What advisers do best is help their clients with the uncertainties of their financial lives. This year has already brought more unpredictability to the table, and many Americans are wondering if they need to reassess their financial plans. Here are three topics that may be worrying your clients in 2018, and some ideas on how you can approach them.
Should clients change their financial plans? The best advisers will proactively reach out to clients to take them through how the new tax laws will affect their retirement plans. From the new tax rate structure to the increase in the standard deduction, having a check-in allows advisers to uncover other changes in the client's life that could lead to more potential solutions. Partner with your client's trusted tax professional to discuss everything together with the client. Here are three important components of tax reform to discuss with your clients:
1. One provision of the law doubles the estate and gift tax exemption to $11.2 million for individuals and $22.4 million for couples. Some of your clients may want to consider gifting ahead of the end of 2025, when the exemption is set to end.
2. Clients planning for retirement may be concerned about how tax reform affects annuities. The good news is that the tax deferral aspect of annuities is still intact. If the money used to purchase an annuity is pretax, all payouts will be fully taxed at the ordinary income tax rate. If after-tax dollars are used, a portion of the payouts will be a tax-free return of your client's principal.
3. Another result of the reforms is that taxpayers can no longer recharacterize Roth IRA contributions that had previously been converted from a traditional IRA. In other words, if a taxpayer converts a traditional IRA contribution to a Roth contribution, it cannot later be reversed back to a traditional IRA. People looking to buy annuities would face this new rule regardless of the investment option they were considering.
Taking Advantage of Market Gains
The stock market has been on an incredible bull run over the last eight years. As financial professionals, we know that the past is not an indicator of future performance. For your investors who are within seven to 10 years of retiring, there may be a desire to lock in their gains if the market is up, or sell everything if they see the market decline.
Traditionally, investors might move gains to "safe" investments like bonds. But these types of investments don't usually generate the returns that equities can bring. In today's low-interest-rate environment, retirees who invest heavily in bonds might not achieve the returns they need to sustain their lifestyle while preserving their principal.
A more efficient strategy is to allocate a portion of their portfolio to purchase a guaranteed income annuity to help pay for expected monthly expenses. Consumers can purchase annuities that guarantee a monthly payment for life (a personal pension-like stream of income). With people living longer than ever before, there's a need for income that lasts as long as they do. Since income annuities are not correlated with the market, they allow retirees to spend more confidently knowing that a portion of their retirement income will always be there when they need it.
Research has shown income annuities can help reduce the probability of running out of money and improve the amount of assets remaining in the portfolio at life expectancy.
Tolerating the Risk of Investing
Would clients want uncapped upside with a no-loss guarantee?
What about clients further away from retirement, who are seeking growth but concerned about market volatility? These clients still need to grow their nest egg but may need the confidence to invest. There are products in the marketplace now that can give clients growth while curtailing the worry that comes with being in the market.
Variable annuities are one possibility. They may not be for everyone, but a variable annuity can be a solution for those interested in stock market exposure inside a tax-deferred product. Some accumulation variable annuities may offer a guaranteed minimum accumulation benefit rider, which provides a no-loss guarantee even as the growth potential remains uncapped. Pre-retirees looking to grow their nest eggs through stock and bond exposure might consider these products as alternatives to CDs or fixed indexed annuities. Keep in mind that we aren't making a recommendation for any specific products, and that advisers should consult with their own tax and legal advisors.
When challenging financial decisions need to be made, advisers can help. Assisting clients as they navigate these financial uncertainties provides an opportunity to deepen relationships that will result in "gains" for all.
Phil Caminiti is a managing director at New York Life.