Blog #135: Merging College and Retirement Planning

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(Presentations in this blog were created using InsMark Illustration System and Wealthy and Wise®.)

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Bob Ritter's blog #135 merging college and retirement planning

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Jennifer Haven, age 45, is an author of popular detective novels.  She is vitally interested in supplementing her personal retirement income beyond what can be provided by her $18,000 annual deposit into her Solo 401(k) plan (see Blog #131 for details of such plans).  She is recently divorced and has custody of her daughter Kelsie, age 7.

Jennifer has two primary financial goals:

  • Funding for Kelsie’s college tuition at age 18: $40,000 a year for four years;
  • Annual, spendable, retirement cash flow for herself starting at age 65: $180,000 indexed at 3.00% as an inflation offset.

There are approaches for Jennifer illustrated in this Blog, each one using $1,320,000 of Indexed Universal Life (“IUL”) max-funded with five premiums of $50,000.

First is a simple illustration of values with policy loans producing tax free college funds and retirement cash flow.  The graphic below shows the effect of this approach:

Image 1
Indexed Universal Life

blog-135-image-1-indexed-universal-life

Click here to review the year-by-year numbers of the illustration.

It is a good presentation of the IUL’s current values - but compared to what?  Most prospects and clients make far better decisions by comparing alternatives.  If you don’t show them, your client may look elsewhere.

To address this issue, we’ll compare the policy to the following financial alternatives -- all with the same deposit pattern as the IUL and matching the after tax college funds and retirement cash flow of the IUL:

  • Tax exempt account (4.00% yield);
  • Tax deferred account (7.00% yield);
  • Equity account (7.00% growth; 2.00% dividend).

The graphic below summarizes the results:

Image 2
Various Financial Alternatives (VFA)

blog-135-image-2-various-financial-alternatives

Click here to review the year-by-year numbers of this comparison.  VFA is certainly a more effective presentation than just the policy illustration shown in Image 1.  While powerful, the IUL needs context to be most effective.  What is missing is a comprehensive integration of the IUL within Jennifer’s overall net worth and cash flow goals.

Below is a summary of her current net worth.

Net Worth
Jennifer Haven

blog-135-img-4-net-worth-yield-growth-assumptions

Click here for comments regarding yield, growth, and Monte Carlo simulations.

Next is a Wealthy and Wise analysis including both a pre- and post-retirement evaluation of goals versus available assets to meet those goals:

  • Strategy 1 is Jennifer’s current assets meeting her two goals of college funds for Kelsie’s tuition and retirement cash flow for herself.
  • Strategy 2 duplicates Strategy 1 plus the addition of the values from the IUL policy featured in Image 1 and Image 2.  The source of the IUL’s five $50,000 premiums are withdrawals from her assets not an out-of-pocket expense she has to absorb, a major difference from the perception of premium cost she has with Image 1 and Image 2.  Strategy 2 also includes a conversion of her Solo 401(k) to a Solo Roth 401(k) spread over 16 years to minimize the tax bite.  (The conversion taxes are also funded by withdrawals from her asset base.)

Below is the graphic summary comparing Strategy 1 with Strategy 2.

Image 3
InsMark Wealthy and Wise® Analysis

blog-135-image-3-InsMark-Wealthy-and-Wise-Analysis-net-worth-cash-flow

The inclusion of the IUL and the Roth in Strategy 2 produces over twice the long-range net worth as Strategy 1.  It is still increasing while Strategy 1 is in a death spiral.  Note again that this increase does not require Jennifer to pay the IUL premiums out-of-pocket; they are withdrawn from her asset base with values of the IUL more than replacing them.  For both Strategies, we used InsMark’s unique Max Net Worth™ algorithm to establish which assets are the most efficient to use for both college and retirement cash flow.

Note: Jennifer’s life expectancy is age 83.  I ran this analysis for 45 years to her age 90 to make sure there are sufficient assets to provide her cash flow requirements past age 83.  (Don’t forget, life expectancy means half that age group is still alive at life expectancy.)  The reason I illustrated the Wealthy and Wise analysis only to age 90 is that so much of her remaining net worth in Strategy 1 (the current retirement plan) at that point is made up of illiquid assets that Jennifer’s retirement cash flow from Strategy 1 will shortly fall below $100,000, reason alone to discard Strategy 1 as an option.

Below is a graphic of Jennifer’s Strategy 1 net worth at age 90:

Image 4
InsMark Wealthy and Wise® Analysis
Strategy 1 - Net Worth at Age 90

blog-135-image-4-strategy-1-net-worth-at-age-90

With only $595,276 of liquid assets remaining in her retirement plan, it is barely enough for one more year’s after tax cash flow.

Below is an alternate graphic of Jennifer’s Strategy 2 net worth at age 90:

Image 5
InsMark Wealthy and Wise® Analysis
Strategy 2 - Net Worth at Age 90

blog-135-image-5-strategy-2-net-worth-at-age-90

Image 5 shows substantial liquid assets remaining with Strategy 2.  With Jennifer’s life expectancy of age 83, is cash flow through age 90 a good enough cushion?  Maybe; maybe not.  Why take the chance if a longer duration is needed?  The 3.00% indexing of her $180,000 of after tax cash flow has grown to $354,000 by age 89, and there are sufficient liquid assets remaining for similar growth thereafter.  Strategy 2 means she can thrive financially well past age 100.

Would Jennifer be better off converting her 401(k) to a Roth as part of Strategy 1?

Click here for that analysis.

Image 5
InsMark Wealthy and Wise® Analysis
Strategy 2 - Net Worth at Age 90

blog-135-image-5-strategy-2-net-worth-at-age-90

Strategy 2 also means more of an inheritance for Kelsie as you can see below:

Image 6
InsMark Wealthy and Wise® Analysis

blog-135-image-6-wealth-to-heirs

Conclusion

Strategy 2 is all good news for Jennifer and Kelsie.

Details of the Analysis

Click here to review the detailed reports in the Wealthy and Wise analysis of Strategy 1 vs. Strategy 2.  The important pages are the first six, and most everything after that is necessary backup.  There are 103 pages in the file.  That is lot to review, but the reason I included them all is to emphasize the need for backup so, when a client’s CPA or attorney asks, “Where did this number come from?”  you will be in a position to show its specific source because every number produced in Wealthy and Wise is backed up in detail.

Maybe Bad News for Some

The bad news for some of you is that a comprehensive analysis like this requires you to gather all of a client’s financial data.  Many of you are used to doing this.  For those of you who are not so comfortable with it, how do feel about asking a prospective client to reveal complete details of financial data?  Clearly, you have to earn a prospective client’s trust to do that.

My suggestion for the best way to gain that confidence is to share examples of how this concept works for others -- this Blog, for example, highlighting the Comparison graphics -- or similar graphics you prepare on your own perhaps with help from an InsMark Referral Resource (more on this below).  We promise you will get a ‘Wow” reaction from most prospective clients.

Questions and Answers

Q.  How difficult is it to gather financial data from prospective clients?

A.  There are typically only two reasons why you can’t get information about financial assets/benefits from what appear to be valid prospects: 1) they don’t trust you (yet) or 2) they don’t have very much in reserve and are embarrassed about it.  Two couples, both of whom appear affluent, may be in quite different financial shape.  You can’t easily spot those in the latter category who are often high livers and spenders but swamped in debt.  Pressing for financial data can often uncover those who aren’t financially sound.

And if you can’t develop a trusting relationship with valid prospective clients, you’ll never get them to reveal very much of their financial data.  A Fact Finder is available in Wealthy and Wise to guide you in your data gathering (see Tools on the main menu bar).  The Fact Finder is best filled out with the client’s active participation.

At first glance the Fact Finder may look intimidating, but on most pages, you will be entering data in only a few of the listed categories.  To acquaint yourself with it, try filling one out for your own situation.  Then, if you enter your data in your copy of Wealthy and Wise -- you may be pleasantly surprised.

Q:  Should college funding always be included in a retirement analysis?

A:  Yes, assuming the parents are involved in paying all or some of the costs.  They are a drain on retirement funds and should be accounted for.

Q:  Why were policy loans used on the IUL for the $40,000 a year for Kelsie’s college tuition funding?

A.  I wanted to use the arbitrage leverage of participating policy loans available with the IUL.  (See Blog #52 for a comparison of participating vs. fixed policy loans.)

Q.  Is cash flow from Social Security always included?

A.  Only if clients believe it will be available based upon their sense of the government’s financial ability to pay it.  In Jennifer’s case, she wanted it included.  Wealthy and Wise includes an after tax Social Security calculator available on any of the arrays on the Expected Cash Flow tab.

Q.  How can a Wealthy and Wise evaluation be reliably projected so far into the future?

A.  It can’t be reliably projected if you perceive retirement planning as a “one and done” analysis.  To be a dependable adviser to your clients, you must meet with them at least once a year and bring all the data current.  Each year represents a fresh look at the future, and this is what turns prospects into clients, not just policyholders.  If you follow this procedure, soon your clients won’t make a significant financial move without asking you to run it through Wealthy and Wise.  Otherwise, changes in finances will make your original evaluation obsolete, and you will lose clients to other advisers.

This approach also gives you a good basis for charging an annual monitoring fee for the analysis.  If you can develop fee revenue from clients who are glued to you for service, it has a significant impact on the value of your practice.  These days, recurring revenue is hard to develop, and monitoring fees are an excellent way to do so.  Blog #98 covers this issue in detail including how to include such fees within a presentation so they are paid for out of plan assets not by addition out-of-pocket costs by the client.  Be sure to check with compliance if you are considering monitoring fees.

If you prefer a “one and done” solution, comprehensive retirement planning is not for you.  That is not to say there isn’t plenty of opportunity for you -- just not in this field.

Q:  What if there are not sufficient assets and benefits to produce the desired cash flow?

A:  This will occur, and when it does, your clients have several options, and Wealthy and Wise can deal with any of them:

  • Commit more to savings and investments;
  • Defer including inflation on desired cash flow;
  • Reduce the amount of desired cash flow;
  • Reduce the number of years of desired cash flow;
  • Defer the starting date for desired cash flow;
  • Manage assets more aggressively.

Reducing cash flow goals doesn’t necessarily mean there will always be a shortage.  Each year as you develop the annual review, add back some of what’s missing, typically by committing more to IUL.

Licensing InsMark Systems

To license the InsMark Illustration System or Wealthy and Wise, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog135.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

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Rich Linsday, CLU, AEP, ChFC, InsMark Power Producer®, Top of the Table, International Forum, Pasadena, CA

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Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

 

Important Note #1:  The hypothetical values associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #134: Best Strategy for an IRA (Part 2 of 2)

Blog #133: Best Strategy for an IRA (Part 1 of 2)

Blog #132: The Calculation Magic of Wealthy and Wise®

Blog #131: Don’t Burn the Nest Egg™

Blog #130: Should I or Shouldn’t I?

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #134: Best Strategy for an IRA (Part 2 of 2)

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(Presentations in this blog were created using InsMark Illustration System

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Strategy 1:  Stretch IRA
Strategy 2:  Charitable IRA
Strategy 3:  Roth Conversion

Bob Ritter's blog 133 image the best strategy for an IRA

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In Part 1 of this series (Blog #133), we compared Stretch IRA vs. Charitable IRA vs. Roth IRA for Harry and Angela Dorsey who are ages 55 and 50, respectively.  Their current net worth is a little over $5 million of which $800,000 is in Harry’s IRA.  They plan to retire in ten years and want $150,000 a year in after tax cash flow indexed at 3.00% as inflation offset.

Stretch IRA:  This involves naming heirs as the final beneficiary of the IRA.

Charitable IRA:  This involves naming a charitable organization as the final beneficiary of the IRA and replacing its value for heirs with $1.5 million of indexed survivor universal life coverage bearing a $25,000 annual premium and paid by withdrawals from their liquid assets.

Roth IRA:  This involves converting the IRA to a Roth IRA with the income tax caused by the conversion paid by withdrawals from their liquid assets.

The purpose of this Blog is to compare the effect of leaving their daughter, Caroline Dorsey Baker, currently age 25, either the Stretch IRA or the Roth IRA.  (The difference in favor of the Roth is substantial.)

Note:  If you did not read Blog #133 (Part 1 of 2), this would be a good time to review it as the details in it are important as well a sequential preview to your understanding of this Blog.  The life insurance sale associated with Blog #133 is even more of a slam-dunk when coupled with the information in this Blog.

Case Study

Harry and Angela’s daughter, Caroline, is currently age 25.  Let’s assume she will inherit either retirement plan in 38 years at her parents’ joint life expectancy of ages 92/87, which will be Caroline’s age 63.

Below is the comparison of Caroline’s Inherited IRA vs. her Inherited Roth IRA (both inherited versions have required minimum distributions).

Image 1
Inherited IRA vs. Inherited Roth IRA
Caroline Dorsey Baker at age 63
Assumed Yield 7.00%

blog-134-img-2-Inherited-IRA-vs-Inherited-Roth-IRA

The Inherited Roth IRA provides Caroline with 595% greater after tax cash flow for her retirement than the Inherited IRA.  Once shown the difference, most parents with sufficient liquid assets to fund the income tax on the Roth Conversion are eager to convert an IRA to a Roth.

If you are not including the giant impact on heirs of inheriting a Roth IRA in your presentations, you are missing out on a major benefit for your clients that they likely have never considered or been shown.

Why is there such a discrepancy between the two options?

By Harry and Angela’s joint life expectancy of ages 92/87, the required minimum distributions from their IRA have reduced its value to $1,413,691.  When inherited by Caroline, it produces cumulative after tax cash flow for her retirement of $2,186,963 from her age 63 to 84 at which point required minimum distributions have exhausted the Inherited IRA.

Conversely, by her parent’s joint life expectancy, the Roth, with no required minimum distributions, has developed an initial value for Caroline’s Inherited Roth IRA of $5,891,839 which produces cumulative after tax cash flow for her retirement of $13,020,861 from her age 63 to 84 at which point required minimum distributions have exhausted the Inherited Roth IRA.

Click here to review all the illustrations and graphics from the Inherited IRA vs. Inherited Roth IRA comparison calculated using the InsMark Illustration System.

What about the difference in cash flow for her parents during their retirement years?  Doesn’t ending up with much more in the Roth IRA means Caroline’s parents are short-changing their own retirement?  No – in the Roth analysis in Wealthy and Wise in Blog #133, both scenarios (IRA and Roth IRA) provide the identical level of after tax retirement cash flow -- $150,000 a year indexed at 3.00% as an inflation offset.

In Wealthy and Wise, except for occasional cases where cash flow is not a consideration, required cash flow is the dominant consideration for all scenarios.  When cash flow from an IRA’s required minimum distributions disappears because the IRA has been converted to a Roth which has no distribution requirements, Wealthy and Wise provides the missing cash flow from another asset based on the user’s prioritization1 of assets.  It could come from or another liquid asset or even the Roth itself.  If there is no other liquid asset available, the program advises you of it.

1Note to InsMark’s Wealthy and Wise licensees and prospective licensees: It is critical for sound retirement planning to prioritize which assets to access for cash flow and in what order.  To do so, activate the following selection on the “Prioritize the Use of Assets” sub-tab located on the Illustration Details tab (after you have entered desired cash flow, expected cash flow, retirement plans, and liquid assets).

Maximize-Net-Worth-Image

Click here to see an 8-minute video, the first 4 minutes of which highlights the logic of the Maximize Net Worth selection.  The last four minutes discusses gifts to a trust for the purchase of life insurance trust and a Roth conversion.

Source of the Inherited IRA and Inherited Roth IRA Calculations

Three calculators from the InsMark Illustration System (InsCalc tab) were used to produce the Image 1 graphic above:

  • Inherited IRA Calculator
  • Inherited Roth IRA Calculator
  • Comparison of Inherited IRAs Calculator

Once your data entry is complete for both Inherited Calculators, the results can be easily imported into the Comparison of Inherited IRAs Calculator (follow the prompts on the first screen).

To establish the initial inherited value for each calculator at Harry and Angela’s joint life expectancy at ages 92/87, click the following reports from the Wealthy and Wise® evaluation in Blog #133 (Part 1 of 2).

In the Wealthy and Wise system associated with Blog #133 (Part 1 of 2), both reports are the last ones shown in the “Selected reports” listing on the Report Selections tab in the first and third Scenarios.  The digital Workbook file from Wealthy and Wise Blog #133 (Part 1 of 2) showing complete data input is available below.

This data from year 38 in each of the Wealthy and Wise reports for the parents noted above was entered into Caroline’s Inherited IRA Calculator and Inherited Roth IRA Calculator located on the InsCalc tab in the InsMark Illustration System.  Don’t forget, Caroline is assumed to be age 63 at this point (current age 25 + 38 years).  The results from each of her calculators were then easily imported into the Comparison of Inherited IRAs Calculator (InsCalc tab) which is source of Image 1 above.  The digital Workbook file from the InsMark Illustration System showing complete data input for each of the three calculators is available below.

Note:  To prepare reports similar to the ones featured in this Blog, you will need access to both the InsMark Illustration System and Wealthy and Wise.

Video of the Logic

To study videos of these IRA/Roth IRA concepts (or if you have staff that could benefit from viewing them), click on the 12-minute video below which highlights all the features of Stretch IRA vs. Charitable IRA vs. Roth Conversion.  Included in the second half of that video is a comparison of an Inherited Roth vs. an Inherited Roth IRA.  The video deals with slightly different case data; however, the principles involved are identical to those discussed in Blog #133 (Part 1 of 2) and Blog #134 (Part 2 of 2).

Three Smart IRA Strategies
Steve Savant, Syndicated Financial Columnist
Don Prehn, Senior Adviser to InsMark

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Licensing InsMark Systems

To license the InsMark Illustration System and/or Wealthy and Wise, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog133_134.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag. I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

“InsMark provides incredible tools to give clients a visual of how they can optimize their wealth.  It’s great for deciding which road to go down.”
Jim Heafner, MBA, CFP, Heafner Financial Solutions, Inc., Charlotte, NC

"InsMark has important marketing information for every one of the producers in my firm — from the newly licensed to the veteran producer."
Gary Curry, President and CEO, ORBA Insurance Services Inc., InsMark Platinum Power Producer®, Gold River, CA

 

Important Note #1:  The hypothetical IRA and Roth IRA values associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.

Important Note #2:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

seperator bar

More Recent Blogs:

Blog #133: Best Strategy for an IRA (Part 1 of 2)

Blog #132: The Calculation Magic of Wealthy and Wise®

Blog #131: Don’t Burn the Nest Egg™

Blog #130: Should I or Shouldn’t I?

Blog #129: Leveraged Executive Bonus Plan with Bank-Funding of the Income Tax (Part 3 of 3)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive