This month's newsletter is a case study of a standard airline pilot and his basic retirement strategy involving qualified accounts. The numbers are impressive, but so is the risk.
A Case Study: Elevate Your Financial Strategies for Retirement
BY THE LEGACY PROJECT TEAM
Our team at The Legacy Project received some great questions after publishing September's newsletter, "An Alternative to Locking-Up Your Money in Qualified Retirement Accounts." If you still need to read the five-minute article, you can review it HERE before continuing.
To give you better answers, we have dedicated this month's newsletter to a hypothetical case study using real numbers. The principles behind this case study apply to everyone, regardless of employer-sponsored qualified retirement plans.
With that said, here are our assumptions for our fictional pilot, Howard:
1. Howard's starting age as a new hire is 35 years old
2. Mandatory airline retirement age is 65 years old
3. Howard's starting annual salary is $100,000, and he has guaranteed pay increases each year for the first twelve years
4. Howard's employer provides a 16% direct contribution to his 401(k) (no matching required)
5. Howard's contribution to his employer-sponsored 401(k) is 0%
6. Howard upgrades to Captain in his 7th yr. flying for his airline
7. Howard's tax rate after retirement is 24.5% (Federal & State)
8. Howard invested his 401(k) in an index fund for 30 years and earned a 7% annualized average return
9. Howard's annual cost of living during retirement is $150,000/yr.
10. Howard has no additional sources of income during retirement
11. At retirement, Howard reinvests his 401(k) into a conservative investment, earning a 3% annualized average return.
As of the time of this writing, employees may contribute a maximum of $22,500 each year, or $30,000 each year if over 50 years of age. Employers can contribute $43,500 each year. In addition, the amount of your contribution that can be considered when determining employer + employee contributions is limited to $330,000 in annual compensation.
After 30 years flying safely for his airline, Captain Howard will retire with $3,464,246 in his employer's 401(k) qualified retirement plan. Assuming a withdrawal rate of 5.75% (required for Howard to have ~$150,000 per year to pay for his cost of living), Howard will have 32 years of retirement income. That's great. Now, let's consider a few things that will likely affect his retirement and which should cause concern, even for yourself.
Timing Matters. Market corrections, resulting in losses of 10%, happen approximately every two years. In comparison, 20% or more losses occur about every seven years. Suppose Captain Howard experiences a market correction right before or during retirement. In that case, his withdrawals during a bear market will be much costlier than those during a bull market. Selling shares at a low price to maintain a standard of living will make it much more difficult for him to get back on track as the market rebounds, simply because he will have fewer shares during the market recovery.
A Dollar Today is Worth More than a Dollar Tomorrow. Inflation is an essential factor to consider when planning for retirement. Over the past five years, Americans have experienced a cumulative price increase of 21.45%. Hence, it's essential to consider how inflation will affect Captain Howard's purchasing power and whether his target retirement plan will be sufficient in a world that is undoubtedly becoming more expensive.
"The Only thing Certain in Life is Death and TAXES." How likely will taxes remain the same over the next 30 years? Let's assume Captain Howard does retire in a lower tax bracket because he will no longer be earning over $300,000 per year. Instead, he is taxed solely on his retirement distributions. By deferring taxes in a 401(k), the tax brackets will likely only increase over the next 30 years. Moreover, let's remember the CUMULATIVE taxes that will likely increase. I am not just talking about income taxes, but also property, sales, school, fuel, luxury, etc. As technology changes, so do the types of taxes we are expected to pay.
"The Only Constant in Life is Change." As technology advances, we adapt and incorporate it into our daily routines. However, these advances usually come at a cost. It's interesting to consider if Captain Howard's parents ever accounted for things like cell phones, high-speed internet, gym memberships, streaming services, food delivery services, etc. when they planned for retirement. As the world evolves, we evolve with it, and the things that were once a dream become part of everyday life. What sorts of changes and activities will Captain Howard integrate into his daily routines, only to stop using them once he retires?
We Aren't Getting Any Younger! As Captain Howard ages, he may face rising medical costs. How will this affect his hard-earned retirement? Although we hope he never experiences a severe medical emergency, it is possible. We all know someone who has struggled with the financial burdens of declining health.
Fear of Outliving Retirement. We have determined that Captain Howard is a high-income earner who retired with a significant retirement nest egg. According to our analysis, this nest egg should last him at least 32 years, assuming no unforeseen events occur. Unfortunately, nearly 60% of retirees fear not having enough money to sustain their standard of living during retirement. This fear is compounded by the desire to leave a legacy for their heirs. Instead of enjoying their golden years, retirees often spend them worrying about running out of money.
Since Captain Howard has excess income and adheres to the above truths, he follows the advice to max out his 401K or other qualified retirement accounts!
Suppose the answer is as easy as investing more into your qualified retirement accounts to offset these concerns. What is preventing so many individuals from enjoying financial success? Consider the following excerpt taken from a profound book about wealth titled "Killing Sacred Cows" by Garrett B. Gunderson:
"The magic pill for that entire financial planning industry is built on – and that most of us are swallowing whole – is that financial success comes from investing in the right products, employing the right strategies, and basing calculations on countless unknown variables. This, despite the fact that it's not working for anyone. The dismal statistics speak for themselves. A Gallup survey showed that 75 percent of workers want to retire before age sixty; yet only 25 percent actually think that they will. According to a study conducted by the U.S. Department of Commerce, only 5 percent of all Americans are financially independent at age sixty-five. This study further indicated that 75 percent of all retirees are forced to depend on family, friends, and Social Security as their only sources of income. An article in USA today showed that the number-one concern for American retirees is the fear of running out of money. Fifty-one percent of retirees today have incomes below $10,000 per year. In a world filled with financial advice, few actually enjoy financial success."
The answer isn't always more.
Navigating the Skies of Uncertainty
Retirement is a significant phase of life. Having certainty and guarantees during this period is a blessing. Captain Howard would have no objections to a plan that preserved all the money he had set aside for retirement and many times more without worrying about market volatility or tax implications. What if he could recapture all the interest he would have paid to third-party debtors and creditors by self-financing necessities and luxuries, thus adding to his net worth? Knowing Captain Howard could access a pool of controlled capital to pay for unexpected financial emergencies like hospital bills would give him peace of mind. Furthermore, imagine leaving a lasting legacy that would help secure his family's future for years after he has passed away without outliving his retirement funds. How does your retirement plan compare to Captain Howard's alternative option? Are you confident about your retirement planning and living out your Golden Years?
The Infinite Banking Concept Unveiled
Lucky for us, a financial strategy has been used for over 200 years by wealthy families such as the Rockefellers, Barclays, and Rothschilds, amongst others, to secure their financial future and create certainty in their retirement. This strategy is called the Infinite Banking Concept (IBC). It involves leveraging a specially designed whole life insurance policy as a personal banking system. Over time, the policy accumulates guaranteed cash value, which policyholders can access through loans while still earning tax-free dividends and interest on the entire cash value. IBC allows individuals to become their own bankers, take control of their finances, and benefit from the power of compounding in a tax-advantaged environment.
IBC is also a buffer against market uncertainty as it acts as a volatility buffer. These policies are safe assets designed to grow at a guaranteed rate and earn dividends and are not tied to the stock market, housing market, or any other market. Life insurance contracts have been sold in the United States since the 1760s and have survived the Revolution, Civil War, two World Wars, depressions, recessions, and even COVID! During the Great Depression, over nine thousand banks went bankrupt, but only 2% of the total assets of all life insurance companies became impaired between 1929 and 1938. These contracts are so secure that banks put their money in them because of the guaranteed growth and security (search Bank Owned Life Insurance, i.e. BOLI, for more information).
Crafting a Financial Flight Plan with Certainty
While you may not know what your employee-sponsored retirement brokerage account will look like once you retire, IBC practitioners will know the absolute minimum of how their cash value will grow and compound the moment they enter a policy contract from inception. Since this is not an investment (investments have levels of risk and can lose value over time), there is a contractual guarantee that these policies will be worth more at retirement than today, and that is guaranteed certainty that will help weather any future financial storms.
Guaranteed Pay Increases: A Tailwind for Wealth Creation
Furthermore, the cash value in these policies will compound every year, not just until age 65. So, if the cash value is compounding uninterrupted during retirement, that means the cash value is increasing every year. In other words, you can get a tax-free pay raise every year you are retired. Voila! Pay raises yearly are a guaranteed hedge against inflation, especially since these policies will continue to compound every year until you are 121 years old!
Tax Efficiency at Altitude
The cumulative effects of taxes, similar to interest, we all pay can significantly erode your wealth and retirement savings over time. However, Infinite Banking Concept (IBC) offers an elegant solution. With this policy, the growth of your wealth is tax-free, which means you can accumulate wealth without immediate tax consequences. Moreover, you can withdraw money through policy loans without paying any taxes. Even the dividends paid out are tax-free. You may not know your future tax bracket, but one thing is sure - the guaranteed growth inside your personal bank will be available to you without worrying about the IRS.
Beyond Life's Runway
Achieving certainty in retirement can help alleviate the fear of outliving your retirement savings. Planning and properly structured IBC policies allow you to confidently enjoy your retirement without worrying about running out of money. By utilizing whole life insurance policies within the Infinite Banking Concept, you can be assured of receiving a death benefit, which can help you leave a lasting legacy for your heirs. This tax-free benefit can be passed on to your loved ones immediately without waiting for a probate court. So, with IBC policies, you can spend your hard-earned money freely and build a secure financial future for you and your family.
Your Life Insurance Retirement Plan Can and Should Be Used Today
It is essential to note that you can reap numerous benefits while practicing the Infinite Banking Concept. However, it is vital to remember that IBC is just a means to optimize your cash flow and not a substitute for earning high rates of return. IBC is not an investment, it’s a process. Nonetheless, even if you use IBC solely as a savings plan for your retirement, you can significantly improve your overall retirement strategy because of the guarantees and certainty it provides. Furthermore, you can leverage the living benefits of IBC right now and don't have to wait until retirement to enjoy them.
By utilizing a well-structured whole life insurance policy, Captain Howard and you can create a personalized banking system that optimizes tax-advantaged growth, fund major life events, and ensure a smooth transition into retirement. In the ever-changing landscape of personal finance, the Infinite Banking Concept offers everyone a path to financial freedom and prosperity, ultimately allowing you to soar beyond the confines of traditional wealth-building strategies. As our economy continues to evolve, so too can the financial strategies that empower you to navigate your financial journey with confidence and security.
Be sure to check out our newsletter in December where we’ll show you how you can use IBC to act as a HEDGE against a down market right before retirement. This stuff is powerful! Do NOT let your LEGACY fly past you!
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Please be sure to check out our website and watch our quick 35-minute video that gives an overview of the Infinite Banking Concept and how we use IBC to Invest in Real Estate. We want to guide you through this life-changing information, help you take knowledge and convert this process into understanding through application. Give us a call if you're ready to take action! Also, we would love to share with you some FREE DIGITAL BOOKS to help get you started.
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