Forbes Councils Member Forbes Finance Council
Reposted from Original Forbes article Dec 10, 2020,07:20am EST
President & CEO of Strategic Navigators Inc.
Your funds require a secure place and should be versatile enough to fulfill various financial objectives. The impact of taxes, fees, and market fluctuations can significantly hinder the growth of your savings. By mitigating potential losses, you can positively influence the trajectory of your wealth and financial stability, rather than merely pursuing higher returns at the expense of increased risk.
Taxes, Fees, Volatility: The Enemies Of Your Wealth
Ed Slott, CPA and author, notes that “taxes are the single biggest factor that separates you from your retirement dreams.” As of the end of September, our national debt was at roughly $27 trillion. At some point, the obligation to repay that debt will arise. Have you considered whether taxes will increase or decrease by the time you reach retirement age? Additionally, who will be responsible for settling the bill?
There's a prevalent misconception surrounding the belief that taxes will inevitably decrease during retirement. This notion stems from factors such as anticipated lower income, reduced essential expenses (like mortgage payments), and a potential shift in lifestyle. However, a significant number of the individuals I advise are not seeking a reduction in their retirement income. Rather, they aspire to have the flexibility to use their money as they wish while sustaining or enhancing their current lifestyle.
Fees present another critical factor that can substantially affect your savings. The array of fees associated with an account can be substantial and includes, among other things, brokerage fees, commissions, mutual fund fees, expense ratios, sales loads, as well as management or advisory fees, and 401(k) fees
Your wealth is susceptible to decline due to market volatility, especially if you must endure and wait out the losses. Would it be unexpected for you to discover that an account boasting a "real rate of return" of 5% might actually yield more money than one with an "average rate of return" of 7%? Prioritizing the avoidance of losses proves more significant than the pursuit of the highest rate of return. Every investor should ponder two fundamental questions: Does the sequence of return receipt make a difference? And, should I employ distinct strategies during accumulation years as opposed to distribution years? The answer to both questions is yes.
Minimizing Losses With A ‘Rich Person Roth’
While it's crucial to bear in mind that you can't eliminate all potential issues, a properly structured "rich person Roth" (RPR) plan, also known as a "rich man's Roth," has the capacity to significantly diminish or eliminate most of the risks discussed above. An RPR involves a max-funded life insurance policy placed with a life insurance company. The term "Roth" is used to describe this type of vehicle because the money grows tax-free and is funded with after-tax dollars. Wealthy families have employed this type of vehicle for decades, hence the name.
A "properly structured" RPR takes into account financial qualifications, medical considerations, and assessed needs, specifically weighing income against growth. The structure aims to eliminate unnecessary costs, incorporates safeguards against market losses (tied to suitable indices), and employs life insurance as a financial instrument. This differs from a conventional life insurance policy by providing substantial cash benefits (exceeding those of traditional whole life) and operates much like a bank account. In numerous RPR accounts, you participate in market gains, often up to 90% to 95% of the "upside," while being shielded from losses. In such RPRs, the assurance of never losing money due to market downturns is upheld by a 0% floor.
Here is a partial list of the advantages of an RPR plan:
• Your cash is liquid. You will not owe any income tax ever. Money invested in the RPR is after tax. Once in the plan, you will never pay tax on the gain or income derived from the RPR.
• There are no age-based requirements to access your cash. You don’t have to begin spending your money at age 70 ½ years old, and you don’t have to wait until you are 59 ½ to gain access.
• Because the RPR is built on a life insurance chassis, the death benefit provides a nice layer of security for your loved ones.
• Your money will earn uninterrupted compounding interest as you pay no taxes and are often net positive on fees and experience no market loss.
It's crucial to bear in mind that this particular plan is constructed on a life insurance framework and, consequently, entails health requirements. Not everyone qualifies for life insurance based on health considerations. An RPR is also not a short-term vehicle; it involves front-loaded costs and requires some time to gain momentum. However, once you become vested, it exhibits its unique capabilities. The RPR is a long-term strategy that thrives when executed as designed. Although it offers flexibility in payments, payment frequency, and benefits, deviating significantly from the original design could potentially lead to the RPR facing challenges. Engaging a proficient advisor is paramount in preserving the integrity of such a plan. While an RPR serves as a sophisticated investment tool demanding consistent funding, its uninterrupted compounding interest has the potential to generate generational wealth. This, in turn, enables you to allocate more, contribute more, and pass on a more substantial portion of your hard-earned assets to future generations.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Investing & retirement resources
When you’re building your portfolio, you may not think about adding a life insurance policy. But it’s not too late. Life insurance can be a valuable addition with many benefits, including:
Since your death benefit will be paid in cash when you pass away, it’s a liquid asset that can be accessed quickly by your beneficiaries.
Assets can be split among any number of heirs.
Since some types of life insurance earn cash value on a predetermined schedule, you can predict the value of your policy at a future date.
When life insurance is guaranteed, the value of the death benefit isn’t affected by the economy or changes in the stock market.
Cash values in a life insurance policy grow tax-deferred. Beneficiaries receive your death benefit income tax free. And estate tax free, too, if properly structured.
Borrowing from your policy is only available for whole life insurance policies, not term life insurance. Taking out a policy loan will not affect your credit and is tax-free, but is still treated as a loan with interest rates and needs to be paid back. Without paying back your loan in a timely manner, you risk going over your policy’s cash value and could result in a policy lapse.
Is life insurance considered an asset? Find out by talking to your insurance professional about adding life insurance to your financial portfolio.
Keep in mind that only permanent insurance policies are considered assets, since they are the only policies that have cash value.
Talk to your insurance professional about whether life insurance would make sense as a part of your portfolio.
Consider that as your life undergoes changes, such as marriage, the birth of a child, or a job promotion, your life insurance requirements may also evolve. It's essential to ensure that your life insurance policy aligns with your long-term needs. Before making a purchase, carefully evaluate any associated costs. Life insurance involves fees and charges, including insurance costs that fluctuate depending on factors like the insured person's gender, health, and age. Additionally, there are extra charges for riders that tailor a policy to meet your specific needs.
Guarantees are subject to the claims-paying ability of the issuing insurance company. Specific premium requirements must be met to be eligible for death benefit guarantees. Please see the contract for details.
Neither the company nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions.
Original article sourced from Nationwide
Copyright © 2023 Mary Huang - All Rights Reserved.
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