Secure Your Future with Smart Finance
Market Downside Protection
Market downside protection for annuities and life insurance provides a safeguard against losses in the value of investments due to market downturns. This protection functions differently in insurance products compared to investment accounts like 401(k)s and IRAs.
How It Works
Annuities
- Fixed Annuities: Provide a guaranteed rate of return regardless of market conditions. The insurance company assumes the investment risk, ensuring that the annuity holder receives a consistent income stream.
- Variable Annuities with Riders: Allow investments in sub-accounts that can fluctuate with the market. To protect against downside risk, these annuities offer optional riders like the Guaranteed Minimum Income Benefit (GMIB) or Guaranteed Minimum Accumulation Benefit (GMAB), ensuring a minimum payout even if the underlying investments perform poorly.
- Indexed Annuities: Tie returns to a market index (e.g., S&P 500) but typically offer a guaranteed minimum interest rate, ensuring that the principal is protected even if the index performs poorly. Gains are capped at a certain percentage to balance the insurer's risk.
Life Insurance
- Whole Life Insurance: Offers a guaranteed cash value accumulation component. The insurer manages the investment risk, providing stable growth of the policy's cash value.
- Universal Life Insurance with Secondary Guarantees: Provides a flexible premium structure and the potential for cash value growth based on market performance. Secondary guarantees ensure that the death benefit remains intact as long as certain conditions are met, regardless of market performance.
- Variable Universal Life Insurance with No-Lapse Guarantees: Allows policyholders to invest in various sub-accounts with market exposure. No-lapse guarantees ensure that the policy remains in force even if the market performs poorly, provided certain premium and funding requirements are met.
Insurance vs. Investment Accounts
Insurance Products
Principal Protection: Insurance products often include guarantees to protect the principal and ensure a minimum return, regardless of market conditions.
Income Guarantees: Many annuities provide lifetime income guarantees, which can be particularly valuable in retirement planning.
Death Benefits: Life insurance policies provide a death benefit, offering financial security to beneficiaries.
Investment Accounts (401(k), IRA)
Market Exposure: Investment accounts like 401(k)s and IRAs are directly exposed to market fluctuations. There are no inherent guarantees against market losses, meaning the account value can decrease if investments perform poorly.
Potential for Higher Returns: Because they are directly tied to market performance, these accounts may have the potential for higher returns compared to guaranteed insurance products.
Flexibility: Investment accounts often offer more flexibility in terms of investment choices and strategies, including stocks, bonds, mutual funds, and ETFs.
Comparison
| Feature | Annuities and Life Insurance | 401(k) and IRA |
| Principal Protection | Yes (through guarantees) | No |
| Guaranteed Income | Yes (for annuities) | No |
| Market Exposure | Limited (indexed and variable products) | Direct |
| Potential Returns | Typically lower due to caps and fees | Potentially higher due to direct market exposure |
| Death Benefit | Yes | No |
| Investment Flexibility | Limited (set by insurer) | High (wide range of investment options) |
| Risk | Lower (due to guarantees) | Higher (market-dependent) |
Summary
Insurance products like annuities and life insurance offer market downside protection through various guarantees and riders, ensuring that principal and income are safeguarded against market downturns.
In contrast, investment accounts such as 401(k)s and IRAs do not provide inherent protections against market losses but offer higher potential returns and greater investment flexibility.
Each option serves different financial needs and risk tolerances, and a balanced portfolio often includes a mix of both to achieve overall financial goals.
Social Security
Social Security does not use market downside protection in the same way as private financial products like annuities or life insurance. Instead, it operates on a different principle and structure altogether.
The policy’s cash value belongs to you, and after the first policy year, you may access it at any time for things such as:
How Social Security Works
- Funding Source:
Social Security is funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA). Workers and employers each pay 6.2% of wages up to a certain limit, and self-employed individuals pay 12.4%.
These contributions go into the Social Security Trust Funds, which are used to pay current benefits.
- Trust Funds:
The Social Security program consists of two main trust funds: the Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.
These trust funds are invested in special-issue Treasury securities, which are considered very safe and stable investments backed by the full faith and credit of the U.S. government.
- Benefit Calculation:
Social Security benefits are calculated based on a worker’s earnings history, specifically the highest 35 years of earnings, adjusted for inflation.
The benefit formula is progressive, providing a higher replacement rate for lower earners compared to higher earners.
- Adjustments and Cost-of-Living Adjustments (COLAs):
Benefits are adjusted annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to keep up with inflation.
This ensures that the purchasing power of Social Security benefits is maintained over time.
Stability and Protection
Government Backing:
Social Security benefits are backed by the U.S. government, providing a high degree of security and reliability. The government’s commitment to paying benefits is not directly tied to market performance.
Not Market-Dependent
Social Security funds are not invested in the stock market or other volatile assets. Instead, they are held in secure Treasury securities, which are low-risk and provide predictable returns.
Inflation Protection:
The annual COLAs ensure that Social Security benefits keep pace with inflation, protecting beneficiaries from the eroding effects of rising prices.
Comparison to Market Downside Protection
| Feature | Social Security | Market Downside Protection in Annuities/Life Insurance |
| Market Exposure | None (invested in Treasury securities) | Some (depending on product type) |
| Government Backing | Yes | No (backed by private insurers) |
| Principal Protection | Yes (through Treasury securities) | Yes (through guarantees and riders) |
| Inflation Protection | Yes (through COLAs) | Varies (some products offer inflation protection) |
| Income Guarantee | Yes (lifetime benefits) | Yes (for certain annuities) |
Summary
Social Security provides a stable and reliable source of income for retirees, disabled individuals, and survivors, primarily through its funding mechanism and the government’s backing.
It does not rely on market investments and thus does not need traditional market downside protection.
Instead, its stability comes from its funding through payroll taxes, investment in low-risk Treasury securities, and adjustments for inflation.
This makes Social Security a crucial component of financial security for many Americans, complementing other retirement savings and income strategies.
4% Safe Withdrawal Rate vs 7% Payout Rate
What is a Payout Percentage?
A calculated percentage of your balance is used as an income meant to last for the rest of your life.
| Variable Products | Indexed Products |
| Stock Market Accounts: Any savings product subject to the ups and downs of market volatility. | Typically, Annuities whose growth is tied to a popular stock market index, but is not invested in it. |
| Brokerage Accounts: 401k, Mutual Funds | Annuities, Index Universal Life Insurance (IUL) |
| 4% Withdrawal Rate | 6-8% Payout Percentage |
| Typically calculated towards a 30-year retirement savings account starting at age 65 | Typically calculated towards a Maturity date age (age 99 for annuities & age 120 for life insurance) |
The Safe Withdrawal Rate (SWR) is a guideline used to determine the maximum amount a retiree can withdraw annually from their retirement savings without running out of money over a specified period, typically 30 years.
Key Concepts of Safe Withdrawal Rate (SWR)
4% Rule:
The most commonly cited SWR is the “4% rule,” derived from the “Trinity Study” by three professors at Trinity University in the 1990s.
The study concluded that withdrawing 4% of your retirement portfolio in the first year of retirement and then adjusting that amount for inflation each subsequent year provides a high probability of not depleting your savings over 30 years.
Portfolio Composition:
The 4% rule is based on a portfolio composed of approximately 50-75% stocks and the remainder in bonds. This mix aims to balance growth potential with stability.
Inflation Adjustment:
The withdrawal amount is adjusted annually for inflation. For example, if you withdraw $40,000 from a $1 million portfolio in the first year, and inflation is 2%, you would withdraw $40,800 in the second year.
Market Variability:
The SWR takes into account historical market performance, including periods of economic downturns and recessions. However, it does not guarantee against future market conditions being worse than those historically observed.
Factors affecting SWR
Market Conditions:
Prolonged bear markets or economic recessions can impact the sustainability of the SWR.
Poor market performance early in retirement (sequence of returns risk) can deplete savings more quickly.
Inflation Rates:
Higher-than-expected inflation can erode the purchasing power of withdrawals, necessitating larger withdrawals to maintain the same standard of living.
Longevity:
Increased life expectancy can strain retirement savings. Retirees living longer than 30 years may need to adjust their withdrawal rate to ensure their savings last.
Spending Patterns:
Variations in personal spending needs, such as unexpected medical expenses or lifestyle changes, can impact the sustainability of the SWR.
Tax Considerations:
Withdrawals from tax-deferred accounts (e.g., traditional IRAs and 401(k)s) are subject to income taxes, affecting the net income available.
Tax-efficient withdrawal strategies can help mitigate this impact.
Adjusting the Safe Withdrawal Rate
Given the factors above, some financial advisors recommend more conservative withdrawal rates, particularly in uncertain economic climates.
Alternatives to the 4% rule include:
3.5% Rule:
Some suggest lowering the initial withdrawal rate to 3.5% to provide a greater margin of safety, especially in periods of high market volatility or low expected returns.
Dynamic Withdrawal Strategies:
Adjusting withdrawals based on portfolio performance or other metrics, such as the Guyton-Klinger strategy, allows for flexible withdrawals based on market conditions.
Bucket Strategies:
Dividing retirement savings into different “buckets” for different time periods (e.g., short-term, medium-term, long-term) and adjusting withdrawals based on the performance and purpose of each bucket
Swiss Retirement System
According to article 113 of the Swiss Federal Constitution, “the occupational pension scheme, together with Social Security, enables the insured person to maintain his or her previous lifestyle in an appropriate manner.”
The second pillar of the Swiss retirement system, also known as the occupational pension plan (BVG/LPP), is a mandatory pension scheme designed to complement the first pillar (state pension).
The payout rate of the Swiss second pillar (occupational pension plan) is determined by the conversion rate (Umwandlungssatz in German, taux de conversion in French). This rate is applied to the accumulated retirement savings to calculate the annual pension benefits.
As of 2024, the minimum legal conversion rate for the mandatory portion of the second pillar is 6.8%.
This means that for every $100,000 of accumulated retirement savings, a retiree would receive an annual pension of $6,800.
Our partners can offer a guaranteed lifetime income with payout rates ranging from 6.8% to 8%, similar to the Swiss pension system.
Summary
| Assets: $500,000 | |
| Annual 4% Safe Withdrawal Rate | $20,000/year |
| Annual 7% Payout Rate | $35,000/year |
| Difference per year | $15,000/year |
| Difference after 10 years | $150,000 |
| Difference after 30 years | $450,000 |
Individual
Here are the various types of current retirement accounts:
IRA (Individual Retirement Account)
Traditional IRA: You can contribute pre-tax dollars, which may be tax-deductible. The money grows tax-deferred until you withdraw it in retirement, at which point it is taxed as ordinary income.
Roth IRA: You contribute after-tax dollars (no tax deduction now), but the money grows tax-free, and you can withdraw it tax-free in retirement.
401(k)
This is a retirement savings plan offered by many employers. You contribute pre-tax dollars from your salary, which reduces your taxable income.
The money grows tax-deferred until retirement, when withdrawals are taxed as ordinary income. Employers often match a portion of your contributions.
403(b)
Similar to a 401(k), it’s designed for employees of public schools, certain non-profits, and some ministers.
You contribute pre-tax dollars, and the money grows tax-deferred until withdrawal in retirement. Employers may also match contributions.
457(b)
This is a retirement plan for state and local government employees and some non-profit employees.
Contributions are made with pre-tax dollars, the money grows tax-deferred, and withdrawals are taxed as ordinary income.
One unique feature is that you can access the funds without penalty if you leave your job before retirement age.
Key Differences:
IRA: Opened by individuals, not tied to employers.
401(k) and 403(b): Employer-sponsored, may include employer contributions.
457(b): Specific to government and some non-profit employees, with unique withdrawal rules.
These accounts help you save for retirement in a tax-advantaged way, making it easier to build a nest egg over time.
Tax-Free
Tax-exempt interest is interest income that is not subject to federal income tax. In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer’s qualification for certain other tax breaks.
| Tax Free Accounts |
| Roth IRA |
| Indexed Universal Life Insurance |
| Whole Life Insurance |
Tax Deferred
Tax-deferred status refers to investment earnings—such as interest, dividends, or capital gains—that accumulate tax-free until the investor takes constructive receipt of the profits.
| Tax Deferred Accounts | |
| 401k | 403b |
| 457b | IRA |
| SEP IRA | Simple IRA |
Why don’t Employers offer Pensions anymore?
Employers have largely moved away from traditional pensions due to changes in corporate structures, the complexity of managing pension funds, and a desire to reduce costs and transfer investment risk to employees.
The unpredictability and expense of guaranteeing lifetime payments to retirees have made traditional pensions less attractive to companies.
When did the US move away from Pensions?
The shift away from pensions in the United States began in the 1980s.
This change was prompted by new regulations from the Internal Revenue Service following a provision in the 1978 Revenue Act, which allowed employees to make voluntary, pre-tax contributions to retirement plans.
The intent behind this change was to encourage individuals to take more control over their retirement savings.
Did 401(k) Plans replace Pensions?
Employers transitioned from traditional pensions to 401(k) plans to transfer the responsibility of retirement savings to employees and reduce their long-term financial obligations.
This shift also allowed companies to minimize market risk and increase overall profits by avoiding the guaranteed payouts required by pension plans.
Investing in a Retirement Account
Investing in a retirement account, such as a 401(k) or IRA, offers significant benefits, including tax advantages and the potential for growth. However, there are also several disadvantages, particularly related to market losses and other risks.
Here are some key disadvantages to consider:
Disadvantages of Market Loss for, Investment Retirement Accounts
Market Volatility:
Loss of Principal: Investment accounts are subject to market fluctuations, which can result in a loss of principal. During market downturns, the value of investments can decrease significantly, potentially reducing the retirement savings you have accumulated.
Sequence of Returns Risk: This risk is particularly relevant during retirement when withdrawals begin. Poor market performance early in retirement can deplete the account faster, reducing the overall longevity of the retirement savings.
Emotional Impact:
Stress and Anxiety: Market losses can cause significant emotional stress and anxiety, leading some investors to make hasty decisions, such as selling off investments at a loss or abandoning their long-term strategy.
Recovery Time:
Long Recovery Periods: After significant market losses, it can take a considerable amount of time for investment portfolios to recover. If retirement is approaching or already underway, there may not be enough time to recoup losses.
Income Uncertainty:
Variable Income: Market-dependent accounts can lead to variable income during retirement. This uncertainty can make it difficult to plan and budget for retirement expenses.
Other Risks and Disadvantages
Inflation Risk:
Erosion of Purchasing Power: If the investments in a retirement account do not grow at a rate that outpaces inflation, the purchasing power of the savings can diminish over time, reducing the ability to maintain the same standard of living in retirement.
Investment Risk:
Poor Investment Choices: Selecting inappropriate investments or failing to diversify adequately can lead to suboptimal returns or increased risk. Poor investment decisions can have long-lasting impacts on retirement savings.
Fees and Expenses:
High Fees: Some retirement accounts come with high fees and expenses, including management fees, administrative fees, and fund expense ratios. Over time, these fees can significantly erode the value of the retirement savings.
Our Solutions
Create your Own Pension System
Utilize the Swiss Formula combined with a Death Benefit (Cash Value) to optimize your retirement income. As detailed in the 4% safe withdrawal rate versus 7% payout comparison , this approach allows you to achieve higher income from the same assets.
Key Benefits
Higher Income
By leveraging the Swiss Formula, you can enjoy a higher payout from your assets compared to traditional methods.
Asset Retention
Unlike annuitization, this strategy ensures that you retain your assets, providing financial security and flexibility.
Death Benefit
Your beneficiaries receive a death benefit, ensuring their financial stability.
Cash Value
The accumulated cash value can be used for investments or to cover extraordinary expenses, offering additional liquidity and financial planning options.
Why choose this Approach?
This method combines the security of a traditional pension with the flexibility and benefits of modern financial strategies.
It maximizes your income potential while preserving your wealth, providing a comprehensive solution for your retirement needs.
How We process:
Option #1 Transfer
Moves money from one IRA or Roth IRA to another IRA or Roth IRA at one of the RESO YOUR FINANCES institutions, without liquidating the original account.
Transfers are usually tax-free if no distribution is made to the account holder.
There is no age limitation.
Option #2 Rollover
Involves transmitting retirement assets to an IRA from a different type of account, like a 401(k) or 403(b).
Rolling over a 401(k) involves transferring the funds from your existing 401(k) plan to another retirement account. This process can be done for various reasons, such as changing jobs, seeking better investment options, or consolidating retirement accounts. Here are the different options and scenarios for rolling over a 401(k):
Rollover to an IRA (Individual Retirement Account)
Scenario: You leave your job and want more control over your retirement investments.
Options:
- Traditional IRA: You can roll over your 401(k) funds to a Traditional IRA without paying taxes. This option offers a wider range of investment choices compared to most 401(k) plans.
- Roth IRA: If you choose to roll over to a Roth IRA, you'll have to pay taxes on the rollover amount since Roth IRAs are funded with after-tax dollars. However, future withdrawals in retirement can be tax-free.
Partial Rollover
Scenario: You want to roll over a portion of your 401(k) while leaving the rest in the current plan.
Options:
- Mix and Match: You can roll over part of your 401(k) to an IRA or new employer's plan while keeping the rest in the old plan.
- Benefits: Flexibility to take advantage of different investment opportunities and manage your tax liabilities.
- Considerations: Requires careful planning to manage accounts and avoid unnecessary fees.
In-Service Rollover
If you’re still employed and over 59½ years old, you may have the option to roll over your 401(k) to another retirement account while continuing to work and contribute to your employer’s plan. This option is often referred to as an “in-service rollover” or “in-service distribution.” Here’s how it works and what you should consider:
Eligibility:
- Age Requirement: Most 401(k) plans allow in-service rollovers once you reach the age of 59½. This age threshold is important because it’s the point at which you can take distributions from your 401(k) without incurring a 10% early withdrawal penalty.
- Plan-Specific Rules: Not all 401(k) plans offer in-service rollovers. You'll need to check with your employer or plan administrator to confirm whether your plan allows it and what the specific requirements are.
Options for Rolling Over
Rollover to an IRA:
- Traditional IRA: You can roll over your 401(k) funds to a Traditional IRA without any tax implications. This gives you access to a broader range of investment options and potentially lower fees.
- Roth IRA: Rolling over to a Roth IRA is also an option, but you will owe taxes on the rollover amount since Roth IRAs are funded with after-tax dollars. Future withdrawals from a Roth IRA are tax-free, which could be advantageous in retirement.
- Partial Rollover: You might choose to roll over only a portion of your 401(k) balance, leaving the rest in your employer's plan.
Why Consider an In-Service Rollover?
- Diversification and Investment Control: IRAs typically offer a wider variety of investment options compared to many 401(k) plans. This allows for greater diversification and the ability to tailor your investments to your specific retirement goals.
- Lower Fees: IRAs often come with lower administrative fees than employer-sponsored 401(k) plans, which can result in cost savings over time.
- Tax Planning: If you anticipate being in a lower tax bracket in the future, rolling over to a Roth IRA and paying taxes now might be beneficial.
- Estate Planning: IRAs can offer more flexible beneficiary options than 401(k) plans, which may be important for your estate planning needs.
Option #3 Open a Retirement Savings Account
Opening a retirement savings account is a key step in planning for your financial future. Here’s a guide on how to open different types of retirement accounts, the considerations you should keep in mind, and the steps to take:
Types of Retirement Savings Accounts: Individual Retirement Account (IRA)
Traditional IRA:
- Tax Treatment: Contributions may be tax-deductible, and the account grows tax-deferred. Taxes are paid upon withdrawal during retirement.
- Eligibility: Available to anyone with earned income. There are no age limits to contributions, but there are income limits for tax-deductibility.
Roth IRA:
- Tax Treatment: Contributions are made with after-tax dollars, and the account grows tax-free. Withdrawals during retirement are tax-free.
- Eligibility: Available to individuals within certain income limits. Contributions are limited based on your filing status and modified adjusted gross income (MAGI).
SEP IRA:
- For Self-Employed or Small Business Owners: Allows employers to contribute to employees' retirement savings. The employer can contribute up to 25% of each employee’s compensation.
Business
Employer retirement plans can be categorized as either qualified or non-qualified based on their compliance with the Employee Retirement Income Security Act (ERISA) and the tax benefits they offer. Here’s a simple breakdown of the differences:
Qualified Retirement Plans
These plans meet the requirements of ERISA and the Internal Revenue Code, which provide them with certain tax advantages.
Tax Benefits:
- Contributions are typically made with pre-tax dollars, reducing taxable income.
- The money grows tax-deferred until withdrawal.
- Employers can deduct contributions made to these plans from their taxes.
Regulations and Protections:
Must meet specific requirements regarding eligibility, vesting, benefit accrual, and non-discrimination.
Subject to contribution limits set by the IRS.
Participants are protected under ERISA, which includes fiduciary responsibilities and provides some level of guarantee through the Pension Benefit Guaranty Corporation (PBGC) for defined benefit plans.
Examples:
- 401(k) Plans
- 403(b) Plans
- 457(b) Plans
- Traditional Defined Benefit Pension Plans
Non-Qualified Retirement Plans
These plans do not meet the requirements of ERISA and offer different benefits and features.
Tax Benefits:
Contributions are made with after-tax dollars (no immediate tax deduction).
The growth of investments may be tax-deferred, but the specifics depend on the plan structure.
Regulations and Protections:
Fewer regulations and no requirement to meet ERISA standards.
No protection under ERISA, so these plans generally benefit higher-paid employees and executives.
Not subject to the same contribution limits as qualified plans, allowing for potentially higher contributions.
Examples:
- Deferred Compensation Plans
- Executive Bonus Plans
- Supplemental Executive Retirement Plans (SERPs)
Key Differences:
Tax Treatment: Qualified plans offer immediate tax benefits and tax-deferred growth, while non-qualified plans often do not.
Regulatory Oversight: Qualified plans are heavily regulated under ERISA, providing protections and requiring non-discrimination, while non-qualified plans have more flexibility but less regulatory oversight.
Contribution Limits: Qualified plans have strict contribution limits, while non-qualified plans can allow higher contributions.
Qualified plans are typically designed to benefit a broad range of employees and comply with regulatory requirements, whereas non-qualified plans are often used to provide additional benefits to key employees and executives.
In collaboration with our partners, we offer a range of services to implement a new employee retirement plan or reorganize your existing one.