Doing Retirement Planning…Again
By Gene Christian and Lon P. Dufek
July 1997
Volume VIII, Number 7

Americans are living longer, healthier lives. The fitness and health food craze has been embraced by all segments of our society. In fact, it’s not a craze anymore. An increasing number of older Americans routinely exercise and have diets that are low in saturated fat, high in fiber, complex carbohydrates and vitamins. In addition to the emphasis on exercise and diets, medical advancements have contributed to the longevity many people are experiencing as well.

A recent report indicated that in 1991 there were 40,000 Americans over the age of 100. By the turn of the century that number is expected to be 400,000. There are many such studies that indicate that our nation is aging rapidly.

Required Distributions 
This aging phenomenon isn’t particularly good news for those seniors with qualified retirement plans who are required to begin taking distributions. After reaching age 70½, an election must be made whereby the plan owner can take minimum distributions over life expectancy using the recalculation method or simply by reducing life expectancy for each year that passes.

Illustration: Mr. Jones retires at age 65 with a large profit-sharing plan account balance. He begins receiving distributions by April 1 of the calendar year after he attains the age of 70½, electing to recalculate his life expectancy annually. He has no designated beneficiary. In his first required distribution calendar year, Jones reaches his 71st birthday. His life expectancy under the applicable IRS table is 15.3 years. In the second year, he reaches his 72nd birthday and his life expectancy is 14.6 years. In the 11th year, Jones reaches age 81 and his life expectancy is 8.9 years. By comparison, if Jones had chosen not to recomputed his life expectancy, his remaining life expectancy in the second year would be 14.3 years (15.3 minus 1), and in the eleventh year would be 5.3 years (15.3 minus 10).

Whichever method for computing life expectancy is elected, each year the plan owner lives, the qualified plan will pay an increasing percentage of the remaining plan balance–with the ultimate objective of the IRS to pay out all plan assets to the retiree in their later years.

As a result, seniors in their middle and late eighties who have IRAs, 401(k)s, KEOGHs and other qualified plans are necessarily taking huge distributions from their plans–as much as 1/5 or 1/4 of the remaining plan is being paid out to them as income. Many older Americans in particularly good health are caught with large taxable incomes and a dramatically diminishing retirement fund, which they are concerned won’t adequately support them as they reach into their nineties.

The Gift Annuity Solution 
The solution to this concern is the charitable gift annuity which can be especially appropriate for people in this more senior stage in life. First, the payout rates are wonderfully attractive. People in the 80-90 age range can expect a 9-12 percent payout rate which will occur for the balance of their lifetimes. Simply, they can’t outlive the annuity payments.

Secondly, even though they are receiving large taxable distributions from their retirement plans, the gift annuity provides a substantial income tax deduction typically in excess of 50 percent of the transfer amount. In other words, if $100,000 was “invested” in a gift annuity, they could expect to receive a current income tax deduction valued at between $50,000 and $65,000 in the process. This substantial tax deduction could offset a good portion of the income reportable as a result of receiving plan distributions.

And finally, the bulk of the annuity payments they receive will not be subject to income tax since the annuity will be funded with cash. Essentially, they would have to find a taxable investment paying 15-20 percent annually to equal the same amount of after-tax income the gift annuity will provide (dependent on the donor’s tax bracket, of course). Investments that provide this type of return can be entirely too risky for seniors!

In conclusion, the gift annuity is a simple way for seniors to “lock in” a very handsome payout rate, coupled with some extremely attractive tax benefits. It is, therefore, an effective vehicle for doing retirement planning…again.

Gene Christian is director of the charitable estate and gift planning program for the Sisters of Providence Health System in Oregon. Based in Portland, he is an executive committee member of the Northwest Planned Giving Roundtable.

Lon Dufek is a certified public accountant and certified financial planner who worked for the Baptist Foundation of Arizona in Phoenix for more than 13 years. For the past seven years, he has been vice president of Comdel, Inc., publishers of Crescendo Planned Giving Software.

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