Life insurance is used to build retirement income it’s a bit of a step-by-step lesson in the world of life insurance and financial planning. Realtors hate it, and life insurance agents love it. No surprises there.
But is there something that life insurance brings to the table that is truly unique? Or is it better to bet your chips on the market for a good retirement? The market, and other investments advertised by your broker or financial advisor appear to be a retirement investment tool, or so your CFP says. But maybe, maybe there is something that we have neglected to consider here. And it may have required a little more flexibility than just saying what the standard textbook says about retirement planning.
Seriously, we talk about this… a lot
Fear is a funny thing. Most people have an innate sense of what is and what affects them. But few of us really think about how it affects our lives, or think seriously about how much, if any, it is. Perhaps this is because we naturally want to be optimistic. Or maybe it’s because thinking about how many risks we face in something as simple as going to work every day can make us all cringe – good for Pfizer, bad for our pockets.
In probability theory, we often study and talk about the types of risks and their magnitudes. Some risks are easily calculated, such as the chance of losing a bet on a Vegas slot machine. Some are more difficult to quantify, such as the risk of your house burning down tomorrow.
For threats that cause more problems or difficulties in multiplying the numbers, we often assign them to vague paths. For example, I can’t tell you the exact probability that my house will burn down tomorrow, but I believe it is very low.
When it comes to planning for retirement, there are a number of dangers that the hopeful one-day retiree will face on her journey to golden girl-hood. There are some obvious ones that any licensed securities trader can discuss such as market risk, interest rate risk, systemic risk, and currency risk. And there are few that go beyond the classic financial advice book like longevity risk and cash flow risk.
My goal today is not to add a bunch of new types of threats to your list of doom and gloom, but to slightly change the way we think about risk.
Time Risk, Simple and Average Rejection, or Greater Risk?
The risk that is the subject of debate among financial institutions is the concept of time risk. For the more educated in personal finance, this one is probably self-explanatory, but for the less resourceful among you, I’ll help you out with a little explanation.
Timing risk is the risk you face when entering the market. The inherent risk is the idea that you will enter the market at the wrong time—such as when the market is too high—and you will lose money due to a market downturn (ie buying and selling too much).
There are many who are involved in the trading industry-especially among people with a lot of money-who will tell you that time risk can be avoided with time and a good technique called dollar cost averaging. For these people, time comes back and being afraid to enter the market is foolish because it gives up the opportunity to make money in the long run. It sounds like a great investment strategy, but I agree that there are good intentions behind them, until you retire.
Risk of Retirement
Despite what many in the business world will tell you, you don’t have time to wait for the market to come back, even if you are only 22 years old. Whether we like to admit it or not, there are very few years between our first and last day at the office. And 40 to 50 years will define how we spend our lives. You only get one crack.
So what are the chances of losing your money?
This is easier to calculate than you might think – or it is easier to argue than to calculate that I will probably be sifting through the ashes of my house tomorrow, assuming that your money is in stocks. But the actual question is not what I care about, because the risk of retirement has less to do with market downturns and more to do with the timing of such downturns.
When the Market Brings You a Bear at Your Retirement Party…
If the market brings you a bear for your retirement party, cry. Bear markets that begin early in retirement can be dangerous. We have been aware of this for a long time, but many financial countries are silent on this issue as they do not have the best solution to prevent its consequences.
Here is an example that helps us explain the point. Let’s use the hypothetical $1 million used to build retirement savings on $50,000 a year in income. This uses the 5% interest rate that has been used for many years.
I’ve compiled a list of stocks that have a 20-year average return of 6.85%, which is better than the last 10 years of the S&P 500, and a good number in terms of major mutual funds. companies tell me that I can have a well-diversified bond and retire. Let’s start with bull market trends first.
Our first 3 years are the best years of the market. We see then a few bears on the way, and towards the end we see strong bears, but they don’t bother us too much. We are still finishing 20 years with a million dollars still to go because of market appreciation. This is the kind of dream that can be found plastered on every product brochure of every mutual fund company in existence.
Now the bears come early.
I didn’t do anything but reverse the refund plan, that’s it. The average return remains the same, of course, but this time we lost money…in the first year.
This is what I mean by retirement risk. We have no control over when the market will occur, and therefore generally cannot prevent a retirement if the market moves in the wrong direction past the last day on the calendar.
How Life Insurance Can Help Solve This Problem
Life insurance is a low risk investment. We have said this several times. And while many of you may agree that the reason is, the truth is that a low-risk profile makes you a star student when it comes to fundraising. Why? Because it is not affected by market dips.
If we go back to our previous example and take out all of the hypothetical annual yields and replace them with a 2% return each year, the retiree could be in 20 years with almost a quarter of a million. . Here are the numbers:
If you gave me a million dollars with a guaranteed yield of 2% forever I can guarantee that you will not be broke after 20 years if you withdraw $50,000 a year from the account. That’s a mathematical fact. And the guaranteed interest rate on most life contracts is 100% better than our 2% return (and we haven’t even started talking about dividends).
Life insurance works well for investment purposes because it is incredibly stable. I’ve said before that you won’t be happy about it, but you will be happy if it rains.
Income life insurance it works, and it works well because we can eliminate many other dangers that you face in front of you that you may not have thought about. If you want to know more, ask us, and if I don’t answer right away, it’s probably because the possibility of my house burning down was greater than I thought.