Optimizing Retirement With Tax-Efficient Retirement Assets

There are many options when it comes to saving for retirement. Common categories of assets that can be used to fund retirement spending include traditional qualified accounts, Roth accounts, and taxable investment accounts. A traditional qualified retirement account may be offered by an employer—such as a 401(k), 403(b), SIMPLE IRA, or SEP IRA—and has certain tax advantages. Its most unique advantage is that it is funded with pretax dollars, providing an immediate tax benefit by lowering taxable income in the year of the contribution. All other assets are funded with after-tax dollars. Another benefit is that funds grow tax-deferred until money is distributed from the account, maximizing the potential for growth. Some employers also match a percentage of the employee’s contributions up to a certain limit to incentivize employees to save for retirement. The additional funds are effectively “free money” for the employee, boosting their savings. Traditional IRAs offer tax advantages similar to employer-sponsored accounts, though there are income limits for tax deductibility and lower contribution limits.

Qualified accounts also have some limitations. Since their purpose is to save for retirement, money cannot be accessed until age 59½ without a penalty. Furthermore, there are annual contribution limits because of their tax advantages. And because pretax dollars are contributed and earnings grow unfettered by taxes, when funds are withdrawn in retirement, they are taxed as ordinary income. These accounts are subject to required minimum distributions, starting at age 73 for individuals born from 1951 to 1959 and at age 75 for those born in 1960 or later. Sometimes, RMDs are so large they may push income into a higher tax bracket and result in higher Medicare premiums.

Most employers that offer a traditional qualified retirement account now also offer a Roth option. However, few workers—around one in five—take advantage of it.¹

A Roth account is funded with after-tax dollars, and earnings grow tax-free. In retirement, withdrawals (after age 59½) are typically tax-free, and there are no RMDs. Roth IRAs are similar to employer-sponsored Roth offerings, but they have income phaseout limits and lower contribution limits.

There are no contribution or income limits for taxable (i.e., nonqualified) investment accounts because they do not have the same tax advantages as qualified and Roth accounts. Certain earnings in a taxable account—including interest, short-term gains, and dividends—may be subject to income tax every year, while other growth may be tax-deferred until distribution, when it is taxed at capital gains rates. Since these types of accounts are not intended only for retirement, the funds can be accessed at any time and without penalty.

Whole Life Insurance

Whole life insurance is a financial asset that is purchased primarily for its lifelong death benefit². It also builds accumulated value over time that can be used as a tax-efficient source to fund retirement spending. The death benefit is generally not subject to taxes for heirs, and accumulated value can supplement retirement income and be withdrawn up to basis without incurring taxes.³ The differing tax consequences of the common account types to save for retirement and of whole life insurance are shown in Figure 1.

Comprehensive asset allocation considers whole life insurance accumulated value a fixed income alternative due to its similar characteristics of stability and income.⁴ Including accumulated value in the asset allocation allows a portion of fixed income to be reallocated to equity, resulting in higher growth potential that is still in line with the overall risk profile.

This research investigates strategies that position funds during preretirement into various combinations of these four assets—qualified accounts, Roth accounts, taxable investments, and whole life insurance. The result is different mixes of the following assets that will serve as income sources during retirement: taxable income-generating assets (qualified accounts and taxable investments) and assets generating income that generally will not be subject to income taxes (Roth accounts and whole life insurance).

The analysis began with a 35-year-old couple with $150,000 household income. They were good savers who already had $150,000 of qualified assets, $100,000 in taxable investments, and $50,000 in cash. Based on the couple’s risk tolerance, their assets were invested in a moderately aggressive glide path that started at 70% equities and 30% fixed income (i.e., 70/30) and transitioned to 60/40 at age 55 and beyond. They planned to continue allocating 20% of their gross income (i.e., $30,000 in the first year) to their retirement goals.⁵ Salary and total contributions grew annually at a constant rate.⁶

A variety of strategies are designed to allow comparison of outcomes from positioning funds into different types of assets, and they are separated into two distinct sets. In the first set, strategies are compared using a mathematically equivalent lens. The total dollar amount allocated to savings includes the incremental tax liability due for each strategy as seen in Figure 2.

The net allocation varies by strategy because tax was paid from the gross allocation. In other words, these strategies accounted for the fact that qualified accounts were funded with pretax dollars and the other assets were funded with after-tax dollars.

The allocations in the first year to the various assets (qualified, Roth, taxable, and whole life) are shown in Table 1 for the first set of strategies.⁷ Max refers to the 401(k) maximum contribution limit, which is initially $23,500 (corresponding to the 2025 limit).⁸ For example, in the first year, the All Qualified strategy is designed to make the maximum contribution of $23,500 to a traditional 401(k) and the remaining $6,500 to a traditional IRA, so all $30,000 of contributions are deducted from taxable income today.⁹

All other strategies have some portion of the allocation to assets that do not receive the same immediate tax benefits as qualified accounts. Therefore, the incremental amount of federal income tax is calculated using the marginal tax rate and assumed to be satisfied by the total allocation. For example, the next three strategies max out the traditional 401(k) and put the remaining funds in either a Roth IRA or a taxable investment account, or they use the money to pay whole life insurance premiums. Because these strategies have $6,500 more taxable income than the All Qualified strategy in the first year, they will have an additional $780 federal income tax liability (all else equal) because that additional income falls entirely in the 12% tax bracket.¹⁰

There are several strategies (e.g., All Roth, All Taxable, “All” Whole Life) that do not contribute anything to the qualified bucket, so they have $30,000 more taxable income in the first year than the All Qualified strategy. Just under a quarter of the additional income falls in the 12% tax bracket, and the rest is in the 22% tax bracket, resulting in $5,905 more federal income tax.¹¹

A second set of strategies is also considered because it is quite challenging for most people to estimate their incremental tax liability if they change where they save. Practically, it is probably safe to assume that few individuals can compare tax-equivalent contributions across potential saving options. For example, someone who currently contributes 12% of their salary to their traditional 401(k) at work may consider shifting to the Roth option with a part (say, 6% traditional and 6% Roth) or all (say 0% traditional and 12% Roth) of their current contribution. They likely would not adjust their contribution down (say, to 6% traditional and 5% Roth or 0% traditional and 10% Roth) to account for the extra income tax they will pay because of that shift. Still, it is important to note that they will have less to spend today.

For clients committed to funding their retirement well, demonstrated by a healthy savings rate and not constrained by a tight budget, it is reasonable to assume they can pay taxes from cash flow rather than reducing contributions to assets funded with post-tax dollars. Therefore, the second set of strategies assumes that taxes due on money that is positioned in retirement assets are paid from cash flow rather than from the gross allocation. The total dollar amount positioned across accounts is equal whether contributions are made with pretax dollars (i.e., qualified contributions) or post-tax dollars (i.e., all other asset types).

The allocations in the first year to the various assets (qualified, Roth, taxable, and whole life) are shown in Table 2 for the second set of strategies. Again, many of these strategies Max one of the following four buckets: traditional 401(k), Roth 401(k), taxable investments, or whole life insurance.¹² The remaining balance of $6,500 was then allocated to either the same bucket or a different one. Other strategies that did not Max any one bucket were also tested. The amount of federal income tax paid from cash flow is shown to quantify the sacrifice to spending today.

During accumulation, the strategies that contributed any allocation to a traditional qualified retirement account benefited from the tax deductibility of those contributions. In the first year, the All Qualified strategy still contributed the 2025 limit of $23,500 to a traditional 401(k) and the remaining $6,500 to a traditional IRA, so the total cost was $30,000. The All Roth strategy, by comparison, also contributed $23,500 to a Roth 401(k) and the remaining $6,500 to a Roth IRA, and because the entire $30,000 worth of contributions was taxable income, this strategy had $5,905 federal income taxes paid from cash flow. Therefore, the All Qualified strategy had almost 6% more spending power in the first year than any of the strategies that made no contribution to a traditional qualified retirement account.¹³

During retirement, however, strategies that more heavily funded traditional qualified retirement accounts had greater tax liability, all else equal. As an example, to generate $100,000 in after-tax retirement spending, a retiree may need to take a gross withdrawal of around $117,000 from a traditional IRA to net $100,000 after taxes compared to a tax-free withdrawal of $100,000 from a Roth IRA. Therein lies the trade-off between paying taxes now versus paying them later.

This research used Monte Carlo analysis to model 1,000 scenarios, each of which contains a time series of interest rates, inflation rates, equity returns, and fixed income returns across the planning horizon. This method simulates randomness in variables whose behavior is uncertain to obtain a range of possible outcomes that are then used to assess the likelihood that a particular outcome (or set of outcomes) will occur.

Outcome metrics from the simulations were then analyzed at a specified probability of success. The output included assets at retirement, the after-tax retirement income used in all trials that can sustain the stated probability of success, and the resulting legacy value. A trial was deemed successful if the portfolio maintained the inflation-adjusted level of income throughout the client’s retirement.

Investment returns were based on Northwestern Mutual 2024 Long-Term Capital Market Assumptions (CMAs).¹⁴ The CMAs forecast asset class rates of return over the next 80 years and provide expectations of risk/return profiles for the asset classes. The dividend interest rate (DIR) applied to whole life insurance was modeled using a formula that is a weighted average of the prior year’s DIR and 10-year Treasury return to simulate the impact of different economic scenarios.¹⁵ Comprehensive asset allocation considers whole life insurance accumulated value as part of the safer assets along with fixed income. It is used to align the overall portfolio to the household’s risk tolerance by rebalancing the investment allocation annually.

In this analysis, all investments, whether inside or outside a retirement plan, were assumed to be professionally managed. This offered benefits such as expert guidance, appropriate diversification and asset allocation, objective decision-making aligned with goals and time horizon, and regular portfolio monitoring and adjustments. In return for these advantages, a 1% investment advice fee was applied, which may differ from the potential costs incurred through self-management, where mistakes may be more likely.¹⁶

Set one: Strategies that assume taxes are paid from the allocation

Of all strategies tested, All Taxable had the lowest median balance at retirement ($3.25 million assuming taxes paid from the allocation) and provided the lowest after-tax retirement income at 90% probability of success ($60,000) and the lowest resulting legacy ($6.17 million) of all strategies. Therefore, All Taxable serves as the base for comparison in Figure 3, which shows the four strategies that allocated all funds in preretirement to just one of the four buckets to save for retirement.¹⁷ While typical advice generally recommends making contributions to different types of retirement assets to have more control over taxes in retirement, looking at these polarizing strategies provides insights into their respective strengths and limitations.

All Qualified provides 18% higher income and 15% higher legacy. These increases are due to a 25% higher median retirement balance that results from funding qualified accounts with pretax dollars and tax deferral during the working years as well as from continued tax deferral during retirement.

While Roth accounts are funded with after-tax dollars, contributions subsequently grow tax-free, which is a benefit relative to taxable investments that have tax due annually on interest, dividends, and short-term realized gains. This led to a 7% higher median retirement balance for All Roth than for All Taxable. During retirement, All Roth provided 11% higher income and 24% higher legacy. When comparing the Roth strategy to the qualified strategy, it is not surprising that All Qualified had higher income (because of its higher retirement balance) and All Roth had higher legacy (because tax-free withdrawals meant less had to be taken out to produce a comparable after-tax income and because legacy was tax-free to the beneficiary).

Whole life insurance premiums are also paid with after-tax dollars. In these tests, the “All” Whole Life strategy purchases a whole life insurance policy with premiums that initially total 16% of gross income. Over time, household income increases, and the allocation increases. Since insurance premiums remain flat, the additional funds are invested in a taxable investment account. Therefore, the “All” Whole Life strategy really combines whole life insurance with taxable investments.¹⁸

In addition, remember that at retirement, the target asset allocation was 60/40, and strategies were rebalanced annually. However, the analysis did not surrender a portion of the policy if accumulated value was higher than the 40% safer-assets target. A full third of all trials that followed the “All” Whole Life strategy were more conservative than the other strategies because whole life insurance accumulated value accounted for more than 40% of total assets. And almost 15% of all trials were more conservative than 50/50. While whole life insurance accumulated value tends to outperform bonds,¹⁹ it does not outperform equities over long time frames. Despite these disadvantages, the “All” Whole Life strategy still provided as much after-tax retirement income as the All Roth strategy and more legacy than the All Qualified strategy.

Next, since All Qualified—essentially maxing out a traditional 401(k) and funding a traditional IRA—had the highest retirement income, Figure 4 illustrates the impact of redirecting part of its allocation to each of the other buckets. Imagine that the portion allocated to the IRA ($6,500 in the first year) is instead invested in a taxable account or a Roth IRA or used to purchase whole life insurance.

Retirement incomes for the three blended strategies are within 1% of All Qualified. The drag of annual taxation causes Max 401k + Taxable to have less income and legacy. Adding a Roth IRA or purchasing whole life insurance led to 6% or 7% higher legacy, respectively, despite arriving at retirement with 2% lower total assets for each. Funding an asset that can provide income not subject to taxation in retirement or a legacy that similarly is not taxed may lead to better outcomes.

The remaining strategies in Figure 5 investigate funding different blends of the assets. Qualified funding in the first year was $7,500 for Balanced, $11,750 for both Max Split 401(k) strategies, and $18,000 for the two 60% Qual strategies. Incomes are higher when qualified savings constitute more than half of the allocation. In general, legacies are higher with more of the allocation going to Roth, whole life insurance, or a combination of both. Except for the “All” Whole Life strategy, which made the comprehensive asset allocation more conservative than the 60/40 target in many trials, having more whole life insurance generally results in higher legacies compared to Roth. While taxable assets are easily accessible (i.e., no income or contribution limits), they often lead to poorer long-term outcomes in terms of retirement income and legacy.

There are trade-offs from paying taxes now versus later. More heavily funding qualified accounts boosts after-tax retirement income primarily because retirement balances are higher. More heavily funding Roth accounts boosts legacy because of the tax-free nature of withdrawals during retirement and of bequests. Including whole life insurance improves retirement income and legacy outcomes, regardless of whether it is paired with qualified or Roth dollars. This is because accumulated value grows tax-deferred and tends to outperform bonds in the comprehensive asset allocation and because its death benefit generally is not taxed.

Set two: Strategies that assume taxes are paid from cash flow

Assuming taxes are paid from cash flow means that the strategies allocate more dollars to any Roth accounts, taxable accounts, or whole life insurance premiums. Only All Qualified is unchanged. While All Taxable again had the lowest median balance at retirement of all the strategies when taxes were paid from cash flow, it was much higher than when taxes were paid from the allocation ($3.76 million versus $3.25 million, or over $500,000 [>15%] more). This leap in retirement balance increased its after-tax retirement income at 90% probability of success from $60,000 to $71,000. This was still the lowest income, yet it tied with All Qualified. All Taxable’s resulting legacy ($7.01 million) was still the lowest of all strategies. Therefore, All Taxable again serves as the base for comparison in Figure 6, which shows the four strategies that allocated all funds in preretirement to just one of the four buckets for retirement. Again, these diverging strategies give insights into strengths and limitations but do not constitute typical advice.

Although All Qualified arrives at retirement with an 8% higher median retirement balance than All Taxable, both strategies have the same retirement income and an insignificant (1%) difference in legacy. The reason is due to withdrawals from qualified accounts being fully taxable in retirement at ordinary income rates. In contrast, the taxable investments have been subject to annual taxation on some of their gains, thereby adjusting their basis upward over time. In addition, they incur a typically lower capital gains tax rate on the remaining deferred gains. If a client can pay taxes out of cash flow on their contributions to investment accounts, the tax deferral benefits that qualified accounts exhibit when taxes are paid from the allocation are nearly eliminated. However, neither set of strategies includes an employer match. If an employer match were available, the balance of qualified assets at retirement would have been higher, improving retirement outcomes for all strategies that would have received the employer match (including All Qualified and All Roth).

Like All Qualified, the All Roth strategy also had a 8% higher median retirement balance than All Taxable. However, All Roth provided 10% higher income and 28% higher legacy than both All Taxable and All Qualified. When taxes were paid out of cash flow, the All Roth strategy was funded more heavily, eliminating the income advantage of All Qualified.

Remember, the “All” Whole Life strategy still partially funded a taxable investment with the growing portion of the allocation because life insurance premiums were flat. As in the analysis above, some of the trials had more than 40% accumulated value at retirement, making them more conservatively allocated based on comprehensive asset allocation. Still, the “All” Whole Life strategy—with only 3% higher retirement balance than All Taxable—provided nearly as much after-tax retirement income as All Roth and over 15% more legacy than either the All Taxable or All Qualified strategies.

The differences in retirement income achievable at 90% probability of success and resulting median legacy for all strategies that paid taxes from cash flow are shown in Figure 7.

First notice the yellow bubble labeled “More taxable income sources.” For these strategies, most assets at retirement (over 80% at the median—shown in Table 3) were taxable or qualified. Maxing out the traditional 401(k) and putting the balance in an asset that provides a nontaxable retirement income source, like a Roth IRA or whole life insurance, led to 3% to 6% higher income, respectively, and 8% higher median legacy. Max 401k + Roth IRA had 84% taxable income sources (73% qualified and 11% taxable) with the remaining 16% in Roth, which could provide nontaxable withdrawals in retirement. Max 401k + Whole Life had 92% taxable income sources with the remaining 8% in whole life insurance accumulated value, which could provide nontaxable withdrawals up to basis to supplement retirement income. Adding either of these nontaxable income sources led to more retirement spending and higher legacies.

Next notice the grey bubble labeled “Mix of taxable and nontaxable” income sources. The strategies here saw 4% to 6% higher income and 13% to 25% higher median legacies. Generally, taxable income sources at retirement (i.e., taxable or qualified accounts) made up over 60% of total assets at the median, yet there were larger percentages of Roth and whole life in this group. Almost 20% to 30% of total assets were composed of Roth assets and/or up to 14% whole life accumulated value. As more of the savings allocation shifted from traditional qualified accounts to Roth or to purchase whole life, income and legacy outcomes improved.

Then look at the blue bubble labeled “More nontaxable income sources.” These strategies accumulated larger balances in a Roth IRA and/or whole life insurance accumulated value, totaling approximately a third to three-quarters of total assets at the median. Relative to the All Taxable strategy, these strategies had 7% to 13% higher income and 21% to 36% higher median legacies.

Having a larger portion of assets in Roth accounts and whole life insurance accumulated value increased the amount of spending the retiree could enjoy and increased the legacy they could leave to heirs. This is because these assets can be used to generate nontaxable retirement income. Moreover, the benefit is derived because taxes were paid upfront on the money that was used to accumulate these assets.

Quantifying improvements from whole life insurance—taxes paid from cash flow

Adding a small whole life policy

The strategies that purchased whole life insurance can be divided into two categories: those that purchased smaller policies and those that purchased larger policies. The half that purchased smaller policies had premiums of approximately 4% or 5% of gross income in the first year.²⁰ The other half, which purchased larger policies, had premiums of 8% or nearly 16% of gross income in the first year.²¹ By retirement, these strategies amassed median values of whole life accumulated value equivalent to 8%, 9%, 14%, and 28% of total assets, respectively.

To explore the impact of shifting a small portion of nonqualified dollars in the budget to purchase whole life insurance, Table 4 compares a subset of the outcomes from strategies that replace savings in a taxable investment account with a whole life insurance policy with premiums of $6,500 annually or ~4% of initial income. The initial death benefit of approximately $450,000 grew to over $650,000 at the median by retirement. Death benefit protection continued to grow throughout retirement. The four pairs show how having even a small whole life policy may increase retirement income and legacy.

Increasing the size of the whole life policy

The impact from incorporating whole life can alternatively be examined by adding progressively larger policies to the strategy. Here, the baseline strategy maxes out the 401(k) and saves the rest of the allocation to a taxable account. For comparison, three additional strategies show purchasing a small whole life policy (Max 401k + Whole Life), purchasing more whole life (60% Qual and 40% Whole Life), and purchasing even more whole life (“Max” Whole Life + Qual).

Table 5 shows how increasing the amount of whole life can substantially increase retirement income and legacy. This is true even when the size of the whole life insurance policy increases to the point where premiums consume such a significant portion of the budget that the common advice to max out a traditional 401(k) can no longer be followed due to budgetary constraints.

There are many choices to make when saving for retirement, including where to save. It is beneficial to know how different types of accounts are taxed while saving for retirement and how different types of income are taxed in retirement. Saving money into different types of accounts—qualified, Roth, or taxable—provides benefits like flexibility and better outcomes compared to saving everything into one type of account. Holding most retirement savings in qualified accounts may limit options to reduce taxes once required minimum distributions (RMDs) start. In addition to meeting death benefit needs, purchasing whole life insurance also provides flexibility to manage taxes by strategically accessing accumulated value to supplement retirement income needs.

There is a trade-off between paying taxes now (when contributing to a Roth or taxable investment account or purchasing whole life insurance) versus later (when taking distributions from a traditional qualified account). More heavily funding qualified accounts may boost after-tax retirement income primarily because retirement balances are higher. More heavily funding Roth accounts may boost legacy because of the tax-free nature of withdrawals during retirement and of bequests. Including whole life insurance provides an immediate death benefit and can improve retirement income and legacy outcomes when paired with either qualified or Roth dollars. This is because accumulated value grows tax-deferred and tends to outperform bonds in the Comprehensive Asset Allocation and because its death benefit is generally not subject to taxes for heirs.

Not everyone can contribute to a Roth. Some employers do not offer that option, and others are not eligible because their income is above the limit to contribute to a Roth IRA. Still, for those who do have a Roth option in their employer-sponsored account, many overlook it, missing out on the opportunity to improve their outcomes.

Making choices that result in holding more retirement assets in nontaxable retirement income sources, like Roth accounts, or tax-efficient assets like whole life insurance may produce better retirement income and legacy outcomes. Replacing some taxable savings with the purchase of even a small whole life policy can improve outcomes. Shifting retirement savings from qualified to Roth will increase taxes today in return for tax flexibility in the future. Withdrawals from a Roth account are generally income tax-free when certain conditions are met and do not have RMDs, which can potentially give more control over how much income tax will be owed in a particular year. This could help in a year when a temporary increase in income—for example, when selling a business or liquidating assets for a pricey home renovation or travel—may otherwise result in moving into a higher tax bracket. It could make sense to consider pulling from a Roth account in that year to limit tax liability, including the Medicare surtax as well as the net investment income tax.

Where should I save money for retirement?

Directing your retirement savings to multiple types of accounts can provide you with tax flexibility in retirement. In many cases, it makes sense to contribute some money to a qualified retirement account such as a 401(k), particularly if a company match is available. However, savers should also consider sources that help increase their nontaxable income in retirement, particularly Roth accounts and whole life insurance policies.

How can whole life insurance help increase my income in retirement?

Regardless of whether you decide to focus your savings on qualified accounts or in Roth accounts, the addition of whole life insurance to your savings strategy can help increase your retirement income. That’s because the accumulated value of a whole life policy grows tax deferred. In the research, whole life accumulated value tended to outperform bonds over the long term, while helping to support the portfolio's overall risk allocation. What’s more, the accumulated value can generally be accessed through withdrawals up to the policy's cost basis without incurring income tax, which allows retirees to supplement their retirement income in a tax-efficient manner.

The research says accumulated value "tends to outperform bonds" and treats accumulated value as part of the safer assets in Comprehensive Asset Allocation. But the paper also expressly warns that life insurance accumulated value is not the same as a fixed-income investment and identifies differences involving liquidity, guarantee of principal, accessibility of income, and underlying risk.

Can whole life help me leave more money to my heirs?

Yes, In the research, strategies incorporating whole life insurance generally produced higher modeled legacy values than comparable strategies using taxable investments Contributing to Roth accounts and/or buying whole life insurance increases the ability to leave a legacy to your heirs. Roth accounts are not subject to required minimum distributions (RMDs) and so can continue growing their balances until they are left to heirs, while the death benefit from whole life insurance is generally tax-free. These nontaxable accounts also tend to help increase the level of income in retirement you can sustainably generate.

Capital Market Assumptions (CMAs)

The Investment Risk Management division of Northwestern Mutual develops the CMAs, including standard deviations and correlations. These CMAs are based on forecasts of asset class returns over the next 80 years, and the following table includes both expected geometric mean returns and expected arithmetic mean returns.

For purposes of performing any probability analysis, CMAs are calculated for each year and vary over time. The model for simulating asset class returns assumes that risk factors in the economy (such as nominal and real interest rates, investment-grade corporate spreads, and equity factors) are the drivers of asset class returns. Based on the historical correlation between these risk factors and the prices and performance of asset classes, a statistical model is constructed that could explain the prices of asset classes over time. Current valuation levels of asset classes are also considered.

In each of the 1,000 trials, the economic risk factors are randomized to create a possible future path of the economy, and asset prices and returns are calculated each year based on the randomized correlated risk factors. For example, if the risk factors show the economy in a recession, higher corporate spreads correspond to the lower equity returns. The risk factors are randomized using a time series model with mean reversion, meaning that the values in one year are the starting point for determining the values in the next year. However, on average at each year the risk factors are at their long-term economic assumptions that underlie the CMAs and not necessarily at historical averages.

The reported CMAs are long-term CMAs, which are not influenced by cyclical developments or current prices but instead reflect long-term structural assumptions about the economy and markets. Northwestern Mutual CMAs are intended to put into perspective realistic expectations of investment risk/return profiles of various asset classes and to reflect the relative behavior of the asset classes over the long term. Our CMAs are forward-looking estimates that are appropriate for long-term financial planning. They are not investment recommendations, projections, or guarantees of actual future performance.

Limitations of this analysis

The results of this analysis are based on assumptions that may differ significantly from your own facts and circumstances. Results may vary based on differing assumptions regarding net worth, time horizon, salary, and other variables. This analysis also uses an assumed portfolio that may not be appropriate for you depending on your risk tolerance and investment objectives. Use of a different assumed portfolio may cause results to differ. This analysis does not project the results of any actual investments or holdings and should not be interpreted as a recommendation of any particular investment or investment strategy.

Important Disclosures:

This research is intended to be educational in nature and is not an offer to provide investment advisory services with respect to securities.

All investments carry some level of risk, including the loss of principal. No investment strategy can guarantee a profit or protect against a loss.

This publication is not intended as legal or tax advice. Northwestern Mutual and its representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

All depicted whole life policies are hypothetical products and reflect industry-average mortality and expenses and a dividend interest rate that correlates to but lags changes in interest rates. They do not represent or approximate any actual policies sold by Northwestern Mutual. Growth in the accumulated value and/or death benefit of any hypothetical whole life policy is based on assumed policy guarantees and the payment of non-guaranteed dividends. Whole life insurance is not an investment or fixed income investment and is purchased to meet death benefit needs.

Using the accumulated value through policy loans, surrenders, or cash withdrawals will reduce both the death benefit and surrender value of the policy, may necessitate a greater premium outlay than anticipated and may result in an unintended policy lapse and/or an unexpected taxable event.

Generally, partial surrenders of life insurance policies are treated first as nontaxable distributions of the premiums paid into the contract (i.e., the cost basis) followed by taxable distributions of gain once all the cost basis has been distributed. Policy loans are not treated as taxable distributions at the time they are taken. Unpaid loan interest is capitalized to the loan principal, and the loan balance may grow large enough to cause the policy to lapse. If a policy lapses or is surrendered prior to the insured’s death, the loan will be repaid from the policy’s cash value and taxed as a distribution, subject to ordinary income taxation to the extent the loan exceeds the cost basis. None of the depicted whole life policies are modified endowment contracts (MECs). If a policy is a MEC, partial surrenders and loans are treated first as distributions of gain, subject to ordinary income taxation and possibly subject to an additional 10% penalty tax if the owner is under age 59½.

Generally, the death benefit of life insurance policies that have not been transferred for value is received free from ordinary income tax. Estate taxes may apply.