Maximizing Income With A Navigational Approach

By Bernie Casey

Advisors and their clients frequently want to know how to generate guaranteed income from a retirement portfolio. This objective has been on the rise, particularly after the market crash of 2008.

The concern arose again at the start of the COVID-19 pandemic, when we experienced portfolios decreasing in value significantly, then increasing and creating volatility concerns with clients. Combine market volatility with the potential for a client outliving their money during retirement and you have both a challenge and an opportunity for advisors.

Ask yourself this question: When was the last time you took a long road trip without a navigational app to help you get where you wanted to go? Do your clients also need direction? The road map to having a more comfortable retirement also can use a navigational approach, by ensuring your clients have guarantee, predictability, safety, security and stability built into their income planning road map along the way.

For retirement planning strategy, this road map can be found by using asset and income maximization. This can also be used to leverage income from some of the low-yielding products available in today’s market while allowing clients a way to provide a legacy to their heirs. Essentially, this wealth replacement strategy can be used by looking for low-yielding certificates of deposit, underperforming bond portfolios and deferred annuities, as well as qualified individual retirement accounts.

Put simply, here is how it works:

The existing asset is sold or exchanged for a lifetime only single premium immediate annuity.
A SPIA is purchased with the proceeds for a life insurance only option, with no refund to help maximize the income.
A portion of the annuity income stream is used to pay life insurance premiums, which typically have a face amount equal to the asset that was sold or exchanged. Sometimes, the life insurance is owned by an irrevocable life insurance trust.
The net after-tax balance of the annuity income stream is now available to supplement the client’s income during their retirement.

Let’s look at a recent case involving a female age 72, with $1 million of nonqualified assets in the 24% federal tax bracket. She has two adult children as her beneficiaries. She wanted to increase her income as well as have an asset to pass on to her children if anything was left at her death. The current rate she was earning was 2% taxable, or $20,000 gross income and $15,200 net after-tax income. Using a SPIA, this is the result: $67,266 annual lifetime income; 98.5% exclusion ration; $1,009 taxable income until cost basis is fully recovered, which occurs around the 15^th year.

Tax on SPIA: $242*

Net after-tax income: $67,024

Life insurance annual premium: $35,343

Net income to client: $31,681

This represents a 200% increase in after-tax income, and it replaces and transfers the $1 million asset to her children at her death. This strategy allows for the client to have guaranteed, predictable, safe and secure income, as well as a tax-efficient manner in which to transfer her wealth at her death.

*Once cost basis is recovered, SPIA payment will be fully taxable.

Bernie Casey, CAS, CIS, is an annuity wholesaler at Crump Annuities. He may be contacted at [email protected].