According to data from the most recent Federal Reserve Study of Consumer Finances (2019), Americans between the age of 55-64 have on average $134,000 in retirement savings. The average retirement lasts 18 years, which only leaves about $7,500 per year for the average person planning to retire in the next 10 years. This will force more retirees to rely on social security benefits, which are often not enough to begin with, in an effort to sustain their current lifestyle. It’s no wonder that so many are anxious about maintaining the quality of their life in retirement.
People under the age of 34 still have a lot of time to save, but studies show that many don’t start saving until they are well into their 40s – and one in every four Americans do not have any retirement savings! If you can start saving at least 10-15% of your pre-tax salary by the age of 34, you should be able to meet your retirement goals. But for many reading this, this timeline may have already passed and you will need to look for other ways to accelerate your ability to save for retirement.
Concept of leverage
Leverage has been used by the wealthy to increase their earning capability beyond what they would be able to achieve using just their own assets. At its basic level, it is borrowing money to fund something of higher value. Everybody uses leverage when they take out a mortgage to buy their own home. You put down a downpayment, and you borrow the rest of the purchase price in exchange for paying interest on the loan. Your hope is that when it is time to sell, you will make more money on the sale than it cost you to buy the house. That is you strive to not only pay off the mortgage (with interest), but to have more money left over than when you started. This is the concept of leverage – borrowing money to make profits that will more than offset the cost of the loan.
How to use leverage
There are many ways to take advantage of this concept. Businesses use leverage all the time to fund their operations or new strategic ventures by taking out loans that they know will make them more money in the long run. The wealthy use it to borrow money against assets they own to fund new profit-making activities.
When it comes to your retirement savings, individuals can use leverage in the same way to increase their ability to earn. This is accomplished by financing your investments. When you combine your funds with a loan from your broker, you will have more money to invest and the potential for greater returns if you make the right moves. You take on a lot of risk by doing this though. Remember in the end you always need to pay back the loan, so if the investment tanks, you may end up losing more money than you initially invested and owing the bank!
But there is one way to leverage your investment that significantly decreases this risk. It is a concept called premium financing, and it’s a strategy that uses the unique benefits of life insurance to build cash value that is fully protected from losing money when the market goes down. This means that as long as your average return can beat the borrowing cost, you can increase your earning capability without taking on significant market risk.
How short are your retirement savings from achieving your goal?
Your retirement is a goal that you have been working towards your entire life. As a financial planner, my primary job is to make sure my clients never run out of money in retirement. I know that after reading this article many of you may have come to the disturbing conclusion that you might be facing a lifestyle downgrade in your golden years. If you don’t think you have enough time to save for the retirement that you’ve always imagined, consider using leverage to accelerate your savings capability! Need help figuring out how? Give me a call today!