So lets explore the idea further. According to Barry Dyke, author of The Pirates of Manhatten, Life Insurance companies were the primary custodians of American savings until Wall Street started marketing Mutual Funds and 401k's. In the Casino Age we live in now, Wall Street will spend as many millions of dollars as they need to market a program into success. However be sure not to look behind the curtain or you will see the foolishness of the system.
I tend to believe numbers since math is hard to fudge and math is the universal language. I want to run a comparison of a 50 year old male saving money in an IRA or 401k verses saving money in a life insurance contract with tax advantages.
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| 50 year old man putting $500 a month away for 20 years at 8%. |
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| 50 year old man putting $500 a month away for 20 years at 8% minus 2.5% fees. |
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| 50 year old man putting $500 a month into Life Insurance for 20 years at 8% |
20 years in IRA/401k at 5.5% (8%-2.5% fee=5.5%) grows to $209,209 assuming no losses.
20 years in a Life Insurance plan at 8% grows to $193,154. Contractually cannot lose money.
I don't think I need to point out that stock market is a Roller Coaster with unpredictable ups and downs. What the market giveth it taketh away. When you lose money in the stock market you don't only lose money, you also lose your most valuable resource, time. If you lose 5-10 years of money and compounding growth time, it can adversely effect your retirement nest egg.
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| Quick little image to demonstrate the ups and downs of the market. |
So if you could get 8% in each of the above scenarios you would be $81,417 ahead of the life insurance plan if you could find a fund with no fees. You would be $16,055 ahead of an account that earned 8% minus fees. Or you could have $193,954 without any worry of the ups and down, the pit in your stomach of opening your annual statement, hoping it isn't another year of losses. Plus you have a life insurance contract that pays out tax free when you are ready to start taking money out of the plan.
I for one cannot guess with any accuracy what taxes will be like in the future. Who knows, they may be lower. With $16 Trillion in Government debt and coming off 2 major Middle Eastern wars, I am not sure how they could go anywhere but up. However I am not a fortune teller or tax advisor.
According to the Wall Street Journal 55% of all the tax-free money saved within life insurance contracts is owned by the top 10% of Americans. If this doesn't show the trail of bread crumbs to where the wealthy are saving their money, I don't know what does. Meanwhile families in the bottom 50% own 6.5% of this asset class. Why is that? Why would the middle class shy away from a proven asset class that is dominated by the wealthy and the only barrier to entry is your health. Anyone at any income could own one of these plans. Is there any chance that Wall Street wants this information buried or distorted. Are there any celebrity figures that would tell you to run away from this asset class?
I know Wall Street absolutely doesn't want you putting money into these plans. They want your money in the next hot stock or mutual funds where they can make a killing off their clients while their clients take all the risk. Dave Ramsey openly detests any life insurance that isn't term insurance. He is a huge fan of Mutual Funds that get 12%. A few problems are the fact that most mutual funds don't earn 12% as he claims, the mutual funds have huge fees that will eat into your retirement money and his target market are people trying to get out of debt. Most debt that isn't good debt or strategic business debt is carried by the bottom 50% of the population and we can see that they only own 6.5% of this asset class. The plans I work with have averaged 8.85% for the last 25 years and 8.35% in the last 10 years alone. See Dave Ramsey's official feelings on Life Insurance here. I have nothing to hide by you seeing his opinion, I just ask that you do research and formulate your own opinion.
"The bewildering array of choices among nearly 5000 equity funds has ill served investors. The returns incurred by the average equity fund since 1984 have averaged just 2.7% per year, a shocking shortfall to the 9.3% return earned by the average fund. The result is that the average fund investor has earned less than one-quarter of the stock market's 12.2% annual return." -John Bogle, Founder and Former CEO of The Vanguard Group. To read more from John Bogle now that he has retired, see my other blog post here.
The plan in the example above shows a stream of tax-free income of $22,005 coming back out of the asset until age 120. While it is true you may be able to save a little more in an IRA or 401k than a life insurance policy, it is not safer and will not kick off a life time of money. In fact once you start pulling income off your qualified plans, you still have to pay the taxes you have put off for 20 years.
So let's say you have $209,209 after 20 years and want to get the same stream of income as the life insurance plan. Assuming a 25% tax bracket you would need to pull $29,340 out of your plan and pay $7335 to Uncle Sam, leaving you with $22,005. Well that is completely doable, unless you want to go back to work in 7.13 years. You see if you pull $29,340 out of your plan you will run out of money in 7.13 years, unless it is growing still and in that case you had to take risk to keep in growing. You could take risk and add on 1-3 years, but you run the risk of losing 30-50% if the market drops like is has every 7.2 years on average.
Lastly, one advantage to using life insurance is the actual death benefit. What happens if the 50 year old male in this examples passes away early. Now his family loses out on his income and he didn't have the needed years to build up a nest egg. The life insurance would cover that with a tax-free payout.
Life Insurance has been used by the wealthy and business owners as an incredible tool for over 100 years and it is still an incredible place to safely grow your money and provide you with income during retirement. Set an appointment to let me show you how your personal plan could look, grow and give you peace of mind in retirement. The safety and tax benefits of life insurance are unmatched.
Cheers,
Stephen Gardner
888-638-0080
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