LifeHealth.com : Retirement Income: All About Accumulation

Retirement Income: All About Accumulation

by Laurence Greenberg

Laurence P. Greenberg is President and CEO of Jefferson National. He can be reached at www.jeffnat.com or at 866-949-3528.

Part I of a two-part feature
Read any industry publication and the buzz is about "retirement income" solutions. The choices include variable annuities offering a range of different living benefits, target date mutual funds and payout mutual funds, all designed to generate income during retirement years. But with all the hype, here's a statistic that's clearly been overlooked: The median boomer is 51 years old. That's 14 years, or more, away from retirement. Which means accumulation is still a big issue for more than half of the 77 million boomers, as well as the younger generations following them. And in this era of do-it-yourself planning and a failing retirement safety net, experts agree most Americans need to save more.

Needless to say, accumulation is the foundation of retirement income.

Needless to say, accumulation is the foundation of retirement income. And to maximize long-term savings, few things beat the power of tax-deferral. When you stockpile your investments for years or decades, compounding growth without stripping away 15 percent to 35 percent in taxes each year during the accumulation period, you could have substantially more by the time you reach your retirement.

A new study, co-authored by University of Chicago Professor Ira Weiss, Ph.D. and Jefferson National's Matthew Grove, set out to prove this point. You may be surprised to learn that tax-deferral can quickly outperform a taxable investment, even when capital gains are at an all time low. It may surprise you even more to learn how little time it can take for a tax-deferred account to break even with, and then outperform, a taxable account. The key is using a low-cost, no-load tax-deferred investment platform.

Study: Tax-deferral can supercharge accumulation for more retirement income

So how can you and your clients supercharge accumulation to help ensure a secure retirement? The basic building block of retirement savings is to max out your tax-deferred accounts such as 401(k)s, IRAs and other defined contribution plans.

But then what? Tax-deferred variable annuities are an option. Yet most advisors and their clients have been cautious about traditional VAs with their high asset-based fees, limited fund selection and complicated insurance guarantees. What about a new type of VA, designed to offer all the power of tax-deferral, without all the cost, and with substantially more investment options? A VA that replaces asset-based insurance fees with a simple flat-insurance fee of just $20 per month?

To find the answer, our study, Increasing Retirement Income Through the Power of Tax Deferral, posed several important questions, including:

All things considered, do tax-deferred vehicles offer an appreciable advantage over accumulating long term in a taxable portfolio?
Comparing various types of portfolios and risk profiles, how long will it take a tax-deferred account to "break even" with a taxable account?
How do factors such as asset class, asset location, active trading and account size impact long-term accumulation?
Do the asset-based fees of traditional variable annuities have a long-term affect on accumulation potential? Replace those fees with a flat-insurance fee, and how much can performance improve?

By the numbers: It doesn't take long for tax-deferral to work

How does the accumulation power of the tax-deferred, flat-fee VA stack up versus the taxable account? Our research shows it can help your client save more, generate more retirement income and leave a larger legacy:

In just four years, the typical mutual fund investor with a conservative portfolio will likely generate more income from a flat-fee variable annuity than a taxable account
After 10 years, investors with a moderate risk profile will break even and then outperform a taxable account.
After 14 years, aggressive investors will break even and earn more.
Investors using an active management strategy almost always improve performance, breaking even with a taxable account within the first year.
Higher after-tax returns are achieved when tax-inefficient assets are held in a flat-fee VA and tax-efficient assets are invested in a taxable vehicle.

And what about the flat-fee VA versus a traditional variable annuity? The asset-based fees of a traditional variable annuity, averaging 1.35 percent annually, can cause the break-even period to skyrocket to 23, 31, and 37 years for conservative, moderate and aggressive investors respectively, virtually eroding any accumulation benefits of tax-deferral.

In addition to the flat-fee advantage, this new breed of VA works harder than the typical VA by offering a broad selection of investment options – virtually a tax-deferred investment platform with 54 times more funds than the typical VA. By eliminating commissions, surrender fees, and complex insurance features, flat-fee VAs create value dramatically faster than traditional variable annuities.