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A Savings Vehicle That Makes All the Difference

Missed Fortune – Preventing Premature Nest Egg Depletion

Posted on | June 17, 2012

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An Acronym Worth Knowing

One of the most important assessments we can apply to our financial and retirement planning strategies is the LASER test. LASER is an acronym that stands for:

  • Liquid
  • Assets
  • Safely
  • Earning
  • Returns

It’s a sad fact that most Americans suffered at least two significant losses of 40% of the value of their retirement nest eggs in the last 12 years. Some of those who have hung in there are barely back to where the break-even point of where they first started.

The lesson here is how important it is to protect yourself from these types of losses due to market volatility and uncertainty.

If you had used an indexing strategy during this past decade, you could have actually doubled your money because the rate of return was 7.23%. This is because, under the Rule of 72, your money will double each 10 years at 7.2%.

Looking back at the market, on average, you’ll see seven gain years with three down years each decade. But the last decade actually saw five down years along with five gain years. Even more remarkable is that two of those years saw losses of more than 40%. This is where indexing can really make a difference.

When the highly respected folks at DALBAR analyzed investors over the past two decades, they found that most mutual fund investors only averaged 3.49% return. This is why so many brokerage firms are counseling their clients to take no more than a 4% payout at retirement. That may seem rather low, but they’re advising their clients to do so to avoid depleting their retirement nest too soon.

This means with a million dollar nest egg, you’d only be able to pull out about $40,000 a year in order to maintain that principal without depleting it.

If you needed a retirement income of $50,000 per year, you’d need a nest egg of $1.25 million at a 4% payout. And here’s where it gets really interesting.

If you’re pulling that money out of an IRA or 401(k), you still have taxes to pay that will gobble up roughly a third of that money as soon as you take it out. That means you’ll actually net about two thirds of that 4% payout and, with the effects of inflation, that $35,000 may not go as far as you’d hoped.

Advantage: Indexing

If you were using the indexing strategy to create predictable rates of return, you would only need about $450,000 in your retirement nest egg to generate the same net spendable income as a $1.25 million dollar nest egg in an IRA or 401(k). One reason for this is because the roughly $36,000 of yearly income generated via indexing would be tax-free.

Now consider an even better scenario: With a $1.25 million nest earning a safe and predictable, tax-free rate of return of 8.2%, you could easily have a yearly tax-free income of $100,000 without having to worry about depleting your principal. That’s nearly triple the $35,000 after tax income described above. Now do you see why indexing is the key to passing the LASER test with Liquid Assets Safely Earning Returns?

Many professional people and business owners as well as CPAs and tax attorneys are blown away when they learn how to teach their clients about indexing and utilizing tax-free strategies.

There’s no shame in not knowing what you don’t know, but there’s a tremendous advantage in understanding how these Missed Fortune strategies work and how they can help you take ownership of your future.

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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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