A million & a half made better

Last week’s post received a ton of feedback.  Thank you for your opinions. 

Remember what I said? 

The scenario can be ripped apart in a bunch of different ways and it was a small amount of effort that I put in to demonstrate how an AVERAGE long-term care event can totally disrupt a plan.  In this case, that plan was “self-insuring” based on the premise that a specific asset level is adequate to “self-insure”.  We know this, in reality, is self-funding (aka bearing the full burden).

If you recall, that average duration of care (3 years) in addition to the annual income stream lost almost half of the value of the initial $1.5 million asset value despite those assets earning $600,000. 

Where they live is important – New Hampshire with no income tax is the most favorable tax situation in the northeast. 

Let’s look at income for year 1 (let’s say this is 2025) where the assets produced $75,000 annually; their Social Security as a couple (assuming that they were an average couple) is $37,068 paid $3,089 monthly.  Their combined pretax income is $112,068.

Using 1040 Tax Calculator from AARP, for the couple filing jointly and taking the standard deduction along with the senior deduction, their estimated income taxes of $7,368.  When you net out the estimated income taxes, their income is $104,700 ($8,725 per month).

If you recall, their portfolio was comprised of 33.3% stock, 33.3% bonds, and 33.3% annuities where the stock and bond portions are qualified making the distribution fully taxable.  The annuity is nonqualified meaning a portion of the distributions may avoid taxation if they are basis.  Basically, all of their money (with the exception of a portion of their Social Security) is taxed.

If you recall, when long-term care distributions occurred, they reduced the balance of the accounts and were taxed as ordinary income.  I floated the idea of a defensive allocation.  Here is what I am thinking.

Since the deferred annuity is our most versatile asset, let’s consider repositioning some of that money into a defensive silo and take advantage of the tax code.  That advantage is the Pension Protection Act of 2010 where we can reposition that existing annuity into a PPA compliant annuity that both grows and can produce tax-free LTC benefits.

Here is how this would work – the client repositions a specific amount of the annuity for defense using it only when it is required for a long-term care situation.  So, it sits on the sideline growing until it is needed.  Then, it is accessed and provides tax-free funding for the long-term care services.

Here is the thing … an income double does not do this.  And, there are less than a half dozen of these annuities offered (OneAmerica Financial offers 3 of them).

Remember, a simple reallocation, while it may not change the overall portfolio mix, will change the tax situation when that long-term care event occurs.

Rather than depleting income producing assets, using the dedicated tax-free resource can maximize their value and the overall efficiency of their portfolio.