The Retirement Miracle by Patrick Kelly is a well-written book that effectively explains a powerful strategy for retirement planning. Kelly writes in an informal, conversational style that makes the subject matter easy to understand and accessible for people who don’t routinely read books about money or finance.
Shocking Truth About America’s National Debt
The first chapter reveals a little-revealed secret about the U.S. government’s debt obligations, especially pertaining to social security and Medicare. Shockingly, the reality is that the American Government’s fiscal issues are MUCH larger than most people know. We always hear that the national debt is $16 or $17 trillion. The truth is that it is really $76 trillion! This topic is so important, I wrote another complete post about it here. There are only two solutions to this impending disaster:
- Spend less
- Tax more
Chapter 2 ends with the question, “Which one do you think is likely?”
The #1 Principle for Wealth Accumulation
Kelly goes on in Chapter 3 to say “Protect your investment capital at all costs!” Really, he advises to never take losses! Impossible, right? What if there was a way to:
- Capture each year of positive gains, up to a maximum cap
- Never participate in a “negative” year in the market, making your worst possible return 0%
(Hint: there is a way!)
The Somewhat Ugly History Universal Life Insurance
In Chapter 4, The Retirement Miracle gives a quick overview of the first two iterations of Universal Life Insurance were introduced in the 1980’s and 90’s.
- Traditional Universal Life was issued during the highest period of interest rates on record. (The prime rate was double digits from October ’78 to May ’84.) These policies projected great results based on continued high interest rates. When the rates eventually reduced to “normal” levels, the policies crashed and burned.
- Variable Universal Life policies were created to give people the opportunity to invest the insurance policy’s cash values in the stock market. Just as no one really thought about interest rates eventually going down, no one really considered whether or not the stock market could ever go down. When it did, these policies crashed and burned.
Third Time’s a Charm
In Chapter 5, Kelly introduces the third generation of universal life insurance: Indexed Universal Life. This policy combines the strength of the first two (growth potential) while offering peace of mind. The Top 15 characteristics of almost all Index Universal Life policies are then explained.
- Death Benefit: after all, this is life insurance
- Cash Accumulation which can be accessed tax-free up to the amount of paid premium
- Protection Against Market Loss guarantees the policy can NEVER have a negative return due to market losses
- The Annual Reset Provision that locks-in gains in positive years that can NEVER be lost in subsequent market down-turns
- Upside Growth Potential allows the cash value to grow with the indexed market, up to a ceiling amount or “cap”
- Tax-Deferred Growth means you don’t pay taxes until you withdraw more than your principal basis (which is the amount of premiums paid)
- Tax-Free Access to Cash Accumulation through the Policy Loan Provision… that’s right you can get ALL of your cash value back without paying taxes!
- No Minimum Age or Income Require so policies can be purchased for anyone at any age (e.g. children)
- No Mandatory Distribution – unlike IRAs and 401(k)s, which require you to take payments at age 70.5
- Access at Any Age – again unlike “qualified plans” which make you wait until you are 59.5.
- Protection From Lawsuits, Creditors, and Bankruptcy (in many states)
- Continued Investment if Disabled through a Waiver of Premium for Disability, so your policy continues even if you can’t work and earn money
- Does Not Make Social Security Income Taxable – if you have a higher income, your social security benefits become taxable. “Qualified plan” distribution plans count as income, policy loans don’t
- Avoids Probate after death since your designated beneficiary gets the proceeds
- Accurate Return Figures unlike most other financial products
In Chapter 8, Kelly tells the story of “Tom”, who retired on the day he turned 65 on November 20, 2008. On this day, the S&P 500 ended down 52% from its all-time high on October 9, 2007. The index was actually closed at its lowest point in 11.5 years. Tom’s retirement account shrank from $2.5 million to $1.2 million in 13 months. To make matters worse, every dollar that Tom withdraws is taxable.
Accessing Money Tax-Free
Strictly speaking, life insurance cash values grow tax-deferred, not tax-free. If you wanted to cash out your policy, you would have to pay taxes on the difference between the value and the premiums paid. However, insurance companies provide a Policy Loan Provision that allows you to borrow against the cash value of your policy. There’s a big difference between borrow against and borrow from. Borrowing against is leaving your cash value as collateral. With a Fixed Loan or a Wash Loan, you earn the same rate on your collateral that you pay on the loan. For example, if your loan interest is 4%, your collateral would also pay 4%. The net cost of your loan is zero. Since this is a loan, it’s not taxable as income. This is tax-free money. The loan is paid back by deducting the amount from your death benefit when you die. Accordingly:
- You must be sure to not borrow too much!
- You must be sure that the policy stays in force until the insured’s death!
- Be conservative with your projections and be sure the policy is illustrated to age 120 (vs. 90, 95, or 100.)
Never Lose Money!
Chapter 10 is so short, I’ll quote it in full:
With Indexed Universal Life Insurance, you will never lose money due to a market decline … ever! How good is that? (End of chapter. Really!)
So far in this review, I have essentially provided an overview and synopsis of The Retirement Miracle. If you’ve read this far, hopefully you are intrigued by the topic and the potential utilizing it in your financial plan. Kelly finishes the book with seven more chapters giving some more practical illustrations and answering some what-ifs. I strongly recommend this book as an introduction to the power and possibilities of Index Universal Life insurance. You can purchase your own copy of the book here on Amazon.