Don’t bet with your retirement savings in the Wall Street casino!
Would you take a home equity loan and use it to invest on Wall Street? That would be financial suicide, right? You shouldn’t be risking your retirement savings there either. The consequences are just as dire.
If you retired in August of 2000, do you know what would have happened to all of your money if you kept it in the mutual funds of your 401(k) plans or IRAs? What happened is that over the next three years it lost nearly 35% of its value. It took until 2007 before that portfolio returned to its August 2000 value. And then what happened in 2008? The market crashed again and this time lost nearly 40% of its value. People who retired in 2000 were wiped out. Their portfolios lost a tremendous amount of value and they depleted their savings much, much sooner than they anticipated. It took until 2013 before the market returned to its pre-2000 level. If you are within 15 years of retirement, you cannot afford to put your retirement nest egg at risk. You need to protect your principal at all cost.
Watch this video to see why the typical retiree would have been wiped out if their retirement savings was exposed to Wall Street when they retired:
Life Insurance companies have a better way to invest your cash value that gives you market exposure but no market risk. It’s called an Indexed Universal Life Insurance Policy (IUL). With an IUL you take part in market movement to the upside but none of the market losses on the downside. Imagine that you can lock in your principal every time that the market goes up. This kind of protection comes with one important limitation. There is a cap on the amount of upside that you can capture. The cap for most companies issuing IUL policies based on the S&P 500 is currently at 13%. Some companies offer other indices and even higher caps.
Historical rates of return vary by the period. To be conservative, most insurance companies will not illustrate anything above an 7% interest rate. Its important to bear in mind that this 7% average return is occurring in a tax-free saving vehicle. The equivalent return in a taxable account would be 11-12%. Given that the long term return on the S&P 500 is only 10%, with wild fluctuations around the average, the 7% return looks pretty good to us!
The performance of an IUL over the period from August of 2000 until the present dramatically outperformed the market. As the chart below shows, the investor in an IUL did not realize the large double digit returns that the stock market indices achieved in the last few years, BUT the client who held an IUL didn’t lose 35 and 40 percent of their portfolio value each time the market collapsed. Their lower returns where credited to an account with a much higher value to start with.
Keep in mind that if the market drops 25%, then you need to make 33% just to return to the starting point.
Also keep in mind that an 8% return in a tax-free investment is equal to a much higher rate in a taxable environment. A 12% return sounds great until you realize that after a 33% tax, you are left with only 8%.
There is no wrong time to get started.
In other words, age doesn’t matter. Yes. It is better to start when you are young so that you can take advantage of compounding interest. But you are never too old to apply this strategy. Since the cost of insurance is higher on an older person, the IRS rules work in your favor. The ratio of insurance cost to cash value still has to stay under the IRS guidelines, but the amount or face value of the insurance policy is reduced. For example, if a 45 year old and a 65 year old each want to put $100,000 per year for 5 years into an IUL policy, each will have roughly the same cash value in their policies at the end of each year. The only differences will be that the 45 year old will have purchased a much bigger death benefit for his premium and, since he has 20 years to retirement, will have a much higher tax-free income stream available when he retires.
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