Tax-Free Income for Life Preview, Part 3 – The Secret to Mitigating Tax-Rate Risk and Longevity Risk within the Very Same Financial Plan

Today’s episode covers the last secret to mitigating the two most concerning risks of people planning to retire.

People are afraid of running out of money before they run out of life. Traditionally the way you can mitigate that risk is by accumulating a lot of money and restricting your distributions to 3% which gives you a statistical likelihood of not running out of money. The alternative is by guaranteeing your income by way of an annuity.

Economists say that the ideal way to guarantee an income stream for life involves giving an insurance company a large lump sum in exchange for a steady stream of income for life.

There are a number of shortfalls with that approach including a lack of liquidity and what David refers to as the “Mack Truck Factor”.

Single premium immediate annuities do not adjust for inflation which means as inflation goes up your spending power goes down.

Insurance companies have recognized a number of benefits of having an annuity as well as attempted to address the shortfalls. The solution they’ve come up with is a fixed indexed annuity.

A fixed index annuity gives you liquidity on your dollars and the growth of the money in the account is linked to the upward movement of the market. They also come with death benefit features which do quite a bit to mitigate the issues with traditional annuities.

The big mistake that most people make is they implement these annuities in the tax-deferred bucket, exposing themselves to the risk of a rising tax-rate environment.

Insurance companies provide options to convert that fixed indexed annuity to a Roth IRA but that comes with its own set of problems. In an attempt to avoid doubling your taxes over time you may end up doubling them in the short term.

There is another option known as a piecemeal internal Roth conversion that allows you to convert your annuity over whatever timeframe your financial plan calls for.

The piecemeal internal Roth conversion eliminates the two greatest risks to your retirement, tax-rate risk, and longevity risk. When you remove those risks off the table, you also take care of the sequence of return, withdrawal rate risk, and inflation risk.

Historically, financial advisors will say you can only mitigate one of those two risks. Either you have liquidity and don’t have to worry about longevity or you cover longevity and have no liquidity. The plan outlined in Tax-Free Income for Life allows you to effectively remove longevity risk, along with all of the risks that get magnified as a result of longevity risk, and tax-rate risk all in the same financial plan.

If you’re looking for an advisor to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, as well as mitigate both longevity risk and tax-rate risk you can go to davidmcknight.com to get connected with an Elite Advisor.

The Power of Zero and Tax-Free Income for Life are companion volumes essential to your financial plan.