Retirement Income Blog

In retirement you may want access to some or all of the cash in your senior life insurance policy. What are some of the ways to get at it?

All cash-value life insurance policies include a “surrender right,” which entitles you to give the policy back to the insurer for its current cash value if you suddenly need cash. If you surrender the policy, your current insurer cancels the insurance and sends you a check for its cash value.

You can find out the status of your policy. Just ask your agent or the insurer for an in-force policy and to show your status. He should give you a table illustrating your guaranteed cash value, estimated cash value; cash surrender value, and death benefit for the remaining years of the policy. Insurance companies send statements with this information to you each year on the anniversary of the policy.

When you retire, you can turn the built-up cash value of your life insurance into cash. A couple of ways are:
• You can withdraw your basis in the policy free of tax. The basis is the amount of premiums you paid less any withdrawals you have made.
• You can take a policy loan. Loans are not generally taxable because they are an advance of the death benefit.
(Remember that taking cash from your policy will reduce or eliminate your death benefit.)

You could also sell your policy for cashto a third party but we discuss this in a separate post.

You may want to terminate it all together. Most cash-value policies offer three non-forfeiture options if you want to terminate your policy before maturity:
1. You can receive the policy’s cash surrender value in a lump sum, or
2. You can use the lapsed policy to continue to provide death protection at the net rate for term insurance, or
3. You can buy a paid-up term or cash-value policy for a reduced face amount using part of the cash surrender value of the policy and keep the rest for your use.

If you have life insurance held within an irrevocable life insurance trust, you generally can’t touch it. However, a family split-dollar arrangement can make the cash accessible by structuring the ownership of the life insurance policy so that the trust owns the insurance coverage and the trust-maker’s spouse holds the investment component.

Note that the purchase of life insurance will incur fees, commissions, and potentially surrender charges.  Withdrawals prior to age 59½ are subject to 10% penalty.  Guarantees are subject to the claims-paying ability of the insurance company.  Income received from a life policy classified as a modified endowment contract is taxed as ordinary income. Not everyone can purchase life insurance due to health reasons.  The purchase of life insurance simply to access the cash value may not be suitable unless insurance coverage is necessary.

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Every year, millions of Americans file their 1040s and end up having to pay taxes; even after all possible deductions have been taken. Many are able to itemize, while others are eligible for dependent care credits, or above-the-line deductions for their retirement plan contributions. But those who have enjoyed short-term market gains or other investment income often end up being penalized harshly, especially if they have no losses to offset against them.

But taxpayers that own municipal bonds may be able to use those assets to generate capital losses without altering the overall allocation of their assets. This is a common strategy used by many brokers and investment consultants who have clients that have substantial capital gains, or other reportable investment income to declare on their returns. The swapping process itself is fairly simple. Let’s assume that an investor owns a municipal bond and the market value is less than the purchase price. The investor has a loss on paper.

Let’s assume that the investor is able to sell this bond and buy another bond of the same rating and similar characteristics, such as rate, term, and call features, so exchanging one bond for another will seldom affect the composition of the investor’s portfolio. But this exchange effectively allows the investor to declare the sale of the old bonds at a loss, while maintaining portfolio integrity. For example, assume that a bond investor bought 10 public school bonds at par (which is listed as a price of $100) when the school originally issued them. This means that his original investment amount was $10,000.

Now, a year and a half later, interest rates have risen, and the price of the bonds in the secondary market is now $92 per bond. The broker who sold him the bonds will find 10 other municipal bonds from a similar issuer with similar features and “swap” or exchange them within the portfolio. The replacement bonds may well be trading at a loss as well, but this is largely irrelevant, as the new bonds will vary in price, the same as the old bonds. But the investor will be able to declare a long-term capital loss of $800 on his tax return, as he bought the original bonds for $10,000 and sold them for $9,200.

If you own municipal bonds you may have a possible opportunity each year to cut your senior tax.

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Thinking about early retirement before you start collecting Social Security Benefits?

Doing so won’t reduce the benefit that you accrued before you stopped working—but it could produce a smaller benefit than your estimated benefits statement suggests. You should receive an estimated-benefits statement from the Social Security Administration each year. The benefits it projects assume that you continue working to the retirement ages listed (62, 66 and 70) at your current salary.

For example, your statement might say something like, “If you continue working until your full retirement age (66 years), your payment will be X.”

But, what if you’re not working, and don’t plan to work again before applying for Social Security benefits? Will you receive the benefit your estimated benefits statement shows, or will it be reduced?

To answer that question, you have to understand how Social Security benefits are calculated. They’re based on earnings over your entire career, with income from past years adjusted for inflation. When calculating your benefits, the Social Security Administration looks at the 35 years with the highest adjusted wages. If you have more than 35 years of earnings, your lowest earning years are dropped. If you have fewer than 35 years of earnings, one or more of the figures used in the calculation will be zero.

Now, to determine future earnings, Social Security looks at your last two years of income. The problem is, if your statement is prepared in the first six to nine months of the year, your earnings for the previous year won’t be included, so the Social Security Administrator will use uses your earnings from the year before as your earnings for last year, this year, and future years. So, in essence, retiring before you start collecting Social Security won’t reduce the benefit that you accrued before you stopped working—but it could produce a smaller benefit than your estimated benefits statement suggests.
To get a more precise prediction of future payments based on your recent past, you can request an updated statement from Social Security by filling or use our social security calculator.

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If you’re using I-Bonds to protect yourself from inflation, you know it can get tricky.

Series I-Bonds are Treasury-backed bonds designed to help protect investors from inflation. Like most Treasury bonds, they appeal to investors seeking the security of an investment backed by the full faith and credit of the U.S. government.  This, they are popular bond investing choices among seniors and retirees. They also have some tax advantages: You can defer reporting accumulated interest for federal income tax purposes until you redeem the bonds, or until the bonds stop earning interest 30 years from their issue date. (Of course, in exchange for greater security, they offer lower potential returns than some other investments.)

I-Bonds seem simple. They’re sold at face value, and when you cash in the bonds, you receive interest. But there are intricacies, mostly because of how I-Bonds pay interest. I-Bond interest rates have two parts: A fixed rate that remains the same throughout the life of the bond, and a variable rate that is adjusted for inflation. The fixed rate is determined every six months, at the beginning of May and November, and applies to all I-Bonds issued in the following six months. For example, the fixed rate set on November 1, 2006, applies to all I-Bonds issued from November 2006 through April 2007.

The variable rate is based on the change in the consumer price index for all urban consumers (CPI-U) over a six-month period. Again, rates are determined at the beginning of May and November. The result is called the “composite earnings” rate. For May 2007 through October 2007, it was 1.30%. But that, again, is subject to change, as the chart below illustrates.
Historical I-Bonds rates
I-Bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I-Bonds issued in the six months following the rate determination. 
DATE FIXED         RATES*
MAY 1, 2007        1.30%
MAY 1, 2006        1.40%
MAY 1, 2005        1.20%
MAY 1, 2004        1.00%
MAY 1, 2003        1.10%
MAY 1, 2002        2.00%
MAY 1, 2001        3.00%
MAY 1, 2000        3.60%
MAY 1, 1999        3.30%
*Annual rates compounded semiannually
Source: US Treasury Department, as of October 2006

You can buy I-Bonds at most financial institutions. The minimum purchase is $50 for purchasing paper bond certificates and $25 when purchasing electronically. The maximum amount you can buy for any calendar year is $60,000: $30,000 in paper bonds and $30,000 electronically. And you can redeem the bonds at any time after a 12-month minimum holding period–although, if you redeem them before five years, you’ll lose your last three months of interest.

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As one spouse of a married couple, you must choose when you will start collecting Social Security benefits. And when you do–whether you will receive Social Security benefits based on your own earnings or as a spouse’s entitlement based on his or her social security benefits. The ‘entitled spousal’ amount maximizes out at 50% of the other spouse’s benefits. You will naturally receive the higher of these two options.
But if your spouse is receiving social security benefits when he or she dies, you are entitled  –as the surviving spouse–to 100% of his or her Social Security payment rather than the maximum 50%. In this case, you will choose the larger of that benefit or the Social Security benefit based on your own earnings. Let’s consider an example.

John and Jane are married and both are collecting social security. John receives a monthly benefit of $1,200. Jane collects another $600 of monthly benefit as the ‘spouse’s entitlement’. This is larger than the $500 per month she would collect based on her own earnings history. If Jane survives John, she would naturally file for 100% of John’s benefit–$1,200 per month.

Alternatively, if Jane’s monthly benefits were $1,000 based on her own earnings history, she would not have collected the lower ‘spouse’s entitlement’ of $600 per month while John was living. But at John’s death she will file for his $1,200 monthly benefit as a spouse’s entitlement, since it is greater than her own benefit.
Incidentally, your deceased spouse is not entitled to a Social Security benefit for the month he or she dies. So when the payment is made on the third of the next month, you should return it to the SSA. But as surviving spouse, you will receive a $255 death benefit.

As surviving spouse, you can begin receiving benefits as early as 60 years of age. See the Table for a summary of circumstances. Benefits are naturally reduced for beginning ‘survivor benefits’ before 65. See the table below for a summary.

What about remarriage?
If you are getting survivor benefits, you will not lose them if you remarry after you are 60 years old. However, a person applying as a widow/widower cannot receive benefits if they remarry before the age of 60 unless the latter marriage ends, whether by death, divorce, or annulment.

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Supplemental Retirement Income Idea #1- Are you in pretty good health?
The woman that cleans my home is almost 60.  I pay her $140 to clean my home.  It takes her about 6 hours.  If you did the same one day per week, that’s $560 — more than many retirees need to bridge the gap in their retirement income needs. She has no skills whatsoever other than making things clean.  How do you get started with this?  Simply place a small ad in Craigslist.org or in your local newspaper under “services offered.”  Here’s one that men may like more–washing cars.  People like clean cars but it’s a hassle and takes time to go to the car wash.  You go to them.  Just go to any small office complex, walk into an office and explain that you wash cars right in the lot. Charge $25 and in an 8 hour day, you can earn $200 once you have a clientele at one location.  Then you decide how many days you want to work.  No skills required for these sources of supplemental retirement income.

Supplemental Retirement Income Idea #2- Do you like numbers?
Contact your local assessor’s office and find out the process to have real estate property taxes reduced. Then go into Title companies in your area and ask how to get a list of all the commercial buildings, the property owners and their contact information.  You can either mail them or call them and offer to cut their tax bill and they pay you the first year’s savings. A building worth $2 million (that’s a small office building) pays property tax of $25,000.  If you reduce that to $15,000 because you can show the value has declined, you just made yourself $10,000. Another idea for numbers people is to prepare tax returns during tax season.  You can go to H&R Block (they will teach you) or contact all the local CPAs in your area.

Supplemental Retirement Income Idea #3- Do you have a college degree?
Tutor kids.  Just let the principal at the local schools know that you are a retired and patient tutor with expertise in your subject.  Find out the going rate in your area by calling the local Sylvan learning center.  Take on as many kids as you like and work just afternoons or evenings as you desire.  You can even make more by having small classes–3 or 4 students that get tutored at once.

Supplemental Retirement Income Idea #4- Do you like administrative work?
You will have a tough time finding a job in this economy doing office work. But there is big demand from professionals who need a few hours a week of your time.  You can offer your services directly at Craigslist.org or on elance.com or guru.com or through your local business newspaper.  Alternatively, look up “virtual assistant” on Google and you’ll see loads of businesses that are already being contacted by professionals to outsource their administrative work.  Just sign on with one of these outsourcing firms and they will get the work for you.

Supplemental Retirement Income Idea #5- Do you have carpentry or fixing skills?
Everyone needs a good handyman but most are unreliable. You can charge $25 per hour or more.  The biggest need is in the retirement communities in your area as many retirees are unable to do their own repairs due to age.  Just let the manager of the retirement community know you’re available and place a little ad in their local paper and you’ll get calls. If you live in an area with a lot of second homes, you can become a caretaker of these homes.  I pay a guy $350/month for up to ten hours a month to look after my 2nd home.

Supplemental Retirement Income Idea #6- Do you like to cook?
You can cook for small parties or business events at the location of your client.  You don’t need to do any work in your home.  Only work at places that have a kitchen so that you can arrive early in the day with your food supplies and prepare everything on location. You can earn several hundred dollars per event.  Get started by letting everyone know you do this.  Send a letter to all the local clubs (Rotary, Lions, Garden clubs, etc) and all local businesses (get a list of local business by size form your Chamber of Commerce and list your service with the Chamber of Commerce).  Make sure to have a nice business card and discreetly place a small stack where the guests at all of your events can take your card.  In no time, your phone will ring off the hook if your food is good and prices reasonable.

Supplemental Retirement Income Idea #7- Are you Artistically Creative?
I found a woman who made gift baskets from her home.  I sent them to all of my new clients and ordered more than 10 per month.  My colleagues found out about it and they started using her also. This is a simple business to start.  Just send a mailer to professionals in your area (you can buy a list at Infousa.com) such as stockbrokers, insurance agents, CPAs, mortgage brokers, realtors, etc.  In no time, you’ll be busier than you want and can expand this business as large as you like.  Or cut it off when you’ve reached your capacity.  You buy the items that go into the baskets and the packing supplies and then add $10 to assemble each one–that’s about $40 an hour to you.

Supplemental Retirement Income Idea #8- Are you Digitally Inclined?
No one talks about it, but many professionals–attorneys, financial planners, insurance agents, etc. can’t work their computer.  They lack basic skills like how to scan their photo or import a photo into a Word document or prepare an Excel spreadsheet.  Offer your service at a super reasonable $35 per call for up to an hour.  All you need to know is how to work MS Office and you can even take a class.  To promote yourself, send out mailers (you can buy a list at Infousa.com).

There you have it, eight simple ideas to earn supplemental retirement income without special skills or by selling skills you can easily learn first.

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Here are many retirement options to earn money yet few retirees have the required entrepreneurial gumption.  Thus, they are at the effect of someone “giving them a retirement job.”  Those days are over—there are no retirement jobs yet there are plenty of ways to make money.  Here are a few retirement income ideas.

Phone Sales from Home

Many people who sell make more than high priced attorneys or physicians.  Selling is the best retirement options for income because you set your own hours.  The reason why most people shy away from sales is that they think it’s about pushing something on someone, something they do not want.  That’s what you’ve seen by lousy sales people. Here’s the correct definition of selling when done by a master, the definition you can use to generate your retirement income,” Asking appropriate questions so that prospect sees the correct direction for himself.”  It’s not about convincing anyone–it’s about guiding people to make the right decisions.  If you think back, you may have encountered such a masterful salesperson that served you.  You can do the same, 100% of the time and cultivate a retirement options to make a lot of money.   You can learn this skill by studying two books: SPIN Selling and Question Based Selling.  Once you learn the skill of selling like a master, just log onto Craigslist or other Internet job board and you’ll find tons of openings to sell from home, without prospecting. Companies are always in need of good sales people, especially in a bad economy.  And they are willing to pay handsome commissions.  In a week, you could earn all the money you need for the month with this retirement option.

Property Tax Reduction Audits

Several services help people get their real estate taxes reduced.  There are several opportunities now because property prices have fallen and you can help owners to get their property reassessed.—a great money making retirement options.  You get a percentage of the savings when you help a property owner reduce their tax.  Just look on line “property tax reduction” and you will find several companies or courses that can assist you in this local business.  You simply send out a small group of mailers and people will call you.  It costs the property owner nothing to hire you because they pay you a percentage of what you save them.  Good for you and good for them and a goof retirement option for earnings.  Limit yourself to one appointment a day, about three hours work and enjoy your hobbies the rest of the time. (Tip—do this on commercial properties and earn more).

 Revenue from Google Ads

Google pays you to run their ads on your web site (s).  If you’ve got time and know how or are willing to learn how to develop up web sites (pretty simple to teach yourself or learn in one college course), you can develop a handsome retirement options for passive income from ads on your sites.   You don’t need to find the advertisers—Google does and they automatically runs the ads on your site(s).  Each time someone clicks on the ad, you get paid.  Even if you know nothing about this, if you are smart and willing to learn (and if you have a knack for marketing or being creative), you can do very well with this retirement option for income.  Once you’ve established a group of sites to meet your living expenses, work as much or as little as you want to develop more sites and increase your retirement income,  Just do a search on “adsense revenue” and you will find all types of resources, books and articles to teach you and help you retire early.

Homeowner Upgrades

Do you like meeting people?  There are lots of of companies that will set appointments for you to meet with people at their homes to give them ideas on refacing their kitchen cabinets, installing closet systems, garage organization systems, etc.  These companies advertise in the Sunday newspapers and get tons of leads from interested home owners.  But they need personable people to go meet these home owners and sell them a solution. Take one appointment a day (about 2 hours) and if you teach yourself to sell proficiently (see above), you can earn a very good income from this retirement option. 

This is just a small taste of retirement options for income.  Get creative, use the Internet and find an overwhelming number of opportunities.

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Even with the bloom off the rose, investors still have interest in using real estate in IRAs.  The interest and use of real estate in IRAs peaked with prices.  Even as the real estate market cratered, real estate professionals with sagging commission income pushed IRA real estate (often mistyped or incorrectly searched as IRS real estate) on investors dissatisfied with stock market returns. But IRA real estate is a bad idea for IRA savings. Here are five reaons why real estate is a bad idea for tax sheltered retirement investing.

You lose the depreciation deduction.  One of the nice things about owning apartments or rental homes is that the cash flow is partially sheltered from income tax by the depreciation deduction.  Since an IRA does not pay current tax, IRA real estate loses the deduction.  Why would someone knowingly lose a tax deduction?  Because they are likely sold on the idea of real estate in IRAs by a zealous real estate sales person.  Or, they may only have liquidity in their IRA and no cash outside their IRA.  If you don’t have the cash outside the IRA, then pass on an IRA real estate purchase.

You lose financial leverage.  When you purchase real estate outside of an IRA, you can typically put 20% down and borrow the rest.  So when the property appreciates 20%, you have doubled your investment–a 100% return on your equity.  But an IRA real estate purchase cannot be done with any mortgages as IRAs cannot have debt.  So you must make the purchase for all cash.  Now, when the property appreciates 20%, you have a 20% return on your money, not 100%.  Therefore, you lose the leverage of “other people’s money” when you consummate an IRA real estate purchase.

You turn the best capital gains asset into ordinary income.  Because of the leverage explained above, you can have very large capital gains on real estate.  Not only do you lose the large capital gain potential because of losing leverage, you have turned  a capital gains taxed at reduced rates (15% to 25% on real estate), into ordinary income (rates as high as 35%). There is not such things as capital gains on IRA real estate because everything withdrawn from an IRA is taxed as ordinary income.

If the rental property in your IRA needs a new roof, you must use IRA funds to replace the roof.  You cannot use your own funds as then you as an individual are deemed to be in business with your IRA and this is a prohibited transaction which could cause your IRA to become taxable.  So you need to always have plenty of cash in your IRA for repairs, insurance payments and property taxes.  This means you need to keep funds liquid in 1a 3% money market and sacrifice the potentially higher returns of other investments. Need yet another reason?

Your IRA fees are likely free at your brokerage firm or bank.  To hold real estate in IRAs, you need a specialized IRA custodian willing to do this and the fees range from 40 to 150 basis points annually–i.e. hundreds of extra dollars in costs.

And just in case you still want IRA real estate, if you should make a bad deal, your loss will not deductible inside an IRA as it would be as a non-IRA transaction.  If you line up 10 people that tell you placing real estate in IRAs is a good deal, you will find 10 people that earn commission by selling real estate.  If you want real estate in your IRA, then buy shares of real estate investment trusts or other real estate securities.

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It’s common to find retirees who are asset rich and cash poor.  You may own some of these assets named below that don’t produce much or any income that you can convert to a much larger income stream.

Investment Real Estate
In many parts of the US, investments in rental houses or apartment buildings will yield less than 4% after expenses.  In other words, in the current value of the property is $1 million, you realize $40,000 or less in cash flow.  You could earn the same in a simple bank certificate of deposit.  Of course, the reason you purchase the real estate was for appreciation and that’s the #1 reason to invest in real estate.  But you may have now reached a stage of life where the cash flow is more important than future appreciation.  You can sell and reinvest for more cash flow.  (There are several methods to defer or avoid capital gains tax when selling real estate including a CRT and a 1035 exchange from residential to triple net commercial property which yields higher cash flow).  of course, raw land produces no cash flow and is the best candidate for conversion to an alternative retirement income option.

Your Residence
A reverse mortgage allows you to tap the equity in your home as income.  Many people don’t realize that the equity in their home has a yield of 0%.  Therefore, if you need income and are at least age 62, it’s easy and financially sensible to convert that equity into cash.  You make no payments on this mortgage as long as you reside in the home.  The main criticism of these mortgages is that the initial cost is higher than a conventional mortgage, typically 5% (e.g. $10,000 on a $200,000 mortgage).  But this is a foolish reason to  ignore this option because if you invest $190,000 that you receive in a 6% tax free bond, that’s $11,400 of tax free cash to enjoy that you did not have before. 

Your Life Insurance Policy
You can sell your insurance policy.  Many investors will buy policies from you for more than you can get if you surrender it to the insurance company.  These transactions are called insurance life settlements or senior life settlements.  The buyer will continue to pay premiums on your policy and collect the death benefit when you die.  But they will pay you cash today.  For example, if you have a $1 million policy (pays $1 million to your beneficiaries when you die), that may be worth $250,000 ore more to an investor, the price being a function of your age, health and type of policy.

Growth Mutual Funds
It’s not uncommon for a retiree to own growth mutual funds which pay very little in dividends.  In today’s market, you can buy plenty of high quality, “blue chip” stocks that pay dividends of 6% or higher.  So get out of growth mutual funds into value stocks with handsome dividends.

Just these few tips could increase retirement income so that retirement becomes financially most comfortable.

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Years ago, I explained to a prospective client that my annual fee to manage her portfolio would be 1% of the portfolio.  She replied, “why would I pay that when I don’t pay anything for my mutual funds.”  Unfortunately, this public ignorance of what investors pay their retirement advisor is pervasive.  In fact, you’d be shocked to know that even executives at companies don’t know what they pay to have their 401k plan handled.  Spectrem Group surveyed plan sponsors and found that even half of the executives with plans of $50 million and more did not know how their representative was paid.

Don't Know Amount of Compensation Paid to Broker/Retirement Advsior by Size of Plan

Here’s how your retirement advisor is paid.

1. If you own mutual funds, the funds are likely load mutual funds which means you paid a fee when you invested (typically 4%) AND you pay an annual fee for management and distribution likely about 1.75% of the total.  Alternatively, you paid no upfront fee and pay an annual fee of 2.25% (including management and 12b-1). Note that these fees are fully disclosed in the prospectus but few people ever read it.  Not disclosed in the prospectus is the “slippage” cost which occurs when a mutual fund buys and sells large blocks of stocks.  This costs the average stock fund investor another 1.2% annually.

2. You may also own mutual funds in a fee-based account.  If these are “institutional class funds” such as DFA or Vanguard, your mutual fund management  costs are much lower.  There is no font end or back end load.  The mutual fund does have internal fees approximating .25% annually.  On top of this, your retirement advisor likely charges a fee for managing the mutual fund portfolio of 1% for a total annual cost of 1.25%. Slippage costs in these funds are minimal because institutional class funds do little trading.

3. Additionally, you may pay your advisor fees for planning on an hourly or project basis (e.g. for a retirement plan).  These fees may be from $100 to $250 an hour and are fully disclosed to you.  By law, a retirement advisor that gets paid fees directly by you (as opposed to situation #1 above where the fees are buried in the mutual fund share price) must disclose them clearly.

If you are confused, ask your retirement advisor to put the TOTAL costs of your investments in writing.  Ask him to enumerate:
1. the front end load or commission paid upon entry into the investment
2. the back end load or commission when selling the investment
3. the annual ongoing management fees and 12b-1 fees
4. advisory fees paid directly to the retirement advisor

If you don’t get a document you can clearly understand, change advisors and ask for this disclosure before investing.

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