Written By — David Shafer
Academics in the 1950s and 60s started defining investment risk as total variation of returns. I think that is fine, as far as it goes. But for some reason, when Wall Street started selling mutual funds they forgot to tell their customers about variation of return risk. As you know if you have been reading my posts, one of the positive attributes of EIULs is they reduce variation by not going below 0 and capping the gains at 15% [current Minnesota Life cap].
Why is this so important?
Two reasons. First negative numbers hurt more than positive numbers help. And second, large losses take time [sometimes large stretches] to overcome. Now the assumption is in your accumulation phase most people have that time. But, in real life it doesn’t work that way. For example, last year 11% of all those with 401Ks took a loan out against their 401K and the total percentage of folks with 401K loans went above 22%. That doesn’t count the folks that took out cash and paid the penalty or totally closed their 401Ks! In real life, folks have to access their retirement accounts for a variety of financial crisis.
Now here comes the kicker: They are most likely to access their 401K money when the market is in crisis too, which is what those 22% of folks with loans did! So they are taking out their money at the same time the market has lowered the value of their retirement cash substantially. This is one of the reasons that people fail to accumulate significant funds in their mutual funded retirement accounts. Now it will take forever to get back up to the same account value they had before the market tanked and they accessed their funds.
Now let’s talk about the retirement years when you are accessing your accounts routinely. The market goes negative about every 3 years. At least once a decade it has a major negative year [greater than 25% drop]. What happens when you are selling for retirement income and your value goes down 25%? Well, let’s just say you are not a happy camper. And odd’s are that will happen at least once right before or right after you are retired! In fact the odds are greater than 50% for a major downturn within 3 years [before or after] retirement. And greater than 95% within 7 years of retirement! By the way there is a term for that risk; sequence of return risk! Any mutual fund or financial planner sales people tell you about sequence of return risk?
EIULs significantly reduce that risk. Another reason to consider EIULs along with your real estate investing!
BawldGuy Here: Understand the content of this incredible post and you’ll have saved yourself much grief in the future — and may well rescue your own retirement from the abyss.
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About David Shafer
This is all too bad. It is truly unfortunate that so many have accessed their 401K in order to stay afloat, or out of fear. I can imagine the mind set of the older generations and that they have put in so much effort to save for retirement, only to find hard times at their doorstep. Certainly a lesson learned and hopefully one that younger generations can focus on as they begin to save for their own future.