Life Insurance for Retirement Planning
One of the drawbacks of traditional retirement accounts such as IRA's and 401(k)'s is the fact that they require minimum distributions, whether you need the money or not, after age 70 1/2. In addition, the full amount of the withdrawals are taxed as ordinary income at the tax rates in effect at the time you take the money out, except for Roth IRA's where you are only taxed on the earnings. Your reward for being an excellent investor is to pay much of what you have saved and earned back to the government in taxes. While it's possible you may be in a lower tax bracket when you retire, it is unlikely that taxes will be any lower than they are today with the government continuing to borrow money and inflation.
An interesting alternative retirement plan idea is to buy a whole life insurance policy from a highly rated insurance company with a very low death benefit. You then pay the maximum premium allowable under IRS guidelines and the money paid in excess of the premium builds up as "cash surrender value" over time and earns a return based on the insurance company's general investments. Insurance companies tend to be very conservative and efficient long term investors and do well in good and bad markets - indeed very few highly rated insurance companies have failed, compared to many banks. One of my best investments during the Great Recession was my life insurance policy. The cash surrender value of the policy grows tax free. Funds can then be withdrawn in retirement by taking out loans against the policy. Those loans are not considered income and are therefore are not taxable. The loans are repaid out of the death benefit, with any excess paid to the beneficiaries of the policy.
A great book on this subject is Missed Fortune 101: A Starter Kit to Becoming a Millionaire, by Douglas R. Andrew. You must be willing to commit some time to understanding life insurance, which can be a bit challenging. You will also need to consult with your tax adviser. You may cringe when the author suggests that you borrow against home equity as a source of funding for the up-front life insurance premium payments, but it's a great way to move your home equity into something safer, as long as you can handle the higher mortgage payment. The concept that home equity is neither liquid nor safe is not lost on most of us having survived the Great Recession.
One of the biggest advantages to the life insurance retirement plan is that you are not required to take minimum distributions with an insurance policy. You can withdraw only what you need. As mentioned previously, policy loans are not taxable as long as the policy meets certain requirements, which is great since it can help keep you in a lower tax bracket in retirement. This reduces taxes on your other income (social security, pensions, investments, etc.) and helps those dollars go farther. You do need to take some care in choosing a highly rated insurance company that will issue the policy as discussed previously.
Even if you are unwilling to go "all in," this strategy can still be used to supplement traditional retirement savings such as IRA, Roth IRA and 401(k) accounts.
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