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Six out of ten people aren’t saving enough for their future. This is a sobering statistic, but what’s even more concerning is that a majority of people nearing retirement say they’re more worried about running out of money than they are about dying. This reveals a problem with how we approach retirement planning in America.
Rabbi Lapin makes an excellent point about retirement using a golf analogy. He says if you’re playing golf and focus all your attention and energy on the moment you hit the ball, the ball won’t go where you want it to. You have to focus on your follow-through for the ball to reach its target. That’s why in most sports, they say “keep your eye on the ball” – not just until you hit it, but through the entire follow through.
Retirement planning works the same way. When people focus all their energy on a single point in time when they can RETIRE, they miss the bigger picture. Instead of building a productive life, they’re fixated on an endpoint. This misplaced focus seems to prevent them from creating as much wealth as they could have if they concentrated on building productive capacity throughout their working years.
Rabbi Lapin suggests that you should enjoy a little bit of retirement every day. Make sure you’re engaging in hobbies and enjoying life along the way. After all, work and worship share the same Hebrew word בוֹדָה – AVoDah – because our work is meant to be part of our worship to the Lord.
Retirement as we know it today is a relatively new concept. In the Bible, we don’t find the modern idea of complete retirement. The Levitical priests served in the tabernacle from age 25 to 50, then “retired,” but they continued working in their communities, helping people around them. The parable of the rich man in Luke 12 who built bigger barns to store his harvest and then planned to retire is actually portrayed negatively.
The concept of retirement only emerged in history when Bismarck in Germany noticed his political enemies were all 65 or older and decided to get rid of them with the stroke of a pen by creating a retirement system.
Of course it is still wise to save money for the future when we may no longer be able to work or may not want to work as hard as we like to work today. We think of the word “retirement” in this context.
The question remains: How much should you save when you don’t know what your retirement will look like? The more you can save, the better your retirement resources can accumulate.
We encourage people to start with saving at least 10% of their after-tax income. Many advisors suggest starting with 15% in saving for retirement. It may be helpful to consider that the average millionaire saves about 23% of their income, and the top-wealthy 1% save over 30% regularly.
This is where the 10-20-70 principle that we use, comes in: 10% of your income should be the minimum you save, 20% is the maximum that goes to creditors, and 70% is what you live on. Once your creditors are paid off, you can easily have 30% of your income available for saving and investing, which easily gets you to the millionaire savings club without changing the percentage of your income funding lifestyle (70%).
We start with 10% because we’re not just focused on your future retirement – we’re focused on getting you started right now, knowing that starting today will make your entire future better.
People who have been using the infinite banking concept and building cash value in their whole life insurance policies throughout their lives often have questions as they approach their golden years.
You do have a couple of options to stop premiums. Usually it’s best not to activate these options until the policy is 10 to 15 years old, to get the best policy growth.
Premium Offset: Where you have the insurance company take a withdrawal from the policy cash values to pay the premium. This is processed internally with no out-of-pocket payment from you. If you wish to pick up premiums again in the future, a premium offset may be a good temporary option.
There is no interest on a withdrawal as there would be with a policy loan, and unlike policy loans where your cash value continues growing while you pay interest until the loan is repaid, a withdrawal actually removes money from a policy permanently.
Reduced Paid-Up (RPU): Where you reduce the death benefit so the policy becomes paid-up and no more premiums are required. This action is permanent, so you cannot decide to start paying premiums again in the future.
Note: Some insurance companies will automatically erase an outstanding loan balance upon RPU while others may let you keep an outstanding policy loan upon RPU.
Example: If a 40-year-old starts a policy designed for Infinite Banking with a $50,000 annual premium and pays this for 10 years, then the premium might drop to about $21,300 for the base policy until the policy is naturally paid up. Let’s say the policy is naturally paid up at age 90 (this depends on the product), but you would like to stop paying premiums at age 65. You can do this by converting to Reduced Paid-Up Status at age 65. The death benefit will decrease to compensate and there will be no future premiums. This example continues with more options below.
You have several options for generating income from your life insurance policies:
Withdrawals: You can withdraw everything you paid in premiums tax-free. Using the same 40-year-old example who stopped premiums at age 65 after contributing about $820,000, they could withdraw $80,000 annually for just over 10 years tax-free.
Policy Loans: After exhausting withdrawals, they could switch to policy loans and continue taking money from the policy until about age 97 (depending on interest and actual policy growth). It’s important to remember that policy loans carry interest costs that need to be factored into your calculations if you’re not planning to repay the loans during retirement.
Combination with Annuities: Sometimes it’s more efficient to combine policy withdrawals with an annuity without relying as much on policy loans. In our example, a combination of withdrawals and loans might provide about $2.6 million from age 65 to 97, while adding an annuity to the mix might increase total income to around $4.5 million (of which some would be taxable), depending on actual policy growth, interest rates, and annuity products available at the time.
Generally, you want to wait 15 to 30 years before drawing significant income from a policy to allow it time to establish and reach its most efficient growth phase.
The good news is that you don’t have to make all these decisions when you purchase a policy – they can be made later based on your circumstances.
One of the powerful ways whole life insurance cash values can help in retirement is by serving as a buffer for your investment strategy. Here’s how this works:
Imagine you have $100,000 in an investment account and the market drops 20%, leaving you with $80,000. If you need to withdraw $10,000 for living expenses, your account drops to $70,000. Even if the market rebounds 25% the following year (which would have brought you back to break-even), your account now only reaches $87,500. After taking another $10,000 withdrawal in year 2, you’re down to $77,500 after two years.
Now think of the same scenario with whole life insurance cash values as a buffer. When the market drops 20% and your investment account falls to $80,000, instead of withdrawing from the depressed investment account, you draw $10,000 from your life insurance policy. Your investment account stays at $80,000. When the market rebounds 25%, you’re back to $100,000. You can then take $20,000 from the investment account – $10,000 to pay back your life insurance and $10,000 for that year’s living expenses – and you’re still $2,500 ahead compared to the scenario without life insurance. Even if we subtract some policy loan interest from the $2,500 net you should still be ahead.
This buffer means that having enough whole life insurance cash values may allow you to be more aggressive with your investment strategy, because you have guaranteed cash value to fall back on during market downturns.
Many advisors say you don’t need a death benefit in retirement, especially those promoting “buy term and invest the difference” strategies. They know term insurance becomes prohibitively expensive as you age. However, even if you’ve accumulated enough assets so you don’t technically “need” a permanent death benefit, it can still provide valuable options.
In a good whole life insurance policy, the death benefit is usually higher than the cash value until you approach age 100 or 121. This creates opportunities to repurpose the death benefit.
For example: When rolling investment assets to an annuity for income, you can often choose between an annuity that pays for your life only or one that pays for both you and your spouse’s lifetime.
When covering two lives instead of one (especially when one spouse is significantly younger than another), annuity payouts can be substantially lower because the insurance company must plan for a longer combined lifespan. You can also structure annuities with certain period guarantees (10, 15, or 20 years) to cover this risk, but that reduces the regular income paid out.
With a life insurance death benefit still in place, you may be able to choose a higher single-life annuity payout. If you die early, their life insurance death benefit can “cover” at least some of the assets that went into creating the annuity income stream so your spouse still has plenty of money to live on. If you live a long time, then you benefit from receiving a higher income throughout retirement.
Fact: Having a permanent death benefit gives you more flexibility to optimize your income strategy.
People should consider not just how much they’re saving, but where they’re saving those assets. Some build everything in real estate, but then must continue managing properties. Others put everything into stock and bond investments and ride the market roller coaster throughout retirement.
The best balance I see includes life insurance cash values as a foundation, combined with other assets like market related investments and real estate based on your interests and expertise.
When people have 50% in life insurance cash values and 50% in other assets, this often represents good balance. I’ve seen people with higher and lower percentages in life insurance cash values who are still well balanced.
Having life insurance cash values at some level can provide significant stability to your retirement strategy. Generally speaking, I also like to see that people have their life insurance values spread across multiple policies on both spouses because this can provide more options.
It’s good to also consider the tax treatment of various accounts as you’re saving and investing money for your future:
With a whole life insurance policy, you pay taxes on the money used to pay premiums (similar to contributions to a Roth IRA), but the growth is tax-deferred. If you never withdraw more than you paid in premiums, the death benefit goes income tax-free to your heirs. If you do withdraw money for retirement income, some withdrawals could face taxes similar to tax-deferred accounts.
Combining your assets in a thoughtful way, can give you more control over your tax situation without being tied to required minimum distribution schedules.
Health concerns are another major retirement worry. Many people purchase long-term care policies, but these tend to be expensive and don’t grow well if you don’t need the care. Plus, you typically can’t access benefits unless you can’t perform two of the six basic activities of daily living.
Instead of paying long-term care premiums, many of our clients build assets in whole life insurance cash values, where the money grows faster. Then, if they need long-term care, they have accessible funds. If they don’t, this money can go to the next generation income tax-free.
Additionally, many whole life insurance policies include riders for critical, chronic, or terminal illness that allow you to access a percentage of your death benefit early if you develop qualifying health conditions.
These riders are usually free to include on new policies, with only an activation fee if you actually need to use them. Terminal illness usually requires a doctor to give you 12 months or less to live. Chronic illness might require inability to perform two of six basic daily activities. Critical illness usually covers one-time events like a heart attack that you survive.
The main takeaway is that with well-designed whole life insurance, you have more options and less risk when it comes to retirement. Building cash values through infinite banking throughout your working years provides multiple benefits:
Our clients using infinite banking have less worry about the stock market, less worry about taxes, and less worry about running out of money. They’ve created a foundation of guaranteed, growing cash value that provides security and flexibility regardless of what the future holds.
The combination of guaranteed cash value growth, flexible access to funds, tax advantages, and a permanent death benefit makes whole life insurance a powerful tool for retirement funding. While whole life insurance shouldn’t necessarily be your only retirement vehicle, it can serve as an excellent foundation which enhances the rest of your retirement strategy including other accounts and investments you employ.
Remember, these planning decisions don’t all have to be made when you purchase your first policy. The beauty of whole life insurance is that it can adapt to your changing needs throughout your lifetime, providing options and security when you need them most.
by John T. McFie
I am a licensed life insurance agent, and co-host of the WealthTalks podcast.
As a 16-year practitioner of the Infinite Banking Concept on a personal level, I can help you find the clarity and peace of mind about your financial strategy that you deserve.
Working with hundreds of financial scenarios over the years has helped me to develop a sixth sense about how to quickly find a clear and balanced solution for clients using whole life insurance as a financial tool.