2nd Half of the Story

Bank CD's, mutual funds, tax deferred annuities, qualified plans, cash value life insurance and Roth IRA's are just a few cash accumulations vehicles available to savers and investors. Each has a different tax structure and therefore, each will grow your cash deposits at a different rate.

The table below is an attempt to compare the accumulation characteristics of various financial instruments. We assumed that each was able to obtain a 6% interest rate compounded annually for 20 years. Each account received a deposit of $2,000 at the beginning of each year. The qualified account was increased to $2,777 because its deposit is tax deductible. We assumed a 28% tax bracket and added the tax saving to the qualified account, just to make the comparison as equal as possible.

This comparison clearly shows the power of compounded tax savings. The Bank CD has no special tax privileges and, as expected, it finished last. The Deferred Annuity, Roth IRA and ILIPP/FLIPP accounts all benefited from tax free accumulations, and the yielded equal results. The IRA/401k was the clear winner in the accumulation race, because it had the advantage of the additional contribution from the annual tax savings.

These results are interesting, but they are only half of the story. The second half, the half that provides retirement income, is the important part. The best retirement saving vehicle is not the one that accumulates the most money. It is the one that delivers the most retirement income. A wise financial planner looks past the initial impression and examines the final outcome.

The table below illustrates the net retirement income available from each of our four retirement funding sources. We assumed that a 5.85% interest, compounded monthly and used to support a monthly payout over a 20 year period. (The equivalent of 6.00943% annual interest, compounded annually)

Our champion, the IRA/401k, is no longer undisputed. Now we have a three way tie. The tax advantage that the IRA/401k enjoyed during the accumulation phase, is reversed at payout. Every dollar withdrawn from the qualified account was taxed at retirement. In order to provide a net income of $6,591, it was necessary to withdraw $9,154, because $2,563 in incomes taxes needed to be paid.

The bank CD again finished last. It only provided an income of $4,739. The Roth IRA and the ILIPP (Special Life Insurance Policy) equal the IRA/401k.. Despite their after tax funding, they both enjoy tax free accumulations and tax favored distributions, which gives them an edge post retirement. The deferred annuity was second, but because of their complexity, not all of the annuity's tax advantages were exercised

These results are important because they emphasis the fact that people planning for retirement have three essentially equal financial tools to provide retirement income. Qualified plans such as IRA and 401k's have numerous restrictions on contributions, the maintenance of the account and the timing of distributions. Account balances passed at death have limited flexibility and are eventually fully taxable. Roth IRA's are more flexible, but have contribution limits. ILIPPs and their FLIPP counterparts are extremely flexible and pass to the heirs tax free at death.

These results are perhaps better displayed in graphical form. .

These calculations are just an example. We could run this same comparison at a different interest rate or for a different period of time and get slightly different results. Each retirement planning situation is unique and needs to be analyzed in light of its specific timeline and contribution schedule. However, this assessment does demonstrate that the second half of the story, should be the real focus of a retirement planning.

**These are hypothetical comparisons, solely intended to illustrate the intricacies of retirement planning. They do not represent any particular investment or savings account; nor are they intended to recommend any specific course of action. Please consult a qualified financial professional for advice on your specific circumstance.