In his book, The Retirement Miracle, Patrick Kelly writes about a man who had built up a 401(k) balance of more than $2 million over his career. Then, on the brink of retirement, his world was shattered. It was a September day in 2008. He’d lost about 10% of his nest egg in a single trading day. By October 7th, he found his balance was down to $1.5 million. By the time he reached his last day of work, his account was down to $1.2 million – actually about $1 million less than what it had been before all this happened.
And if that wasn’t bad enough, the $1.2 million had an embedded tax liability. If this man was in the 30% combined federal and state tax brackets, $360,000 of that belonged to the state and federal government, leaving him with only $840,000 to retire on – and that’s only if taxes don’t go up while he’s in retirement. (For more, see: Turn Retirement Cash Flow Into Your Own Paycheck.)
Growing Retirement Crisis
This kind of situation begs the question, is the 401(k) really an answer to America’s growing retirement crisis? After all, 401(k)-type plans are a little less than 40 years old in this country, created when most people were accumulating assets. They haven’t been around long enough to see what happens when the "baby boomer bubble" begins to drain them.
More than a few experts believe it’s time to shake things up. A recent article by Wealth Management Systems noted the following:
“Recent research indicated that a third of retirement plan participants were “not at all familiar” or “not that familiar” with the investment options offered by their employer’s plan. The study went on to reveal that individuals who were familiar with their retirement plan investments were nearly twice as likely to save 10% or more of their annual income, compared with those who report having little-to-no knowledge about such investments. Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk.”
The 401(k) Failure
How familiar with their options are 401(k) investors? Not very, apparently. Many now believe it’s time to move from a stock market-based system to something that’s insurance-based. While this may not be the right path for everyone, it could work for many people. (For more, see: 4 Keys to a Satisfying Retirement.)
According to The Power of Zero by David McKnight, an insurance-based approach makes far more sense, particularly if properly designed. And there are a number of advantages. The insurance-based approach to funding retirement does seem to have its benefits. Indexed universal life, a life insurance retirement plan, is one 401(k) alternative. What are some of the benefits?
- No contribution limits
- No withdrawal penalties before age 59 1/2 and no mandatory distributions
- Tax-free income at retirement
- Zero loss from market crashes and an annual reset locks in gains
- Tax-free to heirs
- Self-funding option in case of disability
- Protection from market loss ensures you never lose money
Indexed universal life policies also don’t lead to taxation of Social Security benefits, and they provide protection from lawsuits in many states, have no minimum age or income requirement, avoid probate and – this is a big one – they provide accurate return figures. These policies may be something to ask your advisor about as an alternative to your 401(k). (For related reading, see: 4 Mistakes to Avoid with Your Retirement Plan.)