How to Spend Your Retirement Nest Egg and Leave it to Heirs

Have Your Cake and Eat it Too

With your financial legacy it’s possible, but it takes planning.

Life insurance is truly the asset of love. I say that because of the dual purposes it serves. Temporary or term insurance is true insurance, you pay a premium and hope not to have a devastating financial loss should the insured/breadwinner die young.  While this seldom happens, the income generated from the death benefit serves a very useful purpose to the survivors when they need it the most. For most Americans (earning less than $100,000), temporary/term insurance is the way to go as permanent insurance doesn’t fit into the budget.

For those that have a retirement nest egg and assets they want to leave to others (assets of love). Permanent life insurance (for which there are several kinds) is the way to go.

Unlike temporary insurance and any other insurance policy, permanent life insurance is guaranteed to have a claim if held until death. This and the fact that the death benefit is income tax-free make it the ideal legacy transfer asset.

Ideally, people would figure this out in their 40’s or 50’s. Over the past several years, some of my clients have taken advantage of procuring life insurance in their retirement years for the retirement spending and legacy benefit.  While they no longer have the dependent income need should they die, they want the insurance for the  retirement spending and legacy plan benefits. This works for people that want to spend the principal of their retirement savings while still leaving a financial legacy behind. In a perfect world, you would obtain life insurance in an amount equal to what you want to leave your heirs. That frees you up to spend the interest and the principal of your nest egg while still leaving your heirs what you want to leave them.

“In a perfect world, you would obtain life insurance in an amount equal to what you want to leave your heirs.”

Why don’t more people use permanent life insurance in their planning?

It’s not an affordable option for most Americans. With a national median income of roughly $56,000, there are basic necessities that rightly stand in line before permanent life insurance. As I said earlier, term insurance is the way to go for most people as it’s very inexpensive (because it’s unlikely there will be a claim while people have it) and people need to insure their family income. Unfortunately, prices skyrocket for older people making it unaffordable to keep when you are more likely to have a claim.

For those people that can afford permanent life insurance, many are short-sighted and don’t understand the value of this legacy asset. It’s a confusing vehicle and sometimes poorly presented.

The most common scenario:

People save what they can to prepare for retirement and then when they get there they design a spending plan around living off the interest from their savings.

Unfortunately, that means they never get to spend and enjoy all the money they saved up for retirement.

I THINK THAT REALLY STINKS! It stinks that the money you saved when you were younger (deferred gratification) still can’t be spent in retirement for fear of outliving it or to leave as a legacy.

The flaw or shame of this strategy is that at some point later in life, they realize they are too darn old to spend the money they have in their nest egg. That’s money they saved, which you could have spent during your pre-retirement years and certainly during your more vibrant early years of retirement. DOES THIS SOUND LIKE THE TRACK YOU ARE TAKING?

CASE STUDY

• Sixty three year old widow
• Inherits $400,000 401k/IRA from her husband and she is conflicted
• She could use the income, but would like to leave it to her children.
• Her children wanted her to spend their parent’s hard earned savings, but she was determined to live without touching that money.

Goal: spend the retirement savings and leave the legacy for kids

She purchased a $400,000 life insurance policy (legacy asset) by taking a $6,000 annual distribution from the IRA to pay the annual insurance premium.

At the same time, we set up a new automatic distribution from the IRA into her checking account of $1,000 per month. YEA! She is spending her money!

The only reason she agreed to do that is that she didn’t disinherit her kids in the process. The best part about that is that the $400,000 is guaranteed and will be inherited income-tax-free unlike the IRA which would have been taxed as ordinary income when they took out the money.

How it works:

1. Kids inherit $400,000 income tax free – mom is guaranteed to accomplish her legacy goal.
2. Now mom can spend from the nest egg on whatever she wants with the peace of mind her kids will still get the money when she dies.

Of course, she can spend her nest egg, without ever procuring the life insurance, but she wouldn’t, because it would leave less for her kids and she would be concerned about outliving her money.

She could use an immediate annuity strategy in this situation to further increase her income without the fear of outliving her money. This is ideal for people that want the guaranteed income stream they cannot outlive (like a pension). This is often a terrific strategy when you want to maximize retirement income as the lump sum of money you commit is distributed back to you as income with interest over your lifetime. It is as simple as giving a lump sum of money to an insurance company in exchange for a promise to pay a fixed income for life or other period of time. Once the distribution phase (your lifetime or a fixed number of years) has ended, the contract ends and there is no money for your heirs. The benefit is that you actually spend your principal and interest (more money) and cannot outlive the cash flow.

THIS IS A GREAT WAY FOR ULTRA CONSERVATIVE INVESTORS TO SPEND AND ENJOY THEIR RETIREMENT NEST EGG WITHOUT ANY FEAR OF OUTLIVING THEIR MONEY.

CASE STUDY: Required Minimum Distribution (RMD) from IRA Strategy:

• 71 year old couple with $1,000,000 in IRA.
• Income sources include a pension and social security with no mortgage.
• Their income need is more than met by the pension and social security.
• Husband in decent health, wife is terrific health.
• There is no way they will spend down their IRA balance.
• Moderately conservative investors.
• One major concern is if wife needed long-term care.

Goal: Grow and guarantee their financial legacy.

Strategy: Take a portion of the Required Minimum Distribution from his IRA to buy/provide another $700,000 in assets for their children. The $700,000 is guaranteed at the wife’s death and assuming she lives to her life expectancy it would provide a return 3-4% tax-free to their children. They liked the fact there was no stock market risk with this portion of their legacy. They took about $20,000 per year or 2.0% of the IRA portfolio to create/pay for the extra $700,000, so ideally the IRA may continue to grow as well.

*BONUS:

For this client, the life insurance policy included a long-term-chronic care rider that allows the women the ability to draw up to 4% of the death benefit per month from the death benefit while she was alive to help pay should she need and medically qualify for the chronic care benefit.  This gives her peace of mind that if she were to get chronically ill, she could take advances from the death benefit and if she needs the care, her children receive the death benefit.

These are a couple examples illustrating the value of life insurance as a legacy asset. While this works well with retired people buying life insurance when they are over age 60, it works even better if you get the insurance when you are younger. If you are on pace to have a good chunk of retirement savings and want to leave a financial legacy, then this strategy might be for you.

Life insurance is probably the most challenging tool in the planning tool box to understand and use prudently in one’s financial plan. This strategy works whether you have $400,000 or $4,000,000 saved for retirement.

One last factor is your health. You have to qualify for the insurance and you will most likely never be healthier than you are today.

I started my permanent life insurance plans many years ago and recently added more because of the inclusion of the chronic care rider.

I know this can be a little confusing, feel free to ask me questions about how this all works.

Related Posts:

http://www.lifeplanningtoday.com/huge-future-expense-is-lurking/