Question - We are a retired couple, well blessed by life in America (husband 66, wife 60), retired and drawing Social Security.
We have a substantial amount ($660,000) in retirement accounts with Aetna. Our account representative is advising us to do two things on which we would like your opinion. Our goal, of course, is to have a comfortable retirement and leave as much as practicable to our children.First, he advises us to place the entire amount, or a substantial portion, in a 20-year certain annuity with continuing payments until both deaths. The advantage of this over simply withdrawing each year to meet needs and the required draw-down amounts is unclear.
Doesn't this simply remove this money from tax shelter, subject future earnings to taxes and impose some sales commissions?
By the way, tax avoidance is not a major objective for either of us. At worst, three out of four dollars will still go to our kids after we die. To our mind that's not much to pay for the privilege and benefit of being Americans.
Second, he advises purchase of an insurance policy to meet the anticipated total tax liability at the final death.
Since there should easily be enough liquid assets in the estate to pay taxes without selling something, we question the advisability of this suggestion as well.
Incidentally, we dearly love our account rep. - F.C.
Answer - Personal charm notwithstanding, I don't see the benefit in either of his suggestions.
At 66 and 60, you and your wife have a combined life expectancy of about 25 years and a 50 percent chance that one of you will live even longer than that. The annuity he proposes would commit you to a fixed income for the remainder of your lives. It would also commit you to a certain taxable income for the entire period.
The income would not be particularly high and it would all be taxable if the retirement accounts you mention are all tax-deferred accounts. Basically, it means declining purchasing power for the remainder of your life.
You can't afford that. You're too young.
The life insurance for estate purposes is a matter of personal preference. You guarantee a larger estate at the expense of your current standard of living or possible gifts to heirs while you are alive.
When your assets consist of liquid financial assets, providing estate liquidity is not a major prob-lem.
Question - We have funds invested in the Fidelity Trend Fund and would like to move those funds to the Vanguard 500 portfolio. My question concerns the best time to sell a fund.
Should I sell before the end of this year? Or wait until the first of next year? I am concerned about the hit we might take tax-wise. - C.E.
Answer - That's a knotty question. If you sell before a capital gains distribution, your tax liability will be equal to the difference between what you paid for your shares and what you sell them for.
If you wait until after the fund company makes a capital gains distribution, your taxable gain may be larger because the gains distributed may have existed before you purchased the fund.
Using Morningstar Principia, a program and data product from the Chicago publisher that tracks mutual fund performance, I found that the average of more than 2,000 domestic equity funds had unrealized capital gains equal to 19 percent of assets, nearly double the average gain year to date.
What any individual shareholder's exposure is depends entirely on when they purchased shares. None of this, of course, is a worry in a qualified account such as an IRA or 401