What better alternatives to the 401k can
be used for retirement?
There is often little talk on Wall-Street about 401k alternatives and alternative retirement plan options. For the most part, most individuals stick to their 401ks, IRAs, or other retirement plans because it’s all they know.
But there are other alternatives to the 401k that are rarely discussed. However, depending on the situation you are in personally, this option may or may not apply.
Let’s look at one specific 401k alternative option, its benefits, and compare it to the 401k to see how effective it can be, and whether or not it will work for you personally.
Looking at 401k Alternatives
Many alternatives to the 401k are simply just new spins on the stock market. Whether it’s an IRA, mutual funds, stocks, or some other alternative, they are usually just the same thing with a slight tweak.
The alternative to 401k plans that we want to take a look at in this article is a completely unique alternative that does not reflect the same market mentality.
For the most part, when someone wants to find an alternative to 401k and government sponsored retirement plans, there are usually three major things they are looking to change.
- Access to money – many who are looking at alternatives don’t like the fact that they cannot access their money until they retire.
- Get out of the market – the ups and downs of Wall-Street can be hard, leaving many looking for alternatives that do not involve the significant market risk.
- Have total control – 401ks and IRAs often lack control and do not allow the owner to make their own investment decisions.
Looking for 401k alternatives is usually driven by one or more of these reasons.
So, let’s look at an alternative investment option called Infinite Banking, how it works, and why it makes such a competitive alternative to 401k and other retirement plans.
What is Infinite Banking?
Infinite Banking is a fancy name for a concept based around cash value whole life insurance.
Many financial “experts” will say, without really studying the numbers, that life insurance makes a bad investment.
The reason they think life insurance is a bad investment is because these so called experts believe that an individual investor can make 15% or more on their money in the stock market.
Now, if this were true, then there wouldn’t be any reason to look for alternatives to 401k plans. If 401ks were earning 15% or more than…
A. No one would be looking for 401k alternatives and…
B. We wouldn’t, in this country, be so worried about an up and coming retirement crisis.
Why? Because we would all be rich. We could simply invest 75k in our 401k, let it sit there, and we would be millionaires in 15-20 years.
It would be that simple.
But the reality is, it isn’t that easy.
Dalbar did a study on the real averages that an investor actually earns on their money.
Over 30 years, that number was 1.9% average interest earnings.
That is incredibly low.
The point is, investing in the market is not easy. 401ks and IRAs often take the biggest hits too. This is why we need a 401k alternative that is unique, and offers us an alternative retirement plan based on sound financial principles.
This is what high cash value whole life insurance has to offer us. Now that we have set the state, let’s take a look at this alternative investment and exactly what it has to offer.
Whole Life Insurance as an Alternative Investment
Whole life insurance, on its own, is not a significantly powerful investment. When experts talk about whole life insurance, they are talking about whole life insurance used as insurance, not as an investment tool.
However, by structuring a whole life insurance policy differently, we can change this product from being used as insurance, and make it work better as an investment.
We call this high cash value life insurance.
The reason is because we optimize the whole life insurance policy for cash growth, not for insurance.
By doing this, we reduce the amount of insurance and increase the growth potential.
The “concept” around using high cash value life insurance is called Infinite Banking. But, suffice it to say this concept is simply using cash value life insurance as a tool to build wealth and grow money.
Let’s look at some of the benefits of cash value life insurance, and then compare this product to the 401k and look at some of the pros and cons of using alternative retirement plans like whole life insurance.
Benefits of Life Insurance as a 401k Alternative
Here are some of the benefits of whole life insurance as a retirement fund.
Tax advantaged growth – The most important piece of any retirement plan is growth. With cash value life insurance we use money that has already been taxed. Our money is able to grow tax-free, and we can keep it tax-free forever if we treat it properly.
Studies have shown that properly structured whole life insurance policies have seen growth at 6% or higher. This is growth without taxes.
Compare this with a 401k, and we would probably need to earn an average of 9% growth in a 401k plan to match a 6% growth in a whole life insurance policy because of taxes.
Safety – Whole life insurance has a no-loss provision and is not tied to the market. We do not have to worry about losing money in a properly structured whole life insurance policy.
This can be the difference between retiring when you plan to, and having one bad year that makes it impossible for you to retire. Safety, especially for older individuals, can make a big difference in retirement potential.
Liquidity – Unlike 401ks and IRAs, whole life insurance is liquid. We can take out money whenever we want, for whatever we want. There are no stipulations based on age or other factors. Life insurance policies are completely liquid and accessible.
No maximum contributions – There are no contribution limits, we can put as much money into a whole life insurance policy as we want, as long as we plan it out correctly. Making one of the strongest 401k alternatives available.
Paying taxes now – Believe it or not, many individuals actually end up paying more in taxes when they retire than if they had just paid the tax at a younger age and invested it in tax-free growth options. Deferring taxes is not always smart, and cash value life insurance allows us to pay taxes now, and invest it tax-free indefinitely.
These are just a few of the benefits that comes with whole life insurance when structured properly. Like any other investment, whole life insurance is not perfect. It works for some, and it doesn’t work for others. Let’s look at some of the ways that cash value life insurance compares to 401k plans and expose a few of the downsides of whole life insurance as an investment tool.
Is Whole Life Insurance a Better Alternative to 401k Plans?
The 401k has its share of benefits that whole life insurance may not be able to compete with. The most important is the company match.
The biggest downside with switching to whole life insurance, or any 401k alternatives, is the company match.
If you are receiving a company match it is going to be hard to compete with a 100% return on your money up-front. However, any money contributed over that company match may be better suited for a different investment option.
This is the most important difference between the 401k and whole life insurance as a 401k alternative.
It is important to understand that cash value life insurance requires time. Life insurance has to be structured properly, and takes a certain amount of patience to get significant growth. This is a long-term strategy, and should be understood as a long-term strategy.
There is no “one size fits all” – Cash value life insurance is not perfect. However, it does offer many benefits that cannot be found in other investment alternatives. Finding the right path for you, and sticking with it, will help you meet your goals and work effectively towards a fulfilling and happy retirement.