Category: Financial Planning

5 Reasons To Own Life Insurance In Retirement

Your kids might be financially independent, your mortgage is close to being paid off, and you are getting close to having what you need to retire comfortably. You might be wondering, “Should I own life insurance in retirement?”  So, before you go and cancel that policy, read this post and see if you would be a good candidate to own some amount of life insurance for the long haul.

Basics of term and permanent insurance

basics of life insurance in retirement

Before we dive in, let’s go over the basics of the two primary types of life insurance.  Term Insurance is just that, it’s for a specified term.  This is a cost-effective solution for a temporary need.  Let’s say you have young children, a mortgage, and another 20 years of earned income until retirement.  The death benefit you will need, on average, will be at least 10-16x your gross income (according to the CFP board).  So, if your income is $200,000/year, you will need approximately $2mm-$3.2mm of life insurance. 

Depending on your health, this will only cost you pennies on the dollar (perhaps $1800-$3200/year).  The reason it’s so cost effective is that only 1% of term policies ever pay a death claim, so term insurance is one of the most profitable products an insurance company can sell! 

Permanent Insurance is of course, permanent (mind blown).  There are many flavors out there; whole life (traditional), universal life, variable life, variable universal life, joint survivor universal life, and indexed universal life, to name a few.  If you see the term variable, this means the policy performance is going to be tied to an underlying sub account that can be invested, like your 401k plan.  If you don’t see the term variable, this means the performance is going to be tied to the performance of the insurance company’s general account, which is quite conservative.  If you see indexed, this has a component of a fixed rate with potential upside of a targeted index, like the S&P 500.  The difference between universal and traditional whole life is essentially the cost of insurance schedule.  With traditional whole life, you have a fixed cost schedule at the time you start the policy, and it stays that way for the life of the plan.  With universal, the cost of insurance goes up each year as you get older, but the premiums don’t necessarily go up each year.  The schedule is flexible in that you can stop paying premiums one year (assuming you have enough cash value to support it), start again the next, pay half the premium another year and double the premium the year after.  If you attempted this with traditional whole life, your policy would get cancelled, so don’t do that.  I’m also not advocating you make premium payments to a universal policy like so, but it’s nice to have some flexibility.

I just want to emphasize how important it is, if you have a universal life policy, to review the performance at least annually.  You can request an in-force illustration at any time to show how your policy has performed, and how it’s expected to perform based on fresh assumptions.  I can’t tell you how many times I’ve looked at universal policies that people have paid into for decades that are on the verge of breaking.

The common theme for all permanent policies, if they are structured properly, is the death benefit should be in force for as long as you live.  Additionally, there is a cash value component that you can access while you are living.  This can be done through policy loans or partial surrenders. 

So you might be wondering, why wouldn’t everyone buy permanent insurance and skip the term?  The answer is simple, the premiums can range from 5-15 times more expensive!  For this post, I will mainly discuss the argument of simply owning life insurance in retirement, whether it’s term or permanent is not the point.  However, there are certain arguments I will make that ONLY permanent insurance can solve for.  This is why it’s critical to begin with the end in mind and work backwards.      

Reason #1: You are over the estate tax exemption limits (federal and/or state)

Currently, the federal estate exemption is $12.06mm/person (or $24.12mm for married couples).  If your total estate is valued above the threshold and you die in 2022, you will pay tax on the amount ABOVE the threshold. The tax rates range from 18%-40%, depending on the size of your estate.  Let’s say you had a total estate of $30mm and were married in 2022.  If both you and your spouse passed away today under the current law, you would pay taxes on $5,880,000 at the federal level.  There are also 17 states that have a “death tax,” so be careful where you live when you die as you might owe state AND federal estate taxes (and by “you,” I mean your beneficiaries)!   For example, Massachusetts and Oregon tax estates in excess of $1mm!  As you can see, living in an estate tax friendly state is a big decision point for many retirees. 

This can become problematic for your heirs to pay these large sums of taxes. If you own a closely held business, a real estate portfolio, or a mix of stocks and bonds, you probably want your heirs to continue to enjoy the fruits of your labor and preserve those assets.  Well, if your beneficiaries owe a seven figure tax bill, they might be forced to sell an extremely valuable asset in order to pay the taxes. This is where permanent life insurance can come into play. Life Insurance is a tax free payment of cash to your designated beneficiary. Therefore, instead of forcing your beneficiaries to sell that valuable asset, the life insurance death benefit could be used to pay the estate tax bill. 

*The Tax Cuts and Jobs Act will sunset after the year 2025. The federal exemption is scheduled to revert back to the $5mm/person limit (plus some inflation adjustments). So, while you may not exceed the federal thresholds today, you certainly could exceed them in a few short years.  Plan accordingly!

Reason #2: You Have a Dependent with Special Needs

Life Insurance Special Needs

Children with special needs often require permanent financial assistance. Meaning, their condition won’t make their life any easier as they get older. In fact, quite the opposite. The government provides some financial assistance for those they deem disabled in the form of Social Security Income, Medicare and Medicaid. However, you will likely want to provide additional financial support above and beyond the  government assistance.  While you are alive and working, you will do anything you can to provide that additional financial support. However, if something were to happen to you, how do you address that financial shortfall?

Owning a life insurance policy is a great solution to this problem. You can simply calculate the amount of annual income needed to support the beneficiary with special needs, and come up with an appropriate amount of life insurance to pay out to that beneficiary.  These policies are often owned inside of what is called a Special Needs Trust. This special type of trust allows for the preservation of government support for the child, while at the same time receiving supplemental income from the trust. The longer you live, and the more assets you accumulate, might impact the amount of insurance that you need to own. Ideally you will want some amount of the insurance to be term and some permanent to accommodate the future accumulation of other assets. 

Reason #3: To Replace Lost Retirement Income

 Social Security Income

You might be thinking life insurance is there to replace income when you are working, but how does it factor into retirement income?  For starters, Social Security represents the largest pension fund in the world, and most retirees rely on it for some or most of their income in retirement. When one spouse dies, there is an automatic loss in Social Security income.  The surviving spouse will elect to keep their own benefit, or the deceased’s benefit, whichever is higher.  If a couple each had $24,000/year in social security benefits, this would result in $24,000/year in lost social security income upon the first spouse passing away.  Additionally, after two tax years of filing as a qualifying widower, there could be a widow’s tax given they will have to transition over to a single filer, and potentially pay higher tax rates. 

Furthermore, you might receive a pension from the military or government, or perhaps VA Disability income.  The benefit might be cut in half, or even go to zero upon the annuitant passing away.  Therefore, owning a life insurance policy through retirement can help replace lost social security or other pension income, making the surviving spouse whole and protecting their own longevity.

Reason #4: To Replenish Lost Assets from Long-term Care Costs

It’s estimated that medical costs in retirement will total about $300k for a couple that is 65 years old today, and that excludes Long-term care costs.  The average cost of a nursing home in the US is north of $100k/year (in today’s dollars).  If there was a need for long-term care at the end of the first spouse’s life, this could create a significant drain on retirement assets.  This is especially true if the assets that were used to pay for long-term care came from retirement plans such as traditional IRAs or 401k plans, given the tax drag on withdrawals.  Therefore, owning a life insurance policy can guarantee a cash infusion for the surviving spouse to protect their retirement lifestyle and their own longevity going forward.   This could also be achieved with a life insurance policy with a Long-term care rider, which would allow funds from the policy to be paid in advance for long-term care costs, instead of waiting for the death benefit of the first spouse. Either way, utilizing some form of permanent life insurance in retirement is a great way to protect and/or replenish assets in the event long-term care becomes a financial drain.

Reason #5: To Guarantee a Financial Legacy

I often times hear from clients they have a strong desire to leave assets to their children, grandchildren or even their favorite charity.  Ultimately what they are saying is they don’t want to burn through the assets they have accumulated, but they still want to ENJOY their retirement!  These clients often times have a very difficult time spending their own money in retirement simply because of the fear of running out of money and being a burden on their loved ones.  My clients that own permanent life insurance in retirement can sleep extremely well at night knowing that at least one asset is guaranteed to be there upon their death.  This ends up liberating the client to spend more freely on travel, bucket list activities, charitable giving, and overall results in a more enjoyable retirement lifestyle.

BONUS Reason #6 – Owning Permanent Life Insurance in Retirement as a Fixed Income Alternative

Here is a fun concept, especially in light of today’s bond market!  With the bond index down double digits year to date, many clients are asking about an alternative to bonds.  A few come to mind including an individual bond ladder, fixed income annuities, or even a zero duration hedge strategy.  However, the cash value in a traditional universal life or permanent life insurance policy can be extremely powerful, if structured properly.  If you google “cash value life insurance,” you will see a mix bag of opinions.  For the right client profile (maxing out qualified plans, maxing out Roth conversions, higher tax bracket etc.), there could be a very compelling argument to begin accumulating dollars within a permanent life insurance policy well before retirement.  For starters, it will solve for all of the primary challenges we mentioned previously.  Additionally, it will allow time for cash value to build up inside of the policy.  If it’s structured properly, it can become a liquid asset to draw from during your retirement years. 
You will likely experience anywhere from 4-6 bear markets during your retirement years.  You’ve probably heard the concept, “buy low, sell high.”  In retirement, this involves avoiding selling a depreciated asset for income.  In a market like 2022, both stocks and bonds are down.  If you have cash values built up in a fixed life insurance policy, it’s a viable hedge to allow your riskier assets to fully recover when the market turns around. 

A few last words of advice

Life insurance does get more expensive as you get older, and you also have a greater risk of developing a medical condition that might make life insurance unobtainable. There is no one size fits all when it comes to retirement planning, especially when it comes to using life insurance in your retirement plan. The life insurance industry is quite complex with many carriers and many variations of permanent life insurance. Therefore, I highly recommend you consult with a fee-only financial planner who has expertise in this arena, like our firm! (Yes, I’m quite biased).

If you are interested in learning more about working with our firm, or would like to discuss your financial objectives, book a Mutual Fit meeting with the link below. Also, feel free to share this article with anyone that might find it useful.

Are Financial Advisors Worth It?

In my nearly 14 years in this business, I’ve seen financial advice given by many different professionals. Insurance agents, stock brokers, bank representatives, real estate professionals, next door neighbors and the like. I’ve seen some great advice given, but also some terrible advice. This often times leads to the general public to think “are financial advisors worth it?” This is especially the case now given the lines are blurred between different segments of the “financial services” industry. Vanguard did a study called “Advisor’s Alpha” which I have found is the most helpful and accurate summary of value-added services a comprehensive financial advisor provides. I’ve referenced it to clients and other professionals since 2014 when it was originally published. To summarize it briefly, they outline seven areas of advice that add value to the client’s portfolio by way of net returns annually. They have assigned a percentage to each of the categories which amounts to approximately 3%/year in net returns! In this article, I will highlight some of the key components of their research, as well as put my own spin on it based on my thousands of hours working with clients directly.

What is comprehensive advice?

First things first, not all advisors are comprehensive (and that’s okay). However, this article is specifically for firm’s like mine that are focused on comprehensive advice and planning, and I would argue the 3%/year figure is on the low end. I will get into this more shortly.

Here is a breakdown of Vanguard value-added best practices that I mentioned previously:

The first thing that should jump out to you is that suitable asset allocation represents around 0%/year! This is given the belief that markets are fairly efficient in most areas, and it’s very difficult for an active fund manager to consistently beat their benchmarks. This is contrary to the belief of the general public in that a financial advisors “alpha” is generated through security selection and asset allocation! What’s also interesting is that the largest value add is “behavioral coaching!” I will get into more about what this means, but I would 100% agree with this. Sometimes, we are our own worst enemy, and this is definitely true when it comes to managing our own investments. It’s natural to have the fear of missing out, or to buy into the fear mongering the media portrays. So if you take nothing else away, the simple notion of having a disciplined process to follow as you approach and ultimately achieve financial independence will add 150% more value than trying to pick securities or funds that may or may not outpace their benchmarks!

Before I dive into my interpretation of their study, I want to note that I will be using five major categories instead of seven. Some of the above mentioned can be consolidated, and there are also some value added practices I, and many other comprehensive planners, incorporate that are not listed in their research.

What are the five value-added practices? I use the acronym “T-I-R-E-S”

  1. Tax planning
  2. Income Distribution Planning
  3. Risk Management
  4. Expense Management
  5. Second set of eyes

Tax planning

There are four major components of tax planning a comprehensive financial advisor should provide. The first component is what we call “asset location.” The saying that comes to mind is “it’s not what you earn, it’s what you keep.” Well, taxes are a perfect example of not keeping all that you earn. However, some account types have preferential tax treatment, and therefore should be maximized through sound advice. Certain investments are better suited for these types of tax preferred accounts and other investments tend to have minimal tax impact, and therefore could be better suited OUTSIDE of those tax preferred accounts. A prime example is owning tax free municipal bonds inside of a taxable brokerage or trust account, and taxable bonds inside of your IRA or Roth IRA’s. Another example could be leveraging predominantly index ETF’s within a brokerage account to minimize turnover and capital gains, but owning a sleeve of actively managed investments in sectors like emerging markets, or small cap equities inside of your retirement accounts. According to the Vanguard study, this type of strategy can add up to 75 basis points (0.75%/year) in returns if done properly, which I would concur.

The second component is income distribution. This is often thought of much too late, usually within a few years of retirement. However, this should be well thought out years or decades in advance before actually drawing from your assets. One example I see often is when a prospective client who is on the brink of retiring wants a comprehensive financial plan. Often times they have saved a significant sum of money, but the majority of the assets are held inside of tax deferred vehicles like a 401k or IRA, and little to no assets in a tax free bucket (Roth). This type of scenario limits tax diversification in retirement. On the contrary, someone who has been advised on filling multiple buckets with different tax treatments at withdrawal will have many combinations of withdrawal strategies that can be deployed depending on the future tax code at the time. I have incorporated the rest of the income distribution value-added practice in the next section, but this practice as a whole is estimated to add up to 110 basis points (1.1%/year) in additional returns!

Legacy planning is the third component of tax planning that a comprehensive financial advisor should help with. This isn’t discussed in the Vanguard study, but it’s safe to say a comprehensive plan has to involve plans for your inevitable demise! You might have goals to leave assets to your heirs, especially if you are fortunate enough to have accumulated more than you will ever spend in your lifetime. With the SECURE Act, qualified retirement plans are now subject to the “10-year rule,” and therefore accelerating tax liabilities on your beneficiaries. However, if you incorporate other assets for legacy that can mitigate the tax impact on the next generation, this can save your beneficiaries hundreds of thousands, or even millions of dollars simply by leveraging the tax code properly.

Finally, navigating tax brackets appropriately can be another way a comprehensive advisor adds value. If a client is on the brink of a higher tax bracket, or perhaps they are in a period of enjoying a much lower tax bracket than normal, planning opportunities should arise. If you are in an unusually higher tax bracket than normal, you might benefit from certain savings or tax strategies that reduce their adjusted gross income (think HSA’s, pre-tax retirement account contributions, or charitable giving). If you find yourself in a lower tax bracket than normal, you might accelerate income via Roth conversions or spending down tax deferred assets to lessen the tax burden on those withdrawals. Additionally , considerations on the impact on Medicare premiums in retirement should also be taken into account when helping with tax planning.

As you can see, even though I am not a CPA and I’m not in the business of giving tax advice, helping you be strategic with your tax strategies is part of the comprehensive planning approach. All in, you should expect to increase your returns up to 1%/year (or more depending on complexity) by navigating the tax code effectively.

Income Distribution Strategy

In my personal practice, this ends up being a significant value add given the work I do with post-retirees. A systematic withdrawal strategy in retirement will involve a monthly distribution 12 times throughout the year. This reduces the risk of needing a sizeable distribution at the wrong time (similar to the concept of dollar cost averaging). For a 30 year retirement, this means 360 withdrawals! Most retirees have at least two different retirement accounts, so multiply 360 by 2 for 720 different income decisions to navigate. In my experience, the selling decisions are often what set investors back, especially if they are retired and don’t have the time to make it back. By putting a process in place to strategically withdrawal income from the proper investments at the right time, and maximize the tax efficiency of those withdrawals, this can add up to 1.1%/year in returns alone, according to Vanguard’s study! I’ve also had clients tell me they value their time more and more the older they get. Instead of spending their retirement managing income withdrawals each month, they would much rather travel, play golf, go fishing, spend time with their grandchildren etc. So yes, I would agree with the Vanguard study that 1.1%/year is appropriate for this category, but I would also argue the peace of mind of not needing to place trades while you are on an African Safari with your spouse is priceless! Yes, I did have a client who admitted to this, and no, his wife was not happy! That’s why they hired me!

Risk Management

The major risks you will see during your lifetime from a financial planning perspective are:

  1. Bear market
  2. Behavioral
  3. Longevity
  4. Inflation
  5. Long-term care
  6. Premature death
  7. Incapacity or aging process

Vanguard’s study focuses mainly on the behavioral risk (value add up to 1.5%/year) and re-balancing (.26%/year). As I mentioned earlier, it’s fascinating they rank behavioral risk as the largest value add out of any category! What is behavioral risk? Let me tell you a quick story. A client of mine was getting ready to retire at the beginning of 2020, right as the pandemic reared it’s ugly head. He had 30+ years working in higher ed and climbed the ladder to ultimately become president of his college for the last 15 years. He is a brilliant man, and a savvy business person. When the pandemic hit us, he was terrified. Not only did he see his portfolio drop from $2.5mm to $2.25mm in four weeks, but he was worried this could lead to the next depression which his parents lived through. We had at least a dozen conversations during those weeks about how he was losing sleep every night, which of course was miserable for he and his wife. Finally, in our last discussion he informed me he wanted to sell out of his retirement investments and move to cash. I plead my case in that we had a well thought out diversified strategy, and looking at the math, we had enough resources in fixed income investments to pay his bills for the next ten years! However, I told him it was his money and I was ready to place the trades if that is what he wanted. He told me he would think on it for the next 24 hours. The next day, he called me and said I was right, we had a plan, and he wanted to proceed with sticking to the plan. Well, by the end of 2020 his account not only fully recovered, but it grew to $2.75mm! I am not pumping my chest on performance, but by being the behavioral coach he needed at that time earned him $500k of growth in his portfolio (a whopping 22%).

I can literally share a hundred of these stories not just from the pandemic, but stories from 2008/2009, the dot com bubble etc. The point is, having an advisor you trust that can help you navigate through the ups and downs of the market and tell you what you NEED to hear, not what you WANT to hear is invaluable. Furthermore, it can free up your time to focus on what matters in your life and have the professionals worry about the market for you!

So all in all, I would agree on the 1.5%/year value add for behavioral coaching and .26%/year to help re-balance the portfolio properly. However, Vanguard’s study doesn’t even take into consideration proper insurance planning and estate planning advice a comprehensive advisor gives to their clients which are also value-adds in and of themselves. In that sense, I would argue this category can add up to 2%/year in additional returns to a client.

Expense Management

This is oftentimes overlooked when working with a financial advisor. Much of the public believes working with an advisor will be more expensive! However, many of them are used to being sold high commission investment products or services that are overpriced. However, through due diligence and leveraging the proper research, Vanguard estimates clients should save on average 0.26%-0.34%/year on expenses. From my personal experience, this might even be on the low end. However, for arguments sake and given it’s their research, let’s say we agree with the value-added range set forth.

Second set of eyes

Vanguard doesn’t reference this in their study, but that objective point of view is sometimes necessary to drive positive change. I don’t have any specific data on how to quantify this, but I hear time and time again from clients that they so much appreciate having me as an accountability partner. Think about trying to get in tip top shape without a coach or personal trainer! You might do okay, but you certainly wouldn’t push yourself as hard as you could have if you had a coach or trainer. On the contrary, I often hear from new prospective clients how information overload and the fear of making a mistake has caused a whole lot of inaction, which can significantly hurt returns and performance. Think about a surgeon attempting to perform surgery on their own body! They simply wouldn’t. Not that I am comparing my occupation to a surgeon, but someone working to achieve financial independence would benefit substantially from a trusted third party to help navigate all of the different financial decisions they will encounter in their lifetime. This also could be true for married couples who might have differing views on finances. After all, financial reasons are the #1 cause for divorce in America. If I can help a married couple get on the same page with their financial vision, that is a win for them, no questions asked! Without specific data, I would have to say my gut feel is that objectivity should add an additional 0.5%/year in returns over the duration of a relationship, as well as more self confidence and peace of mind that you are on the right path.

If we tally up our TIRES acronym:

  1. Tax planning = 1%/year
  2. Income Distribution Planning – 1.1%/year
  3. Risk Management – 2%/year
  4. Expense Management – 0.26% – 0.34%/year
  5. Second set of eyes – 0.5%/year

This gives us a total value add range of 4.86% – 4.94%/year in additional returns. My firm’s average fee is roughly 0.85%/year. This is why I get so excited to help new and existing clients. The value you receive, is far greater than the cost to pay me, creating a win-win situation. Now, not EVERY client will experience in additional 4-5% in additional value. Some might receive 2%/year, some might receive 10%/year! However, all of you who have yet to work with a comprehensive planner, or for those of you working with an advisor who may not be doing a comprehensive job, it might be time to reevaluate and see what holes you need to fill. If you are interested in learning how to work with me directly, you can schedule a mutual fit meeting with the button below. Or, you can visit my “Process” and “Fees” pages on my website.

Should I use an HSA for Retirement Planning?

What is a Health Savings Account?

In simple terms, a Health Savings Account, or “HSA,” is an account owned by an individual that can be used to pay for health care expenses, either now, or in the future.  The accounts are eligible for those who have a High Deductible Health Plan and are funded with pre-tax dollars.  If the funds are used to pay for qualified expenses, the funds can also be withdrawn tax free for those purposes.  If leveraged appropriately, it will be the most tax efficient vehicle you will utilize for retirement planning.

Why participate in a Health Savings Account?


Fidelity conducted a study that estimates a 65 year old couple will need $300,000 earmarked to pay for healthcare expenses.  This does not include costs for long-term care services.  $300,000 of course represents true expenses, meaning the funds used to pay for those expenses will be net of taxes.  If the bulk of your retirement savings are held in a traditional 401k or IRA, you will need close to $450,000-$500,000 in your account balance earmarked for healthcare costs alone.  Therefore, many of my clients are leveraging the HSA as part of their overall retirement planning strategy, and I’ll summarize some of the benefits in more detail below. 

1.  You recognize a tax deduction today. 

If you are single, the maximum contribution is $3,600 for 2021 ($3,650 for 2022).
If you are married and participating in a family plan for insurance, the maximum contribution is $7,200 for 2021 ($7,300 for 2022).  If you are over 55, there is a $1,000 catch up contribution available as well.  Unlike other tax efficient saving strategies, your adjusted gross income level does not phase you out of a contribution.   Also, you don’t need to worry if you itemize your deductions or take the standard deduction come tax time, all contributions will reduce your taxable income.  You will typically have the ability to make your HSA contribution before tax time.  This is helpful as you could wait until March or April before making your contribution from the previous year after you estimate what your tax liability might be.   Of course, consult with your tax advisor on federal and state tax impacts of making an HSA contribution. 

2.  Tax efficient growth

Once the contributions are made, the growth from year to year is not taxable.  Unlike a taxable brokerage account (investing in stocks/bonds/mutual funds), you will not receive a 1099 for interest or capital gains purposes.  Furthermore, the distributions are also tax free as long as they are used for qualified healthcare expenses.  Unlike a normal retirement account, you don’t have to wait until 59 1/2 to take those qualified distributions. We will cover what a qualified healthcare expense is later, but think about the tax power of this vehicle.  All other retirement vehicles that you take a tax deduction up front grows tax deferred, not tax free.  Furthermore, tax free retirement vehicles like Roth IRAs, Roth 401ks, etc., don’t allow for a tax deduction up front!  Therefore, the HSA has the best of both worlds from a tax standpoint in that it’s tax deductible, and grows tax free (as long as it’s used for qualified healthcare expenses). 

3.  Flexibility

A health savings account can be used for current medical expenses, or future medical expenses.  This means you are not required to “empty out” your HSA at the end of the year, unlike it’s cousin, the Flexible Spending Account.  This means that the HSA can be used in a year where you have abnormally high medical bills (major surgery, having a child, unexpected ER visit etc.), or can be used in future years, or better yet in your retirement years.  Furthermore, there is no limit on the timing of reimbursement.  Let’s say you had major surgery in 2021, but had some cash on hand to pay for the expenses.  Therefore, instead of taking an HSA distribution, you decided to let it compound and invest it for the long term.  Let’s say 15 years later, you needed to raise some cash.  Well, let’s say that surgery set you back $5,000 out of pocket, you could reimburse yourself for that surgery that occurred more than a decade ago.  This feature also allows you to grow the funds over time with compounding interest before reimbursing yourself.  Make sure you have a process to archive receipts, which often times can be done with your HSA provider.  The final component of flexibility is portability.  If you leave an employer, the HSA always remains with you.  You can even roll it over to a different HSA provider if your new company offers a plan that you want to participate in. 

4.  Growth opportunities

Given the ability to make contributions over your working years without the requirement of withdrawing funds, the HSA also offers an opportunity to accumulate a sizeable balance that can be used in your retirement years.  Additionally, you can even invest those unused funds in a basket of securities such as mutual funds or ETFs for even more growth opportunities.  Typically, the HSA provider will require some reserve amount that cannot be invested, let’s say $1,000.  Once you exceed the $1,000 mark, you can choose from a menu of investment options that suit your time horizon and risk tolerance. 

The tax deduction up front, the tax free growth, flexibility, and growth opportunity are all reasons why this vehicle is the most powerful vehicle you can utilize for retirement savings.  We already know healthcare is going to be a major expense during retirement, so why not get the most bang for your buck when paying for those healthcare expenses and leverage the HSA?!


Who is eligible?

Anyone who is not enrolled in Medicare and is enrolled in a high deductible health plan is eligible to participate in an HSA.  Most of you probably won’t worry about this, but you cannot be listed as a dependent on someone else’s tax return.  Some may view the high deductible health plan requirement as a downside, but most high deductible plans still provide your preventative care like annual physicals, child/adult immunizations, screening services and other routine check ups with little to no out of pocket charge.  The minimum annual deductible required to qualify as a high deductible is $1,400 for individual coverage and $2,800 for family coverage.  Additionally, the maximum out of pocket expense plus deductible needs to be $7,000 for individual plans or $14,000 for family coverage.  These are the basic requirements for the health insurance plan in order to be eligible for an HSA.  As you can see, the deductible may be slightly higher, but the tax benefits of the HSA contribution alone can help offset that slightly higher out of pocket cost.  Furthermore, that tax free compounded growth on your investments makes the high deductible plan worth it in many instances allowing you to build up that retirement health care nest egg. 

What are qualifying medical expenses?

The list of qualifying medical expenses is very extensive.  Chances are, anything that is non cosmetic is likely a qualified medical expense, including costs associated with dental and vision.  If the HSA distribution is deemed non-qualified, the funds are taxable and subject to a 20% penalty if you are under the age of 65.  Here is a link to a resource that provides a list of all qualified medical expenses:  CLICK HERE

Outside of the traditional list, I wanted to point out a few that might not come to mind initially.

1.  Long-term care services, and qualified Long-term Care Insurance premiums

This is monumental, given the likelihood of retirees needing long-term care.  The most recent statistic is 70% of those 65 and older will need some type of long-term care services during their lifetime.  On average, women receive care slightly longer at 3.7 years vs. men at 2.2 years.  Given the costs associated with long-term care, it is prudent to incorporate a plan well before you retire, whether it’s buying insurance, “self insuring,” or a combination of the two.  For those who decide to buy insurance, you can withdrawal funds from your HSA tax free to pay the premiums, as long as it’s a qualified long-term care policy.  Traditional, stand alone, long-term care policies without any cash value features are generally qualified policies, and HSA funds can be tapped to pay these premiums.  Hybrid policies, however, are a bit more complex.  These hybrid policies combine life insurance with a long-term care benefit, so if you never need long-term care services, typically your beneficiary will receive some sort of death benefit when you pass away.  These policies have historically been considered NOT qualified, and HSA funds could not be used to pay these premiums tax free.  However, companies are now identifying what is called a “separately identifiable long-term care premium,” which would be allowable as a qualified premium, and therefore HSA funds could be used in this situation.  Consult with your insurance agent and tax advisors to ensure you don’t make any mistakes here. 

If you decide not to buy insurance, or you plan on buying a small policy and “self insuring” for any additional long-term care costs, an HSA is a home run tool for this pool of dollars.  Long-term care services are in fact qualified expenses, and HSA funds can be tapped to pay these costs.  It’s estimated that a private room nursing home is upwards of $105k/year in the US (depending on where you live).  If you needed to tap $105k/year to pay into a nursing home and only had tax deferred accounts on your balance sheet, such as a 401k, you would need to make distributions in the amount of $125k-$150k/year depending on your tax bracket.  On the contrary, a $105k expense is a $105k distribution from an HSA given the tax free nature of these withdrawals.

I wrote an entire article on long-term care planning.  If you are interested in reading more, you can use the link HERE.

2.  Medicare premiums

This would apply to Medicare part B, C and D.  However, Medigap policies are not considered qualified expenses.  This is important because if you build up a substantial HSA balance, you could guarantee that you will have qualified medical expenses simply by way of being enrolled in Medicare.  Additionally, there might be years where your Medicare premiums go up based on your income (think selling a business or real estate property, Required Minimum Distributions etc.), and you can use the HSA to offset that increase in premium.

What happens to your HSA when you die?

If your spouse is named as beneficiary when you pass away, your spouse will take over and continue the tax benefits as an HSA.  Basically, there are no changes.  However, when the HSA is passed to a non spouse (adult child or other beneficiary), the account is no longer an HSA and the full balance is taxable income for that beneficiary.  Nobody has a crystal ball, but if you are building significant savings in an HSA, you might want to have a process to make regular reimbursements during retirement so you don’t create a tax windfall for your heirs.  Given the flexibility in the timing of reimbursements, you can very easily go back over the years and pay yourself for medical bills incurred in the past.  One other final disclaimer on that note.  You cannot reimburse yourself from an HSA for expenses that were incurred before that HSA was established!  If you set up an HSA in 2015, you can only reimburse yourself for expenses as long as that HSA was established (2015 and beyond). 

Final Word

Medical costs are pretty much a given, so why not take advantage of the IRS tax code and maximize your ability to pay for them now and in the future.  If you are young and healthy, I would strongly encourage the use of a high deductible health plan combined with an HSA.  If you have concerns about the higher deductible given your medical history or unique situation, simply do the math on the tax savings of making an HSA contribution vs having a slightly higher out of pocket expense for the deductible.  Most HSA providers even give you calculators to help you with that math.  However, the real power is in the ability to build up a substantial nest egg with tax free compounding and investment opportunity within the HSA.  This will allow for you to recognize some tax relief while you are working and contributing, but have another layer of tax free distributions to supplement your retirement income.  This is especially true if you no longer qualify for Roth IRA contributions or don’t have a Roth 401k/403b option available at your employer.  Even if are are closer to retirement, don’t let that discourage you.  You can still max out the HSA contribution every year, invest the funds in a well diversified portfolio, and have a decent account balance to pay healthcare costs in your retirement years. 

Be sure to consult with your tax advisors and financial planner before making any changes to your situation.  If you would like to schedule a call with me to review your situation and figure out what strategy fits in your overall plan, you can book a “Mutual Fit” meeting by clicking the button below. 

Feeling charitable? Consider strategies that also boost your tax savings.

The Annual Report on Philanthropy from Giving USA estimates that individuals gave $324.10 billion to US charities in 2020.  This was an increase of 2.2% year over year from the 2019 report.  Despite all of the negative news the media likes to focus their attention on,  America is a very generous country.  However, I run into many people that are uncertain about how to maximize the tax impact of their charitable giving.  There are a few key points at play.  

-It’s estimated that older generations will transfer $70 trillion of wealth between 2018 and 2042 as a result of diligent savings and investing throughout their lifetimes.  
-In 2017 the Tax Cuts and Jobs Act passed, which doubled the standard deduction.  This is the amount individuals and couples can deduct automatically on their tax return.  This led to fewer people itemizing their charitable donations. 
-Finally, the SECURE Act of 2019 has increased the tax liability on qualified retirement plans that pass on to the next generation. 

As a result of all of these factors, many of my clients are interested in giving to charity during their lifetime, but at the same time finding ways it could improve their tax situation during their life as well as for their heirs.  QCD stands for Qualified Charitable Distribution, and DAF stands for Donor Advised Fund.  There are other ways to donate to charity by way of private foundations, establishing special trusts or gifting outright.  However, this article will focus on QCDs and DAFs as they are the most common solutions I see used for my clientele.  I hope you find it helpful!

Let's first talk about Required Minimum Distributions

When you turn 72, of 70 1/2 before 2020, you are required to take a portion of your qualified retirement plans as a distribution by way of the “Required Minimum Distribution,” or RMD.  The amount required is based on a life expectancy table published by the IRS.  Most individuals use the table below, unless their spouse is sole beneficiary and is more than 10 years younger.   The RMD is calculated by dividing your year end account balance as of December 31st, and simply dividing it by the Distribution Period associated with your age.  Example:  Let’s say your IRA account balance at the close of the previous year (December 31st) was $1,000,000, and you are turning 75 this year.  You will take $1,000,000 and divide it by 22.9, which gives you $43,668.12.  That is the amount you will be required to withdrawal before the year is over. 

You will notice that each year, the Distribution Period becomes smaller, and therefore the amount required to be withdrawn goes up.  If you turned 90 with a $1mm IRA, you would be required to withdrawal $87,719.30!  This equates to almost 9% of the account balance.  One exercise I will run through with my clients well before turning 72 is to calculate their projected RMD each year during retirement, and compare that to how much they will actually spend for their retirement lifestyle.  Over time, I often see the RMD increases at a much higher rate than annual spending, therefore creating a surplus in income over time.  

A common complaint I hear:  “The IRS is making me take out all of this income I don’t need!”  If you want to minimize the tax impact on unnecessary withdrawals, thoughtful planning must be introduced years before turning 72.  I often tell my clients that retirement income planning begins at least a decade before they retire in order to optimize their financial plan. 

All retirement plans including 401ks, 403bs, 457bs, other defined benefit plans and traditional IRAs have RMD requirements.  Roth IRAs do not have RMDs while the owner is alive.  Roth 401ks, however, do have RMD requirements. Therefore, many people opt to rolling over their Roth 401ks to their own Roth IRA once they have attained eligibility requirements to avoid the RMD. 

It’s critical to satisfy RMD requirements, otherwise you will be hit with a 50% penalty on the funds you did not withdrawal on time.  Example:  If your RMD amount was $50,000 and you failed to take any money out, you could be responsible to pay a penalty in the amount of $25,000!  

If you turn 72 and are actively employed, RMDs associated with their employer plan could be eligible for deferral.  Any other accounts not affiliated with that active employer will still have an RMD.  Once you separate from service from that employer, you will then begin taking RMDs based on your attained age for that year.  For your first RMD, you have the option to defer the distribution until April of the following year.  This is helpful if you expect your tax rate to go down the following year.  Just note that you will have to take two RMDs that following calendar year, one by April 1st, and the other by December 31st. 

I have some clients who wait until December to pull their RMD if they don’t have a need for the cash flow.  This way they can maximize their tax deferral and keep their funds invested as long as possible before taking the RMD.  On the other hand, if you have a need for the income to meet your expenses, you might opt to take an equal monthly installment to reduce the risk of selling out at the wrong time.  It also helps create a steady cash flow stream for budgeting purposes in retirement.  

Qualified Charitable Distribution


A Qualified Charitable Distribution, also known as QCD, allows for you to donate up to $100,000 of your IRA directly to a qualified 501c3 charitable organization.  The Protecting Americans from Tax Hikes (PATH) Act of 2015 has made the QCD a permanent part of the IRS code and allows you to count that distribution towards your RMD that year, but exclude it from your adjusted gross income!  The QCD must come from an IRA (traditional IRA, inherited IRA, or an inactive SEP or inactive SIMPLE IRA), it cannot come from another qualified plan like a 401k or 403b plan.  Of course, the account must also be in the RMD phase.

Example.  If your RMD is $100,000, normally you would be required to withdrawal $100,000 from the balance of your IRA and include the distribution in your gross income.  However, you could instead elect to donate up to $100,000 to a charity, or multiple charities, directly from your IRA and reduce your taxable income by up to $100,000.  Of course, the charity also receives that donation tax free as well.  This results in a significant amount of tax savings for the IRA owner and provides a larger donation to the charity of your choosing.  Also note that the $100,000 limit is annually per person.  If you are married, you would each have that $100,000 limit if you both qualify for a QCD. 

This has become increasingly more beneficial with the Tax Cuts and Jobs Act signed into law in 2017 (TCJA).  The TCJA doubled the standard deduction which for 2021 is $12,550 for single tax payers and $25,100 for married couples filing jointly.  The new law significantly reduced the number of tax payers who itemize their deductions.  Charitable donations are an itemized deduction, so if a tax payer is not itemizing their deductions, the charitable donation has zero tax impact to the tax payer.  Therefore, the QCD allows for the tax payer to essentially get a tax benefit for donating to charity without needing to itemize their deductions.   Excluding the donation from your adjusted gross income could have other tax advantages as it might reduce your Medicare premiums as well as your overall tax bracket. 

It’s important to note that the charity has to be a qualified 501c3 organization.   You cannot donate to a private foundation or a Donor Advised Fund.  However, there is no limit on the number of organizations you donate your QCD to.  Most financial institutions allow you to create a list of the organizations that you want to benefit from your donation, and they will send the checks for you directly from the IRA.

Planning Ahead


Many clients I serve run into what I call the tax trap of traditional IRAs and 401ks.  I wrote an article about this and you can read more about it here.  The gist is they are the victim of their own success.  They saved and invested wisely, and accumulated a bulk of their assets in tax deferred vehicles, among other assets.  At RMD age, they are forced to take distributions they may not need, thus creating a negative tax effect (higher tax brackets, higher Medicare premiums, increased social security taxes etc.).  QCDs can certainly help alleviate that tax burden for those that are charitably minded.  However, you still want to do some planning well before turning 72 to optimize your tax situation.  If you plan to donate to charity during retirement, make sure you leave some room in your tax deferred plans to make those QCDs.  On the other hand, make sure your RMD’s wont push you into higher than anticipated tax brackets or bump your Medicare premiums up substantially.   You may want to consider doing some Roth conversions, or leveraging a Roth 401k option in lieu of a Traditional 401k.  The point is, don’t be blindsided by RMD’s, but be intentional well before you begin taking those distributions so you don’t run into the tax trap!

Qualified charities do not pay taxes on distributions.  I mentioned the SECURE Act briefly and also wrote about it in more detail in the article I referenced earlier (link here).   The important thing to note is that it eliminated the inherited IRA for most non spousal beneficiaries.  Therefore, when you leave those 401ks or IRAs to your children, they will be forced to liquidate all of the funds within 10 years, accelerating taxes on those plans relative to the previous law.  This is a further validation for not only QCDs for charitable giving during lifetime, but also for naming those charities as a beneficiary for these tax deferred accounts.  Instead of leaving those assets to your children for your legacy goals, you may consider leaving other assets such as life insurance, Roth accounts, or taxable brokerage accounts that are more tax advantageous for those beneficiaries.   Again, thoughtful planning is critical to provide these opportunities before it’s too late to make any meaningful changes.

Donor Advised Funds

A Donor Advised Fund, or DAF, is an opportunity for individuals to donate cash or securities to these specified accounts, potentially recognize a tax deduction, and allow the funds to grow tax free to be used in the future for charitable giving.  Unlike donating to a specific charity outright, the DAF can benefit as many charities as the donor chooses.  Additionally, I’ve seen clients name their children as successor Donor Advisors in order to teach the next generation how to be a good steward of their dollars.  A big advantage of a DAF is the ability to front load donations.  As I mentioned earlier, many tax payers are taking the standard deduction given they don’t have itemized deductions that exceed the standard deduction amounts.  However, if you plan to donate each year for the next several years to certain charities, you might consider front loading a contribution to a DAF in order to qualify for an itemized deduction, and then spread out the actual donations over several years.  Let’s look at an example.

Brenda is married and normally donates $5k/year to a local animal rescue.  The $5k donation, along with other deductions, does not exceed $25,100 (standard deduction for married filing jointly).  Therefore, that $5k donation is meaningless from a tax standpoint.  However, Brenda will continue to donate $5k for at least the next 10 years.  She has cash savings in excess of $100,000, so she decides to donate $50k to a DAF ($5k x 10 years), which puts her over the standard deduction limit and gives her the ability to deduct that $50k donation!  Going forward, she will make a distribution from the DAF in the amount of $5k/year over the next 10 years to benefit the charity!  Additionally, she can choose to invest the dollars in the Donor Advised Fund, so she has the possibility of growing her account balance even more for her charitable goals.

The DAF also allows for contributions from appreciated assets, like stocks, bonds or mutual funds.  Let’s say you owned a stock that appreciated $100k over the original value.  This is obviously great news, but if you sold the stock, you would include that $100k in your adjusted gross income and would owe taxes.  However, if there is no need for that particular security for your retirement or other financial goals, you could donate that security to the DAF without any tax consequences.   Additionally, the DAF could sell the security and reinvest it into a more diversified portfolio without incurring any taxes either.  This is a powerful tool to utilize for those appreciated securities that don’t have a specific purpose for your own income needs. 

It’s very important to note that a DAF contribution is irrevocable.  Donors cannot access those funds except when used for donations to a qualified charity.  However, there is no time limit on when the funds need to be distributed.  Just like any charitable contribution, make sure it aligns with your financial goals and is coordinated with the rest of your financial picture.  


If you plan to make financial gifts to charitable organizations, make sure you consult with your tax advisor, estate attorney and of course your financial planner.  Make sure your charitable giving is coordinated with your overall plan, and also make sure you take advantage of tax benefits where possible.  There are certainly more ways than a QCD and DAF to satisfy charitable goals, so please be sure that you choose the right solution based on your unique circumstances.  If you would like to discuss your charitable giving strategy, or other financial goals, you can always start by scheduling a no obligation “Mutual Fit” meeting below to learn how to work with us.  We look forward to speaking with you!

Stress Test Your Retirement Plan

Have you stress tested your retirement goals?

“When you retire, there are two doors in which you can walk through.  Door #1, the people outlive the money.  Door #2, the money outlives the people.  My mission is to help people walk through door #2.”  – Nick Murray

Karen and Pat had a goal to retire in 2009 at the age of 62.  They planned to take Social Security, start drawing Pat’s pension, and then supplement the difference with withdrawals from their retirement portfolio.  Who could have predicted that the Great Recession would wipe out 50% of the stock market value the year before they planned to retire?  They lost nearly 35% of their portfolio, and the decisions that followed ultimately pushed their retirement plans back 11 years!  Pat was a classic “Do-it-yourselfer” and seemed to have the financial house in order, and Karen relied on his handling of their financial affairs.  What I’ve learned is the closer major milestones become, such as retirement, the fear of loss is amplified.  The only way to mitigate the risk of loss is to have a disciplined process that can be followed during the good times, and the bad times, which would have helped Karen and Pat navigate through the Great Recession relatively unscathed. 

Since that experience, I have seen many different events play out that have derailed retirement goals.  On a more positive note, I have personally helped countless families prepare for and execute a successful retirement.  I have come to the conclusion there are 5 major financial risks that could seriously impact financial independence and put you in jeopardy of running out of money.  As part of our financial planning process, we stress test each of these risks to see how our client’s financial goals would be impacted.  The 5 stress tests are as follows: 

1.  Bear Market Risk (a 20% or more drop in the stock market)

2.  Longevity Risk (living longer than you anticipate)

3.  Inflation Risk (what if inflation is higher than we anticipate?)

4.  Prolonged Low Return Risk (experiencing lower returns than expected)

5.  Long-term Care Risk (the cost of needing custodial care later in life)

For a limited time only, we are offering a complimentary Retirement Review to stress test your retirement goals to see how we can help you on your path to financial independence.  By clicking the START HERE below, you will begin the process with a brief questionnaire.  My team will process this information and get in touch with you if we have any questions or initial thoughts.  We will then schedule a 30-45 minute Retirement Review to show you our findings to improve your probability of success.  We look forward to helping you!

6 Stress Tests for a Bulletproof Retirement

You're invited to join us live on Thursday, September 30th @ 2pm - 3pm EST.

Have you stress tested your retirement plans? If you are within 10 years of retirement, you must have a plan for the 6 “what-if” scenarios that could derail your financial goals.

The year was 2007, and my parents were all set to retire in just 12 short months. My Dad worked in IT and is a first generation American. My Mom was a preschool teacher and had no retirement benefits. She knew little about what was going on with their financial plans aside from listening to my Dad complain every time the market was down. As we now know, 2007 was the beginning of the Great Recession, which is the worst recession we’ve seen in our lifetime. Stock markets were down close to 50% and unemployment reached 10%. Like many other hard working Americans, the Great Recession of 2008 ended up pushing my parents’ retirement back 11 years. I made it my mission to help every day families prepare for the what-if scenarios when planning for retirement, including:

  • What if we go through a recession like 2008?
  • What if one, or both of us live longer than expected?
  • What if there are changes to Social Security?
  • What if market returns are lower than we anticipate?
  • What if there is higher than expected inflation?
  • What if there is a long-term care event during retirement?

These are the 6 most common concerns that keep my clients up at night.  My value proposition is to stress test each one of them and ensure their plans are bulletproof to and through retirement.  I look forward to meeting you live at our webinar.

This is my wife, Jessica, and oldest son, Tristan. We have since welcomed twin boys to our family, Julian and Jackson!