April 14, 2024
Search
Close this search box.
Search
Close this search box.
April 14, 2024
Search
Close this search box.

Linking Northern and Central NJ, Bronx, Manhattan, Westchester and CT

Writing Your Own Retirement Permission Slip

As inter­est rates have dropped to his­toric lows and stayed there, some retirement plan­ning benchmarks have lost their rel­evance. In this environment, many retirees find Certificates of Deposit don’t provide enough income, even if they are safe. And retirees who planned to “spend down” their as­sets using the “4% rule” are starting to worry about running out of mon­ey.

(The 4% rule is an assumption that retirees can safely draw down 4% of their retirement accumula­tion, plus a little more, each year to account for inflation. According to the 4% rule, first devised by William Bengen, a California financial plan­ner, this format offers a reasonable expectation that retirees will not ex­haust their funds for at least three decades, even if the actual returns from their retirement portfolio fluc­tuate over time.)

Today, several factors have up­ended the 4% rule. Low yields on the portion of the portfolio required to provide ongoing income have ei­ther meant more assets committed to income instruments, or required liquidation of principal. Either ac­tion leaves less for long-term invest­ments that offer the promise of re­turns great enough to sustain a lifetime of distributions.

Closely connected to the issue of fewer funds available for long-term investment are the losses that many recent retirees sustained in the early years of their retirement. During ac­cumulation, the sequence of gains or losses doesn’t impact the final accumulation; any order of identi­cal gains and losses will produce the same result. But when one is with­drawing funds, losses sustained ear­ly in the sequence can decimate a portfolio’s ability to provide a life­time income.

For those whose retirement plans are grounded in the 4% rule, the only fixes are working longer to increase the principal or planning to receive less income. These aren’t exactly win-win choices. But they do illustrate the potential short­comings of trying to accomplish a secure retirement using just one format (a retirement plan).

Many times, coordinating sev­eral diverse assets can deliver bet­ter retirement results. A prime example of this coordinating concept is making permanent life insurance part of one’s retire­ment plan. In the 4% approach, the untouched principal serves as insurance for future income dis­tributions. This creates an ongo­ing tension between enjoying to­day’s benefits and worrying about whether today’s enjoyment jeop­ardizes future solvency. By con­trast, having a true life insurance benefit in place allows for greater financial certainty. This certain­ty means retirees have the ability to use retirement assets in ways that would not be possible if the insurance did not exist.

By providing a known amount of money for a certain event (death), the life insurance policy can deliver income tax– free funds for inheritance, which means other accumulation ac­counts do not have to be con­served for this purpose. In the event of terminal or chronic ill­ness, the cash value and a per­centage of the death benefit may be accessed with a long-term care rider. Again, this frees up more funds for income. These strate­gies involving life insurance as a “last asset” make it possible to “spend down” other assets during one’s lifetime, thus maximizing their present financial value.

Because of the unique benefits of permanent life insurance in a com­prehensive retirement and estate plan, financial professionals often re­fer to it as a “permission slip” because the life insurance allows for confident consumption of accumulated assets.

The permission-slip benefits of permanent life insurance are so ex­pansive it is not uncommon for many individuals to obtain cover­age in their 60s and 70s as they be­gin retirement. “I never thought I would be buying life insurance in retirement” is a common refrain. But waiting until just before retire­ment to obtain a permission slip has some hazards. Health and insurabil­ity are major concerns. Annual pre­miums will be significantly higher. A prudent approach is to establish a life insurance plan today that can be structured to meet tomorrow’s circumstances as well. If you want to fully enjoy the rewards of saving, make sure to include a permission slip for spending.

Elozor Preil is Managing Director at Wealth Advisory Group and Regis­tered Representative and Finan­cial Advisor of Park Avenue Securi­ties LLC (PAS). He can be reached at [email protected]. See www. wagroupllc.com/epreil for full dis­closures and disclaimers. Guardian, its subsidiaries, agents or employ­ees do not give tax or legal advice. You should consult your tax or le­gal advisor regarding your individ­ual situation.

By Elozor M. Preil

Leave a Comment

Most Popular Articles