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Retirement Immunization

By: Neal Parrish

Immunization is defined as “the action of making a person immune to infection, typically by inoculation.”

The most common immunization is the flu shot. People get the flu shot to help prevent them from getting the flu. That makes sense.

The flu is a risk so by getting the flu shot you are trying to minimize or eliminate the risk of getting the flu. That makes sense.

What if you could do that with your retirement? Protect your hard-earned retirement savings from risk, would you want to know how to do that?

I assume you do. There are two types of retirement immunizations…

Risk Immunization

The common, and unfortunately, train of thought when it comes to growing your retirement savings is that you can’t grow your money without risking it. That is false.

 You can immunize your retirement against the risk of loss. Just recently the Dow Jones dropped nearly 1,000 points in one day due to a virus [Yes, I know I am talking about retirement immunization when there is a “pandemic” going on. I thought it tied together nicely].

With all the attention the Coronavirus is getting it is going to affect the markets. As of me writing this we have seen multiple days of drops.

So, what can you do to immunize your retirement? Most investment advisors would say diversification is the way to do that. However, people think they are diversified because they are in different kind of stocks. They are still stocks and if the whole market tanks, so do the different stocks. So, that is not the answer.

You should consider looking at indexed annuities. I know all the press out there says indexed annuities are not good, cost too much, or limit your growth. The advisors saying this either only sell investments, don’t understand the product, or don’t know about how indexed annuities really work these days.

I am an investment advisor and an insurance advisor so I do both and I can show people how both options can play a role in their retirement savings. Back to the indexed annuities. Here is how they work and give you risk immunization…

First, your principal [the money you put into the annuity] is guaranteed and you will never lose it. If the worst should happen, your account will never be less than what you put into it.  What I love about the indexed annuities I help my clients with is that when the market goes up, the value of the annuity goes up too.

If the market goes up 20%, the value of your annuity will go up 20% [in the annuities that I use]. Here is the immunization part: when the market goes down, the account value does not go down with it. So, if the market goes down -30%, the annuity is credited with 0%.

The indexed annuity will never lose value due to a market correction, ever. Now, you should never put all of your money in an annuity, but you certainly want to explore the option of having a portion of your assets in an annuity.

Let’s talk about the second immunization…

Tax Immunization

This is the one aspect of retirement planning that rarely, if ever, get addressed. As mentioned, people think diversification minimizes risk but often times people diversify in assets that are all taxed the same way.

So, what do I recommend? A portion of your assets should not be subject to taxes in retirement. To be clear, I am talking about a portion of your retirement being tax-free. 

Most people are told the classic retirement lie of “you’re going to be in a lower tax bracket when you retire.” That is highly unlikely to the case.

The tax cuts we are enjoying now are temporary. The end in 2026 and tax rates are going back up. So, if you retire in 2026 or after, your taxes will be higher than they are now even if you don’t earn any more money.

There are a lot of reasons taxes are likely to go up but the “follow the herd” mentality of saving for retirement in tax-deferred vehicles only benefits you if you are in a lower tax bracket in retirement. 

Let me ask you this: Do you want to have a lower standard of living in retirement? I doubt many people do. So that means at the very least your income and if you are lucky your taxes will stay the same.

What I suggest is take the unknown variable of taxes in retirement off the table. How? Consider paying your tax bill now. Taxes are on sale right now. 

By doing this and putting a portion of your retirement assets in a vehicle that grows your money and allows you to use it tax-free can save you hundreds of thousands of dollars in taxes in retirement. 

Just the other day I showed a new client that one of his IRAs worth roughly $500,000 would generate nearly $325,000 in taxes over the course of his retirement. That was shocking for him as I am sure it may shock you too.

I showed him how to get those taxes down to $125,000. That is the absolute minimum amount he would pay in taxes on that IRA because when he started saving it, he chose to save tax deferred.

So that means $200,000 of those taxes are optional. As you can assume, he chose to pay $125,000 instead of the $325,000 and I am sure you would like that option too.

I share all this with you to let you know that there are ways to immunize your retirement. This is what I tell people I meet with for the first time that I can help them do…

I help people reduce taxes in retirement by hundreds of thousands of dollars, increase retirement income by thousands of dollars a year, and I take market risk off the table.

There are rules of retirement that you never knew about. I show people how to use those tax laws to their benefit. If there was a law that could significantly help your retirement, when would you want to know about it.

ABOUT THE AUTHOR: Neal Parrish is an Investment Advisor Representative & insurance advisor with Both Hands Financial Group. For over two decades Neal has helped people prepare for retirement by showing them how their investments and insurance can work together all while minimizing risk, minimizing taxes, and maximizing gains. Neal lives in Hendersonville, TN with his wife, Crystal, and their twin boys, Brooks and Paxton. Neal enjoys Vanderbilt and Western Kentucky University athletics, the Tennessee Titans, the Nashville Predators. and axe throwing in his spare time (yes, axe throwing).