The following is an example of “out-of-the-box” financial thinking. It certainly is not meant to make any recommendation for any individual or couple since everyone’s present circumstances and financial goals are very different. It only serves to show that there are more possibilities out there to reach various financial goals than many people (including advisors) realize. Of course, the numbers shown below will vary based on age, gender and health. They could be better or worse – more attractive or much less so.
But with all that being said, let’s just look at how one couple, who does not need income from an IRA, but must take Required Minimum Distributions (RMDs) might choose to use their IRA. There are many more financial options than will be described below, but here’s just a few ones that you probably have never heard of before.
You could do some similar financial moves with “Lazy Money” that I write about in my latest book. Lazy Money is money that isn’t earning its keep (stuck in low interest bank accounts, etc.). Who else is talking to you about non-traditional financial solutions to real-life issues?
David is 70 years old and his wife Sally is 67. He isn’t in perfect health but he’s in pretty good shape (still plays doubles tennis) and expects to live to around age 85. Sally is very active and healthy and her mom didn’t pass away until age 96. Sally’s a little financially worried about living beyond age 100!
He has a $500,000 IRA that the IRS is going to begin making him take RMDs of some $18,000 the first year. They’ll have to pay taxes on this unneeded income too. He does not need any of the income that he is required to take, as Social Security, a pension and some rental income provide more than they need to enjoy their chosen lifestyle. With low recent Social Security COLAs and no cost of living increases on his pension income, they do worry about the long-term and compounding effects inflation rising faster than their income over the next 15-25 years.
One little-known way to help offset future inflation with dollars that are not needed now is to purchase a Qualifying Longevity Annuity Contract (QLAC). I’ve written about these before, although they are certainly not a financial tool that would be right for most folks. But here’s quick refresher how they work.
You pay a lump sum premium now to an insurance company.
Then, starting at a specific age in the future (perhaps at age 85) the insurance company begins paying you a specific amount of money every month, and they continue to do so for the rest of your (and perhaps your spouse’s) life. QLACs can be income only, or come with a refund of premium at death (which would lower the guaranteed lifetime income).
They are much like Single Premium Immediate lifetime income Annuities (SPIAs), except for the fact that the income doesn’t begin for many years (hence, deferred lifetime annuity). And, because the payments don’t kick in for several years, the premium is much lower for a given level of future income. And funds deposited in a QLAC are not subject to RMDs (nor do they satisfy them).
At their ages, here’s how a QLAC might look for them if they invested $125,000 of the IRA account.
A single male lifetime income for Peter with a cash refund at death ($125K) would be $2,949/month. Or he could get a higher guaranteed monthly income of $4,009 with NO death benefit at all – regardless of when death occurred.
Should they choose a Joint lifetime income (paying for as long as either of them are alive) with a cash refund at the 2nd death ($125K) would be $1,876/month or $2,134 per month with NO death benefit.
Which, if any, of those four options would you choose if you were in their shoes?
Depending upon their chosen 3 buckets of risk, we could invest all or part of the rest of the IRA ($375,000) in a “protected principal” account… or with our private wealth managers in the other two risk buckets with more risk for potentially higher returns (while attempting to limit downside).
Whether the balance of the IRA is invested in 1, 2 or all 3 of those risk buckets, his RMDs will be based on this amount only (the QLAC is excluded). But remember… they don’t need the annual income!
Well, they have to take it anyway (approx. $14,000) and pay taxes on it. Let’s say they’d have $10,000 or so of after-tax income from his RMD. Again, since they don’t need the extra cash-flow, perhaps Peter would want to purchase $350,000 life insurance policy to protect Sally from losing 50% of his pension income and dropping from two monthly Social Security checks to just one at his death.
Who else is bringing these type of potential financial solutions to your attention? Unlike a number of advisors, my financial “tool-box” is full of possible solutions that I customize for each client’s situation and objectives. I’m product agnostic. I just look to get the job done as efficiently as possible while attempting to minimize risk and offering as much future flexibility as possible.
All the best… Mark