You Could Be Grosser

I am sitting down with a young Paul Gross, which of course is a fantasy of mine … but enough about me.   

We are discussing his financial plan and reviewing his economic circumstances.     We are going to look at different approaches to retirement, and how it will profoundly affect his ability to receive more income in the future.    A comparison … to help him decide which strategy is best for him and his family.

Paul’s Objectives:

  • Assets for retirement
  • Lifetime retirement income
  • Safety and control
  • Financial security for his wife and children

PAUL GROSS

In Paul’s younger years, he started thinking about saving for retirement.   

Paul’s challenge was to make smart decisions through the three phases of economic life.

PAUL GROSS(ER)

Paul Gross(er) takes a different approach.    Just like his alter ego, he has a desire to prepare for retirement.   He recognizes, however, the pressure on his money when he must go from “Working for Dollars” to “Dollars at Work”.   Paul Gross(er) will not leave his retirement strategy to chance.

Gross(er) has made a decision to alter his financial destiny.     He has decided not to conserve principal like his alter ego Paul Gross, but rather employ an Asset and Income Maximizing Strategy.

In order for Paul Gross to save money for retirement, and still provide the family financial protection in the event of his death, he uses the following strategies:

  1. Saves and invests for retirement
  2. Seeks to grow a nest egg that will be large enough to be “self-insured” and hence not need life insurance in his golden years
  3. Buys low cost term life insurance which he will drop after 20 years

ACCUMULATION PHASE

Paul Gross is 45 and has $25,000 a year for the next 20 years to allocate towards his plan.  He purchases $750,000 of Term 20 life insurance for a cost of $1,455/yr.   The balance of $23,545 he invests.   He earns 5% after fees and taxes. His savings grow to $817,464 at age 65 and he drops his term insurance.                                     

DISTRIBUTION PHASE

Paul still has a legacy goal for his wife and children. So he takes his $817,464 and lives off the interest income.      We are assuming more conservative growth rate in retirement of 3% and a marginal tax rate of 35%. Paul takes $23,810 from his savings every year and after tax he gets $15,476. His principal of $817,464 remains for his heirs.

Gross(er) uses an Asset and Income Maximizing Strategy:

  1. Receive more enjoyment from his wealth during his lifetime
  2. Overcome the risks which plague conventional retirement income strategies
  3. Convert his term life insurance to permanent life insurance (the only difference from his alter ego) that will act as the key to unlock the full value of his assets over his lifetime, in addition to leaving a large legacy to his wife and children

ACCUMULATION PHASE

Paul Gross(er) has the same amount of funds to allocate towards his strategy.  He purchases $750,000 of permanent insurance for $13,835/yr and invests the difference of $11,165 earning the same 5% after taxes and fees. His savings grows to $387,605 at age 65. He has $750,000 of permanent insurance that is paid up and continues to grow in cash value and death benefit.

DISTRIBUTION PHASE

Paul Gross(er) has permanent life insurance.   So he adopts a 20 year paydown strategy for his $387,605.   He takes $25,294 from his account each year.    But pays significantly less tax as much of this is principal.   The tax payable declines over time but his after tax income varies from $21,490 at age 65 to $24,078 at age 85.

Even though Gross(er) has accumulated less in his account, he has greater income.    The gross number is higher.

At age 85 Paul Gross(er) has no savings left.   But his insurance policy has grown to $1,182,903 and he has $957,170 in cash value he can access from his account.

Paul Gross explaining on Breakfast Television how little income he has to live on in retirement.   Wife noticeably absent.

Paul Gross(er) explaining on Breakfast Television how he has lived on greater income with less wealth because of his permanent insurance.   With his supportive wife in tow.

So Gross(er) at age 85 (life expectancy btw) has greater cash value in his insurance policy that Gross has left in his account.     And Gross(er) was able to have a greater after tax income from age 65 as well.     If Gross took the same after tax income as Gross(er) his estate value would be even less as he would be encroaching on capital.

Even if Gross(er) spends all the cash value, there is still a residual tax free death benefit of $255,733.

Coupling retirement assets with whole life offers an opportunity to optimize retirement an income legacy.