they need . The remaining $ 3.6 million would have to be covered by their investment portfolio .
If the clients live as long as they hope to but their portfolio performs below average , unfortunately it would cover expenses only until they ’ re 85 years old , Adams said , and by the time the second spouse dies at 94 , he or she will come up short by more than $ 800,000 .
“ As we know when we have an investment portfolio , it ’ s susceptible to things like market risk and interest rate risk ,” he said . “ We see spikes in volatility that could really scare our clients if we see a massive drop in a given year . So we want to increase those guaranteed tax bill and avoid the two-year Medicare look-back period .
The process involved in this approach , Adams said , is to :
• Create a qualified RILA ;
• Transfer $ 300,000 from the clients ’ 401 ( k ) to the RILA ;
• Create a Roth IRA portion of the RILA ( where the distributions are changed from ordinary income to taxfree income );
• Set up the installment schedule to fund that over the next five years ; and
• Take the distributions from the Roth portion of the RILA .
“ Now we ’ re becoming tax efficient with that annuity by making all of the
“ When we talk about working longer and spending less , what we need to focus on is becoming as efficient as possible with their assets .”
— Schyler Adams , Allianz Life Insurance retirement confident that they will not have to resort to working longer or reducing their already modest spending .
“ Obviously , when we talk about working longer and spending less , those aren ’ t very positive conversations to have ,” he said . “ What we need to focus on is becoming as efficient as possible with their assets .”
The Cost Of Doing Nothing
Over time ( barring any dramatic change in their circumstances ), the clients in Adams ’ s example face total expenses of $ 7.5 million during the years when they ’ re between ages 65 and 94 . Their Social Security , which begins when they are 70 , will end up contributing around $ 3.9 million , which is only about 52 % of the total income inflows and not have to rely so heavily on their investment portfolio to cover their expenses .”
Finding The Fix Adams ran through several options to improve the clients ’ situation .
One is a scheduled conversion of $ 300,000 to a Roth . Another is a $ 300,000 investment in a registered index-linked annuity ( RILA ) with an increasing income stream . And a third option was to do both at the same time but separately , with $ 600,000 .
This strategy helped the couple with their expenses by reducing taxes or increasing income ( or both ). However , the maximum benefit occurred when Adams combined the Roth and the RILA into a single instrument .
In this approach , the client purchases the RILA with an increasing income stream for $ 300,000 , and then does the Roth conversion from within the RILA . From the time they are age 58 to 62 , the client converts $ 60,000 a year to the Roth inside the annuity to even out the distributions from that annuity during our clients ’ retirement completely taxfree ,” Adams said . “ Our probability of success has now jumped from 59 % up to 87 % by being smart with our distributions , and by tying our tax-diversified income into our inflation hedge .”
The total expenses are now $ 7 million and the guaranteed income is $ 5.2 million , leaving just $ 1.8 million to be funded by the portfolio — far less than the $ 3.6 million the clients started at .
And even with the worst-case , belowaverage market assumption , the clients would be able to leave almost $ 500,000 at the end of their lives to a beneficiary . They could leave almost $ 1.6 million behind for heirs if the market performed at its average .
“ That ’ s off of a $ 300,000 transfer to the registered index-linked annuity where it provides an inflation hedge with tax diversification within our drawdown strategy ,” he said . “ It ’ s definitely something from an advisor ’ s standpoint where you can show the value that you ’ re providing to the client ’ s financial plan .”
MARCH 2023 | FINANCIAL ADVISOR MAGAZINE | 55