Several recent studies show peoples number one fear is running out of money during retirement.
To prepare us for retirement the government gives workers the ability to set up qualified accounts in order to save for retirement and get tax deferred growth. By deferring taxes money saved can grow faster. You put money away, not paying taxes now, but paying taxes on the money when you pull it out during retirement.
When you get to retirement, you can start pulling money from your account. In the past it has been considered good practice to not draw more than 4% from an account during retirement in order to make sure you don’t outlive your money. In the past bond yields have been 5-7% and that makes a 4% draw down possible. Now over the past 5 years bond yields have been around 2-3% and because many retirees rely on bonds to deliver income to their portfolio, many economists and advisors have been advising clients to withdraw less from their IRAs; this is so retirees don’t run out of money when they are older.
Now what if I told you there was a government program that requires you to draw more income from your account, without any consideration for how long you or your spouse will live, and without regard for whether you will run out of money or not.
This program is known as “required minimum distributions”. Once you get to age 70 ½ the IRS says ok you have waited long enough. We need you to start taking money out of the accounts and paying the taxes you owe on your retirement account. It’s not a choice, it’s a requirement. Hence required minimum distributions.
- At age 70 ½ the withdrawal amount is a 3.6% of the balance
- At age 80 it is 5.3% withdrawal
- By age 90 it’s an 8.7% withdrawal
Now during retirement you tend to invest more conservatively anyway and so you do not expect to get 8 or 9% returns. As a result this program is designed to deplete an account. Over time the RMD withdrawal increases what needs to be withdrawn and over time the balance on the account begins to go down.
The challenge if you have your IRA in mutual funds or CDs when your balance gets to zero you will no longer be able to draw income from that account. Imagine being 88, 90, 95 years old, having no investment income and being forced to live only on social security income. When you pass away your heirs get the balance of what’s left in the account. If there is no cash value in the account, your heirs get nothing.
A different option is to move the IRA into a different kind of account. Using an annuity, the retiree deposits their IRA. They are able to then draw income and RMDs from the annuity. This income stream is guaranteed to last the rest of their lives. In addition, many vehicles provide a guaranteed Death Benefit, so long as the balance in an account doesn’t go to zero the heirs would get at the minimum the original investment.*
If the account does go to zero, worst case is the retiree then gets the standard income benefit for the rest of their life.
This is huge.
Most retirees do not have the benefit of guaranteed retirement income. Many retirees will outlive their savings because we are living longer.
Retirement Income. Tax Efficient Planning.
Life Insurance. Disability Insurance
Socially Responsible Investing
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Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 7101 WISCONSIN AVENUE SUITE 1200 BETHESDA, MD 20814. 301-907-9030. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Devon Financial Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation
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* Annuity guarantees are backed exclusively by the strength and claims paying ability of the issuing insurance company.