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Taming a Bear Market in Retirement

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Permanent Life Insurance can help tame the bear market in retirement.

Published in: Economy & Finance

Taming a Bear Market in Retirement

  1. 1. Taming a Bear Market in Retirement<br />
  2. 2. Taming a Bear Market in Retirement<br />Traditionally, retirement needs have been funded by Social Security benefits, employer-sponsored pension plans, and personal savings. <br />Today, however, many people are finding that the traditional means of funding a comfortable retirement can no longer be relied upon. <br />
  3. 3. In fact, as of January 2007, most retirees could expect to receive just $1,011 monthly from Social Security.1<br />In addition, employer-provided pension plans are becoming less and less common.<br />In 1983, 88% of workers were covered by defined-benefit pension plans.<br />Today, only about 37% of workers have traditional pensions.2<br />1Source: Social Security Administration website - www.ssa.gov.<br />2 Economic Policy Institute, 2006<br />
  4. 4. With the very real possibility you will live well into your 80s and 90s you need to be sure you don't outlive your retirement income. <br />But with inflation, rising health care costs, and the uncertainty around many traditional retirement funding vehicles, how do you help ensure that doesn't happen?<br />
  5. 5. Many people with the necessary risk tolerance level and a long-term time horizon have securities in their portfolios and plan to systematically withdraw money from those investments to supplement their retirement income. <br />But how is that plan affected when the market is down?<br />Secular Bear Market<br />
  6. 6. Why Sequence of Returns Matter<br />The sequence of returns may have less of an impact on the portfolio of a long-term individual who is accumulating assets for retirement. However, during retirement, the interplay between an individual’s rate of withdrawal and the sequence of returns can have a dramatic impact on a portfolio’s overall ability to last.<br />
  7. 7. Why Sequence of Returns Matter<br />The sequence of returns may have less of an impact on the portfolio of a long-term individual who is accumulating assets for retirement. However, during retirement, the interplay between an individual’s rate of withdrawal and the sequence of returns can have a dramatic impact on a portfolio’s overall ability to last.<br />
  8. 8. A Solution<br />If you retire during a bear market (a market in which stock and/or bond prices decline over an extended period of time, which may be accompanied by an economic recession, inflation or rising interest rates)3, the negative performance of the market combined with withdrawing assets on a systematic basis can leave a lasting negative effect on the value of your investment account. However, by using the cash value in a life insurance policy you may be able to cushion the effects of a bear market.<br />The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for access to the cash value in the short-term, such as through loans or partial surrenders, these transactions will impact the policy’s death benefit if the values are not restored prior to the insured’s death. You should know that there may be little to no cash value available for loans in the policy’s early years.<br />The information in this presentation is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Our employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.<br />3 Source: www.FINRA.org 2/28/08<br />
  9. 9. Peter<br />and Paul<br />Both Retirees in a Bear Market<br />A Case Study<br />The following case study illustrates how purchasing a cash value permanent life insurance policy during your working years gives you flexibility to access the cash values for supplemental retirement income and provide a death benefit to your beneficiaries when you die. Let's take a look at two scenarios:<br /><ul><li>Peterhas only securities.
  10. 10. Paulhas a Whole Life insurance policy with a cash value in addition to securities.</li></ul>Each situation could meet the individual client's needs in the right situation, but notice the supplemental retirement income and added benefit that Whole Life insurance can provide.<br />In this particular situation, both of our clients will retire during a bear market.<br />
  11. 11. A Case Study<br />Peter:<br />Let's assume that when Peter reaches age 65 he has accumulated $250,000 within his investment account. At retirement, he’ll have a desired income level of $10,800 per year after taxes, which is equal to $15,000 before taxes (28% tax bracket). <br />He will accomplish this by systematically withdrawing $15,000 annually from the account.<br />$250,000<br />$15,000<br />Annual Withdrawal<br />- $4,200<br />Tax @ 28%<br />$10,800<br />Net After Tax<br />
  12. 12. A Case Study<br />Paul:<br />Let's assume that Paul purchases a Life Paid-Up at Age 65 (LPL65) Whole Life policy when he is 45 with a face amount of $250,000 for death benefit protection. He also likes the idea of having no premiums after age 65 (his expected retirement age) and the opportunity to receive a cash value in the case of emergencies or to supplement a need like retirement. When he reaches age 65, his policy is paid up and he has $229,777 in cash value (not guaranteed), based on the current dividend scale (dividends are not guaranteed).<br />Let's also assume that Paul has accumulated $250,000 in his investment account when he reaches age 65. With the same desired income level as Peter he will also systematically withdraw $15,000. He will, however, not withdraw any money from his investment account in the year following a down market year. Instead, he will take income from the cash value of the life insurance policy in the form of partial surrenders.4<br />4 Distributions under your policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (your cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.<br />
  13. 13. Peter's Hypothetical Investment Account<br />Let's take a look at Peter's hypothetical investment account after taking systematic withdrawals each year for 15 years. During the bear market, Peter experienced four years where the market produced a negative return.<br />
  14. 14. Paul's Hypothetical Investment Account<br />Now, let's take a look at Paul's hypothetical investment account value after not withdrawing from the account the year following a bear market year. As you can see, by not withdrawing from the account during the negative years, the total value was less impacted by the market fluctuations. By age 79, Paul’s account had over $200,000 more in value than Peter’s.<br />
  15. 15. A Case Study<br />So where will Peter's supplemental retirement income come from in those four years? His Whole Life insurance policy.<br />Keep in mind that the distributions from the life insurance policy are a return of cost basis (the money the client put into the policy) so it will not be taxed.5<br />Therefore, Paul only needs to partially surrender $10,800 from his policy in those years. <br />In addition, even after using a portion of the life insurance cash value for supplemental retirement income, the guaranteed death benefit never falls below the original face amount of $250,000 and may potentially grow to over $600,000.<br />5If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxed to the extent of gain and are subject to a 10% tax penalty.<br />
  16. 16. Paul's Partial Withdrawals During Bear Years<br />
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  19. 19. Is It Right for You?<br />This Supplemental Retirement Income Strategy could be right for you if:<br /><ul><li>You have a protection need that life insurance can provide
  20. 20. You are looking for a life insurance product that includes values that you can access for supple-mental retirement income
  21. 21. Would like to include fixed income assets in your overall supplemental retirement income portfolio</li></li></ul><li>SynergiaBusiness Presentations<br />Joaquin “Duke” G. Wilwayco8301 Ephraim Road, Austin, TX 78717Phone: (512) 799-2999<br />Fax: (512) 671-6377Email: dgwilwayco@aol.com<br />

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