We hear a lot about asset allocation - and rightly so.  However, have your clients considered income allocation?  The number one tool today for accumulating retirement income is the 401k plan.  These plans provide some significant benefits for the participants; pre-tax contributions, tax-deferred accumulation, and in many cases, an employer match.  However, when distributions begin, they are 100% taxable as ordinary income and there’s a very real possibility that many years down the road, your clients will be in a substantially higher tax bracket.

So, the question is, “Would you rather pay taxes on the seed or the harvest?”

There may be a better way.  Let’s take a look at Sam.  He’s 40 years old and he’s maxing out his 401k contributions at $18,000/year.  Assuming he can earn an average of 8% for the next 25 years, he should accumulate about $1,436,000 by age 65.  If he retires at that point and begins taking a 4% withdrawal, he’d be pulling about $57,441/year in retirement income.  If we aim low and assume his tax bracket at 25%, his net spendable income would be $43,081.

So, we asked Sam, “If I could show you a way to significantly increase your net retirement income – without changing your budget – would you be interested?”

We showed Sam a tool to diversify his retirement income which provided an after-tax cash flow of $71,685.  That’s a 66% increase without spending a dollar more!  Here’s how we did it…

We re-allocated 50% of his current 401k contribution into an indexed universal life (IUL) contract taking advantage of section 7702 of the U.S. tax code. Yes, life insurance!  In this case the Balanced Growth Advantage (BGA) from Minnesota Life and Annexus.  The $750/month ($9,000 annually) accumulated enough cash value so that at age 65 he could withdraw $50,144 tax-free for 30 years!  This is in itself a significant increase over what he had already planned to do – but there’s more.  The other 50% of his 401k contribution continues into his plan.  At 8% that would have grown to about $718,000 which could generate about $28,721 in annual income or $21,541 after tax.

Finally, since this program is funded by life insurance, it provides a significant amount of additional death benefit to the family in the event of Sam’s premature death.  In summary:

If you were Sam, which column would you choose?

As an advisor, you:

  1. Increased Sam’s after-tax retirement income by 66%.
  2. Added an additional $230,000 in death benefit to the family.
  3. All by re-allocating dollars he was already spending!
  4. And, by the way, generated almost $3,000 in commission for yourself!

A couple parting thoughts…

  • If Sam already has life insurance, he may no longer need that policy.  Its premium and corresponding cash value (if any) could be rolled into this plan and create significantly greater value.
  • If Sam has no other life insurance but needs more than the minimum generated here, you can dial up the death benefit in the early years (at the expense of some accumulation) but still provide a significant change in circumstances (Plus earn about $6,000 in commissions).