If you're like most people, you're looking forward to a long retirement. But what if that retirement is longer than you thought? Turns out, more Americans are worried about outliving their assets than they are about dying.
How can you stretch your resources to make sure you have a comfortable retirement plus pass on what's left to the next generation? Here's the solution I recommend to many of my clients: life insurance plus an annuity.
Annuities: Do It for You
You'll never outlive your assets with an annuity. Never is a strong word, but in this case, it applies. Annuities work particularly well for clients in their 50s and 60s because they usually have assets ready to cash out: a 401(k), a pension, or a CD. Pulling your money out of an asset like this and putting it into an annuity ensures you won't outlive your retirement account, and you'll even be able to leave something behind for your kids, 100% tax free. Here's how it works:
- Buy an annuity with a lump sum. Any of the assets listed above can fund your annuity right away. That means you can start taking monthly distributions immediately. Or, if you're not quite ready to retire, that money can earn interest until you are ready. Either way, the annuity provider issues you a check every month for the rest of your life. It doesn't matter how long you live—the checks keep coming.
- Use part of your annuity's proceeds to buy a life insurance policy. The reason I suggest this is because passing on an annuity to your children is going to result in a big tax burden for them. Let's say your annuity has $300,000 in it when you pass away. If you leave this to the kids, this influx of cash could push them into the 45% tax bracket. They'll lose almost half of what you want to give them. Life insurance can keep that from happening.
Life Insurance: Do It for Your Kids
If you don't already have life insurance, time is of the essence. Age and health affect the policy's price, so you want to buy as early as possible. If you already have life insurance, I can help you evaluate your policy to make sure it's still right for you. For example, lots of folks in their 60s convert term policies that are about to expire into permanent policies to keep from having to buy a new policy, take another medical exam, and pay higher rates.
Life insurance offers three key benefits in your estate plan:
- It can help divide an estate evenly between your kids. Let's say you're not planning on having a lot of cash left over, but you will leave a home and a business. How do you divide that estate between three or more kids? Life insurance makes it easy. If you have physical assets that you want to leave to one child, leave a comparable life insurance death benefit to the other. This is called estate equalization.
- The life insurance death benefit doesn't get held up by probate. It can take six months or longer for a will to go through probate. Suppose one of your kids isn't financially secure. Can they wait six months for the inheritance you left for them? What if they need that money now? With life insurance, they'll get that money right away. All you have to do is be sure your beneficiary list is up-to-date, and your life insurance carrier does the rest.
- The life insurance death benefit replaces cash your kids have to pay in tax. If you leave cash to your kids, they'll have to pay income tax on it. If your estate is valued at more than about $5.45 million in 2016 (this number goes up every year), your kids will have to pay a 40% estate tax in order to inherit it. This can add up to a lot of out-of-pocket spending. It's common for kids to have to sell assets to round up the cash needed to pay the estate tax. That's not what you want for your family. Life insurance can provide the cash needed to handle any necessary estate tax. Plus, if you leave life insurance instead of cash, your kids won't pay any income tax on the death benefit. It's theirs free and clear.