Is Life Insurance a Retirement Investment?

Sometimes it seems the insurance industry believes that buying a life insurance policy in one form or another is a cure for any financial ill. To be clear, life insurance is a part of many properly constructed financial plans. Many of us need to provide this protection for our families in the event of an untimely death. Parents, and anyone who provides support for someone else, might consider life insurance protection.

Life insurance can also be used for estate planning purposes or as a vehicle to ensure that a business can continue to operate in the event of the death of an owner or key employee.

My beef, however, is with life insurance marketed as an investment, most often as a retirement investment vehicle. To say the life insurance folks are inventive and creative marketers is an understatement.

A typical scenario

Life insurance is often marketed to high-earning professionals and business owners as a means to put away additional funds for retirement over and above any type of retirement plan they might already have, such as a 401(k).

The pitch is this: buy a policy with underlying investment vehicles that will build cash value over time. The client funds the policy for certain number of years and the growth in the cash value will eventually negate the need for additional premiums. At retirement the client can withdraw cash as a tax-free loan for retirement. The loans never need to be repaid and the only consequence is a reduced death benefit.

Consider alternatives

If you are pitched a plan to use life insurance as a Retirement Insurance Policy make sure that you have reviewed and exhausted all other alternatives first, including:

Fully funding a qualified retirement plan including a 401(k) or SEP-IRA.

Starting a pension plan for yourself. This includes a cash balance plan.

Funding a low-cost, no-load variable annuity.

Even if you find that this life insurance strategy is the best course of action make sure that you shop policies and companies. You will want to look at the quality of the underlying investment and understand all underlying fees and expenses.

If you buy a policy, make sure that you continue to monitor it. Set aside money to fund it, watch the performance of its underlying investments, and be sure withdrawals won’t a trigger a tax penalty?

Life insurance can help provide financial security for your family. However, if you buy it for any reason other than the death benefit, make sure that the policy fills the alternative role in the best possible fashion before writing your first premium check.

Five policy fixes to help small employers with retirement plans

Policy changes for small employer retirement plans

Broad adoption of workplace savings plans for small employers may require policy changes that encourage small businesses to give their employees the opportunity to save for their future.

What can we do to solve this problem? Here are five ideas that Empower Retirement believes can help with this important goal:

Develop a simplified starter 401(k). Small businesses operate very differently from their mid- and large-market counterparts. They don’t have the same resources to manage a workplace savings plan, but they should have access to a simpler solution that removes administrative burdens. This starts with eliminating expensive and time-consuming testing and limiting in-service withdrawals, which reduce the amount of savings available at retirement. This could ease plan administration and keep the plan healthy by minimizing asset reduction.

Expand underutilized startup tax credits and make the credits refundable. Small businesses take time to get off the ground. Profitability, which may be minimal during the early years, eliminates the value of a nonrefundable credit. Additionally, the uptake rate of the current credits is low — approximately a half-million dollars annually.3 we have to increase these tax credits to improve uptake.

Increase availability of multiple-employer plans. Small businesses have limited access to the multiple-employer plan (MEP) system. This is due to the Department of Labor’s stance that there must be some commonality among MEP sponsors. Under current IRS rules, a disqualifying event by a single sponsor can disqualify the entire MEP.  This further discourages adoption.

Establish designated plan providers to oversee administration of MEPs. A designated plan provider (DPP) could assume many of the fiduciary responsibilities to eliminate concerns and fears small businesses have related to this role. The creation of DPPs would also encourage retirement service providers to fully engage in this market.

Create a regulatory environment that encourages plan adoption and maintenance. Small businesses need a simple, limited-liability correction process that doesn’t result in overly punitive penalties or unwarranted windfalls to participants. Policy makers need to remove the administrative burden associated with termination and asset distribution of abandoned plans. Providers should be able to streamline, consolidate and deliver required notices in a manner that leverages evolving technologies.

Retirement Insurance Company service providers and policymakers should work in partnership to ensure that all working Americans have access to an employer-sponsored savings plan. Any one of the proposed ideas could help more employers provide a retirement plan for their workers.

Source: http://retirementplansinindia.tumblr.com/post/145001841845/five-policy-fixes-to-help-small-employers-with

How Your Home Can Function as a Pension Plan for Your Retirement

Ah, the good old days of defined benefit pension plans. Pensions used to be common and a wonderful source of retirement income. But these benefits are increasingly rare. If you are feeling the stress of funding retirement, it is likely because you simply lack the guaranteed pension income that your parents probably had.  You have worked hard, but the structure of our financial systems changed and you may be feeling like you don’t have enough cash for retirement.

What is a pension and why was it so valuable?

A defined benefit plan is a type of pension in which an employer agrees to pay a specified monthly amount to the retired employee. Typically, this amount is predetermined using a formula based on the employee’s earnings history, age and tenure of service.

So someone with a pension likely had three significant sources of Retirement Insurance Company income: their pension payments, Social Security and personal savings.

How your home can be your own personal pension plan

For many people, housing wealth represents a sizable share of their overall net worth. But for retirees in particular, home equity is even more valuable.

Home equity represents more than 50 percent of net worth for the typical household over the age of 65, according to research published in the Journal of Personal Finance. As a percentage of wealth, housing commands 80 percent of total wealth for roughly 30 percent of people above the age of 62.

This is particularly good news for people who are struggling with how to pay for retirement.

If you own your home, you may be able to use your home equity to create a kind of pension for yourself.

How does reverse mortgage work as a pension replacement?

For homeowners age 62 and older, a reverse mortgage can enable you to access a portion of your home equity, which you can use to increase cash flow during retirement.

Unlike a traditional “forward” mortgage, monthly payments toward the loan balance are not required on a reverse mortgage. So rather than paying the lender each month, reverse borrowers is instead receiving funds from the lender.

The money received from a reverse mortgage is considered a loan advance, and as such, it is not subject to state or federal income taxes.  As you borrow from a reverse mortgage and receive portions of your home equity, the loan balances increases. The amount of funds borrowed must be repaid at some point. Repayment of the loan is not required until the borrower dies or otherwise vacates the home secured by the reverse mortgage loan.

Source: 

http://retirementplansinindia.tumblr.com/post/144946722040/how-your-home-can-function-as-a-pension-plan-for

Insuring your retirement is not unlike insuring your car

You can insure your home and car from disasters and accidents. Life insurance essentially protects your family from the loss of your income should tragedy strike. You can’t insure your retirement accounts in the quite same way, but there are a few tried and true strategies that can help safeguard them.

1. Save for retirement even during…retirement

There is no rule that you have to stop investing when you hit your golden years. One of the best hedges to outliving your retirement assets is to continue investing even when you reach retirement age. While there are mandatory age distributions from 401(k) retirement plans and traditional IRAs, you can continue to make investments in other assets during your retirement.

Here’s a reminder: In the last 30 years, the dollar has lost nearly 60 percent of its purchasing power to inflation. Investing offers a way to combat that loss of purchasing power by developing a plan that not only takes this into account but allows you to achieve what you want to achieve over a given time period.

2. Work longer

While some Americans must continue to work during retirement because of a lack of savings, others simply want to work and enjoy the social aspect of working during retirement.

Retirement today looks very different than it did decades ago, and that isn’t necessarily a bad thing. The real problem is getting over our preconceived notions as to what retirement means in today’s economy and society. A longer work life means continued engagement as well as continued paychecks.

However, the day you cash your last paycheck, the price of everything begins to matter. Why enter a shrinking economic reality sooner than you need to, especially if you enjoy your work.

3. Invest in passive income strategies

Truly effective retirement planning should include other income streams to supplement your retirement. For example, you could have a pension, income from real estate, Social Security and an annuity to help replace the income that you had before you retired.

The key is to save assets that produce cash flow in excess of your expenses versus amassing a pile of inert assets that will have to be converted in order to fund your retirement. In other words, looks for ways to create perpetual income, reduce or eliminate risk and treat your retirement as a “working retirement” that aligns with your lifestyle.

Retirement is a euphemism for old-age financial independence. The core of financial independence using passive investments is that you create cash flow from investments that exceed your expenses and only spend the cash flow, not the principle balance. A passive income requires minimal input from you after you invest in it to start.

4. Invest in annuities

An annuity is an insurance product. You trade a lump sum for equal monthly or yearly payments when you invest in an annuity.

For example, a $1 million lump sum payment to an insurance company could provide you with more than $40,000 in yearly payments for you and your heirs for the rest of your lives. That’s because annuities shift risks from you to the insurance company including market risk, actuarial risk and longevity risks from you to the insurance company.

5. Hedge your investments

Receiving company stock in the form of options can be an important tool for insuring your retirement. An option gives you the opportunity to sell or buy shares of stock with contracts at a future time at a set amount of money, instead of relying on the fluctuations of the market. If you don’t feel comfortable with options, you can enlist a financial planner to hedge your retirement investments.

Finally, it never hurts to get professional financial help if you are worried about your retirement accounts and if you will have enough saved for retirement. Retirement Insurance Company  do not offer retirement portfolio insurance, but there are ways that you can hedge against calamity with your retirement accounts.  

HOW TO CREATE A RETIREMENT PLAN WHICH WORKS

Some of the top questions we get from people in our financial planning sessions are as follow

1.       Why do i need a retirement plan, i have enough savings

2.       How much money do I require to live a comfortable life once i retire

3.       How do i retire as early as possible

4.       How do i retire at the age of 40

5.       I save 10 K per month, is it enough for my retirement plan

6.       What is the best way to save money and retire early in India

7.       How much money i require to maintain the same lifestyle as today once i retire

8.       What is the best retirement plan

This is first in series of posts through which I will try to  answer some of these questions , most of the advice here is tailored for Indian users

So before we get started , lets get some basic definitions out of the way

What is a retirement plan

Simply put Retirement plan is set of financial planning activities/steps you undertake to ensure financial security and a comfortable after retirement life, A good retirement plan should have all of the following

·         How much do i need for retirement

·         Where will the money come from

·         Where do i invest to get to what i need

So how do i start building a great retirement plan

·         Start right away , Its never too late , early you start you get more time to grow your money

·         Ensure you have other key financial obligations checked in your financial plan, these include but not limited to following: Emergency funds, Health Insurance, Other key goals house, Marriage, kids education , kids marriage etc.

·         Find your monthly expenses if you are not married, try to forecast your expenses post marriage

·         Take a premium on the monthly expense of around 20 %, generally you will under-estimate expenses

·         Provision for Inflation , this is the biggest elephant in the room, and the unknown devil you need to provision against, here take inflation on higher side from CPI inflation numbers you see in newspapers, thats because inflation that might impact you can be different like health, travel, leisure can have higher inflation.

·         Figure out the right asset portfolio for your retirement so that you get the best possible return, with reasonable risk

Creating a sample plan

Let say your current age is 30 years, current monthly expenses are  Rs 50,000 per month, you plan to retire at 60 years, and average life expectancy is 80 years ( so you will live till 80)

So number of working years you have are 30 , now assume that you have separately taken care of all other financial obligations like children marriage, children education, contingency etc, we will go ahead and calculate your retirement  corpus , for simplicity we will assume that inflation is 7 %, we will also assume that your annual expenses will be 80 % of your expenses today.

6 big mistake to avoid while creating a Retirement plan

·         Underestimating impact of Inflation

·         Underestimating impact of compounding, hence starting late

·         Under estimating health insurance required resulting in unplanned health related costs

·         Getting debt/equity ratio right in your retirement portfolio , right mix can take you far

·         Getting contingency funds right

·         Underestimating other financial obligations

·         Never rebalancing the plan you made, its always good to periodically review your plan

·         For more details on things to avoid in a Retirement Pension Planread my post here

So where do we go from here, well you can start with getting help on retirement planning , by creating a custom plan for your self-created by our proprietary algorithm here.

Be Financially Secure In your Old Age

The theory of evolution revolves around the cycle which consists   of various stages of life. Right from the initial stage of childhood to the last leg of old age; people tend to complete a full cycle of life. Childhood is considered to be the most carefree years of life where all your needs are catered by your family. It’s a stage of life when a person is completely dependent on others even for routine work. The next phase is the adolescent stage of life where a person pursues education and aspires to be successful in life. Then comes the final stage of life which is the old age. Old age usually tends to weaken the health and drop regular energy levels of a human. Often people tend to worry about their old age a lot. Trying to figure out their way through the old age phase, both physically and financially. If you are one of them, who usually gets worried about your old age, here is your getaway.

Invest well for your future. If you want to know how? This is your answer. Invest in pension plans for a much secure future. While in your professional employment , you can invest for a longer goal. Pension plans benefits are intangible and provided when you need them the most i.e. after your retirement. Retirement plans are simply an investment which you make through payment of fixed amount of money on fixed amount of time. These monetary transactions are known as premiums and the benefits are provided after the maturity of the policy. Best pension plans provided by insurance providers have drafted to provide maximum benefits with minimal amount of cost.

Pension plans are not just investments for the future but also a way to be financial independent at an age which demands dependency. In order to opt for the best insurance policy its important you have a detailed data of various plans available in the market. This can be done by comparing insurance plans online. Compare best pension plans in India using various insurance comparing websites such as not only provides you the detailed information about a particular pension plan but also helps in brief pension plans comparison. Comparing Pension plans online helps in providing the right direction in taking a financial investment decision. We believe when it comes to investments, think and think hard.

How Do We Make Retirement Decisions? The Psychology Behind Our Choices

We all like to think we understand why we take certain actions, but that’s not necessarily the case because of the psychology behind our decisions. Frequently, we choose actions that are based on emotion rather than facts, or we respond to even more subtle suggestions that guide our behavior. The field of behavioral finance investigates why people don’t always make the best financial decisions, like how much to save for retirement. That’s particularly important for retirement plan sponsors who want employees to make better decisions about their future. So, what does influence your employees’ decisions? Here are some of the factors:

Inertia . We often expect and even want things to continue the way they always have in the past. This inertia keeps us from making decisions that could improve our lives or even change previous decisions. For example, employees may avoid enrolling in a 401(k) plan because they never have done it before, so why start now? One way to overcome inertia is through automatic enrollment, in which employees are enrolled in the plan unless they opt out. That puts inertia on your side, since once employees are enrolled, they are less likely to make the effort to opt out.

Default bias. Many people automatically accept things that are presented to them “authoritatively.” For example, employees who enroll in a 401(k) plan might find that their employer has chosen a default contribution level of three percent. Many will simply accept that default, assuming that their employer has selected the “right” number for them. In fact, most retirement experts agree that people need to save about 15 percent of their income for retirement, so accepting the “default” can seriously impact their future. Similarly, people may react the same to employer-matching rates. If the employer matches three percent of contributions, they will “default” to that contribution. Employers should be aware of this bias and use to it help employees. Setting higher defaults for contributions and matching will encourage employees to increase those amounts.

Indecision . Too many options can paralyze people. After all, people struggle to pick from a dinner menu, and choosing investments is much more important than choosing appetizers. Trying to select from 20 or more investment options in a Retirement Plan Company confuses people, who choose poorly or refuse to choose at all. For example, a participant who is forced to choose among a large number of options may simply elect to put his or her contributions into Investment A, which may not offer enough growth to meet retirement needs. Retirement plan sponsors can address this by limiting the number of investment options.

Build your strategy around your participants’ behaviors

As retirement plan sponsors, we rely on behavioral finance to understand why your participants make certain decisions and how you can structure your plan to turn these psychological weaknesses (and many others) into strengths. We’d be happy to review your plan and suggest changes you can make to help your employees reach a successful retirement.