Using Technology to Help a Hypothetical Couple Plan for Retirement (Part One of Three)

July 7, 2014

The first in a three-part blog series that tracks a hypothetical couple being helped by an advisor.

As part of our continual efforts to promote the resources available through Pacific Life, we have written a three-part blog series that tracks a hypothetical couple being helped by an advisor, and highlights a nonqualified annuity as the solution. The advisor uses the Pacific Life Tax Deferral Analyzer tool to help explain the value of a nonqualified deferred annuity to these clients. In this first blog post, we will examine the accumulation story by seeing a couple meet with their advisor, Charlie, to discuss how to meet their retirement goals.

Family Facts:

  • Husband named John, age 50.
  • Wife named Theresa, age 50.
  • Three teenage children.
  • Family business: Real Estate Development Company owned by both John and Theresa. John handles the day-to-day operations as CEO, and Theresa serves as general counsel to the business.
  • John and Theresa plan to retire at age 62.
Abbreviated Financial and Tax Picture
Jointly filed returns for last three years. Average adjusted gross income of $500,000 per year.
Twenty percent of annual income ($100,000) attributable to investment income and remainder ($400,000) from the business.
Taxable brokerage account with balance of $2.5 million dollars. Contributes $50,000 annually to taxable brokerage account.
Business has both defined benefit (DB) and defined contribution (DC) plans in place.

Charlie thinks this couple has not optimally structured their assets and could benefit from an additional vehicle for tax-deferred growth of assets. He suggests a nonqualified deferred annuity. To fund the annuity, Charlie suggests liquidating some investments in the $2.5 million brokerage account to obtain $500,000, and contributing this lump sum to a tax-deferred annuity. For purposes of this strategy, the couple’s tax attorney recommends that any liquidated securities be non-appreciated dividend-and-loss-producing securities.

The advisor runs the Pacific Life Tax Deferral Analyzer tool to give the couple a general idea of the power of tax deferral on growing the $500,000 during the next 12 years to reach the husband’s retirement age (versus keeping it in the brokerage account). Below are the results:

As you can see, using a hypothetical 6% annual rate of return and assumed effective tax rate of 43.4% (which includes the impact of the 3.8% net investment income tax), the funds in the annuity grow for 12 years to $1,006,098 (versus $746,474 if kept in the taxable brokerage account).

The advisor showed the couple how funds can grow faster tax-deferred. In our next series of posts, we will explore how this couple can tax-efficiently distribute any necessary income stream, and if there are any assets left over, create a financial legacy plan.

Read Part Two


The Pacific Life Tax Deferral Analyzer tool



The purpose of the Pacific Life Tax Deferral Analyzer is to provide an estimate of the potential growth individuals may receive with a tax-deferred annuity versus a taxable investment. The methodology used is approximate, intended for educational purposes, and not meant as a predictive or forecasting tool.

The projections of information generated by the Pacific Life Tax Deferral Analyzer regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The results and explanations generated by this calculator vary due to user input and assumptions. The Pacific Life Tax Deferral Analyzer output does not incorporate the impact of any specific federal or state tax other than an assumed tax rate and net investment income tax when elected.

These results do not take into consideration state taxes and any applicable premium taxes. Actual tax rates may vary for different taxpayers and assets from the results shown (for example, capital gains and qualified dividend income). Actual investment performance also will vary. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the results shown. Investors should consider personal retirement objectives and income tax brackets, both current and anticipated, when making an investment decision. Hypothetical returns are not guaranteed and do not represent performance of any particular investment.

Pacific Life Tax Deferral Analyzer is not a comprehensive financial plan or strategy, and it should not be the sole means of determining such a plan or strategy. Results may vary over time based on changes to your input and the tool’s underlying assumptions.

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

BlueRush is an independent third-party that is not affiliated with Pacific Life.

Annuities are long-term contracts designed for retirement. The value of variable investment options will fluctuate and, when redeemed, may be worth more or less than the original cost. Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply. Withdrawals will reduce the contract value and the value of death benefits, and also may reduce the value of any optional benefits.

IRAs and qualified plans—such as 401(k)s and 403(b)s—are already tax-deferred. Therefore, a deferred annuity should be used only to fund an IRA or qualified plan to benefit from the annuity’s features other than tax deferral. These include lifetime income, and death benefit options, and the ability to transfer among investment options without sales or withdrawal charges.

Variable insurance products are distributed by Pacific Select Distributors, Inc. (member of FINRA & SIPC), a subsidiary of Pacific Life Insurance Company and an affiliate of Pacific Life & Annuity Company (Newport Beach, CA), and are available through licensed third-party broker/dealers. Variable and fixed products are available through licensed third-party broker/dealers.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency

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Pacific Life offers a broad and diversified range of products and solutions designed to help individuals and families achieve asset growth, sustainable retirement income, and long-term financial independence. We also help businesses manage and fulfill their long-term retirement plan commitments to employees.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency