5 Cardinal Rules Of Retirement Planning

Whether you are currently retired or planning for retirement, there are five cardinal rules investors must follow to provide a stress-free retirement.

There is an investment product that will achieve all five of these rules, automatically. Although it has been around for almost two decades, many haven’t heard of it. It is called the Fixed Indexed Annuity (FIA), and it has a proven track record so your retirement plan will navigate smoothly through your retirement years. It’s like putting your car on cruise control. So, let’s examine the FIA under a microscope to understand its role as the “financial spoke” of a retiree’s complete “retirement wheel.”

  1. Never Lose Money

The FIA is designed as a fixed annuity that guarantees against principal loss. However, it is also designed to track an index of the Stock Market. The first FIAs only tracked, or looked at, the S&P 500 to receive its annual rate of return. Due to the innovation of the insurance carriers, today’s FIAs have many market indexes to track, not only the S&P’s, but also others such as the DOW, the NASDAQ, Russell, Barclays, and/or even commodities as well. Many of today’s FIAs have the ability to track a blended index of one or more of the indexes and allow the investor to allocate the percentages he or she wishes to participate in. But, here is the key: The FIA only looks at the index to receive its rate of return. It never actually buys any of the market positions. And by design, the FIA only participates in the up-growth potential of the market index, never participating in downside loss. Therefore, removing 100% of the risk of losing your money instantly achieves this first rule. It locks in any and all gains to the principal, so it’s never exposed to any risk of loss. I often tell my clients, “We may use your principal, but we will never lose your principal.”

  1. Legally Reduce Or Avoid Taxes Whenever Possible

By IRS design, a fixed annuity grows tax-deferred. The investor never pays taxes on any of the FIA’s growth as long as the growth remains in the annuity. Then, the investor only pays taxes on just the amount he or she withdraws. This feature of the FIA is referred to as triple compounded interest.

A second feature of the FIA being a tax-deferred investment is that the interest it receives is not included in the Modified Adjusted Gross Income  (MAGI) calculation. MAGI is very different from Adjusted Gross Income (AGI). MAGI is the calculation used to figure a 2nd taxation on a retiree’s Social Security income. If the total MAGI annual income crosses the threshold set by Congress, then up to 85% of his or her Social Security income is taxed again at their tax level. So, what are these levels?

  1. If you are single, the 1st threshold floor is $25,000 - $34,000. 50% of your Social Security income is taxed at your tax bracket.
  2. If you are single, the 2nd threshold floor is $34,001 and more. Up to 85% of your Social Security income is taxed at your tax bracket.
  3. If you are married, the 1st threshold floor is $32,000 - $44,000. 50% of your Social Security income is taxed at your tax bracket.
  4. If you are married, the 2nd threshold floor is $44,001 and more. Up to 85% of your Social Security income is taxed at your tax bracket.

MAGI also uses income from other sources to calculate the threshold. Income from dividends, taxable interest, tax-free interest from municipal bonds, and even 50% of the Social Security income itself is used to calculate the MAGI threshold. There are only two ways to reduce or eliminate double taxation on your Social Security income: You can reduce the amount of other income that you are receiving or change the type of investments you currently have that are paying dividends and interest income.

The FIA by design grows tax-deferred; therefore, this interest is not included in MAGI. Under a provision of the Internal Revenue Code, Section 72-b-1, regulation 1.72-4-a, Congress passed a feature that income from an annuity may be disbursed tax-free, which is referred to as “The Annuity Exclusion Ratio.” This feature allows an investor to continue to receive needed income tax-free to potentially reduce the amount of money that counts toward the threshold income.

  1. Take Your Winnings Off The Table

The FIA takes your winning off the table. It has a built-in feature called the Index Reset, which is when the FIA locks in its gain at a designated time period. Some FIAs are annual, some are two years, and others are four to five years. Depending on the particular annuity, this feature put the lock-in on cruise control. Once the annuity locks in its growth to the principal, the principal is no longer exposed to risk. The “winnings” are tucked into the principal, removing the devastation of risk.

  1. Never Forget Rule #1

By design, the FIA never forgets, nor allows for, loss of your money!

  1. Guarantee That Your Money Lives As Long As You Do, Or Even Longer

A couple of years ago, the insurance carriers added an option to the base FIA know as a Guaranteed Minimum Withdraw Rider (GMWR). This rider, also known as the Income Rider, comes with a small fee charged to the base annuity. However, this small fee actually “buys” the investor guaranteed growth during deferral to a second value of the annuity known as the Income Account Value and a guaranteed income from the annuity (without annuitization) as long as the investor, or his or her spouse, lives. Upon the death of the annuitant, the reaming full-account value is pasted to other beneficiaries, without probate because the base annuity was not annuitized.

An IRA annuity can be “stretched” to several generations by setting up a designated beneficiary, or beneficiaries, on the annuity beneficiary form. A non-qualified annuity’s income can be stretched for many years by use of a restricted pay-out form that instructs the annuity to limit, either through time limits or amount limits, the pay-out to the beneficiary or beneficiaries.

So there you have it. The FIA can achieve all 5 of the cardinal rules of retirement planning that will lead to a stress-free retirement. Is the FIA a perfect product? No, there is no such thing as a perfect investment product. However, in my opinion, the FIA is the next best thing to a perfect retirement product.