Check with your clients to see if they have term life policies that have a conversion feature to a permanent policy. It is not uncommon that they don’t need the initial death benefit they took out, but still need a portion of it on a permanent basis beyond the length of the original term. This is especially important if they have declined in health as they could keep their original health rating instead of going through underwriting again.
Another possible consideration for your clients focuses on required minimum distributions (RMDs). Thinking ahead to RMDs before your clients reach age 70½ (when RMDs are mandated to begin) may help you bring additional value to your clients. Tax deferral today may need to be sacrificed for longer, possibly more controlled, deferral during retirement. That is because leaving assets in traditional IRAs or qualified plans to defer taxes may move the client into higher tax brackets when RMDs begin.
A client might have an income well below the top of the 12 percent or 22 percent tax bracket. But when the client turns 70½, his taxable income from the IRA may cause a jump to the next tax bracket—because the RMDs are distributions from a traditional IRA and are taxed as ordinary income. You should also consider the possibility the RMD distributions may cause more taxation on Social Security benefits.
One strategy to help address that problem would be strategically moving a portion of their assets into a nonqualified annuity, paying taxes, then continuing to accumulate with no current taxes on gains. Clients might also delay their Social Security benefit until age 70, being conscious of mitigating considerations such as poor health or poor family health history. And if their tax advisor is in agreement, they might withdraw from the traditional IRA until they’ve “filled up” their current tax bracket. By doing this they still have deferral (non-qualified annuity and IRA), but they are controlling the tax bracket applicable to traditional IRA distributions while they can.
The benefits of the nonqualified annuity and paying more tax in the lower bracket early can be substantial, due to potentially paying less tax on the IRA distributions now. Different assumptions will cause different results and clients should consult their tax advisor for their own unique situation.
Your client may also want to consider Social Security benefits and income strategies. Taking Social Security at age 62 means the Social Security retirement benefits would be permanently reduced. This should be considered one of the last sources of income before full retirement age. As an alternative, clients may consider using non-qualified assets or a combination of after tax and IRA distributions for their early retirement income needs, claiming their Social Security benefits later. This could provide for more guaranteed income for the life of both spouses throughout their retirement.
Multiple Strategies Needed
Given the complexities of retirement planning, it may take a combination of strategies to help clients close the retirement gap. In most scenarios, saving more aggressively is a key to their retirement income success, but it’s clear that a combination of strategies covering investments, risk protection and strategic tax deferral will provide the best opportunity to help clients achieve their goals.
It’s important to remember that retirement strategies become more sensitive to variables when the time horizon is short. Therefore, it will be critical to periodically review your client's situation and revisit these “catch-up” strategies throughout the retirement process.
Kelly LaVigne is vice president of advanced markets at Allianz Life.