It is understandable why bank accounts have an allure for retirees, especially in times of financial turmoil. The plight of retired Americans who depend on income from CD’s is a matter of great concern. The old assurance of protection of Federal Deposit Insurance makes for peace of mind for most investor’s. But it does so at the cost of current income sacrificed, and that amount can be quite substantial.
Not only have they seen a reduction in the interest income, there is an obligation pay income taxes on that income, even if it not needed for current consumption, and it may also result in an increase in the tax assessed on their social security check.
Those who have planned ahead and set aside money for retirement are now seeing their plans impacted by interest rates in the range of 2% to 3%. This does nothing to preserve purchasing power in times of inflated prices. Granted, their principal is preserved, but at the cost of much lower income than is available from an income source many have found much more rewarding in recent years: annuities.
Many advisers have recommended the use of treasury notes and bonds as a suitable depository for ‘safe money’. However, we seldom hear mention of taxes and inflation on the minimal interest rates offered for this alternative. And even more rarely do we see anything mentioning the loss of principal when interest rates rise and you need to liquidate your holdings.
Even with the low interest rates offered on the open market, however, the use of guaranteed insurance contracts for a planned income strategy allows
Current income over 7% of principal Preservation of principal Availability of a lifetime income guarantee Over 90% tax free income
Here is what an 80 year old was able to recently set up with a $100,000 deposit. He received a monthly check of $657 that was guaranteed for 5 years. This works out to over 7.8% interest on his deposit. Because this was a planned liquidation of a portion of his total account, it was taxable as ‘return of principal’ which meant it was 94% tax free. The amount not needed for income immediately, was placed in a tax sheltered account calculated to replace his original principal. At the end of 5 years, his $100,000 was available to provide him with a guaranteed lifetime income at a minimum of $7,000 a year.
This type of account can be set up for most retirees, but we mention the age of the individual to make a particular point. It is a response to those who would state that annuities are not a suitable for a senior citizen who is over 80. The question is: When does a person get so old that they do not need a safe place for their money and no longer need guaranteed income?
