The two biggest risks you face in retirement (and how to get rid of them)


The two biggest risks

Most people spend their entire lives planning for their retirement. You work day in and day out with the goal in mind that one day you will never have to worry about money again, and you will get to live the retirement you have always dreamed about. After all of your careful planning and follow-through, the worst thing you could do would be to jeopardize your dream by failing to protect your retirement savings. There are two huge risks that you will face in retirement. One is taxes, the risk that taxes go up and take a more significant portion of your retirement income. The second risk is market volatility; if the market goes down while you are relying on the funds for income in retirement, your savings may not last long enough.

You need to find tax-free growth

In order to avoid some of the worst tax time bombs in retirement, you need to maximize retirement investment vehicles that will grow tax-free. Good examples would be to fund the Roth option on your 401(K) AND open an Individual Roth IRA. Both of these will tax contributions on the way in, while you know what your tax rate will be, but they will never tax anything on the growth of your investment. When it comes time to retire, any money you pull out after the age of 59 ½ will never be subject to taxes, and you can ensure that the distributions you have planned for your retirement will never go down due to an increase in tax rates. By working with a financial advisor, you can learn more sophisticated strategies to help you maximize the Roth options, and get the advice you need to invest confidently with your goals and risk tolerance in mind.

You need to build in downside protection

When your investments are subject to market volatility, they are always at risk. While you are young and saving, stocks plummeting may not matter as much because you have the time to ride out the natural cycles of the market. But as you get closer to retirement this risk becomes more pronounced. And, when you are in retirement, the risk that the market crashes while you are taking out money to live on could drain your account far faster than you planned. This is called the sequence of returns risk, highlighting how the timing of good and bad years can significantly impact how long your savings last. That is why it is so important to plan for this risk and build in some downside protection for your portfolio. Examples include investments such as buffered annuities, and other buffered investment options such as ETFs, that will provide some protection if the market goes down. They normally work by offering you a certain level of protection (5-25%) where if the market falls within this range, your investments will not go down. However, anything above the buffer (+25%) will still be at risk and subject to losses. In this way, at least you can partially hedge if the market takes a turn for the worse.

There’s a way to get both

There is a product that will protect you from both of these risks. It’s called Indexed Universal Life Insurance, and if funded correctly, it can provide you with a savings vehicle that has 100% downside protection (it will never go down if the market dips) and it grows completely tax-free! Why life insurance? Because a life insurance policy offers unique tax advantages and protection that is hard to find anywhere else. This is why it can be a pivotal piece in planning for risk during your retirement. The way it works is that a portion of your premium pays for the cost of insurance, and the rest goes towards a savings component that can build cash value inside the policy. The cash value is linked to a market index, and if that index goes up over a certain time period your account will be credited by the percentage increase. But, if it goes down, your account will only be credited 0%! For this protection, you will be subject to a market cap, so if the account goes up 15% and your cap is 9% you will only receive a 9% credit. But if the market tanks by 50%, your account will not lose any money!! During retirement, you can take out a loan every year against your cash value, and enjoy a stable cash stream that will not be affected by market fluctuations or a change in tax rates!

Call Us Today!

All retirees face some risk during retirement, but market volatility and increasing tax rates could wreak havoc on the plan you have spent so long putting into place. Indexed universal life insurance is a powerful tool to protect your retirement savings from the two most common threats. Mission Critical FPI can help you understand the risks in retirement, evaluate your current strategy, and ultimately protect your retirement savings so that you never have to worry about running out of money. Give us a call today!  

About the Author

  • Jeff Geraci

    Jeff Geraci grew up all over the world in a military family, and spent 5 years on active duty. While serving, he felt the tug between planning for financial independence with a limited income, and an all-consuming job. That’s when he decided that with a financial plan and a mentor, a service member could be successful in his career and finances! Military members are decisive, family-oriented, and really too busy to keep up with the changing financial world: the psychographics matched, people with military experience were an ideal community to serve!

Jeff Geraci

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