Juice Up Your Pension Plan with Life Insurance

One of the best strategies I would use with clients that had pension plans was to have them supplement it with life insurance. There is a very good reason for this for the people that are looking to retire, and are married. Many times when someone retires and wants to start collecting on their pension plans they worked so hard for all their lives they take a reduced benefit so that if they die they will be able to leave their spouse a benefit as well. This is a nice thought, but isn’t there a better way to utilize a pension plan and have more money while you are alive? Yes. Yes there is.

Let’s consider a typical situation of the day when you start collecting on your pension. You may elect to take the reduced benefit of say 70% so that your spouse can continue to collect 40-50% of your pension if you die before they do. Most people elect to get their distributions in this way. For some it is the correct solution, but for many they could just take a 100% distribution for themselves and supplement it with a life insurance policy.

Let’s use some remedial math to look at a situation which would make the most sense for someone collecting on a pension, and qualifies for life insurance coverage. Hypothetically, if you were to take a 100% distribution on your pension you are going to get $1000 a month. So that means if you took only a 70% distribution you would get only $700 a month, but your spouse would get $500 a month after you died until they dies. What if life insurance only cost you $100 a month to cover the need for your spouse after you died? Wouldn’t it make more sense to collect $1000 a month and pay the $100 for insurance every month than it would be to just collect $700 a month? Of course it would! You would still have $900 a month while you were alive instead of $700. Your spouse would also get a big lump sum payment after you died from the life insurance policy instead of the piddly 50% benefit ever month from your pension.

Any financial advisor worth his salt should think of using this strategy for a client that has a pension plan when they will retire. More importantly, you need to think about this a bit before you retire. There is a big difference in the monthly cost of life insurance as you get older. As some insurance agents like to say: “One year older, and closer to death.”. This just means that the risk of you dying to an insurance company is greater the older you are so the cost of the insurance is more. If you get yourself insured younger the premiums will be much lower and you may avoid the unfortunate possibility that you could become uninsurable as you age due to disease, or any other ailment that disqualifies you from coverage.

As always, planning for your retirement starts as early as possible, but when it comes to life insurance as a retirement supplement this couldn’t be more true. If you have a pension plan for when you retire ask your financial advisor about this strategy. I guarantee they will love it since it not only helps you tremendously if all the numbers fall into place, but they make a good sum of money selling life insurance to you so it is a win-win for everyone.

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Small Business Retirement Plans

Having a small business and wanting to offer some sort of employee incentive to keep them is always something to consider. Many small business owners are looking to add a retirement plan to their benefits package, but which one? There are several options, and it isn’t always easy to decide which small business retirement plan will work best for your particular business. Many of the financial advisors that try to sell these retirement plans to business owners aren’t really on the level as to which plan is best for YOU, but more into what will make them the most money. Often times they don’t even know what other plans are out there!

In this article I want to give you a bit of an early look on what small business retirement plans are out there and help give you a bit of knowledge on the subject before you just go with whatever plan is presented to you. I will go in depth on each plan in further posts, and will link each of them here so you will have easy access. Here I just want to point out the basic plan parameters since each plan has much more information than this post can hold.

As a business owner myself, I know that there are plenty of other business owners that don’t want to appear as if they are clueless about anything. Don’t be that guy. Ask questions, do some research, and don’t pretend to know about things that are outside of your knowledge base.

Small Business Retirement Plans Quick List

Simplified Employee Pension Plan (SEP IRA)

Elligibility: Any business.

Contribution Limits: 25% of compensation (if you’re an employee of your own corporation) up to $45,000; 20% of self-employment income (if self-employed) up to $45,000. Employees cannot contribute. But the employer must contribute to eligible employee accounts the same salary percentage they contribute to their own.

Vesting: Immediate.

Pros: Contributions do not have to be made every year. Very easy and cheap to set up and administer. Immediate vesting for the employee.

Cons: Must cover all qualifying employees. Employees cannot contribute. Vesting is immediate.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

Elligibility: Employers with 100 employees or less who do not maintain any other retirement plan. All employees who have ever earned more than $5,000 in any two years prior and who will earn at least $5,000 this year.

Contribution Limits: 3% employer match (in certain situations, the match can be 1% to 2%) or 2% non-elective contribution for all employees up to $4,500 per employee. Employees can contribute up to $10,500 plus employer match up to 3%. (Employer can contribute $10,000 plus match to their own account.) Additional $2,500 if you are age 50 or older as of 12/31/07.

Vesting: Immediate.

Pros: If you have lower salary (or self-employment income), you can make larger contributions than under other types of plans. Employees can contribute.

Cons: Employer most likely cannot contribute as much as she can to a SEP IRA. Match is mandatory. Vesting is immediate. Unless the employee has a high income that would allow them to contribute more in another type of plan, they have no real cons in this type of plan.

Profit Sharing Plans

Elligibility: Any business. Employees who worked at least 1,000 hours in past year; two years, if no vesting period.

Contribution Limits: 25% of salary (20% of self-employment income) up to $45,000. No employee contributions.

Vesting: Determined by business owner.

Pros: Contributions can vary from year to year.

Cons: Administration fees may be expensive. Plan typically will need to be managed by a pro. No employee contributions.


Elligibility: Any business. Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.

Contribution Limits: Combined employer and employee’s contribution cannot exceed $45,000 ($50,000 if you are 50 or older). Employee contributions of $15,500 ($20,500 if you will be age 50 or older as of 12/31/07.)

Vesting: Determined by business owner.

Pros: Employee/employer contributions. Employers are not required to match contributions. Employees will be able to contribute, and will typically have some say as to what they will be invested in.

Cons: This plan can be quite expensive for smaller businesses due to administration fees. Employees may have a vesting period for the employee contributions.

Defined Benefit Plan

Elligibility: Any business owner or self-employed individual can create this plan. Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.

Contribution Limits: No set limit. Contributions are based on actuarial assumption. Maximum annual retirement benefit is $180,000 or 100% of the participant’s average compensation for his highest three consecutive earning years.

Vesting: Determined by the business owner.

Pros: Older employers looking to put away a lot of money over short time period can do so. This can be a major benefit if you have reinvested all your profits back into the business to build it. When you have put yourself in a position to have extra money to save for yourself this plan can help you save a very large amount of money in a short time. Employees will be guaranteed a set payout upon retirement.

Cons: Not much flexibility. The plan could be very expensive as well depending on how it is set up. No employee control over investment options. No employee contributions. Vesting takes years in most plans.

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Stretch IRA

What is a Stretch IRA?

A Stretch IRA is a way to take an IRA and stretch the deferred earnings over the course of many years. Many times it is used to “stretch” that term over the course of generations. When the original owner of an IRA dies, and they have established a stretch IRA, the beneficiaries are allowed to keep that money in the IRA instead of having to take a lump sum right away and pay all the taxes up front. The beneficiaries will have to take required distributions that are defined by the plan so beneficiaries of such a plan should be informed prior to receiving the IRA from an estate so they can be prepared.

Do you need a Stretch IRA?

Before you decide to get a Stretch IRA you need to take into account your goals and decide if it is the right option for you. Most people that would use this type of IRA are those that are going to have more money than they can spend while they are alive. If there are no plans in place, the beneficiary would have a major tax payment due when they inherit a traditional IRA in the year they receive it. They would get a lump sum payment and is would be part of their income! A Stretch IRA allows your beneficiaries to spread that tax burden over a course of years so that the tax hit is minimized. This also allows the money to keep accumulating tax free while it is still in the plan. As always, you will want to discuss the situation with your financial adviser so that you have looked into all the possible options for your personal situation.

Setting up a Stretch IRA

1. Review your personal situation. You must make sure that you have all your bases covered before committing to such a plan. Make sure that your insurance for a long-term health stay is in place, any possible medical expenses would be taken care of, and that any emergency is looked at and reviewed just in case.

2. You must first look at your beneficiaries and what their needs may be. It may actually be more beneficial to them that you give them the lump sum payment as you want to help them pay off a large debt that they wouldn’t be able to do if they were forced to stretch that payment over a number of years. Though it may make sense to lower the current tax burden for your beneficiaries, it may not be in their best interest to do so due to them having a need for the money right away. Many of those that want to leave money after their death do not discuss their intentions with the beneficiaries. In some cases this may be important as you don’t want them to know, don’t want to deal with family squabbles while alive, or it just isn’t all that important. If your beneficiaries are more level-headed and you want them to get the best benefit possible, it should be a priority to discuss your intentions with them while you are still alive.

3. Talk to your financial advisor. Your advisor will need to put together the appropriate documents should the two of you decide this is your best option. Your advisor just may be able to recommend a better solution as well, or at the very least be able to set this up the best way possible. If you have several beneficiaries you may need to set up more than one account for them so that you can mark what percentage each is entitled to.

Possible Negatives for a Stretch IRA

1. If you think you may actually need this money during your life there is no benefit to a Stretch IRA. As I mentioned int he last section, it is very important to review your own situation before committing to any such plan.

2. Tax law changes. It is important to understand that tax laws change over the course of our lives. Although most situations are correctable when a law changes this is something to consider.

3. This point is so important that I will mention it again. If you think there is going to be any need during your life-time for this money then you do not want a Stretch IRA.

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