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Post 1The last, and one of the most important, financial disasters that we will discuss in this Lesson is the threat of running out of money during retirement. In this chapter, we will focus on the type of investments you can make to ensure that you avoid financial disaster and don’t run out of retirement savings.
This may sound odd, but the reason this chapter is so important is because we don’t know when we will die. Because you cannot predict that day you will die, you can’t possibly know how much in retirement savings you need or know how much retirement income you can afford to take out each year. Many retirees operate in such fear of running out of assets that they make the mistake of never touching their principal. This leads to a lower quality of life in retirement and to unnecessary estate taxes at death.
One of two things will certainly happen. You will be like many retirees and either die with money leftover for your heirs (and for the government via estate taxes) or live longer than expected (or spend too much) and run out of money in retirement. If you die with money left-over, we assume you would rather leave it to your heirs than to the federal government (this is where this chapter overlaps with the estate planning topics discussed in Lesson #9). We also assume that you don’t want to have to rely on your children, your children’s spouses, or your grandchildren to support you.
In this chapter, we will explain how certain Doctors get the most out of their retirement plan assets without risking running out of money in retirement. These savvy physicians get the most out of all of their assets. They also make sure that they don’t have to experience financial and emotional disasters like running out of money in retirement and having to ask children or grandchildren to support them. A very valuable tool to help avoid this financial catastrophe is the Life Annuity.

Life Annuities
Retirement is a time for you to worry less, not more. You have already worked for thirty or more years, raised children, dealt with weddings (and maybe divorces), and handled thousands of day-to-day crises with your kids, among many other troubles. The last thing you want to do in retirement is worry about how you’re going to support yourself and still leave something for your children, grandchildren, or your favorite charity. The Annuity and Insurance strategy eliminates the risk, “guarantees” you an adequate income in retirement, and leaves as much as money as possible to your heirs and/or charities, if there is anything left. In our best-case scenario, we can do all of this while reducing, if not eliminating, the income and estate taxes in the process. The first part of that strategy mentioned above includes a life annuity.
The life annuity (not to be confused with the variable annuity) is designed by actuaries to pay interest and principal back to you over your lifetime. The amount the insurance company pays you is “fixed” and will not decrease if the stock market crashes or if interest rates fall. Moreover, if you outlive your life expectancy, the insurance company continues to pay you or your spouse for as long as you are alive. This is a good way to remove the investment risk of your retirement plan assets and “lock in” a fixed income in retirement.
You may be wondering how much income one can expect from a life annuity policy. To answer this question, simply look at the table below, which shows some numbers for clients of ours (some individuals, some couples) at varying ages. Of course, these numbers are only examples and may differ based on a variety of economic and medical factors. However, once a life annuity is purchased, the monthly or annual income amount cannot change (unless a cost of living rider that increases the annual payout 1% to 3% annually is also purchased).
If you are afraid of running out of money or are just uncomfortable with investment risk and how it may impact your retirement, you may want to consider what sophisticated clients have utilized for years—Life Annuities. Your multidisciplinary planning team can help you integrate life annuities into your planning to minimize risk, maximize after-tax retirement income, and maximize your estate. How life annuities can be part of an estate plan will be discussed next.

Using A Life Annuity To Leave Money For Heirs
Life Annuities also are a valuable tool in helping you give retirement funds to your children and grandchildren, without enduring financial burdens. In most cases, the life annuity policy pays you more than you need to cover your cost of living. We recommend you gift the “excess” to an irrevocable life insurance trust (more in Lesson #9, which focuses on estate planning) and buy
life insurance to replace the value of the pension assets. Because pension assets are only worth 25 %+ to your heirs after income and estate taxes (also discussed in the estate planning Lesson), this solution almost always gives more to the heirs, reduces income taxes paid on withdrawals, AND provides a fixed income stream in retirement. If you’re not sure how this solution would work in your situation, please feel free to call us and we will run an illustration for you.

The Exclusion Ratio Can Save Taxes
Interestingly, there is a way to get tax-free income with a life annuity. If you purchase a life annuity with non-retirement plan assets, you will receive a significant tax benefit. Savvy Doctors know this and consequently implement a life annuity policy into their financial plans so that they can save even more in retirement and avoid financial disasters.
Each life annuity of this type has what is called an “exclusion ratio.” This is the amount of the monthly or annual payment that is NOT income taxable. The older you are, the greater the tax-free percentage of the life annuity payment. For an 80-year old retiree, 70% of the annuity payment may be tax-free. As an example, if you received annual annuity payments of $100,000 that were 70% tax-free, you would pay tax on only $30,000 of that payment per year. Assuming a cumulative tax rate of 25%, you would pay only $7,500 in taxes on $100,000 of income. For this reason, many retirees like to purchase life annuities rather than live off of the interest of their savings and subject themselves to the risk of outliving their funds.
In the context of retirement plans, should you decide against utilizing the life annuity and take your chances with the stock market, it is possible that you could end up with a sizeable retirement plan balance at the time of your death. While you think this is desirable because it will benefit your children or grandchildren, you would be gravely mistaken. Many of your retirement plans will be subject to taxes of 80% when you die. Avoiding this hidden tax trap is a concern that warrants its own chapter within Lesson #9.

The Diagnosis
One of the biggest fears most Americans share is running out of money in retirement. Not only would this create a financial challenge, but it would also bring about a number of emotional issues. Most Doctors are “independent,” responsible people who don’t want to have to ask children for money or be forced into a nursing home. By addressing protection of your income in retirement with your advisory team, you can avoid this important financial challenge that is becoming more serious as people live longer while relying on retirement vehicles that were de-signed in a completely different environment.
Before we proceed to strategies for structuring your practice, there are two more specific is-sues that every Doctor must understand—Healthcare/Insurance issues and Employment issues. These are growing risks that threaten Doctors’ livelihoods more than medical malpractice and cannot be ignored.