Double Your Retirement Income AND Buffer Yourself From Volatility (the 30% target)

A recently published Ernst and Young study compared a variety of different retirement investment strategies and showed some very interesting (and surprising results).

The first of which was the importance of creating a volatility buffer in retirement.

This simply means having 3–4 years of retirement savings in a flexible, tax-free environment, that is NOT dependent on the performance of the market.

So, if the market tanks in the early years of your retirement, you still have a bucket of money that is completely unaffected (this is very valuable)!

Ernst & Young’s study chose a cash value life insurance policy as the most effective and efficient way to buffer yourself from volatile markets and create stability in your retirement portfolio (note: these insurance contracts have to be designed in an optimal way for maximum cash accumulation and for minimum death benefit to keep the costs low).

Creating a volatility buffer is more important than most people realize because it gives you the freedom to NOT have to withdrawal money from your investment portfolio when the market is down.

This is HUGE.

When you take money out of your portfolio when the market is down, it can send your entire portfolio into a downward spiral that you might never be able to recover from…

To combat this risk, (which is called the sequence-of-return risk) experts recommend that you never withdraw more than 4% per year (adjusted for inflation) from your retirement portfolio in retirement (many experts are now recommending as low as 2–3% per year for added safety).

So, if you have $1M saved for retirement you can only take $40k/year out of that portfolio without taking on too much risk of running out of money (which is retirees #1 concern in retirement).

Now, following the 4% rule still only gives your portfolio an 86% chance of lasting your entire lifetime, so there is still risk of running out of money, but it’s substantially mitigated by sticking to the 4% rule (at least for the first 10 years of your retirement).

There are other ways to ensure that you will not run out of money in retirement, which is something I help people with frequently, but that’s a separate blog & video that you can check out here.

This volatility buffer not only gives you the ability to take tax-free distributions when the market is down (allowing your portfolio to recover and preventing you from taking withdrawals from a portfolio when it’s down), but more importantly, it can mathematically allow you to take twice the amount income from your portfolio than you normally would!

That means that instead of taking $40k/year you could take up to $80k/year and NOT increase your risk of running out of money in retirement.

How would you like to be able to take 8% out of your portfolio rather than 4% without any more risk?!

Sounds pretty good to me!

So how do you build up a tax-free bucket of money that is NOT market-dependent?

Ernst & Young crunched the numbers and said that approximately 30% of your retirement savings should be going into some sort of cash value life insurance policy (So for example, if you’re saving $10,000 per year right now you should divert $3000 per year into some sort of cash value insurance policy).

This would give you the 3–4 years’ worth of retirement savings that you need to buffer yourself from market volatility and give you the ability to take double the amount of income from your investments in retirement as compared to a 100% investment-only strategy (this really goes against a lot of people’s conventional wisdom about retirement planning).

Not only does this strategy eliminate market risk, allow you to take more income in retirement, but it is perfectly in alignment with the tax-free retirement strategy that I talk about ALL THE TIME (which includes strategically getting your social security check completely tax-free as well)!