increase in size with each transaction. And guess what? You will never know what hit you. You see, W.D., or "Withdrawal Drag," is the ultimate portfolio silent killer.

Before we expose the secrets of "withdrawal drag," first some background. When you're saving for retirement, or you're in the "accumulation stage," as we retirement income planners like to refer to it, assuming that you take no withdrawals from your portfolio, you realize the beauty and grace of compounding rates of return. To appreciate compounding, let's start with simple interest.

Retirement Asset Planning – The Foundation

Last week, in Retirement Planning Risks, I discussed six risks associated with retirement planning in general. In order to understand and appreciate the value and importance of retirement income planning and its associated strategies, let's take a closer look at retirement asset planning.

As was presented in The Retirement Planning Paradigm Shift – Part 2, the focus of retirement asset planning is on the accumulation and "spending down" of one's assets. The accumulation phase is common to various financial planning areas, not just retirement, including house purchase planning and education planning, to name a couple. With most types of planning, you're typically designing a plan for the purpose of accumulating funds for either (1) a single expenditure at some specified, or target, date, in the future, e.g., a down payment on a house, or (2) a series of expenditures for a limited and specified series of target dates, e.g., a four-year college education.

Is Your Retirement Plan At Risk?

Before I write about the specific risks associated with retirement asset planning and the strategies that retirement income planners use to address, and, in many cases, mitigate, these risks, let's take a look at risks that are common to all retirement planning. While many of these are uncertain and/or uncontrollable, each of them needs to be addressed in a retirement plan.

The risks that will be discussed are as follows, with the first three common to all types of financial planning, and each one intended to be a brief introduction vs. a comprehensive discussion:

1. Inflation 
2. Investment
3. Income tax
4. Longevity
5. Health
6. Social Security benefits reduction