Investing for Doctors

Our official federal debt is approximately 30 trillion dollars, which is a phenomenally large number. The worst part is that when you add "off the books" liabilities, which is to say you include all of the money our government has promised to pay, the number rises to an astronomical 123 trillion dollars.

This is money that will have to be repaid and the way the government will raise the money is by dramatically raising tax rates. As tax rates rise your retirement lifestyle is much more likely to be affected as you are forced to draw down your savings. It is incumbent on you to have as much of your retirement income come from tax-free sources.

We can help you maximize your tax-free post-retirement income such that you won't have to worry about rising income tax rates. Basically, you have three buckets of money. 1)Taxable, things like money market accounts, investment accounts, CD's, and any other taxable investments. 2) Tax-deferred accounts. Things like IRA's, 401-ks, 403bs, and other accounts that are taxed when the funds are distributed. 3) Tax-free accounts. This includes Roth IRAs, permanent life insurance, and income-producing real estate. The basic idea is that you want as much of your income in retirement to come from your tax-free buckets.

So, the foundation of your retirement plan should be your Roth IRA and your Indexed Universal Life policy. Our primary focus is on guaranteed accounts like indexed annuities and indexed universal life. Ideally, you would use indexed annuities in your Roth IRA and you would use an Indexed Universal Life insurance policy as a kind of private, tax-free retirement program. The benefit of Indexed Annuities and Indexed Universal Life is that while they both allow you to potentially earn double digit returns they allow you to do so while having zero downside risk.

While there are some trade offs, on balance Indexed Annuities and Indexed Universal Life policies have a place in most investor's portfolios. Permanent life insurance is the only thing in the tax code that allows you to grow your money tax-free and withdraw it tax-free in the form of policy loans. The combination of Roth Ira's and an Indexed Universal Life policy is the ideal combination to achieve a zero income tax retirement.

The first step in planning your retirement is to determing your income needs. You need to calculate how much money you will need after taxes to maintain the lifestyle you desire.

After establishing your income requirements, we'll then evaluate your expected social security income, income from your tax-deferred accounts and income from your tax-free accounts.The idea is to structure your income so that you are not getting more in taxable income than your standard deduction to avoid having 85% of your social security income being subject to income taxes at your highest tax bracket. Our fundamental approach is to help you get to where you are in a zero percent tax bracket so as to insulate you from the inevitable income tax increases that we know are coming down the pike.The basic strategy is to have the bulk of your post-retirement income come from tax-free Roth IRA distributions and tax-free withdrawals from your permanent life insurance policy. The idea is to keep the amount of money in your tax-deferred accounts small enough that your Required Minimum Distribution (RMD) does not exceed the amount you are allowed to earn before your social security income is taxed.

One of the primary benefits of an Indexed Universal Life insurance policy (IUL) is that in addition to paying a death benefit to your heirs in the event you should die, it also will provide you with living benefits in the event you should get a critical, chronic or terminal illness.

While the specifics will vary according to the policy, here is how the terms are defined by a carrier that I recommend:

Critical illness
This benefit allows the acceleration of up to 100% of the policy’s death benefit, not to exceed $1,000,000 if the insured suffers from a covered critical illness. It covers a heart attack, stroke, major organ transplant, paralysis, diagnosis of ALS (Amyotrophic Lateral Sclerosis), arterial aneurysms, central nervous system tumors, significant burns, an end-stage renal failure diagnosis and invasive cancer.

Terminal illness
If a physician diagnoses the insured with a terminal illness that results in a life expectancy of less than 24 months, this rider allows the acceleration of up to 100% of the policy’s death benefit, not to exceed $1,000,000.

Chronic illness
May accelerate up to 25% of the policy’s death benefit if the primary insured is certified by a licensed health care practitioner in the previous 12 months as having a qualifying chronic illness. A qualifying chronic illness is defined as being unable to perform two out of the six activities of daily living (ADLs) or requiring supervision because of severe cognitive impairment. This rider does not terminate after the initial acceleration. Subsequent annual accelerations are available, upon continued qualification, until your client accelerates either 100% of the death benefit or the lifetime maximum of $1,000,000. The accelerated amount is paid prior to death, so the amount paid will be less than the amount accelerated. The policy death benefit will be reduced by the amount accelerated.

I recently had a prospective client ask me if the living benefits covered Alzheimer’s disease or dementia. Yes, the policy would cover this under the Chronic illness coverage once you would be unable to perform two of the six activities of daily living (ADL).

And what exactly are the ADLs being referred to? Here they are:

Basic ADLs, sometimes referred to as BADLs, are self-care activities routinely performed which include, but are not limited to:

• Functional mobility, which includes the ability to walk and transfer in and out of a chair or bed. Essentially, it’s the ability to move from one place to another as a person goes through their daily routines.

• Personal hygiene, oral care and grooming, including skin and hair care

• Showering and/or bathing

• Toileting, which includes getting on/off toilet and cleaning oneself

• Dressing, which includes selecting appropriate attire and putting it on

• Self-feeding

Source: Activities of Daily Living (ADLs) – SeniorLiving.org

The living benefits offered by modern IULs are significant and can make buying an IUL an even better decision.

At age 72 you will be required to begin taking out money from your qualified retirement accounts, if you are not already doing so. Even if you are withdrawing money, at age 72 you will be required to take out a minimum amount based on your projected life expectancy. These distributions are known as your required minimum distributions (RMDs).

RMDs are taxed as personal income, so your RMD withdrawal could cause you to move into a higher tax bracket. Furthermore, more of your Social Security benefits could be taxed and you could lose out on certain deductions and credits tied to your modified adjusted gross income, and you might pay higher premiums for both Medicare parts B and D.

Distributions from your Roth IRA and tax-free loans from your permanent life insurance policy are not counted as income when calculating how much of your Social Security benefits are taxable which is why you want your post-retirement income from those sources.

At the end of the day, you want the bulk of your post-retirement income to come from your Roth IRAs (or other Roth accounts) and your permanent life insurance policy. These are the only two sources of income (other than real estate income sheltered by depreciation) that are not counted toward your provisional income limit, which is the calculation the IRS uses to calculate how much of your social security income is subject to income taxes.

We can help you calculate how much more you can grow your account and how much you can save in taxes by converting your IRAs, 401(K)s and other tax deferred accounts to Roth IRAs. We can also illustrated the additional benefits of adding an Indexed Universal Life insurance policy to your estate.