Today, more than ever, physicians are concerned with retirement. I believe that, due to market volatility and massive tax hikes, it’s possible that the guaranteed pensions and retirement at 65 with a tidy little nest egg may be a thing of the past. Physicians are increasingly worried about how to protect their assets, build for their future retirement, and leave a legacy for their families. If this sounds all too familiar, you could find more reassurance by utilizing what I like to call The Buffer of the Wealthy. Buffer of the Wealthy is simply utilizing the benefit of investing a portion of the assets you plan to use at retirement into Indexed Universal Life Insurance. Earning decent returns on a portion of your retirement assets, while being protected from catastrophic declines is possible using the Buffer of the Wealthy as a tax buffer and as a risk buffer.
Many high income earners are unaware that the tax treatment of Indexed Universal Life is very similar to a Roth IRA without the income limitations or contribution limitations, to name a couple.
As a Retirement Tax Buffer
Even with tax reform lowering all tax brackets somewhat, we are still 20 plus trillion in debt, according to Market Watch’s February 2019 Economic report, which, coincidentally, is about the same amount of money that Americans hold in qualified retirement plans, according to the US Government Accountability Office and American Benefits Council. Should the tax pendulum swing back the other way, today, tomorrow, or in the near future, none of the following are immune from the grip of Uncle Sam.
Rental Real Estate
Taxable Brokerage Account
Tax Deferred Annuities
Deferred Compensation Plans
Retirement Accounts such as IRAs, 401-Ks, Profit Sharing Plans, Defined Benefits, Pensions, etc.
As tax rates continue to change with different political parties occupying congress throughout the course of your retirement, the IUL could provide you with the versatility to choose the amount of taxable (or in the case of the IUL, non-taxable) retirement distributions you take each year. Imagine having the option of withdrawing dollars from your taxable sources right up until you reach those really ugly tax brackets and then having another source to supplement the rest of your income needs using tax-exempt distribution from your Buffer of the Wealthy Indexed Universal Life Plan. In extreme cases, you could scale back taxable retirement withdrawals and aggressively pull from a heavily funded IUL plan; then, when the tax policy stabilizes or the pendulum swings back in your favor, you could pull again from your retirement plan assets.
As a Retirement Risk Buffer
Ask yourself the following question: “If I lost 50% of my retirement account this year, what would I have to accumulate next year to break even?”
Most people answer 50%, but the answer is 100% to break even; if you have $100,000 and you lose 50% you now have $50,000. In order to regain all of the $50,000 you would have to have a 100% gain, at 50% you only gain back $25,000.
For many people who lost 50% in 2008, it may have taken up to six years to get back to square one! If you are looking at retirement, you may not have the time to recoup the money lost.
Although IUL is not completely uncorrelated to the stock market, it has a unique growth methodology that allows for stock market participation without stock market risk. The IUL offers a contractual 0% floor protecting against losses in down market years. In other words, if the S&P experiences a negative return, you simply get 0%, yet you still have the opportunity to earn returns tracking the S&P 500 Index during up market years.
At retirement, if there is a market crash, you could have a block of assets allocated to draw your immediate needs from while allowing your stock and mutual fund accounts time to heal. Without this protective measure, in a down market, you would need to redeem significantly more shares of your stocks and mutual funds to meet your ongoing standard of living. In addition, once utilized, these shares can no longer participate in the next market rebound.
Occasionally, investors are initially hesitant about Indexed Universal Life because of the cost compared with Roth IRAs, traditional IRAs, 401(k), pensions, etc. However, in the long term, the costs are nearly the same, including the PS58 charges.1 The IUL allows the benefits and versatility to ultimately decide how you want to control your assets. Almost always, the cost/benefit trade off of a properly structured plan is very attractive to high income earners.
The Buffer of the Wealthy or Indexed Universal Life is a valuable and worthwhile investment with substantial utility when implemented correctly. I believe investing properly in an IUL could provide extra protection for your retirement, today, as well as in the future.