THE LIFE INSURANCE RETIREMENT PLAN – REPORT (LIRP)

 

At American Financial Literacy Institute we’re always looking for ways to better educate our people. In particular, we created a report called the Life Insurance Retirement Plan. In this report we compare some of the differences of using life insurance as a retirement planning alternative unlike a traditional 401k or something of this nature. In particular with Life Insurance, we get some benefits that we don’t get in a traditional 4o1k or IRA. In particular, we can have tax free distributions on the back end, meaning that when the money comes out we don’t pay taxes. Unlike a 401k or IRA, we have to pay taxes on the back end, we don’t get a tax deduction upfront, but we do get the ability to have the money grow tax deferred and then have it come out tax free so it could be a really powerful story. The other thing we talk about is how Life Insurance; the investment component of it can be done in an indexing type concept. What do I mean by indexing? In particular, it’s a strategy that allows you to target the SMP 500 or a multi-asset index (there is many different investment options). As you invest in this, you don’t get 100% of the upside, but what you get is none of the downside. Meaning that if the market dropped five or ten percent, you would get zero. We joke and say “zero is your hero”. But over the last ten or fifteen years, this would’ve been a very powerful way for you to invest, protecting yourself, and actually outperforming a traditional buy and hold type strategy. On the back of this report, we explore specific examples of using a $10,000 contribution to your 401k every year, comparing that to a $10,000 contribution to a Life Insurance plan. While you do get a tax savings upfront with the 401k, because you get a tax deduction, when the money is growing in the 401k, you pay taxes coming out. With the Life Insurance example, you don’t get the tax deduction upfront, but what you do get is the money coming out tax-free! This can be a huge difference in the way of returns. In a traditional 401k, using a 7.5% growth rate (Warren Buffet cited from 1950-2011). That money would’ve grown to $268,000, meaning $10,000 a year for 15 years, $150k worth of contributions, at 7.5% would’ve grown to $268,000. And we show you using that how the money in a traditional 401k would come out. You have to pay taxes on that money so we assume a 25% tax bracket coming out with the 401k, and we notice that over that time of getting income. If we do a 30 year time horizon, you basically are going to pay over $150k in taxes while that money has been coming out of your traditional 401k. With the Life Insurance, again, we don’t get that tax deduction upfront, but we get the tax-free distributions on the back end. What that means is the $150k of taxes that you would’ve paid, you don’t pay that with the Life Insurance. The nice thing too is that as it’s coming out of the Life Insurance, it doesn’t effect your social security taxes. Unfortunately, most people don’t realize that potentially much as 50 to 85% of your social security could be taxed in retirement, depending on how much income they make. With the Life Insurance Retirement Plan, you don’t have that. The other thing is that it doesn’t effect your Medicare B Premiums. The last concept that we talked about with the report is taxes. Where are we currently in taxes? You’re not going to believe this, but we are in the lowest tax environments we’ve been in for the last 70-80 years. Most people feel with a budget out of control and the big deficits that we’re facing that taxes have to go up over the long run, so the argument can be made that deferring today to potentially pay taxes down the road at maybe a higher tax bracket isn’t going to make as much sense as you think it is. So if you think that taxes are going to go up, a Life Insurance Retirement Strategy might make more sense to you. It’s our job to educate you as to what is out there, this might be a piece to a portfolio, there are great reasons to have a 401k like potentially a company match. There’s also great reasons to maybe have some money in a Life Insurance Retirement Strategy.

 

 

**ACCESS THE REPORT HERE**
https://aflinstitute.org/wp-content/uploads/2017/10/AFLI-LIRP.pdf

EMERGENCY CASH FUND

Besides budgeting, debt management, and educating ourselves on “understanding our money,” having an emergency cash fund is the first place to start saving money.  The temptation may be to invest in the stock market,  or invest in your company’s retirement plan–but the emergency fund is arguably the most important piece of getting your finances in order.  An account that is used to stave off unplanned expenses that can often cause financial turmoil. When we have some money put away for a “rainy day” or to handle unexpected financial curve balls, it provides a safety net and peace-of-mind. The money should be readily available and safe to be used specifically for emergencies, i.e. an emergency fund.  How much we put away really depends on us, what we can afford, and what’s sufficient to cover our expenses for a period of time.  A good rule of thumb is to have 3 to 6 months of expenses set aside.   Obviously, if we have unpredictable income, such as commissions, seasonal income, concerns about our employment, a lay-off, or possible job change, then we may want more.  Also, if we are having health concerns or potential needs with other loved ones, consider that as well.  There are no set rules, but the goal is to make the unpredictable expenses more predictable, and feeling less stressed. Ideally, this money should be in a safe, accessible place, such as a savings account, money market, or in 3-month T-Bills.  Most mutual fund companies have a money market option available, but beware of any service fees that may be charged if we don’t maintain a proper account balance.   Unfortunately, there are also many examples where people get into a financial bind, and take a loan from their retirement 401(k) as their emergency fund.  This isn’t what the retirement monies are to be used for, because they can come with potential fees and penalties, income tax consequences and are supposed to be earmarked for long-term retirement needs.
A couple of examples may help further illustrate: If our monthly budget totals roughly $2,100, then we should shoot for having about $6,300 in an emergency fund.  Also, in this same example, let’s say that we have a leaky roof that needs about $1,700 to fix. Then our emergency fund should be $8,000, ($6,300 + $1,700).
As with any saving’s goal, getting started and sticking with it is the best plan for success. Having an emergency fund gives us flexibility and reduces stress.

GOAL SETTING AND SAVING

Many of the topics that we have been discussing play a major role in helping us shape our finances by taking action. However, goal setting and savings are synonymous for various reasons. What we are saving should gel with our financial needs and goals. Goals help set priorities, because most of us don’t know what we are saving for, or how money fits into our life goals.   “Are we trying to build a college fund?” or “Do we want to buy a home?” or “Is planning for our retirement the most important thing?” If we have a sense of what we want to accomplish by saving our money, it helps to focus on what investment ideas can fit with that need (longer term growth or shorter term needs), our time horizons, and how much we need to put away.  Many people may feel that saving money has some value as it relates to happiness. We’ve discussed plenty of examples where having money didn’t equate to happiness.  Balancing priorities, financial goals, savings needs, and life desires, are key ingredients to personal wellbeing. Your life shouldn’t be consumed by the almighty dollar, or lamenting about how things would be better with a higher paying job, or having more money to spend.  One of the acronyms to goal setting involves taking a S-M-A-R-T approach to financial or personal needs.
By setting goals we have focus and a direction– without them we would wander aimlessly.  Imagine trying to throw a dart without a dart board, or building a house without a blueprint.  Some of the many benefits of setting goals include:
1.   Allowing us to stay focused rather than wasting time. 2.  Helping us to measure our progress while we push towards our objective. 3.  Converting dreams and wishes into something that is real. 4.Goals help us to stay motivated; we are excited to accomplish our objective.

CREDIT CARD DEBT

It’s very easy to rely heavily on credit, but remember that the more you charge, the more you owe.  You have to live within your means, and make sure that you are only charging what you can afford to pay back.  Unlike a home mortgage or a car payment, credit cards don’t have a fixed monthly payment that we can plan around.  If you are having to pay a lot of your monthly income to your credit cards, then that should be a warning sign.  Also, the more you charge, the more potential interest you are incurring.  As a rule of thumb, don’t allow your credit card to take up more than 10% of your monthly income.  Additionally, keeping your credit limit low, limiting the number of cards that you have, or using cards that make you pay off the balance every month, like American Express, can help to keep your credit card debt manageable.
Credit scores and credit history are also very important when it comes to debt management.  Our ability to buy a house, get a car loan, qualify for student loans, personal loans, and credit cards are just a few of the many things impacted by credit scores.  The interest rates charged on many things depends on our credit score; the lower the score, the higher the rates.  How we handle our debt has a huge influence on our credit score, so it’s important that we try to follow a few tips:
1. Carrying a lot of debt, especially high credit card debt, hurts our score.  Our level of debt is 30% of our score, so paying the balances quickly or reducing them can help. 2. Late or missed payments hurt your credit scores.  Payment history is 35% of your credit score. 3. Try to keep the revolving debt (credit card, retails cards, gas cards, etc.) below 10% of your total available credit. 4. Taking out loans or keeping credit balances DOES NOT help build credit score. 5. Understand any “enticement” offers, such as charge $5,000 in first 60 days, and we will give you 25,000 reward points.  These cards could be loaded with lots of other costs, such as much higher interest rates, fees for late payments, or rate hikes for over-charging.  Remember, you need to charge to get the offer! 6. Having too many cards creates more temptations to charge more debt, and can become very unmanageable.

DEBT MANAGEMENT

In a Pew Charitable Trust report, roughly 80% of Americans are in debt from mortgages, student loans, car loans, and credit cards.  As a matter of fact, credit card debt is second only to mortgage.  As many as 40% of us have credit card debt, and 65% carry a balance every month (revolving debt).25  The average credit card’s interest rate is 15%, according to CreditCards.com.  Consider this example:  If we had a credit card with an Annual Percentage Rate (APR) of 18%, and a $5,000 outstanding balance,  the minimum payment requirement is around 2.5%, or $125.  You think that this means $125 x 40 payments = $5,000, which means in about 4 years the debt will be paid off.
This is the real shocker: keeping on the minimum payment schedule, that $ 5,000 actually would take 273 payments…over 22 years!
Credit card companies keep the minimum payment schedules low, so that they can collect on that interest for as long as possible.  And as the balance is coming down, the minimum payment becomes even less.  It’s one of the major ways that lenders make money.  Also, by hoping that many of us will only make the minimum payment, it helps people rationalize the debt: “This $5,000 charge is only going to cost $125 per month, so we can afford that!”  Ironically, that $125 payment only reduced the balance by $50, because the other $75 went to paying interest fees.  This means that over the long term, 60 cents of every dollar goes towards interest! We would pay more in interest than what we had originally charged. Consider that the same $5,000 credit card balance, making only the 1.5% minimum payment every month at 14% interest, would take almost 61 years to pay off because the interest would add almost $16,000 more to the debt over that time.
Regardless of the interest rate, we would save a significant amount of money by paying off our debt. Americans should be sprinting to the finish line to get out of debt  We’re trying, we’re pushing, and we’re paying–but it seems like we’re going nowhere.  What’s even more frustrating is that we are doing the right thing by paying down our balances on time, but we aren’t seeing any meaningful results.  The potential problems can only intensify, because many of the credit card companies award us with increased credit limits rather than keeping us at a limit we can afford to pay off.  By increasing our credit limit from $5,000 to $6000 or maybe $6,500 they hope we will charge more.   It’s a psychological boost because we think, “they feel so good about me, that they gave me more credit.”
Unfortunately, according to Time.com, many people will spend this credit increase immediately, adding 10% to our existing credit card debt on average. It’s important to remember that whether it’s a credit limit increase, a pre-approved card in the mail, or some incentive to charge more, we control our credit decisions.  We can ask that our credit limit isn’t increased, rip up those cards and applications that come in the mail, and don’t need to take advantage of any special offer. “NO” can be a great way to stay out of trouble.
Credit cards can be a great convenience, and provide some great perks, but they should be properly managed.  It’s important to remember that card providers are actively looking for customers, because we are a revenue source.  However, you should know some of these key points when using credit cards.
1. Know your credit score. The better your credit score, the better card deals you can get. 2. Using the web to help search for credit cards that fit your needs can be very useful, such as creditkarma.com or creditcards.com.  However, applying for a lot of cards can also hurt your credit score. 3. Beware of annual fees, hidden charges, or additional costs for being late or missing a payment, and cards that offer rewards–the later can be more expensive. 4. If you have trouble making payments on time, steer clear of card offers that give you a low introductory rate, but skyrocket if you make a late payment. 5. Don’t max out your accounts, as using too much credit can be a negative. 6. Cancelling cards that you no longer use can actually hurt your credit score if closed too soon. 7. Avoiding credit altogether doesn’t allow card companies to view your credit history. 8. Don’t lie on applications, Not only is it illegal, but also qualifying for a larger credit limit than you can handle could cause additional problems. 9. Co-signing credit cards or loans for someone else can hurt you.  In 2016 CreditCards.com reported that 4 in 10 co-signers ended up losing money, or it hurt their credit.