How to fund retirement with your life insurance

Most people who buy life insurance want to replace income if they die prematurely, and that's as it should be, according to many financial advisers. These customers can opt for a term plan that ends once they retire.

However, it's also possible to use a permanent life insurance policy to fund retirement plan company by taking withdrawals from the plan's cash reserve.

This strategy isn't without potential pitfalls. "There have been many articles written on why whole life insurance isn't an investment vehicle. Most have to do with high cost and lack of liquidity," said Jim Ludwick, a certified financial planner with Main Street Financial Planning.

Still, permanent life insurance can be a valuable part of some investors' retirement strategies. Are you one of them?

You can afford a permanent policy

Not certain where life insurance fits into your budget? A permanent policy definitely isn't for you. Premiums are much higher than those for term policies, and it's harder to get out if bills become too high. In addition, it's best to overfund the policy in its early years if you want to draw on the reserve later.

"It would take 20 years for the returns inside your whole life policy to look reasonable as an offset to the front-end cost. Owning one is like running a marathon," said Stephen Northington, a certified financial planne in Little Rock, Ark.

If you're confident that you can afford a permanent policy, it might be a good retirement investment option. On the other hand, if your budget is tight, another kind of retirement plan would be better.

You're contributing the maximum to other retirement plans

Individual retirement accounts and 401(k)s are popular retirement investment options for good reasons. Both offer tax advantages to users, unlike typical brokerage accounts. They also give users flexibility in investment options and costs, particularly IRAs. If fees are eating up too much of your profit, you can always switch funds.

Cash value accounts may not achieve the same level of growth. Ludwick estimates that most currently make around 3%, and investment choices are often limited.

But there are upsides. "Cash values that are invested by the life insurance company in their general account aren't correlated to stock market returns, and they don't go down in value in rising interest rate environments like bonds and bond mutual funds do," said Brian Frederick, a financial planner in Scottsdale, Ariz.

[source http://www.marketwatch.com/story/how-to-fund-retirement-with-your-life-insurance-2014-10-27]

Financial lingo to know for retirement planning

If you’re age 50 or older and are like most investors, you’re investing largely in mutual funds through an employer-sponsored retirement plan. If you have a brokerage account, you’re probably choosing funds rather than individual stocks.

Investors who have a little more knowledge will often assess the balance of their holdings and the ratings of the funds they own. They may subscribe to newsletters or visit financial sites that provide guidance and recommend stocks and funds.

So much of that guidance, however, is focused on growth — the potential for price appreciation as investments increase in value. The only way to turn investment growth into cash is to sell the investment. As investors get closer to retirement, though, they want to know more about how much income their portfolios are earning — that is, how much cash their holdings are actually generating. Growth may be high, but income may be quite low.

Recommended: Retirement Plan Company: Six myths, busted

So what is an investor to do? Ride the hills and valleys of the market and hope for the best from a growth standpoint? Or take steps to lock in more certainty about income?

Retirement planning: Six myths, busted

To choose the strategy that’s best for you, it’s important to understand some income-related financial terms and definitions.

Dividends

Dividends are paid by common and preferred stocks, usually on a quarterly or semiannual basis. Preferred stocks are a type of fixed-income instrument, with a guaranteed dividend. Common stocks are the more typical equity issues; their dividends aren’t guaranteed, although they have greater potential for growth.

Other income sources

Annuities produce regular, guaranteed payments that are usually a mix of income and a return of capital. Depending on the annuity, there may be a guarantee of lifetime income.

Covered calls are an additional source of revenue for people who own a portfolio of common stocks. Engaging in a call strategy requires an in-depth conversation with your financial advisor to review your risk tolerance and the tax implications for realized gains.

What income sources are right for you?

Well-diversified investors may be using a mixture of all these strategies to produce the annual income they need from their accounts. The actual allocation of weight among strategies may depend on the risk tolerance of the investor, as well as the amount available to invest. All of these decisions are made in the context of an investor’s need for liquidity — the ability to convert investments to cash. Investors who are already retired are normally advised to keep a percentage of assets in cash to have available for emergency needs. This lets them avoid “fire sale” events should markets turn down.

 [source: http://www.csmonitor.com/Business/Saving-Money/2015/0528/Financial-lingo-to-know-for-retirement-planning]

Retirement planning an important goal: survey

JUNE 7:  

Retirement planning is the most important financial goal for people in the 30-55 year age group, ahead of other goals like buying a house, education of children and marriage, a survey has found.

 “India is a young country with the median age of its population under 30 years. We have around 100 million people today above the age of 60 years, which is expected to triple to 300 million by 2050. This will pose a huge economic challenge for the country, if we do not plan for providing right retirement options today. With this study, we have made an attempt to understand the mindset of the consumer towards retirement planning,” Himanshu Vyapak, Deputy Chief Executive Officer, said.

Objective of planning

The most important reasons for consumers to buy a retirement plan are “Enjoying retired life” and “taking care of family”. States like UP have expressed greater concern towards rising costs on account of inflation and would like their retirement returns to beat inflation, the survey found.

Considering the strong family structure that exists in India, “my children will take care of me when I retire” has emerged as the main reason for not planning for their retirement.

“I have enough savings” was the second key reason for not opting for any retirement plan. “Studies have indicated that the joint family system has dropped from 35% to 31% in the last 5 years. Also the number of people from ages 41-55 who are living alone has increased from 31% to 34% since 2008.

“We are seeing a shift in the family structure which will have an impact on the retirement planning behaviour in the next 5 years,” Vyapak observed.

Over 60% of the respondents said that they prefer to invest in retirement plans between the ages of 30 and 40 years.

Men, women differ

The survey also points out that men and women consumers have different motivations to opt for a retirement plan. While “taking care of my family” was the prime reason for male respondents intending to buy retirement plan, “I don’t want to be dependent” was the top reason for females.

“India today has approximately 15 lakh crore of retirement assets – including EPFO, exempted Provident Funds, superannuation & gratuity funds, NPS, PPF and Insurance – of which over 90% are currently invested in fixed income options. “The government has been sensitive to expand this portfolio and allow these retirement funds to invest in equities in a calibrated manner.

“We see this as a strong move that will enable superior returns in the long term for investors,” Vyapak said.

The total commitment from SIP’s in Reliance Retirement Fund is over 1,300 crore till date, he said, adding, “Our plan is to enrol over one million customers for this option in the next three years.”

India’s per capita retirement and pension assets as a percentage of GDP are amongst the lowest in the world.

[source: http://www.thehindubusinessline.com/banking/retirement-planning-an-important-goal-survey/article7291914.ece]