Retirement planning poses risks that nobody can anticipate – even if they are diligent about building wealth.
Taxes will likely be your biggest expense in retirement. It’s important to build wealth in tax-free options while you are accumulating money. This allows you to take the money out tax-free in retirement.
We will explore the tax problem and other key retirement risks in this article. We will look at a lesser-known retirement vehicle to guard against these risks. Then, we will review case studies and wealth-building strategies for your family.
Quick Note Before Diving In
There is one major difference between wealthy Americans and everyone else from a retirement perspective. Wealthy families have a tax problem. Everybody else has a cash flow problem.
This difference stems from factors we won’t cover here. The only concern is making sure everyone can retire as comfortably as possible based on their current financial situation.
Anyone in the top 25% can benefit from this retirement funding strategy. It’s also important to discuss the specifics of your situation with a tax lawyer and financial advisor to personalize your plan of action.
3 Biggest Retirement Risks
We can save. We can invest wisely. We can hedge our risks. But there is nothing we can do about:
- Stock market volatility
If you could predict what the markets will do, keep on doing what you’re doing. If you know exactly when you will pass on, you can plan accordingly. If you know how the government will change the tax rates throughout your life, please share your knowledge.
In the more common circumstance that nobody can predict those, there are ways to hedge against the concerns of market crashes, outliving your money, and unexpected tax hikes.
Stock Market Volatility
In addition to investing money to grow your retirement accounts, you need to account for management fees (1-2%), inflation (~3%), and taxes. These can swing anywhere from slightly deflating your growth to wiping it out entirely – depending on how the market is behaving.
If it has a series of slow growth years or becomes a bear market for a year or two, you’ll need other strategies to avoid selling your investments during downturns.
You’ve probably read that the life expectancy in the United States is beginning to decline. However, if you make it to age 65, you’re expected to live to age 85 or 88 – depending on whether you’re a man or a woman.
If you’re married, you have a 50% chance of living to age 90 with a 5% probability of reaching 100 years old.
That means you have reasonable odds of a 25-year retirement – better odds than winning at a roulette table in Vegas.
Adding a lengthy retirement to unforeseen medical needs, there is a real risk of outliving your money.
Top marginal tax rates have trended downward since the late 1960s. However, they’ve trended back up since the 1990s. We’re still below the average of 57.5% for the past century.
Any way you look at it, taxes will eat away at your retirement accounts. Plus, most people won’t have the three biggest tax deductions of mortgage interest, child exemptions, and qualified retirement contributions.
What is the “Perfect” Retirement Vehicle?
In a perfect world, there would be a retirement vehicle that looked like the following chart.
Ideally, there is no risk and no penalties. Combined with the above, everything else increases the desirability of the vehicle. The most common retirement vehicles – the IRA & 401(k) – only check off two boxes, with the possibility of the third. They are:
- Tax-deductible payments
- Possible liquidity use, & control – with a loan or surrender
The bad news is that a perfect retirement vehicle doesn’t exist. But, we can get closer than the traditional recommendations. It is wise to contribute to your 401(k) up to the match. However, you should consider putting any savings above the match into a tax-free option. This will help ensure you have the cash flow to retire at the same quality of life that your working years provide.
The Closest You Can Get
The closest thing you can get to perfect is a well-designed life insurance policy for the same situation that most high-income earners find themselves in.
Life insurance is the top tax-minimization retirement vehicle available today. It’s 10 out of 12 on the perfect vehicle standard. It has a unique combination of a tax-free death benefit and a tax-deferred cash value accumulation.
Now, you may have seen these things advertised on TV. The financial gurus will tell you that they have high fees, poor rates of return, your money is stuck, hidden costs, etc.
There are dozens of ways to set up life insurance. What if there was a type that has low fees, competitive returns, transparent costs, and easy access to your money?
Remember that the financial gurus you hear on TV are focusing their advice on the bottom 75% of wage-earners in the US. They make more money through broad appeal. After all, wouldn’t you rather have a market for your product that consisted of 75% of the population who can benefit from roughly the same advice?
Their advice is excellent, but they aren’t talking to you. They’re talking to people with a cash flow problem – people who would have to choose between funding their IRA and a life insurance vehicle, not people who can move the money around to do both. Income brings the options of maximizing potential returns through traditional vehicles and safe growth through an IUL.
What is an Indexed Universal Life Policy?
Indexed universal life is one type of permanent life insurance policy – permanent, meaning that it stays with you throughout your whole life. Most people think of whole life when they think of permanent life insurance. It’s still the most popular in the US today, despite term insurance making more sense for many people.
Instead of the cash value accumulation that barely outpaces inflation (the kind you get with whole life), indexed universal life (IUL) ties its cash value growth to an index.
Why it’s different from other Life Insurance
IULs differ from other policies because of their indexed cash value accumulations. They are policies for people who need alternatives to other stable growth vehicles. Life insurance is important, but the death benefit is there to facilitate the tax advantages of life insurance cash value.
How the Guarantee Works
Not losing money on your IUL cash value sounds a little too good. For the 0% growth floor, there is a ceiling. The ceiling varies by carrier, but it’s usually 10-14%. This is not a product to choose for aggressive returns; it’s meant to supplement your conservative investment strategies.
However, that 0% floor will save you during market crashes. While everyone else is watching their investments lose ten years of growth, you know that your cash value will remain intact.
Here’s the best part. When the market begins to grow again, the calculated growth percentage starts from the low – even though your cash value remains the same.
For example, if the market has a bad year and your growth is 0%, followed by a great year, and you earn the cap of 12%, you earn the 12% on top of the locked-in cash value you had before the crash. You can avoid the hassle of everyone else seeing that growth on top of their dramatically reduced account value.
They do this because your money is never directly invested in the market. The company will take 95% of your premiums, invest those in investment-grade bonds, which are conservative but stable. They know that the growth from that will be just enough to cover 100% of your original premium.
The other 5% they’ll use to buy options. The option is where the money grows. When the market rises, you’ll see the corresponding growth in your cash value. When the market falls, you’ll have the safety net of the 95% the company invested in bonds.
Retirement Tax Problems Solved
A strategically implemented IUL policy built to focus on the cash value accumulation can supplement your primary retirement planning strategies. It’s also the #1 tax-minimization retirement vehicle.
- No risk
- You retain control
- Has collateral uses
- Disability benefits
- Wealth transfers
The only downsides are there are sometimes penalties depending on how you set it up, and payments are not tax-deductible.
As an example, we’ll use the case of Jared and Eve Smith. (Their names have been changed, and their finances rounded for privacy.)
They’re both employed, 42 years old, looking to retire at 70, and are planning on paying for their son’s college tuition in 5 years.
They’re concerned about the Expected Family Contribution (EFC) on their son’s college funding. They have:
- $100,000 in a money market in their bank
- They each contribute an extra $600 each month over their 5% company match on their 401(k)s
After examining their personal wealth report, they realized that the things they thought they were doing right could be even better. The extra money going toward 401(k) that their employers didn’t match could be put somewhere else for more profitable growth. The cash sitting in their savings account beyond the recommended three months of expenses as a financial buffer could produce better returns. Rather than losing money on the piddling interest on a bank savings, that cash could be growing and liquid – in case there was a major emergency.
The loan against an IUL – even as the full cash value grows – showed promising numbers for their son’s college tuition in the event their college savings account couldn’t cover everything.
We compared the numbers for funding their retirement with the normal qualified retirement plans against an IUL policy.
Now, let’s look at the numbers for their retirement years.
You can see the money from the Taxable, Tax-Deferred, and Tax-Free accounts will run out well before the expected lifespan for the couple. Remember that a married couple (if both reach retirement age) is likely to live to at least 85. Their prospective IUL can supplement or replace that retirement income in their later years. Or, if they don’t outlive their money, it can be passed on tax-free to their son.
This adjustment to their retirement planning required no changes to their budget, just a different allocation of what they were already earning.
What About Others?
While the indexed universal life policy is relatively new, the strategy has been used by wealthy professionals for over 100 years.
When Walt Disney had this crazy idea to build what would become Disneyland, nobody wanted to invest. Everyone thought he was insane.
Disney then funded the first park himself by borrowing the money from the cash value of his life insurance.
During the Great Depression, stores everywhere were closing because they couldn’t meet payroll and operational expenses. Instead of shuttering JCPenny, James Penney borrowed against his life insurance policy to keep the doors open.
When he became the head coach at the University of Michigan, part of Jim Harbaugh’s compensation involved a leveraged life insurance contract. The university pays for the premiums on the policy, which they leveraged into a massive life insurance policy and massive cash value growth.
Whenever Harbough retires, he will have tax-free cash from his life insurance policy to spend however he pleases. This strategic compensation plan makes him one of the best-paid college football coaches in the country. Now some other coaches are implementing a similar compensation structure using a cash value life insurance policy.
How to Get Your Personal Wealth Report
You can get a preview of the possibilities like the Smith family case study with your own personalized wealth report. All you need to do is complete the Wealth Report Request from this page to receive your personalized potential cash value growth.
It’s obligation-free, and you’re welcome to share it with your financial planner to see if this strategy makes sense for your family.
Learn More With A Free Online Course
My team has also put together 13 free educational videos explaining this wealth-building strategy in further detail.
Remember, the most critical part of growing your money is understanding the vehicles. We want to show you the exact strategy wealthy families have been using for decades to grow their money in a protected vehicle.
You can sign up now for Proven Wealth Strategies with no obligation.
How Abrams Insurance Service Can Help
At Abrams, we’re a small group of independent agents looking to help families across the country build a stable financial foundation for their future. One of the pillars involved in financial stability is risk-mitigation through life insurance.
An important part of using an IUL to supplement your retirement income is that it must be designed for maximum tax-free accumulation. We are experts at policy design and will make sure the policy is properly designed for your benefit.
Personally, I believe in practicing what I preach and have used an IUL for over 10 years as an integral part of my retirement plan.
Give us a call today at 858-703-6178 to see if one of these strategies would be right for you.