By DEBRA L SEPHTON

My favorite quote by Isaac Newton, "What we know is a drop, what we don't, is an ocean," comes into play a great deal in my practice when it comes to clients getting ready to retire and or turning 65. My best clients will educate themselves by researching or allowing someone else to provide their expertise, which is why they seek my advice.

When I was looking to reallocate a portion of my retirement funds several years ago, I decided to look at my options and what I discovered, changed my financial picture. I've learned there is a threat that most of us don't consider when we approach the subject of planning for our financial future. This discovery changed how I structure my practice and it has proven to be extremely beneficial for my clients.

The traditional "retirement account" also known as the 401(k) is a wonderful plan, enables an employee to contribute pre-tax dollars which an employer may match a portion of and the account grows tax deferred. Reducing taxes on earnings and on growth, plus the employer matching contributions are a winning strategy, right?

So, now that you have accumulation and growth covered, what about distribution? Here is where taxes show off its fancy foot work, (but not before age 59 ½ or you'll pay a 10% penalty). Here is the most overlooked problem; during our working years, we have the greatest opportunity for applying tax deductions, such as business expenses, child care, mortgage interest, college, etc... but as we near retirement and we've sold the business, grown children, paid mortgage, what's left to offset this income which is now going to be 100% taxable? How do we protect this wealth from tax erosion?

The threat of taxes is real, dissolving a significant portion of a portfolio, reducing generational growth... how do we combat this inevitable event? Possibly by limiting 401(k) pre-tax contributions. By contributing pre-tax salary only as much as the employer matched percentage of your income. The remainder could be placed in an age-old idea implemented by millionaires for centuries, a cash value life insurance policy.

I know, life insurance? That's exactly what I thought when I first heard of this concept. But the more I learned and discovered the value of this powerful tool I was on-board and made a step forward to own one. Cash value life insurance is not only used for a death benefit but also as a hedge against taxes, here's how. After-tax dollars placed in a cash value life insurance policy grows tax deferred, may be taken from the policy pre-59 ½ without the 10% penalty, and may be used for any purpose. When structured properly and distributed properly these funds are generally tax-free. Riders may also be available with some carrier's which offer lifetime income protection, critical and
terminal illness. Cash value of these polices build without market risk, never decreasing due to market volatility, providing peace-of-mind and enabling retirement planning at a time you choose, not the market.

Another tidbit most people wish they you knew before they retired and one most every financial planner is either unaware of or does not pay attention to, is the Medicare Income Related Monthly Adjustment Amount (IRMAA). I can't tell you how many of my clients consult with me regarding Medicare Supplements, they are totally unaware of the amount of money their Part B (medical) and Part D (pharmaceutical) monthly premiums will cost them.

In 2017, a married couple with a 2015 tax return (yes, they look back 2 years) modified adjusted gross income (MAGI) above $170,000, will pay more for their Part B which is currently $134.00 each per month for most individuals. A couple with a MAGI above $428,000 will pay $428.60 each per month. Part D may cost more as well, depending on MAGI but minimal in comparison.

Another reason why a pre-tax retirement account, such as a 401(k) or IRA, combined with after-tax/tax-free accounts, such as cash value life insurance, may be the answer to an overlooked surprise when retirement is realized, taxes and Medicare planning. The dollars received properly from a cash value life insurance policy generally will not create a taxable event, generally will not trigger a 1099 form, and generally will not increase Medicare premium costs or additional Social Security taxation when structured properly.

Overall, there are specialty products and consultants available when seeking alternative and complete advice when it comes to hedging life's unforeseen obstacles. Planning for retirement is not just growing the all-important portfolio, but also reviewing the impact of Social Security benefits, Medicare, Long Term Care and Life Insurance. There comes a time when the distribution and wealth preservation need to be addressed and after retirement is too late for most people. Consulting with a Life and Health Insurance agent who specializes in specialty designed cash value plans, Medicare and Long-Term Care Insurance planning will complete the total retirement picture.

This article is not intended to provide legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Atlantic Benefit Consultants, LLC and Debra L Sephton do not give legal or tax advice and do not work for Medicare. You are encouraged to consult your tax advisor, attorney or Medicare directly. For more information, please email Deb@AtlanticBenefitConsultants.com