Your LIRP functions as the ideal volatility buffer because it grows safely and productively in a tax-free way.
According to a recent study by Ernst & Young, investors that contribute 30% of their retirement savings to a LIRP will have their savings last longer than people who put 100% of their savings into investments alone.
This seems to fly in the face of every financial guru who has ever opined about cash value life insurance like Dave Ramsey and Suzy Orman.
It’s commonly understood that with an investment-only approach to retirement, you build up a large pile of money and take a modest distribution rate each year adjusted for inflation. If you take out higher than 4% per year, you drastically increase the odds of sending your portfolio into a death spiral during down years in the market.
The most critical time is the first 10 years in retirement where you can expect two or three down years, any of which can cause your retirement portfolio survival odds to plummet.
The LIRP serves as a volatility shield during those first ten years by allowing you to take tax-free loans from the policy during those first ten years of retirement.
The LIRP has a few features that make it the ideal volatility shield.
- You can’t combat market risk with an account that is exposed to market risk. LIRPs grow safely and productively.
- LIRPs in the form of universal indexed life insurance have a historical track record of 5% and 7% net over fees over time, making it easy to accumulate the amount of capital you need to shield yourself from volatility.
- LIRPs are tax-free. If you don’t have to pay taxes during the accumulation and distribution phase, your money will grow more efficiently and you won’t have to save as much money along the way.
- If you can take distributions tax-free, you aren’t exposing yourself to tax rate risk and those distributions don’t count as provisional income.
- If your LIRP is fully funded from day 1 of retirement, you will be in a position to pay for lifestyle expenses during the years following a down year in your stock market portfolio.
According to the study, if you contribute 30% of your retirement savings to an LIRP you will find that your sustainable distribution rate skyrockets to as high as 8%.
The study made a statistical case that shows the LIRP can extend the life of all your other investments significantly.
The most viable retirement strategy is the one that gives you the highest likelihood that your retirement savings will last through life expectancy.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com
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