So devastated, one third of my retirement fund was evaporated.
While originally, I thought I could retire very soon, it was in mid-2007; my retirement fund grew so well.
Just shortly after, the market crashed; more than one third of my retirement fund was gone.
Fortunately, I still had a job, still have time to accumulate my retirement money and did not have to retire for another 25 years.
But what if this could happen again when I would be ready to retire or after I would have retired.
Should I postpone my retirement? Or should I still have time to accumulate my wealth?
So I started to look for alternative, and safer solutions, I found these strategies with downside protection and upside potentials; now I know my fund can grow consistently without worrying too much about the market risks.
Want to learn more about the market risks and risk control strategies, click here to sign up a FREE consultation with me, I will reach out to you witin 24-48 hours. In addition, I will occasionally send you some emails, blogs and news covering from investment to retirement, from protection to Tax saving, from kids education to asset and estate planning etc...
Ok, I am not saying these are the best strategies for everyone, because I know some can still make good investment even when the market is down, but most people are not, including myself. So I would like to share what I have discovered …
The Impact of Market Crash on Retirement Plans
It may be too much exaggerated to claim that investors who are invested entirely in stocks could lose as much as 80% of their savings if the 1929 or 2001 crashes repeat and if the 2008 crash would occur again, the loss would be as much as 56%.
But according the U.S. history of previous market crashes, it is possible the next market crash could be just around the corner.
Then is our retirement fund safe, does it have a downside protection and upside potential?
Well, I am neither an investment savvy nor a professional financial analyst, I cannot accurately predict the market crash. So I constantly seek for investment strategies that can minimize the risks while ensure consistent growth.
Now, let's take a look at the most common financial risks?
#1. The Market Risks
If the market is downside, MOST of us will lose money in our retirement account; but what if the market go sideways?
Our retirement funds will still diminish gradually. Why?
Here are some examples. If market drops 10%, we will need to make a gain of 11.1% in order to get back to where it was before the drop; if the stock market drops 30%, we need to gain 42.9% in order to get back to where it was; if the stock market drops 50%, we will need 100% gain in order to make it back to what it was.
Now, let's look what will happen if the stock market go side-ways. After each drop, our fund will need to gain a bit more than the market drops in order to make it back to where it was before, but before it reaches where it was, the market drops again. As a result, our fund will gradually diminish.
#2. Investor Behavior Risks
As individual investors, we have emotions, so we tend to sell when the market is down because we are panic and tend to buy when the market is up, because we are greedy. These are just human natures; but these behaviors usually result in "buy high and sell low"; so to avoid the risks from our own behaviors or emotions, we may hire a third party management, however the behavior of the fund manager may also incur risks to our investment.
#3. Longevity risks
The longer of our lives, the more the retirement fund we will need; since we have to take out retirement income every year from our retirement funds if we want to live with a similar life style.
#4. Withdraw Risks
Withdraw during the market down would be a significant risk to our investment; our retirement fund will diminish much faster if we continue to take retirement income out of our retirement funds while the market is down, which will be discussed later.
There are a few other risks such as the sequence of Return Risks, Interest Rate and Inflation Risk.
In addition to the above risks, there are 3 additional factors that may also have impact on our investment.
#1. Rate of Return
Do you know the Rule of 72?
Basically, we can estimate the number of years it takes to double our investment, by following the formula of 72 / the return interest rate .
For example let’s say John invested $10,000 at the age of 29, with 4% investment returns, it will take about 72/4=18 years to double that investment; so at the age of 47, he will have $20,000; at the age of 65, he will have $40,000 .
If the investment return is 12%, it will take about 6 years to double the original investment. If John invested the same amount at the same age but with 12% interest rate; by age 35, he will have $20,000; by age 65, he will have $640,000.
#2. Risk Control Strategies
No matter where we leave our retirement funds, there are always risks, and these risks cannot be eliminated. But we can find strategies to minimize these risks while ensure consistent growth at the same time.
The volatility of the stock market has a big impact on our assets, but it does not mean we should exit the market.
As you can see, staying invested is also crucial to the growth of our wealth; the light blue curve (stay invested) is significantly higher then the dark blue curve (exist the market between 2009 and 2010).
But if we are planning to retire soon, it is probably not wise to have a portion of our retirement fund wiped out before our retirement. Then how to minimize the risks during the market decline. I will provide some tips on how to minimize these market risks especially during the market decline.
#3. Tax consequences
“Yes”, tax will probably be one, if not the most important disbursement of our retirement income, when we are ready to take money out of our retirement funds, we have to considering our tax responsibilities.
In addition, we also have to be aware of the following regulations from IRS: if we take out retirement money before the age of 59 ½, we will get penalized by 10%; if we don't take out the required minimum distribution on or after the age of 70 ½, we will also be penalized by 50%.
If our retirement funds is too big, we may have to take out more than we are willing to take out, end up with higher tax consequences. So it is important to consider that, when we prepare the retirement funds.
Now let's talk about the risk control strategies.
It is never a good idea to put all your eggs in one basket.
It is better to diversify our investment.
Diversification takes asset allocation deeper by dividing our portfolio into different categories within each asset class.
The challenge, however, is to effectively spread our investments amongst a wide range of companies and industry sectors, concentrating on those that may perform differently under a variety of market conditions.
Some mutual funds may invest in thousands of companies, which, in theory, provide a greater amount of diversification and can help smooth volatility.
However, diversification does not guarantee a profit or protect against loss in a declining market.
Would you rather ride in an elevator with just one cord holding it up or in one with multiple cords holding it up? What if a cord were to snap?
Although there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio, diversification is an important component of any long-term financial strategy that seeks to reduce risk.
Want to learn more about the financial strategies to reduce the market risks, click here to sign up a free consultation session with me; I will also reach out to you within 24-48 hours. In addition, I will occasionally send you some emails, blogs and news covering from investment to retirement, from protection to Tax saving, from kids education to asset and estate planning etc...
2. Asset Allocation
Below is the 5 most common asset allocation strategies .
3. Asset Rebalancing
Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state.
In addition, if an investor's strategy or tolerance for risk has changed, he can use rebalancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset allocation.
Rebalancing can achieve slightly better performance.
4. Dollar Cost Average
The best time to purchase stock is when the price is low. However, it is challenging to predict the market. So to avoid trying to “time the market” (buying when the market is down, selling when it's up), some investors take advantage of dollar-cost averaging.
How Dollar-Cost Averaging Works in a Fluctuating Market
No matter how fluctuating the market is, regular purchases can lower the average cost per share and increase your total number of shares purchased over time.
However, a plan of regular investment cannot assure a profit or protection against a loss in a declining market. Click Here to sign up for my FREE Retirement Fund Boosting Strategy.
5. Value Investing
Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.
6. Professional Tactical Money Management
The latest DALBAR Quantitative Analysis of Investor Behavior was published recently, and it confirms what we already know: The average investor is terrible at investment.
This yearly report gives an annual insight into the trading decisions of U.S. mutual fund investors. DALBAR has been conducting the study, one way or another, for several decades, compiling a rich bank of data.The QAIB report "uses data from the Investment Company Institute (ICI), Standard & Poor’s, Bloomberg Barclays Indices and proprietary sources to compare mutual fund investor returns to an appropriate set of benchmarks. Covering the period from January 1, 1987, to December 30, 2016, the study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior." Compiling this data gives a picture of the "average investor" and his or her trading decisions across several market cycles.
On the whole, the average investor has significantly underperformed the broader S&P 500 over most periods.
Even for 2017, the average equity fund investor underperformed the S&P 500 by 1.19% (20.64% vs. 21.83%).
The leading causes for the under-performance is due to the investor’s behavior effects, include loss aversion, narrow framing, anchoring, mental accounting, lack of diversification, herding, regret, media response and optimism. However the biggest The biggest of those problems are the herding effect and the loss aversion.
The appropriate behavior is to avoid selling on a “Rising” market and avoid buying on a “Falling” market. But how?
So it is recommended to use a professional tactical management, who can implement plausible strategic options independently.
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7. Leverage Financial Programs
The last strategy is to leverage some financial programs, such as annuities, index-linked programs. Here is a list of guaranteed programs, fixed annuity, indexed annuity, variable annuity with guaranteed rider, WL / UL with cash values and IUL.
The above table compares the annualized return S&P500 vs. an FFIUL product. The annualized return for S&P500 is 6.64% and 7.94% for FFIUL. Of course, this return is before-Tax for S&P500, and before-costs and fees for FFIUL.
Of course, there are other things you need to know about the difference between a complete investment product vs. the FFIUL:
- For a real investment product, we have to pay Tax for the profits we make as well as some investment cost; it has no protection against the market risk, so it has no guarantee for the account value, but the money is easily accessible. It will be counted as our asset by all educational institute, so it may affect our child's chance to get tuition aid for college education; it has no protection against creditors or probation.
- For FFIUL, since it is a Life Insurance product, so it protects Life, if we pass away, both the cash value and the face value will be accessible to our benefitiaries; it also has an investment feature, with cash value in it, it guarantees the account value with upside potentials and downside protection; the profits and returns are Tax-FREE (certain rules apply); the cash value can be accessible if needed. In addition, the product is not considered as our asset for most of the educational institute or the government, so it is protected against creditors or probations. But It does also have a cost; the money in the cash value would be locked down for at least a few years, unless penalty is paid.
Still, we do need to take out our retirement income, right?
Let’s look what will happen if we retire in a down market.
Assuming we have 1 million in our retirement or investment account at the age of 65; for retirement, we plan to take out 70,000 annually without taking the inflation into account.
Assuming during our retirement, we have a a total of 15 years of bull market and only encountered 6 years of down market, at the age of 65, 66, 69, 70, 73 and 82.
Still at the age of 85, we would have $382,643 left. See how fast our saving is depleting?
The Power of Not LOSING.
What if we don’t take out money in the years of down market.
Assuming the same scenario, if we don’t take out any money during the 6 down years, what would happen?
We should have $3.7 million left at the age of 85.
Huge difference, right?
This is the power of not losing.
The last question is how do you want to spend that much money? Leave it for your heirs or spend it?
Want to learn more about risk-control strategies, click here to sign up a FREE consultation with me; I will reach out to you within 24-48 hours. In addition, I will occasionally send you some emails, blogs and news covering from investment to retirement, from protection to Tax saving, from kids education to asset and estate planning etc...
Well, we still need income during those 6 years of down market, right? If we don’t take it from our retirement or investment fund, where do we get our retirement income then?
CASH VALUE from the IUL Life Insurance
We can take advantage of the cash value from our life insurance.
Assuming a 45 year old preferred non-tobacco male, purchased an IUL with $500,000 death benefit; he should have paid a premium of $6,967 annually for 20 years at default return interest rate of 6.64% (assuming the annualized return of S&P500).
With strategically timed policy loans, he took out $50,000 from the cash value against his policy (which is equivalent to $70,000 Taxable income at the 28% tax bracket).
Note that loans from life insurance is not taxable, as long as the life insurance is still in force; however if the policy is surrendered, the profit in addition to the premium will become taxable. (We have to be very careful to keep the policy in force.)
Without accounting for insurance cost, fees, or loan interest, at the age of 85, he will still have the death benefit of $200,000 with a cash value of $52,228 left, but his retirement or investment account could be reaching to $3.7 million at the age of 85.
But as we mentioned earlier, there is an IRS regulation, the required minimum distribution (RMD).
By the age of 70 ½, we need to take out the RMD from our retirement account, otherwise we will be penalized by 50%; IRS does not care whether the market was down, and the market does not care if we have RMD.
We have looked at the risks for our retirement funds, the factors affecting our retirement funds and the risk control strategies.
How to use these information to help ourselves? Do we want to invest aggressively or conservatively? Does our investment need downside protection with upside potentials?
Click here to sign up a FREE consultation session with me, I will reach out to you within 24-48 hours. In addition, I will occasionally send you some emails, blogs and news covering from investment, to retirement, from protection to Tax saving, from kids education to asset and estate planning etc...
Plus, we cannot change the IRS regulations, all we can do is to change our own investment strategies to minimize our tax responsibilities.
Unlike Wall Street investors, who need a significant amount of fund to open an account, there are some programs available for almost everyone; these programs have very low balance requirement, so that almost everyone would qualify.
Let's rethink about our retirement and investment account.
Should we leave them under the financial risks? Or should we enjoy active money management that can utilize the Wall Street Strategy, and can provide consistent growth with downside protections with little or reduced emotional equations.
I am sure you have the answer.
So I suggest you to sign up a FREE consultation session with me, I will reach out to you within 24-48 hours. In addition, I will occasionally send you some emails, blogs and news from investment to retirement, from protection to Tax-saving, from kids education to asset and estate planning etc...
Founder of BuildWealthwithDuo.com
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