Perspective: The Secret to a Happy Retirement

Bobby Layne, the Hall of Fame quarterback for the Detroit Lions, once described the perfect plan for generating an income in retirement: “The secret to a happy life,” Layne mused, “is to run out of cash and air at the same time.”

Unfortunately, most Americans can only aspire – or should we say “expire” – to this fate.  As life spans continue to increase, many people sincerely worry about running out of money long before they run out of breath.  Increasingly, financial advisers are working to tackle the problem of how to create income that their clients won’t outlive in retirement.

In the past few years, retirement plan providers have introduced new solutions to this problem, often in the form of annuities imbedded within the retirement plans themselves. These annuities are available as an alternative investment option into which plan participants can direct their contributions and earnings, or both.

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The best solutions allow plan participants to accomplish the overriding goal of generating a guaranteed income in retirement that will last as long as they do. In Bobby Layne parlance, they would never take a breath without at least another dollar in their pocket. This concept is particularly important for plan participants who may not have other sources of guaranteed income such as a defined benefit pension plan.

Research from The Hartford in 2010 found that 82.6% of Americans age 45 and older do not have a pension plan from either a current or former employer. Two-thirds said they were uncertain about how to determine their income needs in retirement.

So what is the best solution for a defined contribution-based income annuity?  What makes the most sense for plan participants?

Some of the first products on the market were decidedly complicated and could be difficult to understand.  Perhaps that’s one reason why the take-up rate on annuity income options within defined contribution plans has been relatively disappointing to date.

Newer products have focused on simplicity.  The simplest allow each participant to purchase a unit or share of monthly income that is guaranteed to last for as long as he or she lives.  The cost of the unit or share is based on the age of the annuitant, current interest rates, and an assumption that he or she will retire at age 65.

Participants should be able to easily purchase or cash out their income annuity before they start taking income, exchanging money in and out as their financial needs change or become more concrete over time.  If they leave their current employer, they can leave the shares within their previous retirement plan or redeem the income shares with the intent of rolling over the proceeds into a new employer’s retirement plan or IRA. Or, in certain circumstances, they may receive a distribution of the annuity shares as a nontaxable qualified plan distributed annuity (QPDA).

The most flexible plans allow purchases of income shares through regular payroll deduction, from exchanges of other investment options, or from rollovers from other retirement plans.  Over the long term, a participant can direct retirement plan contributions into the income shares on a regular basis, in effect employing a dollar-cost-averaging strategy for guaranteed income.  The actual cost of the shares varies over time based on prevailing interest rates and the participant’s age.

Of course, participants often decide to retire before or after age 65.  An income product must be flexible enough to accommodate those decisions, adjusting the payout accordingly.  Once the benefit payment begins, however, participants typically cannot change the form of their income payment or cash out of their investment in the annuity.

Ultimately, the No. 1 priority of income annuities is to provide the “biggest bang for the buck,” maximizing income payments for the life of the retiree.  That’s something Bobby Layne could relate to because no one lived life with more gusto or competed harder or longer.

“I never lost a game but sometimes I just ran out of time.” Layne once famously said.  With the right income option within a defined contribution retirement plan, plan sponsors can help ensure the plan’s participants don’t run out of money before they run out of time.

E. Thomas Foster Jr., Esq., is The Hartford’s national spokesperson for qualified retirement plans. Foster works directly with broker/dealer firms and advisers to help them build their qualified retirement plan business and educate them about industry issues.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. This information cannot be used or relied upon for the purpose of avoiding IRS penalties. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

Many tax planning strategies emphasize the deferral of current income taxes, on the basis that your federal income tax rate may be lower at retirement.  Please keep in mind that federal income tax rates are unpredictable and may be higher when you take a distribution than at the time of deferral.  Other factors, including state tax rates and your income, may also affect your overall tax rate upon distribution.  Please consult with your tax advisor for individual tax planning strategy and advice.  The Hartford does not predict or in any way guarantee favorable tax results.

Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if made prior to age 59-1/2, may also be subject to a 10 percent federal income tax.

RPS #107743
 

Connecticut Ranked Worst State to Retire

TopRetirements.com released its list of the 10 worst states to retire. 

 

The list for 2012 is based on five considerations including fiscal health, property taxes, income taxes, cost of living and climate.

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Connecticut was ranked first place on the worst states to retire list. TopRetirements.com stated that Connecticut received the top spot due to its high property and income taxes. According to the news release, most pension income in Connecticut is taxable. The state also had the third-highest tax burden of any state in 2009.

Other states in the top 10 include:

•  Illinois. Its pension funding, deficit spending, unemployment and foreclosure rates are among the worst of any states. The state began to address its problems last year when it raised income tax rates. Although Illinois does not tax most pension or Social Security, other earnings and investment income are taxed at a fairly high rate due to its 5% flat tax rate.

•  Rhode Island. This state has severely underfunded pension/health liabilities and budget deficits.  It has the fifth-highest median property taxes paid.

•  Vermont. This state has a very high median property and income tax, with a top 10 cost of living.

•  Massachusetts. A retiree living in this state would face property taxes that are among the highest of any state. Even though Social Security income is exempt, income taxes would be high because of the flat rate applied to other earnings. Most government pensions are exempt, but private sector ones are taxed. Also, the cost of living in Massachusetts is high.

 

 

•  New Jersey. The median property tax in this state is the highest in the U.S. at $6,579. New Jersey also has the highest tax burden, a large budget deficit issue and a very high cost of living. The state has both an estate and inheritance tax. One advantage to living in New Jersey is the state excludes most pension and Social Security income for couples making less than $100,000.

•  Minnesota. A retiree couple living in Minnesota would receive the fourth-highest income tax due to the absence of any pension or Social Security exceptions in the state. Property taxes are just below the top 10. Minnesota also has a large budget deficit issue.

•  New York. The state has the fourth-highest median property taxes and one of the highest tax burdens. The state, however, does offer generous exemptions for Social Security and pensions, along with a high standard deduction. The cost of living in New York is one of the highest.

•  Maine. The property taxes in Maine are much lower than New York’s, however a retiree couple in the state would be taxed $1,000 higher for income taxes. The cost of living is much lower in Maine, which is a plus for the state.

•  Wisconsin. Property taxes are among the highest in the country here. The state has a high foreclosure rate. Wisconsin’s high income taxes are mitigated somewhat for retirees because Social Security income is exempt and because there is a high standard deduction.

Click here for more information on this top 10 ranking. 

 

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