Are RMDs the WMDs of a retirement plan?

By Tom Hegna for LifeHealthPro.com. Tom Hegna, CLU, ChFC, CASL, is a retirement expert, author and speaker, and former first vice president of New York Life

Although they might claim that they are here to help boomers and seniors retire, are you sure that the government’s “retirement plan” is the best option for your clients?

At age 70-and-a-half, all seniors have to take RMDs (Required Minimum Distributions) from their traditional IRA, 401(k), and/or any other qualified money. They must calculate and withdraw the correct amount on their own and can face harsh penalties if they don’t. For most seniors, the RMD plan is the one they are going to follow because it’s been laid out for them and, after all, it was designed by the government so it must be the optimal way to receive retirement income. Right?

The reality couldn’t be further from the truth. Not only is the government’s plan suboptimal, but with life expectancy tables dramatically increasing it can actually be downright dangerous to seniors’ financial health in their later years.

The lifetime income annuity is the alternative solution for today’s markets, and one that most of your boomer and senior clients have not considered. It’s easy to roll the IRA or 401(k) into an annuity; there are no taxes due for transferring funds and no 10 percent withdrawal penalty for your clients, even if they start taking the income prior to age 59. In addition, the advantages of the lifetime income annuity significantly outweigh those of the government’s RMD plan in three powerful ways:

They avoid volatile markets

If the markets were guaranteed to grow every year just as they were skyrocketing in the late ‘90s, there would be no argument; it would be far better to give client’s the opportunity to let their portfolio ride in stocks and bonds while taking their RMDs. But facing a decade of stagnant economic performance, disappearing pensions and a dwindling Social Security trust fund, clients need to protect themselves from market volatility.

With the lifetime income annuity, market risk is eliminated. Clients know ahead of time exactly what they are getting. Make sure you can explain to your clients that the investment is guaranteed by the issuing insurance company, and backed by their performance rating. Secondly, order of returns risk‑the risk that you clients may take a hit in the early years of retirement that may devastate the rest of their retirement‑is taken off the table. With the lifetime income annuity, they are going to get a steady, unchanging paycheck no matter what the markets do.

They can save your client’s “golden retirement” decade

Ask your clients, “At age 70-and-a-half, what will be the next 10 best years of your life? What’s going to be your ‘golden decade’ of retirement?” Most clients will say the next 10 years, roughly from age 70 to 80. However, if you cross check this with the government plan, something is wrong. During that first decade, the RMD withdrawals are small, which then become higher in their 80s. I guess the government wants your clients to save money for their 90s so they can afford a more expensive wheelchair.

Does this plan not strike you as ridiculous? Your clients need to enjoy these early years of retirement to their fullest while they are in their best health. They should be able to receive more money so that they can do all the things they’ve been dreaming about, whether that’s traveling or joining the country club. A lifetime income annuity will ensure that they get high payouts during the golden decade of their retirement, and also guarantee that they will never run out of money.

They protect seniors from the precipitous RMD crash

We know the RMD payouts are low in the beginning, higher in a person’s late 80s, but what happens as they get older? If we look at an account value of $250,000 that featured a 2 percent or 3 percent growth rate, around age 95 the RMD withdrawal amounts begin to fall sharply every year as the account begins to run dry. By the time they hit age 100, their account is in a free fall and by 110 the account is virtually dry.

Right now, most seniors are not concerned about living to age 100 or longer. But the facts are facts: If you take a 65-year-old couple, there is 50 percent chance one spouse will live to age 92 and a 25 percent chance one will live until 97. We are seeing more and more people live well past the ripe old age of 100. In fact, centenarians are the fastest growing age segment in the United States.

In many scenarios, the payout rate of an annuity could exceed the RMD withdrawals in every single year. But even if there were another great bull market that dramatically boosted the RMD calculations, it still would not remove the risk of outliving the money. Seniors have to protect themselves from the RMD drop and take longevity risk off the table. Lifetime annuities can do this with their guaranteed paychecks for life, and offer high payout rates due to mortality credits.

Why the lifetime income annuity?

As with any investment, there are always some trade-offs. With the annuity, retirees do have to give up some liquidity and it may lessen their opportunity for growth in a bull market. However, considering the recent volatility of the markets, isn’t that an incredible exchange for zero market risk, zero order of returns risk, and high payouts that are guaranteed for life?

In the end, it really comes down to one question: Do your clients want to follow the government’s one-size-fits-all retirement plan, or do they want to create their own? As their advisor, if you discuss the three powerful benefits and display a simple chart of what can be guaranteed every single year of their retirement, the vast majority are going to want to move their money into the annuity.

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