3 Retirement Decisions Nobody Prepares You For - Retire Today | Lyssna här

3 Retirement Decisions Nobody Prepares You For

Retirement can change how you approach life insurance, mortgages, income, and investments. Jeremy Keil answers three financial questions retirees may not expect to face.

https://youtu.be/H4WXLWLuHi0

When people think about retirement planning, oftentimes they naturally think about their investment portfolio, Social Security, or taxes. Those are important parts of the plan, but after helping hundreds of people retire, I’ve found that some of the questions that cause the most confusion aren’t about the stock market at all.

They’re questions like: What should I do with an insurance policy I’ve owned for decades? How do I prove my income to a mortgage company when I don’t receive a paycheck anymore? Can I find an investment that provides the principal protection I want while also receiving capital-gains tax treatment?

These questions can catch retirees by surprise because the financial world doesn’t always work the same way after you retire.

The specific answers will vary based on your circumstances, but all three illustrate a broader principle I think is essential to good retirement planning: Don’t begin with a financial product. Begin with the problem you’re trying to solve.

Question #1: What Should I Do With an Old Whole Life Insurance Policy?

“I’ve been paying premiums on my whole life insurance policy for decades now that I’m retired and my kids are financially independent. Should I keep paying for it? Does it make more sense to cash it in?”

This is a great example of how a financial product can outlive the original reason you purchased it.

If you bought life insurance decades ago when your children were young, you may have needed the death benefit to protect your family financially. Now you’re retired, your children are financially independent, and that need may no longer exist.

That doesn’t necessarily mean the policy no longer has value.

The first thing I’d want to confirm is exactly what type of policy you own. I’ve had people tell me they have whole life insurance when the policy was actually converted to universal life decades earlier. The guarantees, premiums, interest, and other characteristics can differ, so start by understanding what you actually own.

From there, I would generally evaluate three possibilities.

Option 1: Surrender the Policy

Cashing in the policy may be the simplest solution. You’re finished paying premiums and can use the cash value elsewhere.

But don’t make that decision without looking at the tax consequences.

If the policy’s cash value exceeds the amount you’ve paid into it, surrendering it may produce taxable income. On the other hand, I’ve worked with a client whose situation was essentially the reverse: he had put about $50,000 into an older policy whose remaining value had fallen close to zero.

Rather than simply surrendering the policy and losing the potential usefulness of that cost basis, we contacted the insurance company and the company holding an existing non-IRA annuity. We determined that the policy could be exchanged into that annuity, allowing the cost basis to transfer with it.

That’s a more complex example, but it illustrates why I don’t like making these decisions based solely on whether someone still “needs life insurance.” There may be tax consequences attached to a policy you’ve owned for decades.

Option 2: Keep the Policy

At the other end of the spectrum, keeping the policy may make sense even if the death benefit isn’t particularly important to you anymore.

I’ve seen older whole life policies credit interest in the 3% to 4% range. If your alternative is putting the same money into a bank account, it’s worth comparing what the existing policy is actually providing.

There may also be tax characteristics worth considering. The growth within the policy can be tax-deferred, and if the policy ultimately pays a life insurance death benefit to the beneficiaries, that death benefit is generally received income-tax-free under the circumstances I described.

The point isn’t that everyone should keep an old whole life policy. It’s that you should evaluate the policy you actually own before assuming it’s obsolete.

Option 3: Find a Middle Ground

There can also be an option between surrendering the policy and continuing exactly as before.

With one recent client, we evaluated the amount they had paid into the policy and the growth that had accumulated. We took out the cost basis and left the accumulated interest in the policy. Then we asked the insurer about reducing the paid-up insurance amount so the client wouldn’t have to continue paying premiums at the same level.

That allowed us to address several different objectives rather than forcing the decision into a simple “keep it or cash it in” choice.

When evaluating an old permanent life insurance policy, I’d want to understand at least:

What type of policy do you actually own?
How much have you paid into it?
What is its current cash value?
What interest or dividends is it currently producing?
What happens from a tax standpoint if you surrender it?
Do you still need the death benefit?
Can the policy be modified if you don’t want to continue paying premiums?

The answers can tell you much more than simply asking whether you still need life insurance.

Question #2: How Do I Prove Income After My Paycheck Stops?

“Now that we’re retired, we don’t have paychecks anymore. If we want to rent an apartment or apply for a mortgage, how do we prove our income when most of our money is in retirement accounts?”

This problem surprises a lot of financially secure retirees.

I’ve worked with people who have millions of dollars on their investment statements and still encounter a bank telling them they don’t have enough income to qualify for a loan.

It sounds ridiculous. But there’s an important practical distinction: lenders and landlords are accustomed to evaluating income, especially wages. A large investment account doesn’t necessarily fit neatly into the same underwriting process.

I’ve seen this firsthand.

One client had about $100,000 sitting at a bank and wanted to borrow a couple hundred thousand dollars from that same institution. The bank said they couldn’t afford the loan.

We moved the $100,000 from the bank savings account to a brokerage money market account, where it was also earning a better rate. Then we established a $3,000 monthly distribution from that account.

After two months of showing that predictable income, the bank was satisfied and approved the mortgage.

The client’s underlying financial position hadn’t suddenly improved. We had simply created the kind of income trail the lender knew how to evaluate.

Create the Paper Trail Before You Need It

The larger lesson here is to plan ahead.

If you know you’re going to need a mortgage, it may be easier to apply while you’re still working and have W-2 income.

If you expect to sell your house and rent an apartment after retirement, find out what the landlord will require before you make the move. You may be able to establish systematic monthly distributions from your assets to demonstrate the income they’re looking for.

Retirement doesn’t necessarily mean you lack the resources to qualify. But you may need to present those resources differently once the traditional paycheck disappears.

Question #3: Is There a “Safe” Investment That Produces Capital Gains?

“Is there a safe investment that produces capital gains instead of ordinary income so I can keep my taxes lower?”

I understand exactly what this listener is trying to accomplish.

Long-term capital gains may receive more favorable federal tax treatment than ordinary income. So it’s reasonable to wonder whether you can combine the principal protection you might associate with something like a CD with the potentially preferable tax treatment of a long-term capital gain.

The problem is that those characteristics generally don’t go together.

Investments that can produce capital gains involve the possibility that the asset’s value can decline. That possibility of loss is part of investing. Products designed around principal guarantees or similar protections generally produce returns taxed as ordinary income rather than capital gains.

That’s why I wouldn’t begin by searching for a product that somehow combines the two.

I’d change the question.

What problem are you actually trying to solve?

Are you trying to lower your taxes?

Protect your principal?

Protect your income?

Generate a particular return?

Those are different objectives, and they may require different tools.

Start With the Problem, Not the Product

That principle ties all three listener questions together.

With the life insurance policy, the answer isn’t automatically to surrender it simply because you no longer need as much insurance. You first need to understand the tax characteristics, interest, cost basis, and options available within the existing policy.

With a mortgage, the problem isn’t necessarily that you don’t have enough money. The problem may be demonstrating income in the format a lender expects.

And with investments, searching for a product that provides every desirable characteristic can distract you from identifying the financial objective you’re actually trying to accomplish.

This is one reason I use a five-step retirement planning process. A good process gives you a framework for making decisions when retirement presents a financial question you weren’t expecting.

Financial products are tools.

First determine what you’re trying to build. Then decide which tool belongs in your hand.

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About the Author:

Jeremy Keil, CFP®, CFA is a retirement financial advisor with Keil Financial Partners, author of Retire Today: Create Your Retirement Income Plan in 5 Simple Steps, and host of the Retirement Today blog and podcast, as well as the Mr. Retirement YouTube channel.

Jeremy is a contributor to Kiplinger and is frequently cited in publications like the Wall Street Journal and New York Times.

Additional Links:

Buy Jeremy’s book – Retire Today: Create Your Retirement Master Plan in 5 Simple Steps
5StepRetirementPlan.com

Connect With Jeremy Keil:

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