Punch-Drunk Boxers and Guaranteed Income

The stock market has most investors feeling a bit like a punch-drunk boxer over the last year.?Month after month, round after round, it has been a persistent and painful journey into a bear market coupled with historic inflation.?It is in challenging times like these that we as philanthropic advisors and fundraisers need to bring new skills to the conversation.?Donors are experiencing stinging losses and some of them are inevitably looking for alternatives especially when it comes to the purchasing power of their investments and income sources.?Today’s Gift Planning Tidbit will teach you how to talk about the power of tax-advantaged income that can never go down, and how to use a Charitable Gift Annuity (CGA) to diversify their portfolio and providing legacy-creating support for our institutions.

In an early edition of GPT I introduced the concept of Taxable-Equivalent Yield.?This is especially relevant today so let’s refresh that concept for this larger audience first and then learn how to position the CGA for today’s uncertainty.

Taxable Equivalent Yield compares a taxable income source with a tax-free income source to arrive at the amount of taxable income needed to equal the amount of income received from a tax-free, or tax-advantaged, income source.?For example, imagine your salary is $70,000 per year, but is tax free.?The amount of spendable cash in that scenario is higher than if the salary was $100,000 but taxed at 45%.?The higher salary might appear more attractive, but the lower income results in more spendable income.

The income a donor receives from a CGA is not 100% tax-free but in many instances a substantial portion is tax-free, so the ability to explain this concept is critical.?

Let’s look at two realistic scenarios- an upper-middle class, but not overtly wealthy, retiree who has watched the value of their nest egg crater over the last year, and a married couple of similar means looking ahead to retirement.

Donor 1: Terry, aged 73, Retired, living in a high-tax state, but not in the top income brackets, looking to diversify and stabilize income sources, $250,000 cash available

>>>CGA pays 5.7%, Annual income: $14,250, $9,433.50 of which is tax-free<<<

Because fully two-thirds of the income from the immediate CGA is tax free, Terry would need to earn 11.2% on fully taxable income source.?Consider also, the immediate tax savings of nearly $54,000 on a charitable deduction of over $119,000 and not only does a CGA provide meaningful relief immediately, but a compelling alternative to income sources available to them through other means and to cap it all off with a fine cherry- the annual distribution will never go down.

Switching now to our married couple fretting over when they can retire…

Donor 2:?Jesse and Nat, ages 60 & 58 respectively, were planning on retiring in 10 years but those plans have been put into question now.?How do we present them with an opportunity to maintain those plans and still provide generously to charity?

>>>Creating a Deferred Gift Annuity today with cash they’ve earmarked for retirement income will provide an immediate Charitable Tax Deduction they can use today to save over $50,000 this year in taxes and provide the equivalent of $21,752 of taxable income beginning in 10 years.?This equates to a 10.9% equivalent rate of return.<<<

In both scenarios, the tax-advantaged stream of income provides for super-competitive equivalent rates of return that are nearly impossible to obtain in the market right now while simultaneously guaranteeing that level of income will never go down despite what happens in the stock market in the future.

Consistency and security of income are top of mind right now with many donors left shaken by the volatility of the stock market lately.?Showing our donors that we can provide sophisticated advice in challenging financial times that retains their ability to support charitable causes is a potent combination.?

You do not need to be able to cite these figures for this to be useful in your daily work.?During your outreach, stop to consider how someone you’re talking with about making a campaign gift or endowing a scholarship might be hesitant to make a final decision right now, but might benefit from a conversation along these lines.?You might ask them questions like these:

1.???????"Many donors are challenged by the current environment with the stock market and run-away inflation.?We’re finding that some of the techniques that are reserved for philanthropists like yourself are showing compelling cases for consideration.?Getting a tax-advantaged stream of income, either now, or in the future, that is guaranteed for life, seems more attractive now than in recent years.??How do you feel about your own retirement income security?"

2.??????"How does the recent rout of the stock market affect your ability to retire comfortably??Will you need to wait for a recovery to retire confidently? (or alter spending habits if they’re already retired)"

3.?????"Volatility in the stock market is affecting many of our donors and some have even decided to delay making the campaign gift they were hoping to make.?If my Gift Planning team could show you some creative ideas that can give you a significant financial benefit now and still participate in the campaign’s final year push, would that be interesting enough to learn more?"

4.??????*This example is a version of setting the stage to invite your donor to have a conversation about “how” they can fund a gift, adapted from Dan Shephard 's "High Probability Fundraising" and what he and Craig Smith call "Priming the Pump":

"As we near the end of our campaign, the financial pressures we are all facing are causing some donors to rethink their capacity to participate in the campaign in the same way they originally planned.?For instance, you might tell me that the losses in the stock market are:

??????????i.?????making it harder for you to officially retire, or:

??????????ii.?????(if they are retired)- making it harder to sustain your retirement income without tapping into your nest egg more than you’d like to at this point,

?Or, you might also tell me that you will need more income in retirement due to the historic inflation we’ve seen.?Finding those opportunities can be challenging, not to mention scarce to begin with.?You may be surprised to learn that some philanthropic tools offer compelling benefits that can help alleviate these issues and still allow you to provide meaningful support to the College.?Would exploring this avenue be interesting to you?"

At the end of the day, our donors are not immune to the financial environment.? Facing that reality and presenting options proves that we are more than simple transactional facilitators or making na?ve solicitations without regard for the environment we are all experiencing.? Providing value-added topics of conversation prior to making the ask improves our professionalism and our donor’s perceptions of us as trustworthy advisors.?

Please let me know how I can help increase your comfort level having conversations like this with your donors. As always, I appreciate the great comments and support I get each time I send these out. You can continue to reach out directly to me, or by leaving comments below.?The big goal here has always been to help expand the reach of Gift Planning into more donor conversations and help you become more conversational with Gift Planning techniques.?Please let me know if you see that happening in your own work, or what I can do to make that happen even more. Please also share this post as you feel appropriate. Thanks!!

"Strive to be beyond what others perceive you to be, by striving beyond the limits of yourself. - Debbie Tosun Kilday