Building a Solid Retirement Plan at 3 Income Levels

The maximum income that can be considered in determining the benefit your client can fund for is $270,000 in 2017.  

How much income can you replace using a maximum defined benefit limit to fund a life annuity of $215,000 per year?

Defined benefit plans typically allow the largest pretax contribution of any qualified plan type for clients age 40 or older. The higher contributions allowed in a defined benefit plan can go a long way in helping to achieve a client's goals, and are extremely underutilized as a retirement planning technique.

A more commonly known qualified plan is the 401(k) plan and may be a good strategy for younger business owners. With a 401(k) there is much left to the unknown. Funding levels and asset allocation both play a major role in what that accumulation number could become. If we use the client's number from our scenario above as the target, and adjust for inflation, the 401(k) plan will get us part of the way there. If your client believes that a 401(k) plan alone will meet their retirement needs, they will be disappointed.

By combining a defined benefit plan with a defined contribution plan, such as a 401(k) plan, the client could take advantage of some unique planning opportunities.

The tax deduction and tax-deferred growth options within qualified plans make them the most efficient place to accumulate wealth. However, it is all taxed as ordinary income at distribution, either during the client's lifetime or at time of death. With the right strategy it is possible to distribute qualified plan assets at a lower tax rate, which can result in a tax deductible, tax deferred savings and tax-advantaged distribution. 

However, in our $700,000 income example, we have to make up for almost 70% of additional assets outside the statutory restrictions of a qualified plan in order to produce the desired income your client will need.

How do you make up the difference? You will need to pull out all the stops and consider as many double-duty dollars as possible. One solution that is often overlooked is permanent life insurance. Modern life insurance products combine life insurance protection with additional protection in the form of optional accelerated benefit riders that allow access to the death benefit while living in the event of a qualifying illness.¹ Permanent life insurance also offers the ability to accumulate tax-deferred cash values that can be accessed, if sufficiently funded, using policy loans and withdrawals² to supplemental retirement income on a tax advantaged basis.

As financial professionals, we shouldn't overlook the insurance protection need. To protect a client with a $300,000 income in the event of a premature death would require around $6 million in life insurance protection. It is very possible to purchase protection on a pre-tax basis through a qualified plan and on an after-tax basis as part of a nonqualified strategy.

The benefit of purchasing life insurance with after-tax dollars is the tax-free treatment of loans and withdrawals. Additional benefits of using tax-free³ loans and withdrawals to potentially supplement retirement income include:

• Helps protect against income tax rate increases. If the life insurance is structured properly, cash value distributions during lifetime can be received income-tax free. If tax rates increase, your client can tap their insurance cash value for income without creating additional tax burden.
• Saves on Medicare Part B premiums by reducing modified adjusted gross income if you can get $1 below defined income tiers. Medicare and You is a free and great resource detailing the subject.
• May save on Social Security taxes.
• May save the 3.8% Medicare surtax.

To this end, I highly recommend creating a comprehensive approach to ensure that you are carefully addressing all planning possibilities and providing a complete approach on behalf of your client and their retirement objectives. It would be wonderful if, like Ebenezer, we all had a ghost of "Yet to Come," who would appear and provide us with that crucial glimpse into our future based upon our decisions in the here and now. Perhaps that's what retirement planning is at its core: a professional peek into your client's financial future at what could be achieved through careful planning and proper actions taken today.

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1. Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event, may affect your eligibility for public assistance programs, and may reduce or eliminate other policy and rider benefits. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.

2. The use of cash value life insurance to provide a resource for retirement assumes that there is first a need for the death benefit protection. The ability of a life insurance contract to accumulate sufficient cash value to help meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy's cash value and death benefit and may result in a taxable event. Surrender charges may reduce the policy's cash value in early years.

3. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender.