By Jason Oshins, Financial Advisor, MBA
Context is everything, and an important component of a financial advisor’s job is to contextualize the decision-making process to enable clients to make more effective decisions with a greater likelihood of long-term success.
When planning for a couple’s retirement, I frequently begin by reviewing a life expectancy chart, emphasizing two components:
(1) the potential gap between the first and second deaths and (2) the potential length of time before the second death is likely to occur. Assuming a healthy 40-something couple, the gap can be 10, 15, or 20 years, if not more, and the second death isn’t likely to occur until the second spouse is 90-something. Typically, this is the first time my clients are exposed to this reality, and more often than not they are stunned by what they learn. These two components demonstrate that retirement could last a really, really long time, and access to accumulated assets could be limited by this unknown time horizon.
Recognizing that the unknown is what prevents us from enjoying our wealth, I ask clients, “If on your 65th birthday you retire with $1 million (or I use a number that feels relevant), how long does this have to last?” to which most respond, “I don’t know… but I know it’s a long time.” I then ask, “If you don’t know how long it has to last, how much can you spend each year?” which is typically met with a resigned, “Not a lot.”
Once this has resonated, I discuss the importance of including guaranteed events in their overall planning. When we know an event is guaranteed to occur, we have additional options, and we have the ability to treat assets differently. I ask, “If, when you retire, the bank is holding $1 million of ‘it’ll-be-there-no-matter- what money’ for you in its vault, how much of the original $1 million can you comfortably spend over a 20- or 25-year peri- od?” Asked another way, do they now have the comfort and confidence to access and enjoy more of their wealth knowing that this $1 million will replace the original consumed as- sets? Invariably, they answer in the affirmative, and they lean in, anxious to learn more about how this strategy works.
I explain that it involves acquiring a whole life policy from a highly-rated mutual life insurance company, and using it just as de- scribed, to serve as the guaranteed “it’ll-be-there-no-matter-what money” around which they can plan. The husband is the insured, and the whole life policy is placed next to the couple’s other assets. With its presence, they now have the ability to spend a significantly greater amount of their accumulated assets, if they so desire, while the whole life’s cash value and death benefit accelerate along the compound interest curve. Once they’ve spent these other assets, either the death benefit replaces the consumed assets, or the cash value is available to enjoy. At this point, they typically ask me, “Why doesn’t everybody do this?”
Indeed, context is everything.
*Whole Life policy has a guaranteed premium, cash value, and death benefit. Additionally, the cash value and death benefit grow through annual dividends declared by the board of directors. The calculations for this concept were computed using Guardian’s illustration system, assuming male at second-best category, funding premiums through age 65. The concept was tested and works for 40-49 year olds. The death benefit was selected to result in $1 million at age 85. The policy’s cash value grows through tax-deferred dividends and is available for tax-free distribution through loans. Based on current assumptions, the cash value at age 85 will be between $770, 000 and $805,000 depending upon the insured’s original age.
All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. Policy benefits are reduced by any outstanding loans and loan interest. Dividends, if any, are affected by policy loans and loan interest. If the policy lapses, or is surrendered, any loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59½, any taxable distribution from the policy may also be subject to a 10% federal tax penalty.
Material discussed is meant for general informational purposes only and is not to construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.
ABOUT THE AUTHOR
Jason Oshins is a Wealth Management Advisor and Certified Exit Planner with WestPac Wealth Partners. He works closely with clients throughout the country to increase wealth during lifetime, improve income during retirement, and provide a greater legacy upon passing, while also protecting their estates from taxes, inflation, and market volatility. He specializes in the areas of estate planning, investments, retirement planning, insurance planning and design, disability protection, long-term care, wealth transfer, and business planning. Jason obtained his MBA from the University of Michigan in Ann Arbor. He can be reached at (702) 470-2753 or by e-mail at jason.oshins@westpacwealth.com