Actuarial Science and Retirement Planning

{5 minutes to read}  Today’s blog is on actuarial science and retirement planning. What moved me to write about this was a recent article in Forbes Magazine by Dr. Wade Pfau, a professor at the American College. His article is titled “Whole Life Insurance in a Lifetime Financial Plan.” What he talks about is a strategy that shows how life insurance can help make your retirement better with higher income. However, a lot of people simply don’t see this as a positive, strong, or commonly used strategy, because most people see life insurance as a vehicle for heirs, legacy, spouses, children, estate planning, or taxes, not as a tool to help the individual with their own retirement.

In the article, Dr. Pfau talks about a strategy called a Covered Asset Strategy. Most people, when they reach retirement, have a portfolio of assets, usually invested in securities. These assets are made up of brokerage accounts or 401(k)s, IRAs, etc. You live off a percentage, and what’s recommended is no more than 4%. Some are using a little bit less than that, so if you have a million dollars, you may be able to pull out $35,000 or $40,000 a year.

With the same million dollars in your portfolio, if you did some planning prior to retirement and had permanent life insurance, you could buy an annuity. For a male age 65, instead of providing $35,000 a year, it might provide $50,000 or even $60,000 a year guaranteed for the rest of that individual’s life versus the $35,000-$40,000, which isn’t guaranteed. If the market has tremendous swings, as we experienced in 2008 and 2009, as well as other periods in recent history, you might be in a position where your money could run out.

The annuity protects the individual against two things.

1. Market risk: because you’re guaranteed to get that check every month or every year, depending upon how you set it up.
2. Longevity risk: Whether you live to be 100 or 105 years, that income continues. The reason we call it a covered asset strategy is that the life insurance would cover the annuity so that if you died, the million dollars gets paid tax free to the heirs, to the spouse, and/or to the beneficiaries. This covered asset strategy is something worth considering for some or all of your retirement assets.

For those who are anti-annuity — and there are some who don’t want to buy an annuity for whatever reason —  and who think that there’s an upside with keeping their money invested in the market, there is a different strategy called a volatility buffer. Linked below is a video in which I explain the volatility buffer strategy, where instead of buying the annuity, we keep their money invested in the same pool of assets, but instead of a 3.5% or 4% distribution, we take, let’s say a 5.5%, 6%, or even 7% distribution. Why can we do that? Well, with this strategy, rather than having to take the money out of the investments every year, we don’t pull the money out of the investments in the year following any years where there is a negative return, because the key is never to withdraw out of an account after it goes down.

The worst thing that you could have done in 2009 or 2010 was pull money out of your investment portfolio because you lose the ability for the money to regrow itself. And, at that point in time, the market began to recover from that terrible period, and it has gone up tremendously ever since. As the video illustrates by not withdrawing in the years the market goes down, you can pull out more money in the years the market goes up, which is approximately 70% of the time.

Whether it’s the covered asset strategy or the volatility buffer strategy, these are solid concepts that are the road less traveled. They can give people a more secure and safe retirement. If you’d like to learn more about these strategies, give us a call, send us your comments, and let us know what you think.

Read the Forbes article by Dr. Wade Pfau: Whole Life Insurance in a Lifetime Financial Plan –

Retirement Risks

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