Pre-Retirement Then Post-Retirement Income Transition Planning

[M Paquette]

Welcome!

Perhaps your biggest long term concern for the future will that of inflation and taxation. I would suggest you take a look at indexed universal life (IUL) as a part of your overall asset allocation as well as your retirement and income plan. This will provide for (amongst other benefits) tax free income during your retirement years, as opposed to the taxable income you will receive from your tax-advantaged (deferred) accounts.

Congratulations to you and your wife for achieving what you have so far toward your financial independence

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We have had some other popular threads around topics mentioned in your post. Why not review them, and get a better feel for this communities thoughts on the subjects?

http://www.early-retirement.org/forums/f28/annuity-salesman-jailed-for-inappropriate-sale-60590.html
http://www.early-retirement.org/forums/f28/vuls-and-surrender-charges-ameriprise-61331.html
http://www.early-retirement.org/forums/f30/help-friend-peddling-wfg-and-vuls-24911.html
http://www.early-retirement.org/forums/f28/still-contributing-to-vuls-at-age-80-a-56012.html
http://www.early-retirement.org/forums/f28/parents-still-funding-vul-at-76-a-31255.html
http://www.early-retirement.org/forums/f28/just-realized-i-have-a-vul-what-should-i-do-25249.html
http://www.early-retirement.org/forums/f28/indexed-life-insurance-worth-it-60960.html
http://www.early-retirement.org/for...protector-universal-life-insurance-67865.html
http://www.early-retirement.org/forums/f28/universal-life-cash-accumulation-cigna-50111.html
http://www.early-retirement.org/forums/f28/life-insurance-scam-60956.html

 

[nun]

The average expense ratio for a well priced IUL would average less than 1% over a 20 year period (a declining scale) - compare this to the average equity mutual fund at 3.2%.

Very few on this board would even contemplate a mutual fund with an 3.2% expense ratio.

That said, if he is so inclined toward "avoiding all fees" to the risk management part of his portfolio - by all means. For the "safe money' I would look to transfer the risk to those who manage risk for a living.

Life Insurance and variable annuities are not popular on this site because of the high fees, lack of indexing and dubious returns. However, some do advocate the use of SPIAs as part of their fixed income portfolio and some are grandfathered into the low cost and competitive interest rates of TIAA-Traditional (currently 4.72%). However, almost everyone on this site manages their own money and use SPIAs, stable value funds and TIAA-Traditional as fixed income components of their overall portfolio that is managed to provide income in retirement with low expenses. Not many want or need professional managers.

 

[aja8888]

IUL salesmen seem to be coming out of the woodwork these days. In the last week or so, I have seen a half dozen or so TV commercials selling this junk. I guess the companies make so much off these they can afford high priced TV ads.

 

[jIMOh]

I would do a few problem solving exercises...

1) You listed what you had
List what you want
List what you need
Try to be positive... "I want to retire in 8 years" is better than "I don't want to work"
Because the positive answers show the path you want to take.

For example, you alluded to doing things in retirement- what are they?
State what income you need
State other needs (health insurance, etc...)

2) I would map out a timeline of events you want to happen
Is the order of the events important? For example if you want to travel to Alaska, travel to Europe and retire in 8 years, are those 3 things order dependent?

Other events on this timeline include:
a) Roth conversions
b) SS payments (you mentioned you were married, have you looked at claim and suspend at age 62?)
c) your retirement date and spouse retirement date
d) medicare vs health insurance

Map out as many events on the timeline as you can

Try to identify if any of those have financial implications


3) I would map out an income need separate from the above 2 exercises. The first two things might help you see income needs differently, and you may begin to prioritize things as well... for example you might decide travel is more important than Roth conversions, or capital gains is better than _______ because the timeline is more important than taxes...

4) Prioritize goals.

I would not try to do all these things at once. Each issue contributes to the other categories and actions, I would just exhaust one planning phase (like goals, wants and needs), before beginning another (like timeline). The purpose of #1 and #2 is to put issues on the table and organize them. The purpose of #3 and #4 is trying to converge to a solution.

 

[pb4uski]

Yes a SPIA may be appropriate as part of his retirement income strategy in the future when interest rates are higher. The income from a SPIA is mostly tax free as it is a largely return of principal.

The life insurance aspect of the IUL (if priced accordingly) is secondary to the fact that this is both a tax deferred (after tax contributions) and a tax free income retirement vehicle.

The average expense ratio for a well priced IUL would average less than 1% over a 20 year period (a declining scale) - compare this to the average equity mutual fund at 3.2%.

That said, if he is so inclined toward "avoiding all fees" to the risk management part of his portfolio - by all means. For the "safe money' I would look to transfer the risk to those who manage risk for a living.

Balderdash. If one needs an investment for retirement funding, buy an investment, not a life insurance contract. In many cases retirement funds are already in a tax-deferred account so there is no need to duplicate that tax deferral buy buying a life insurance or annuity contract. Hate to break it to you, but even a 1% ER is too much, especially in a low return environment. I pay around 20 bps across my retirement nestegg using no-load, low-cost mutual funds - plus, I don't get fleeced into paying for mortality coverage that I don't need.

While the death benefit from life insurance might be tax free it is of virtually no use from a retirement planning/funding perspective and no IUL provides tax free income but my no-load, low-cost domestic equity mutual funds do provide tax free income because qualified dividends and LTCG are tax-free if you keep your income in the 15% tax bracket. I can live off my dividends and capital gains.

P.S. Welcome antsinfla

 

[rayvt]

I started the discussion due to lack of clarity on my part of how to most efficiently begin taking money out of my investment portfolio.

Check these out:
TIAA-CREF - Error Message
Tax-Efficient Sequencing of Accounts to Tap in Retirement
http://www.vanguard.com/pdf/s557.pdf?2210022071
Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors


I've spent all these years trying to figure out ways to get the most into it... I've not thought enough about the best ways to get money back out.

Yes. Things change a lot when you are deccumulating instead of accumulating. It's not just a matter on putting a minus sign in front of everything.

I am trying to plan how to maximize my Total Return by extracting money from a combination of Taxable and Non-Taxable assets that have different implications to taxes (dividends, interest, capital gains).

See those papers I linked above.

Although I recognize my AA is aggressive now, that is actually intentional. What I'm trying to figure out, is what factors I should consider in changing my AA that would improve my Total Return.

None. No factors, no changes. Pick your desired AA and stick with it.

FWIW, I think that this is a bad time to jump heavily into bonds. People I've read are saying that for the next few decades bonds will be negative total returns.

I completely max out the available Tax Advantage investments...

I did this too, in the 2 years before I retired. Now, that creates an awkwardness, since everything I take out is taxed as ordinary income.

Seems to me that there are a couple of general paths you could take. One is to go with a typical 60/40 or 80/20 AA. The other is to be closer to 95/5 or even 100/0 and protect yourself by using a timing method such as Mebane Faber's paper.

 

[RobLJ]

I'm with pb4uski on his suggestion. Just start buying more bond/stable value in the next 8 years to bring your AA to something less aggressive. You may need 30-35 years of income so don't get too conservative. Many on this board keep about 3 years worth of expenses in cash or short-term notes. That way you can go through bear markets without having to sell equities when they are down.

This is essentially what I did in '06, shifting from a 90-10 AA and realizing that wasn't necessarily appropriate as a neared 50. The other impetus was my spidey sense fear that we were approach a Texas RE oil bust on a national scale, which turned out to be basically correct. I did rebalancing as stocks went up and shifted a lot of the new allocations to cash, MM, and bonds. Lucky it took until '08 for the horror to strike since the allocation took a while to implement. Reading your other post, I'm not thrilled with bonds either, so you could look at real estate/REIT/REIncome; short bonds; some cash; and perhaps allocate more on the stock side to Dividend Growth (like Vanguard's fund) and dividend stock income funds.

 

[sengsational]

We are maxing out our HSA but it is in a MegaCorp plan that is very conservative. Plus I believe it can't be used for insurance premiums.

Part of my reason for the question is the realization of how much we will need to meet our expenses. Especially 58 to 59 1/2.

As to HSA funds, true, you can't use them for insurance premiums. But most people expect that, unfortunatly, you'll have plenty of medical deductables and copays in future years. Many of us look at HSA's as just another way to shelter a bit of income from income tax. The benefit comes by racking up gains in the account, so being stuck in something that barely keeps up with inflation doesn't do you as much good, but it would offer the benefit of paying deductables and copays with pre tax funds. To get the second benefit (compounding tax free), if your megacorp doesn't have investment choices, you can probably select your own HSA provider that does. You might need to pay a monthly fee, but there are many providers that waive the fee if you have enough money in there.

With respect to the 58 through 59 1/2, you probably don't ahve to worry. Since you have funded (and will continue funding) your 401K, you may consider the years from 58 to 59 1/2 "not a problem"! If you quit when you're 58, you will very likely have penalty-free access to your 401K funds, believe it or not. This is due to an IRS allowed rule that says if you separate from a company in the year you turn 55 (or later), you have penalty-free access to the funds. Most big 401K plans allow this, but you should check with your plan administrator to make sure.

 

[MichaelB]

HSA funds can be used to pay for Long Term Care Insurance and also Medicare premiums (but not Medigap). From the IRS Publication 969 (2013), Health Savings Accounts and Other Tax-Favored Health Plans

Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

1. Long-term care insurance.
2. Health care continuation coverage (such as coverage under COBRA).
3. Health care coverage while receiving unemployment compensation under federal or state law.
4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

 

[antsinfla]

Thank you for your response and direction, I apologize if I have offended anyone in this forum in any way - that was certainly not my intention at all.

 

[antsinfla]

Very few on this board would even contemplate a mutual fund with an 3.2% expense ratio.



Life Insurance and variable annuities are not popular on this site because of the high fees, lack of indexing and dubious returns. However, some do advocate the use of SPIAs as part of their fixed income portfolio and some are grandfathered into the low cost and competitive interest rates of TIAA-Traditional (currently 4.72%). However, almost everyone on this site manages their own money and use SPIAs, stable value funds and TIAA-Traditional as fixed income components of their overall portfolio that is managed to provide income in retirement with low expenses. Not many want or need professional managers.

Thank you for your response and direction as to the sense of the group as a whole. I am all for self management and low cost and I do practice this in my personal risk management accounts. Apologies if I offended anyone!

 

[antsinfla]

Thank you for your response and direction as to the sense of the group as a whole. I am all for self management and low cost and I do practice this in my personal risk management accounts. Apologies if I offended anyone!

That said, I do not advocate the use of variable annuities for several reasons, primarily the high fees and expenses. Life insurance or any type of insurance for that matter, serves a purpose only, and is not to be confused with investing.

In addition I am not a great fan of "professional managers" in most asset categories. This is only my opinion from my years of experience both from within and without the financial services industry.

 

[kimcdougc]

We are maxing out our HSA but it is in a MegaCorp plan that is very conservative. Plus I believe it can't be used for insurance premiums.

Part of my reason for the question is the realization of how much we will need to meet our expenses. Especially 58 to 59 1/2.



Sent from my iPad using Early Retirement Forum

My DH is planning to retire in December of this year. He will be 57. We are doing an NUA to cover expenses till 59 1/2. We will take out enough of company stock then live off of it until 60. The rest of our 401k money will be rolled over into an IRA.

 

[ERhoosier]

But if you keep that much in cash/short term notes to avoid a sale when equities are down, you would miss a 30% run up like last year, so wouldn't it just be a wash.

No one can know the future. The market could have dropped 30+% too. It's all about individual risk tolerance and goals. There's no single AA that's right for everyone.

 

[LongTerm]

+1 with aim-high. It seems like you think that there should be a big shift in your asset allocation once you retire and I don't think that is necessary. However, your current AA of 87/13 is a bit aggressive for your age. What I would suggest is targeting contributions in you tax-deferred accounts to fixed income (especially if your employer offers a stable-value fund that pays a decent return) and the new money will gradually reduce the overall equity exposure you currently have without any tax cost.

Unfortunately my options in my 401K for bond funds are not corporate bonds but are US Government Long Term Bonds. I am concerned that this contains more risks to principle than is readily apparent so I've not allocated any of our 401K portfolio to this.

Just one other point. DW and I work for the same MegaCorp (not an office romance - we met in college). Our 401K choices are therefore identical.

 

[pb4uski]

Unfortunately my options in my 401K for bond funds are not corporate bonds but are US Government Long Term Bonds. I am concerned that this contains more risks to principle than is readily apparent so I've not allocated any of our 401K portfolio to this.

Just one other point. DW and I work for the same MegaCorp (not an office romance - we met in college). Our 401K choices are therefore identical.

Perhaps you could suggest through the proper channels that a broad based bond fund or corporate bond fund be added to the choices. Certainly the provider you use must have something like that. We had Harbor Bond fund from PIMCO where I worked.

 

[pb4uski]

That said, I do not advocate the use of variable annuities for several reasons, primarily the high fees and expenses. Life insurance or any type of insurance for that matter, serves a purpose only, and is not to be confused with investing.

In addition I am not a great fan of "professional managers" in most asset categories. This is only my opinion from my years of experience both from within and without the financial services industry.

You may have a future here after all.

 

[antsinfla]

You may have a future here after all.

Thanks for the welcome!

Previous correspondence refers - for the record: The cash value in an IUL may be taken out as withdrawals or policy loans and is regarded as tax free income. In essence, using the death benefit as a lifetime benefit - hence the use of a life (I call death) insurance contract from a retirement income planning perspective - particularly if you are in a higher tax bracket. Indeed you are partially correct "the death benefit from life insurance might be tax free" - it is.

 

[pb4uski]

Thanks for the welcome!

Previous correspondence refers - for the record: The cash value in an IUL may be taken out as withdrawals or policy loans and is regarded as tax free income. In essence, using the death benefit as a lifetime benefit - hence the use of a life (I call death) insurance contract from a retirement income planning perspective - particularly if you are in a higher tax bracket. Indeed you are partially correct "the death benefit from life insurance might be tax free" - it is.

As I recall, surrenders up to the amount of premiums paid is not taxable (since it is essentially a return of "principal") but surrenders in excess of premiums paid are taxable so your statement above that withdrawals are tax-free is only partially correct. You are correct that loans are not taxable. However, the post I was referring to trumpeted IUL as providing "tax-free income" and while IUL withdrawals/loans can be constructed to in effect make income/return of premium tax free upon death it isn't tax-free income like muni interest or my qualified dividends.

I'm actually totally correct on death benefits - there are cases where death benefits are not tax free (for example, stranger owned life insurance death benefits are taxable).