Timing is everything, especially during a client's "accumulation years" when fluctuations in the market can severely impact the value of their investments and retirement assets. Investors who purchase assets during a market low have the potential to benefit when the market increases. Concurrently, if an investor buys those same assets during a market peak, it could take years to recover from the losses following a market drop. This issue of "investing-at-a-peak-or-trough" is a normal part of the planning process that all pre-retirees face.
What many may not realize is that once they have retired, the planning process begins all over again. This time, the "peak versus trough" issue can have a significant impact on retirees. When the market is stable, retirees have the potential to preserve, and in some cases continue growing, their retirement assets. When the market is down, individuals may find their retirement assets are eroding faster than planned, necessitating a return to the workforce or delay in retirement.
Waiting for the market to stabilize before entering retirement is not an attractive or even realistic option for many clients, but there are still ways to help retirees offset the negative effects of a fluctuating market. For recent retirees who are struggling with the aftermath of the 2008 recession, cash value life insurance offers a solution. The below example illustrates what will happen if a client can eliminate drawing down on their retirement assets in a "down" market.
The Problem
Take Tom for example, an average 65-year-old retiree with $1,000,000 accumulated in retirement savings. Tom and his retirement planner calculated that Tom would need $100,000 each year in retirement. With Tom's pension and Social Security benefits covering just $30,000, he still needs to find $70,000 each year.
Tom and his advisor analyzed a 20-year return for the stock market, conservatively focusing on a period of 20 years that the market had a mix of gains and losses, of which there were only five “down” years. If Tom were to make annual withdrawals from his retirement savings, he would still be forced to sell during loss years, exacerbating his losses during the “down” years and significantly decreasing his total retirement assets.
Permanent Life Insurance to Cushion the Down Years
But Tom has one advantage over the fluctuating market; he bought a cash value life insurance policy when he was in his 40s to protect his family in case something happened to him during his working years.
After 25 years his life insurance policy has a reasonable cash surrender value that Tom can access to help supplement his retirement. A cash value life insurance policy can help retirees avoid selling assets in down years while giving their traditional retirement funds the chance to recover over time. Instead of drawing from the cash policy every year as expected, Tom's advisor showed him how to strategically access the funds only during "down" years.
The Moral of the Story
Because Tom chose to make strategic withdrawals only in the years following down stock markets, he doesn't need to maximum fund his life insurance policy, but instead adequately fund it to build cash value. One benefit of supplementing retirement income with permanent life insurance is that permanent life insurance policies allow tax-free withdrawals (until the total premiums are paid). Another benefit is the potential to provide a legacy by not entirely depleting assets in retirement.
Using a permanent, cash value life insurance policy is just one way that advisors can help create balanced retirement plans for their clients. It’s not the best recommendation for every client however, so it’s important to create customized recommendations based on unique client needs. Generally speaking, the ideal client for a permanent life insurance recommendation would:- Have a need for life insurance
- Be between the ages of 35 and 55
- Already have traditionally funded retirement options like IRAs and 401(k)s, but have a need for additional funding
- Show concern regarding what will happen to their funds in the event of a market drop as they approach retirement age
Clients may never know if they will retire during an up market or a down market. But financial advisors and retirement income planners can still help clients protect their assets against market fluctuations by including permanent cash value life insurance as part of a complete retirement income plan.
One way for advisors to expand their knowledge on comprehensive financial planning concepts, like using life insurance products as part of a retirement income strategy, is by pursuing a professional financial designation like the Chartered Life Underwriter® (CLU®) or the Chartered Financial Consultant® (ChFC®).
If you’re ready to grow the insurance component of your practice and solidify your position as a retirement planning expert, get started with CFP®, ChFC®, and CLU®: Which is Right for You?
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