Given the substantial blow the economy has taken as a result of the COVID-19 Pandemic, as well as economic concerns stemming from the 2020 Presidential Election, many business owners are greatly concerned about their financial stability and, especially, retirement savings.
First, let's discuss how far behind many business owners (and other high-net-worth individuals) are on their retirement goals. Then we can go over a strategy that could help individuals catch up to their long-term savings.
Why Aren't They Saving?
If you have a job with a company that offers retirement savings, you are in luck. You sign up (or you might be enrolled automatically) and then contribute through your paycheck. You don’t have to do a thing. However, many working Americans are on their own in this aspect. Last year about 16 million Americans were self-employed, according the Bureau of Labor Statistics.
But when you’re an independent entrepreneur or a business owner yourself, you have to come up with your own plan.
Studies show that the struggles of retirement planning aren’t limited to just the middle class; even high net worth individuals face uncertainty when it comes to sustaining their wealth. According to the 2018 U.S. Trust Insights on Wealth and Worth study, most high net worth individuals lack a retirement plan.
The problem business owners face is: most of them view their business as their retirement plan. But, what an owner wants for their business and what they get are rarely the same. If the owner’s business is not structured and protected properly, there may be unforeseen factors that may cause the business to face financial difficulties.
One essential component of high-net-worth wealth management is understanding which options are available and appropriate when it comes to tax-advantaged retirement accounts. High net worth individuals may have more complicated financial situations than the average investor, meaning traditional savings and investment vehicles alone may not be ideal for preserving and growing their wealth.
Given the COVID-19 Pandemic and 2020 Presidential Election, we are seeing increased volatility in all economies.
Those planning for retirement may be uneasy about exposing their finances to these situations. While the market is at risk, cash value life insurance policies (more specifically indexed universal life policies) may not be. Indexed universal life insurance offers flexibility and could give you higher interest rates than other kinds of life insurance.
Cash Value Life Insurance allows you to participate in part of a market’s upside, but protects your downside risk. Although the crediting rate of a cash value life policy is usually subject to a cap on its return, unlike the market, there is a floor through which the policy’s crediting rate cannot fall. As a result, your policy gets to participate in the market upside but the risk during a downturn is mitigated. This adds a stabilizing element to your policy.
Future Tax Rates
Let me ask you this: Do you think income tax rates are going to change? Are taxes going to go down?
Tax rates vary at different points and times. Most people feel that the income tax rates are high today and are unsure of what the will be in the future.
Despite the general feeling that taxes are high now, we are actually experiencing one of the lowest marginal tax environments in American history, according to The Tax Policy Center.
Considering this (as well as the fact that Biden has stated he will increase taxes for high-income earners), we can only assume tax rates will go up from here.
Use Other People's Money[Leverage]
Interest rates have been coming down since the 1980s and have reached a level where it’s harder to get much lower. The effective Fed Funds rate is at 0% – 0.25% and the 10-year yield is at under 0.7% in 2020. These are record low rates.
Re-Investing in Their Business
Business owners know that re-investing in their business is critical. Its the only way any company can grow and and have the ability to take in additional resources and capital. So many are using their excess income to reinvest in their own business rather than the retirement.
Business Owners Understand Leverage
As you know, leverage involves using capital (assets), usually cash from loans to fund company growth and development in a similar way, through the purchase of assets. Such growth could not be accomplished without the benefit of additional funds gained through leverage.
Our Solution: R²
Our solution leverages the current tax environment and current interest rates. Because interest rates are so low right now we can actually leverage a cash value life insurance policy via loan from a financial institution. The low interest rate can be overcome easily via policy performance, loans are used to pay premiums and grow the cash values.
R² is an optimized retirement plan that utilizes a Cash Value life insurance contract combined with bank financing to maximize retirement income on a taxed advantaged basis. R² provides as much as a 30% or more increase in income per year as compared with traditional retirement plans.
Follow the link below to find out how we can mitigate your clients' retirement concerns: