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There Is More To Saving For Retirement Than Getting The Highest Investment
Returns!
Dear ~Contact.FirstName~,
I hope you’ll agree that saving for
your family’s financial security and your retirement is critical. And it all
starts with paying yourself first. The reality is that it doesn’t really
matter where you save your money. What matters most is that you start saving
today. Time and compounding interest is what makes your money grow.
However, once you start saving, you
can help yourself achieve financial freedom and generate more spendable
income in retirement by selecting investment vehicles offering more than
just the promise of higher investment returns.
What would
your ultimate retirement savings vehicle look like?
If you could design your ultimate
retirement savings vehicle, what benefits or features would you like it to
have? Let your imagination go wild.
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Would you want to receive an income
tax deduction for the money you put into the plan that's similar to the
deduction you get for many of the current qualified retirement plans?
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Would you want to be able to put in as
much money as you can without regards to how much money you make, with no
limits or caps?
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Would you like to have the money
inside the plan accumulate tax deferred? You don’t pay any income taxes or
capital gains taxes on the account while your money is building.
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Would you like to be able to generate
a tax-free income during your retirement?
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Would you like to be able to access
all of the money tax-free before retirement and without the early withdrawal
penalties associated with traditional qualified retirement plans?
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Would you like to have a minimum
interest rate guarantee each year?
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How about an opportunity for the
higher stock market type returns?
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What if you could lock in those higher
stock market type returns each year and with no risk to your investment
principle? (No stock market losses.)
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If you become disabled, would you like
for someone to keep putting money into the retirement plan for you?
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If you die, would you like for someone
to pay your family what you meant to save during your lifetime?
Here are what I would consider to be the best choices for investment
vehicles: a 401(k) with matching contributions, tax-free municipal bonds,
Roth IRAs and something you may not of heard of — investment grade life
insurance.
401(k) with
matching contributions
In most cases, you’ll want to take
full advantage of your company’s 401(k) plan if they offer any sort of
matching contributions. It’s free money, so you’ll generally want contribute
to your 401(k) only up to the amount that your company matches.
Why only up to the amount the company
matches? Remember, in an earlier article we discussed the problems with tax
deductible qualified retirement plans and the exorbitant income taxes you’ll
pay in your retirement years. So, you’ll want to contribute the amount
necessary to receive all of the free money your company offers and then stop
right there.
Exceptions: If your company
only offers their company stock inside of the 401(k) and all of your
contributions, plus the matching contributions are required to be invested
into company stock, then you may want to pass on the opportunity.
Consider: If your company has a
financial problem like Enron, then not only could you lose your job, you
could lose the nest egg that you’ll need to survive until you find another
job. Investing most of your retirement savings in one company isn't prudent.
If your company collapses, both your paycheck and your retirement savings
could evaporate.
Tax-free municipal bonds
Many people today believe that tax-free municipal bonds are an exceptional
retirement income vehicle. Regional and local agencies, towns, and cities
issue municipal bonds. Most municipal bonds have lower interest rates than
comparably rated corporate bonds and treasury securities. The minimum amount
required for investment in municipal bonds is generally $5,000. Municipal
bonds are sometimes issued at a discount to compensate investors for the
additional risk that these bonds may have due to the financial difficulties
of some local governments.
The most important feature of municipal bonds is their tax-exempt feature.
Due to subsequent judgments based on the 1819 McCullough v. Maryland ruling,
the federal, state and local governments don't possess the power to tax each
other. Consequently, municipal bonds can't be subject to federal tax.
Additionally, income from state and local municipal bonds can't be taxed if
purchased within the geographic area. For example, Georgia residents don't
pay state taxes on Georgia bonds. However, residents of Florida are subject
to state income taxes on their Georgia bonds.
Drawbacks of tax-free municipal bonds
While municipal bonds do offer a tax-free income that is very attractive,
there are several hidden drawbacks:
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Investors (before and after retirement) who generate substantial income from
municipal bonds could be subject to paying the alternative minimum tax
because the interest from those bonds is one of the indicators used to
calculate who pays the tax. If you start investing heavily in municipals,
you'll need to keep a sharp eye out to make sure you don't hit the AMT,
because as soon as you do, you lose all of the tax-free advantage of
municipal bonds.
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Because the interest rates are lower on municipal bonds, there is also the
risk of having your investment not keep up with inflation and taxes.
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Most retirees are unaware that while you generally won’t pay income taxes
directly on municipal bond income (except if you hit the AMT) you do have to
report the municipal bond income on your income tax return, and it can cause
up to 85 percent of your Social Security income to become taxable.
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There is also credit risk, the possibility that a municipal bond issuer's
credit rating may be downgraded or that it will default in payment of
principal and interest on its bonds. Lower-quality issues typically offer
higher yields than those considered investment grade, but also involve more
risk.
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There is also the problem of interest rate risk. As interest rates increase,
you could see the value of your municipal bond portfolio decline.
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The final problem is that municipal bonds are attachable by creditors.
Because of the many hidden drawbacks of municipal bonds, you have to be very
careful when using them. In most investment portfolios, only the use of a
very limited amount makes any sense.
Roth IRAs
The Roth IRA is a type of individual retirement account in which
contributions are made with after-tax (non-deductible) dollars. If certain
requirements are met, then the earnings accumulate tax-free, and no federal
income tax is levied when qualifying distributions are taken from the plan.
A Roth IRA allows for tax-free withdrawals as long as the contributions
remain in the account for a minimum of five years and the account holder
meets one of the following criteria: age 59½, death, disability or
first-time home purchase.
As with all IRAs, there are restrictions on your eligibility to contribute
to a Roth IRA based on your income level and filing status. You can stay
current with these rules and regulations with IRS Publication 590. Note, if
you are eligible to contribute to an IRA in a given year, then you have
until the following April 15 to make a contribution. The current
contribution limit is $5,000 per individual if you are under age 50 and the
amount you can contribute phases out at higher incomes. The rules for the
Roth IRA are changing every year, so I won’t go into the details here.
Roth IRAs offer some very distinct advantages over most other qualified
retirement plans (401K, 403B, SEP, etc.) and municipal bonds.
The biggest advantage is the tax-free income they provide during retirement.
Consider, if you were to put the maximum contribution into a Roth IRA and a
tax-deductible qualified retirement plan, you would be depositing the same
amount each year, into each plan. If you receive the same rate of return on
both accounts, then won’t you have the same amount of money in each account
when you retire? If you then withdraw the same amount out each year from
both accounts, the Roth IRA will provide you with more spendable income,
because you won’t have to pay taxes on that income.
Unlike the Traditional IRA, there is no required minimum distribution at age
70½.
Another advantage of Roth IRAs is that unlike tax-free municipal bonds and
the taxable income from a qualified retirement plan, the Roth IRAs income
is not reported on your income tax returns to determine the taxability of
you Social Security income.
Also unlike tax-free municipal bonds, the tax-free income from a Roth IRA
does not trigger the alternative minimum tax calculation.
Roth IRAs, like most qualified retirement plans, are generally not
attachable by creditors.
Drawbacks of A Roth IRA
There is a cap each year as to what you can put into a Roth IRA and for the
higher wage earner, the eligibility to contribute to a Roth IRA phases out.
(See IRS Publication 590)
There is a 10 percent early withdrawal penalty if you with withdraw the
accumulated interest prior to age 59½. (You can generally withdraw the
investment principal as long as you’ve had a Roth IRA longer than five
years.)
One of the main concerns I have with Roth IRAs is whether sometime in the
future the federal government will lower the Social Security retirement
income for the people who have accumulated a lot of money using qualified
retirement plans. (means testing) I think the federal government will be forced to find ways
to lower Social Security income payments.
Investment grade life insurance
Most people think of life insurance in terms of death benefit protection.
However, because you can over-fund today's cash-value life insurance
policies, they also provide vehicles for meeting other goals, such as saving
for retirement and college education, paying estate taxes and providing
liquidity. Life insurance now has some very competitive returns and is
treated uniquely by the IRS. Life insurance offers the added bonus that most
goals can be achieved on a tax-free or tax-deferred basis. In effect, life
insurance is one of the few remaining tax shelters available.
Life insurance is the investment the wealthy have used for decades to
accumulate, protect, provide liquidity and pass on their safe money. We are
talking about the investment money that a wealthy family needs and uses to
cover their daily living expenses. It’s the money that they can’t afford to
put at risk. A recent survey by the Spectrum Group found that 84 percent of
ultra-wealthy people own life insurance.
Investment grade life insurance offers some very distinct advantages over
most other investments, even Roth IRAs and municipal bonds.
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Like the Roth IRA, your money grows tax deferred, and you can receive a
tax-free retirement income.
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Also, like the Roth IRA, there is no required minimum distribution at age
70½. The income you receive is not reported on your income tax returns to
determine the taxability of your Social Security Income and it does not
trigger the alternative minimum tax calculation.
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Unlike the Roth IRA, there is no cap each year as to what you can put into
cash value life insurance. You can simply increase the death benefit to
accommodate more cash.
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And, unlike the Roth IRA, for the higher wage earners, there is no phase-out
of eligibility as there is with a Roth IRA.
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Unlike the Roth IRA, you can access the your money tax-free prior to age
59½. There is also no 10 percent early withdrawal penalty if you withdraw
the accumulated interest prior to age 59½.
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Life insurance cash values do not count against you when applying for
college financial aide for your children.
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Life insurance is generally not attachable by creditors, and has the added
advantage of bypassing probate.
Drawbacks of investment grade life insurance
Because of the commissions, expenses and surrender charges, there is very
little usable cash value in the first three to five years of the policy.
You should generally use investment grade life insurance only if you can
leave the money there a minimum of 10 years. (15 years is preferable.)
You are buying a life insurance death benefit, so there is a charge for the
death benefit each year. However, considering that most people need and are
paying for life insurance anyway, this is a great way for you to get the
life insurance you need at the lowest cost possible.
Unlike other investments, your ability to purchase life insurance depends on
your overall health. In many cases, even if you have a health problem,
investment grade life insurance may actually work better for you.
With any product you buy, there are good ones and bad ones. Life insurance
is no exception.
Investment grade life insurance works well in most circumstances and
exceptionally well for those families who need and are already paying for
life insurance.
We’ll discuss investment grade life insurance and its uses in greater detail
in later articles.
Jeremy Nason
Trainer, Coach & Mentor
'The 9 Out Of 10
Guy'
Message to Financial Advisors…
You have the choice to be successful, or not to be successful. It's entirely
up to you! You can sit back, do nothing and hope that things will change.
Or, you can take action right now to make things change! What have you done
in the last sixty days to increase your sales? Why not learn the marketing,
prospecting, appointment setting and sales strategies that most of the
leading advisors on the planet use?
______________________
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