2015 will be remembered as a very volatile year in the stock market. In August we experienced a formal correction, defined by a 10 percent or more drop in the market, and fortunately some of that was regained by year end. The market volatility certainly impacted the retirement accounts of millions of Americans who are already retired as well as all of us Baby Boomers who are working and saving to secure a comfortable retirement.
Today I want to share some ideas on a retirement planning tool for the charitably minded baby boomer planning for retirement. For those who would like to leave a legacy and include a gift to charity in your estate planning, a Deferred Charitable Gift Annuity is an important tool for you to consider. First, let’s define a Charitable Gift Annuity, or a CGA. A CGA is a contract between a nonprofit and a donor where, in exchange for a contribution the nonprofit guarantees an annual payment of a set amount to an individual or a couple for their lifetime. After the death of the beneficiary, the balance or remainder of this gift is then used by the charity to achieve their mission. A Deferred CGA is where the contribution is made now and the annuity payment is deferred to a later date.
Let’s look at an example to demonstrate how this works and the benefits of it. Let’s take a married couple who are now 56 years old and in their peak earning years in their careers. They have IRA’s or retirement plans and are making the maximum contribution each year but would like to put a little more away into a retirement account that is not experiencing the volatility of their IRA account. Another tax deduction would also be beneficial. They also would like to create a legacy gift to benefit their church.
The couple creates a Deferred CGA contract with the Truman Heartland Community Foundation. The plan is for them to contribute $4,200 each year for six years, a total contribution of $25,200. They defer their annuity payment until they reach their full retirement age for Social Security, age 67. Over the six years they are making the contribution they receive a partial tax deduction for their contribution of $5,392, which saves them $1,779 in taxes, assuming they are in a 33 percent tax bracket.
At age 67 they begin receiving an annual annuity of $1,512 based on a 6 percent annuity contract (6 percent of the contribution amount) that they will continue to receive for both of their lifetimes. This amount will not change from year to year but will remain at $1,512. Also over half of this amount, $858 will be income that is tax free for the first 20 years. So, a similar taxable investment would have to earn 8.2 percent to have the same return. It is estimated over their lifetimes that they will receive $42,741.
The foundation through our investment committee and professional advisors invests their contributions and tracks the investment returns and annuity payments in a fund specifically set up for this annuity. If we estimate a conservative average annual return of 5 percent, the fund would have $54,547 remaining in the fund after their lifetimes to create an endowment to benefit their church.
Through this Deferred Charitable Gift Annuity they have provided a significant legacy gift to their church and also received reliable income for themselves in their retirement as well as a tax deduction during their peak earning years. This can be a great retirement planning tool for those who wish to leave a legacy and support their favorite charity or charities.
Phil Hanson is president and CEO of the Truman Heartland Community Foundation, based in Independence.