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Don't Mix Your Investments With Your Retirement Plans

Don't Mix Your Investments With Your Retirement Plans
(Bondarenko Ivanna/Dreamstime)

By    |   Friday, 06 November 2020 10:53 AM

When it comes to retirement, many people think your investments are your retirement plan. But that’s not the case.

For too long, traditional financial planners and retirement advisors have made their clients’ investments the core part of the retirement plan. The problem is, if you’re planning on your 401(k) or IRA to fuel your retirement, you’re counting on the wrong type of investments.

The traditional mix of 401(k) and IRA plans that contain stocks and bonds are flawed as retirement plans because they don’t provide enough income opportunity during actual retirement and carry too much risk. Although they can make good returns in the early years like any investment, as you near retirement, they traditionally convert from risky to more conservative, simultaneously killing the rate of return and income potential.

The 401(k) and IRA Risks

If you plan to fully retire (not work part time), then of course you need income. You need to replace as much as possible of your current monthly intake, in order to ensure you don’t run short and need to reenter the workforce. At the end of the day, you can only plan your future expenses so accurately. It’s entirely possible your living expenses will rise, either by choice, such as golf trips or long vacations, or due to unforeseen events. In those instances, you might need to start withdrawing and using more than the “4% rule” demands.

What’s the “4 rule?” It’s a guideline long accepted in the retirement planning realm that is considered a withdrawal rate you can take every year with a lost risk of running out of money during retirement. The problem with this rate is it often requires people to downsize their expectations. Even if you’ve hit $1 million in your account, this four percent is just $40,000 per year. The problem is the average 401(k) balance for someone in their 60s is around $182,000. For someone in their 40s, it’s around $93,000. Those balances aren’t going to reach that million and will leave retirees living on much less than $40,000 per year.

So, what can you do? You can’t just “throw in the towel” and not save a nickel. The best move is to shift your thinking away from investment-based retirement planning that doesn’t provide you with enough income.

Leveraging Real Estate or Insurance

Traditional 401(k) and IRA plans come with significant market volatility (the amount of fluctuation in how the market goes up or down). This volatility can strike at the wrong time. For example, a downturn in your mid or late 50s can put your balance in a bad spot, because you just don’t have enough years of compounding left to accumulate enough. These plans focus on the early “accumulation” phase but neglect the more important “distribution” phase.

An alternative source of retirement funds is through leveraged real estate. It’s a hard asset (one you can see and touch), which makes it more tangible. The annual returns on real estate are modest, so you need a more aggressive strategy. You can use the equity in a property to take out a HELOC to acquire additional capital at a low interest rate. And then use that money to buy more properties, build more equity, and so on until you have a large amount of money compared to the initial investment. This is an interesting track, but it comes with substantial risks. Just look back to 2008 when home prices dropped fast, and many people with HELOC debt owed much more than their properties were worth.

Another option to generate reliable income without the risks of real estate or traditional investments is through insurance. Specifically, a type of retirement plan called an Indexed Universal Life, or IUL. Like a 401(k), this plan has three phases, with the difference being it’s built for maximum distributions. It also has an early accumulation of around six to seven percent returns on average, with a zero percent floor guarantee. This means the risk of losing money is eliminated, as the lowest annual rate of return - even if the market drops 40% like it did in 2008 - is 0% or break even.

The IUL has an advantage over other compound interest accounts. IUL contracts can have an acceleration phase, increasing your rate of return as it matures over time and decreasing your expenses.

This unique max-funded insurance contract is called an MPI™, or “Maximum Premium Indexing.” This form of the acceleration phase boosts returns up to 15 percent through the leveraging of a RELOC™ feature, or Retirement Equity Line of Credit, to improve the growth potential and maintain security of a life insurance contract.

Finally comes the distribution phase, where money from the MPI™ is tax free, eliminating capital gains exposure, and you can leave the cash value and life insurance contract to your heirs as a tax-free windfall. The MPI™ plan is also more flexible because it doesn’t come with a restriction on withdrawals before 59½ which is the minimum age to take out funds from an IRA or 401(k) without paying steep penalties.

So, what does this mean for our $1 million nest egg scenario? Instead of the four percent rule, the MPI™ produces up to 15%, so the retiree is looking at $150,000 in income instead of $40,000. This plan of course still takes time and patience, but the payoff is worthwhile. It’s a different kind of approach that provides the missing piece of traditional plans.

By not mixing investments with your retirement you can achieve the key to your relaxing golden years—reliable income. You can be bringing in potentially four times as much cash per year. That’s a lot of golf and extra time spoiling the grandkids.

Curtis Ray founded SunCor Financial, LLC and serves as the President and CEO. In 2014, Curtis was introduced to the world of financial planning & insurance.

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By not mixing investments with your retirement you can achieve the key to your relaxing golden years—reliable income. You can be bringing in potentially four times as much cash per year. That’s a lot of golf and extra time spoiling the grandkids.
mix, investments, retirement, plans
Friday, 06 November 2020 10:53 AM
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