Currently pending is Congress in a harmless sounding bill entitled “Highway Investment, Job Creation And Economic Growth Act of 2012.” Buried deep within the bill is a bit of stealth legislation that would kill the concept of the stretch IRA.

The stretch IRA (we also call these an “Inherited IRA”) is a planning concept that has been well-used for years now. It allows the beneficiaries of an IRA, like children and grandchildren, to take the IRA over their life expectancy thereby reducing the income taxes on each distribution and allowing the IRA to keep growing. Before IRAs were allowed to be stretched, or inherited, the non-spouse beneficiary had to take the entire IRA out -and pay all the taxes, within five years.

So, a little known bill has a provision hidden deep inside that will make a huge change to the estate planning of most Americans -and nobody knows a thing about it.

This travesty has been recommended by Senate Finance Chairman Max Baucus (D., Mont.). Under the proposed legislation, starting for deaths next year, most nonspouse inheritors would need to withdraw the entire amount from a traditional IRA within five years. In other words, no more stretch. There’s an exception for a beneficiary who is: disabled; chronically ill; not more than 10 years younger than the employee or IRA owner; or a child who is a minor. Try and imagine the red-tape involved in trying to convince the IRS that a particular beneficiary is “chronically ill.” No, once this happens the stretch will be gone for good.

Another exception would be for Roth IRAs. But, of course, a stretch for these makes no particular sense because no taxes have to be paid on distributions anyway. There is no indication why the Democrat side of Congress thinks this is necessary. Does it have something to do with Evil Rich People? Who knows what goes through the mind of a Congressman these days. The only certain thing is that Congress seems to be focused on punishing those of who save over our lifetimes. It is far past the time that Congress needs a further shake-up message from the voters. Hopefully, that message will be loud and clear in November. Things need to be changed from the top on down.

Of course, everyone knows the biggest fear that retirees have: dying broke.

According to the accounting firm of Ernst & Young and the Center for Retirement Research at Boston College, a household relying on income from Social Security and from $300,000 or less in savings has a 90% of going broke.

How does this happen? According to the research it is a combination of things, but mostly it boils down to unexpected expenses and increasing income on depreciating assets. That is just a fancy way of saying that every time you need money above income, you reduce your assets. And, every time you reduce your assets, you reduce your income because there are fewer assets available to produce income.

Now, here is the big question: is there anything that can be done about this? The answer is YES. It can often be as simple as taking a portion of the existing assets and turning them into lifetime guaranteed income to supplement the Social Security income. When sufficient assets are devoted to producing income, the need to tap into other assets is greatly reduced. We have seen from experience that the odds of going broke can be flipped to a 90% chance of never going broke rather than a 90% chance of outliving assets.

There are only two places you can go in the United States to get income that is guaranteed to be payable for your lifetime.

One is Social Security provided by the U.S. government, and the other is legal reserve insurance companies.

Social Security is guaranteed only to the extent Congress keeps it’s word on the guarantees. We have already seen the promise that Social Security would be a separate trust fund broken and we have seen the promise that Social Security income would never be taxed broken. It is a hard fact that the rules can be changed any time Congress wants to change the rules. Insurance companies, on the other hand, have to honor the terms of the contract they make with you -they are not free to change things the way Congress can.

Those are the two choices. Nothing else can guarantee a stream of income that will live as long as you do. Stocks, bonds, CDs, mutual funds, or anything else you can name cannot provide lifetime income on a guaranteed basis.

Guaranteed lifetime income from an insurance company -what we call a private pension, is also the perfect supplement to Social Security. If SS income is not, or will not, be enough for you to live on, then a private pension is the answer to increasing lifetime income. It is very simple to calculate exactly how much income you can receive lifetime for an amount of money put into a private pension. Plus, there are numerous other advantages, like safety, creditor protection, predictable growth, and tax deferral.

Going after investment returns is the wrong way to look at retirement investing. Returns mean nothing.

Everyone seems to be looking for getting 7% “return” on their money. Here is why returns mean nothing, and let’s look at an actual case we have:
Bob and Sue had $1 million in their retirement portfolio. In good years they had a 7% return, which they felt good about. They felt especially good since they were taking out 5% per year for income -about $50,000 per year.

And then 2007/2008 hit and the investments that were giving them a 7% return were now worth about $500,000. Now, what do you suppose happens when you keep taking $50,000 out of investments that are now worth $500,000? That’s right, you’re taking a withdrawal of 10% per year which is a recipe for going broke -and doing it fast.

Of course, Bob and Sue could also reduce their income to $25,000 which would bring them back to a 5% withdrawal. By the way, how did Bob and Sue come up with the 5% withdrawal rate in the first place? Because their broker told them it was a safe rate and that their nest egg would still grow safely at a 5% withdrawal rate. Study after study has shown that a 5% withdrawal rate has a 30% chance of leaving you broke during retirement.

Wouldn’t it make more sense to have a guaranteed return of income of 5% of your investments rather than any withdrawal rate that may or may not work? Of course it would -especially if the guarantee was lifetime for both spouses.

That is why we say that a return rate is meaningless as long as the return is calculated against an asset that can shrink or even disappear. What you really want in retirement is cash flow -income- not return. It is income that allows you to live the lifestyle you want to live in retirement.

Our own prediction is for a flat, stagnant market in this decade with inflation starting to become a serious problem in the next few years. If that turns out to be true, return rates are going to become even more meaningless than they are now.

Depending on age and other circumstances, we have been able to get a 6% guaranteed return of income for our clients from their investments. Call and ask me how.

The outcome of good retirement planning is income.