The Power of Tax Diversification

Transcription

1 For Agent use use only. This This material may may not be not used be with used the with public. the public. MLINY The Power of Tax Diversification Tony Molino, CFP CLU Regional Director John Hancock

2 Tax Control Triangle After Tax $ After Tax $ 2 1 Roth IRA* Muni Bonds Life Insurance* 529 Plans* Tax Deferred Growth 3 Tax Deferred Growth 1099 Stocks Mutual Funds CD Savings Accounts Capital Gain Taxes Tax Free $ 100% Ordinary Income Tax IRA 401(k) 403(b) SEP Pre Tax $

3 Case Study: The P ow er of Diversification Clients may need to decide where to invest their additional retirement savings. Diversifying the income tax treatment of investments can reduce income taxes in retirement. Let s take a look at an example: If a client withdraws from a 401(k), and makes a $120k distribution from that 401(k), they would be left with $78k (if we assume a 35% income tax bracket). If they withdraw $40k each from their 401(k), life insurance, and mutual funds (assuming a 15% capital gains tax, and 35% income tax bracket) they would be left with a net $100k By diversifying their withdrawals, they reduce their income taxes in retirement.

4 Diversify Withdrawals! Non-Diversified Withdrawals Diversified Withdrawals 1 1 $40K 2 3 $120K Withdrawal 2 $40K Tax Free $ 3 $40K 100% Ordinary Income Tax Capital Gain Tax $40K $34K $26K 100% Ordinary Income Tax $78K $100K!

5 Tax Control Triangle After Tax $ After Tax $ 2 1 Roth IRA Muni Bonds Life Insurance 529 Tax Deferred Growth 3 Tax Deferred Growth 1099 Stocks Mutual Funds CD Savings Account Capital Gain Taxes Tax Free $ 100% Ordinary Income Tax IRA 401(k) 403(b) SEP Pre Tax $

6 INCOME TAX For Agent use only. This material may not be used with the public. History of Federal Income Tax Highest tax bracket according to IRS YEARS ( )

7 Retirement Income Backstop Help Eliminate the Risk of Outliving Assets in Retirement Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY MLINY

8 Retirement backstop For Agent use only. This material may not be used with the public.

9 Retirement P lanning P rocess An imperfect science How much will I need? How much can my savings earn? When do I want to retire? How long will I need it to last Life Expectancy That point when 50% of people ARE STILL ALIVE!!!

10 Accumulating for Retirement During working years, or the accumulation period, individuals save for retirement based on analysis of current and projected future worth of: Qualified Plans (IRA s 401(k) etc..) Annuities Life Insurance Roth IRA s Other Savings/In vestment Accounts

11 SEQUENCE OF RETURNS The order, year by year, in which poor and good market returns occur a) Accumulation Phase (The Working and Savings Years) 1)Risk is minimized over an extended accumulation period 2) We are looking to AVERAGE the assumed return rate b) Distribution Phase 1)Can have a significant impact on how long your retirement savings will last. Since we can t predict future markets and we don t want to delay retirement, Sequence of Return Risk is a risk we assume in retirement For Agent use only. This material may not be used with the public.

12 Sequence of Returns: Does it matter w hen you retire? For Agent use only. This material may not be used with the public. Maybe All variables the same, $8k withdrawal, same pool to start, just different periods Mr Jones retired in 1969, Ms Smith in Mr Smith runs out of money by age 85 has higher overall rate of return

13 Risks During the Distribution P eriod For Agent use only. This material may not be used with the public. The Imperfect Science has many risks What happens if one of many risks associated with retirement planning occur that was not considered in the initial plan?

14 Longevity & Illness Risks Longevity What if the client lives beyond the years they expected? What is the probability that one of the spouses living 30 years (to age 95)or longer in retirement? Consider this risk squared if married. Illness A sudden illness can erode assets very quickly It is estimated that approximately 70% of people over age 65 will require longterm care services at some point in their lives* *Source: US Department of Health and Human Services longtermcare.gov 2014

15 Taxes & Inflation Risks Taxes Can anyone predict with accuracy what taxes (in all forms) might look like in 20 years or more? Do your clients believe that tax rates will go up? Will they be able to control taxation? Inflation Was this aspect factored into the retirement needs analysis accurately? How erosive is inflation over a long duration of time? What is the effect of inflation on the cost of health care for the elderly?

16 W ithdraw al Rate Risk What if an unexpected cash need occurs? What happens to accounts, if, as a result of the previously discussed risks, the amount needed exceeds the planned amount?

17 Sequence of Return During Distribution P eriod For Agent use only. This material may not be used with the public. This risk is often ignored If accounts underperform during the distribution period, it is difficult to make up for the loss When you combine this likely event with the withdrawal rate risk, it is unlikely accounts will last as long as expected

18 Introducing the Retirement Income Backstop A cash value life insurance policy w ith a Long Term Care rider can be a very useful backstop against these risks: Longevity Taxes Inflation Illness Withdrawal Rate Sequence of Return

19 Benefits of Cash Value Life Risk Longevity Taxes Inflation Illness Withdrawal Rate Sequence of Return Offset Death benefits can help replenish diminished retirement assets for surviving spouse Eliminated as life insurance policy loans are free of taxation and not reportable as income (unlike 401(k)s or IRAs) Indexed UL or Variable UL can help offset the risk of inflation as accounts are indexed to (or participate in) market performance LTC riders help protect other investment accounts from unexpected costs due to illness risk Minimized by being able to vary the loan amounts (unlike IRA s where RMD s must be taken) Minimized in Indexed UL as the indexed account cash values are protected from market losses. In addition, the fixed account of all cash value products provides a stable yield to minimize risk. Loans and withdrawals will reduce the death benefit and the cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Withdrawals in excess of the cost basis (premiums paid) will be subject to tax and certain withdrawals within the first 15 years may be subject to recapture tax. Additionally, policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2. Cash value available for loans and withdrawals may be more or less than originally invested. Withdrawals are available after the first policy year.

20 Case Study: Mr. Quigley & Mrs. Quigley both 55, P referred, Non-Smokers When they review their retirement plan, they realize that there is a real possibility that one or both of them could live past age 85, which was their estimated end date for their retirement income

21 How Long W ill Retirement Last? Mr. Quigley s life expectancy is 85, but the chances of his survival are 55% Joint life expectancy is 92, with a 51% chance that one of them will live longer than that! There is over a 30% probability that their retirement income needs to last 30 years. Based on 2008 VBT Primary Table. Life Expectancy (LE) tables are based on actual mortality experience collected from sources such as the life insurance companies and the Social Security Administration. LE tables show the average probability of death by a certain age. The LE data provided is not necessarily indicative of life expectancy, and the insured may live longer than indicated by the table. The LE tables used are not tailored to a particular situation or risk class; rather, they are based on population averages and are presented to help form a generalized idea of potential ages at death.

22 Mr. Quigley Concerns Need Retirement Income from Need Long Term Care Coverage Solution Mr. Quigley commits to a monthly additional savings of $1,500/ month for 10 years Purchases Accumulation IUL at assumed 6% rate of return, with a 4% Long Term Care rider Benefit Roughly $465K of death benefit on Mr. Quigley s life, that can also be used for LTC benefits, with an $18,600 monthly benefit Non-reportable tax-free income of $45,472 per year from ages 85 through 100 via loans. This is a supplemental illustration. Not all benefits and values are guaranteed. The assumptions on which the non-guaranteed elements are based are subject to change by the insurer. Actual results may be more or less favorable.

23 Case Study: Mr. Quigley s Retirement Income Backstop The IRR on cash value at age 100 is 4.53%, assuming a 6% rate of return. That means the expense for the benefits was only 1.47% For that 1.47% expense, Mr. Quigley secured a a death benefit, long-term care benefits and discretionary, nonreportable, tax-free distributions

24 Tools That Can Help Invest in Your Life Provides the IRR on Life Insurance and Highlights Life Expectancy JH Solutions Our Proprietary Software to Illustrate Various Concepts Life Insurance In Retirement P lanning Demonstrates the Value of Life Insurance and the Cash Value Our Team of Attorney s and Advanced Markets Consultants can answer questions, help with case design and much more

25 Identifying The Client Clients who are retired (or close to retirement) Clients who are concerned with a long retirement Clients who are concerned with long term care

26 Disclosures Insurance policies and/or associated riders and features may not be available in all states. The Long-Term Care (LTC) rider is an accelerated death benefit rider and may not be considered longterm care insurance in some states. There are additional costs associated with this rider. The Maximum Monthly Benefit Amount is $50,000. When the death benefit is accelerated for long-term care expenses it is reduced dollar for dollar, and the cash value is reduced proportionately. Please go to to verify state availability. This rider has exclusions and limitations, reductions of benefits, and terms under which it may be continued in force or discontinued. Please contact the licensed agent or John Hancock for more information, cost, and complete details on coverage. This material was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based on their particular circumstances from independent professional advisors.