Terry Bork CLU ChFC, President   |   Aurum Insurance Services   |   D: 440-605-7230   |   C: 440-666-6032   |   tbork@auruminsurance.com   |   www.auruminsurance.com

The Modern Road To Retirement - Funding The Trip

February 19, 2018

As I wrote last time, in your grandfather’s day, funding for retirement was provided by the “3 legged stool”:  Social Security, the Company Pension Plan and Personal Savings.  Today, company pension plans are all but extinct and Social Security covers less of the cost of retirement than in the past, leaving personal savings to shoulder the load. There are choices when it comes to personal savings, and the burden is on each individual to choose the personal saving method that best fits their needs.


With managing income taxes being a major risk to achieving retirement funding objectives, the Modern “3 legged stool” involves choosing a personal savings method based on how it is taxed. Based on taxation, retirement savings alternatives can be broken into 3 categories; taxed currently (taxable), taxed later (tax deferred), and taxed never (tax free)


The taxable bucket requires you to pay income taxes on the assets growth as well as the earned income contributed each year (after tax contribution). The bucket can hold assets such as money market funds, bank accounts, individual securities, mutual funds, real estate, partnership interests, etc. Gains in value can be taxed at either ordinary income or capital gains rates.

Assets held in this bucket can be dedicated to providing future retirement income, as well as more speculative “risk assets.’’ A major reason to hold assets in this bucket is flexibility and liquidity.


Maximizing contributions to the tax deferred bucket is the most popular retirement planning strategy.  Options include 401k and 403b plans. They have become the default choice for most individuals for one primary reason, a current tax deduction for contributions.

The contribution is not, however, a true deduction.  It is a deferral and will be taxed, along with all investment gains, as ordinary income at distribution. The mindset is to defer income while in the peak earnings years, and recognize the income in retirement when taxable income may be lower.

Other reasons for the popularity of these company sponsored plans include the ease of making contributions through payroll deduction and a possible employer contribution.  An additional benefit is assets held in 401k, 403b, and IRAs are generally exempt from the claims of creditors in most states.

Liquidity and flexibility are factors to be considered.  Access to assets is generally limited, with penalties for withdrawals prior to age 59 ½, and withdrawals must occur at 70 ½ whether you want them or not.  In addition, investment gains are all taxed as ordinary income, forfeiting the potential benefit of some gains being taxed at a lower capital gains rate.

Tax deferral can be a valuable tax planning strategy, providing true financial benefits if future distributions are taxed at a lower tax rate, if not the benefits are minimized or negated.  Putting too much emphasis on a current tax deduction and deferring too much income into the future, creating a “Bloated 401k,” can produce unintended negative consequences in retirement.


Contributions to the tax free bucket are after tax, meaning you pay taxes on the income contributed, but all future gains are not taxed. Tax free means free of all taxes including federal income tax, state income tax, and capital gains tax.  In addition, income must not count as provisional income, negatively impacting the taxation of Social Security and the Medicare surtax.  Assets that meet those criteria are the Roth IRA and Accumulation Designed Life Insurance.

Roth IRA

While the Roth IRA meets the criteria of being truly tax free, it has one major drawback…..income and contribution limitations.  For that reason, it is not much help for highly compensated executives, professionals, and business owners.

Modern Accumulation Designed Life Insurance (ADLI)

In your grandfather’s day, life insurance was acquired to provide family death benefit protection.  Today, modern Accumulation Designed Life Insurance focuses on maximizing policy cash value in addition to the death benefit.

ADLI is an attractive “alternative asset strategy” with a unique combination of advantages.  It provides all the positive characteristics of a Roth IRA and more, only without the income and contribution limitations.  For that reason, it is often referred to as the “Super Roth” strategy.

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