The number one financial concern for most Americans is having enough money for retirement.
Unfortunately, the vast majority of Americans will run out of money in retirement, if they live long enough, and here are the seven reasons why. I call them the Seven Ways to Run Out of Money in Retirement™ because any one of them can kill your retirement plan. If you have any combination of them, you will very likely run out of money in retirement.
Here are Seven Ways to Run Out of Money in Retirement™:
1. Taxes – You need to create a tax-free retirement income.
2. Inflation – I'm going to show you an easy way to calculate with good accuracy, how much money you will need in retirement.
3. Market losses – It’s one of the biggest Retirement Stoppers.
4. Major medical illness – We are living longer, and the need for long-term care strikes 91% of all couples who reach an advanced age.
5. A late start to saving – You can’t turn back the clock, but there are solutions.
6. College for your kids – I’m going to show you how to get someone else to pay for your kid’s college, and they'll be happy to do it.
7. The death of a breadwinner – It is devastating, and it's sad.
Your IRA or 401(k) will not protect you from any of the Seven Ways to Run Out of Money in Retirement.
Taxes
If your retirement money is taxable, you can’t possibly know how much money you will have in retirement. That’s because you have no idea how high taxes will be when you retire. Which means you don’t know how much of your money the government is going to let you keep.
To protect yourself, you need to create a lifetime tax-free retirement income stream that will fully support the retirement lifestyle you want. The only way to do that is to use a permanent cash value life insurance policy as your primary retirement savings vehicle. The money will grow tax-deferred just like your qualified plan. In retirement, you pull the money out tax-free in the form of policy loans. Moreover, because the money is tax-free, it’s not pushing you up into a higher tax bracket for other retirement income that is taxable. This means you could save even more tax dollars on your 401(k) or IRA, and Social Security. Another way to create tax-free income is with a Roth IRA, however, the Roth IRA does have restrictions and limitations that make life insurance a better choice.
You can’t control how high taxes go, but you can control whether or not your money is taxable. Creating a tax-free retirement income with a permanent cash value life insurance policy is a key first step to building the retirement of your dreams.
Inflation
Do you know what it will cost you to live 20, 30, or 40 years from now? If you don’t know what it will cost you to live in retirement, how can you possibly know if you will have enough money for retirement?
Here is an easy way to calculate in a matter of seconds how much money you will need for retirement. To be as accurate as possible we’ll use the long-term inflation rate because we are calculating for the future.
For the last five decades, inflation has averaged 3.33%. At that rate, the cost of most things doubles about every 20 years or so. Whatever it costs you to live now, in about 20 years it will cost you double. The only caveat being any debts or costs that will go away.
For example: If you are going to pay off your home mortgage and never have another mortgage again, you could subtract the cost of the mortgage. If you plan on ever refinancing your mortgage, or buying another home in the future, then you need to leave the cost of the mortgage in.
Inflation coupled with taxes is the reason why the 401(k) or IRA, absolutely cannot possibly work as your primary retirement savings vehicle and here’s why. A 45-year old with monthly living expenses of $5,000 per month will need about $10,000 per month by age 65. But we’re living longer, so add another 20 years, and at age 85 that number doubles to $20,000 per month. How much money will you need to take out of your taxable 401(k) or IRA to have $20,000 per month? Possibly $40,000 per month?
You can see why people run out of money in retirement if they live long enough. You can also see the importance of having tax free income. Creating a tax-free retirement income with a permanent cash-value life insurance policy is a key first step to building the retirement of your dreams.
Market Losses
Market losses are one of the biggest reasons that so many people are not prepared for retirement.
Is there a place for stocks and mutual funds and other risky investments in your retirement plans? Yes, but only after, the keyword here is after, you have enough retirement savings put away to last throughout your retirement.
Let me ask you a question…. Should you go to Las Vegas and then come home and try to figure out how to pay your bills? Or should you pay your bills first, and then if there is money left over go to Las Vegas? When it comes to retirement, most people go to Las Vegas first. Wall Street is the largest casino in the world. All those mutual funds and stocks are nothing more the table games and slot machines in the casino. The financial advisor who sold you those mutual funds and/or stocks is nothing more than the dealer; they are there to take your money while you take all the risk. You can win in the short run, but in the long run, you will probably lose.
You hear financial advisors say, don’t worry about losses, just stay in the market, the market always comes back…. The sad truth is, the market has all the time in the world to come back. Unfortunately, you don't, because time is not on your side. If you listen to those who tell you to put your financial future at risk in the markets, you won’t have enough money to last through your retirement.
So, let's get to the solution. Use a “properly structured,” indexed universal life insurance policy with critical and chronic illness riders as your primary savings vehicle. If the market goes up, you will get a reasonable rate of return. If the market goes down, your gains are locked in, and you could still get up to two percent, depending on the policy. That one step will protect you from market losses, and the riders can protect you if you suffer a covered critical illness or if you need long-term care.
Major Medical Illness
Major medical illness is one of the Seven Ways to Run Out of Money in Retirement because it can kill your retirement plans.
During your working years, a critical illness such as a heart attack, stroke, or cancer can devastate your retirement nest egg. Health insurance is good, but it doesn’t pay your mortgage, and it won’t put food on the table. Moreover, the average couple retiring today at age 65 will have over $275,000 in uninsured medical expenses, and if long-term care is required that number skyrockets from there.
What can you do to financially protect yourself? Use a permanent cash value life insurance policy with living benefit riders as your primary retirement savings vehicle. The policy can grow to provide you with life-long, tax-free retirement income, and the living benefit riders will financially protect you from major medical illnesses.
There are two types of living benefit riders. The first one is called a critical illness rider. Depending on the company and the policy, it can provide a benefit of up to one million dollars in cash, tax-free, if you are stricken with a covered critical illness, such as a heart attack, stroke, cancer, blindness, ALS disease, or end-stage renal failure. The money is paid in a lump sum, in addition to any other insurance coverage you may have.
The second living benefit rider is called a chronic illness rider it's a great alternative to expensive long-term care insurance. It provides huge financial benefits if you cannot perform two of the activities of daily living, or if you have a cognitive impairment, dementia, or Alzheimer’s disease. Just like the critical illness rider, this benefit is paid in addition to any other insurance coverage you may have.
A Late Start to Saving
Are you a business owner in your 40s or 50s and feel you’re behind on your retirement savings?
You can’t turn back the clock, but you can make up for the lost time by combining the power of financial leverage and compound interest.
You borrow money from a bank at a low simple interest rate and put the money into a permanent cash-value life insurance policy. The loan interest rate is simple interest, and the money in the life insurance policy is compound interest. Moreover, the loan interest rate is lower than the life insurance policy interest growth rate. As a result, the money in the life insurance policy grows faster than the interest on the loan.
This is the power of financial leverage, and it is the ideal way to catch up on your retirement savings. Most of the collateral for the loan is in the cash value of the life insurance policy. The only additional collateral required is either a business line of credit or a letter of credit. Which means, in some cases, you can start the plan with relatively little out-of-pocket expense.
For the past twenty years, successful business people have been using this technique for estate planning purposes. In this case, you can use the same powerful financial tools and methods to create a very substantial lifetime, tax-free income. This is not for everyone, but most businesses with a valuation of greater than five million dollars are good candidates for this type of plan.
College for Your Kids
College tuition for your children is one of the Seven Ways to Run Out of Money in Retirement™. Just when you should be focusing on saving for retirement, along comes this massive bill called college tuition for your kids. It’s bad enough if you only have one child, but if you have two or three children, or more it’s staggering.
Paying for college is not easy and one mistake can financially affect the rest of your life. A huge mistake many parents make is they start a 529 plan to save for their kid's college education. There are simply too many restrictions and risks associated with a 529 plan. I have three words to say about a 529 plan… “Don't Do It!!!”
Easily the biggest and most common mistake parents make is using their retirement money to pay for their kid’s college tuition. As a result, those parents find themselves in their late 40s and 50s with absolutely no retirement savings.
The best way to put your kids through college is to get someone else pay for it. There is a nonprofit 501(c)3 organization called Power of Working Together www.POWT.org. This organization works with families to help them get merit award money from the colleges. They have a terrific program that the student goes through. It’s a lot of hard work but it’s worth it.
The merit award money is free money that you do not have to pay back. It comes in the form of discounts on your child’s college tuition. That means the money is not taxable because it’s a discount, not actual cash.
The same way that students compete to get into the best schools, the schools also compete to attract the best students. Each school has a profile of what they consider their ideal student.
Contrary to popular belief, students do NOT have to be athletic, or academic superstars, to get merit award money. The student simply has to match the profile of the school’s ideal student. Students should start as early as the eighth or ninth grade and as late as early in their senior year in high school. The earlier they start the better, because it gives the student more time to prepare.
The Death of a Breadwinner
The death of a breadwinner is one of the Seven Ways to Run Out of Money in Retirement™. Protection from this retirement killer is very simple; it’s called life insurance. The problem is, most people do not have the proper amount and/or type of life insurance to suit their needs.
Imagine what would happen to a family financially if the income from the breadwinner, or one of the breadwinners suddenly and permanently stops. It’s bad enough in a two-breadwinner home, it’s devastating in a single breadwinner home. Add to that the stress from the loss of a precious loved one, and it becomes unthinkable. The surviving spouse needs time to stop and grieve, yet the bills don’t stop. Life insurance can’t bring back your loved one, but it can replace the financial loss. The purpose of life insurance is to replace the financial loss resulting from the death of the insured.
Let’s start by calculating how much protection you and your family need. Begin with the income of each breadwinner and multiply that amount by the number of years until retirement.
For example, a 45-year old male, earning $100,000 per year, with plans to retire at age 65, would have 20 years of income ahead of himself. You also want to factor in raises and bonuses over that period. This means a 45-year old male earning $100,000 per year, would want to buy 25 times their income or 2 ½ million dollars in life insurance death benefit.
The next thing you need to do is get out your calculator and figure out how much life insurance you need. Simply multiply your income by the number of years you will continue to work and then add in five more years of income.