The Future of Retirement Planning
By Steven Moravec
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The Future is Binary – Truly the world has changed over the last 20 years. Reading this article is an example. We now live in a worldwide economy where everything and everybody is connected. American companies now manufacture overseas and serve customers worldwide and foreign companies do the same. The speed of information now is lightning fast. Our markets and thus our stock markets affect each other like never before. Think back 20 years- what happened in the European economy didn’t really affect our stock market. Boy have things changed…
These factors along with others such as unstable governments, economies have created a volatile stock market. We have been told for years that to grow our retirement savings you must use mutual funds and accept the ups and downs that go with it. For over the long haul, it has proven to outpace inflation. But what about the downturns? What is the real impact? Well from 2000-2010 the market was up 6 of those 10 years, and down in 4 of those 10 years, the net result was a LOSS of -9%. How did that happen? A variety of things, the Dot Com Bubble, 9-11, wars, the derivatives scandal to name a few.
But what if you could just Get Rid of the down years? Well your money would have DOUBLED. Oh on top of that guess what, your mutual funds were still charging fees even though they were losing you money. Does that make sense? And it’s not just the money you lose, it’s the time we lose from growing our money. And what about taxes? Well we have over 17 Trillion Dollars in federal debt, which will be made even worse due to healthcare reform. Where will that money come from to pay the interest on the federal debt? You already know, YOU and ME. So while past conventional thinking has been tax rates will be lower in our retirement years, that thinking has changed. I believe you will see tax rates increase over the next 10 years. So imagine having a 401 K or IRA of $500,000 or more. Now when you pull it out 100% of it is taxable. So if the tax rate is 30%- your $50,000 is now only $ 35,000 after Tax, OUCH–
And oh… your IRA withdrawals could cause 85% (currently) of your social security check to be taxable.
Is there a way to Grow your money without stock market losses and take it out as a Tax Free Retirement income and won’t cause your social security to be taxable? The answer is yes at least for those who have 15-20 years to save until their retirement.
So what is this future in retirement planning? Actually it is going back to the past that we are able get to a more predictable & secure future. Life Insurance companies were the founders of the original retirement plans. Now they have created and refined a type of plan which is knocking the socks off of 401 K ‘s and IRA’s and Roth IRA’a. The plan is called Indexed Universal Life Insurance. This is NOT your parents or grandparent’s life insurance. These policies have a Much lower cost & expense structure than older policies. It provides for a flexible premium and a flexible death benefit. They can be designed with a smaller amount of insurance and a larger savings component. The saving component is linked to the upward movement of a major market index like the S & P 500 to a cap. Caps have run between 12%-17%. Your account gets credited interest up to the cap rate for that year, once credited the returns are locked in Forever and can Never go down due to the market. If the index return is negative for that year than -0- is credited to the account, but all prior earnings remain. So while mutual funds were losing 35%-45% in 2008 IUL policies did not lose a dime. When the market recovered, the IUL accounts went up with it. When you eliminate the down years the result is a smoother more predictable return. Example: A policy with a 14.5% cap has average 8.3 % return compared to 7.3% S & P 500 index over the last 25 years. (Yahoo finance)
Now here is where it gets even Better. You can withdraw your money Tax Free, using policy loans. The tax laws that support this, Code 7702, have been around for over 50 years. IRS requires interest to be charged on the loan amount. You can beat that loan charge though, because most plans will credit you interest at the same amount you are being charged. There is also a neat loan provision called variable loans which I will write about that in a future article. Actual after tax retirement income comparisons are
very interesting. If set up with the proper ratio of premium to insurance and you have 20 years or so to save, these plan can produce a much higher and longer retirement income. And when you die whether it is early on or at an old age you have permanent life insurance to help out your family or charity.
As they say – necessity is the mother of invention. The indexed Universal life policies are just that. When more people find out about these and compare them to 401 K’s and IRA’s they will take off like gangbusters. I believe this is a big part of the new wave of and the future of retirement planning.