Retirement: Will It Look The Way We Thought It Would?
February 20, 2019 by Eric Henderson
Planning for living in retirement requires balancing risks, understanding trade-offs, and choosing a path that has enough flexibility to adjust as circumstances change. There are multiple types of investment options to consider in a retirement strategy, along with their corresponding tax aspects. Ultimately, individuals and families must make decisions about how their investments can mitigate the financial risks of living in retirement so that they can enjoy the retirement they envision for themselves.
Insurance products like life insurance and annuities should be considered as part of this process because they can mitigate living-in-retirement risks like outliving income, long-term care (LTC) events or decreasing purchasing power because of inflation, all while providing tax efficiency.
Tax-Free Retirement Income
For instance, a cash value life insurance policy can be structured in a way to provide retirement income through withdrawals of cost basis, and loans, so an owner can have a source of tax-free retirement income that can be accessed when needed. The life insurance policy’s growth can be based on direct investment participation if invested in a variable universal life (VUL) policy, or on the performance of certain indexes if invested in an indexed universal life (IUL) policy. That life insurance policy could also have a LTC rider added to it that would provide a pool of assets to cover the nursing home or other care expenses the individual may incur if they can no longer take care of themselves. Finally, the life insurance policy can also provide an income-tax free death benefit to the owner’s heirs, so they leave something behind.
Guarantee an Income Stream
Annuities can be used in variety of ways to mitigate multiple types of living-in-retirement risks as well. An immediate annuity can be used to guarantee an income stream for as long as the owner is alive, plus their spouse if a joint life option is selected. The income from a nonqualified immediate annuity can also provide income tax efficiency through an exclusion ratio, which means that with each payment received, a portion will be return of investment in the contract, and a portion will be earnings.