Jason is 53 years old and just changed jobs. He's facing two retirement planning dilemmas...
1. He has $830,000 in his 401(k) from his previous job and wants to move it where it gives him more guarantees that he and his wife, Julie, won't outlive their money in retirement.
2. He had been putting $19,000 a year into his old 401(k) and wants to continue socking away that much. But in the last couple of years he experienced several downsides to 401(k)s that have soured him on the idea of continuing down that path.
The Five 401(k) Drawbacks Jason Discovered...
Drawback #1: When the pandemic hit, Jason's employer stopped doing any matching contributions, which had been a big incentive for him. He'd forgotten the employer match isn't guaranteed.
Drawback #2: As Jason gets closer to retiring, he has much less of an appetite for risk and volatility. What if the market crashes again shortly before he plans to retire in 14 years at age 67? He'd been saving diligently in a 401(k) for 29 years already, and his real annual return had been less than 6%! Wow! All those sleepless nights and heart-stopping crashes... for less than 6% a year?!? He wondered if a monkey throwing darts couldn't have done better than that...
Drawback #3: Jason had done a little digging into the investments in his 401(k) and made some shocking discoveries! All of his money was in a single Target Date Fund (TDF) because the plan administrator had set that fund as the "default" investment. (That's where most employers now automatically put your money unless you specifically tell them otherwise, but studies show most employees never even think about doing something different!) The TDF he was in was one of the largest and most popular... but he discovered the fees it charges would devour more than 20% of his hard-earned money over 30 years. Ouch! To rub salt into the wound, he also discovered that fund had experienced much steeper losses than the overall market during past crashes.
Drawback #4: A couple years ago, Jason had a terrific opportunity to invest in real estate. He knew the return could potentially beat his mutual fund by a country mile. So he asked the HR Department about taking a 401(k) loan... and that's when he realized how little control he had over his own money in his 401(k)! Turns out the government and your employer control that money. It was like putting his money in prison! Jason quickly discovered there was a very low limit on how much he could borrow and strict limits on when and how he must pay it back or face penalties and taxes. And the loan application process had 13 steps!
Drawback #5: Like most people, Jason had been told that being able to defer your taxes until you take withdrawals was one of the best reasons to contribute to a tax-deferred account like a 401(k) or IRA. But recently his father had been grumbling about how, at age 74, he was now in the highest tax bracket of his life. After a little digging, Jason discovered that if tax rates are higher during your retirement years, you're going to end up paying significantly more in taxes overall. And he knew there was only one direction taxes would be going over the next 30 years, and that's UP! Jason was beyond frustrated.
So, in summary, Jason was exposed to a great deal of market risk, with little return, opaque fees which devour gains over time, and increasing tax risk.
And he had no LUC: Liquidity, Access or Control of his money!
Fortunately, it was then that a coworker referred him to us and our team, the Income for Life Professionals. We looked at Jason and Julie's situation and goals and proposed...
The Two-Step Solution to their Challenges...
Step 1: Ensure Guaranteed Lifetime Income by Doing a Tax-Free Rollover of His 401(k) into an IRA Annuity
This could enable Jason and Julie to start receiving $85,786 a year starting at age 67, and by age 80 – thanks to the "Increasing Income Rider" we included – they could receive $161,995 a year. And the size of their check could increase year-over-year and continue coming for the rest of their lives – even if one or both of them live to be 120 years old! With no market risk involved! This gives Jason and Julie a permission slip to spend every single dime they receive from the annuity because they know they'll get another check the next month and every month – forever – just like the company pensions that are now rarer than the northern hairy wombat. Since none of us knows when we'll die, this little-known, powerful retirement planning solution lets you live out the rest of your life without the stress or worry that you'll run out of money before you run out of life.
Step 2: Redirect Future 401(k) Contributions to Enjoy Multiple Benefits and Tax Advantages Rather than funding a 401(k) at his new job,
Jason puts the same $19,000 a year he was funding a 401(k) with into a high-cash value, Private Reserve Strategy Life Insurance Retirement Plan from ages 53 to 67. The result is that when he's 67, the policy could have a death benefit of over $900,000 that would go to Julie income-tax free if he should pass away then, ensuring that Julie would have money to cover health care, long-term care and nursing-home costs if needed. If Jason lives beyond 67, he could have an additional $260,000 or so he could take – tax-free – to supplement his retirement income. And he can access that money for whatever he wants with no questions asked.
We showed Jason how – at age 67 – he could use up to $460,000 of the death benefit of his policy to cover the cost of care if he developed any number of debilitating or disabling chronic illnesses or a terminal illness. The pandemic had exposed the dangers of nursing homes, and Jason felt reassured that he could use this money to be cared for in his own home if he chose.
When Jason heard this, he exclaimed, "Wait a minute! Are you saying I can use a big chunk of the death benefit while I'm still alive to pay for health-care costs?!? I thought I had to die for Julie to receive the death benefit. How come no one ever told me about this before?" We just smiled. We wish we had a dollar for every time someone had said that to us, thanks to all the myths and misconceptions abounding about permanent life insurance.
Jason and Julie are real Income for Life clients – only their names have been changed to protect their privacy.
Whatever Your Financial and Retirement Concerns Are, an Income for Life Professional May be Able to Provide Solutions
No two plans or solutions are alike because each one is custom tailored. Some are able to get tax-free income for life!
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