The Process

Next, we do a portfolio analysis to find out what your current fees are. Typically, we find that we can save someone several thousands of dollars once we take over as their advisor. Achieving low volatility managing assets in a very volatile market is difficult for the average advisor or the average retiree. When the markets are really rocking and reeling, we’ve got a lot of volatility, and our goal is to minimize the down side of that portfolio as much as possible. We don’t like to see clients lose money.

We use a strategy called institutional wealth management. Years ago, you had to have 2, 3, $4 Million before companies would even look at you for institutional wealth management. If you had less than $3 Million, you really fell under a term called retail management. Retail management is made up of basic investment models, like mutual funds. That’s where people start out. Any child with $25 can start a retail account investing into mutual funds. And usually, it’s a buy and hold strategy, so they just keep on putting money in there. The market goes up, the market goes down, no big deal—that’s retail management.

Institutional management, is when we strip away the middle man. We take people directly to the wholesaler and we serve as the advocate. We serve as an active adviser to sell positions should the market turn down. Typically, we don’t sell anything that has a prospectus. To us, it’s too hard for clients to understand. A prospectus is full of all these formulas and things that nobody understands. At the end of the day, to us, it really means high fees, and the potential for high losses.

With institutional wealth management, our clients typically enjoy competitive returns but there’s no guarantee with that. Our goal is to avoid big losses in the market. That’s why we have a very tactical, strategic and dynamic approach. When people come into our office, we’re going to identify what their current risks are and how we can have less risk, less fees and hopefully get a decent return.

The portfolio analysis helps to understand the taxable nature of your current holdings. We need to know if you’ve got 401Ks, IRAs, a Roth, maybe you’ve got cash-value life insurance, whatever the case may be, and we need to understand the tax status of those holdings. Do you have some tax advantaged instruments built into your current portfolio?

Stretch IRA

There’s a lesser-known strategy called a Stretch IRA that we use. When someone sits down with us and we go through their plan, we may look to see if a Stretch IRA is appropriate based on his or her unique circumstances and financial goals. Let me give an example, I’ll use my dad. Let’s say my dad retired with a million dollars and at age 70 he has to start taking what’s called RMDs, Required Minimum Distributions on all his qualified monies. So, a qualified plan is an IRA, 401K, or 403B. Typically, the rules state that you can’t take money out before age 59 and a half. The money that you put in there will grow tax deferred. You earn interest on your principal and interest on your interest. You would have to qualify under certain IRS exceptions if you wanted to take out money before 59 and a half without a penalty. Maybe for a new home purchase or medical emergencies, and you may be able to avoid the 10% penalty from the IRS. Now, at age 70 and a half, whether you need the money or not, you have to take the Required Minimum Distribution, and that’s the RMD. However, there’s a 50% penalty if you don’t take the RMD from the IRS.

If you’re supposed to take out $10,000 and you don’t do it by December 31, then you’re going to have to take the $10,000 plus send the IRS an additional $5,000 penalty. And trust me, you want to avoid that.

Let’s say my dad retires, he starts taking his RMDs, say $40,000 a year starting out. Typically, RMDs start at 3% and the percentage goes up a little bit each year. So, hypothetically, let’s say my dad started with $962,000 in his IRA and gained a little more than 3% each year. If he was taking out roughly 3% for his RMD and passes away at age 80, he would still have $962,000 left in his IRA. He dies at age 80 with $962,000 and let’s say I’m the only child, and I want to cash that out. Well I’m going to figure about a 35% taxation.

Automatically, I would have to turn around and give the IRS $375,000 because that $962,000 was going to be counted as a taxable ordinary income tax to myself. If I take that away from the $962,000, that’s going to leave me an inheritance of $586,000. So basically I’m going to get a little over half of what my dad planned for me to have.

Well, if dad could convert his Traditional IRA to a Stretch IRA before he dies, I’ve got to continue taking the RMD, now based upon my life expectancy. Let’s say when he dies I’m at age 67 and I continue those RMDs until, I pass away at age 86. If we look at the math during my dad’s lifetime he would have taken out about $400,000 out of that $1 million IRA in RMDs and when it passed to me, I would have been able to get $1.4 million out by taking that RMD each year (assuming a 4% rate of return) versus me cashing out the IRA and only ending up with $585,000. See chart below:[1]

Altogether, that RMD strategy, that Stretch IRA, was able to generate a total of $1.8 million in income (between dad and myself) versus it being cashed out right at $600,000. A stretch IRA can be very powerful in creating more dollars to the beneficiary. This is what I mean when I say you have to be a Viking. You must plunder all the funds that you can, and that’s what a Stretch IRA can do for you.

Legacy Optimizer Strategy

Now, I’m not the only child, and I do have a sister. Let’s assume when my dad dies he would like to leave an inheritance, but we need this money up front. One way this can be accomplished is by theLegacy Optimizer Strategy. This strategy allows us to receive tax free benefits from a life insurance policy. You might be thinking, there is no way an insurance company is going to issue me at age 70, and even if they will, it will cost a fortune. Surprisingly enough, in my experience, insurance companies have products that are very competitive to people, even in their 70s. The results from what this strategy offers can be shocking.  

Let’s say that my dad started taking a distribution of 5%, which he does not need to support his retirement lifestyle, from a $625,000 qualified annuity (IRA), that’s $31,250.[2] We figure 35% taxes[3]on that, so we turn around and give the IRS $10,938 of that $31,250 distribution. My dad didn’t have to take any money out of his actual bank, we just took it out of the IRA itself. He set up a life insurance policy. We use the remaining after-tax amount of $20,313 a year for annual life insurance premiums that we’re paying into this policy. Based on this information, let’s assume the death benefit is $969,418 tax free[4] to my sister and me. Let’s assume my dad’s IRA is getting 3% growth, and that he also has this life insurance that he’s funding with the RMD. If you have an IRA and you don’t need the RMDs from it, and trying to decide what to do with the distribution, the Legacy Optimizer Strategy might be the viablesolution for you. 

Let’s assume my dad dies 10 years after setting up the Legacy Optimizer Strategy. After 10 years, through legacy planning, this strategy will leave my sister and me $1,275,538 instead of his existing plan of leaving us $542,976 in his qualified IRA annuity. The legacy optimizer strategy takes into account the life insurance death benefit of $969,418 and the $306,120 that would still remain in the qualified IRA annuity account at that time.  After 20 years with the legacy plan, $171,554 would remain in his IRA and the tax-free life insurance death benefit would still be $969,418. So, in the 20th year, this strategy would leave my sister and me $1,140,972 instead of what would have been $703,229 in the IRA.  Life insurance provides a tax free death benefit and can be a powerful tool at creating a legacy strategy to give your children, or beneficiaries a tax free benefit that can be used to pay the taxes on the IRA and enables the beneficiary to maybe get 100% (maybe more) of what the parents want them to get.

There are several other tax strategies. What if someone doesn’t have children? A Charitable Remainder Trust, or a CRT, might be fitting. That’s where you take an IRA and you donate it to the Charitable Remainder Trust. There are no taxes that must be paid on that IRA because it’s been donated to a charity. There are multiple strategies that can be used to help mitigate taxes during your life, and after you’re gone.

Tax Torpedo

What many people don’t recognize or realize is they just walk into retirement not really planning, just hoping and praying they get to age 70 and now they have to start taking RMDs. All of a sudden they realize something, taxes have gone up on everything—even more of their Social Security may be taxed as regular income. Maybe just $1, just $1 more in income, could take you from that $44,000 ceiling, you take $44,001 now you must count 85% of your Social Security benefit as ordinary income. All of a sudden your Medicare premiums go up because you’re making more money now. It’s called the tax torpedo. It just creates a taxable situation that causes taxes to go up across the board. Tax planning is really essential when it comes to retirement, because again, at the end of the day it’s not what you make, it’s what you get to keep.

Healthcare Planning

The second highest concern among the retirees we work with (running out of money being the number one concern), is healthcare planning. What’s going to happen if I get sick? Is the nursing home going to take my home or all my savings?

At age 65, you qualify for what’s called Medicare. Medicare has part A, B, C, and D. Medicare A is your hospitalization coverage. You’ve paid into Medicare, it’s an entitled benefit. Part B covers yourdoctor, and outpatient matters. Medicare’s Part C is what they refer to as Medicare Advantage Plan. Then, Part D is your drug coverage. Lastly, you have what’s called supplemental insurance (or medigap).

Medicare Part A and Part B have gaps in them. Let’s say under part A, you have $1,000 or $1,200 deductible that you have to pay to go to the hospital. Well, it’s good for a 60-day period. Let’s say you go to the hospital three times during a year, you’ve had to pay $2,400.00 out of pocket as a deductible. Part B is an 80/20 coverage. That means, Medicare pays 80%, and you have to pay 20% out of pocket.

Say you have an outpatient surgery—these can be expensive, maybe $40K, $50K, or up to $100K out of pocket cost. A Medicare supplement basically covers the gaps of Medicare A and B—and is what we normally recommend. You can get a supplement anywhere from $100 to $200 a month and it covers everything that Medicare A and B don’t cover. Part D is important because, you have certain illnesses and need certain drugs that are extremely expensive, you want a Part D coverage that’s actually going to cover those types of medications.

You may need advice about claiming your Medicare benefits and do it right, because when you turn age 65, you have guaranteed issue, meaning that you qualify for anything. But after you’ve turned age 65, and after you’ve elected for Medicare benefits, the government will give you the option to change your benefits every year, only at that point it will be using an underwriter.


[1] https://www.dinkytown.net/java/StretchIRA.html

[2] Surrender of and/or withdrawal charges from an annuity contract may be subject to surrender charges, market value adjustments and/or taxation as ordinary income and if taken prior to age 59 ½ may be subject to a 10% IRS penalty tax. This hypothetical example is for illustrative purposes only, and should not be deemed a representation of past or future results, and is no guarantee of return or future performance. This example does not represent any specific product and/or service. Your experience and needs will vary.

[3] Assumed combined federal and state income tax.  

[4] If properly structured, proceeds from a life insurance policy are generally income-tax free to the beneficiary.

Leave a Comment