Ideal 4 Point Retirement Plan

Do you like my 4 point plan?

This plan is a framework for what I consider to be an ideal retirement plan. 

Part 1. In my ideal retirement plan, my wife and I would like to be able to spend and enjoy ALL (not just portfolio interest) of the money we’ve saved for retirement.

This doesn’t happen for most successful retirement savers. Why? Mainly because of an inherit fear of outliving your money if you were to dig into principal early on in retirement.

It’s a very real fear and applies to people of modest retirement savings and people with seven figure wealth.  It’s a shame that most people don’t feel comfortable spending their principal savings until they are too old to enjoy it.

Can you imagine one day being an 80 year old couple with no mortgage, limited travel and entertainment costs? You  wake up one day and realize “we are too old to ever spend our money now.”  This happens all the time to good retirement savers. This is not a tragedy, but it’s a shame they didn’t plan better.

In order to have a lot in retirement savings you had to defer (save instead) many things when you were young and healthy (nicer home, car, family vacations, etc.) so you could afford to retire. Once you make it to retirement you still choose not to spend your principal savings in your early retirement years for fear of outliving your money.

Is that a great plan? No, but I bet that’s what most people you know will be stuck doing.

What could this look like in numbers? 

Imagine having $1,000,000 in retirement assets at age 65. If you live off 4% interest then you get $40,000 per year to live on and leave your principal alone.  You don’t want to dig into principal for fear of outliving your money if you spend it down.  Fast forward 15 years and you’re 80 years old and still have your million dollars. Now what will you be able to do with it? Too bad you couldn’t have spent and enjoyed some of the principal in the first 15 years of retirement when you were healthy and active enough to really enjoy it.

Part 2. In our ideal retirement plan we want to be able to spend and enjoy ALL (principal and interest) of our retirement savings WITHOUT THE FEAR OF OUTLIVING OUR MONEY.  

Doesn’t that sound like fun? With people living longer and longer thanks to medical advances and lifestyle choices, it’s going to more common to live well past age 90. 

Part 3. In my ideal retirement plan it’s important for us to leave a substantial financial legacy to our three children. Keep in mind that I’m a planner and accustomed to looking far ahead when I plan. It’s not surprising that some couples may have differing views on this subject.

In my family both sets of grandparents left some money that helped my parents and my parents will do the same. It’s very important to me to do this as well. I can do this while potentially spending all my retirement savings in the process creating a win/win.

Part 4. Be as tax-efficient as possible in my planning. While estate tax laws will always be a political football subject to change, it’s smart to plan ahead. This plan will shrink my taxable estate and be very tax efficient. We’ve paid enough income tax.

How do you implement this 4 point plan?

It all starts with saving what you can in your pre-retirement years.  Saving 20%+ of what you earn will go a long way toward being financially independent.

Implement Phase 1. Spend and enjoy our retirement savings (Principal & Income)

Take a chunk of your retirement savings and create a private pension. Most of you are familiar with the “pension” term which usually refers to a lifetime or joint lifetime income. In this case, you give a lump sum of your retirement savings to an insurance company and they give you a contractual promise (immediate annuity) to make a monthly payment for as long as you and/or your spouse live. Is a Private Pension in your Future?

This payment is a combination of your interest and principal so it’s going to be greater than if you were living on your interest and not touching your principal. The payment is fixed and there is no stock market risk. Your payment is based on your life expectancies and current interest rates. The older you are when you start the pension the greater the payment. Same is true with interest rates, the higher the better.

Implement Point 2. Income that can’t be outlived

The private pension accomplishes this objective because the payment lasts as long as either spouse is alive. You cannot outlive it. The payment continues while either spouse is alive and the contract ends with no value after both spouses have died. You die enjoying your principal and interest, instead of just living on interest. Winner!

Implement Point 3. Leave financial legacy

The wealth transfer/financial legacy vehicle of choice has always been life insurance. You would only want this if you want to spend and enjoy your retirement saving and STILL LEAVE A FINANCIAL LEGACY. 

If you don’t care what you leave your kids or grand kids, skip this and it becomes the perfect 3 point retirement plan.

In our ideal plan, my wife and I procured permanent life insurance when our children were young and we had a dependent need should either of us died young. The insurance would help pay off the mortgage debt and generate replacement income.  

Now that the  “dependent need” is fading away, (our kids are in college) the new reason (can I call it greed?) that we have permanent life insurance is that we can greedily spend ALL of our retirement nest egg (principal included) and leave of kids the life insurance.

The plan is to spend our investment assets, or die trying and leave life insurance to our kids as the wealth replacement asset. You can make this life insurance strategy work well even after retirement age. The sooner you figure out what you want to leave your kids, buy that amount of permanent life insurance as it’s a better deal when you are younger and healthier.

You won’t read about this sophisticated strategy in the mass media, if you are living paycheck to paycheck like 75% of the country this isn’t for you. 

Implement Point 4.  Minimize taxes.

That’s a big part of the planning I do for my clients and this certainly comes into play here. Estate and income taxes in the future are very unpredictable. With the private pension, when both spouses have died, there is no money left to be taxed. It’s gone. No income or estate tax.

If you leave your kids with your IRA rollover from your old 401k(s), they will be stuck paying ordinary income taxes when they are forced to make withdrawals. With the life insurance, the benefit is income tax-free and if the policy is owned by your kids or an insurance trust it would not be part of your estate. Therefore, it’s not subject to estate tax either.

This may sound more a little complicated. There are many ways to implement this concept. It must be molded to fit with your desires and financial situation.

Reach out to me if you want me to work out the numbers for your situation.