Today, investors face an interesting choice: speculate with their savings in the hopes it results in a secure retirement or… choose guaranteed insurance policies and know — for a fact — their financial future is safe and secure.
For self-employed individuals, the choice is deceptively difficult. Because the self-employed don’t enjoy employer subsidized retirement plans, they bear all the risk if things don’t turn out as expected. Many self-employed freelancers, artists, computer programmers, and professionals choose to keep reinvesting in their business.
But, at some point, that may not be the greatest option. As these individuals get older, their ability to recover from stress, and put in long hours at work, decreases. They need help supplementing their income.
Life insurance can help. Here’s how:
Let’s assume, for the sake of this example, a male, 40-year old, non-smoker, self-employed, individual making $150,000 per year with $50,000 in “essential expenses” — mortgage, car payments, groceries, gasoline, energy expenses, health insurance, child care, etc. At an average annual inflation rate of 3%, those expenses rise to $140,693.12 in 35 years. Inflation for some expenses will be high — like for heathcare. But, some expenses have decreased over time, like some grocery items. Additionally, as long-term debts are paid off, like mortgages, those debt obligations disappear altogether.
Continuing with our example, let’s further assume this individual is married, filing jointly, with 1 dependent child. After taxes, this individual keeps $112,746 of his income, assuming standard business deductions. If he has more deductions, he keeps more of his money, and has more money to spend on his lifestyle, his business, or more money to save. Either way, in this example, he has over $60,000 of disposable income to save and invest.
He could, theoretically, spend most of this $60,000 on luxury items and save just a small amount of money, risking in the stock market. This is the conventional approach to financial planning. However, if he adopts an insurance-centric approach, he prioritizes his expenses — especially premiums for whole life insurance.
In this example, let’s assume this individual saves $40,000 of his $60,000 of disposable income, and pays premiums into a custom high cash value whole life insurance policy. The first premium payment triggers immediate cash value growth inside the policy and also purchases $1.6 million in total death benefit. If the individual dies soon after the policy is issued, the death benefit easily replaces the individual’s income for 14 years, providing some measure of financial security for his child. Alternatively, the policy’s death benefit is more than enough to pay the father’s expenses and support the child forever, even if the death benefit is invested at a low guaranteed interest rate.
Meanwhile, the guaranteed future cash value of that whole life policy — assuming no dividends are ever paid — is $2,099,083 at age 75 (illustration below):
|Year||Age||Total Premium||Total Guaranteed Cash Value||Total Guaranteed Death Benefit||Assumed Current Dividend||Total Cash Value (Based On Current Dividend Scale)||Total Death Benefit (Based On Current Dividend Scale)|
At a conservative annuitization rate, the father could retire at age 75, and his policy could be converted to an income stream, producing a guaranteed lifetime income of $146,935.81 — enough to cover all his inflation-adjusted expenses. Alternatively, an inflation-adjusted annuity could be purchased to cover future cost of living increases. The policyholder could also take policy loans for income to pay his retirement expenses.
This is a rather conservative savings plan, since we are assuming only the guaranteed rate in the whole life policy, and some expenses, like child care expenses, and perhaps even the mortgage, will be paid off by the time this individual retires. Some expenses will go away, but perhaps other expenses will rise, like healthcare expenses.
This plan covers the policyholder’s basic income using a high savings rate and a guaranteed rate of return.
But, whole life insurance pays dividends in addition to the guaranteed cash value. If the cash value grows at the current dividend scale, the policyholder will receive $3,786,733 in cash value — more than enough to pay a lifetime of retirement expenses and leave a significant legacy to his heirs.
Whole life is known for its generous dividend payments. These dividends, once paid, become part of the guaranteed cash value. Dividend payments, however, are not guaranteed, and each year the payments may fluctuate. So, while future dividend payments are unknown, once they are paid, they are added to the guaranteed cash value and become guaranteed against loss.
It’s theoretically possible that an insurance company might not have any divisible surplus to pay, and thus no dividend payments would be made. However, all major mutual life insurance companies have paid dividend payments to their policyholders for well over 100 consecutive years. Some of the older mutual life insurers have been paying dividends for over 150, and even 170, consecutive years.
Once again, each year a dividend payment is made, it increases the guaranteed cash value. Meaning, if mutual life insurance companies continue to pay dividends, policyholders will receive far more than what the insurance company has promised.
Even under the most conservative assumptions — the guaranteed rate — policyholders can accurately plan for, and meet, all of their future retirement income goals.
What’s not mentioned here is the fact that the policyholder did not spend all of his disposable income on life insurance. With over $60,000 of investable dollars, the policyholder only paid premiums of $40,000. Meaning, the remaining $20,000 can be invested in more speculative investments for an even greater potential return, or spent on improving his lifestyle.
It’s his choice.
Either way, his future is guaranteed no matter what happens. That is the true power of a custom high cash value whole life policy.
Of course, a life insurance-centric approach requires more planning in the form of tight budgeting and money management, and a higher savings rate than a speculative investment strategy. In exchange for this extra planning, the policyholder is only taking risks he can afford to take. In this example, he can afford to risk $20,000 per year on a speculative investment. His spouse, assuming he is not a single parent, can make a similar plan, adding to their financial security as well as their riskable pool of savings.
Compare this to the empty promises of speculative investments.
For years, investors were promised 12% annual investment returns in their 401(k) plan, which is often invested directly in equity mutual funds (stocks). But, as noted in a previous article, investors (on average) have often received far less than this — just 5.29% before taxes. But, of course, this is just an average. Some make more than that. Some investors tread water, and some actually lose money over long periods of time. And yet, they have all been told to expect high rates of return, that they will retire comfortably using 401(k) and IRA plans, and that they only need to save between 5% and 10% of their income to make it happen.
This strategy has not worked out well for the overwhelming majority of investors.
The reason is simple. These speculative investment plans are non-guaranteed investment accounts, which may lose value over long periods of time. Each loss causes a negative compounding effect, which the investor has to recover from before new investment gains can be made. Investors often spend a significant amount of time retracing lost ground and recovering from minor and major market corrections.
To paraphrase Lance Roberts of RealInvestmentAdvice: ‘the magic of compounding only works when large losses are not incurred.’
Unfortunately, the stock market naturally fluctuates over time, inflicting a thousand small “paper cuts” on investors over both the short and long-term. Each cut takes time to heal, and that healing process means new investment gains are not being made. And, every now and then, the stock market experiences a major correction — a “crash”, which wipes out a significant amount of an investor’s savings. These major corrections take many years to recover from. That adds up to a lot of lost time and lost savings.
Of course, it is possible that investors could make money in these equity mutual funds. Many have. However, many have also lost money. The stock market has gone through many long periods when growth was negative, and investors suffered dearly for their loyalty.
The reality of the stock market is:
- Short periods of tremendous performance are followed by long-periods of underperformance and even negative growth. This is called a “mean-reversion event”. These happen a lot more often than you’d think.
- There are no guarantees in the stock market. Equities are inherently speculative because the growth of the stock market hinges on technological innovations. Those don’t happen like clockwork. They happen in fits and starts.
- The stock market spends something like 90% or 95% of the time retracing and recovering from losses. Most investors benefited from higher dividends in the past… dividends which have been shrinking almost in a straight line since the 1930s.
As a real-world example of the speculative nature of investing, some investors made a lot of money in the stock market run-up to 1901. But from 1902 to 1922, the inflation-adjusted compound growth in the stock market was actually negative… -3.08% to be exact. Even without inflation, the S&P500 had nominal growth of 0.44%.
If you had retired in 1902 (not that that was common back then), you would have received dividend income, but your principal amount — your savings — would have actually shrunk in real terms during that time.
For 20 very long years, you lost money. If you reinvested your dividends, your savings technically would have grown, but you also would have had to stay committed to throwing good money into a losing investment.
Does that make any sense?
Even with dividends fully reinvested into a sinking ship, your “net growth” was still only 2.34%.
To most investors, it doesn’t make sense to throw good money after bad, which is why psychology often governs investing decisions, and why study after study shows investors try to time the stock market instead of staying married to a losing investment. They pile into stocks when their investment is rising, and they halt contributions or cash out when their investment tanks. True, this results in many investors locking in investment losses. Also true is the fact that most investors are terrible at timing the tops and bottoms of financial markets. Even more true is that hardly any investor questions the premise that they should be investing at all.
Most investors who are committed to investing either continue to try to time the market, or they blindly dollar-cost average their way into ruin.
After the “roaring 20s”, from 1930 to 1950, the stock market “grew” -0.21%. Investors who “stayed the course” were pummeled. If you were part of that investing herd, you actually lost money, both in nominal and in real (inflation-adjusted) terms. The inflation-adjusted return was -1.97%.
Then, for the next 15 years, stocks did pretty good.
Then, from 1967 to 1987, the inflation-adjusted growth of stocks was -0.67%. Dividends helped by increasing the “return” on your savings to 3.58%, but again… it only helped in a technical sense, because dividends allowed investors to buy more shares of a losing investment.
Meaning, in real terms, you lost money, but you owned more of a losing investment, which grew your savings simply by virtue of having more dividend income.
Then, again, from 1988 to 2007 — 9 years — there was another tremendous run-up in stocks. Your investment actually grew by an amazing amount. But… this was tempered by 2008, which cost you roughly 40% of your savings. Interesting is the fact that this was sort of an anomaly in the historical analysis, because from 2009 to 2019, you would expect the pattern to continue… to see very low returns, but instead, you saw a sharp and quick reversal of fortune followed by a long rise in stocks.
So, what comes next? A sharp crash that will wipe out your savings, like in 2008? A long and slow decline like in previous decades? Or… something else?
That is the $2 million question.
By choosing a guaranteed custom whole life insurance policy, that $2 million question is answered with certainty. With speculative investments, you’re left with uncertainty about your future financial security.
The question is: can you afford to take that kind of risk with your hard-earned savings?
David C Lewis, RFC is an independent life insurance agent, a Registered Financial Consultant, and the founder of Monegenix®. For more information about his unique approach to life insurance and financial planning, go to www.monegenix.com.