May 2019 Volume LIV Number 3


Is Your ‘Whole Life’ Ahead of You?

March 2013 Volume XLVIX Number 2

 Imagine its the morning of your first day in retirement.

While sipping your favorite latte, you reflect over the past few decades of a successful career in dentistry. What a blessing to have been able to provide a valuable service to the community and a great quality of life for your family. Now you look forward to the freedom of pursuing other interests and spending time with grandchildren.

Suddenly, though, optimism turns to fear as you read the headline in todays newspaper: "Dow Falls Record 778 Points; Stocks Lose $1.2 Trillion." Now that youre on a fixed income, you begin to worry about how long this financial decline will continue. Your mind races: "How long is my money going to last?" "Will I have to work part-time to make up for these losses?" "Should we scale back that trip to Europe?"

Had you retired on September 29, 2008, this might have been your reality.

Unfortunately, nobody can predict what shape the economy will be in when you retire. There are, however, tools available to help you weather bear markets and avoid the financial catastrophe of outliving your money. One such tool is permanent life insurance – specifically, whole life.

Whole life is an insurance contract that provides a guaranteed death benefit to an insureds beneficiaries. Unlike term insurance, this benefit is paid when and not if the insured passes away. Also unlike term, whole life policies offer a living benefit in the form of  a tax deferred savings vehicle with returns mirroring that of  a bond fundbut without market volatility.

The policy cash value represents a source of  tax-free income in retirement and, when used strategically, may prolong the life of your other invested assets.

Consider the following case study of an individual ("Robert") in retirement from 1973 to 1987. This 15 year period embodies a wide range of economic conditions including three recessions, four bear markets and double digit inflation. That notwithstanding, the S&P 500 returned an average of 11.28 percent. Only four years experienced negative returnsthe largest of which occurred in the first two years.

By 1973, Robert (age 65) accumulated $2 million in qualified plan assets that he rolled into an IRA and invested in a diversified stock portfolio. Upon retirement, he immediately began taking annual distributions of $150,000/yr.

During his first two years of retirement, the S&P 500 declined by 14.8 percent and 26.5     percent, respectively. At the end of that second year, Roberts account balance had fallen by nearly half to $1,048,257! Fortunately, the S&P came roaring back and his investments averaged a 16.2 percent return for the next 13 years. Despite the positive returns, however, Roberts account value had dwindled to $900,642 by the 15th year.

With the possibility of living another 10, 15 or even 20 more years, Robert can’t afford any further losses. In fact, it appears likely hell outlive his money. And should he encounter an unforeseen expense such as long term care, Roberts control over his quality of life will be greatly diminished.

Now lets review an alternative approach to Roberts distribution strategy. This approach has Robert avoiding distributions from his retirement account in those years that follow a negative return on account assets. Instead, he relies on the cash value from his whole life policy.

By following this strategy, Roberts account balance actually increases from $900,642 at age 79 to $3,353,353! In addition, should he pass away, Roberts family will receive both the current value of his retirement account and proceeds from his life insurance policy. For example, were Robert to die at age 80, his family would receive a little over $2.2M. Under the old approach, hislegacy would be reduced to simply the value of his retirement accountor about $600,000.

Regardless of whether or not you believe in the advantages of incorporating whole life into the distribution phase of your retirement, the above example reminds us of a few critical lessons about markets and our money:

First, investment returns are geometricnot arithmetic. In other words, theyre not independent of one another. For instance, lets suppose you lose 50 percent one year and gain 75 percent the next year. Your average return is 12.5 percent. Doesn’t sound too  bad, right?

Dont be deceived by the arithmetic average. If you have an account value of $100 and lose 50 percent the first year, but gain 75 percent the next year, your account value is only $87.50. Suddenly, a 12.5 percent return doesnt look so great.

Which leads us to the next lesson: Investment losses hurt more than gains help and the ultimate outcome depends on the sequence of returns. If you experience significant losses in your first year or two of retirement, as those who retired in 2008, it can be very difficult to recover. This is why its so important to have a strategy in place that buffers volatility.


Lastly, control what you can control. Since theres no crystal ball to tell us what economic conditions will be like when we retire, having the appropriate financial tools available should the unexpected happen can mean the difference between a peaceful retirement and one filled with anxiety.

Now imagine again its the first morning of retirement. While enjoying your favorite latte and reading the newspaper, you skip the front page headlines about economic headwinds and go right to the crossword puzzle. Your mind is completely at ease because you have your whole life’ in front of you.

For more information on your insurance planning needs, contact Treloar and Heisel, Inc at (800) 345-6040 or net.