The Next Golden Age is Underway...
It’s happening. The wheels are in motion. People are set up for a ton of good news.
In a recent coaching session, I explained to some whole life insurance agents that the products they’re selling today are setting them up to be the bearers of good news for a decade (or many more) to come. With insurance companies investing in bonds at yields that are double than just a year ago, you can bet that the bottom is in for dividend interest rates. This month, major insurers are announcing their 2023 dividend schedules, and two of the biggest have already held steady. As the coming years unfold and insurers replace low-yield investments in their portfolios, it will be a game of who can show up with the best news in a world full of turmoil and financial uncertainty. These tailwinds mean product illustrations today are most likely conservative.
Furthermore, in 2020, the life insurance industry successfully lobbied Congress to reduce the required valuation rate from 4% to as low as 2% so they could confidently meet guarantees. A coincidental result was some newly-designed policies that allowed for even more efficient tax-advantaged buildup of cash value. Some contracts issued today offer the best deal in decades, and they will probably only be available for a limited time. It's the best-kept secret in personal finance.
We are now in the new golden age for whole life insurance - its most supportive environment in 80 years. Now is the time to transform conservative dollars into an asset that protects one's family, provides liquidity, is guaranteed to grow, will likely outperform due to current economics, and carries tax advantages unlike anything else.
Does the Fed threaten your finances?
In 1981, the 10-Year Treasury peaked at a whopping 15.84% as the Fed fought to battle the high inflation of the 1970s. These rate increases were man-made, and not voted up by some independent market the way stocks are. As inflation rears its ugly head in a way not seen for 40 years, presumably due to the excessively easy (low rate) policies of their past, the Fed has done a complete 180 and indicated it will continue to raise rates until inflation is under control. They’ve done it before, and will do it again. “Don’t fight the Fed,” goes the familiar adage for investors.
Is this time different? Yes. Rates are coming off all-time lows, which wasn’t the case back then. This translates to disproportionately greater impacts to things like bond performance or your mortgage payment. Also, national debts and the amount of leverage households carry against their homes are MUCH higher than back then. The Fed must balance fighting inflation with causing a major economic depression. Inflation is a tax on the poor and middle class, so price stability is vital for society. On the other hand, if markets crash and values of assets decline sharply, businesses will suffer or fail.
As conservative investors fret about the sharp losses in their bonds this year, many are questioning their strategy. Bonds may still be a great form of diversification, but probably less so than in the past unless rates go much higher. And if they do, that path will be painful for bond investors.
What to do? Diversify more. I happen to know a vehicle that can’t go down in value and participates positively as interest rates rise, all while protecting your family and providing guarantees. It’s the best kept secret in financial planning, and a vehicle many investors don’t even know they wish they owned.
BEAT THE BITE OF BONDS
Over the last 41 years, bond investments have had a historic run unlike anything seen before. This is because when interest rates fall, as they consistently did over that time, bond prices rise. Bond kings born during this time were luckier than they were skilled. This cannot be expected to happen again, and the only way it even could would be following a prolonged period of rising rates like we saw in the 60s and 70s. That upward road would be paved with volatility, losses, and meager total returns. Bonds are no longer the great diversifier that they once were. This is not my opinion - this is math.
This year, bond investors got a rude awakening with some of the steepest losses in modern history due to quickly rising rates off of all-time lows. Those saying it’s time to get back into bonds are traders, not long-term investors. While a drop in rates will produce a good year to two, interest rates can only stay low or rise from here over the long run. In the chart below you can see clearly how different a rising or flat rate environment could be going forward.
Whole life, due to the rate environment, is set up for what may be its biggest performance advantage over bonds in 80 years. This is it. This is the time. Historically when rates have risen, whole life dividend interest rates did as well while bonds suffered. If rates stay low, whole life dividends may offer yields unavailable to retail bond investors, all without risk of loss. And with section 7702 changes implemented in 2022, many policies now deliver value more efficiently.
Are you an advisor who helps your clients act strategically? Are you forward-thinking and value-added? Do your clients care about minimizing taxes and risk? A golden era for whole life insurance is already well underway… don’t miss out.
You will be afraid to spend!
...But not as much with a “buffer” asset.
Suffering large market losses early in retirement can be catastrophic. A retiree without other sources of income would need to sell assets at depressed values, locking in losses. In such a case, the portfolio effectively suffers an even deeper loss, which it will struggle to recover from since it needs an even bigger subsequent gain to compensate. This is commonly referred to as “sequence of returns risk,” where automatic selling works against the retiree by selling more shares when prices are low. We want to be doing the opposite and selling high! And the only way to bounce back is to stay invested in risky assets - something few in that position would remain comfortable with.
A strategy is to have a buffer asset - somewhere else to draw income from in a down market like we’re experiencing in 2022. My research below illustrates how safe withdrawal rates improve for every year a retiree can pull income from another reliable place (cash, home equity, life insurance, etc.). In summary, on average, an investor can take about a 10% higher safe withdrawal rate from their investment portfolio for every year they can take “off” following a market downturn. This is an incredible and disproportionate lift. For example, one could have reallocated roughly 5% of their portfolio to get 10% more income from the remaining 95%.
Whole life can’t lose value and has few limitations on when you access it. It therefore provides an outstanding alternate source of income, allows you to stay more fully invested elsewhere, and is set up for its best relative performance environment in over 80 years so you’re not missing out on anything.