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How RMDs can Impact a Retirement Strategy

Without a strong plan for how to use their Required Minimum Distribution (RMD) – a client’s legacy and retirement income could be at risk.

Your clients are well prepared for retirement. You’ve helped them plan and they have followed that plan. They have weathered the bears, and taken advantage of the bulls. Now as retirement draws near, they can just sit back and enjoy their final working years before retirement kicks in. Is there anything else left to plan for?

Well, yes. How about Required Minimum Distributions?

Uncle Sam wants his share

RMDs, which are withdrawn from tax-deferred qualified assets, were created to make sure the federal government finally gets those taxes they've been allowing your clients to defer for years. Without RMDs, retirees could simply keep growing their qualified assets, leave those savings to their children, who in turn could do the same – all without ever paying the taxes Uncle Sam is counting on. So RMDs were created as the trade-off for the tax deferral benefit for retirees who will not need to use all of their qualified assets for income.

So, in general, at age 721 your clients must take income, even if they don’t need the money.

"RMDs could potentially deplete your client’s retirement savings or plans for leaving a legacy."

What risks could RMDs create?

While RMDs may be part of some clients’ plans to fund their essential or lifestyle expenses – others might see RMDs as a disruptor to their retirement strategy or legacy plan.

Taking the required distributions from an IRA may reduce your client’s growth potential, especially if they still have accumulation goals – even while in retirement. Or maybe on the flip side, those distributions could disrupt their portfolio balance and make them more susceptible to market volatility – a risk they don’t want to take while in retirement.

Then there’s the worst case scenario. RMDs could potentially deplete your client’s retirement savings or plans for leaving a legacy, especially if they live beyond their life expectancy.

How might a fixed index annuity help?

A fixed index annuity (FIA) may offer your clients an alternative way to potentially grow and protect a portion of their retirement portfolio, while lessening the impact RMDs might have on the legacy aspect of their retirement strategy.

Meet Reid

Take this example of a client named Reid. Reid is 60 years old and has saved $500,000 in his IRA. With help from his financial professional, Reid has an equities and fixed income allocation strategy to help manage volatility while still providing growth potential. At age 72 Reid starts taking RMDs from his IRA every year. If he takes his RMDs from the equity portion, he risks his growth potential. If he takes from his fixed income portion, he risks overexposure to volatility. And a proportional combination of both still reduces his growth potential more than he would like.

If Reid looked at replacing just a portion of his fixed income allocation with a fixed index annuity, he could use the guaranteed income from the FIA to help fund his annual RMD. The income withdrawal from the FIA helps keep more invested in equities, while providing an additional level of protection with a stream of protected lifetime income that he can’t outlive – especially important if he lives longer than expected. See Reid’s full story here.

Talk to your clients now – about how they might like to manage RMDs when they turn 72. See if a fixed index annuity could offer them growth potential for their retirement portfolio and help protect their legacy by providing a source of lifetime income that could help fund their future RMDs.

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