Not long ago I was going over an insurance contract retirement plan with a nurse client of mine on the West Coast. She had been saving in her hospital's 403b plan for almost 15 years and felt she should have been further ahead than she was. She asked me to investigate and then run some numbers to help her see how her plan compared with my plan.
Because of the limited number of investment options the hospital's qualified plan offered and management fees, the client was averaging close to 3.15% on her retirement account. All the while every piece of literature she was given over the years touted that she would average closer to 8%. So she essentially had a retirement program earning just above inflation that had never been taxed. She was disappointed to say the least.
She asked if I could run her a scenario where she averaged 5% and compare it to my plan. To make the examples simpler, I have eliminated management fees from her program but kept them in my program because my program offers death benefit in addition to her growth.
I'll be sharing the numbers from 4 growth scenarios below:
The first scenario is this client saving $6000 a year and consistently compounding her money at 5%.
The second scenario is the client saving $6000 a year in a specially designed whole life plan. This plan will provide guaranteed increase, protection against losses, allow the money to grow tax-free and provide tax-free death benefit were she to die prematurely.
The third scenario is the client saving $6000 a year and earning 5% with one year in which she doesn't earn interest. I'll show what just one year of no growth does to a portfolio.
The fourth scenario is the client saving $6000 a year and earning 5% interest with one year in which she losses 20% one time.
When I asked the client what her main goals were, she told me she first and foremost wanted to take care of her family if something were to happen to her. This means leaving behind money. With her 403b, she only leaves what she has in the account on the day she dies. With the insurance contract, she recovers 100% of the money she places and the death benefit as the money she could leave behind. Her second goal was to make sure she and her husband had money in their older years.
If the client were to save $6000 every year and earn 5% compound interest until age 70, she would have $424,665 going into her Golden Years. If she could live off her 403b money and other sources while she allows this account to continue growing, she would have $597,405 by age 77. The client was excited to see these numbers. Up to this point, she was just hoping to have something, but had no clue how much she might have down the road.
By bringing the future to the present, she was able to catch the vision of becoming a good saver and working to consistently get a good rate of return. However exciting these numbers were, they didn't leave her with the peace she had hoped for in the event she passed away early. As a nurse she told me she sees how fragile life is and how many people pass earlier than expected. No one is guaranteed to live a long life and she needed to plan in case she didn't, but also plan in case she did.
Now let's compare her investment numbers to a specially designed whole life plan that earns interest and dividends. This also gives her the peace of mind she desired because it would give a lump sum of leveraged tax-free money to her family when she dies. The death benefit protection is in place from now until she passes.
I want to be the first to point out that by age 70 she has less money with the whole life plan than with a traditional approach. However, she is only off by $22,837. By age 77 the plan is off by $9,998. The older she gets, the closer this gap will come to closing. Eventually the whole life will surpass the traditional plan in earnings.
In a way though, my whole life plan already had surpassed her traditional plan. Here's why! Let's say that the client passes away at age 70. With her traditional plan, she passes $424,665 to her family. With my plan, she pass $673,929. All of which is tax-free to her beneficiary. By age 77 she would pass $597,405 with her traditional plan and $814,956 tax-free with my plan. To be able to pass an additional $217,551 and have the total amount be free of Government plundering through taxation is an incredible gift.
By using the whole life plan, she gets close to the amount of money she would have regardless of which plan she chose, but gets the increased benefit of the larger, tax-free death benefit along the way. If the client passed at age 50, her traditional plan would only have grown to $85,241 which isn't a lot to leave a husband and two children. With the insurance contract, she would leave $325,118. That's 3.8 times more money and it isn't diminished in any way by taxes.
The client and I then discussed how earning 5% compounding interest every single year for 37 years wasn't realistic in the real world even though the insurance group I use has been doing it for over 150 years, banks and Wall Street have not. So we ran two additional scenarios just to give her an idea of how not earning one year or losing one year can affect her bottom line. Based on historical data, it is very likely you would have several years of no growth or losses in a 37 year period but let's keep it simple.
The above scenario shows just one year out of thirty-seven having no growth. By age 70 the year with no growth lowered her money to $412,180. One year without growth cost her $12,385. By age 77 it cost her $17,426. This is how much it costs to interrupt compounding interest. In traditional investing where losses occur on average every 3-4 years would have this number significantly lower. With the insurance contract, growth occurs every year and compounding interest is never interrupted.
Now let's look at a one time loss to see how market loss can damage your retirement nest egg.
Market loss is the number one killer of retirement accounts. Wall Street would lead us to believe it is just part of the game and is out of anyone's control. This is true, but only if you allow market loss to be a part of your money game. There are ways to eliminate the losses!
In the above scenario we are viewing just one year of market loss in a thirty-seven year period, but it is damaging. By age 70 your account would only have reached $337,903. That's an $86,662 difference due to one loss. By age 77 your account is $121,942 less than it should be because of one year of loss. Remember the market on average losses every 3-4 years. I'm only demonstrating one year of loss.
The average baby boomer is retiring with less than $50,000. This is a travesty because it means they will either run out of money or they will have to reduce their lifestyle significantly in order to live on social security. Baby boomers more than any other generation were sold on the stock market approach to saving money and it hasn't worked out. Most are going into retirement with no life insurance either. Little money and no protection for the surviving spouse is a bad combination.
There are those that say life insurance is a bad place to grow money, but in nearly all cases, they are comparing growth to a traditional plan built for death benefit and not a plan like mine that is built for retirement planning. How a plan is built and it's intention matter.
As you can see, a traditional plan doesn't significantly outperform a well designed insurance plan. They are fairly comparable in end result. Where a well designed plan really outperforms a traditional plan is in living benefits, stream of tax-free income to live on during retirement, the ability to borrow against your plan and have it continue to earn interest as if the money were never gone and the death benefit when one does finally pass away.
For decades Wall Street has beaten the 8% growth number into our minds, but research firm after research firms shows that most people are averaging just above 3%. Don't be fooled by what Wall Street can claim compared to what they actually achieve.
Keep in mind, the traditional plans I compared to my insurance plan aren't taking into account annual management fees, taxes or multiple years of losses. I've been generous in an attempt to show the closest apples to apples comparison I could. The truth is they don't compare. The whole life when built correctly, will outperform a traditional plan while alive and cannot be beat as far as performance when someone dies.
The nurse was thrilled with the plan I showed and has since become a client. In the event she passed, she had used her money to give the biggest amount of money to her family and children. In the event she lived, she gave her self the largest stream of tax-free income she could.
There is a reason the wealthy use these plans to stack the deck in their favor. They understand the damage of market loss. They understand the damage of taxation. And they understand the damage of not compounding their money.
You can choose to remove the most damaging effects of retirement planning if you so desire, but it's up to you to decide. Hopefully the math and numbers above helped you see a picture of how different plans can help you get to your retirement goals.