Retirement Planning: Protect your hard-earned money, manage your risk and think of smarter ways to invest.
Fluctuations and volatility in the securities market have forced many investors to seek safer investments. This is a very important factor to consider especially when preparing for retirement. A severe market adjustment can be devastating, in fact, it can cripple your retirement plans. Having some of your hard-earned money invested in fixed instruments can help protect your future and allow you to continually grow your funds.
Depending on your initial balance and additional contributions it may not seem like much at first, but with time your money will grow, guaranteed. This is why young affluent savers do extremely well when given enough time. For pre-retirees, remember your main reason for investing in fixed products – protection, liquidity, and access.
There are many options out there, and you have to understand that they are not built equally. Each financial instrument serves a specific purpose. When planning, whether it is for business or any life event, you should have a short and long term goal. You must also make sure that these goals are aligned with each other, otherwise it can be a very costly mistake.
Now, lets review some of your options...
HIGH YIELD SAVINGS ACCOUNT
A high yield savings account is a good option. This type of banking instrument is highly liquid. It also offers a higher interest than a traditional checking or savings account. These banking products are FDIC insured, and are not affected by market volatility. Minimum requirements for these banking products are fairly low, but beware of the associated banking fees.
CERTIFICATE OF DEPOSITS (CDs)
Certificate of Deposits or CDs is another good tool to save money. Commonly, these banking products offer a decent return. Just like a high-yield savings account, it is immured from market fluctuations. Deposits in a CD are traditionally left for a specified period of time, within that period it earns a given interest until it matures. In most cases, CDs are not negotiable, the terms - the period and interest rate given, are set during the time of purchase. Some banking institutions do offer negotiable CDs, which allow investors to negotiate certain terms, but it does come at a higher price point, usually a minimum of a $100,000 deposit. CDs do offer a higher interest than a high-yield savings account, but it is slightly less liquid. If a CD is redeemed prior to the date of maturation, owner will have to pay a fee.
PERMANENT LIFE INSURANCE
A permanent life insurance policy, a whole life or an indexed universal life, is a great investment vehicle. These policies offer a higher return than the banking products mentioned above. Aside from providing a death benefit, a permanent life policy affords the owner with many living benefits.
Guaranteed growth
A whole life policy and an indexed universal life both have a cash value which increases overtime. Whole life policies (WLP) allow owners to allocate money in a savings component compounding interest every year without interruption for as long as the policy is in-force.
On the other hand, an Indexed Universal Life (IUL), allow owners to allocate their cash value amounts to a market index account. Now, depending on market performance, the policy owner can enjoy a higher earning potential than it's counterpart. In either case, the growth offered by these instruments is better than traditional banking returns.
Performance and protection from market volatility
Cash value growth within a whole life policy are in no way affected by the market, but an IULs growth is dependent on the selected index's performance. If the market is continually out preforming the fixed interest rate given to a WLP, then owners of an IUL will benefit more. During a market downturn, An IUL policy owner can enjoy the security of a downside protection of a guaranteed zero percent floor. This is a big benefit to IUL owners, since they can earn during an upswing and lose nothing during a downturn.
Permanent life insurance offers more benefits
It's clear that permanent life insurance is a valuable asset, other than the benefits mentioned above, life policies have more to offer. When utilized properly, a permanent policy can be used for other purposes like funding a college plan. A fully funded policy can provide for your short term needs, like paying for your child's education and then serve as a supplemental income for retirement (or maybe more).
Using the same policy, if designed properly, can also be used to offset your mortgage or other debts. Can you imagine what your family will have to deal with if you in the event that you prematurely die? Don't you want to preserve their quality of life? Having a form of mortgage protection, or off-setting your liabilities, will give your family and loved ones the security they require in case something bad happens to you.
Moreover, riders like "chronic illness" or "terminal illness" can be added to a life policy, allowing owners to advance the benefits to pay for the insured's medical bills and other expenses while they are still alive.
Accessing your funds
Since a life insurance policy have cash value, owners can choose to liquidate or “surrender” their policy at any given time. A full or partial surrender, is basically the term used to either terminate your policy and receive the equivalent cash value, or you can partially liquidate to receive an equivalent portion of the cash value. There is one caveat when exercising this right, owners have to be aware that there will be a surrender charge fee due, but there are other ways to access the cash value within a policy.
If structured properly, there could a better and more tax efficient option to access the cash value. Savvy people, could leverage the cash value within the policy. Instead of surrendering the policy for full or partial return, you can take a loan against it. Generally, you can take a loan up to 90% of your cash value. The biggest advantage with leveraging your policy is that your cash value still continually grows, even when you have a loan. By doing this, the investor can minimize the cost of opportunity. Secondly, unlike bank loans, you don't have to jump through hoops to qualify for a loan, all you have to do is call your insurance provider, to collateralize your policy, and you're approved.
INDEXED ANNUITIES
An indexed annuity is another great tool that can help affluent savers prepare for their retirement. Annuities are typically used to mitigate longevity risk, when the option is elected during annuitization an annuity can provide income for life. This can be very advantageous for many looking to fill in gaps in their retirement.
Funding an indexed annuity
Many of you may be asking, how does it work? Well, an indexed annuity is a financial tool offered by insurance companies. It is a contractual agreement between an individual and an insurance provider that provides the owner an equal distribution over a specified period of time (in 10, 20 years, or as income for life). An annuity can be funded in two of ways. The first method allows the owner to fund an annuity with a one lump sum payment, while the second method, allows the owner to fund it with multiple contributions over time. Provided with two methods, owners have the flexibility to fund their annuity to develop a tax efficient retirement plan.
Growth and protection
Indexed annuities offer owners a great earning potential. The money invested in an indexed annuity is held in an equity fund (it is not directly invested in securities). Instead, the growth is determined by a market index (like the S&P500) that is chosen by the owner. As you can imagine, it can provide owners a great earning potential, but that is not all. Annuity owners can also enjoy a zero floor protection in the event of a market down turn. Yes! It means the invested funds can continually grow when there is good market performance and when the market is down, owners are protected from a loss, making it a very good instrument when you are retiring.
Minimum Guarantees and added bonuses
Market protection and a good earning potential are not the only advantages to owning an indexed annuity. Some companies will offer a guaranteed minimum return and an added bonus. Meaning, if you invest your money with them, the company will ensure that you get a minimum return on your investment. In addition, they will also give you a specified dollar amount for investing with their company and keeping your money with them for a specified time. These minimum guarantees and added bonuses can stack up and can be advantageous.
Tax and other benefits
Since taxation is a major factor that impacts retirees, I want to discuss the different ways annuities are taxed. As mentioned, an annuity can be funded in several ways, but depending on how it is funded will determine how your annuity is taxed. To be clear, the type of money refers to categories identified by the IRS, “qualified” (meaning pre-tax) and “non-qualified” (money that has been taxed). If an indexed annuity is funded with pre-tax dollars, 100% (both contributions and earnings) of it is taxable, but if it is funded with post tax dollars, only the earnings is taxable. Calculating the taxable portions of an annuity is what makes it complex. advisors use an exclusion ratio to calculate the taxable versus the non-taxable portion of the annuity.
Traditional retirement accounts have contribution limits and owners of these accounts will later be required to take minimum distributions at a specified age (70.5 -72). This can be very problematic for high earning individuals. Not only does the contribution limits hinder them from funding their retirement the way they want to, but they are also forced to take out RMDs even if they don't need it (or otherwise pay a hefty tax fee). Funding an annuity can be very advantageous for these high earning professionals. These individuals can fully fund the account they want to since annuities do not have a contribution limit, unlike other retirement instruments. In addition, owners also do not have to take RMDs unless they want to since annuities are not categorized in the same way.
ROTH ACCOUNTS
Roth accounts are great investment instruments, these accounts allow owners a tax-free option for distributions in retirement. Unfortunately, like the other retirement vehicles, roth accounts have a very low contribution threshhold permitted by the IRS, in fact it is even lower than traditional savings account like IRA's, 401(k), 403(b) and 457 plans. It is a good tool, but using it as the only investment vehicle will surely leave your retirement plan with a shortfall.
WHAT IS THE BEST INVESTMENT?
Truthfully, there is not one single financial insturment that is better than the other, each of the mentioned tools are meant to serve a specific purpose. Every person will have different needs and different goals, to further complicate things it will be at different times. So, when planning for those necessities it is best to make sure your short term goals and long term plan in place aligns with each other. It is not about the product rather than the best strategy that can help you accomplish your goal. Keep in mind there are many ways to grow your money and wealth, but is your strategy effective and tax-efficient?
ARE YOU SAVING FOR RETIREMENT?
Do you know all the major risk factors that will impact you and your spouse in retirement? Are you deferring taxes? Will you have enough money to last you throughout retirement? Are you looking to develop a tax efficient retirement plan that can provide you income for life? If so, let's talk! Schedule a free consultation with our team, leverage our expertise. Our main focus is to help you and your spouse develop a strategy that will provide for your current needs and family's future requirements.
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