The LIRP: When Does It Make Sense and How Old Is Too Old?

the power of zero

The 3% Rule says that if you want to have $100,000 per year in retirement, you would need $3.3 million saved up, which is not very attainable for most Americans. If you can offload longevity risk to a company that can handle it better than you can, you have to save far less.

If you take a portion of your liquid investment portfolio and purchase an annuity, you can potentially achieve the same income flow at roughly half the cost.

An annuity from an insurance company also mitigates withdrawal rate risk. If you have an income guaranteed in retirement by an insurance company, you won’t have to rely on your stock market portfolio to take care of your lifestyle needs.

Long-term care risk is one of the most pernicious risks for most Americans. Almost, but not quite dying, is much worse than simply dying. In that case, the surviving spouse is often left with a subsistence living instead of the retirement lifestyle they planned for. 

People don’t love paying for long-term care insurance for a variety of reasons, but there are alternatives to traditional long-term care insurance that accomplish most of the same things.

If you give an insurance company a chunk of your liquid assets, they will give you a guaranteed stream of income that will live as long as you do. Your assets get pooled with thousands of other people’s and statistical averages work everything out over time.

Mathematically, the single premium immediate annuity is going to give you the most bang for your buck but there are three things that people tend not to like. The first is giving up some amount of liquidity, the second is the lack of inflation protection, and the third is the risk of dying early. 

The alternative is a fixed index annuity, which allows you to tie the growth of your income to a stock market index. This protects you from inflation, comes with a death benefit, and gives you a period of liquidity which addresses the three biggest concerns that people have with instruments that guarantee lifetime income.

Your income in retirement can be guaranteed, but if you do that out of your tax-deferred bucket, the after-tax amount is not guaranteed. To plug that hole, most Americans dip into their stock market portfolio. This can also result in social security taxation, leading them to spend their stock market portfolio even faster.

You should think very carefully before dropping a large amount of money into a single premium immediate annuity that doesn’t have the ability to do a piecemeal Roth conversion.

The Life Insurance Retirement Plan comes into play in retirement when you need to pay for discretionary expenses, typically after the 10 year mark. The years where the stock market is down are the perfect time to take money out of your LIRP.

The LIRP is the perfect vehicle to fund discretionary needs like plugging the hole in your roof or taking the grandkids to Disney World without withdrawing anything from your stock market portfolio.

Most LIRP companies also allow you to receive your death benefit in advance of your death to pay for long term care. If you die peacefully in your sleep, your kids can inherit the death benefit which negates the feeling of paying for something you never receive.

The ideal amount of money to have in your taxable bucket is about six months worth of expenses. Any more than that is a great candidate for funding your LIRP.

It’s crucial for life insurance that the money be growing safely and productively. With some products, your cash value ebbs and flows with the stock market. There are scenarios where people can run out of money and death benefit, as well as long-term care.

A whole life policy or an indexed universal life policy are your best choices. David favours the indexed universal life policy for most people.

The IRS has strict limits on how much money can be put into a life insurance policy. Those limits were premised on what the interest rates were over time, but since interest rates have changed, they adjusted the rule and consumers can put almost twice as much money into those programs for the same amount of death benefit.

People up to the age of 62 can still make use of the LIRP since they still have time to let it gain steam. Once you get to the age of 65, it’s not the best option if your objective is to accumulate wealth.

Insurance companies are in the business of predicting how long you will live so the viability of the LIRP is directly related to your health and life expectancy.

If you can figure out which spouse is going to live the longest, it informs many different decisions regarding the overall retirement plan. 

Joe Biden will likely honor his campaign promise to not raise taxes on anyone making less than $400,000, which means there’s a lot of opportunity to take advantage of the tax sale of a lifetime before taxes go up for good.

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