Retirement Strategies without IRAs and 401ks
By Lee Zebold
Are you ready for retirement? How much do you want your income to drop to when you retire?
Did you know there is a way to take your money out at retirement time and not pay Uncle Sam?
This information is for people still working (young and old), and for retirees. As discussed in other papers and books, the retirement issues America faces today are not to be dismissed. We are in danger of facing a serious dilemma with the fact that millions and millions of Americans will be retiring with their pensions, social security and 401ks, 403bs and IRAs, after paying taxes on the withdrawals, only to find that there is not enough in the tank to keep the engine running long enough. In other words, put bluntly, they will run out of money before they die.
Fortune Magazine, October 1, 2007
Alan Greenspan
00e have a dysfunctional political system in the sense that there are very serious fiscal problems out there, most importantly, Medicare. As best I can judge when the baby boom retires, we are going to have to either raise taxes very sharply or cut benefits by half. No politician wants to confront this. And this is a very sad event because what00 at stake here is the fiscal stability of the American Government.00/b>
I have personal experience with this. My mother had to sell the house that was intended to be my (and my sister00) inheritance in order to purchase enough liquidity to insure her another 15 years of sustenance. I do not begrudge her actions, and would much rather have my mother comfortable than have a nice asset waiting for me down the road. Had we known of these strategies a few years ago, she would probably still be living in her beloved home, and living very comfortably with enough money to take care of every need. But I make this point as it is not uncommon. More and more we are seeing people having to re-adjust and refinance, just to have enough wiggle room to make it to the end.
Unfortunately, many people can00 find any more wiggle room. They00e stuck with government designed retirement plans that will not fill the bill. We all know how private industry is falling back on promised pensions. We also suspect that public servants of all walks may well face the same or similar closure, thus being shorted from the pensions they thought they were going to get.
In the last several years, new strategies have evolved with the blessings of our government (or the IRS 00which in actuality is not part of our government, but may be best described as 00uasi-government). The need to change the flawed planning through 00ualified Plans00is very apparent to them, and they endorse these new methods as a means to get them off the hook, so to speak. Indeed, if millions of Americans go broke in their retirement years, who is going to have to support them? Of course 00Uncle Sam.
Investing money into Real Estate, the Stock Market, Mutual Funds, CDs, Treasury Bills, and a myriad of other vehicles has its risks and rewards. But without structured and safe guidelines, a person is not sure that the money will be there when it is needed. It is extremely necessary to find a way to accomplish the goal 00to have enough money to live comfortable and safely for the rest of their lives.
There are many professionals who call themselves 00inancial Planners00 The large majority of them (90%) have good ideas to help people in their financial lives, but collectively, most of them look at the opportunities that you may have from their limited perspective pertaining to their particular product(s) 00annuities; mutual funds; securities; fixed investments, etc. Very few will or are able to step back and look at the 00ig picture00 because they are compartmentalized with limited vision. The big picture would include asset management, risk management and debt management. Most of them know about asset opportunities but only as it applies to your cash accounts. 90% of them follow the standard line that you should save your money, max out your retirement account, pay down your mortgage and eliminate debt. They miss the crucial problem that we are facing 00that our retirement money will be taxed heavily and we will probably run out of cash long before we die.
With certain strategies that we use, you can get your current qualified cash out tax free from your 401k, 403b, TSA, IRA and other pension plans. This is a big statement, but given the opportunity to analyze your financial portfolio we can usually show you that the answer is here, and it involves the use of mortgages, life insurance and annuities (and sometimes mutual funds, other investments, and buying other investment mortgages). Do not pre-judge this as I did. There are certain structures that are safer than having you money in the bank. I have a 12 page summary on the use of mortgages as a way to fuel the fires in this regard, so with this paper I will concentrate briefly on Annuities and Life Insurance. The mortgage is a way to stoke the coals in a big way to make the fire hotter and brighter. But it can be done without the mortgage, but it just takes longer. Not everyone qualifies for all three, and not everyone wants to do all three. Some don00 want to involve a mortgage, and still others are not interested in Life Insurance. But when they allow time to see the options and what can be accomplished, a new shift in focus occurs, and enthusiasm is the result.
Added to all that we have the MMA program which will reduce your mortage in 陆 or 1/3, saving you hundreds of thousands of dollars in interest. The typical 30 year loan will be paid off in 7 0010 years, and the result will be a very substantial reduction in the amount of interest paid on the loan.
The first consideration is to get out of the limiting government 00ualified00programs and get into the more attractive, safe and better performing 00on-qualified00 programs. These plans are available from Insurance Companies, believe it or not. Do you know that the insurance industry is more regulated than banks? It is safer to have your money in insurance (investment grade life insurance earning market rates, or index annuities earning market rates)
But, as I have said, we can get into CDs, Mutual Funds, Stocks and even mortgage purchases at foreclosure. Also, again, if applicable, we can put you into the MMA program that will pay off your 30 year mortgage in 10 years without paying any extra money per month. So, as you can see, we are not limited in options. But this paper will focus mainly on the Insurance guaranteed products that you can take advantage of.
Why do you want to leave your 401k or your IRA you might ask? Well, there are too many controls; you can only put so much in, and when comes the time, you have to take out the money in amounts that are approved, and then, you have to pay tax on each withdrawal. If you do not take the money out when you are supposed to, you can get a 50% penalty.
The original concept that they sold us on was that you should put your money in now tax free, so that when you take it out after you have retired, you will be paying your taxes in a lower income bracket.
Well, that is BUNK. You will still pay as much if not more tax on your withdrawals. Suppose you were able to take out $30,000 per year as your income supplement. You would still have to pay approximately 1/3 of that in taxes. That would leave $20,000 per year for your net income. Not only that, your nest egg retirement savings would now depleted by $30,000. For example, if you had saved $300,000 in an IRA or 401k, you would have a little more than 10 years life (interest would add more to the fund over the period of time). But basically, using 10 years as an example, if you retired at 65, at 75 your retirement fund would be used up. Now you are down to Social Security, and if you have a home that is paid off, you have to face the prospect of having to sell the home to have enough money to live on.
Wouldn00 you rather take that $30,000 per year, not pay any taxes, and never deplete your reserves thereby having $300,000 in reserve for as long as your live 00even if you live to 100? And what if you could increase that $300,000 to $600,000 or $900,000? Wouldn00 that really set you up nicely? Take out, say $48,000 to $72,000 per year, tax free, never deplete your $600,000 to $900,000 in principle, and live to the end of your days in safety, security and comfort.- and have $600,000 - $900,000 that you could pass on to your heirs? (Numbers can be much higher depending on the individual).Transferring retirement funds into non-qualified accounts
00ualified00retirement plans include the IRA, 401k, TSA, 403b and 457. The goal is to transfer the qualified funds into non-qualified accounts which include indexed annuities and indexed investment grade universal life insurance.
You want to plan your own retirement, be your own bank, and not have Uncle Sam do it for you. Why? Uncle Sam00 plans will cause you to run out of money probably long before you die. The non-qualified plans can keep you comfortable earning tax free money until age 100 and beyond.
When you transfer the money from one to the other, the IRS will still want its cut, but you can follow strategic transfers over 5 to 7 years that will save you as much as 60% less in taxes. By repositioning your after tax distributions into a tax-free environment, your money will now grow and compound at a much greater rate which over time will give you enough to live on, comfortably, until the end.
Sometimes it makes more sense for people under the age of 50 to roll out their money under a strategic plan despite the 10% early withdrawal penalty that the IRS imposes because the amount of penalty could be recouped with better interest during a 10 to 15 year prior before retirement.
It is generally best for people between 55 and 59 陆 to wait until after 59 陆 to start their roll outs. There are several variables to consider, and everyone is different. It requires an analysis of ones personal investments and assets before structuring a sensible plan.
Depending on your personal circumstances, don00 think that postponing your taxes is saving you any money. Postponing or 00tretching out00your distribution will likely increase your tax liability. You can successfully transfer up to $600,000 ($60,000 for 10 years) out of your IRA00 or 401k00 between ages 59 and 70.
Non-Qualified plans that are safe and grow
Index Annuities
Today most annuities are simple savings accounts with insurance companies. When you deposit money into an annuity, you accumulate your money in a tax favored environment. However you still face taxes when you withdraw your money. The difference is, your money will generally earn a greater return, and you can withdraw as much or as little out after 59 陆 as you want without IRS restrictions. And, when done right the amount of taxes you pay are almost painless in comparison to the amount you are accumulating.
A single premium annuity (SPIA) is an annuity in which one lump sum payment is made and the annuitant (you) begins to receive immediate income distributions.
Indexed annuities are deemed safe and prudent investments under most circumstances because they are obtainable only through insurance companies, which have legal reserve requirements more stringent than banks or credit unions. Also they are indexed to the S&P 500, so they earn a better return, (5%-9% average earnings per year over time), and there is a no loss formula that should the market drop, and lose for a period of time, the worst you will experience is still a positive interest rate - a CD rate of 1.5 or 2%. In other words, those invested in the stock market can crash and lose, but you will still be earning a positive interest on your account.
As compared to a 401K or other qualified plan, the annuity investor has guarantees from the insurance company. They can get 00nnuitization00which means the insurer will return the principal and earnings in regular payments that are guaranteed to last for the rest of the purchaser's life. Or, if desired, money can be withdrawn as a lump sum, in a systematic way over a specific term, such as 10 or 20 years. Annuity guarantees are based upon the claims paying ability of the issuing insurance company Many investors use annuities primarily as a way to accumulate tax deferred Annuity earnings without intending to annuitize. Because they don00 owe income tax on any earnings until they withdraw or begin to receive Annuity payments, they have the potential to accumulate a larger account balance than in a taxable account. Other investors buy annuities as a personal pension, to provide a stream of guaranteed lifetime income.
As an example, someone who has just received a large sum of money00n inheritance, a bonus, or profits from selling a home or a business00ut really needs a steady source of income can choose an immediate annuity. Also, many experts suggest that anyone who expects a lump sum pension or 401(k) distribution might consider an immediate annuity as a way to convert their funds into a stream of income they can00 outlive.
Investing in Life Insurance
I used to think of Life Insurance as a 00ecessary evil00 That was until I learned about 00nvestment grade00life insurance, that was indexed to the S&P 500 market. Basically, it is term insurance, with the extra premium going into the S&P without risk of loss. You get the best of both worlds 00you get cheap life insurance, and get risk free investment into the market.
Indexing has a very unique feature. You can earn money at market rates when the market is up, and if the market drops you are guaranteed to earn at minimum, CD rates of 1.5 or 2%. You cannot lose your money like you can if it was in the stock market or mutual funds. If the market went into the loss column, you would still be earning money 00not as much, true, but still be earning positive returns. When the market goes back up, your earnings start back up at the same rate from where it left off, so you cannot lose money. On long term average you will earn 8 0010 percent with this type of vehicle. You will never lose your money, nor your prior earnings.
Prior to the 198000 life insurance was not considered a very attractive investment because a typical whole life policy would earn only 2 or 3% on the accumulated cash values. But now with this new type of Universal Life, the door has been opened to some amazing things.
There are legal guidelines that we must follow to allow a life insurance policy to be an investment cash machine. It is a ratio of the amount of life benefit (death benefit) to the amount invested. That investment can be one lump sum payment or incremental payments (monthly, yearly). As long as we stay within the parameters devised by the IRS, we have a life insurance policy that not only provides a lump sum death benefit payment when we die, but also a tax free accumulation of cash value, and tax free withdrawals from the cash reserves.
An investor should determine the primary purpose for establishing an insurance contract. When done correctly, those who establish a policy for investment purposes are thrilled when they can potentially achieve a safe rate of return that is as good or better than an annuity. Not only can they access funds on a tax-free basis, which they can00 do with an annuity, but should they die, their investment will actually blossom by as much as double or triple 00and still transfer to their heirs on an income tax free basis!!!
Generally, through structuring a universal life (UL) insurance policy correctly to accommodate the full capital invested, a UL will out perform an annuity, especially when it passes through the distribution and transfer phases. This approach will give the insured enough cash reserves to live year after year after year, comfortably, and never deplete their reserves.
The Mortgage
Just a short note on the use of your mortgage as a vehicle for retirement purposes. This is a technique that you will seldom hear from the 9 to 5 financial advisors out there. Forget what our father00 taught us with sage advice to pay off our home totally because a mortgage was a bad thing. Wealthy people think just the opposite. Turns out that that concept is hold-over depression era thinking because in those days of the Great Depression, banks could foreclose on you with no provocation other than their decision that they just wanted to do it. The home owner had zero protection from the errant banking practices because there were no protection laws back then.
Your home, though probably worth a lot of money, especially if it is paid for, is a dead asset. All your money is tied up and stuffed under your mattress (or more accurately, in your walls). You have no liquidity. In the event of tragedy, should you need money quickly, you will not be able to access your equity in the house and indeed, you may have to sell the house to achieve the liquidity you need to survive.
Take some of that money out of the walls, and put it into the safe UL policy or Annuity I just spoke of. You will be able to earn so much, if given time (5 00 20 years), that you will be able to live off the earnings for the rest of your life, still have your cash reserve principle intact, pay off your mortgage and still own your home free and clear.
Every case is different 00 there is no cookie-cutter answer. These strategies apply to twenty somethings to seventy somethings. All portfolios are analyzed and recommendations are made for proper allocation to achieve the desired end point 00financial security and peace of mind. We counsel you and get your input 00all plans are structured to accommodate you to meet your needs and goals.
Essentially, the more money you can put into a non-qualified insurance plan (annuity or UL insurance) the better off you will be because:
-You won00 run out of money as with a standard retirement plan -Your money will multiply and compound faster -You will have tax deferred or tax free earnings for the rest of your life
Case Study - A Teacher's Lesson
Here is a typical example that people find themselves after many years of funding a qualified plan.
A school teacher who sought retirement planning had the following situation:
1) She had worked under the state retirement system for 30 years. Her defined benefit pension allowed her to receive 2% for every year of service. Her average salary was $60,000 and therefore her annual retirement income would be $36,000 per year. (2% X 30 years = 60% X $60,000 = $36,000)
2) Knowing that the best she could do is 60% on this retirement fund, she decided to have a supplement plan. She put her money in TSAs, 403bs and 401ks where she received matching contributions for 30 years. She managed to put $4000 per year into these vehicles which resulted in a balance of $450,000 after the 30 year time period. Not bad.
If she earned an average of 8% and chose to withdraw only the earned interest, she would have an additional income of $30,000 per year. ($450,000 X 7% = $31,500)
So her gross income after retirement was #1 + #2 or $67,500 per year.
Sounds OK, right? What didn't sound so good were the looming taxes she would be hit with in this so called lower tax bracket income that she was supposed to realize. The fact is, she was in a higher tax bracket than she had hoped (not 15% but 33%), and when combined with her state taxes, she was paying 40% for taxes alone.
This left her with a net income each year of $40,500. Because she no longer had a house mortgage to give her a large deduction, she was shocked that she was in a higher tax bracket than when she was working.
Is that manageable? I suppose so. It would have to be, because that would be her only choice.
BUT, what if we are able to substantially reduce her taxes through strategies in our arsenal. (And in some cases eliminate them)
Here are some examples of compounding if you were to re-finance your home and take some money out of the 00alls00and put it into one of our safe side funds as mentioned already. Let us assume you took your present IRA which has accumulated value which will net $200K (after taxes), and pulled out $300K from you house, and put them ($500K) into a UL product earning an average of 7.5%. (our products have averaged 9.1% earnings over the last 25 years) After 5, 10 etc. years you will have earned:
Year 0 $500,000 Year 5 $717,000 Year 10 $1,030,000 Year 15 $1,479,000 Year 20 $2,122,000
Of course, if you were to supplement the $500K every month or year with additional money, and were to re-finance every 4 or 5 years as your house became more valuable, your numbers would be even higher. But in this example alone, suppose you were to use this formula for 15 years without putting in any more money, and did not take any money out00and suppose you had initially refinanced your home for $600K in order to pay off the old mortgage (assuming it was $300K), leaving you $300K left over to put into the side fund, -- you would have $1,479,000 in savings. From those savings you chose to pay off the $600,000 mortgage (which you have been paying interest only 00and a lower payment that your previous $300K loan), thereby leaving you $879,000 in earnings/cash value. If you were to leave that money where it is, and take a monthly check for just the tax free earnings, and leave the $879,000 there as a liquid security, you would be drawing $5,400 per month as living income TAX FREE and you would earn this forever 00or as long as you keep it in the system.
More examples with higher numbers if you were to keep feeding the machine:
Year 0 $1,200,000 Year 5 $1,722,000 Year 10 $2,473,000 Year 15 $3,550,000 Year 20 $5,097,000
Year 0 $800,000 Year 5 $1,148,000 Year 10 $1,648,000 Year 15 $2,367,000 Year 20 $3,398,000
Annuities and Life Insurance 00Lee Zebold
of 8
