Saving for Retirement
Considering retirement savings, we must take the time to plan for the future. There are too many risks involved, and too much responsibilty at stake, to let it happen by chance.
Recent studies show that most Americans are not saving enough to retire. But, what’s worse is, the average American family spends over 30% of their income on interest and fees. And, another 20-30% goes to income taxes.
If we want to retire comfortably, we have to ask ourselves these questions:
- Why are we saving in the first place?
- What are we giving up now to save for the future?
- How can we maximize our savings?
Retirement Saving or Passive Investing
Saving and investing are two different things. They have different purposes, and should be balanced according to your risk tolerance and goals. You should understand the differences and utilize them as such in your financial plan. Read more: How to Save
We’ve been told to invest with Wall Street Financial Institutions in paper assets. And, to defer taxes until we retire, or until our death.
Most people just turn their money over to the financial institutions with little knowledge of the underlying investment, nor the tax consequences.
If you listen to the financial gurus, stock market investing is the best way to accumulate wealth, and you should pass this responsibility on to a wealth manager. Someone else who is in control of the underlying asset.
Personal saving and individual investing both require time, effort and discipline. More importantly, we have to think long-term and plan for the future.
The 3 Simple Rules to Save More Effectively
- Pay yourself first
- If you want to create wealth over time you should pay yourself first, if possible before paying expenses.
- Make systematic savings
- Making systematic savings towards an asset that provides a return and compounding to stimulate growth.
- Choose effective financial tools
- Effective financial tools provide multiple benefits and tax advantages.
Diversification
There are many ways to invest money and there should be a balance through diversification. True diversification doesn’t mean owning multiple individual stocks inside of a mutual fund, it means owning multiple asset classes.
Today, there are a multitude ways to store our capital. People trade paper money they’ve earned for other financial assets. Paper assets such as stocks or mutual funds, or physical assets like real estate or precious metals. With all of these assets, there is the probability of loss, and there are risks involved.
My approach to saving for the future suggests saving at least 20% of your income, and to reduce or eliminate debt and wealth transfers. From my experience, there is more money to be had by avoiding the losses than by trying to pick the winners.
Retirement Income Streams
At some point we retire or perhaps succomb to old age. We’re no longer working to produce income, and we will need retirement income to live. The amount of money we have to spend after taxes when we retire is what really matters.
It only makes sense to understand how retirement income streams work, so you can direct your savings in ways that gives you the greatest income and most enjoyable life when you retire.
Retirement success is not about owning assets. Assets can be lost, stolen, swindled, sued, divorced or decimated in a market crash.
Understanding how retirement income streams work can help you allocate savings today to have the most spendable income available for tomorrow. Enjoying life with multiple streams of income, with tax advantages, and wealth transfer options is ideal.
Tax Considerations
- Sources of Income
- Required Minimum Distributions (RMD)
- Social Security Income Tax
Taxation of traditional investments such as CD’s, stocks, bonds, mutual funds, real estate and qualified retirement plans, falls under the control of the government and the IRS. You can pay them now, or pay them later when tax rates are uncertain.
Spending in Retirement
One thing we know is that our spending will continue even after we retire. The question is “how much will it take to retire with a similar lifestyle to what we have today?”
The long used 4% rule may not work like it was supposed to if inflation rises. This is why a retirement income withdrawal strategy will be important. Having a volatility buffer to offset market losses and rising inflation would be prudent.
In retirement, you may want to join the country club, buy a boat, or vacation the world. All of these things require a consistent, predictable income stream.
Saving for Life
If we are thinking long term, for our retirment dreams and the next generation, we must consider the one asset that addresses life’s certainties.
“In this world nothing can be said to be certain, except death and taxes.”
~Ben Franklin
Ultimately, we all save today to accumulate more money for the future. Whether this money will be used for our retirement, or for future generations, the goals should be to store our capital in a safe place that provides tax benefits and offsets losses.
Tax Planning
Income taxes will vary based on your income streams. Assets, distributions and income are taxed differently, and some may affect Social Security or other government benefits.
For years, particularly since the TEFRA DEFRA and TAMRA laws, we’ve been told to invest in stocks and mutual funds inside a government qualified retirement plan. Prior to these laws, many families were quietly storing away their capital in cash-value life insurance.
These laws established life insurance industry terms like 7702, 7-Pay Test, Modified Endowment Contract (MEC) Cash Value Accumulation Test (CVAT), and Guideline Premium Test (GPT).
Although TEFRA DEFRA and TAMRA rules have placed limits on life insurance, and accumulating wealth in these plans, they still enjoy favorable tax benefits not found in other assets.
As long as someone is cognizant of the rules and abides by them, life insurance is a viable option for tax-advantaged savings.
Social Security Taxation
“The IRS reminds taxpayers receiving Social Security benefits that they may have to pay federal income tax on a portion of those benefits. Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income, which aren’t taxable.”
“The portion of benefits that are taxable depends on the taxpayer’s income and filing status.”
50% to 85% of a taxpayer’s benefits may be taxable. These taxes can be have a significant impact on retirement income. To maximize income, it’s important to offset these taxes.
Life Insurance as a Financial Tool
One asset that offers protection, savings and growth is dividend paying, whole life insurance. A participating policy from a mutual life insurance company offers multiple benefits not found in other financial products.
Life insurance can provide the perfect balance of protection, savings, growth, liquidity and financing options while we are saving. This allows for more effective and efficient uses of our money.
Passive Income
A cash-value, whole life insurance policy offers a safe place to store our capital, and can be used as a tax-free income stream.
When used in conjunction with other assets, benefits can be multiplied, therefore increasing savings and minimizing wealth transfers. Cash value life insurance can stand alone as a tax-free income stream, or as a volatility buffer in down years for other assets.
Whole life insurance allows your savings to grow with uninterrupted compounding, and helps to avoid wealth transfers while recovering lost opportunity costs. Having liquidity, use and control of this ideal asset is unparallled.
The Ideal Asset Benefits
- Liquidity
- Safe Haven
- Competitive Return
- Contribution Options
- Creditor Protected
- Tax Deferred Accumulation
- Disability Benefit
- Collateral Options
- Privacy and Control
- Use and Access to Capital
- Critical Illness Benefit
- Long Term Care Benefit
- Tax Free Distributions
- No Tax Impact on Social Security Benefits
- Estate Tax Free with Simple Planning
Not Tax Advice
Any information provided is not intended as specific tax or legal advice. We provide information for educational pourposes and are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel
To learn how you can save more for retirement and create generational wealth using life insurance. Contact me for a personal financial review
Until next time,
Barry Page, RFC
Barry Page is a Registered Financial Consultant, Managing General Agent and Founder of Legacy Insurance Agency, PLLC. He helps clients with tax-advantaged investment alternatives, and specializes in showing families how to protect their assets, income and lives utilizing a macro-financial approach to planning.