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When Taking RMDs Is Not In Your Client’s Best Interest

The blanket requirement that owners of qualified funds begin distributions at age 70½ violates the fiduciary standard. Here’s why.

Numerous surveys report that the No. 1 concern of retirees is that they will run out of money before they die. Yet compulsory required minimum distributions increase the risk of running out of money by compelling that money, wisely saved for retirement and its associated uncertainties, be distributed at a purely arbitrary time unrelated to the personal financial needs of the owner. Worst yet, the intent of the original minimum distribution regulations was to ensure, that to whatever degree possible, the owner had distributed, and thus been taxed on, all of their qualified money by the time of their death.

The motive is bad. The process is bad. The result for the client is bad. There is nothing about this circumstance that could be said to put the needs of the individual owner above all else. Until such time as compulsory RMDs can be removed from the tax code, guaranteed annuities offer the best protection against this abusive practice.

Very few Americans have saved nearly enough money for the retirement they imagined they would experience. If we apply the widely recognized 4 percent rule to $1 million saved, we get a $40,000 annual income stream that is “reasonably” likely to last 30 years. With a pretax income of  $40,000, after applying 20 percent for an array of federal, state and local taxes, the net is perhaps $32,000, and our millionaires will have about $2,700 per month to pay for the stuff for their lives.

Many of the sustainable distribution models use a 90 percent likelihood as “reasonable.” That’s a little like Russian roulette with a revolver that holds 10 cartridges. It will probably be OK, but it’s really hard to be comfortable, don’t you think?

With $1 million, your client has about a 90 percent chance of netting $2,700 each month for 30 years.

But most Americans have far less than $1 million. The U.S. Census Bureau reports that the net worth, excluding home equity, for married households of any size age 65 and older is $148,823. Even including home equity, the number is only $323,254. For single and younger households, the numbers are much lower.

Overlooking the many barriers to actually implementing a planned and managed distribution of assets with an account of such meager size, using the 4 percent rule, a 70-year-old married couple might realize a net monthly after-tax income of perhaps $400 per month if they amortize their entire net worth.

Of course, all this is just arithmetic. What do you have? What will it earn? How long will you live? Mix all that together and out pops the answer. But distributing all of their carefully saved resources strips families of the ability to determine how they had hoped to provide income retirement. It also wipes out their reserve for the unexpected. Nonetheless, the mandated distribution requirement is arbitrarily triggered, and the client’s best interest ends up being abused in favor of other objectives.


It’s All About The Timing

An important element of building a sustainable withdrawal strategy is related to the timing of withdrawals as a function of market fluctuations. Withdrawals taken during down-market periods have a disproportionate effect as compared to withdrawals taken during boom periods.

When people have control of their assets and the responsibility for their own best interest, they manage these issues to suit their individual circumstances. They know to not buy high and sell low. But if they are compelled by arbitrary RMDs to make withdrawals without regard to market conditions, they have lost control of their circumstances. As a result, both their current and future welfare are put at risk. In the face of these circumstances, guaranteed fixed annuity products can provide unique protections and planning advantages as compared to market-based alternatives.

Foremost among the advantages of fixed annuities is their ability to provide a guaranteed income for life. There is no other product or strategy that can do that. To guarantee a specified, predetermined income, no matter what and for as long as one lives, is the cornerstone of meeting the No. 1 concern of the majority of retirees. Clients can be guaranteed there will be income for as long as they live. Only annuities can provide that assurance.

Critics of annuitization strategies are quick to jump on liquidity and inflation risks, but those complaints are just red herrings. By structuring deferral and income periods, liquidity can be maintained — certainly as much liquidity as can safely be provided for with market-based alternatives. 

Current annuity product designs provide a wide range of contractual and trigger-based liquidity features tied to real-world life events. Easy access to funds triggered by riders relating to illness, chronic care, disability and even unemployment are just a few of the annuity features that can boost liquidity. There are even products that guarantee a return of the premium paid. You will not find that sort of liquidity in even the slickest play with big-caps and bonds balanced with just the right dash of emerging markets.

A growing number of guaranteed income immediate annuities offer a commuted-

value option. It is possible for your clients to eat their cake and have it too. When you stagger features and benefit periods across carriers and product designs, you can provide high income guaranteed for life, safe liquidity options and performance.

Many financial professionals are oblivious to the unmatched performance provided by guaranteed fixed annuities. We know that the No. 1 concern of retirees is outliving their income. But a close second to that concern is their desire to have adequate income. Clients want to know that they will get the maximum amount of secure income that their savings will provide. Annuities lead the way here as well.


Making the Comparison

Let’s look again at our 70-year-old with $1 million.

We assume there’s about a 90 percent chance that $1 million can provide $40,000 per year for 30 years. So how would a guaranteed annuity compare? If we put the entire $1 million into a life-only annuity, a 70-year-old man could be guaranteed about $70,000 per year for as long as he lived.  Not just a 90 percent shot at 30 years but a 100 percent guarantee for the balance of his life. And not just $40,000, but $70,000. And we don’t assume it; we know it.

A couple both age 70 with $1 million can get a guaranteed $60,000 per year for as long as either of them lives. When you can guarantee a 50 percent income increase, that is a really great result. With that result, it is a bit of a stretch to suggest that not incorporating annuities as the major element of a retirement plan could ever meet a client’s best interest standard.

Some advisors may question why we would advocate putting all of our hypothetical client’s money into an annuity. Is that a breach of fiduciary duty? I can say that over the years, there have been a number of circumstances where we have put essentially all of a client’s money into an annuity. To do so is not typical, but doing so is certainly not taboo.

We have worked with people who have had essentially all of their money in annuities — some since the 1950s. No client has ever lost a penny. The accounts have grown worry-free. And low-middle-income families have accumulated literally millions of dollars having never done anything but save their money in annuities. So the short answer is “Yes, I do advocate something very different from a ‘diversified portfolio’ that gives you a 90 percent chance of getting 4 percent for 30 years.”

If we accept the wisdom of 4 percent as an acceptable sustainable withdrawal objective, fixed annuities can meet that standard with 100 percent certainty using only two-thirds of the client’s available resources. The remaining $300,000 can be left for liquidity, dealing with inflation and enjoying the excitement of watching what’s happening in emerging markets. Using the guaranteed strong performance of fixed annuities would certainly give any client more options than would otherwise be available.

Thus the notion of keeping strong options open brings us back to the “no option” reality of RMDs. How can fixed annuities best deal with that travesty?  One answer lies with early leveraging of the performance and guarantees provided by annuities as primary elements within the retirement plan, including within qualified plans.

Instead of delaying withdrawals from qualified accounts until RMDs are force- fed, push qualified money into annuities and exploit the guarantees and high payouts. There has long been a bias against putting tax-deferred plans within qualified plans. Because of good evidence in support of doing so, that notion is changing and, if there was ever any validity to the notion, it fades before the benefits of guaranteed high income. As many people have the bulk of their savings in qualified plans, there is considerable benefit in bringing the best performer to bear on the largest block of money.

If your client is already at the point of being forced to take RMDs or face a 50 percent penalty, moving money into an annuity and leveraging the advantage of the high payouts avoid the risks of taking withdrawals in down periods. Once a client is in the annuity, there are no down periods.

Although there are more things to consider than presented here, there are zero smoke and mirrors in the numbers shown. For an overwhelming majority of clients, fixed annuities are the absolute best way to meet their retirement concerns, particularly when those clients are faced with taking RMDs.  


Jack D. Aiken is president of LTA Marketing Group, Fargo, N.D. Jack may be contacted at [email protected] .

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