Advanced Strategies for RMD Management

How annuities can help shoulder RMD burdens in a market drawdown

Birthdays are a funny thing; you don’t get to choose them. My dear departed dad was born on June 9, 1938. Some quick math had him turning 70.5 in December of 2008, right about the time he was winding down his life insurance recruiting business after a long corporate career. December of 2008 was also smack in the middle of a vicious collapse in stock and bond markets across the globe that had picked up a big head of steam in mid-September.

My dad’s date of birth could not be less timely in retrospect. I don’t recall exactly when he took his first RMD, but I do know it was not until early 2009, hoping that the market would recover some by then; it didn’t. In fact, the start of today’s bull market was at that market low almost 13 years ago, on March 9, 2009, when the S&P 500 closed at 676, a level not seen since Sept. 12, 1996. (source: CNNMoney.com Market Report - Mar. 9, 2009) That was just three weeks before the April 1, 2009, deadline for my dad’s first RMD. Talk about bad timing.

Now, note that RMDs for 2009 were waived, but not for 2008; anybody who turned 70.5 in 2008 still had to take an RMD for 2008 by April 1, 2009. (Source: www.irs.gov/pub/irs-drop/n-09-09.pdf) Sorry dad!

All of which leads to our topic: how can one prepare for this kind of bad alignment of events faced by my father 13 years ago? And prepare they must, for the panoply of risks for anyone who is within say 5 years of age 72 and their first RMD is impressive:

  • The bull markets in both bonds and stocks have been roaring for eons; stocks since 2009, bonds since 1981. They will one day end.
  • Stocks are expensive, with the forward p/e on the S&P 500 at over 20.
  • Fixed income yields remain low and future returns do not look promising if rates rise; the Federal Reserve has said they will be reducing accommodation through tapering bond purchases imminently, and begin raising the federal funds in the near future.
  • The S&P 500 is dominated by very few mega cap stocks. As they go, so goes the index. Microsoft, and Apple are together worth almost $5 trillion. Throw in Amazon, Tesla, Alphabet (Google), and Facebook, and there’s another almost $6 trillion. Those six companies alone are worth half of the GDP of the United States. When they sneeze, the world catches a cold. (For more on this topic, please see the 11/2 article in this publication by Ron Surz, “The Unprecedented Concentration Risk in U.S. Equities.”)

The key is to start the planning process early, say within five years of turning age 72. The simplest approach could be to allocate the first five years of estimated RMD amounts, today, to the most conservative allocation, perhaps to cash equivalents. It could also be accomplished with a fixed or fixed indexed annuity and perhaps earn some interest in the years up until those RMDs must begin, without risking any principal amount. Just make sure the annuity has no surrender charges when it is used to satisfy RMD withdrawals.

Another intriguing approach would be to allocate a larger chunk of the clients IRA(s) into a fixed indexed annuity with a guaranteed lifetime withdrawal benefit.

For example, the Symetra Income Edge fixed indexed annuity, if purchased by a couple at aged 67, will produce a guaranteed cash flow five years later, at age 72, of 7.25% of the greater of the contract value or purchase amount. We know that the RMD percentage at age 72 is 3.65% of the aggregate value of the IRAs owned by the client. (Assets remaining in qualified plans can’t be aggregated for purposes of satisfying RMDs).

If we assume the couple has IRAs worth $1 million in the aggregate at age 67, and we assume no growth in those IRAs by age 72, a simple math exercise can provide some allocation guidance:

The 7.25% annuity cashflow is roughly double the 3.65% required by the RMD rules. Consequently, the client could put half of their aggregate IRA values in the annuity ($500,000) at age 67, and by age 72 the 7.25% lifetime withdrawal amount would be no less than $36,250 for life. Meanwhile, if the remaining $500,000 IRA left in the client’s growth portfolio was flat or down in value by age 72, it could remain untouched to grow without the burden of a withdrawal since the annuity would take care of the entire RMD obligation.

Should markets do very well in the five years up until age 72, the annuity could remain untouched and left to continue growing the withdrawal percentage for another year. In the Symetra example, each year withdrawals are deferred adds another 0.40% to the lifetime withdrawal amount, for up to ten years. In this way, the annuity can stand firm as a reserve vehicle to be tapped to shoulder the burden of RMDs when doing so is optimal based on market conditions.

John Rafferty has spent much of his 30-year career building annuity marketing departments at MassMutual, AIG/American General, and Symetra. He holds a B.A. in economics from Colby College and an M.A. in public policy from Trinity College, and currently operates an annuity sales and marketing consultancy, RaffertyAnnuityFraming.com.

By John R. Rafferty,
Rafferty Annuity Framing LLC
Raffertyannuityframing.com

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