Is It Time for a Reboot?

Okay, enough already.  When will this crazy stock market show us a little love and give us a break from this insane volatility?  I mean, seriously, these days the stock market has more gyrations than an Elvis impersonator at a cheap Vegas hotel.

Speaking of Vegas, the equities market feels more like the spin of a Roulette wheel than it does a sound and profitable investment strategy.  “I’ll put four-hundred thousand on red please.”  The insanity has to stop.

As I write this article, the market, along with many retirement accounts, is down 3.5% at midday.  Wait, 3.5% in less than a day?  Shouldn’t that be closer to an annual growth than a daily retreat?  It should, but that’s unfortunately not the case any longer.  I fear those days are gone – and quite possibly gone forever.

Sorry to be the bearer of bad news.

I believe there is one primary culprit driving this radical transformation – Information.  The Internet age has given all the people, all the information, all the time.  Market movements that used to take weeks or months, now take days, or even minutes.  One day you’re up a little.  The next day you’re down a lot.  It’s the proverbial “two steps forward, three steps back” scenario.

The problem is, the market isn’t kind enough to stop and ask for your permission before it wipes out your savings.  Rather, it simply bludgeons you with the volatility club and demands you push your retirement date so far into the future that you’ll be washing your prune juice down with a tall glass of Metamucil.

Here’s what I say – it’s time for a reboot.

A what?

A reboot.  You know, a fresh start, a new beginning, a better way.  Just like you can reboot a computer to get a fresh start, I believe you can reboot your retirement strategy.  In today’s world, you must reboot your retirement strategy.  Regardless of past successes or past failures, to succeed in the future, you must take a different approach.  The kind of approach that eliminates volatility while protecting your entire nest egg from loss.

Think about that.  Wouldn’t it be amazing if you could do just that – capture some gains when the market was up, but take no losses when it was down?  Sounds too good to be true, doesn’t it?  (My dad warned me about that sort of stuff.)  However, the good news is that this strategy does exist.  You can do exactly that.  There are strategies and products that will allow you to protect your downside from loss, but still receive some market-like returns.

To do this, however, you need to bring your retirement thinking into the twenty-first century and leave behind the old and archaic models of the past.

Here are three key factors that can help you do just that:

1. Taxation matters

It’s not how much you amass in your retirement account that matters – it’s how much you keep.  As obvious as that sounds, most people overlook that significant fact as they stuff their government-sponsored, tax-qualified plans (IRA, 401(k), SEP, etc.) full of money.  The so-called “experts” tell you to put as much money into your tax-qualified plan as possible because it will allow you to “save” tax.

Really?  Save tax?  I don’t think so.  Let’s take a look.

Let’s say an individual is currently paying income tax at the rate of 25% and is able to contribute $10,000 into his or her 401(k).  Yes, that $10,000 contribution would allow him to pay $2,500 less in tax in the current year, but does it really “save” him any tax?  No, it just “delays” tax – making it much worse.  Let me show you how.

At a growth rate of 7.2% money will double in value every ten years.  Let’s say the individual in the above example is 35 years old when he makes this $10,000 annual contribution.  If his account were to grow at 7.2% annually (definitely not a guarantee) then at age 45 that $10,000 deposit would have grown to $20,000, at 55 – $40,000, and at 65 – $80,000.  And that doesn’t take into account all of the additional contributions into his 401(k), but rather just that first deposit of $10,000.

Now, if tax rates didn’t go up during those 30 years (how likely is that?) and he could still pay income tax at a 25% rate, he would now have to pay $20,000 of tax instead of $2,500!  Does that sound like a tax savings to you?  No.  It’s a 700% increase!  By delaying payment on the $2,500 income tax bill today this individual would have to pay $17,500 more in future income tax – and that’s if tax rates didn’t even increase.

Let me ask you a question, “Do you think tax rates are going to stay at the same rate for the next 30 years?”  Yeah, I thought so.  And if they do go up, that tax bill becomes far worse.

So how can you combat this problem?  Utilize products and strategies that allow you to pay your tax now, before your contribution, so you can access that money in the future free from the burdens of additional tax.

I’m aware of only four options that currently exist for this type of strategy: Municipal Bonds, the Roth IRA, the Roth 401(k), and certain types of life insurance, utilizing the policy loan provision.

To find out which option is best for you, I encourage you to meet with a qualified financial advisor who can walk you through each of the different options.

Just be sure of this – putting money into a tax-qualified plan today does not save you tax, it simply delays it.  And how often is delaying a problem the right choice?

2. Never Take a Loss

I’ll make this one short and sweet.  Never take a loss.  It’s just that simple.  What if that could be true?  What if your retirement account could experience a positive growth when the market was up, but never lose money when it was down?  Well, it can.

You might call it magic.  I call it the Indexed strategy.

A little more than a decade ago two new products were introduced into the insurance marketplace – Indexed Universal Life Insurance and the Indexed Annuity.  While each boasts different policy features, both share the incredible benefit of capturing a portion of the stock market’s gain in the positive years, while never, ever taking a market loss in the negative years, even in horrific years like 2009 when the market was down nearly 52% from it’s 2008 high.

But it gets even better.  Not only do these products never take a market loss, they also lock in and protect each year’s gain they received from future market losses as well.  Think about that.  It’s remarkable.  This feature, called the Annual Reset Provision, allows an individual to not only protect his or her original cash value but also each years’ gains as well.

3. Create an income stream you never outlive –

One of the great fears for today’s retirees is exhausting their retirement account too early; and that should make them nervous because I’m certain that running out of money was never part of their original plan.  (Of course neither was flipping Whoppers at Burger King.)

But, without the right planning and protection, that is exactly what can happen.  In No. 2 above we talked about the first step in protecting ones retirement – never take a loss.  That is critical.  But even if a person never takes a loss they can still run out of money, the account can still run dry.

It’s a Catch-22, really.  We all want to live a long and healthy life in our senior years, but what if that great health causes us to outlive our money?  Then what?

Fortunately there is an answer to this dilemma – it’s called an annuity.

For far too long annuities have been maligned by the uneducated and misrepresented by uninformed.  They are truly one of the financial world’s greatest gifts to the retiree.  Are they for everybody?  Of course not – nothing is.  But for those that understand their unique benefits they can serve a powerful role in a prosperous retirement.  In short, annuities allow an individual to create a consistent stream of income that will last their entire life, regardless of how long they live.

So, if good genes are on your side and you want to make sure your money lasts as long as you do … talk to a qualified advisor about the role an annuity might play in your financial future.

Do these features give you a glimmer of hope that there may be a better plan for your financial future?  I hope so.  Just know that there are solutions to combat the wiles of taxation, the risk of stock market loss, and the fear of outliving your income.

By the way, in the few hours it took me to write this article today, the stock market has fallen an additional 1.5%, ending the day a disastrous 5% lower across the board.  Hmmmm.  Just another ho-hum day in the markets.

Yes, it definitely IS time for a reboot.

Patrick Kelly is the author of two national bestselling books: Tax-Free Retirement and The Retirement Miracle.  To purchase a copy of Patrick’s books go to: