MANY FOLKS ARE do-it-yourselfers when it comes to home improvement projects. On that score, I have no skills, so I end up paying others. In fact, in high school, I was so anxious to avoid metal shop and woodshop that I opted for typing and four semesters of bookkeeping.
It’s a different story when it comes to my finances. Yes, I use an accountant to file my taxes. But helped by both a degree in finance and the Chartered Financial Analyst designation, I handle other money issues myself. Indeed, during my career, I kept my money in the mutual funds I managed, rather than paying someone else to handle my investments.
I left the investment field six years ago, at age 55, and began my retirement planning journey. To understand my choices better, I earned a Retirement Income Certified Professional designation, as well as obtaining life and health insurance licenses. I came to realize that—as a retiree—I needed to protect myself against four major risks: tax increases, a surprisingly long life, rising interest rates and potentially huge long-term-care expenses.
1. Tax increases. During my high-income years, I funded a 401(k) plan, which meant I deferred taxes on the income involved. Now, with my income lower, I have the chance to “undefer” this income.
When I left my investment job six years ago, I rolled my 401(k) into an IRA. Each year since, I’ve converted part of that IRA to a Roth IRA, where the money now grows tax-free. In effect, I’ve prepaid a big chunk of my retirement tax bill and protected that money against future tax increases.
I strongly suspect those tax increases are on their way. The federal government has spent massive sums to soften the pandemic’s financial blow. The huge taxable amounts in tax-deferred IRAs will, I believe, be a prime target. I also suspect that today’s low capital gains rates will come under attack. Both Social Security and Medicare already penalize recipients who have a high taxable income, and there may be more of that to come. On top of that, tax rates are scheduled to increase in 2026, when many provisions in 2017’s tax law sunset.
2. Living long. Even with the Roth conversions, I was left with a substantial sum in my traditional, tax-deferred IRA. I decided to use some of that money to fund two accounts that’ll boost my guaranteed lifetime income, thus hedging the risk that I live far longer than average.
Even though neither of my parents lived to their 80s, I’m banking on a long retirement. My hope: By exercising, eating healthily and not smoking, I’ll live longer than average, plus the data show that those with higher incomes are more likely to live to a ripe old age.
I was intrigued by the concept of longevity insurance, particularly so-called QLACs, or Qualified Longevity Annuity Contracts. A QLAC can be funded using IRA money, with the annuity’s payment start date set as late as age 85. You can use up to 25% of your IRA to fund QLACs, but with the total sum invested currently capped at $135,000. I funded three QLACs with payments starting at ages 76, 80 and 85.
I also used my traditional IRA to fund a “period certain” annuity. This annuity will pay me monthly income from age 62 through 69. I view it as my Social Security “bridge.” The annuity will pay me income while I delay claiming Social Security from age 62 to 70. At age 70, the period certain annuity stops paying income and I’ll file for Social Security benefits, at which point my benefit will be 76% larger in inflation-adjusted terms than it would have been if I’d filed at 62.
3. Rising interest rates. Once I’m retired, I want a more balanced portfolio, with less in stocks and more allocated to bonds. Problem is, interest rates are very low and seem poised to rise. If I reduce risk by holding bonds with short maturities, I’ll earn very little. If I go for bonds with longer maturities, yields aren’t much better, plus these bonds could decline sharply if rates rise.
My solution: Overfund a whole life “cash value” insurance policy. After six years of overfunding the cash value, my policy’s cash value is now projected to yield 3.5%. The beauty of cash value is that, as rates rise, the yield rises but the account value doesn’t decline—which would be the case with bonds.
In addition, if I don’t withdraw more than I paid in premiums, my withdrawals will be tax-free. I’m the first to admit that, if your goal is the maximum death benefit, term insurance is a far better bet. But if you’re looking for a bond substitute, cash value life insurance can be a good choice if you have the money available to overfund the policy—and if your policy offers that option.
4. Long-term-care costs. When I bought my cash value policy, I attempted to add a long-term-care (LTC) rider that would allow me to use my death benefit to pay LTC expenses. I’m still mobile—I play pickleball four days a week—but my insurance company still denied me coverage because of some past surgeries.
Fortunately, I was able to purchase hybrid LTC insurance from a different insurance company. That policy has locked-in premiums and should cover much or all of any LTC costs I incur. Having my LTC expenses covered removes one of retirement’s biggest financial uncertainties. For now, I’m also still funding a health savings account, arguably the most tax-favored account available. I can take tax-free withdrawals from the account to pay my annual LTC insurance premiums and my Medicare premiums.
Why didn’t I opt instead to pay any LTC costs out of pocket? I might have—if the only insurance choice was a traditional LTC policy where premiums can potentially rise sharply over time. But instead, I bought one of the new hybrid policies, where escalating premiums aren’t a risk. I also like the idea of prepaying potential LTC costs so, if I need assistance, I won’t delay getting help because I’m deterred by the expense involved.
Putting together the various pieces of my retirement puzzle, I feel I’ve created a plan where risk is minimized. This might seem like an odd goal, given that I spent much of my career coping with stock market risk. But as I head into retirement, my attitude has changed.
I spent decades measuring my investment performance on a daily, monthly and quarterly basis versus both competitors and market indexes. That can be exhausting emotionally. In 2008, during the financial market meltdown, my most positive workday was spent at a movie theater watching a double feature. In retirement, I want to travel overseas and play pickleball most mornings when I’m home—and I want to do these things without worrying about the stock market’s daily spasms.
