This presentation is meant to communicate the concept that taxation on withdrawals from a deferred qualified plan can shorten a retirement income stream from an account. The presentation can show how a future tax increase can further shorten a retirement income stream. The assumptions will allow the display of how long funds will last given a starting balance, a withdrawal stream, a rate of return, and tax rates. Because this speaks to increasing tax rates in the future, you may want to consider showing the Tax History presentation first. This may establish a likely belief from your client that their tax rates will be increasing in the future. INVESTMENTS: You must be registered with a broker/dealer to discuss investment concepts with a consumer. TAXES: This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. LIFE INSURANCE: Please remember the primary reason to purchase a life insurance policy is to protect one's beneficiaries through the death benefit. However, permanent life insurance can also serve as an accumulation tool that has some very unique benefits. To qualify for life insurance, one must take a health examination to determine insurability. Not everyone is insurable. Life insurance products contain fees, such as distribution fees and mortality and expense charges. The main way that a permanent life insurance policy is positioned to be tax advantaged is though policy loans. Policy loans may reduce the cash value and death benefit of a policy, and if they are not repaid, a loan could cause a policy to lapse. If a policy is over funded and becomes a MEC contract, the contract's earnings will be taxed as ordinary income at withdrawal, and may be subject to a 10% penalty if withdrawn before age 59 1/2. All hypothetical presentations must be based off of policy illustrations, and the illustration must be presented to the client. |
Let’s take a look at the impact taxation can have on your retirement income. When you think about withdrawing money to fund your retirement, you think in terms of after-tax spendable income. To generate what you want to spend, you withdraw money from your tax-deferred account. If you wish to spend $75,000 a year and start with $1,000,000, your savings will last a little over 10 years. Now this assumes earning a 5% rate of return, an initial tax rate of 30%, and an increased tax rate in 3 years to 40%. What do you think about your balance only lasting a little over 10 years? <show documentation to point out the cumulative taxes paid> As a matter of fact, this forecast shows that you could pay over $475,000 in taxes on this money. That’s almost paying half of your initial balance in taxes over the 10 years of withdrawals. Now if we could move some or all of this balance into a tax-advantaged account where the future withdrawals would not be subject to tax, the money would obviously last longer. Instead of 10 years, it would last over 20 years! That’s something isn’t it? You could be on the path to pay over $475,000 in taxes and cut your retirement income by 10 years. Now, it’s not possible to move the money to a tax-advantaged account without paying some tax up front. But, there are strategies to minimize the tax and maybe even offset some of it with deductions from other strategies. TRANSITION: <Depending on when this is discussed in your process, this may be appropriate.> Now that we can see how much tax impacts your future retirement, let’s talk about ways to roll over some money to take advantage of paying lower or no taxes when it’s withdrawn from your tanks. NOTES: Be prepared to explain (or be prepared to defer questions to a tax expert) the differences in the tax rates over the years. Use language such as the following when you cannot answer a particular tax question: That's a good question. I don't know the answer, but I do suggest you consult your tax adviser. Also, I recommend visiting the IRS web site, www.irs.gov, to anyone with tax questions or anyone who would like information about the IRS. |
This calculator assumes all withdrawals are made at the beginning of the year. The math for this calculator is computed similar to a spreadsheet as described below: Column one is the age. Column two is the balance at the beginning of the year before withdrawal. Column three is the gross withdrawal at the beginning of the year. The gross withdrawal is calculated as: Lifestyle Target / (1 - Tax Rate). The Lifestyle Target is adjusted for inflation annually. Column four is the annual growth the remaining balance. (Column two - Column three) * Rate of Return. Column five is the balance at the end of the year. Column two - Column three + Column four. Column six is the tax paid each year. It is simply column three * Tax Rate. Column seven is the cumulative taxes paid. It is the summation of Column six. Column eight is the annual lifestyle dollars generated. Column three - Column six. Column nine is the cumulative annual lifestyle dollars generated. It is the summation of Column eight. |