In part five of my seven part series on "How to plan for income in a low yield, high tax world" I discuss one of the foundational concepts and tools for boosting income for settlement recipients, those who are retired or people just looking to generate more income off of their accumulated savings.
First, as a back drop to those who haven't read or viewed the previous posts, a reminder that we are talking about using fixed rate savings and insurance products for the very specific audience that my firm typically works with. Those are people who have received, or expect to received a settlement from a personal injury or court claim, those who inherit funds, people at or near retirement who need to generate tax favored income and lawyers looking to structure and defer fee income over time. Each of these groups typically can not afford to lose or risk principal, wait out the stock or real estate market, or want the volatility that comes from these longer term investments. These are INCOME oriented clients and savers.
Second, I have to stress that while most people view bonds as your typical income investment, that I agree with many writers, economists and most notably Bill Gross of PIMCO, that we have seen the end of the bond market rally and that there are huge risks in going "long" in bonds at this time, or purchasing bond mutual funds. There is a substantial risk that rates will, at some point in the near to medium future, have to increase as inflation and dollar concerns related to US debt begin to push upwards. Those holding long bonds and bond funds could potentially get hammered, not to mention the short term market risk of defaults or debt work outs on bonds of vulnerable companies, states and governments.
As you will hear in this edition, the solution that I am advocating is the "25% income solution" which is based on the use of life income annuities, or period certain annuities. In it's simplest form you take 25% of the available capital, dedicate it to a fixed, life income for the individual and then structure a savings plan for the other 75% dedicated to grow over time as interest rates or markets rise. It is an orderly method of providing guaranteed, easily budgeted cash flow, is paid on schedule due to market conditions and allows for the longer view investment on the remaining 75% as well. Additionally, if properly designed this income can be either tax free, if a qualified section 104 structured settlement, or substantially tax free if used as immediate income from a non-qualified immediate annuity with a large exclusion ratio for each payment.
Watch this weeks edition and I will have the next installment this weekend in which we discuss and cover what to do with the remaining 75% of the retirement or settlement nest eggs and how to avoid inflation and market risk in the process.