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NiC Alert: 401(k) Retirement Crisis

A New Study’s Alarming Results Revealing The Dire Truth About Most Americans’ 401(k) Savings Spells Out A Significant Retirement Crisis Facing This Country. It’s Time To Sound The Alarm.

A recent Congressional Survey of Consumer Finances showed that the average 401(k) balance for 65 year olds in the US is roughly $61,000. That’s only about two years worth of retirement income, and statistically, retirees need about 17 years worth of retirement income after age 65.

Retirement Crisis

Also, a recent survey conducted by Harris Interactive for Wells Fargo, titled the Wells Fargo Middle Class Retirement Study, showed 37 percent of persons nearing retirement saying they don’t ever expect to retire, and instead will have to “work until I’m too sick or die.” And 48 percent say they’re not confident they will be able to save enough for a comfortable retirement.

Stock Market

Wall-Street-stock-marketWhat we’re witnessing now is the first generation attempting to retire based largely on returns from equities, that is, the stock market.

Ever since the mid-1980s, Wall Street’s conventional wisdom has continued to be that investing in equities, as long as properly diversified, is the only way to go when saving for retirement. But, we simply cannot depend on the stock market to produce the consistent returns we need over 10, 15 or even 20 years, especially leading up to or in retirement.

The truth about investing in the stock market is that it doesn’t matter whether you earn 12 percent for the year, or eight percent… or even five percent… it’s the down years that kill you.

So, although diversification might reduce stock market risk in theory, for the average investor, it can’t really be done. When a crash comes, everything pretty much correlates and gets wiped out. And, there goes your retirement savings, again.

If you have the majority of your retirement savings in the stock market, consider these three points:

    1. There are 78 million baby boomers aging into their retirement years. Most have had the majority of their savings in the stock market for last 30-odd years, whether though the direct purchase of individual shares or as a passive investor in mutual funds held in IRAs and 401(k) plans

As this group ages into retirement, however, they’ll be pulling money out of their retirement plans. Some of that money will be used for retirement income, and some will move away from equities and into safer savings vehicles and annuities. That means in the years ahead there will be fewer dollars in the stock market, and that means reduced demand for stocks, which will put downward pressure on stock prices.

  1. Secondly, the capital gains tax is about as low as it’s ever been and going forward it certainly won’t be any lower. In fact, at some point, in the not too distant future, the rate is likely to go up, at least on the highest earners (who are also the people with the most money in the market). A higher capital gains rate reduces the attractiveness of investing in the stock market to some degree, and again, that means less money in the market, and lower aggregate demand for stocks, thus lower stock values.
  2. Third, interest rates are sure to rise at some point in the coming years, even more certainly than taxes will increase on higher earners. When they do, corporate earnings forecasts will take a hit, which will lead to a pull back in stock prices.

And these are only a few of the risks inherent to investing in the stock market today… there are plenty of others. Most people today don’t know or don’t remember, but from 1966 to 1982, the stock market’s average annual real rate of return compounded annually was 6 percent per year for 16 years! “That’s a bear market and it’s something we may experience again,” says Dr. Art Laffer.

And if that hasn’t convinced you to consider moving some of your retirement funds out of the stock market, consider something written by Warren Buffett in his 2007-2008 Letter to Berkshire Hathaway shareholders; “Over the last century, the Dow went from 66 to 11,497. While this may seem like enormous growth on the surface, compounded annually, it’s just 5.3 percent per year. In this century, if investors matched that return, the Dow would close at 2,000,000 by year-end 2099.

And anyone who expects to earn ten percent annually from equities during this century is implicitly forecasting the Dow to reach 24,000,000 by the year 2100.”


Income Diversification

The most significant risk to your retirement income isn’t addressed by diversification, because as we’ve all been taught to define it, diversification only applies to asset class. But, in retirement it’s income we’re worried about. Specifically, we need to know how much money we can get each month once we’ve stopped getting a paycheck from work.

The biggest risk to income is taxes. Since taxes are the biggest bite out of anyone’s income by far, to protect income from the threat of higher taxes in future, we need to apply the concept of diversification to the sources of our retirement income and create a bucket of funds that can be accessed on a tax-free basis during our retirement years.

Yet, many people have all of their retirement savings in tax-deferred vehicles, such as a 401(k) or IRA, and the income that gets withdrawn from those vehicles will be taxable as ordinary income. So, not only do we have our savings in accounts subject to the downside risk of the stock market, but we also invest in vehicles that will provide income at risk of higher tax rates in future years. So, here we are… even after witnessing bubble after bubble… we’re still betting on the stock market going up and future tax rates staying the same or going down.

Indexed Universal Life

There should be no question that a portfolio’s value can be devastated by losses that occur during the 10-20 years before retirement. That’s when most people have the most money at risk, and the least number of years to make up for losses should they occur.

Once retired, the situation is largely the same. Today’s 65 year-olds have at least 20 years of retirement ahead of them, and many will live longer than that. How many down years can this group take before any hope of gains is lost.

There’s only one financial vehicle that can offer you double-sided protection, and it’s offered by the insurance industry, which is the other side of Wall Street—the boring side, the safer side.

When you invest inside an indexed universal life policy (IUL), you participate in the market’s ups, but not in the downs.

Key Points

  1. Depending on the IUL policy, for example, if the S&P were to go up, you’d earn returns up to 12-13 percent. But if the S&P dropped by double digits, your return would never be lower than two percent in some policies and zero percent in others, but either way there’s no downside risk.
  2. You can take money out of a properly structured IUL policy tax-free, so it can create a source of tax-free retirement income or you can use the money however you’d like whenever you’d like. For example, saving for college inside a well-structured IUL policy means you don’t need to save $66,000 to pay a tuition bill of $33,000. Which number sounds better to you?
  3. And because it’s an insurance policy, there’s also a IUL death benefit, so it creates an immediate estate. Should you die unexpectedly, the death benefit will ensure that the money is there to pay college tuition, even though you hadn’t saved enough before you died, as one example.

There are plenty of financial advisors who will tell you not to invest inside an insurance policy. They’ll claim that the costs of insurance diminish your potential ROI. They are focused on the pursuit of ROI, when it’s never been ROI that mattered most. it’s market downturns that kill you. Whether your ROI is a few points higher, does not matter.

The truth is, our ability to retire or save while exposed to stock market risk as well as the impact of higher taxes on tax-deferred investment vehicles, greatly contribute to the current serious retirement crisis.

Some straight talk: It’s time to start playing it safer about retirement and transform some portion of your savings into safe money. We’ve gambled long enough and the scoreboard says we lost. The question is: Now what?


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