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The American dream of retirement varies from person to person but generally consists of a time of stress-free enjoyment. The idyllic retirement lifestyle that many envision is increasingly unattainable to many if not most Americans. According to Ernst & Young, the savings gap, the amount by which needs will exceed savings, is expected to reach $240 trillion by 2030. This huge shortfall is partially explainable by a number of factors. The bottom line is that people have been unable to save enough for secure retirements. Certainly, 401(k)s and IRAs offer excitement and potential, but the frequency of market losses makes these savings vehicles inadequate.
Given the rising cost of living and increasing life expectancy, drastic actions are needed in order to improve retirement outcomes. Although they lack the perceived excitement of IRAs and 401(k)s, life insurance companies offer products that deliver a more consistent, successful retirement savings plan. In this article, we’ll review the problems facing the American retirement landscape, and the role and products insurance companies offer that can help you make a smart and successful retirement plan.
The bottom line is that people are not saving enough to enjoy the longer retirements that increasing life expectancy make possible. There are a myriad of reasons for this, but here are some of the most compelling reasons for the lack of savings:
The increased connectedness of life through digital technology has broken down barriers between finances, lifestyle and entertainment. The prevalence of subscription services and digital payments foster increased spending. Higher spending reduces savings.
Beyond the failure to save enough of our income, our investment performance is generally quite poor. Although the long-term historic return on the stock market is usually calculated to be around 8%, most people do not actually achieve this rate of return. For example, for the 20 years ending in 2017, the average annualized return on the S&P 500 was 7.68%, but the average investor only earned 4.79%. The average investor underperformed the market by almost 3% on an annual basis.
What cuts into our returns? Many things, including fees and commissions. Also at play, though, are flawed strategies and poor tactics. People have a terrible habit of buying near the top and selling near the bottom. It’s quite possible that the democratization of investing, where a much higher percentage of the population own investment securities, has caused financial reporting and analysis to unduly influence people’s investment choices. People just don’t seem to have patience to hold securities; the average holding period for stock and mutual funds has been declining for years.
When you add it all up, people don’t save enough out of their paychecks, and the money they do save doesn’t earn as much as they need it to.
This is a problem, of course, because there is a practical limit to how long people can work. We can’t work forever, even if we wanted to. And, if you’d like to stop working at a young enough age to luxuriate during retirement, you need to save more and earn more investment income.
One huge component in the lack of retirement preparedness is the decline of the traditional pension plan. It used to be that workers would work for one or two companies for 20 or 30 years. In exchange, they would receive a guaranteed pension payment for the rest of their lives. Unfortunately, the traditional pension plan is almost extinct, with less than one-third of Americans expected to have traditional pension income.
Pensions have declined because of their growing cost to employers. Since pensions pay a guaranteed income for the life of workers, the benefits due to be paid to retirees has grown right along with life expectancies. Increasing lifespans mean that more money is needed in the plans. This money only comes from two possible sources:
The chase for higher investment returns is a double-edged sword, however. When you seek higher returns, you expose yourself to higher losses, too. Every time there is a major market meltdown or bear market, pension plans become more under-funded, threatening their ability to pay the benefits promised to workers.
Higher contributions are unwelcome because these costs eat into corporate profits. The solution has been to phase out traditional pensions in favor of employee-directed defined contribution plans.
The 401(k) plan and individual retirement account (IRA) were touted as superior alternatives to pension plans. The increasing popularity of the 401(k) has been the cause of much controversy over the years. On the one hand, putting control of retirement in the hands of individual workers has its benefits. They are personally aware of their savings status and at least potentially very aware of their retirement savings status. By putting investment responsibility on the shoulders of employees, it was thought that individuals acting on their own account could earn higher investment returns than traditional pension plans.
Unfortunately, that has not turned out to be the case. With more and more individual investors involved in the financial markets, the natural volatility of the stock market has wreaked havoc on investment returns. For instance, since the advent of the 401(k) provision to qualified retirement plans, there have been at least four major market crashes or bear markets: 1987, 2000-2002, 2008-2009 and 2020. In each of these cases, retail (individual) investors suffered terrifying losses.
When these major swings occur, the average investor tends to sell near the bottom. Worse, though, is that because they remain fearful of further losses, they delay getting back in to the market, so they miss out on the early gains of the next bull market. By the time they become comfortable investing in riskier assets, they’ve already missed out on much of the gains; they often come back in to the market close to market tops. Then, they’re set up to suffer major losses again. While every major market crash or bear market has had its own theme, the way the losses play out tend to be the same. The consequence is that American’s can’t expect to have adequate savings for retirement. Better options are needed.
It is just here that assets from insurance companies can make a huge difference as part of a smart retirement plan. By using a combination of permanent life insurance and annuities, you can greatly improve your chances of a successful retirement. Life insurance and annuities are a proven “slow and steady” option that really can help you win the race. These products, generally dismissed as “old-school” or “boring” by pundits, offer three major benefits:
One glaring improvement offered over market-based investments from insurance contracts and annuities is the availability of guaranteed income payments. This income is usually paid in the form a life annuity – a monthly payment you receive from your insurance company. The wonderful thing about these payments is that they’re guaranteed for as long as you live, even if you live into your nineties – or longer. Traditional investment products can’t make such a guarantee.
You can structure your income to include provisions for the longer lifespan of one spouse over another. So-called “survivor” benefits can help add peace of mind; you’ll know that the income stream will continue for the full lives of both spouses.
The guaranteed income options from these insurance products give them a huge leg up over traditional market-based investments. However, permanent insurance policies and annuity contracts also give you substantial protection from market losses.
Important studies have shown that simply not losing money can boost your overall investment returns greatly. In other words, it’s better to earn a lower but consistent rate of return with zero losses than it is to chase the market performance of stocks and bonds. We’ve already seen that investors don’t actually earn the historic return on stocks in any case. Remember, the “average” actual return over 20 years was 4.79%. This is an average, though, which means that many people did worse than this. In fairness, it also means that many people did better than 4.79%, but can you really guarantee that you’ll be one of those more successful investors? History has shown that you can’t.
As an alternative, you can anchor some or all of your investable funds in guaranteed or fixed assets like life insurance and annuities. These products will pay a minimum rate of interest. They also many times pay non-guaranteed dividends. Although people will tell you that you should be doing “more” with your money, just sticking with these low, but fixed, interest payments will stand you in good stead. The best news of all is that by doing this, you will be protecting against market losses. Imagine having a nest egg that earns interest year after year, but never loses money. That’s exactly what insurance products can help you achieve. However, you can actually do something to improve the interest-earning capabilities of life insurance and annuities.
By using fixed index insurance products, you can actually earn interest based on financial market performance, but with none of the risks of financial markets. When you do this, your interest rate is calculated based on the performance of one or more financial indexes. Every insurance company and policy is different, but this kind of indexing strategy can help you earn much higher interest rates than traditional fixed interest policies. Best of all, you’re still guaranteed to never lose money due to stock market fluctuations. It truly is a win-win situation. The smoothness of your interest earnings over 15 or 20 years from this strategy will stand you in great stead; it will put you ahead of most people saving for retirement who will use “traditional” strategies based on stocks and mutual funds.
The concept of leverage is simple. It involves using a small amount of money to control a larger one. In the realm of investing, it usually means either buying stocks on margin, or selling them short (actually two sides of the same coin). If the stock in question moves the way you hope it will, you’ll make a very large return on your money. However, the reverse is also true: if the stock moves the “wrong” way, you’re liable to be wiped out because you can end up losing more than the amount of money you initially “invested.” For this reason, margin and leverage have a bad reputation. Most investment advisors recommend that savers avoid using margin due to these risks. This is leverage in a negative sense.
Life insurance, on the other hand, allows you to take advantage of “positive leverage.” In this case, you actually benefit from disaster. This is because the death benefit provided by a life insurance policy is usually much larger than the premiums you pay into it. This is especially true in the early years of a policy. For example, if you bought a $1 million life insurance policy in your late 40s, say age 48, your annual premium might be $30,000 per year. Here’s where leverage comes into play. If you die, your beneficiary will receive the entire $1 million dollar face amount. Let’s say you die unexpectedly at age 65. You will have paid the premium for 17 years. You’ve paid premiums totaling $510,000, but your heirs still get $1 million. The death benefit is almost twice the amount you paid. If you should die younger, the leverage is even better. Of course, if you die at age 80, then the leverage is significantly smaller. However, no other investment is able to provide this kind of protection. The best part is that with a permanent life insurance policy, you’ll be earning interest and potentially dividends on your premiums every year that you don’t die.
Assuming you live a normal life expectancy, your life insurance policy can provide a source of cash to help you fund your retirement though tax-advantaged policy loans if you desire to do so. When you do die, your policy will still pay a death benefit to your surviving spouse. This death benefit can help them maintain or even improve their retirement income for the rest of their life. If they also have insurance protection, you can ensure that you pass on a financial legacy to your children or grandchildren, even after you’ve both lived a long and fulfilling retirement.
What insurance companies offer that no other market-based investment can is stability, guaranteed income and positive leverage. However, to take full advantage of these benefits, you need a sound plan. It is critical to work with a financial professional who knows how to select the best products for your goals. You will also need to be prepared to stick with your plan for the rest of your life. To get the most out of life insurance and annuities, you must put time to work for you. The longer you keep these assets working for you, the better the payoff will be.
You’ll also need a thick skin. When the stock market is earning double digits and brokerage commercials are airing during every ball game, you’ll need the discipline and wisdom to remember that a bear market could be just around the corner. Remember that the average investor never attains the gains promised by the stock market. Instead of trying to do better at a losing strategy, you can use an alternative strategy that eliminates the problems inherent in relying on the volatile stock market to accumulate your nest egg. For those willing to stay the course, and not be swayed by the temporary euphoria of bull markets, fixed and guaranteed insurance products can deliver a better retirement.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
