Retirement planning is an essential yet often-neglected matter for many Americans, with many failing to plan until it's too late. People are living longer, with the average US life expectancy growing from 73.7 years in 1980 to 79.11 in 2023, meaning they have to support themselves on their post-retirement funds for more years. This failure to plan results in insufficient savings to support retirees in old age, leaving them in poverty or burdening their children, who are often also supporting their own children.

America Should Diversify Its Approach To Retirement
America Should Diversify Its Approach To Retirement Planning, Says Ironhawk Financial's Joseph Lombardi Pixabay

Today, the most popular retirement investment vehicle is the 401(k), an employer-sponsored retirement account with defined contributions from both employee and employer. According to Joseph Lombardi, Founder and Managing Director of Ironhawk Financial, the 401(k) is exposed to the equity and debt markets, which places a degree of risk on its outcome. Poor economic performance means the account won't be able to meet projected returns, which is especially worrying today, with a recession on the horizon. Furthermore, the money in a traditional 401(k)s is taxed upon withdrawal, whether pre- or post-retirement, leading to the loss of a person's hard-earned money.

'When taxes go up most people don't understand they lose a lot more on 401k as it's a taxable asset, and when the market goes down, they also lose a lot more of their 401k's value and often don't have the time horizon to make back their loses. Additionally, when interest rates and inflation go up it causes losses in the market which are reflected in your 401k. With my strategy, when taxes go up, or the markets go down, my clients don't lose anything in their accounts. More importantly when interest rates and inflation go up, not only do my clients not lose money as they would with a 401k, with my strategy, they earn more.'

This is why Lombardi is a passionate advocate of diversifying one's retirement planning portfolio to include life insurance as a bond hedge to ensure a more stable outcome in old age. By not putting all your eggs in one basket, you have a better chance to retire safely. Lombardi's strategy diversifies your market exposure, your future taxation, and your liquidity because according to him, tying your money up for decades is rarely a wise financial decision. 'This, says Lombardi, is why people must avoid putting all their retirement assets in the market where they're vulnerable, but instead diversify their market exposure through life insurance as most people did using bonds back when interest rates were more stable'.

According to Lombardi, people should consider life insurance as a valuable tool for retirement planning because of its built-in tax benefit in the future, as long as the employee pays taxes on the money at present. He says that using insurance can potentially save a client around $1 million in taxes, compared to purely using a qualified account such as 401(k), IRA, or SEP.

In his example, a person contributing $15,000 annually to a qualified account for 30 years will receive a $150,000 tax write-off. But, when they retire, they will end up paying $38,000 in taxes (at 28% federal and 6% state) to receive $100,000 net per year. Assuming the person retires at age 60 and lives until 90, they will pay $1.12 million in taxes.

Lombardi says that people tend to prefer instant gratification, which is why many prefer having the $150,000 tax write-off while they are working. However, using Ironhawk Financial's insurance-based strategy will actually lead to a net saving of $970,000 in taxes, making it a more viable decision in the long term.

Aside from providing an adequate income in retirement, life insurance also creates a solid financial foundation that protects the policyholder and their family from the financial consequences of their untimely death. Losing a breadwinner can have devastating consequences to the family's lifestyle, including greatly reduced income, having to move to a more unsafe neighborhood, and the children not being able to finish school.

"Nobody wants to talk about dying or becoming too old that they can't care for themselves anymore. It's a really morbid topic, but we can't run away from it forever. That's why when I'm introducing insurance to clients, I first leverage the tax benefits that will let them enjoy their retirement years then tell them the other benefits, such as long-term care and the death benefit, which builds the financial foundation and protects the family from the financial repercussions of losing a spouse or parent," Lombardi says.

According to Lombardi, awareness of insurance as a retirement planning tool is growing in the US, which is in the midst of a transfer of wealth from the Baby Boomer generation to their heirs, Generation X and Millennials. However, he believes this awareness has yet to reach critical mass, so there's more work to be done.

"I've been doing insurance for more than two decades, and it's definitely getting more buzz now in the retirement planning circles. But I want to use that buzz to protect more people. Saving people taxes is awesome. But if an extra one million people have long-term care, life, disability, and chronic illness insurance, they have some sort of protection for their children and spouse in case something bad happens. I want to strike while the iron is hot right now, with people realizing that 401(k)s and IRAs are pretty much not what they thought they were. People are now looking for alternative investments, and insurance is a very positive asset to have, one that they can own for the long term."