What would you say if I told you, you could potentially save six figures in taxes each year during your retirement?
You’d probably say, is it legal and how??
Yes, it is legal…
In this lesson, I am going to show you exactly how; the Jones family did exactly that.
Currently, the Jones family saves 25% of their income each year. Combined they currently make $325,000 a year.
This means that they are currently saving $81,250 a year. As we found out in the Retirement Ready or Not Article, if they retire at the age of 65 they will run out of money at the age of 76. See Calculator here for numbers.
However, what if I told you that if they invest $50,000 of their yearly savings into a specific permanent life insurance policy. Then when they each turn 70 they could take out $145,499 a year tax free until life expectancy.
I want to put an emphasis on TAX FREE.
Today, If you were to draw $145,499 out of a qualified retirement plan (401k, IRA, Defined benefit plan, etc.) each year you would get hit with a 35.92% tax.
Which means you would lose $52,263.24 in taxes every year until you hit life expectancy.
Even if your life expectancy was to 85, your qualified retirement plan could cost you $783,948.61 in taxes…
That is A LOT of money!
Now, if you went the qualified retirement plan route you would have to draw $224,848 to then be taxed at a bracket of 35.92% and be left with $145,499.
Which means your qualified retirement plan is costing you $79,349 each year in taxes. Remember that is calculated at today’s tax bracket, when you retire it could be completely different.
That’s almost as much as the Jones are currently saving each year!
Ohh and in addition to this, when Mr. and Mrs. Jones pass away, they would leave over $750,000 also tax free, to their loved ones in addition to the $145,499 they drew out each year.
On top of all this unlike a qualified retirement plan, the Jones could also access the money they put away each year if they needed to, at any time!
Before I get into the detail of this plan, I want to first give you a little more detail on the Jones family.
Mr. and Mrs. Jones own their own business and makes a combined $325,000 a year, Mr. Jones is 45 and Mrs. Is 42, they reside in Summit, NJ with their two children, Joseph who is 8 and Brook who is 6.
Based on the analysis in the Retirement Ready or Not Article, they were running out of money at the age of 77.
Now I am going to show you exactly how the Jones did this.
We are going to use a cash rich compressed life insurance policy and we are going to put $25,000 a year into a premium for the husband and we are going to put $25,000 in for his wife a year.
That will accumulate a significant amount of money but the most important thing is that money will come out tax free.
Now, if you remember the analysis for the earlier lesson we used an after tax gross amount of money that we needed for retirement, so this is going to be a lot more effective at satisfying our retirement needs because it’s going to be tax free.
Not only is it tax free, Mr. and Mrs. Jones won’t have to report it.
Now, I’m going to walk you through the actual numbers.
We have illustrations from one of the major insurance companies. There are several companies that we can use, but it is very important that you pick a mutual insurance company when planning for retirement.
Why is it so important?
Because they don’t have any stock holders, which means all of the profits for that insurance company
are in the form of tax free dividends to the policy holders, in this instance, that would be Mr. and Mrs. Jones.
You want to think of this as your fix income portfolio with an equity kicker for your retirement. If you use a stock company, then they have to share their profits with the shareholders.
Therefore, the policyholders do not make out as well. They would have to include something like an indexed whole life policy, which may or may not perform.
There are so many variables, which then puts most of the risk on the insured (Mr. and Mrs. Jones), and the insurance company takes minimal risk.
A mutual insurance company could be a much safer approach and that is what we would recommend.
There are several companies that would qualify for this. We are going to use the company that we think is the best performer, and that is Mass Mutual.
Attached to this lesson we have the full Mass Mutual illustrations for you to reference if you would like, but just to summarize the numbers, we are going to put $25,000 away for Mr. and Mrs. Jones.
Combined, that is a $50,000 a year until they reach the age of 65. At the age of 65 we are taking the policy up to a maximum government permissible level. If we exceed this by a dollar, it will become a modified endowment contract and then all of this money will become taxable and we want to avoid that.
Now that we have funded the policy all the way to the governments maximum permissible level. Mr. and Mrs. Jones can pull out a retirement income.
At the age of 70 Mr. Jones will start to pull out $61,642 a year tax free. Mrs. Jones will start to pull out $83,857 a year tax free. Combined they will be pulling out $145,499 a year.
You are probably wondering what the Jones are going to do for money between the ages of 65 and 70…
During this five-year period, they will draw down on their investment portfolio. When we met the Jones they already had $1,000,000 saved in investment accounts and they were saving $81,250 a year.
After we deduct the money that we have rerouted for their insurance policy, they are now saving $31,250 that they can use to continue to grow their investment portfolio. (See Below.)
This means that from the age of 65 to 69 they will have $3,526,947 after taxes to live off of, that breaks down to $705,389.40 each year, which is well above their standard of living.
I need to add the disclaimer that the investment return of 5% and the tax rate of 10% is not guaranteed, however it is a very conservative estimate. If you have any questions on this please feel free to contact us.
Now going back to the whole life insurance strategy… It has made a significant impact on their retirement needs.
The beauty of this is that it’s safe and it’s liquid, so if they need access to it along the way, they can get to it.
It can become a personal financial reserve, if that is what they need it for. More importantly, we have given them a safe way to accumulate tax free money for retirement.
They won’t have to worry about the stock market going up or down, interest rates fluctuating or what the tax bracket will be when they retire.
Mr, Jones would have invested $500,000 during his working years.
Then when he retires he will pull out almost $1,497,404 and the difference is the almost $1,000,000 that he pulls out will be tax free. If Mr. Jones was to pass away at the age of 93 the family would get another $291,107 tax free.
In Mrs. Jones case she would have invested $575,000 and will take out over $2,000,000 and that is also tax free and if she were to die at the age of 93 there would be $464,448 death benefit for the family, which is also tax free.
That is $4,247,531, if they were to save this amount in a qualified plan they would have to pay $1,525,713 in taxes meaning at the current tax bracket of 35.92% this plan saves the Jones over $1,500,000 in taxes during their retirement!
In addition to this, if God forbid one of them were to be disabled along the way the insurance company will step into their shoes and make those payments, so even if they can’t work they will still have this retirement benefit.
None of this is possible with a 401K plan or other qualified plans.
Now this strategy is one of a few that the Jones are implementing to ensure that they do not run out of money in retirement.
With this first strategy, the Jones will be collecting $145,499 a year in retirement tax free.
Remember, this alone will not solve all their problems and depending upon your specific case this plan may not make sense for you, as everyone’s situation is very unique.
If you would like to find out if this strategy could work for you, you can setup a complementary session with a member of our team below.