The Volatility Buffer Strategy

Thank you for registering for the Volatility Buffer Toolkit. You’ve taken the first step in protecting your retirement savings.

Inside this guide, you’ll learn how to improve your investment returns, earn tax-advantages like the wealthy, and hedge against market volatility.

The result?

You’ll achieve your retirement dreams, generate income for life—even retire early.

To get started, explore each of the sections in order and dive into their corresponding resources. Once you’ve completed the course, schedule your complimentary consultation with a Paradigm Life Wealth Strategist to start building your own customized volatility buffer.

Table of Contents

1. What is a Volatility Buffer?
   
2. Tax advantages of a Volatility Buffer
   
3. The 4% rule
   
4. Sequence of Returns Risk
   
5. How to reduce investment risk
   
6. How to increase income in retirement
   
7. The Wealth Maximization Account
   
8. Exploring Annuities
   
9. Case studies
   
10. Creating your own Volatility Buffer

What is a Volatility Buffer Strategy?

As pensions increasingly become ancient history, today’s retirees are more dependent than ever on equities (i.e. 401(k)s, IRAs, brokerage accounts, etc.) for income in retirement.

The challenge of taking income from an equities portfolio is complicated by two uncertainties:

1. Market volatility
2. Mortality

Because none of us know exactly how long we will live or what the markets will do in the future, we’re left exposed to economic downturns and the possibility of outliving our retirement savings.

Fortunately there is a better way to hedge against economic downturn—the Volatility Buffer.

The Volatility Buffer is a pool of capital insulated from market volatility that you can withdraw from in years following negative market returns. The ability to buffer against market volatility is a vital element of an effective retirement income plan. The tool ideally suited for the strategy is a whole life insurance policy structured for maximum cash growth.

Life insurance products from mutual insurance companies aren’t correlated in the same asset class as qualified retirement funds like 401(k)s and IRAs. The market doesn’t influence mutual insurance companies the same way it influences market-based funds. A bad day on Wall Street won’t hurt the value of your mutual insurance-based assets.

Mutual insurance companies can protect and grow your wealth in multiple ways, including guaranteed interest and dividends. In fact, the top-rated mutual companies Paradigm Life utilizes have consistently paid out dividends for nearly 200 years, even during the Great Depression, the Great Recession, and during pandemics.

Tax advantages of a Volatility Buffer

The 4% rule

How much can you spend in retirement without running out of money?

Typical financial advisors use the 4% Rule as a guideline to gauge the longevity of your retirement portfolio. It’s based on the Monte Carlo simulation, which determines the probability of being able to take continuous withdrawals from your portfolio at regular intervals without your balance hitting zero before you die. The 4% Rule states that you can withdraw 4% of your retirement funds each year and not have to worry about outliving your wealth.

For example: If you have a 401(k) or IRA with $1 million in retirement savings, you could take out $40,000, or 4%, per year and have about an 80% chance of not outliving your retirement fund.

But what if the 4% Rule is wrong? 

 

According to retirement expert Wade Pfau, professor of retirement income and co-director of The New York Life Center for Retirement Income at The American College of Financial Services, the effect of the coronavirus and recent changes in the market have made the 4% rule obsolete. A better estimate for how much you can withdraw annually in retirement is 2.4%. Read professor Pfau’s recent article here. 

 

At 2.4%, if you have a 401(k) or IRA with $1 million in retirement savings, you would only be able to withdraw $24,000 per year in order to not outlive your wealth. 

 

Fortunately, mutual life insurance products can provide alternative sources of income to help you enjoy a more comfortable and financially secure retirement while buffering against market volatility. 

 

When it comes to funding your retirement, it’s not just about how much you can spend each year. When you take a distribution from your retirement fund also matters.

 

 

Sequence Of Returns risk

Entering retirement in a down market and taking distributions from your qualified plan can result in a much smaller retirement portfolio in the long run. It’s called the Sequence of Returns Risk. If your portfolio declines in value early in retirement, the impact of the decline is made much worse when you take an income withdrawal. The withdrawal following a negative market year impacts the ability of the portfolio to recover in a subsequently positive market year(s).

What if you could avoid taking distributions during years the market is down?

A Volatility Buffer gives you the option to alternatively fund your retirement in order to make your 401(k) or IRA last as long as possible while providing you the greatest returns.

Carefully look at the following three tables to see how using a Volatility Buffer increases your overall wealth in retirement:

The last table highlights the tax advantages offered with a Volatility Buffer consisting of whole life insurance. Simply by shifting assets into a Wealth Maximization Account and utilizing the tax advantages of this type of asset, this client was able to earn an additional $9,170,932 for retirement.

You don’t have to be a millionaire to build and utilize a Volatility Buffer with whole life insurance. This financial tool can be created at any age, any financial stage, and for any amount of income. It is a completely customizable product to help you reach your retirement goals, whatever they may be.

 

How to reduce investment risk with a Volatility Buffer

By now, you should have a basic understanding of the benefits of a Volatility Buffer for growing and protecting your retirement income.

In this section, you can watch and listen to learn more about how a Volatility Buffer works, exactly why you need a Volatility Buffer, and where it fits in your overall financial strategy.

The following Hierarchy of Wealth shows you how to build a solid financial foundation that puts you in control of your wealth while reducing investment risk.

 

How to increase income in retirement

Creating a Volatility Buffer with whole life insurance inside a Wealth Maximization Account is a proven strategy for financial freedom. It has been utilized by the wealthy 1% for hundreds of years, including families like the Rockefellers, Walt Disney, and by large corporations.

But a Wealth Maximization Account isn’t the only way to generate more income in retirement.

An annuity from a mutual life insurance company can also play a key role in growing and protecting your wealth to hedge against the next economic downturn.

So how do you know which financial products are best for your situation?

Start by taking this simple flowchart quiz:

Got your answer?

In the next two sections, we’ll break down the Wealth Maximization Account, Fixed Indexed Annuities, and Single Premium Immediate Annuities to help you get a clearer picture of your path to financial freedom.

 

The Wealth Maximization Account™

A Wealth Maximization Account is a uniquely structured, dividend-paying whole life insurance policy that uses a Paid-Up Additions rider to rapidly grow your wealth.

Typical whole life insurance focuses on the death benefit of the policy as its main function. A Wealth Maximization Account is NOT typical whole life insurance. It focuses on the cash value of the policy as its main function.

The primary purpose of a Wealth Maximization Account is to grow and protect your wealth, free of market risk. Use funds from your Wealth Maximization Account to fund retirement when the market is down and taxes are high. Use funds from your qualified retirement plan with the market is up and taxes are low.

Here are some of the main benefits of a Wealth Maximization Account:

CERTAINTY
A guaranteed rate of return takes the guesswork out of your portfolio

CONTROL
Reduced tax liability and increased asset protection keep your wealth in your hands.

LIQUIDITY
Access your wealth when you need it, regardless of age, without penalties.

PROTECTION
Rest easy knowing market volatility can’t touch your financial foundation.

CASH FLOW
Enjoy retirement income you don’t have to worry about outliving.

LEGACY
Pass along wealth the same way the Rockefellers have.

 

Exploring Annuities

Annuities are a great addition to most retirement plans. Depending on the type of annuity you and your Wealth Strategist choose, you can begin receiving immediate payments or you can defer them to a later date, typically age 70.

Annuities work by increasing cash flow in retirement. You pay a sum to purchase your annuity through a mutual life insurance company, and the life insurance company guarantees you income for life. You will receive payments until the day you die, regardless of how much money you have in your retirement portfolio.

There are multiple types of annuities you can utilize for guaranteed retirement income.

If you don’t need immediate annuity payouts, a Fixed Indexed Annuity can be a great choice. With this type of annuity, you have a guaranteed payout that can increase in value based on market performance. However, the payout amount won’t decrease during a market downturn. You can enjoy the protection a mutual insurance company offers while benefiting from market upswings.

This graph illustrates the concept:

If you need immediate annuity payouts, a Single Premium Immediate Annuity (SPIA) immediately boosts your retirement income.

Regardless of which type of annuity you choose, it is recommended that you utilize both an annuity and a Wealth Maximization Account to hedge against economic downturn. Using both life insurance tools creates a strategy called the Covered Asset, where you’re protected financially if you outlive your retirement income and your beneficiaries are protected financially if you die too soon.

 

 

Case studies

Now that you understand the Volatility Buffer and Covered Asset strategies, it’s time to explore the financial illustrations of each strategy. Check out the overview of each client, then use the links to dive into the details for each policy type.

Client A

Client A is a 60-year-old female concerned that her retirement portfolio won’t provide her enough income to last her lifetime. After speaking with her Wealth Strategist, it was determined that a Fixed Indexed Annuity will provide her with the additional income she needs.

Client A’s one-time premium payment is $150,000.

Not only will she receive guaranteed payouts starting at age 70, she will be able to benefit from market upswings with the potential of nearly tripling her investment. The following illustrations show investment gains over 30 years, from the date of annuity purchase (age 60) to age 90.

Client B

Client B is a 35-year-old male concerned about the volatility of the market. He is looking for a non-correlated option to grow and protect his wealth so he can retire early and achieve financial freedom faster. After speaking with a Wealth Strategist, it was determined that a Wealth Maximization Account with additional Paid-Up Additions riders will help him reach his goals faster.

Client B’s annual premium payment is $30,000, which he will pay until age 65.

With a lifetime premium amount of $900,000 Client B is guaranteed over $2 million in both cash value and death benefit by age 90. Once potential dividends are factored in, he could have over $7.5 million in cash value and a death benefit of nearly $10 million—quite a return on $900,000!

 

Setting up a Volatility Buffer with Paradigm Life

The expert Wealth Strategists at Paradigm Life not only understand how a Volatility Buffer works, they own Wealth Maximization Accounts themselves and have first-hand experience using whole life insurance as a financial foundation. They’ve worked with thousands of clients to set up participating whole life policies properly structured to help them reach their financial goals.

Get free guidance on how to set up yours. 

Schedule a free time to talk with a Paradigm Life Wealth Strategist today to find the right whole life insurance policy to help you achieve your financial goals.