eAC Sales Idea:
The Stretch IRA

Lots of people talk about a stretch IRA. However, very few agents are actually talking about it with clients and selling products to support the concept. The stretch IRA is an easy concept for wealthy seniors to grasp. It’s appealing because of its tax management features and it is a terrific planning strategy for multi-generational accumulation.

In 2001, the IRS changed the way required minimum distributions are handled. Prior to 2001, if you inherited an IRA, you generally had 5 years to liquidate. For many, the inheritance caused a significant increase in their tax bracket and tax liability. The 2001 rules allowed individuals inheriting an IRA to spread payments throughout his or her lifetime based on the IRS Uniform Beneficiary Table.

Why does this matter to your client?

The stretch IRA concept allows your client to leverage triple compounding. First, interest compounds on the amount of principal that would have been paid initially on income tax. Second, interest compounds on principal. Third, interest compounds on the interest that would have been assessed each year on the earnings of your investment.

Over a long time period, such as two generations, the interest that has compounded upon interest can sustain growth even after the entire initial principal amount has been depleted!

How might an advisor explain the advantages of a stretch IRA concept?

Mr. Smith – Are you taking advantage of the Stretch IRA rules?

The idea is to leave far more money to your kids by taking advantage of some recent tax law changes. Many people can save tax income now and build a legacy in a tax smart manner. Would you like to do a quick income profile to determine whether this is an option for you?”

Example:

Ron and Doty are 74. Ron has $250,000 in his IRA. He and Doty also have about $250,000 in nonqualified funds that he plans to leave to his daughters. Ron currently has non-qualified funds in CDs at his bank and is drawing $10,000 per year interest income. He also draws $25,000 per year in income off his IRA. Finally, he has about $12,000 in Social Security income. His entire IRA distribution is taxable, as is the interest income from his CDs. Further, 85% of his Social Security benefit is taxable since their Adjusted Gross Income is over $44,000.

If Ron were to reverse the situation and live primarily off his non-qualified investments, he could generate significantly more wealth for his children due to triple compounding. Further, he could safely generate similar net income for life while deferring or eliminating taxes on Social Security with a Split Annuity Concept.

3 easy steps to setting up a Stretch IRA:

It’s relatively simple to plan for a Stretch IRA. What’s important is getting your client to realize its potential.

1. Plan your client’s income stream using non-qualified funds. Split annuity, Multi-Bucket, or Index Corridor strategies work well for structuring income stream.
2. Plan to take only the Required Minimum Distributions from IRA funds. For a brief explanation of Required Minimum Distributions, see our RMD primer.
3. Establish beneficiary designations for both primary and contingent beneficiaries.

As an active agent you are welcome to post feedback about the detailed Sales Idea. Please indicate your answers below and click the "Submit" button when you are finished. You may review each Sales Idea only once.

Have you sucessfully integrated this Sales Idea into your selling strategy?
Yes
No
Indicate your rating:
	Poor
	Avg.
	Above Avg.
	Good
	Excellent
Submit Your Rating

If you would like to leave additional feedback, please CLICK HERE

eAC Sales Idea:
RMD Primer

The IRS requires that each year after an individual reaches age 70 ½, the individual must take a distribution on a certain portion of funds in retirement accounts including IRAs, qualified plans and tax sheltered annuities. The amount of the distribution is based on the IRS life expectancy tables below.

The required minimum distribution is calculated off of the total amount of all qualified money as of December 31 of the year prior. Required minimum distributions may be made from one account to satisfy other accounts.

IRA Owner's Age MRD Withdrawl Factor 70 27.40 71 26.50 72 25.60 73 24.70 74 23.80 75 22.90 76 22.00 77 21.20 78 20.30 79 19.50 80 18.70 81 17.90 82 17.10 83 16.30 84 15.50 85 14.80 86 14.10 87 13.40 88 12.70 89 12.00 90 11.40 91 10.80 92 10.20 93 9.60 94 9.10 95 8.60 96 8.10 97 7.60 98 7.10 99 6.70

Here is a sample calculation for a 77 year old individual with $100,000 combined in IRAs and qualified plans.

100,000 / 21.2 = $4,716.98

The $4,716.98 may be taken from the IRA, the Qualified Plan, or spread out proportionally over the two accounts.

For further questions on Required Minimum Distributions, please contact Senior Market Sales annuity department at 800-786-5566.

As an active agent you are welcome to post feedback about the detailed Sales Idea. Please indicate your answers below and click the "Submit" button when you are finished. You may review each Sales Idea only once.

Have you sucessfully integrated this Sales Idea into your selling strategy?
Yes
No
Indicate your rating:
	Poor
	Avg.
	Above Avg.
	Good
	Excellent
Submit Your Rating

If you would like to leave additional feedback, please CLICK HERE

eAC Sales Idea:
The Market Myth

I. The Market Myth

Investment products such as stocks, bonds, and mutual funds are by nature subject to market risk, which means their value fluctuates up and down depending on market conditions. This short term instability is actually beneficial during the accumulation phase because of Dollar Cost Averaging. Dollar Cost Averaging in general states that an investor can lower his average cost per share in an increasing market by investing a set dollar amount at a set interval regardless of share price.

What most people outside the investment community do not consciously know (although they may suspect) is that taking distributions in a declining market actually results in sort of negative dollar cost averaging, in which losses are magnified. Few retirement advisors discuss this when planning for an income stream through retirement years. Most written proposals assume a constant projected rate of interest, which simply is not the case with most investment products.

II. An example of magnified losses

For simplicity sake, we will assume that Bill’s portfolio is in mutual funds and each share is worth $1.

Bill held 400,000 shares in his IRA as of last December 31st. His total account value is $400,000.

Bill does not need the income from his IRA to live on, so generally he takes his required minimum distribution (RMD) at the end of the year to try to maximize the gain. This year, his required minimum distribution is $15,094. This year, however, his portfolio was down 15% by the end of the year so each share was only worth $0.85. In order to make the RMD, Bill needs to liquidate 18,383 shares.

The remaining shares total out to 381,617, but at only $0.85 per share. Bill’s account balance dropped to $324,374. Bill needs his share price to rebound by 18% to make up for the 15% loss since it was magnified by the distribution.

This is a conservative example, and much more radical swings are possible in investment products, particularly if they are funding an income stream as opposed to required minimum distributions only.

III. An anecdote to help you explain the concept

My wife baked a pie today. Since it is just my wife and I in the house, I usually get half the pie and we always cut it into 6 big pieces. I’ll have one piece for an after lunch dessert, one for an afternoon snack, and after dinner I’ll have a piece with ice cream for dessert. I guess this explains my weight…

My oldest son came over this afternoon and ate 1/3 of that pie. If I still eat three pieces, as planned, there’s only one piece left for my wife, and that just isn’t going to fly. The point is this: if something is down by a third and I take what I am used to taking, there will be significantly less remaining.

IV. The opportunity

Some vehicles are better than others for taking an income stream. A fixed annuity may be one of the best vehicles because there is no risk of loss and thus no chance of magnifying the loss when a distribution is required.

In a similar vein, if a client is drawing an income stream from investments or variable annuities, a fixed annuity makes sense. Just one or two years of magnified losses could trample a portfolio and force a retiree to return to work or adjust his or her lifestyle so as to continue to live off savings.

Ask your clients how they are generating income stream. If they are generating an income stream from stocks, bonds, or mutual funds, take the opportunity to explain the concept of magnified losses. Suggest splitting the retirement dollars between fixed or certain equity indexed annuities to fund the nearer term obligations (1 to 15 years), while leaving a smaller portion in the market for the long term.

As an active agent you are welcome to post feedback about the detailed Sales Idea. Please indicate your answers below and click the "Submit" button when you are finished. You may review each Sales Idea only once.

Have you sucessfully integrated this Sales Idea into your selling strategy?
Yes
No
Indicate your rating:
	Poor
	Avg.
	Above Avg.
	Good
	Excellent
Submit Your Rating

If you would like to leave additional feedback, please CLICK HERE