What is the ideal investment mix to provide retirement income AND leave money behind? Is it better to invest all of your cash? Should you buy term insurance and invest the difference? Or is there some other method PROVEN to be better?
In this episode, Chris Miles shares what an independent study discovered with over 1000 simulated market scenarios, and which one came out on top. The answer might surprise you!
Check this out: How Life Insurers Can Provide Differentiated Retirement Benefits
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New Study Reveals The Best Investment Mix
Welcome to our show that’s for you, those that work so hard for your money and you’re ready for your money to start working harder for you today. You want that freedom of cashflow, not 30 or 40 years from today, but you want it right now so that you can live that life that you love with those you love. It’s so much more than just about living a rich life because as you are blessed financially, you have the greater ability to bless the lives of those around you. That is exactly the ripple effect that you create as a rippler.
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I found a study. This is a completely third-party study. This is not done by me. This is not done by somebody who has self-interest in you buying their crap, which is the kind of study that I like. It’s interesting that there’s a new study talking about what’s the ideal retirement mix. Is it all stocks? Is it like buy term and invest the difference? Is it annuities? Is it this or that?
I’m not even talking about alternative investments, but I want to talk about that here because if you stay tuned for the rest of this, you’ll see that I won’t only address what they see in the study, but also what could do better than what they found in that study as well. This is a study from Ernst & Young. I’m going to go ahead and share this here.
If you guys don’t know, they do a lot of things with business. They do a lot of independent studies and whatnot. It’s interesting because they start talking about permanent life insurance. They’re not the kind of guys that talk about life insurance that often, but they were talking about how life insurance and deferred income annuities, basically annuities that payout, which is also done through insurance companies, could increase income in retirement.
They address a few things here. First and foremost, there’s a retirement gap. They even acknowledge the same thing I’ve been saying for years. They estimate that by 2030, there will be a $240 trillion retirement savings gap and a $160 trillion protection gap. What does that mean? The retirement savings gap means you’re $240 trillion short of what you need to be financially independent.
The $160 trillion protection gap means that you’re $160 trillion short of being able to provide a legacy. You can pass on money to your family, especially to make sure that there are no issues with paying all these bills and things like that. Pretty much, there are people who aren’t insured enough and don’t have enough in savings. I was almost going to say not saving enough. Although there’s a partial truth to that, the truth is also how people are saving. That’s what this discusses here.
They’re going to talk about two particular products like PLI. They refer to it as Permanent Life Insurance. Also, when they say DIA with IIP, it just means that annuities that have bonuses, guarantees, and stuff. If you’re not sure what an annuity is, it’s very much like a CD in a lot of ways, even though it could have some stock market related to it. The one thing that annuities can let you do that’s done through life insurance companies that can provide a stream of income for an X number of years for a period of time or a certain amount that you could be receiving income.
There are a lot of different bells and whistles you can get with those annuities. I’m not a huge fan of them, although they do have their place and they’re not a bad option, especially if you don’t know what to do with your money. Annuities can be good at providing a good predictable stream of income for you at retirement or even before retirement too, depending on what you’re doing here.
They wanted to analyze five different strategies. Strategy 1) Investment only. You’re putting money in the stock market with a combination of stocks, bonds, and that kind of thing. It’s investing. Pure, using your cash to invest, and that’s it. There is no life insurance. That’s strategy number one. Strategy 2) Buy term and invest the rest in investments. It’s your typical Primerica type of philosophy. They have that here. They have permanent life insurance plus investments. This would be whole life insurance specifically.
It even says here, “It’s whole life insurance paid up to age 65 and then it’s paid,” meaning that it’s paid and done for that period forward. They also take 25, 35, and 45-year-olds in this and run these Monte Carlo simulations, meaning that they’re going to take all these different scenarios, market factors, returns, and things like that up and down years left and right, taking 1,000 different scenarios to see which ones come out on top.
It’s like playing war games to see which one comes out better. Thanks, Matthew Broderick. That’s what they’re doing here. They got investment only, buy term, and invest the difference, whole life and then invest the difference. They also have those income annuities and invest the difference. They then have whole life plus annuities, plus investing the difference. Doing a combination of all of those together. They wanted to see which strategy came out on top the majority of the time, and which one was really the winner depending on the circumstances.
It is possible that you could win in any of these scenarios. They’re looking for not only just more money for retirement but also to make sure that there’s also money to protect the family too. It’s covering both bases. It’s money today and money for legacy AKA ripple effect. Let’s talk about that here. Here’s what they found out.
There are six key insights that they came up with. 1) The whole life plus investment strategy outperformed the investment-only strategy. It’s just cash only and buy term and invest the difference. This right here, this number one, bucks a lot of the things that debunk a lot of what’s going on with what people have believed.
There are a lot of people saying, “You just buy cheap terms.” Dave Ramsey says, “Buy term and invest the difference,” doesn’t he? This says in many of those cases, that doesn’t work. It ends up being worse than buying whole life and investing the difference. Sorry, Dave Ramsey. Sorry, Primerica. Your strategy didn’t work. Even crazier, even if you weren’t even a fan of life insurance, it still beat the investment-only strategy. Why? Whatever money you die with, when you’re looking at not just having more money later, and there’s, of course, volatility and stuff there too.
The difference in whole life though is it diversifies you away from all that stock market risk that you’re taking all that ups and downs, it diversifies your money a little bit more. They don’t see it here a whole lot but on the passing on of money, that legacy side of things, there is no legacy side because whatever investments you have are going to get taxed to death. The funny thing is that many people say, “I don’t want to have life insurance,” and even the buy term and invest a difference, they’ll end the term at about age 65.
Whole life, you pay to 65 but then it keeps going forever providing you guaranteed returns on the cash that’s inside that whole life policy. The whole life does have a tax-free savings account associated with it where it’s growing cash. What we’re seeing here is that even if you just invest money and have no death benefit at all, you’re going to pass on money to your heirs, but it’s going to have to go through taxes. Whereas life insurance passes on tax-free. That’s one thing they didn’t say here, but it is definitely a part of it.
2) The thing they talk about is annuities also outperformed other strategies in retirement income. They’re talking about this here where you have annuity like that annuity protection and even talk about projected legacy coming here. It tends to be lower than the whole life plus investment. It did say legacy-wise, it didn’t win the result from the actual investments providing fixed income was better than doing the other strategies. Even buying term and invest difference or just investing in general.
Integrated strategies are more efficient than investment-only strategies. What does that mean? What they found is that the strategy of allocating 30% to whole life and 30% to assets into an annuity starting at age 55. It’s like a ten-year annuity and then and then, of course, investing in other things. It says it provided 5% higher retirement income and 19% more legacy, passing on the money than the investment-only strategy because whole life and annuities outperform fixed income. That happens when you’re trying to deal with retirement.
Integrated strategies are more efficient than investment-only strategies. Click To TweetWhat they’re saying is you don’t have to diversify into all these different areas within mutual funds that may not perform well, when you can make more with these annuities and using whole life. For investors with high-risk appetites, integrated strategies still remain better. Even if you’re a higher-risk investor, still using the combination strategies of whole-life annuities and dealing with retirement accounts is still better even if you have a risky appetite.
Even if you go high risk into your thing, because the market scenarios could go against you, they do not work in your favor. They still worked. This integrated strategy, again using all three of these, provides investors with the flexibility to focus on the financial outcomes most important to them. Whether it’s retirement income, legacy, or a balance in between, pretty much, it’s more flexible. The allocation of up to 30% of annual savings to life insurance, with 30% going to that annuity, may be appropriate when optimizing retirement income and legacy value outcomes.
Pretty much they’re saying, 30% whole life, 30% annuities, and 40% to the stock market mutual fund-based investments. That’s the main point of this article here. I want to come back to summarizing this a little bit more to help you understand what we’re talking about here. They’re just saying buying life insurance with annuities. Both have good income abilities and guaranteed income abilities.
While you can also still have risk in the markets, you can still be putting your money in mutual funds. They’re only looking at those five types of strategies. They found integrating all of them, essentially diversifying yourself, not diversifying in only mutual funds, which is not diversification, but having this spread created a better scenario most of the time. That was the true clear winner.
Buying life insurance with annuities both have good income ability and guaranteed income abilities. While you can also still have risk in the markets, you can still be putting your money in mutual funds. Click To TweetAs they said, even 5% outperformed just investment only and then 90% better when it came to legacy. That’s pretty significant. That’s a pretty big deal. Not much different than what I’ve been saying, although I mean they’re talking about putting money in the market. What does that really mean? I want to show you something here before I talk about what I would do instead. Again, this is just me. I’m not giving investment advice on this. This is something that we look at with our clients. There are ways even to do better than their proposed integrated strategy. They’re taking traditional financial advising models.
Remember, these guys are not financial advisors, Ernst & Young. They’re separate from that. What we could do is something much better with alternative investments. Before I get to that, let me show you the whole life side because I don’t talk about this a whole lot. Most of the time, I talk about using this to buy assets, using this as a way to store up cash reserves. Make more than point nothing percent in the bank and the ability to double dip your money where you can get your money to work for you. This is what’s interesting. Understand, the whole life that they were using was a traditional whole life policy.
This is not the policies we talk about on our show. It’s a policy that does a lot worse than the whole life policies we talk about and still outperforms the market. Even though that’s the kind of whole life that, even before, while I was a financial advisor, I completely criticized even though I didn’t really have any justification for it because I didn’t know whole life that well. Even now, I’m not a big fan of doing this base premium-only type of whole life policies and these traditional policies. Even though that underperforms, it still beat the market combined with annuities and everything else.
I guarantee the annuities helped. There is no doubt there but it’s interesting that even the annuities with mutual funds still didn’t beat having whole life annuities and mutual funds. That’s the important thing to remember. They still did see those scenarios. They separated them out and still, those three together worked well, which is whole life because it gives you that protection and some guaranteed income. You got the guaranteed income from the annuity side and then you’ve got a little bit of the growth potential from the markets too.
Let me show you an example of a whole life policy. This is one I could do all myself right now. Based on me being in good health as a 45 now, almost 46-year-old. This is my kind of scenario. I figured I would do the same thing. What if I put $50,000 a year for the next 20 years? From 45 to age 65, $50,000 a year I put into this, that’s $1 million total. What would that provide me for income in retirement?
I talk about all the time not using this for retirement, but it’s still a very valid option. I’ve had people on this show before, very brilliant people, even real estate investors, that were sold this very strategy of paying in for 30 or for 20 years and then taking out income and they look at it like an annuity. They say, “I can pull this money out tax-free.”
Remember, the money you pull out of a life insurance policy when it’s done correctly, it comes out tax-free. It grows tax-free, comes out tax-free, and then the death benefit is even tax-free. Let me show you an example of what I would do, which is better than what Ernst & Young was doing in their study. If I was doing $50,000 a year, here’s what happened.
In the Ernst & Young study, if you were doing $50,000 a year, which they’re putting in 30% of income, not $50,000 a year unless 30%, you’re putting away roughly about $150,000 to $200,000 a year. This would be the case. We do it more because we integrate this a little bit differently. Now $50,000 a year right here. You are still in the first year. Based on this, you have about $37,000, almost $38,000.
This is higher because I wanted to show an example where you could pull off income. It had to raise the death benefit to illustrate it even though in reality, we would have a lower death benefit. I would have closer to about $39,000 in cash value in that first year, but we’ll take it. We got just under $38,000 the first year. We pay into it for twenty years. You got $1 million. That million dollars turn into $1.61 million here after twenty years. Again, this is a non-guarantee. This is based on current rates, which have been historically lower than dividend rates because of the low-interest rate environment that it’s had.
We’ve already got predictions from companies that I work with that they’re looking to raise that dividend either next year or the year after, assuming rates stay higher, which the Feds are now saying, “We’re going to keep raising rates this year in 2023.” There you go. $1.61 million, assuming the current low dividend rates. What does that mean for income? I could take that tax-free. I could pull it all out right now, but what if I wanted a stream of income for the next 25 years? I pay him for 20 and pull out for the next 25 years. What could I be taking off from age 66 until age 90?
I showed $100,000 even. Even if you could take out $100,000, tax-free, there still have some cash left over the death benefit’s lower. No doubt because you’ve pulled out a lot of cash and the way we design it here, it’s not as big on the death benefit, but if I wanted to pull out $100,000 a year, I could easily do that and somewhat disinherit my kids even though there would still be a death benefit left behind depending on what age I die at. That’s one of the things that’s really cool.
I’m able to pull $100,000 a year for 25 years. That’s $2.5 million after putting in $1 million and that’s tax-free coming out. It’s not a bad deal, if you ask me. That’s again in a place that’s not market driven. It’s not based on stock markets. It’s not ruined by the Feds raising rates and things like that. If anything, the Feds, when they raise rates, help you because you’re able to make more money off of this.
That’s $100,000 a year in this lower interest rate environment. If there are higher dividends, this could be more. It could be less if it goes lower. It’s very possible too. Even though that’s not as likely of a scenario, that still could happen. That’s something that’s pretty cool and I forget to explain that because the truth is, I don’t think that’s the best-case scenario.
I’ve had people that are real estate investors have been sold this strategy and it’s a good one. Is it really the best-case scenario? Instead of just taking the money out, we could use this money now to invest. The truth is, we don’t have to just leave it in here. We could still let it grow, but I can use this money to invest and create more cash today. I ran that same scenario with one of my friends. He was putting in $25,000 a year for the next 20 years. it’s half of this number. He was excited because he’s like, “I put in $25,000 a year but I can pull out $50,000 a year, about double, give or take.”
He was told only he could do that for about ten years. He’s like, “I can put in $20,000 a year or $25,000 a year and pull out $50,000 a year for the next ten years. That’s like a great paying annuity without all the risks.” I said, “That’s true but you could do so much better. Remember that built up to $1.6 million. Do you think you could buy some good real estate with $1.6 million?” “Yes.” Take an even number here. You pull out $1 million and a half of that $1.6 million. At 10%, it makes you $150,000 a year without sacrificing your principle. That’s the income that’s being paid $150,000 a year. That’s not even talking about along the way. Along the way, it’s even better than that.
I show that to him as well. I said, “You could pull out $50,000 a year but you could pull out over $110,000 a year or more if you invest it today over these next 20 years versus just letting it build up in the whole life.” There’s nothing wrong with the whole life but they’re very conservative stable returns. That’s the benefit.
Again, if you can leverage it by getting that line of credit against it then use it to invest elsewhere to make bigger returns than what it does. Remember, you’re still getting paid the returns in the policy. That’s the beauty of using whole life. You still get paid the dividends in that policy while you also have an interest rate being charged. Use that money to create cashflow. Do you remember that episode I did called The Miracle of Simple Interest?
Re-watch that if you haven’t done so already, you’ll realize even if you’re paying interest, you can still far exceed the interest you’re being charged, not just by a little bit but by a lot. You’re making money inside the policy while also still making cashflow from those investments, building those assets, building those cashflowing investments that can create that great income for you. Even some of it could be tax advantage depending on what kind of investments you’re doing.
That thing right there, think about it. Even if you just saved the $150,000 whole life for 20 years, then just invested the $1.5 million. You’ve got $150,000 a year coming in and you could still be using some of that for retirement income, but not as much because now it’s invested. The best thing you can do is invest along the way using these policies. You can make a heck of a lot more money.
The only reason I didn’t run it is because of the preparation for doing a show on showing that like year after year for twenty years with alternative investments, especially if you’re doing rentals or things like that where there are all kinds of variables. We’re still working on software, so it doesn’t take me four hours to do the math. That’s the only reason I’m not showing this to you, but I have done it before.
I spent a Saturday morning running these scenarios and seeing how much better it is when you invest along the way. Instead of putting the money in the market, where it’s gambled, what if I put that money into real estate-backed investments? Things that are all-term investments paying usually at least double-digit returns. It’s not guaranteed but paying those double-digit returns, allowing that cash to grow those assets along the way, generating cashflow.
The cool thing is you can take that cashflow now versus waiting maybe twenty years to say, “Now it’s big enough. I can pull out that $100,000 a year.” There’s nothing wrong with doing that strategy. The main point I want you to get is that it’s not just about doing investments. It’s not just about doing whole life insurance.
I’ve told you guys several times, you don’t need infinite banking to become financially free. However, you can throw a little extra gas on the fire to boost that income even more by doing it. Even though it seems like you’re taking money away from investing, you’re not when it’s designed properly. When you’ve got more money to be able to invest right away, it allows you to be able to grow that money faster.
My main point of this today is that Ernst & Young has already shown an integrated strategy works. Not just throwing all your money in the market, not just throwing everything into investments but using a combination not just to generate more income now. You can also preserve and create a legacy for your family for generations to come. Imagine how much better it is if you teach your kids while they’re young how to do this very thing where they’re learning it younger than you were.
What could they create in their life? How many tens of millions of dollars could they be creating in their life that you missed out on right now? I’m not saying you couldn’t create millions or even tens of millions of dollars yourself doing these kinds of investments. Imagine if you can get your kids to do it younger, what kind of legacy are you passing on? What new traditions and new ways of seeing money and thinking about money are created? What new levels of freedom could they have?
You don’t have to spoil them. Teach them good values. Teach them good stuff. Pass on that legacy too. Imagine the ripple effect that you create throughout your family and what freedom it creates that allows you to be able to be freer to do the things that you love to be able to serve in a capacity that blesses lives.
I’ll give you one last example here. I have a friend. I want to mention his name but I will bring him on the show so then you’ll know his name. This guy has been a real estate investor, very successful, made millions and millions of dollars in real estate. He got bored of it. He got to the point and said, “I can make millions in real estate but I feel like I need to focus on helping people become happier with their lives. Why have all this money if you’re not happy?” He went through his own transformation of his own happiness journey as well. To see the transformation him where now he’s spreading that message, helping people get rich and be happy too. He’s not teaching them to be rich but he’s teaching them to be happy while they’re rich.
Seeing the passion and him lighting up, that is what he was meant to be on this planet to do. I’m not saying that’s the only thing he’s meant to do. That’s way better for him to do that versus just having his real estate business making a lot of money. He is impacting and changing people’s lives. You can do the same as well like I’m choosing to do with my retirement days. I’m doing this as part of my retirement. I love teaching, helping, and serving and I feel a responsibility to create a ripple effect through your lives. You have the same ability to do the same. You have the same power within you. You can accomplish the same things and probably even do better than I could potentially.
In whatever scale, whatever way, do it the way that honors you and allows your life to be what I believe that God’s put us on this planet to do. It is to bless lives, to impact people’s lives, to leave a better footprint on this planet, and to leave the planet better when we left than when we came to it. That is why I feel as a duty and responsibility to the human race and whatever that is for you, do that.
That’s why we teach this freedom and that’s why I want you to really internalize and figure out how to integrate these kinds of strategies into your own life as well. You can always reach out to us, MoneyRipples.com if you have a question on that. I challenge you to find ways to be better, follow what actually works, and do that. Go and make it a prosperous week. We’ll see you later.
Important Links
- Money Ripples Podcast – YouTube
- The Miracle of Simple Interest – YouTube
- Ernst & Young study