LIFE180

Top Financial Concerns for People 55+ | How Whole Life Can Help

This article is a written adaptation of the video that resides on the LIFE180 YouTube channel.

As you approach 55 years old, it's crucial to reassess your relationship with money. The strategies you've employed to manage your finances must undergo significant revisions as retirement draws nearer. Your financial priorities undergo a profound transformation during this period.

In this article, we'll explore how whole life insurance can alleviate various financial worries for individuals aged 55 and older. Now, we'll address the top concern: running out of money. Let's dive in.

Concern 1 - Running Out of Money

As individuals near retirement and step into their retirement years, a pressing concern that looms over them is the fear of depleting their financial resources. Surveys reveal a startling fact: about 70% of people admit to harboring a greater apprehension of running out of money than they do of facing mortality itself. This statistic starkly illustrates the deep-seated worry many harbor regarding financial stability during their later stages of life.

Now, the foremost challenge they encounter is what's commonly referred to as longevity risk.

Risk 1 - Longevity Risk

Now, you're concerned about running out of money, but there are different risks that increase our chances of running out of money. What we have to do with our money to galvanize and insulate ourselves from those risks is to understand the various financial tools and products available to us.

Longevity risk acts as an amplifier of risk because it magnifies all the other risks we face. The longer we live, the more likely we are to encounter problems such as economic downturns, recessions, and market fluctuations during our retirement years.

Consider this: if you live until you're 95 or 100 years old, meaning you have a long lifespan, you could be in retirement for 35 years or more. That's a substantial portion of your life where you must ensure your finances last, potentially amidst challenging economic conditions. So how are you going to weather that storm? This is where the concept of sequence of return risk comes into play.

Risk 2 - Sequence of Return Risk

If you retire with what you believe is sufficient funds and a well-modeled plan, imagine retiring, for instance, in 2007. You might have felt financially secure, only to be blindsided by the events of 2008. Suddenly, due to conservative investments in the S&P 500, 40% of your portfolio evaporates overnight.

Suddenly, upon entering the industry in 2009, I encountered countless individuals facing a common predicament. It's difficult to express just how many people I met who had to re-enter the workforce after attempting retirement. Their struggle stemmed from a lack of comprehension about managing their finances effectively, particularly in mitigating the sequence of return risk. This failure to grasp essential financial concepts had a profound and detrimental impact on their lives.

Risk 3 - Monte Carlo Simulation

Hence, the concept of Monte Carlo simulations becomes pivotal. Financial planners rely on these simulations to assess factors such as how much money you may require and the probability of running out of funds during retirement, based on assumed rates of return.

There's a concept known as the 4% rule, which is often relied upon by many individuals. It suggests that for a lump sum of money, let's say $2 million, you could safely withdraw 4% of that amount annually as income. This rule posits that with this approach, you have a high probability of sustaining your finances throughout your lifetime without depleting your funds.

Thus, with $2 million, according to the 4% rule, you'd have an annual income of $80,000. However, for many individuals capable of saving such a substantial sum, this amount may not suffice to maintain their desired standard of living. This discrepancy poses a significant challenge for them.

How Whole Life Insurance Helps Mitigate Financial Risks in Retirement

Now, where whole life insurance becomes crucial is in its ability to mitigate many of these risks. It's important to grasp that it can offer a decent rate of return, guarantees, and liquidity. Especially if you start early, such as at 55, it can serve as a volatility buffer, providing stability as you build up your financial resources.

So, particularly for individuals aged 55 and older, speaking directly to the demographic this article addresses, it's essential to recognize that whole life insurance should not be viewed as your sole asset.

Many online sources currently advocate for utilizing indexed universal life or whole life insurance as the primary source of tax-free income in retirement. However, this notion couldn't be further from reality.

Firstly, in my opinion, it's not a sound strategy regardless of when you start, even if you begin at a younger age, like 30. Secondly, if you commence at 55, you won't have adequate time for these policies to accumulate enough value to serve as your primary income source, even if one were to endorse that idea, which I do not.

For me, it means positioning yourself in a situation where you allocate a portion of your funds to a whole life insurance account. This functions as a volatility buffer, supporting your other assets.

Whole Life Isn't An Investment - It Simply Makes Your Investments Better

In some of my other content, I often liken whole life insurance to the BASF of the financial industry. It doesn't directly make the investments you undertake; rather, it enhances the investments you make. It's akin to the BASF slogan from the 90s: "We don't make the products you buy, we make the products you buy better."

With whole life insurance, it's not about being the primary investment; rather, it serves to fortify your investment portfolio. Here's what I mean: it can assist in mitigating risks such as the sequence of return risk. By doing so, it not only reduces the impact of longevity risk but also extends the longevity of your funds, making your financial resources more likely to sustain you over time.

So, imagine you had a pool of money, let's say a million dollars, and you retired in 2007. At that time, you thought, "I need $40,000 annually from this account," and you felt confident about it. However, 2008 came along, adhering to the 4% rule, and suddenly things took a turn for the worse.

Now, in 2008, the unforeseen occurred, and that million-dollar nest egg plummeted, let's say by 35%, a middle-ground estimation between some experts' opinions of 40% and others of 30%. So, you're left with $650,000. Here lies the issue: despite the economic downturn, your need for $40,000 of income per year remains unchanged.

Now, the question arises: what percentage of $650,000 is $40,000? It's almost 6.2%, which represents a significant increase compared to the 4% rule. If you continue withdrawing and distributing $40,000 from your diminished $650,000 as you were before, the likelihood of exhausting your funds becomes alarmingly high.

If you have this money, it's essential to ensure you have enough in a side fund. This is where whole life insurance can be invaluable. It functions as a side fund that grows on a guaranteed basis, providing tax-free access that you can utilize as a volatility buffer.

Whole Life Insurance As A Volatility Buffer

By adopting this approach, as exemplified by the market recovery of 2008, you steer clear of the damaging effects of prematurely liquidating underperforming assets. Instead of leaning solely on whole life insurance as your primary retirement income source, it serves as a vital resource during portfolio downturns. With funds allocated to your whole life insurance policy, you can access the necessary income multiple times throughout retirement, effectively navigating adverse market conditions.

This strategy not only mitigates longevity risk and sequence of return risk but also enhances the accuracy and effectiveness of Monte Carlo simulations. It provides leverage for you across every phase of life, underscoring the value of a properly designed whole life insurance policy.

When discussing individuals aged 55 and older, the best time to start is undoubtedly as soon as possible. By initiating the policy at age 55, there's ample time for it to grow, build liquidity, and navigate through the fee stage. As you age, you can contribute more cash, and the Modified Endowment Contract (MEC) rules tend to work in your favor. The key is to begin the process at the earliest opportunity, allowing us to accumulate capital in the policy to serve as a volatility buffer and mitigate various risks.

Ultimately, it's essential to start as soon as possible, particularly for those aged 55 and older. Beginning the policy at this age allows for adequate time for growth, liquidity building, and fee stage navigation.

Additionally, with age comes the ability to contribute more cash, with MEC rules favoring older individuals. Initiating the process early enables the accumulation of capital in the policy, serving as a volatility buffer and effectively mitigating risks.

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Until next time, have a blessed, inspirational day.