After decades of hard work and careful saving, retirement years should be well-deserved golden years when you can kick your feet up, enjoy time with loved ones, pursue passions and otherwise live a vibrant life. However, as lovely as that concept may seem, retirement is not cheap. Health care alone costs the average retired American couple almost $300,000 a year.
Many individuals use resources such as IRAs and 401ks to prepare for the potential expenses that come with retirement, which are often unexpected. But did you know that if you own a permanent life insurance policy with cash value, you can use this as a way to supplement your retirement finances? Here's a closer look at life insurance retirement plans and how they can help you fund your retirement.
There are two basic types of life insurance policies: term insurance and permanent insurance. Permanent life insurance policies accrue a cash value over time as you pay your premiums. Permanent insurance typically comes in the form of universal and whole life policies.
If you own any kind of permanent life insurance policy with a cash value, you can use your policy's accumulated funds to supplement your retirement income. This practice is often referred to as a life insurance retirement plan, or LIRP.
Whole and universal policies are best used to preserve wealth you want to leave to beneficiaries. A whole or universal policy's cash value typically comes with a guaranteed interest rate to help you build savings in a cash component over time.
With each monthly premium payment you make, a specific percentage of your payment goes straight into this cash component, thus raising the cash value of the policy. Any excess money you pay over the premium amount also goes straight into the cash value.
Once you've accumulated a certain amount of funds, you can access these funds in the same way you would a bank account; you can make withdrawals and even take out a loan against them.
Here's an example of how you can use your permanent life insurance policy's accumulated cash value to supplement your retirement income.
Imagine you enroll in a permanent life policy at the age of 35. To maintain your policy, you pay $25,000 a year in annual premiums. By the time you turn 36, your policy has accumulated $19,000 in total net cash value.
Following this pattern, in five year's time (by the age of 40) you've paid out a total of $150,000 in premium payments and accumulated a total cash value of $153,000 with a little help from interest gains.
Fast forward to age 65 — at this point, you are no longer required to make premium payments on your policy. Additionally, you no longer have the option to continue adding funds to the cash value going forward. For the past thirty years, you've paid a consistent $25,000 a year in premiums; by now, you've paid a grand total of $750,000 and accrued a net value of $1.6 million.
Note that this is a general and hypothetical example. Actual interest rates and investment performance varies, and you should always work with qualified wealth management and retirement investment professionals when creating a financial plan for the future.
Once a policy has fully matured, you are at liberty to withdraw funds from your accumulated cash value to further support your retirement income. Perhaps, by extension, the next logical question must be: what's the most prudent financial strategy to ensure your policy's cash value can supplement your annual budget throughout the entirety of your retirement? This is where the 4% rule comes in.
The 4% rule is a practical rule of thumb that's been backed by retirement professionals for years. The purpose of the rule is to maintain a steady stream of income that's sustainable throughout the course of your retirement. As the name implies, the rule suggests that retirees should withdraw no more than 4% of their life insurance policy's cumulative cash value each year.
Use this rule in reference to the example above: you've paid a total of $750,000 in premiums over the course of thirty years, resulting in $1.6 million in retirement savings. If you are to abide by the 4% rule, you'll withdraw no more than $64,000 a year from your policy's cash component. If you follow this rule faithfully, your policy's cash value can support you for up to 25 years of retirement.
Being financially prepared for retirement is more important now than ever before. Thankfully, you don't have to rely purely upon investment returns to ensure your retirement income is steady and reliable for many years to come. Becoming a resident in a community like Bethesda Gardens in Loveland can help make your living expenses in retirement far more manageable.