WHY LIFE INSURANCE IN RETIREMENT?

Why Life insurance in retirement?  Money is now at work in retirement rather than people at work so you can not leave this to chance. It is extremely hard for an asset to generate income and be a legacy tool at the same time.  This puts a lot of stress on your money.

Problems with traditional strategies without whole life or permanent life insurance:

Inflation:  Reduces buying the power of our dollars over time.

Outliving Money:  Need to make sure our money lasts throughout lifetime

Tax Law Changes:  Tax increases reduce the spending power of income.

Volatility of Returns:  Market fluctuations can negatively impact an investor's net returns and thus reduce future spending power.

Loss of Principal:  Market fluctuations, unforeseen needs, or other unknowns can reduce the total value of your account.

Lifestyle Changes:  Technological change, planned obsolescence, and standard of living increases.

 Asset Insurance...Whole life or permanent life insurance in retirement will give you a permission slip to spend another asset without the fear of running out of money, maximize retirement income, and still leave a significant legacy to heirs and charity.  The idea is to spend and enjoy wealth without sacrificing lifestyle and protecting wealth erosion. 

An asset and income maximizing strategy utilizes permanent life insurance combined with accumulated assets to provide these benefits:

1.  Paydown vs Interest Only:  Enhance your lifestyle by spending more of your wealth

2.  Reduce pressure on capital:  Less capital needed to produce desired retirement lifestyle

3.  Reduce pressure of withdrawal rates:  Less reliance on traditional methodologies such as Monte Carlo, and less worrying about market fluctuations 

4.  Reduce income Risks:  Less volatile assets can be used to produce more stable income

5.  Reduce Risk of Tax Increase Impact:  Reduce impact of tax increases through asset paydowns, charitable giving, and other integrated strategies

6.  Reduce taxes:  deferred growth of cash values, tax-preferred loans, and tax-free distribution at death

7.  Additional Income:  Create additional income through dividends, cash value, or loans depending on policy type, or through other asset and income maximization

8.  Inflation protection: Reduce the effect of long-term inflation by increasing expected retirement income  

9.  Reduce Fear:  Reduce fear of running out of money

10.  Capital Opportunites:  Have the flexibility to use capital for opportunities that do not create immediate income

THE TAKEAWAY

-Income distribution strategies are very important

-Fixed income saving strategies should be avoided because wealth eroding factors diminish lifestyle over time

-Coordinating multiple elements boosts advantages and limits disadvantages

-Coupling retirement assets with whole life insurance offers an opportunity to optimize retirement income and legacy

 

Tax Allocation vs Asset Allocation

 As people accumulate wealth the #1 asked question I receive is "where should I put my money"? My question back is where do you think taxes are going in the future?  The majority of the time the answer I hear is "up".  The place most people are putting their money currently is in qualified plans which means they are investing pretax into retirement accounts that will be taxed sometime in the future.  Most clients believe they will be in a lower tax bracket in the future even though they believe taxes will be going up during their retirement years.

The government will have 100% control on what they want to tax on these accounts in the future. Trillions and counting are in retirement accounts vs Trillions of debt and counting.....I wonder where the government will get money from when the social security system cracks or they need to handle the debt issue.   How can you put so much control in our government hands when the tax code changes consistently? The problem is if you saved properly in a retirement accounts along with having the least deductions in retirement (home interest, kids for exemptions etc.) you have actually set yourself up to pay more tax in the future.  Understanding not paying taxes on your money sounds like a great idea you are actually compounding your tax burden and putting heavy risk on your wealth.  YOU ARE BUILDING A TAX BOMB!

Have you ever wondered if you should structure your savings in accounts based on taxes that could go up and planning to have less taxable income vs tax free income during retirement?  We can save you hundreds of thousands of dollars in tax strategies......

Average 25% return

If you could earn 25% average rate of return over the next 4 years... would you take it? Most people would... just on the lure from the rate of return. The first year in this study you received 100% rate of return on your money. Most likely, your financial adviser / stock broker would be calling you every other day toasting to your combined success! The following year, your rate of return was -50%. You probably will not hear from your broker/financial adviser. The third year, 100% rate of return, again! Everyone is happy. The fourth year your return is -50%. When you get your annual statement... you will see that you got 25% rate of return on your money during those 4 years.  You are confused, because you have the same amount of money you started out with. So, what rate of return did you really get? 0%!! Now I understand that this is drastic, but, this is reality. Many of us do not know what our real rate of return actually is.




Look for another blog based on this model talking about taxes and lost opportunity cost to learn that really you earned a negative return!

How Long Will You Live?

How long will you live? It's a question none of us really know the answer to, but when it comes to retirement planning, wouldn't it be helpful for planning purposes to have some way to figure it out?

I came across this calculator that helps figure it out....no guarantees, of course, but it is kind of slick, and it also gives ideas on how you can add  years to your life by making lifestyle changes.

You have to sign up, to use the age calculator, but it's worth it. Hopefully you're going to live nice and long! .

Please do share it with your friends, and let us know how you like it in the comment section below.

photo credit: grandparents via photopin (license)

Where's The Tax Savings?

Did you ever wonder if there is actually tax savings when you contribute to an IRA, 401k or another pretax investment?  Your CPA or tax consultant will say you are getting money back if you contribute.  The tax deferral is in the plan and not in your pocket!   The cash flow or net income is what you must consider not the supposed tax deduction.

The example above shows you contributing $10,000 pretax which means you will pay less tax but you still had to put the money into the plan which which does not help you with ultimately paying less tax.  The contribution will just give you a delay of tax hoping to be in a lower tax bracket when you retire which would mean you would be receiving less income in retirement.  Lowering your income in retirement would be difficult especially when most of your income that you receive is taxable.  If you are receiving lower income in retirement it would mean you are enjoying less!  Will you lower your standard of living because you retired or will you be spending more money because you are not working 9-5 any more!

I ask these questions!

Do you believe tax brackets will be lower or higher in the future? 

Do you believe you have more or less tax breaks?  

Do you believe you need more income because of inflation?

Do you believe the government will not hijack these tax deferred accounts because they need money?

Do you believe that the tax you where suppose to pay earned more interest because it compounded?

Do you believe that you are deferring tax to just pay more tax in the future?

Miracle of compound interest vs Reality

Reality of Compound Interest 

Building wealth has numerous eroding factors that are not being recognized today by most financial advisers.  Most investors only see their gross return because that is what the financial institutions want you to see.  Investors are using the miracle of compounding interest without understanding the miracle of compounding tax.  The problem is not only the compounding tax it also has a partner called lost opportunity cost!

  

The Ideal World:

The client invested $10,000 into an account earning 8% which would grow in 30 years to $100,627.  End of story!

The Real World:

If the client was in a 25% tax bracket they would pay $22,657 in taxes out of pocket or some other account.  The problem is that tax money could also be earning interest so that lost an additional $23,127 which could earn 6%= (8% x 25%).  This is called lost opportunity cost!  The biggest mistake most financial planning companies are failing to show is what it cost to grow your money.  The real question is why would they show you this?  The reality only hurts performance so performance is  marketed by financial institutions without full disclosure to improve rate of return.

The Real Math:

You have $100,627 in your account but it cost you the initial investment: $10,000, taxes $22,657 and lost opportunity of $23,127. The net result is really costs of $55,784.

The analogy: 

Imagine being in a boat sitting on a still lake and it takes you one hour to cross at 8 knots (8%).  The lake is still with no current and no wind  (Ideal World).  The problem would arise if wind and current starts it might take you two hours to get across the lake even though you are still going the same speed.  The drag  (wind and current) is the problem similar to taxes and lost opportunity cost!  You would need to increase your speed (risk) to get across the lake in the same 1 hour period (retirement).  

Conclusion:

Removing the cost or erosion associated with building wealth is the first step to financial mastery! 

P.S. then add inflation....

Are You Retiring with a Tax Bomb?

Tax Bomb

Are you Retiring with a Tax Bomb? Most people that save for retirement and pay down debt during their working years end up in the same or a higher tax bracket during their retirement years. Is this statement MYTH or FACT?

First, consider that typical recommendations of investing tax deferred will usually put you in a higher tax bracket when retirement begins.

THE FACTS

1. Distributions from tax deferred accounts are totally taxable.
2. Taxable accounts count as income, which have compounded through the years.
3. Your mortgage deduction--your biggest deduction--may be gone.
4. Social security could be taxed up to 85%.
5. Pension is taxable income.
6. Most likely you're not itemizing on your taxes at retirement--that triggers more income.
7. You're retired. Hopefully, that means you go on more trips, out for dinner and can actually spend more money enjoying yourself because you're not working.
8. You will need more money because items cost more. It's called inflation!

So why do advisers/institutions say you can live on 70% of the income you made while working? So you will! One big reason is they want to retain your retirement money at their institution to collect fees to pay their bills, and so the adviser can retire off of you.

Most advisers tell you that asset allocation within your portfolio is key, but the Real Answer is to have Asset Tax Allocation. That means splitting your assets so that 1/3 are taxable, 1/3 are tax deferred and 1/3 are tax free. Balance is essential to everything, right?

If you're like 80-90% of the clients I see, an extra-large portion of your life savings are in tax deferred places. This is one of the best accumulators of wealth, but also one of the worst distributors of wealth. On top of that, if they raise tax rates....it only gets worse.

This is what I call a TAX BOMB! Are you sitting on one?