Do You Have an IRA? 401K?

IRA stands for Individual Retirement Account, and 401k refers to a section of the Internal Revenue Service (IRS) that created such a plan. The main reason people have an IRA is to accumulate a retirement income, its main attraction is that you can put money into it “tax-free” and it grows “tax-free”. The 401k is similar, however the employer might contribute a percentage of your salary into it. Today this percentage is dwindling down significantly and from my experience with other clients it has come down to about 3% if any at all.

The IRA and 401k retirement plans were created by…the IRS. Hum…. That’s food for thought. Isn’t the IRS’s job to collect revenue? Why would they then allow people to have money “tax-free”? The “put money in tax-free” and “let it grow tax-free” messages blind us as to what is really going to happen.

The IRS’s mission is to maximize tax revenue, so how can they do that if you are allowed to put money for your retirement “tax-free”?

Very simple, let’s take the following example: (this works for both the IRA and 401k) Say you are making $7,000 per month or $1,750 per week, which is $84,000 per year, gross. This example works if you make a lot more or if you make a lot less. Now, out of the $84,000 per year you are earning, you can contribute up to $4,000 per year to your IRA or 401k–that’s the maximum allowed for 2006. Therefore your taxable income decreases to $80,000 –remember the contributions are tax-free, you are not taxed on them. This sounds good!

You are a patient, persistent and disciplined individual and managed to keep this up for 20 years! So, $4,000 x 20 = $80,000 that you saved. However, since you invested your savings over these years and because you were getting a conservative rate of return of say 8%, these $80,000 ballooned into $197,691 due to the magic of annually compounded interest –one of the World’s marvels, according to Albert Einstein. 8% over 20 years would be pretty good, 80% of mutual funds are unable to produce this type of return.

After 20 years, what do you think is going to happen to tax rates? Are they going to decrease? Remain the same? Or increase? The government is very bad at managing money. Right now president Bush has passed legislation to cut taxes and at the same time done nothing to stop legislation that increases spending. No matter who replaces him they will have to increase taxes UNLESS the government decides to spend less…however this has never happened in the last 200 years.

Even if by some mysterious force taxes remained the same, inflation is going to push you up anyhow, regardless of whether taxes go up or down or remain the same. Tax brackets are calculated using dollar amounts, i.e. from 0 to $7,300 you pay 10%, from $7,300 to $29,700 you pay 15% and so on. Inflation for the last 20 years has been going at 4% per year, this means that 20 years from now, in our example, you will have to earn $184,054 per year just to have the same $84,000 per year you have today.

This means, that regardless of what your tax bracket is in present time, regardless of whether the government decreases or increases taxes or does nothing, you are guaranteed to be in a higher tax bracket than you are today! If nothing else, just because you will be earning more dollars! Even if these dollars buy you less than what they buy you today!

So, if we assume in our example that your tax bracket will be around 33% by the time you retire, we are not taking any kind of wild guess, rather, we are being optimistic in the extreme.

If you would have NOT put the money into your IRA/401k, you would have paid in taxes: $4,000 (you were putting this money away into the IRA/401k) x 0.25 (say you were at 25% tax bracket while in your earning years) = $1,000 per year, or $20,000 in 20 years. In other words, you would have paid $20,000 in taxes over 20 years. Another to look at this is that you saved $20,000 over 20 years.

Now, why do we save? So we can enjoy it at a later date, correct? Now, let’s pay attention at the moment that we have been waiting for, when we finally take our money out.

We have $197,691, saved up in our IRA or 401k. If we plan to use this money over the next 10 years, and assuming we are still getting our 8%, this means that we can only withdraw $29,500 per year before all the money is gone –that’s just 10 years!

At 33% tax bracket, $29,500 x 0.33 = $9,735 in taxes per year you will have to pay x 10 years = $97,350 you will pay in taxes, considering an extremely optimistic scenario! If taxes go up, as they will certainly do…. you will pay even more.

You saved $20,000 in taxes over 20 years, you paid $97,350 later, at a time that you REALLY needed the money. In other words, in our example $97,350 out of $197,691 disappeared in taxes. $97,350 out of $197,691 hum….isn’t this about 50%?

So, who’s retirement are you planning? yours? or the government’s?

Who designed these plans? the IRS. What’s its purpose? to maximize the collection of money. Are they doing that? you bet they are!


Remember what matters is what happens when you take the money out, that’s when you need it most! What matters is the result, the final result, not the advertised frills or the packaging. They simply divert our attention from what’s important.

Today more than ever this is VERY important. When social security was created back in the 1930s, the average life expectancy was less than 65 years of age.
That is why social security entitlement was established at 65, they figured that most people would be dead and therefore they could collect more taxation revenue this way.

Insurance companies have been in the business of determining life expectancy for over 100 years. To them this is a science since accurate life expectancy is vital for them to determine Life Insurance Premiums. They have determined that today, the average individual will live past his 90s. Even a significant percentage of people will go well into their 100s with some reaching 110. If you look at any Life Policy issued recently, it goes all the way to 110. This is not wishful thinking from the Insurance Carriers, but hard science.

Most people when they plan their retirement seldom think about living too long. Most people think they will never even get to 90. What would you do if you did? Do you want to run out of money by the time you are 85?

How much do you make a year? Say it is $70,000. Do you know how much money you need to accumulate to keep this level of earnings without having to work? I will give you a simple formula. Let’s assume that you are able to get 8% return on your investments, as I said, this is optimistic but realistic. What you have to do is divide $70,000 or whatever it is you make or would like to have per year in your Golden Years by 0.08. In this example: $70,000/0.08 = $875,000.

With $875,000 accumulated in your savings or retirement, providing you are able to obtain 8% per year, tax-free, you would be able to spend $70,000 per year for as long as you live. If you pay taxes, it would be a lot less than $70,000 -take at least 1/3 out.

You see what I mean? If you have just $100,000 or $200,000 or even $500,000 in your retirement account you are not going to make it. If your savings are sitting on a stock-mutual fund driven account you are liable at any time to incur a loss. Can you afford that? especially when you are not a “spring chicken” anymore?

So we have two problems:

1) We need a lot more money to retire than we thought.
2) Taxes will consume from 30% to 50% of what we do have accumulated.
3) Whatever is left will be eaten up by inflation (a.k.a rising cost of living)

What are the solutions?

A) Create big savings that will maintain our standard of living well into our 90s.
B) Protect them from taxation.
C) Preserve the Gains so we never incur losses and therefore diminish the risk.
D) Get a decent real return above inflation.

For many decades there has been a solution to this problem. However, this solution is not trumpeted by the media or widely advertised.

This solution allows you to invest your hard earned money into an account that is about two to three times safer than a bank, where your money grows tax free and, if you follow certain simple formalities, you can access your money tax-free too! There is more: you get an average annual return close to 8% (it varies year to year this is an average of the last 53 years) your principal is GUARANTEED NEVER TO GO DOWN and even in the worst case scenario you still get to make 2% to 3% minimum return.

We are not done yet. On top of all the above, if something happens to you, the company that has this account will pay whoever you choose all the money you had accumulated in the account, and very frequently a lot more than what you had! tax-free! without a will or going through probate!

We have already beaten to dust any IRA or 401k, but there is even more.
During the accumulation phase, unlike IRAs or 401k which have a lot of restrictions, in this account you can access your money, use it and then put it back if you so desired. If you don’t want to return it, that’s OK too! when you pass away whatever you took out is deducted from what your beneficiary receives!

Unlike IRAs or 401k:

You are not limited to how much you can put in, you can put in any amount, change it, skip payments, and put in more, etc…This is important when you are older. Limited at $4,000 or thereabouts per year will prevent you from accumulating any kind of decent retirement.

You can take it out anytime you want without penalties. You can put it back in or never repay it back. It’s like being your own bank.

You don’t have to wait until you are 59 ½. In fact you can start in your teens and retire at 40 a millionaire! Or you can set up one of these accounts for your kids so they will have money for college, for their wedding and/or for starting a new business or buying a new house –cash.

Your money grows tax-free. No need to file special returns.

Your principal is guaranteed not to go down. If people were loosing their shirts with stocks it would not impact you. Whatever earnings you have accumulated you get to keep them. Your money is NOT in stocks NOT in Mutual Funds either.

Your money is protected from creditors, they cannot attach it. If you run into financial difficulties these funds are protected from creditors. You have a safe cushion to fall back on and rebuild your life. You could have years of savings that will allow you to whether any sort of financial storm or devastation in your life.

Your beneficiary usually receives a lot more than what you had accumulated. If something happens to you, your wife, kids, loved ones or organization or charity is protected from not getting the income you supplied. They have time and resources to replace you without having to change their lifestyles or take major drastic decisions, such as selling your home, belongings or suffer needlessly.

If you have a business, this account can be configured to work with it. You can structure so business income goes into it and therefore it is protected from taxation.

If your goal is pay off your mortgage, by using an account like this, you can pay it off faster than by making extra principal payments to the bank.

If you are a wealthy individual, you can use this account to pay for all your Estate Taxes. In this manner, your heirs inherit your Estate free and clear from taxes and your lifetime achievement is not decimated by taxes.

If you are a high net worth individual and you are older than 70, you can sell your account for MORE than what you have in it and enjoy all the money now!

Did you know you could do all this with a Life Insurance Policy?

The right kind of Policy structured in the correct manner, and when you use it as directed, provides all the above benefits.

I wrote this article for informational purposes and to give you an insight into what is, in my opinion, one of the most powerful and most misunderstood financial tools, a Life Insurance Policy.

The media and the “everybody knows” type of knowledge suggests that we should invest our retirement funds in stocks and mutual funds, however, these are the most risky and in my opinion, under performing type of investments.

A Life Insurance Policy is not a get-rich-quick method of accumulating money. It is rather a safe and conservative depository for your hard earned cash. It is a good place to plan for the long term.

As a mortgage planning tool, it is amazingly powerful! As an Estate Planning Tool it has no equal.

I hope this article has given you a new insight into planning for the future. It is never too late to do something about it.

It doesn’t matter if you are old, young, rich or poor. If you want a life with less risk, more predictability and financial solvency it is never too late to do something about it.

There is no one set solution to every person. This is not a cookie-cutter approach. The Life Insurance tool can be adapted and modified to fit very specific circumstances.

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