The use of life insurance to fund retirement is a little more complex topic in the context of financial planning and life insurance. The life insurance salespeople adore it, but stock jockeys detest it. That should come as no surprise.
However, is there anything particularly unique that life insurance offers? Or would it be wiser to place your bets on the market in hopes of winning a wealthy retirement? According to your CFP, the market and other investments promoted by your broker or investment advisor appear to be the best tools for producing retirement income. However, it’s possible that we haven’t given this enough thought. Maybe a bit more grey matter stretching was needed instead of just repeating the compliance-approved brochure’s advice on retirement income planning.
We Talk About Risk.Many times
It’s funny what risk is. The majority of individuals are naturally aware of what it is and what it involves. However, very few of us actually consider how it impacts our lives or even how much, if it exists at all. Maybe this is our desire to be naturally upbeat. Or perhaps it’s just that we would all become profoundly depressed if we considered all the hazards involved in something as basic as going to work every day—bad for our wallets, good for Pfizer.
We frequently study and discuss the various kinds of hazards and their measurability in probability theory. Certain hazards, such as the likelihood of losing a wager on a Vegas slot machine, are simple to measure.Some are slightly more difficult to compute, such as the possibility that your home will burn down tomorrow.
We typically attach values to hazards in imprecise assessments when they pose a greater degree of complexity or effort when crunching the numbers. For instance, I’m sure that my house has a very low chance of catching fire tomorrow, but I can’t tell you with precision.
There are several dangers associated with retirement planning that the eventually retired person would encounter on their path to golden years. Anybody licenced to sell securities will probably bring up a few very apparent ones, such as market, interest rate, systemic, and liquidity risks. A few others, including longevity, go beyond what is typically taught in a textbook for level one financial advisors.
Is There A Serious Threat Or Is Timing Risk Easily Negated By Averages?
The concept of timing risk is one type of risk that the financial planning community disagrees on. This one should be rather obvious to those who are more knowledgeable in personal finance, but for those who are not, allow me to provide a little explanation.
The risk you take when you enter a market is known as timing risk. The risk is the possibility that you will enter the market at a bad time, like when it’s very high, and then lose money when the market contracts (buy high, sell low).
Many in the bond and equity sales industry, particularly those that concentrate more on mutual funds, will tell you that timing risk can be eliminated over time with the clever dollar cost averaging method. These people believe that time averages out returns, therefore they don’t think it’s wise to be afraid of entering the market because doing so will prevent you from eventually making money. It sounds like a really nice sales presentation for some investment products, and until you retire, I’ll concede that their point about averaging out is logical.
Risk of Retirement Timing
Even though you are just 22 years old, you do not have an endless amount of time to wait for the market to recover, despite what the majority of people in the investment sales industry will tell you. Whether we choose to acknowledge it or not, the years that pass between our first and last day of work are comparatively limited. And how we end our lives will be determined by those forty to fifty years. You have one chance to try it.
What is the likelihood that your investments will lose money?
It’s actually not as hard to figure out as you might think, or at least not as hard as figuring out how likely it is that, assuming your investments are mostly in stocks, I’ll be going through my house’s ashes tomorrow. However, I’m not really concerned with that particular subject because retirement timing risk is more about the timing of a market downturn than it is about the likelihood of one.
When Your Retirement Party Is Met With A Bear By The Market…
Cry if the market delivers a bear for your retirement celebration. Early-retirement bear markets can be extremely damaging. Although this has been known for a while, not much has been spoken about it in the financial community because there isn’t a particularly excellent solution to mitigate the risks.
Here’s an example to further clarify the idea. Let’s utilise a $1 million hypothetical portfolio that produces $50,000 in annual income for retirement. This makes use of the 5% withdrawal rate that has long been the norm in the business.
I’ve created an arbitrary list of portfolio returns spanning 20 years. A well-diversified bond and equities portfolio in retirement may yield a comfortable return, as most large mutual fund companies tell me. The average return for all years is 6.85%, which is higher than the S&P 500’s last ten years. First, let’s discuss the scenario of a bull market.
How Life Insurance Aids in Solving This Issue
One low-risk investment is life insurance. This has been brought up numerous times. Although the majority of you will acknowledge that it is dependable, the truth is that its low-risk profile makes it an excellent choice in terms of generating cash. Why? because market downturns have no effect on it.
Returning to our earlier example, if we eliminate all of the fictitious annual yields and substitute 2% returns for each and every year, our fictitious retiree will have survived for the whole 20 years with almost a quarter of a million dollars left over.
I promise that if you give me a million dollars and an unending 2% interest, you won’t go bankrupt after twenty years as long as you take out $50,000 annually from the account. It is a fact of mathematics. Furthermore, the guaranteed rate on the majority of whole life contracts outperforms our 2% return (discounting dividends).
Because life insurance is so highly reliable, it works incredibly well for income purposes. As I’ve mentioned, you won’t usually be thrilled about it, but when the rain starts to pour, you’ll be glad it’s there.
The reason life insurance for income production is effective is because it allows us to remove a plethora of additional hazards that are likely hidden from your awareness. Please get in touch with us if you’d like additional information. If I don’t respond right away, it might be because there was a slight chance that my house might burn down instead of just burning down.
