Why You Might Need The Insurance Company
Written by: Greg Marchand of Marchand Financial Services, Inc
I don’t know if I agree with Jack Nicholson. I think you can handle the truth, I just don’t think you can handle the risk. We should all understand what the goal is. For me and my clients, the goal tends to be, having adequate income when they quit working. To sustain the type of lifestyle they desire. I find that, if we are too anxious about reaching that objective we may be willing to believe things that just sound good. Yes, making 8 or 10% rate of return does sound good. But, how realistic is it?
I like to tell my clients not to count on things you can’t count on. You cannot count on the stock market, the real estate market, future tax rates, inflation, or your own longevity. The only way I know to feel more secure, is to count on what you can count on. I don’t hear people factor in the probability of realizing their objectives. For example, if I have a 90% of achieving a 4% rate of return, and only a 40% of getting an 8% rate of return. Which would be better suited for the “important” money in my life. And the 4% will ultimately get us to the same place, it will just take longer. Perhaps we need to be a little more patient!
We should realize there is a difference between average rate of return and actual rate of return. If you earned 50% in year one, and lost 30% in year two; the average return is 10% (50-30 equals 20/2= 10). But if you had $100,000 invested that would have grown to $150,000, but then losing 30% is a loss of $45,000. So you only made about 2.5% per year (actual return). And, let’s say it took 2 years to earn the 50% but only one year to lose the 30%, and during the 3 years you withdrew 5% per year (of your original investment). Not much point in determining exactly what your account is worth, I just know it is less than what you started with.
You see, if over time your investment doubled and then you lose 20%. You didn’t just lose 20% on what you earned; you lost 20% on what you invested. Better said, you didn’t just lose part of the extra money, you lost a portion of what you started with. Salary deferral is money you earn or receive now, and put away to spend later. Would you go to work if your employer said he might or might not pay you?
Markets will go up when the majority of people are buying and bidding up the price. Markets will go down when the majority are selling.
When I use to go snow skiing. I can recall the shuttles were usually jam packed in the morning, going from the parking lot to the mountain. But, if I needed to go back to the parking lot, I might be the only person on the bus. Now, at the end of the day it was just the opposite. There was very little you could say or do to change that phenomenon. Same is true with the stock market.
The insurance companies can collect a lot of money from many people. They can invest it for you, or let you invest the majority of it. But, by being part of that community you can get some guarantees on how long your money will last, and how much. They can hedge, reinsure, or use other sophisticated risk management strategies. Things, that you and I, cannot possibly achieve on our own.
Let me leave you with this analogy:
Say your objective was to take a train from Boston, Massachusetts, to Los Angeles, California. Now you could take a high speed train, but that train often passed through hubs and switched directions. And, you didn’t know until after you switched directions again, when it was going to be redirected. So instead of going true west, you spend much of the time going in the wrong direction, even backwards. What if there are two other choices? The first one moved in the same direction all the time, it never ever turned, but it went extremely slow (fixed annuity). The third option was a train that again always headed the right direction (west in this case), but could travel pretty fast at times, and at other times very slow, or even stopping. But, never coming off the tracks, and never heading the wrong way. You see, I sell tickets to all three trains. The question is: which train is right for you?
My name is Greg Marchand. I have a series 7 securities license. I own an independent firm in Massachusetts. I have over 24 years experience directly with clients. I am a CLU, CHFC, and CFP®. I have three children, all boys. If I’m not working, and not playing, then I’m thinking about how I can be more effective for my clients. Contact me directly to schedule your free evaluation: (508)793-7841 or greg@marchandfinancial.com.
*Guarantees discussed are based on the claims paying ability of the issuing insurance company.
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