John E. Girouard
Feb. 7, 2019
What are you worth?
It isn’t always an easy question to answer, particularly when you consider that your age, education, earning potential and countless other factors all go into your net worth. For the youngest among us—Gen X-ers, Millennials, and especially the latest group coming up now, Gen Z—net worth is largely measured by their human capital, which is best defined as the value of one’s ability to earn. In other words, how rich you’re going to be, one day.
But as we work and age, we transfer that seemingly unlimited human capital into finite investment capital—meaning that we put the money we’ve earned out into the market where it can earn more for us. But as the scales of time begin to tip and the working years of our lives become outnumbered by the years we’ll need to fund in retirement, we often start to feel a little less comfortable having our life’s earnings out there wandering around unchaperoned in the market—the same market that lost $6.9 trillion in shareholder wealth in 2008.
The point is that folks headed into retirement simply want to know that their money is safe and secure, and I can’t blame them. No one wants to think that a bad day on Wall Street could wipe out what they spent 50 years accumulating. And when we think about the risk inherent in the market, it only serves to highlight our complete lack of control.
Control, I’ve found, is always an important part of this equation. It’s human nature to think that if times get tough, or if we take a loss in the market, or if we spend through our emergency fund, we can just work harder, and earn that money back. How many times have you thought to yourself, “I can take on a second job if I need to,” or “I can always find a higher-paying position if I need one.” Just the knowledge that we could go out and earn more is comforting, on a deep psychological level. We’re actually genetically wired to prioritize earning money over saving money, according to a study from Cornell University, so at our essence, we’re all little worker bees, which explains why retiring—and saying goodbye to our human capital—can come as such a blow. It also explains why, when our net worth becomes investment capital, the risk it endures in the market can be so unsettling to us.
So, we’re unsettled. We want a better way. The only problem with that? Most Americans have no idea what a “better way” looks like. They don’t have a strategy when it comes to facing life’s changing investment objectives. Instead, they do what most people around them do, and they keep the majority of their wealth in their 401(k)s, IRAs and their homes. But of course, when the majority of your wealth stays in your retirement accounts, you’re essentially giving a faceless company free reign with your cash, while you continue to shoulder unnecessary risk for your age.
Given the misinformation out there—and complete lack of information on how to truly protect your assets—the number one priority at my firm (and all successful firms) is to ensure our clients always have enough cash on hand to weather any market cycle. As a retiree, you don’t just want to have enough cash to make it through the next recession, you want to have enough for every eventuality, life-changing event or opportunity you meet in retirement.
The Strategy I Use In My practice
Annually, from ages 65 to 95, I have my clients transfer between 3% to 6% of their excess wealth to an over-funded mutual participating whole life insurance policy. If you were to look at the ideal investment pyramid, this policy would be the foundation of safety. It provides cash, liquidity and tax-free contractual guaranteed minimum rates of return. In my opinion, it is the most overlooked money management tool, and has more lifetime living benefits that any other after-tax/tax-free place I’ve analyzed.
These policies provide tax-free access to cash that can be utilized for any need and ultimately create a place where you can access cash for emergencies, supplemental retirement income, or funds to enter a retirement community. Through these policies, you can place and protect a wide variety of excess funds, including equity from the sale of your home, an inheritance or excess retirement distributions that you’ll have no choice but to start taking at age 70 1/2. Of course, these insurance policies also provide a tax-free death benefit to your loved ones, and many newer contracts offer the ability to draw on the death benefit for chronic long-term care needs, although this may come at an additional cost.
And, at the end of the day, these policies offer you a means of leaving a lasting legacy, whether that’s a donation to charity, a foundation you want to start, or simply money for your grandchildren.
If you’re following along so far, this policy probably sounds like exactly what you’ve been looking for. And it can be—but, as with any financial product, there’s a right way and a wrong way to do things. All too often in our society, insurance is sold the wrong way—people think that getting the largest death benefit they can for the least amount of money sounds like the best plan, but the greater the risk to the insurance company (i.e., the less cash you have in the account) the higher your cost. Don’t do that.
Instead, structure the policy with the least amount of death benefit and fund it with the maximum amount of savings, the goal being to increase your liquidity and flexibility to protect your cash during hard times. What’s even better? The more money you store, the better your return on cash value, since you’ve reduced the amount the insurance company has to fork over when you’re gone.
If at any point during this article you’ve thought to yourself that using whole life insurance as a cash or bond alternative is a “new” way of thinking about things, you’re only half right. From 1940 to 1970, these contracts were the most popular insurance products on the market. But over the years, many of us forgot about them as we gravitated towards cheaper term life insurance policies or universal life insurance that came about in the 1970s when interest rates were high.
Today, the latter are proving to be an albatross for people in their 80s who didn’t understand that as interest rates fell, they’d have to increase the amount of money they paid in. Of course, these can all be great policies when managed correctly, but they serve a completely different purpose from participating mutual whole life insurance. It’s called whole life for a reason because it’s something you use throughout your entire life. These policies have got your back until the day that you die, and I can guarantee that between now and then, you’re going to want tax-free access to cash, and a risk-free place to put some extra money.
So talk to your financial planner today about how this old-fashioned wealth protection tool can have an important place in your retirement toolbox. Just because it’s been on the market for over 100 years doesn’t mean it isn’t just as reliable as it’s always been. Think of it like your father’s Oldsmobile—still chugging along, safely getting you right where you need to go.
John E. Girouard is the author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research.