G. A. Finch interviews Charlie Russ, a financial representative with Northwestern Mutual .
FINCH: Charlie, what are some of the strategies you would suggest to clients to manage the impact of taxes today and for the balance of their lives?
RUSS: If a person has the option of a ROTH IRA or a ROTH contribution to a 401k, we’d advise to take advantage of those options. Trouble is, many people make too much money and exceed the IRS set income limits for contributing to a ROTH, and very few 401k plans offer that option. Assuming folks are maximizing their pretax
contributions to their retirement plans, the another approach is to use a deferred annuity. The tax deferred treatment of any accumulation can help manage the impact of taxes.
FINCH: When we met last, you told me about strategies that could materially enhance clients’ retirement distributions. Would you mind sharing those strategies with my readers?
RUSS: The key to optimizing retirement distributions is having assets funded in several buckets, and preferably most of those buckets are tax deferred. Anybody retiring now or in the near future is in a panic. They thought they’d be way ahead in the stock market from where they are now. They may be in a position to feel as if they’re forced to sell equities at a loss and move to bonds, (as a rule) because they no longer can accept the risk of another 40-60% collapse in the market. Moving away from equities to bonds affects the long-term yield and can create a very negative tax consequence in the taxable portfolio. We’re not talking about proper asset allocation within a stock portfolio.
Furthermore, one standard in the financial services industry, sometimes called the safe withdrawal rate, states that one may only draw down 4% of one’s assets if they expect to never run out of money for 30 years. This assumes a growing market, which we have not faced in 10+ years! The traditional wisdom of 4% being considered safe is simply not accurate in today’s environment.
FINCH: We have talked about six risks associated with retirement: Longevity Risk, Market Risk, Inflation Risk, Tax Risk, Health Care Risk, and Long Term Care Risk. What kind of strategies have you suggested to clients to mitigate each of these risks?
RUSS: Again the objective of our practice is optimizing retirement distributions while mitigating risks our clients face. Therefore it’s critical to address these risks long before retirement; otherwise it is unlikely you will be able to fully mitigate the risks.
Annuities address longevity risk; long-term care planning addresses the financial impact of a long term care event.
Broader asset allocation across accumulation vehicles not in the stock market is one strategy to address Market Risk;
Running retirement analyses with higher inflation rates and incorporating lifetime incomes through annuities and whole life insurance can help identify a strategy for addressing Inflation Risk;
Placing assets in tax deferred tools with tax free distributions is another way to manage the impact of taxes;
Budgeting for healthcare costs is important to offset healthcare costs; we estimate $1000 per month appreciating with inflation be written in to a retirement analysis in addition to lifestyle requirements;
Addressing potential long-term care needs is prudent unless one can be self insured, which would require considerable assets.
FINCH: What are your thoughts about handling potential future estate tax liability?
RUSS: The IRS announced that the estate tax exemption will be raised from $5,000,000 to $5,120,000 in 2012. That’s the good news. The bad news is that it returns to $1,000,000 on 1/1/2013 when the Bush tax cuts expire. Many are gifting the maximum with the thought there will be no “claw back” of prior gifts. You may not wish to gift that today, for obvious reasons. However, I believe it’s important to consider the need for permanent insurance to cover estate taxes.
What these changes mean in plain English is that all assets, north of $1MM, including real estate and all investments remaining inside the estate at the 2nd to pass will be taxed at ~50% between state and federal taxes. Those taxes will be due 9 months from the date of the 2nd to pass and will be payable with or without insurance to fund. You could place all the insurance in an irrevocable trust and avoid estate taxes on 100% of those proceeds.
And, there are some tools which can permit a client to put potentially a substantial amount away on a tax deferred basis keep those assets in the estate and still provide for life insurance to protect against estate taxes. If you’re worried about estate taxes but cannot afford or choose not to fund an irrevocable trust today because you might need your own money in 50 years, this is a very relevant conversation to have.
FINCH: Do you have any thoughts about what if any role insurance products might have in seeking creditor protection?
RUSS: We have a very strong practice among doctors and other professionals who have personal liability from malpractice or on personal loans or other business obligations. Permanent life insurance is purchased primarily for the death benefit. Over time, it accrues cash values which are generally protected, similar to the equity in a primary residence or assets in a retirement account from the claims of creditors in Illinois. Keep in mind creditor protection varies from state to state. Of course one would always need to consult with one’s attorney concerning the applicability for individual circumstances.
Another important idea around wealth accumulation is contractual guarantees. The cash values within a whole life contract with Northwestern Mutual are guaranteed by the good faith and credit of the company to never go down year to year. It’s common for people today to be less concerned with the return “ON” capital vs. the return “OF” capital!!!
FINCH: Charlie, whole life insurance sometimes gets a bad rap in the personal finance press as not being a smart financial investment as compared to term life insurance. Could you give us your take as to why whole life insurance can be advantageous to an executive or professional?
RUSS: It’s not a panacea and it has its risks. We go out of our way to explain and articulate those risks. We only put whole life plans in place for clients where those inherent risks are minimized. That said, the truth is that most people need and want life insurance. Most need and want to grow their wealth, which the cash value build up of permanent life insurance can help accomplish.
The job of our team is to design a financial strategy for our clients which meets their needs today and through their lifetime. The objectives are most often to minimize or eliminate risks and to accumulate wealth in the most tax efficient tools available. Your readers should be asking themselves these simple questions. Do you have a distribution strategy? What asset will you sell first to try to optimize the yield and manage the impact of taxes on your entire portfolio now and through your lifetime? If you don’t have an answer, we can work with you to get it answered and identify a plan designed to achieve all of your objectives discussed in this interview.
web site: www.charlieruss.com
Northwestern Mutual (NM) is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Charlie Russ is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM. Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM,broker-dealer, member of FINRA and SIPC. There may be instances when this agent represents companies in addition to NM or its subsidiaries.
LEGAL, INVESTMENT AND TAX NOTICE: THIS INFORMATION IS NOT INTENDED TO BE AND SHOULD NOT BE TREATED AS LEGAL ADVICE, INVESTMENT ADVICE OR TAX ADVICE. READERS, INCLUDING PROFESSIONALS, SHOULD UNDER NO CIRCUMSTANCES RELY UPON THIS INFORMATION AS A SUBSTITUTE FOR THEIR OWN RESEARCH OR FOR OBTAINING SPECIFIC LEGAL OR TAX ADVICE FROM THEIR OWN COUNSEL AND TAX ADVISORS. THIS POST DOES NOT ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP AND DOES NOT CONSTITUTE AN ENDORSEMENT.