IUL VS. 401(K): SAFETY & LIQUIDITY
Last year, the average 401(k) dropped by 22.9% to 25%. That kind of loss can have a big impact on those close to retirement.
Comparing Market Protection and Optimal Access to Your Money
Anyone with $1 million set aside in their 401(k), for example, would have lost $250,000. If someone were just one year from retirement, he or she might have to consider continuing to work for another few years to make up the difference. For those with their money set aside in properly structured, maximum- funded IULs (what we call IUL LASER Funds), they didn't lose a dime due to market volatility, as they were protected by a 0% floor.
ACCESSING YOUR MONEY Now what about penalties for IULs vs. 401(k)s?
Let’s say you’re in your 50s and you have a good chunk of money set aside in your 401(k). Life is clipping along, but then an emergency strikes. You have a major accident, incur medical debt, and find yourself unemployed for a year while you recover. You need to access money from your 401(k) to cover the bills, the mortgage, the kids’ college tuition, and your medical care. Not only will you pay taxes on the money you withdraw from your 401(k), but you’ll also pay a 10% early withdrawal penalty (a juicy little bite Uncle Sam takes for himself when folks withdraw money from their 401[k] before age 59 ½).
With the employer contribution, 401(k)s can be a useful part of an overall retirement portfolio, but the market volatility can put you at risk.
In last month’s issue, we compared properly structured, maximum- funded Indexed Universal Life policies to 401(k)s. We examined how each type of vehicle affects your taxes. In this article, we’ll continue the comparison, looking at safety and liquidity. MARKET VOLATILITY VS. MARKET PROTECTION Let’s start with another time period when market volatility was significant, during what we call the Lost Decade (2000–2010). Between 2001 and 2003, the 9/11 tragedy and the dot-com bust destabilized the market, and millions of Americans lost 40% of their traditional retirement account values. Let’s say you had a $1 million nest egg saved in 401(k)s in the year 2001. In three years, you would have seen it drop to $600,000. Then it would have taken four years to come back to breakeven at $1 million.
Suddenly your nest egg has become Uncle Sam’s breakfast.
But what if instead you had your money in an IUL? You could access the money needed to cover all your expenses, AND you wouldn’t have to pay any taxes on that income. What’s more, you wouldn’t have to pay any early withdrawal penalties. Thanks to IRS codes, if you access money from your IUL the smart way (in the form of a loan), you can enjoy tax-free income at any time, any age, for just about any reason, without owing any income taxes or penalties. While 401(k)s can be a useful part of your financial portfolio, they clearly have some limitations. This is why we generally recommend putting as much as you can into an IUL LASER Fund (up to your maximum affordability guideline percentage, typically 20% to 40% of your income or net worth), and balancing the rest of your retirement strategies with vehicles that offer as much liquidity, safety, rates of return, and tax advantages as possible.
During that same time period, many of our clients doubled their money using IULs IUL LASER Funds.
They were protected by the 0% floor, which means they did not lose money due to market volatility when the market went down — and they made money when it was going up. A few years later, disaster struck with the 2008 market crash, causing millions of Americans to lose 40% of their account values yet again. It took another four years (until 2012) for many of them to come back to breakeven.
Contrast that with our clients who had money in IULs at the time. Many of them tripled their money.
How can IULs offer safety during downturns? Through something called indexing. With indexing, your money can be LINKED TO the market, while not actually being IN the market. This way, your IUL benefits from tax-free growth during the market’s up years, and it’s protected from loss due to market volatility during down years with that guaranteed 0% floor.
Learn more about the safety and liquidity your financial future deserves. Order your free copy of “The Laser Fund” book today.
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