On the heels of Brexit, where the Dow Jones dropped 900 points over two days because of a market decision by a single country, it’s time to reevaluate some ways to purchase your retirement.
It’s time we talked…
It’s time to talk about something that has been worrying many people for a while. It’s going to be painful for some, confusing for others, and a giant relief to the rest. It’s going to inflame some established professionals and I look forward to them denigrating me later.
The stock brokers, the traders, the certified financial planners will all shout me down. The Dave Ramsey die hards will say I don’t know what I’m talking about. The securities licensed professionals will mock my supposed lack of knowledge.
And that’s fine.
I’m not here to talk down about what others are doing, I’m not going to lambast anyone for their work. I’m simply going to teach you about some options that may work better in the future. I want to show you how the money you work hard for can be lost through no actions of your own. I am going to show you how it can be even better protected.
It’s not you, it’s them
The securities industry is shrouded in myriad misconceptions. Their financial representatives have been thought to be able to take $100 and turn it into thousands. Maybe you’ve even heard a company say their traders or company algorithm beats the market regularly.
What does that even mean?
Does it mean their traders lose 10% less than their next competitor 51% of the time? That’s beating the market. Does it mean the baseline they measure themselves against performs at 75% while they are at 76%? That’s beating the market, and they can even change their baseline on a whim. Maybe it means their highest value clients’ performance buffered all the losses in their lower clients’ portfolios. It can mean many, many things.
Very few of those meanings will mean much for the average worker. Here’s the point: each year the hidden fees in stocks and mutual funds could destroy whatever you’re setting aside in your 401(k), IRA, mutual funds, or stocks.
The bottom line:
Your retirement account might be slowly suffocating in low performing or stagnant markets.
Does this apply to me?
I generally look at this to apply to people making between $30,000 and $150,000 each year. There’s wiggle room downward and upward, depending on financial comfort levels and stability.
Millennials, the oft maligned generation I proudly claim membership in, usually prefers our solutions. Their forward thinking parents and family members who are worried for the future being left will also usually align with this viewpoint.
Why should I care?
If you have $10 in the market and it drops 50%, you have $5.
How well does the market have to perform to get back to $10?
Many people instinctively answer 50%, because that is the amount of the loss, but a 50% increase of $5 leaves you with $7.50, only an increase of $2.50.
50% of 5 is 2.5.
The market needs to increase 100% to compensate for a 50% loss.
The thing is, and this is where the securities oriented people will concede a point, it eventually will recover from any major losses.
Yes, over the course of months, or years, or a decade, it should recover. The major loss of 2008 when the housing market tanked took years upon years to recover. One of my clients lost over 85% of his pension, and even in 2015 had only 30% of it’s original value when he was finally ready to retire due to these many factors.
That’s what matters most
Ready to retire is the operative phrase. If you’re planning on retiring in September and the stock market supporting your mutual fund or stock options tanks in May, you might have to delay it. You might have to return the tickets for your 14 day Alaskan cruise, you might have to scratch off all the train stops around Europe, you might have to tell the grandkids you’ll take them fishing next year.
Rebuilding takes time and banking on longevity only works for so long. Eventually something will have to be solidified and the opportunity for that could disappear incredibly quickly.
I once had a fencing coach tell me “If you see the moment, it already passed.”
This is how I look at finances: proactively and ready to seize opportunities as they come, rather than reacting to negative stimuli.
The proposed solution
Cash value life insurance.
Four words which bring up untold emotions and reactions. People hate talking about life insurance to begin with, and adding the emotionally charged word “cash” to it just makes it more confusing. Oh, and let’s add “value” on top of it just to deepen the obfuscation.
All it means is that it’s life insurance which builds up an amount of money you can access while you’re alive. Yes, life insurance that helps you live!
A properly designed and funded cash value life policy, especially in an indexed fund (which we’ll get to) will outlast mutual funds from any period of history. They are likely to continue that performance simply because of how they’re designed.
The real impetus, the most important part, is that it’s designed correctly. Just as a crummy broker can put you into a fund which cracks your nest egg before it hatches due to fees, a bad life insurance agent can build a life insurance policy that doesn’t do what you need because it nets them a higher commission.
The main things to look for
For our purposes, we’re going to talk about an indexed universal life policy, or IUL. Whole life can also work, especially with dividend options, but a good indexed life policy is really the meat and potatoes of the future of planning.
The first, and biggest, thing to look for is Option A or Option B. Two industry terms that mean only one thing: level death benefit or increasing death benefit, respectively.
The death benefit is basically what the life insurance company will pay upon your death, or the expiration of the policy. It involves the total stated death benefit minus any loans that haven’t been paid back.
Level death benefit is A, and it’s not ideal for building wealth. As your life insurance builds a balance of money you can borrow against, it doesn’t get added onto the check the company will cut your family should you, G-d forbid, die.
Increasing death benefit is B, and it’s exactly what you’d to use to build wealth. As the policy increases in value, so does the check the company would pay.
Yes, cash value not only builds something you can use while living, it can increase the total amount paid to your family.
These two tools with completely different outcomes are based on one kind of life insurance. The former (A) is what every unlicensed mainstream financial adviser rails against, the latter (B) is what agents sell because we know what works.
The other main thing to look for is how much you can fund the policy without hitting the MEC limit. All that means is that you want to keep it as a life insurance policy according to the government rather than a modified endowment contract (taxed like an annuity, not a life insurance policy).
Why would I care about an IUL?
The indexed universal life insurance policy will do something amazing: it increases when the markets do well, and it stays level when they don’t.
When the exchanges tied to your policy’s index go up, the value of your policy goes up. Simple as that. When they go down, which they will, the policy will stay level.
Generally speaking, most of these programs will take the first 0.15%-1.45% of the increase, called strategy spread, to compensate for the inevitable downturn and for fees. The best ones will only take that strategy spread when the market does well, and they don’t compound it if they didn’t take it last go-around.
A properly designed IUL will not only perform just as well as a similarly funded mutual fund long term, it will provide immediate life insurance. That means just from purchasing your retirement plan you will have some life insurance protection, which you can supplement even more with lower-cost term insurance.
Even better, and perhaps most importantly, a long term care rider can be added on, often for mere dollars. This provides access to the death benefit and cash value should the insured become ill or injured to the point where they need assistance with multiple activities of daily living.
Long term care insurance becomes exponentially more expensive later in years, and taking care of it with this option in your 20s, 30s, 40s, or even later can save not only thousands of dollars, but many headaches. With over 90% of married couples and 70% of individuals eventually requiring long term care, this is practically a necessity.
Finally, I write a lot about properly funding an indexed universal life policy. Many of us go through lean times and, during those times, you can scale back how much you pay into the policy. This will, of course, affect its growth, but it’s easily recoverable.
The long-short of the IUL
With access to riders which provide long term care, other rider options which we didn’t get into, no market loss, growth potential, and payment flexibility, this is a great option not only to start with, but to stick with.
After years of building the cash value in an indexed life insurance policy, you can either start borrowing or withdrawing from the value, or you can take all or some of it and purchase another product, like an indexed annuity to grow further with guaranteed lifetime income.
If it’s made right and funded right, a 20 year old could have access to over $1 million by their mid 30s. With it used as a retirement supplement started by someone in their 30’s, they can borrow against the fledgeling cash value in times of emergencies or even as a down payment for a home. The possibilities are really quite endless.
The best part is that if the S&P 500 absolutely drops, tanks, craps out in May and you were planning on retiring in June, you still get to.
One further advantage
There is one more reason to trust a cash value life insurance policy: protection from seizure.
If you are found at fault for injury, whether from an auto accident or personal liability, and you don’t have enough insurance to cover it or money enough to pay for it all, the state of Arizona can seize your assets. This can include your 401(k), IRA, draining your bank account down to $150, and even 25% of your future wages — all from a couple terrible moments in a car accident. One of the few things Arizona cannot seize is cash value life insurance.
It’s protection from market fluctuations and from massive life fluctuations.
There are many, many products out there to ensure your golden years are golden for many years. This is simply one astoundingly flexible tool which provides stability, options, and layers of protection to your and your loved ones.
If you have any questions, please do reach out.