How is your retirement planning going? If you’re like nearly half of American families, you have between nothing and $1,000 saved away for retirement. Part of the problem is not knowing where to fit retirement savings into the budget, especially for families living from paycheck to paycheck. The other part is knowing what to do in order to invest that money wisely.
Obviously, the first thing that most people need to deal with, before starting their retirement investment, is getting their budget in line, so that they’ll have money to invest in their retirement. Our free budget planning tool can help with this.
But then comes the big question; should you invest in insurance or equities for your retirement? Basically, all retirement plans fall into one of these two camps. You are either saving your money, through insurance company products or you are buying equities, with the idea that their value will grow. But how to decide which is best for you?
Let me clarify what I’m talking about here, so you’ll have a better understanding. When we’re talking about insurance, there are a number of different products that insurance companies sell, presenting them to their potential customers as part of their retirement savings. These various products include:
For the moment, it doesn’t matter what the difference between these various insurance products are. Just know that if you have one, it is a vehicle to help you save for retirement (arguably the EIUL). They are all sold to the customer (you) with the idea that you make payments into the fund or policy and then when you reach retirement age, the insurance company pays you a certain amount of money each month.
In the equities camp, we actually see a wider group of options, including:
Generally speaking, we’re talking about the stock market here, with all its various permeations. Unless you are an investment professional or you have a background in finance, chances are that you don’t really understand the complexity of the market. That’s why most people who invest in equities as part of their retirement package invest in mutual funds, trusting in investment professionals to manage their investment and make their money grow.
To compare the two of these general categories, we need to look at the pros and cons of each of them. We’re not going to get into the detail of comparing stocks and bonds with each other, but rather just look at the differences between the two groups (Insurance and Equities).
While there are always exceptions when we generalize, within the insurance camp (annuities included), you can find the following benefits:
Equities can have the following benefits:
As with everything in life, the positives have to be weighted in contrast to the negatives. Both insurance and equities have their downside, areas in which they do not provide you with the best investment opportunities. The negatives of insurance include:
The disadvantages of equities, as compared to insurance, are almost exact opposites, showing the biggest difference between the two camps:
In many ways, we can say that the advantages and disadvantages of insurance and equities are polar opposites. Insurance is a much safer investment option, with guaranteed retirement income. But there is generally less opportunity growth. Equities, on the other hand, provide a much greater opportunity for your investments to grow, with a lower overhead cost, but at a much higher risk.
Each individual needs to decide for themselves what will work best for them. Some of us are by nature more cautious with our money and less likely to take risks. For those people, insurance provides security. Others, who are willing to take a risk, for the potential of higher gain, would lean more towards the equity camp.
However, none of us should put all of our investment eggs in one basket. Any sound investment plan requires diversity. In this case, some of your retirement savings should go into insurance, providing you with a stable, secure income, while the rest should go into equities, providing you with a greater profit potential. By splitting your investment dollars in this manner, you provide yourself with a combination of security and the potential for higher retirement income. The combination possibilities are near limitless and can have a huge impact on the final impact of the outcome in retirement (but that's another post).
The other thing that splitting your investment dollar does is limit your losses. Even if you were to lose everything you invested in equities, you would still have the insurance and the income from that. While that might not be as much as it would have been had you only done the insurance, you have to remember that there is also as much potential to gain off of that investment, as there is to lose.
With the greater potential for earnings that the equities provide, a measure of risk is justifiable. You can mitigate that risk to some extent, by carefully selecting equities which provide some stability and slow growth. For retirement savings, slow growth over the long term is better than fast growth, without security.
Where do you have your money now? Is it at risk or is it safe? Is it providing enough growth to meet your retirement needs? How are you maximizing your potential profits, while still retaining some degree of security? Give us your feedback!
All the best,
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