What are you worth?
It isnât always an easy question to answer, particularly when you consider that your age, education, earning potential and countless other factors all go into your net worth. For the youngest among usâGen X-ers, Millennials, and especially the latest group coming up now, Gen Zânet worth is largely measured by their human capital, which is best defined as the value of oneâs ability to earn. In other words, how rich youâre going to be, one day.
But as we work and age, we transfer that seemingly unlimited human capital into finite investment capitalâmeaning that we put the money weâve earned out into the market where it can earn more for us. But as the scales of time begin to tip and the working years of our lives become outnumbered by the years weâll need to fund in retirement, we often start to feel a little less comfortable having our lifeâs earnings out there wandering around unchaperoned in the marketâthe same market that lost $6.9 trillion in shareholder wealth in 2008.
The point is that folks headed into retirement simply want to know that their money is safe and secure, and I canât blame them. No one wants to think that a bad day on Wall Street could wipe out what they spent 50 years accumulating. And when we think about the risk inherent in the market, it only serves to highlight our complete lack of control.
Control, Iâve found, is always an important part of this equation. Itâs human nature to think that if times get tough, or if we take a loss in the market, or if we spend through our emergency fund, we can just work harder, and earn that money back. How many times have you thought to yourself, âI can take on a second job if I need to,â or âI can always find a higher-paying position if I need one.â Just the knowledge that we could go out and earn more is comforting, on a deep psychological level. Weâre actually genetically wired to prioritize earning money over saving money, according to a study from Cornell University, so at our essence, weâre all little worker bees, which explains why retiringâand saying goodbye to our human capitalâcan come as such a blow. It also explains why, when our net worth becomes investment capital, the risk it endures in the market can be so unsettling to us.
So, weâre unsettled. We want a better way. The only problem with that? Most Americans have no idea what a âbetter wayâ looks like. They donât have a strategy when it comes to facing lifeâs changing investment objectives. (Hereâs a helpful decade by decade breakdown on how to manage your money.) Instead, they do what most people around them do, and they keep the majority of their wealth in their 401(k)s, IRAs and their homes. But of course when the majority of your wealth stays in your retirement accounts, youâre essentially giving a faceless company free reign with your cash, while you continue to shoulder unnecessary risk for your age.
Given the misinformation out thereâand complete lack of information on how to truly protect your assetsâthe number one priority at my firm (and all successful firms) is to ensure our clients always have enough cash on hand to weather any market cycle. As a retiree, you donât just want to have enough cash to make it through the next recession, you want to have enough for every eventuality, life-changing event or opportunity you meet in retirement.
The Strategy I Use In My practice
Annually, from ages 65 to 95, I have my clients transfer between 3% to 6% of their excess wealth to an over-funded mutual participating whole life insurance policy. If you were to look at the ideal investment pyramid, this policy would be the foundation of safety. It provides cash, liquidity and tax-free contractual guaranteed minimum rates of return. In my opinion, it is the most overlooked money management tool, and has more lifetime living benefits that any other after-tax/tax-free place Iâve analyzed.
These policies provide tax-free access to cash that can be utilized for any need, and ultimately create a place where you can access cash for emergencies, supplemental retirement income, or funds to enter a retirement community. Through these policies, you can place and protect a wide variety of excess funds, including equity from the sale of your home, an inheritance or excess retirement distributions that youâll have no choice but to start taking at age 70 1/2. Of course, these insurance policies also provide a tax-free death benefit to your loved ones, and many newer contracts offer the ability to draw on the death benefit for chronic long-term care needs, although this may come at an additional cost.
And, at the end of the day, these policies offer you a means of leaving a lasting legacy, whether thatâs a donation to charity, a foundation you want to start, or simply money for your grandchildren.
If youâre following along so far, this policy probably sounds like exactly what youâve been looking for. And it can beâbut, as with any financial product, thereâs a right way and a wrong way to do things. All too often in our society, insurance is sold the wrong wayâpeople think that getting the largest death benefit they can for the least amount of money sounds like the best plan, but the greater the risk to the insurance company (i.e., the less cash you have in the account) the higher your cost. Donât do that.
Instead, structure the policy with the least amount of death benefit and fund it with the maximum amount of savings (the U.S. Government imposes a maximum premium guideline, often referred to as a modified endowment contract, or MEC limitation) the goal being to increase your liquidity and flexibility to protect your cash during hard times. Whatâs even better? The more money you store, the better your return on cash value, since youâve reduced the amount the insurance company has to fork over when youâre gone.
If at any point during this article youâve thought to yourself that using whole life insurance as a cash or bond alternative is a ânewâ way of thinking about things, youâre only half right. From 1940 to 1970, these contracts were the most popular insurance products on the market. But over the years, many of us forgot about them as we gravitated towards cheaper term life insurance policies, or universal life insurance that came about in the 1970s when interest rates were high.
Today, the latter are proving to be an albatross for people in their 80s who didnât understand that as interest rates fell, they’d have to increase the amount of money they paid in. Of course these can all be great policies when managed correctly, but they serve a completely different purpose from participating mutual whole life insurance. Itâs called whole life for a reason, because itâs something you use throughout your entire life. These policies have got your back until the day that you die, and I can guarantee that between now and then, youâre going to want tax-free access to cash, and a risk-free place to put some extra money.
So talk to your financial planner today about how this old-fashioned wealth protection tool can have an important place in your retirement tool box. Just because itâs been on the market for over 100 years doesnât mean it isnât just as reliable as itâs always been. Think of it like your fatherâs Oldsmobileâstill chugging along, safely getting you right where you need to go.
See related article: How To Fail At Retirement: What Almost Everyone Does Wrong That’s Costing Them Money
John E. Girouard is the author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors.