Whatever
your age, it is never too soon to look
ahead
and begin giving thought to your retirement.
When
the time finally comes, if you've done the proper
planning,
the transition will be smooth and you will
feel
comfortable and secure about it.
Today,
more than ever, as the society we live in
becomes
more demanding, planning for retirement is a
necessity. You must plan ahead by setting goals and
deciding
how they will be met. Retirement
planning
also
means getting ready for a lifestyle change as well
as
a changing financial picture.
You
may be faced with some hard choices. If
it
has
been difficult to accumulate the essential funds
necessary
to enjoy a truly "worry-free" retirement, you
may
find yourself choosing between dining out more
frequently
or preparing more meals at home. You may
find
yourself having to choose whether to put your
spouse,
the man or woman with whom you've spent the
last
50 years, into a no-frills nursing home or a
nursing
home with big bay windows, a view of the ocean
and
a private sitter. Many retirees find
themselves
balancing
between having a sufficient life style and
lacking
some of the comforts that make life easier.
In
addition,
you may find yourself considering just how
much
or how little you want to leave to your children.
These
difficult decisions can be made easier, with
proper
planning, savings, and investing done ahead of time.
Investing
for a future lifestyle
Although
pre-retirement and post-retirement
investment
portfolios should each have both income and
accumulation
aspects, your pre-retirement portfolio
should
be more heavily weighted toward accumulation for
later
use. A post-retirement portfolio should
show a
greater
allocation of investment resources toward
income-producing
vehicles, with a portion allocated for
accumulation,
in order to be able to create a greater
income
in the future; inflation will erode some of the
purchasing
power of current income-producing
investments.
You
can use different investment management
techniques
as you create your own portfolio and
consider
the different investment alternatives
available
to you.
Tailor
make your investment portfolio
Diversification,
or spreading your investible
assets
among a group of different investments, is
insurance
against a severe crisis every few years and
avoidance
of the old "feast or famine" characteristic
of
investment markets. Diversification is
used to
create
a margin of safety in the portfolio by spreading
you
investible assets among various groups, including
mutual
funds, variable annuities, life insurance and
fixed-return
savings accounts, such as money market
funds. Today the majority of all retirement assets
are
contributed
to tax-deferred retirement plans through
employers
or through individual retirement accounts.
The
fact that Uncle Sam allows contributions to be
made
on a tax-deductible basis, as well as allowing
tax-free
accumulation, is the ideal stimulus for
increasing
the amounts which go into the above
retirement
choices.
At
the top of most lists are mutual funds.
Choosing
a family of funds is the wisest approach.
Under
this arrangement you will be able to take the
amount
allocated for mutual funds and break it down
further
by positioning a specific percentage to either
income
funds, growth funds, or a mixture of both.
In
addition,
these same families of funds can provide
municipal
bond funds, which distribute tax-free income
when
you want it most -- at retirement.
While
mutual funds represent the largest source of
retirement
funds, in order to maintain a diversified
portfolio,
you must include annuities, fixed or
variable,
as well as life insurance. The latter
will
also
establish a basis for a sound estate plan.
If
you are financially independent at retirement,
it
can become a time of new opportunities, a time to
try
a second career, to develop a new lifestyle or to
pursue
new dreams and goals. Instead of a
period of
boredom
and disenchantment, retirement can be your most
stimulating,
fulfilling time ever -- your true golden
years.
You
can retire rich
What
is the idyllic way to spend your retirement
years? Travel to all the exotic places you never had
time
to before? A beach home where the sun
always
shines? A cozy mountain retreat? However you picture
it
for yourself, it's going to be a lot harder to
achieve
than it was for your parents' generation.
With
Social Security cuts and rising health care
costs
clouding the future, most Americans are worried
about
funding their retirement. But sticking
to a few
simple
strategies, you should be able to retire
comfortably,
or with a little luck, lavishly.
Your
company's retirement plans may be more than
enough
to feather your nest, especially if your firm
offers
a 401(k) plan. These plans allow you to
deduct
up
to nearly $9,000 annually from your pre-tax income
and
place it in a managed investment fund.
Often,
matching
funds are pitched in by your employer.
Put
away
the maximum amount, and you could find yourself
with
$500,000 in savings after 25 years.
If
you're successfully self-employed, you can set
aside
an even higher percentage of your income as
savings. Keogh plans and SEPs (simplified employee
pensions)
allow you to save up to 13 percent of your
income
tax-free, and you can salt away up to 20 percent
of
your income in a Keogh (to a maximum of $30,000) if
you
agree to put away the same percentage of your
income
each year. Most such plans offer
productive
interest
yields.
A
growing number of two-income families are
tightening
their belts for the future by undertaking to
save
or invest one spouse's entire earnings.
Doing so
may
require you to forego some luxuries in the present,
but
prudent investment of the "extra" income in savings
plans,
mutual funds, and insurance can pay off big in
your
golden years.
The
road to retirement comfort can also be paved
with
real-estate investment. Some families
have put
their
savings into the purchase of one or two multi-
family
rental units. Once your units are paid
for, you
can
turn profit on them through rental revenues and tax
breaks
for homeowners. You can then plow the
profits
back
into savings and investment, giving yourself more
padding
for a plush future.
IRAs
are still one of the best wealth-builders around
Nobody
likes to pay taxes, and nearly everybody is
concerned
about retirement. Yet many investors
neglect
or
underutilize one of the best ways to escape the
taxman's
clutches -- the individual retirement account.
IRAs
have declined in popularity since Congress
disallowed
tax deductions on IRA contributions for most
individuals
with employer-sponsored pension plans.
But
the
biggest advantage of an IRA, the ability to shield
investment
earnings from income taxes, remains intact.
To
utilize IRAs fully, you must know both how to
exploit
their tax advantages and what investments to
put
in an IRA. In many respects these
objectives are
interrelated. IRAs should be viewed as part of your
overall
portfolio. If income stocks, bonds, or
income
funds
have a place in your portfolio, place those
securities
in an IRA. That way, dividends and
interest
payments,
normally taxed each year, can compound tax
free.
All
else equal, your lowest-yielding stocks should
be
held outside an IRA. Taxes on capital
gains are
deferred
until a stock is sold, so an IRA's tax shield
is
not as valuable. In fact, by putting a
capital-
gains
vehicle in an IRA, you forever lose the ability
to
pay lower capital gains taxes on the gains.
All
gains
are taxed at ordinary rates upon withdrawal from
an
IRA.
If
you plan to sell a stock after a couple of
years,
however, holding it in an IRA may be worthwhile.
But
losses on assets held within an IRA are not tax
deductible,
so highly speculative investments should be
kept
outside your IRA. Whatever you do, don't
put
variable
annuities, municipal bonds, or other tax-
advantaged
vehicles in an IRA. Municipal bonds pay
lower
yields because the interest they pay is tax-
exempt,
but that interest will be taxable when
withdrawn
from an IRA.
Seeking
the Ideal Retirement Investment
There
are many possible investments available
today
which can be accumulated for one's "retirement
nest
egg." Some examples include:
Certificates
of Deposit Mutual Funds
Stocks
and Bonds Municipal Bonds
Deferred
Annuities Real Estate
.
. . plus many others, including Qualified
Retirement
Plans.
However,
the complexity of today's tax laws and
government
regulations which pertain to Qualified
Retirement
Plans has prompted many people to seek
alternative
ways to provide for their retirement years.
DESIRABLE
FEATURES IN A RETIREMENT INVESTMENT
1.
No legal, accounting, or actuarial costs.
2.
No annual administration costs.
3.
No complex rules regarding discrimination.
4.
A provision for automatic withdrawal of money
from
one's checking account or paycheck.
5.
A conservative investment policy.
6.
A death benefit which is income tax free.
7.
Contribution of pre-taxed dollars.
8.
Tax-free accumulation of funds.
9.
Withdrawal of funds without penalties or
taxation.
The
Accumulation Process
There
are three basic phases to accumulating one's
"retirement
nest egg." Those phases are:
1.
The Contribution Period
2.
The Accumulation Period, and
3.
The Withdrawal Period
PERIODIC
CONTRIBUTIONS
³ ³
³
³
$ ³
³ $ ÉÍÍÍÍÍÍÍÍÍÍÍÍ»
³ ³$
³ ÉÍͼ ÈÍÍ»
$ $
³ v ÉÍͼ
ÚÄÄÄÄÄÄÄÄÄÄÄÄ¿ ÈÍÍ»
³ ³
$ ÉÍͼ ³
YOUR ³ ÈÍÍ»
³ v
ÉÍͼ ³ RETIREMENT ³ ÈÍÍ»
³
$ ÉÍͼ ³
NEST EGG ³ ÈÍÍ»
v ÉÍͼ
$ ÀÄÄÄÄÄÄÄÄÄÄÄÄÙ $
ÈÍÍ»
ÉÍͼ $ $ ÈÍÍ»
ÉÍͼ $ $ ÈíÍ»
º
º
ÉÍͼ ACCUMULATION YEARS ÈÍÍ»
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍËÍÍÍÍËÍÍÍÍËÍÍÍÍÍÍÍËÍÍÍËÍÍÍËÍÍÍËÍÍÍÍÍÍÍͼ
TODAY º º
º º$ º
º º DEATH
³
$ ³ $
³ ³ $ ³ ³ ³
³ $ ³ $
³ ³ ³$
³ ³
v v
v ³ ³ $ ³
³
CHILDREN'S
NEEDS ³ ³
³$ ³
-
College ³ ³ ³
$ ³
-
Weddings v v
v v
etc. RETIREMENT
WITHDRAWALS
WILL
THERE BE ENOUGH IN YOUR RETIREMENT NEST EGG?
Taxation
While Accumulating The Nest Egg
In
comparing various types of investments, one
must
consider the question of income taxes.
Most
investments
are taxed during one or more of the three
phases
of building the retirement nest egg.
ÉÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍ»
º
1. TAXATION DURING THE º
º CONTRIBUTION PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º Are Contributions made with: º
º º
º 1. Pre-tax dollars, or º
º º
º 2. After-tax dollars º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍͼ
ÉÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍ»
º
2. TAXATION DURING THE º
º ACCUMULATION PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º Are Earnings Taxed: º
º º
º 1. As Income is Earned, º
º º
º 2. As Assets are Sold, or º
º º
º 3. Not Taxed During º
º Accumulation Period º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍͼ
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º
3. TAXATION DURING THE º
º WITHDRAWAL PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º When Withdrawn, Are Funds: º
º º
º 1. Fully Taxable, º
º º
º 2. Partially Taxable, or º
º º
º 3. Not Taxable º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍͼ
Proper
tax deferral or avoidance will result in a
larger
retirement benefit.
Potential
Problems When Comparing Investments
There
are four basic methods of taxing an
investment
as illustrated in the following chart:
ÉÍÍÍÍÍÍËÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍËÍÍÍÍÍÍÍÍÍÍÍÑÍÍÍÍÍÍÍÍÍÍÍÍÍÑÍÍÍÍÍÍÍÍÍÍÍÍ»
º º
EXAMPLE OF THIS º PRE-TAX
or³ TAXABLE ³ TAXABLE AT º
º
TAX º
METHOD OF º AFTER TAX ³ DURING
³ DISTRI- º
ºMETHODº TAXATION º
DEPOSITS ³ ACCUMULATION³
BUTION º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 1 º
CERT. OF DEPOSIT º AFTER TAX ³ YES
³ PARTIALLY º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 2 º
QUALIFIED PLAN º PRE-TAX
³ NO ³
FULLY º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 3 º
MUNICIPAL BONDS º AFTER TAX ³ NO
³ NO º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 4 º
DEFERRED ANNUITY º AFTER TAX ³ NO
³ PARTIALLY º
ÈÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍͼ
It
is somewhat difficult to compare investments
when
each of them is taxed by a different method.
For
example, additional pre-tax dollars would be
available
for investment in a qualified retirement plan
over
an after-tax investment like personally owned
stocks,
bonds, mutual funds, etc.
On
the other hand, the qualified retirement plan
generally
has a much higher annual maintenance fee to
cover
accounting and actuarial fees, the cost of
including
other employees and potential tax penalties
upon
distribution. Even the thought of further
government
involvement has its own "emotional costs"
for
many people.
Also,
more and more people today are considering
the
value of life insurance as a supplemental
retirement
plan. These plans generally take the
form
of
a cash value life insurance policy, where the
balance
of the premium (after certain charges and
expenses)
is credited to the account and interest is
allowed
to accumulate. (For details, refer to
the
complete
insurance company illustration.)
Comparing
only
the cash value account to the other investments
does
not take into consideration that a portion of each
deposit
pays for the death benefit as well, an
advantage
which is not found in the other planning
vehicles.
These
factors should all be taken into account in
reviewing
this comparison.
The
Value of Tax-free Compound Interest
Much
of the discussion of the growing value of a
retirement
fund or annuity investment depends upon the
tax
free compounding of the earnings.
Everyone
knows about the "miracle of compound
interest." It is such a cliche that almost everyone
ignores
the powerful, fundamental truth underlying the
concept. And few people understand how to make
compound
interest work for them.
Compounding
is a two-way street. Debts compound,
too. That is why so many "wealthy"
people are going
bankrupt,
for example. Back in the 1970s and
1980s,
the
fashion of the time was to buy real estate
leveraged
with debt, and roll over the debt, counting
on
an increase in the value of the property to pay off
the
debt and make a profit.
And
in much of the United States, real estate
values
did increase at a rate that enabled a lot of
people
to make a lot of money purely on debt financing.
They
would buy a property. And they would pay
for it
with
borrowed money, sometimes 90% or more of the total
value. (The banks played along with this game. They
made
money too as long as prices were rising.)
Instead
of paying off the loan, they would allow
the
principal and interest to build. At 10%
interest...after
a year the principal on a $100,000
loan
would grow to $110,000. In five years it
would be
a
monstrous $161,000, and so on.
The
trouble is, real estate values don't go in one
direction
only. They also go down, as is they are
now
in
many parts of the world. All that
built-up,
compounded
debt eventually has to be paid. And very
often,
real estate investors do not have the means to
actually
pay off the debt they contracted. They
never
expected
to have to do so.
The
secret of compound interest is to be on the
right
side of it. Debts compound and so do costs.
Being
on the right side of compounding means
positioning
investments so that time works for them,
rather
than against them. When investments are
positioned
properly, each passing day adds to their
value,
free from taxes and inflation.
More
than 2,000 years ago the philosopher
Aristotle
explained that the secret of success in
anything
was habit. Aristotle used the word
"ethos."
To
him it was the crucial ingredient of all genius.
And
it was nothing more than a recognition of the
concept
of compound interest applied to life itself.
Aristotle
recognized that people do not simply
wake
up one day with the idea for a great
invention...or
jump to the command of a great army...or
write
down a marvelous essay...or get rich.
All
progress is made by small increments
compounding
over time. A great thinker thinks hard
for
a
long time and, over time, comes up with great
thoughts.
A
great builder lays one brick at a time and, over
time,
builds great monuments.
A
great artist works day after day and, over time,
produces
great works of art.
So
too, a man builds his wealth a little each
day...and
over time...becomes very rich.
The
idea of building wealth over time has a kind
of
tedious ring to it, but it leaves out the entire
power
of compounding. With compounding, time
adds to
value. Instead of being tedious, the passage of time
in
the investment plan becomes an important ingredient
that
turns the capital into more.
Thus
the "miracle of compound interest."
It is
based
upon a powerful, fundamental truth, although too
few
people understand how to make compound interest
work
for them.
The
results are incredible. As we showed
earlier,
a
20% annual free of tax compounds to a sum 1200%
larger
over a lifetime than the same sum with tax.
It
is
the difference between $8 million and $100 million
over
40 years. And the same magic applies
when you
start
with smaller amounts.
But
we do want to stress that just because money
is
offshore does not automatically mean it is tax-free.
It
is important that a proper and legal structure be
used
to keep the money tax-free, either through
annuities,
trusts, or other structures that you choose
only
after proper accounting and legal advice.
$2,000
a year into a tax-free account investing in
stocks
that pay 10% dividends, means $35,062.31 after
10
years -- not including any capital gains.
YEAR TAX-FREE INCLUDING
TOTAL DIVIDENDS
1
starting capital
$2,000.00 $2,200.00
2
add US$2,000
$4,200.00 $4,620.00
3
each year
$6,620.00 $7,282.00
4 $9,282.00 $10,210.20
5 $12,210.20 $13,431.22
6 $15,431.22 $16,974.34
7 $18,974.34 $20,871.77
8 $22,871.77 $25,158.94
9 $27,158.94 $29,874.83
10 $31,874.83 $35,062.31
After
25 years, he'd have $216,363.29 -- just by putting
$2,000
a year into his IRA, with its $2,000 contribution limit.
An
annuity has no such limit.
11 $37,062.31 $40,768.54
12 $42,768.54 $47,045.39
13 $49,045.39 $53,949.92
14 $55,949.92 $61,544.91
15 $63,544.91 $69,899.40
16 $71,899.40 $79,089.34
17 $81,089.34 $89,198.27
18 $91,198.27 $100,318.09
19 $102,318.09 $112,549.89
20 $114,549.89 $126,004.87
21 $128,004.87 $140,805.35
22 $142,805.35 $157,085.88
23 $159,085.88 $174,994.46
24 $176,994.46 $194,693.90
25 $196,693.90 $216,363.29
Compounding
this kind of income from investments,
in
a tax-free annuity, is a guaranteed way to build
wealth. There weren't any extra risks, or any extra
effort. Once the wealth-building strategy was in
place,
it was just a matter of time. Most
investors
are
looking for extraordinary capital gains -- and most
fail
to realize how hard it is to achieve that.
Wealth-building
investors should seek investments
offering
decent dividends or interest, and let that
yield
compound. Think of it another way:
Amounts
at Compound Interest
Multiply
the Principal by the Factor in the Table
Years 1%
2% 3% 4%
5% 6% 7%
1 1.0100
1.0200 1.0300 1.0400
1.0500 1.0600 1.0700
2 1.0201
1.0404 1.0609 1.0816
1.1025 1.1236 1.1449
3 1.0303
1.0612 1.0927 1.1249
1.1576 1.1910 1.2250
4 1.0406
1.0824 1.1255 1.1699
1.2155 1.2625 1.3108
5 1.0510
1.1041 1.1593 1.2167
1.2763 1.3382 1.4026
6 1.0615
1.1262 1.1941 1.2653
1.3401 1.4185 1.5007
7 1.0721
1.1487 1.2299 1.3159
1.4071 1.5036 1.6058
8 1.0829
1.1717 1.2668 1.3686
1.4775 1.5938 1.7182
9 1.0937
1.1951 1.3048 1.4233
1.5513 1.6895 1.8385
10
1.1046 1.2190 1.3439
1.4802 1.6289 1.7908
1.9672
11
1.1157 1 2434 1.3842
1.5395 1.7103 1.8983
2.1049
12
1.1268 1 2682 1.4258
1.6010 1.7959 2.0122
2.2522
13
1.1381 1.2936 1.4685
1.6651 1.8856 2.1329
2.4098
14
1.1495 1.3195 1.5126
1.7317 1.9799 2.2609
2.5785
15
1.1610 1.3459 1.5580
1.8009 2.0789 2.3966
2.7590
16
1.1726 1.3728 1.6047
1.8730 2.1829 2.5404
2.9522
17
1.1843 1.4002 1.6528
1.9479 2.2920 2.6928
3.1588
19
1.2081 1.4568 1.7535
2.1068 2.5270 3.0256
3.6165
20
1.2202 1.4859 1.8061
2.1911 2.6533 3.2071
3.8697
21
1.2324 1.5157 1.8603
2.2788 2.7860 3.3996
4.1406
22
1.2447 1.5460 1.9161
2.3699 2.9253 3.6035
4.4304
23
1.2572 1.5769 1.9736
2.4647 3.0715 3.8197
4.7405
24
1.2697 1.6084 2.0328
2.5633 3.2251 4.0489
5.0724
25
1.2824 1.6406 2.0938
2.6658 3.3864 4.2919
5.4274
26
1.2953 1.6734 2.1566
2.7725 3.5557 4.5494
5.8074
27
1.3082 1.7069 2.2213
2.8834 3.7335 4.8223
6.2139
28
1.3213 1.7410 2.2213
2.9987 3.9201 5.1117
6.6488
29
1.3345 1.7758 2.3566
3.1187 4.1161 5.4184
7.1143
30
1.3476 1.8114 2.4773
3.7434 4.3219 5.7435
7.6123
Years 8%
9% 10% 11%
12% 13%
1 1.0800
1.0900 1.1000 1.1100
1.1200 1.1300
2 1.1664
1.1881 1.2100 1.2321
1.2544 1.2769
3 1.2597
1.2950 1.3310 1.3676
1.4049 1.4429
4 1.3605
1.4116 1.4641 1.5181
1.5735 1.6305
5 1.4693
1.5386 1.6105 1.6851
1.7623 1.8424
6 1.5869
1.6771 1.7716 1.8704
1.9738 2.0820
7 1.7138
1.8280 1.9487 2.0762
2.2107 2.3526
8 1.8509
1.9926 2.1436 2.3045
2.4760 2.6584
9 1.9990
2.1719 2.3579 2.5580
2.7731 3.0040
10
2.1589 2.3674 2.5937
2.8394 3.1058 3.3946
11
2.3316 2.5804 2.8531
3.1518 3.4785 3.8359
12
2.5182 2.8127 3.1384
3.4985 3.8960 4.3345
13
2.7196 3.0658 3.4523
3.8833 4.3635 4.8980
14
2.9372 3.3417 3.7975
4.3104 4.8871 5.5348
15
3.1722 3.6425 4.1772
4.7846 5.4736 6.2543
16
3.4259 3.9703 4.5950
5.3109 6.1304 7.0673
17
3.7000 4.3276 5.0545
5.8951 6.8660 7.9861
18
3.9960 4.7171 5.5599
6.5436 7.6900 9.0243
19
4.3157 5.1417 6.1159
7.2633 8.6128 10.0197
20
4.6610 5.6044 6.7275
8.0623 9.6463 11.5231
21
5.0338 6.1088 7.4002
8.9492 10.8038 13.0211
22
5.4365 6.6586 8.1403
9.9336 12.1003 14.7138
23
5.8715 7.2579 8.9543
11.0263 13.5523 16.6266
24
6.3412 7.9111 9.8497
12.2392 15.1786 18.7881
25
6.8485 8.6231 10.8347 13.5855 17.0001 21.2305
26
7.3964 9.3992 11.9182 15.0797 19.0401 23.9905
27
7.9881 10.2451 13.1100 16.7386
21.3249 27.1093
28
8.6271 11.1671 14.4210 18.5799
23.8839 30.6335
29
9.3173 12.1722 15.8631 20.6237
26.7499 34.6158
30
10.0627 13.2677 17.4494 22.8923
29.9599 39.1159
Does
It Matter When You Contribute to an IRA?
When
contributions to an IRA are consistently made
at
the beginning of the year rather than at the end,
the
funds have an extra 12 months in which to grow.
Over
a period of years there is a substantial
difference
in the amount accumulated.
$2,000
PER YEAR ACCUMULATED AT VARIOUS RATES OF RETURN*
ÉÍÍÍÍÍÍÍÍÍÍÍÍËÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍ»
º
NUMBER OF º 5% RETURN º
º
YEARS FROM ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄĶ
º
BEGINNING º ³ CONTRIBUTION ³ INCREASE
º
º OF THE
º MADE ³
MADE ³ IN AMOUNT
º
º
FIRST YEAR º JAN. 1 ³
DEC. 31 ³ ACCUMULATED º
ÌÍÍÍÍÍÍÍÍÍÍÍÍÎÍÍÍÍÍÍÍÍÍÍÍÍÍÍØÍÍÍÍÍÍÍÍÍÍÍÍÍÍØÍÍÍÍÍÍÍÍÍÍÍÍ͹
º 5
º $ 11,604 ³ $
11,051 ³ $
553 º
º 10
º 26,414 ³
25,156 ³ 1,258
º
º 15
º 45,315 ³
43,157 ³ 2,158
º
º 20
º 69,439 ³
66,132 ³ 3,307
º
º 25
º 100,227 ³
95,454 ³ 4,773
º
º 30
º 139,522 ³
132,878 ³ 6,644
º
º 35
º 189,673 ³
180,641 ³ 9,032
º
º 40
º 253,680 ³
241,600 ³ 12,080
º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍͼ
ÉÍÍÍÍÍÍÍÍÍÍÍÍËÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍ»
º
NUMBER OF º 10% RETURN º
º
YEARS FROM ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄĶ
º
BEGINNING º CONTRIBUTION ³ CONTRIBUTION
³ INCREASE º
º OF THE
º MADE ³
MADE ³ IN AMOUNT
º
º
FIRST YEAR º JAN. 1 ³
DEC. 31 ³ ACCUMULATED º
ÌÍÍÍÍÍÍÍÍÍÍÍÍÎÍÍÍÍÍÍÍÍÍÍÍÍÍÍØÍÍÍÍÍÍÍÍÍÍÍÍÍÍØÍÍÍÍÍÍÍÍÍÍÍÍ͹
º 5
º $ 13,431 ³ $
12,210 ³ $ 1,221
º
º 10
º 35,062 ³
31,874 ³ 3,188
º
º 15
º 69,899 ³
63,544 ³ 6,355
º
º 20
º 126,004 ³
114,549 ³ 11,455
º
º 25
º 216,363 ³
196,694 ³ 19,669
º
º 30
º 361,886 ³
328,988 ³ 32,898
º
º 35
º 596,253 ³
542,048 ³ 54,205
º
º 40
º 973,702
³ 885,186 ³
88,516 º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍͼ
*
Assumes compounding annually - amounts would be
higher
if compounded quarterly, monthly, daily, etc.
The
overall effect is that you have one full extra
year
of growth when you make the contribution at the
beginning
of the tax year.
IRAs
vs. Life Insurance
Life
insurance in a IRA may sound like a great way
to
plan for one's retirement. However, the
law does
not
allow IRAs to purchase life insurance contracts.
After
comparing cash value life insurance to the
benefits
of an IRA, many people are choosing the life
insurance
method as a better alternative. The
following
chart compares the two methods:
OVERVIEW
COMPARISON
ÉÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÑÍÍÍÍÍÍÍÍÍÍÍÑÍÍÍÍÍÍÍÍÍÍÍ»
º
³ ³ LIFE
º
º DESIRED FEATURE ³ IRA ³ INSURANCE º
º
³ METHOD ³
METHOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄĶ
º
1. Can you contribute as much as you want? ³
NO ³ YES
º
º
³ ³ º
º
2. Is the contribution deductible?
³ SOMETIMES ³ NO º
º
³ ³ º
º
3. Is the accumulation tax-deferred?
³ YES ³
YES º
º
³ ³ º
º
4. Can participants borrow funds?
³ NO ³
YES º
º
³ ³
º
º
5. Are withdrawals before 59 1/2 free
³ MAYBE ³
YES º
º of the 10% penalty tax? ³ ³ º
º
³ ³ º
º
6. Can forced withdrawals at age 70 1/2
³ NO ³
YES º
º be avoided? ³ ³ º
º
³ ³ º
º
7. Does the death benefit exceed the
³ NO ³
YES º
º accumulated cash? ³ ³ º
º
³ ³ º
º
8. Do heirs of a participant receive the
³ NO
³ YES º
º funds income tax-free? ³ ³ º
º
³ ³ º
º
9. Can provisions be made to continue
³ SOMETIMES ³ YES º
º contributions if disability occurs? ³
³ º
º
³ ³ º
º10.
Can death benefits be estate tax free?
³ NO ³
YES º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍͼ
1.
IRA contributions are limited to $2,000 per
year
(or $2,250 if non-employed spouse).
Contributions
to
an insurance policy are limited only by financial
means
and health of participant.
2.
Life insurance premiums are not deducible.
Contributions
to IRAs are deductible unless participant
is
also covered by an employer's qualified plan, in
which
case, the contributions are not deductible for
married
couples earning over $50,000 (or single
taxpayers
earning over $35,000); and they are only
partially
deductible if salaries are between $40,000
and
$50,000 (or $25,000 and $35,000 for single
taxpayers).
3.
Accumulation of funds in both methods is
tax-deferred.
4.
Funds may not be borrowed from an IRA nor can
they
be used as collateral for a loan. Life
insurance
cash
values are readily available at rates below
market.
5.
There is a tax penalty on IRA withdrawals made
prior
to age 59 1/2 unless the participant dies, is
disabled
or elects to begin distribution of equal
payments
over his or her life expectancy.
6.
Persons with IRAs must begin taking withdrawals
(and
begin paying the income tax due) after they reach
age
70 1/2 years. There is no such rule for
life
insurance.
7.
Whatever has been accumulated in an IRA will be
paid
at the death of the participant to his or her
named
beneficiaries. Life insurance generally
has a
death
benefit which greatly exceeds the accumulated
cash
values.
8.
Heirs who receive a death benefit from an IRA
must
pay income tax on the amount received.
If the
amount
in all Qualified Plans and IRAs exceed certain
limits,
there will also be a 15% penalty tax.
Heirs
who
receive the death benefit of life insurance
policies
are not required to pay any income tax.
9.
Life insurance contracts often provide for a
disability
waiver rider which guarantees the premium
will
continue to be paid even if the insured becomes
disabled. Disabled IRA participants would not be able
to
contribute to an IRA unless they received earned
income
for the year.
10.
Life insurance owned by an irrevocable trust
can
be free of estate taxes.
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