Focus on Income not Account Statement Values
Account statements don’t pay bills. Cash does. How many times have you heard one of the pop-culture financial gurus state “Buy Term and Invest the Difference?” These people are WRONG! Dave Ramsey and Suzi Orman have their Schtick. We agree with most of what they advocate. However, we believe that those people are targeting their message to those most in need of basic financial advice and counseling. Its the old adage of KISS: keep it simple stupid. If you introduce a little bit of financial sophistication and a strategy that takes advantage of the special tax treatment of permanent life insurance, you realize that it not only provides a death benefit, but it also provides a safe and secure vehicle for retirement savings that will generate far more INCOME than a corresponding “wall street” approach. Nearly 3X as much!
Permanent Life Insurance should make up the core of your retirement savings. This is the first money in that will provide for your family if you die. This is the money that will earn attractive yields with principal protection. This money will provide for your family whether you die early or live a long healthy life. The balance of your portfolio should be in safe financial alternatives that will provide superior returns with much less risk than traditional Wall Street investments.
What follows is an important aspect of retirement planning using life insurance that may not be totally obvious to you: the “bucket” of funds that you save all your life will continue to grow even after you start taking tax-free income! Again, as long as the rate of return on the equity in your policy exceeds the borrowing rate on your loans, your entire bucket will continue to grow even after you start taking income.
Here’s how it works for the typical retiree with an IRA. The typical retiree will begin to access social security, pension funds, or make IRA distributions when they reach retirement age. So if a retiree has an IRA or a 401(k) with $1 Million in it and we assume that the stock market is growing at an average rate of 10% per year, how much can the retiree take out every year for the rest of his life? Don’t forget you have to account for the income taxes that have been deferred until withdrawal. We won’t make you do the math. The point is, unless they are withdrawing less than the annual return on their portfolio, they will begin to slowly deplete their savings. It will run out at some point. And hopefully not before they die. The “4%” rule is somewhat in dispute after the wild ride the stock market took in the last decade. 4% is supposed to be the percentage that you can withdraw from your retirement fund and reasonably expect the income to last forever. On $1M dollars, that is only $40,000.
Now what if we assume that someone retired in August of 2000 and they had all their retirement savings in stock mutual funds? How long would their portfolio have lasted? We’re beating this to death to make a very important point that not only do most people miss, but also many of our peers in the financial services industry. Running out of money is a very real problem. Age, Market Performance, and unfortunately taxes (if you didn’t have the foresight to listen to agents like ours and take steps to build tax-free income for retirement.
When you take loans against your policy to fund your retirement, your savings “bucket” stays full. It not only stays full, but it also continues to grow for as long as you live. As long you can borrow money at a lower rate than what your cash value is earning, the bucket will continue to grow. The best thing you can do when you retire is liquidate your IRAs and qualified savings accounts over a period of 5 years and purchase an over funded, life insurance policy. It is the only way that you will be able to keep from running out of money.
Take a look at this table if you need to see the numbers!
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