Ted Jenkin, CFP® co-CEO oXYGen Financial, Inc. 800-355-9318
It used to be that when most people talked about their retirement, the expectation was to have a three legged stool for deriving income when you actually retired. The first leg of the stool was really around the pension plan. You worked for a company your entire life. Some of your parents or grandparents worked for 30, 35, 40 years for the same company and when they retired, there was the reward of a pension for all of those years of hard work. Pension only exist today largely in jobs such as state, local, federal government, or education. Very few public companies actually offer a full fledged pension plan.
The second leg of the stool would be Social Security. The way that Social Security was originally laid out was to give you the opportunity to get that supplemental income in addition to your pension plan to be able to enjoy your retirement. The third leg of the stool was really around any additional personal savings and investments. In today’s marketplace with private companies rapidly declining their pension plans, people concerned about Social Security, it turns out that personal savings and your investments are really the pogo stick of your retirement.
One of the things we discuss with clients is the thought process of considering setting up your own type of pension plan. One way to do this is through the use of cash value life insurance. Of course, you’re going to need to consider your tax bracket, your time frame, and your overall risk tolerances. But even if you don’t have a physical need for life insurance in terms of the traditional sense of death protection, there may be an opportunity to use life insurance especially if you are a high wage earner or business owner to set up a supplemental pension plan. The thought process behind this is really about putting in more cash than just the part that pays for the cost of insurance. All of your cash value will grow on a tax deferred basis as laid out in section 7702 of the internal revenue code. Once these assets build up, somewhere down the road you may have the opportunity to pull the money out on a tax free basis, which would be under section 72A and 72E in the internal revenue code. One part of the withdrawal process is to pull your basis of your insurance contract out on a tax free basis and one part is about physically taking a loan from yourself from the cash value in your insurance policy that you would not pay tax on due to the fact it is a loan. This concept of a supplemental pension plan using cash value life insurance should be an important consideration for high wage earners.
One way or another, the reality is that these policies can be very complicated to understand. There are both good parts and bad parts to the policies. You may want to consider this as part of your overall strategy in retirement. One question you need to ask yourself is which part of your investment portfolio is really carved out to be your “pension plan” when you actually retire. Generation X and Generation Y people don’t think like this about their retirement when doing financial planning. You should consider with these policies that if you pull out too much money and run out of cash value, you may create a considerable taxable event to yourself. In addition, if not managed correctly by your insurance agent, these policies may end up being more costly than the benefit you receive.
So, where is your pension coming from in retirement? Without a pension, you’ll have to hop that pogo stick of personal savings and investments to your retirement dreams.
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation. Learn more by visiting Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS. NFPAS does not provide tax or legal advice. This site is published for residents of the United States only. Registered Representatives and Investment Advisor Representatives of NFP Advisor Services, LLC (NFPAS) may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact NFPAS Compliance Department at 512-697-6000. PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Advisor Services, LLC makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Advisor Services, LLC liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.