Seminar Transcript With Accompanying Slides
[Ron Ryan] Good morning, everyone. This is Ron Ryan. I'm co-founder and Director of Education and Marketing at QLACguru.com. Welcome to the QLACguru's seminar on building a Failsafe retirement. Without exaggeration, what follows may be the most important 30 minutes of the next 30 years of your life.
Here's why: today, we're reviewing a new strategy for how to keep from running out of money in retirement. We're going to introduce you to a way that a Qualified Longevity Annuity Contract or "QLAC" can be used in a very specific way to guarantee you maximize your income and don't run out of money in retirement.
Some housekeeping details before we get started. The purpose of today's presentation is purely educational. We recommend that you review this strategy with your local advisers who may be more familiar with you and your particular facts. You should do this before making any purchase decision. Moreover, QLACguru shouldn't be your sole source of information.
Now if, after seeing this presentation and discussing it with your advisors, you would like to purchase a QLAC and you need the assistance of an agent licensed in your state, please call us at our toll-free number or send us an email at the email address above.
I have them highlighted here. That's 800-460-4166. The email address is email@example.com To follow up with you, we'll need your contact info, the state in which you reside, as well as the best times to get in touch, we'll arrange for agent whom we know and trust to follow up. Now, for our speaker!
Ray Ryan is a co-founder QLACguru.com and is the author of The Failsafe Plan. Ray has a long record of helping clients to maximize their income and minimize how much they pay in taxes. He's worked for companies like Price Waterhouse. Ray was partner in that firm for many years. He worked running International tax services for Price Waterhouse first in Paris and then in New York.
Ray now resides in Colorado and spends his time consulting with local clients there as well as doing a little fly fishing on the side. He has an MBA from Stanford University in Palo Alto, California. He received his bachelor's from Stanford as well. Ray is a Certified Public Accountant as well as a Licensed Insurance Producer, which makes him uniquely qualified to share with you the Failsafe plan. I'm going to hand over the presentation to him now.
[Ray Ryan] Good morning everyone. What we're here to talk about is a retirement strategy we call the Failsafe Strategy. Really, we have two objectives. We need to say who is it for and how does it work?
Let's start with who is it for? The Failsafe Strategy is for that retiree that is concerned about having adequate assets for retirement. This is not a small concern. The AICPA did a study some years back. More than 60 percent listed this as their number one issue with retirement.
For those fortunate few whose primary concern is, "Who's going to get their left-over assets when they pass away," For those of you who fall into that category, today will be clearly academic.
Those of you who are concerned about making your assets last need to start with a schedule that identifies all your potential income. Obviously, Social Security and Medicare benefits stand as the foundation of anyone's retirement. Unfortunately, for most of us that's not going to cover our living expenses. It was really designed for and serves as vehicles to avoid poverty. Some fortunate few may have a lifetime pension benefit. Those are fewer and fewer around. Corporations -- particularly major corporations are transferring out of defined pension benefits into defined contribution plans. And, as a result, fewer and fewer retirees have that benefit. If you've got it -- terrific!
The thing that most people have is savings. And most of the savings are inside of a tax-qualified plan -- a plan that has tax advantages for the assets to grow tax-free. But others also will have in addition savings, an account with Merrill Lynch or Schwab or whatever, where they're accumulating assets. The residence is always an asset you should put on your list particularly if that residence is owned without a debt because down the line there's always a possibility of creating liquidity with a reverse mortgage.
Most retirees have their mental faculties about them, and their physical abilities are OK, and they can work. Oftentimes retirees do that and that in fact becomes a part of their income to support themselves during "retirement."
There is a fellow whose work I am very fond of called Wade Pfau. He's a professor of retirement income at the American College. He is very well-recognized in this whole arena. We're borrowing a table that he created which is a hierarchy, very useful in thinking about retirement. He says OK we have a waterfall of goals. The first one is longevity needs which is the essential costs of living. How do you cover your costs of basic rent, food and so forth? To cover that, you need reliable income like Social Security, bonds, pensions, annuities. The next layer is lifestyle wants and that's discretionary expenditures. That could be, for example, a trip to Europe, new car......those lifestyle wants are supported by a diversified portfolio of investments. Now, our retiree really doesn't fall into the last category, legacy desires. That's who gets the leftover money. The private assets, real estate, etc.
We're really operating under the first two sets of goals, although liquidity can apply. Liquidity is for special contingencies -- a car wreck, a grandchild that is going to college and needs some tuition.
Life insurance, the cash in your bank account, and home equity we talked about earlier. All that comes under liquidity.
Now we have a framework for analyzing retirement. Longevity Protection says, "Hey how long is the cash flow going to last for the tail-end of retirement?" In the Failsafe strategy we look at retirement in two sections. We call it the 'body' years which is, say, through age 84 and the 'tail' years, say, starting at age 85.
Let's look at longevity percentages – survival using the 2012 Society of Actuaries Table. We have a group of people and we start analyzing who's going to die. We have a group of people starting at age 65, by age 85, 66% of those people are still alive -- if they are male.
If they are female, the survival percentage goes up to 73%. And that's a lot at age 85! Seventy-three percent of 65-year-olds are still going to be around needing to cover their living expenses. If we start with a group at age seventy, the percentages are even larger. For a male, it's 69 percent of those alive at age 70 are still out there spending money. At age 85 for females that percentage is 75 percent! Longevity is, in fact long!
Here's a table that makes it very, very, clear what longevity looks like. The blue lines represent people who have passed away and the green lines represent survivors. We're just looking at people who are alive at 65 here. If you go across at and see at 50 percent, we're at age 89. We have 50% of the population surviving! That's big! If you look at 10% survivors and you go across that's age 99. There's quite a long tail to worry about. Let's look at the females and basically, it's two years different. If you look at 50% survivors that's age 91; if you look at 10% survivors that's a hundred and one.
Again, women are going to outlast us men, but we're all going to have a long-life expectancy. It's amazing to look at these numbers.
Alright, just a quick review: 1/2 of women will live to 91 or older and 1/2 of men will live to 89 or older. We didn't graph it for you but 1/2 of couples will have a survivor but 1/2 of couples will have a survivor (one of the two members of the couple) live to age 96 or older. So long lives are ahead. The bad news is the cost of living does not stop in later life.
Where is that longevity income going to come from? Well, again, defined benefit pension plans are hard to find. If you've got one, terrific. Social security, well, that's the base and as we said earlier it's unlikely the fill the vacuum for all the income you need; but if you look to investment income that works only if you don't invade the capital. If you invade the capital, ultimately it is going to disappear during longevity. The one thing that can fill the gap are life annuities. That's where the longevity risk is transferred to an Insurance Company. Ron suggested I share with you one last option. You can move in with your kids. There's a lot of reasons not to do that -- we won't get into that but it's certainly an option and one that some people use.
Unfortunately, for many folks who are retirees, spending savings is necessary to meet living cost and lifestyle needs. Social Security benefits simply aren't enough. You could have all your savings put into a life annuity and that would eliminate all risk. But it also takes you out of the market, so you don't have market returns on the assets. And if you're one of the unfortunate that you lost the tail end of that annuity. A different approach would be to buy a deferred annuity inside the qualified plan. The problem with that is there is no reduction in the required minimum distributions until the annuity payments begin.
Another alternative with its own problems is that you can take a distribution out of the qualified plan and then use it to buy the deferred annuity but when you take money out of qualified plan, that's taxed. If your tax rate of 25% or 35% -- whatever the number is -- you're going to have 25 percent or 35 percent less assets to invest in the annuity. That's not particularly attractive either.
Maybe I need to pause and discuss briefly what a required minimum distribution is. On a traditional qualified plan, when you reach age 70 and one-half, the rules are that you have to take out an amount of money every year. And that required minimum distribution is equal to the assets that you've got in your plan divided by a life factor which the IRS comes up with, and that's the amount of your minimum required distribution. What's in that numerator is important. If it is smaller then you have a smaller required minimum distribution; if it is larger then, you have a larger minimum distribution.
What we're going to do, with the Failsafe Plan...now we're saying how does it work...We're looking at the body. We're going to say arbitrarily that the "Body" is age 70 to age 85. That's a 15-year period. And we're going to have the investment assets to cover that body with stocks and bonds...standard savings types of investments.
The tail takes off from where the body is and that is, ages 85 to death. We'll use the deferred annuity to cover this benefit/cashflow -- or spending need -- of the retiree. Any residual from the body bucket asset left over at age 85 can roll over into the tail bucket.
Now, the reason we can have a tail bucket is because the IRS in 2014 created a new type of annuity contract. And this annuity contract meets definitions defined by the government but then gives benefits if you meet those definitions. This annuity is called a "cue lack" (QLAC) or Qualified Longevity Annuity Contract.
Okay, so the big, big benefit is that if you take money out of a qualified plan and use that money to buy a QLAC, then, that withdrawal is not taxed. That means if you have to take money out of your plan, or even if you do it inside the plan, you have no taxable income. The withdrawal also reduces the Plan's required minimum distributions. The R M D (required minimum distribution) goes down. Another rule that the government wrote in was that the annuity start date can be as late as the 85th birthday -- it can be earlier -- but it can't start past the 85th birthdate of the annuity owner. It can be a joint annuity for a husband and wife. It has to be a straight, fixed annuity. It can't be indexed or variable. It's a very simple type of annuity. There's also a limitation as to how much you can take out of the plan assets, and that's 25% but that's a limitation; you can take less if you want.
There is a maximum; the government says, 'We don't think anybody who puts in a hundred and thirty thousand needs more for their tail-end living expenses.' That's it. That's the overall limitation. That may change as time goes on, but that's what it is now.
To review again, the Body Bucket assets equal plan assets savings - a maximum of 25%. Again, it can be a smaller number; it could be 15%. Could be 20%; whatever. And these Body Bucket assets are going to provide income during a 15-year period only. Spending of principal, then, is very predictable. The assets need to last to age 85, not forever. These assets have to last to one point in time, age 85.
Calculating the benefit under this strategy we assume zero earnings or losses. The annual distribution is equal to assets divided by number of years; in our example, that's 15 years. The retiree has no obligations on how to invest plan assets in the Body so, he can take whatever risks -- or low risks -- he or she chooses. They could even by a fixed annuity for a fixed term of 15 years if they wanted. At any rate, the individual's also able to adjust spending and savings, based on investment performance as they go through time. Let's look at an example and see how that works. You have the same 'Body Bucket' and 'Tail Bucket.' Same retirement period. Let's say ages 70 - 85 for the Body Bucket. And ages 85 to death for the Tail Bucket.
Sam has an IRA with $500,000. He decides to buy a QLAC with a premium of $100,000 so that's 20% of his $500,000. He's left with Body Bucket Assets of $400,000 for stocks and bonds. Divide $400,000 by 15 you come up with an annual distribution of $26,666. That might have to be adjusted if he has losses; it could go up if he has gains. But that's the number he needs to live on. The $100,000, remarkably, generates another annual amount from the annuity, of $26,666. As you can see, we've laid a layer of income from age 70 to death. And that's $26,666. Now, he may have other assets outside of the Plan that he can supplement, and whatnot. But this is a very clear, fundamental, layer that he has to build his retirement on.
No strategy or plan that we undertake is perfect. That's true of the Failsafe Strategy. The Strategy targets longevity risk. We're covering the risk when it occurs. That's the real positive. We're not targeting longevity risk pre-age 85. We are really buying protection for a period when we need protection. And only we need 25 percent or less of the assets to cover that risk. The other 75% of the assets (or more) are free to be invested as required. The retiree has a finite period - 15 years in our example - to manage those assets. And we think that's important. Another advantage, of course, is that QLAC assets aren't taxed until annuity payments are received. That's the same as any distribution out of the Qualified Plan. Interestingly, in our example, the payback period for the premium is less than four years. In other words, the $100,000 premium divided by $26,666 is less than 4 years. And if it starts at age 85 and you go to life expectancy at age 89, that's 4 years. The risk of not getting your money back is small. And, of course, the last thing, the RMD amounts are reduced, because the QLAC funds are outside the Qualified Plan.
Disadvantages of the Failsafe Strategy. Clearly, if someone has a family history of dying very early; or a terminal disease, you don't want to use the Failsafe strategy. Why? Because life expectancy is very short. The issue one has to plan for is the QLAC contract does not have cash value. It can't be reversed. You buy it, and that's it.
There is advantage to that in that the insurance company then can give the maximum benefits because they know they're not going to have surrenders. They have a long time horizon to plan with. QLAC distributions are 100% taxable. There's no way around that. because the distributions from the plan are taxable. Clearly, it's not designed for wealth transfer we hit that one hard.
There are only a few plans that can have money taken out of them to buy a QLAC: that's an IRA, 401K, 403b, 457. The 401K and the IRA's are probably most familiar to people. The 403b and 457b are government and employees and teachers and so forth. At any rate, the last three plans typically have roll outs into an IRA and that's where you'll see most of the withdrawals going into a QLAC. Roth plans and defined benefit plans aren't eligible to fund a QLAC. Obviously, if you have a defined benefit plan, you don't need a QLAC; and the Roth plan, well, you probably need to understand what a Roth plan is -- most probably do -- but for those who don't, with a Roth plan, contributions aren't tax deductible; assets still grow tax-free but because there is no deduction for contributions, withdrawals are not taxed. It's a whole different approach than from traditional IRA's and other plans.
One of the things we often hear and I'm sure people in our audience have heard is that annuities are a bad investment. That may be for some annuities but we're just talking about life annuities. And we're talking about fixed life annuities. They are very clear as to what they provide. And they provide two things. They are partially investment and partially insurance. The investment, of course, is cash flow. And that's clearly defined in the annuity agreement. In Sam's case, that's $26,666. That is the amount. He knows that when he writes the check for the $100,000. But he doesn't know how long that cash flow is going to be, and the insurance company is promising for life. That's what the contract says. As long as he is living, he is going to collect that amount, year after year after year. That's the insurance side of it. You know, if you think about it, we all buy insurance for our houses. If the house doesn't burn down, we're not getting our premium back. That's basically the same thing here. If you die early, you're not getting your premium back. What you are doing is buying insurance for an eventuality that you really can't fund for. That's it. You're getting income throughout late life; you're not getting cash a distribution or some residual value. that you can pass on to your heirs. But, for most of us not having to be supported by our children, that in itself is a benefit to the children that may be worth a lot more than any kind of residual value a contract might have.
A final question is how is this a Fail-Safe? How did we come up with the name 'Failsafe?' Clearly, a fairly 'true' definition would be even if the owner of the assets doesn't do good job of managing assets during his Body years he's at least going to Failsafe and have a Tail provided. But even then, the Body retirement years in the Failsafe Plan become manageable because the retiree has clear choices.
He has a finite amount of time to have his investments be matched with his spending. Because you have a clear period that encourages disciplined behavior. And a reducing of risk of failing to provide for his cost of living during that Body period. And the 25% itself is a relatively small amount to cover a very long period. At worst, It's a low cost for the elimination of a very significant risk. It's an insurance as well as an investment. I hope we've explained our Failsafe Strategy adequately and created some excitement or interest in a new way to approach retirement. With that, I'll turn it over to you, Ron.
[Ron] Ray, we’ve had a couple questions. This first one is I've heard about very high commissions in annuities. Is this true for QLACs? Do you want to hit on that, Ray?
[Ray] Sure. Sure. Well, the commission rate on typical QLAC contract is 5%. That's a one-time commission on the premium. If you think about it, money managers are typically getting anywhere from 75 to 150 basis points or 1.5% for managing money. And if they manage money for 10, 15, or 20 years, then they're going to make a lot more than just 5%.
[Ron] Please follow up by chat if you have more questions on that. "Most of my retirement money is in a 401k. How would I use this money to buy a QLAC? How would that work?"
[Ray] The answer is, first of all, the Plan itself has to provide for that ability. It could be for a QLAC or the Plan may allow for a distribution into an IRA. When you approach retirement or depends on the plan. But as a certain age, 401(K) plans allow partial or full liquidation to roll the money out of the 401K plan into an IRA.
If that's available, you can roll the money out of the 401K plan and put it into an IRA and then from the IRA you can move the money into a QLAC. Now, the question I raised is a question that is unresolved. And that is...because we don't have any guidance from government on it...that is, if you're younger than age 59.5, right?
Would a distribution either from the 401K or an IRA, would that be an "early distribution" which would trigger a 10% penalty even though the money went into a QLAC? We don't know the answer to that. What we do know, is that after age 59.5, you don't have a problem.
Did I cover it all?
[Ron] Yes! That's all the questions I have here from the chat. If you have further questions, please don't be shy. We're happy to answer any questions you might have. And, if you if you want to follow up. They're couple of ways of communicating with us. The first is send an email to firstname.lastname@example.org And if it is a question specifically for Ray, I will route that -- all email@example.com emails come to me -- And I will route that to Ray. If you want to set up a meeting with us, or get a call back from us, you can call 800-460-4166. That will put you into our call center. Someone will take a message and we can get back to you through that means. I wanted to remind everyone that our website qlacguru.com is full of information.
If you haven't spent much time on the site, you should. Again, if you want some help with the purchase of a QLAC, we are happy to provide referrals to agents who we have vetted; agents who we know and trust. Just send an email to firstname.lastname@example.org Give us a sense for what days and times are good for a follow-up call and also indicate your email and contact info so we can get back to you with follow-up. Thanks everybody for watching our presentation. And again, don't be a stranger. Thank you for your time. Thanks everyone for listening. I'm going to sign off now and close the presentation.
Notice: The foregoing video and examples do not portray any one person’s situation. The dramatizations were prepared by the Company to introduce viewers to a new financial product, a Qualified Longevity Annuity Contract. Individual circumstances of a viewer are likely to vary from the examples in the videos. The videos are not tax or legal advice. The financial information, and calculations depicted in these videos are supplied from sources we believe to be reliable. However, we are unable to guarantee their accuracy. These materials are not intended to replace the viewer’s legal, tax and accounting advisors. Any viewer should seek advice from his or her qualified advisors prior to entering into a QLAC purchase. The Company accepts no responsibility for any outcome arising from a QLAC purchase or a failure to make a QLAC purchase. This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties.