I recently read an article on CNBC that said millennials would need to save a whopping 40% of their income over the next 30 years to be able to live off half their salary in retirement. Reading that, you might be thinking the same thing I was --
Yeah right! Is anyone actually doing that?
And more importantly, how would a financial professional go about encouraging someone, in this case a millennial, to put that much away for retirement?
The more I thought about it, I wondered how someone would respond to being told to put half their salary in their 401(k) or directly in the stock market. Even though as a millennial, they would have quite a few years to ride the waves of the market-- wouldn't they be leaving their life in retirement up to sheer luck?
Understanding your target market
Before we go any further, we need to know a little more about millennials: a potential target market. One of the most important aspects of selling a product is knowing your customer, right?
First off, show of hands: who still thinks all millennials are young 20-somethings? Ok, newsflash — they’ve gotten older along with the rest of us. In 2019, millennials are between the ages of 23 and 38.
According to Pew Research, millennials are the largest living generation, even surpassing Baby Boomers, with a population of 79.8 million in 2016. And millennial households are earning more money than ever: a median income of $69,000.
Millennials aren't working for a pension and many are interested in more work-life balance where they trade the clock-in, clock-out, 9-5 jobs for more flexible work schedules.
Pew Research Center also indicates that many are raising families. All told, Millennial women (those born from 1981 to 1996) accounted for 82% of U.S. births in 2016. At the same time, Millennials made up 29% of the adult U.S. population and more than a third of the U.S. workforce (35%).
Ok, that gives us at least a little background on our prospective clients. Now, let’s consider potential pain points they may be experiencing…
A recent T. Rowe Price survey revealed that "about a third of millennials say they expect to retire between the ages of 65 and 69."
Pretty typical to what we see with Baby Boomers.
"However, 43% of millennials say they actually expect to retire earlier."
That definitely puts a ticking time bomb on things, huh?
Millennials' roadblocks to saving for retirement
So, if retiring early is their goal -- what could potentially stand in the way of that?
According to a report from The Center of Retirement Research at Boston College, the growth of the gig economy may be impacting the number of millennials who have 401(k) and other company-sponsored retirement plans. The report notes that fewer than 40% are taking part in employer plans.
Ouch.
So, not only are they not saving 40% of their salary, more than half of millennials aren't contributing to a 401(k) at all. (Not picking on millennials, just establishing a better understanding of our prospective clients.)
Besides the gig economy, there are a couple of other reasons that millennials might be less inclined to participate in a company's 401(k) plan or not contribute AS MUCH as they could:
1. Many could be changing jobs before they would be fully vested in a plan or before they receive any kind of company match.
2. They could be hesitant to get involved with the stock market having seen their parents lose a significant portion of their retirement savings during The Great Recession.
It's true that these could be viewed as two valid reasons for not wanting to participate. And at this point, you may be thinking OK, there are probably quite a few millennials who aren't saving enough money for retirement and at this rate, could be facing the possibility they won't achieve their financial goals at 65, let alone earlier.
So, how to do I help and where does IUL come in?
We believe there's an opportunity for millennials to use an Indexed Universal Life insurance policy in their retirement income strategy.
If you sell the product, I invite you to stick with me a little longer while I lay out the argument for it.
Why millennials may want a fixed indexed universal life (IUL) insurance policy
Many people are told that life insurance is ONLY good for a death benefit in the event of their passing. And term life is often marketed to young professionals with families for this reason. And if someone is looking for a lower cost option, this is more affordable coverage.
On the other hand, buying term life insurance means paying for monthly premiums for the duration of the policy and not having anything to show for it when you don't die.
Alternatively, an IUL is permanent life insurance, which could be used during a person's lifetime AND pays a death benefit. Plus, once approved for life insurance, the coverage doesn't end unless the policy is terminated or lapses.
Therefore, one could argue that permanent cash value life insurance is more of an asset.
Robert Kiyosaki, author of Rich Dad, Poor Dad, defines an asset as "something that puts money in your pocket."
I'd say a fixed indexed universal life policy does exactly that because of the cash value accumulation that can grow over time. However, if we call it an "asset" we need to clarify that it wouldn't be considered an "asset" when applying for financial aid, for example.
This is especially important to note when working with millennials who may be doubly interested in this fact. Because they are at an age where they could be putting themselves through school OR preparing to send their own children to college.
The vitamin and water strategy for retirement income
Some financial professionals may tell their clients to invest in the market and diversify their portfolio among different stocks. However, is diversifying within the same asset class really diversifying? It certainly wouldn't protect an investor from systemic risk (like we saw with people in 2008 who had retirement plans subjected to the volatility of the market).
Please note: We aren't advising anyone NOT to participate in a 401(k) because that may be someone's best option. And we're NOT saying to exclude stocks from the portfolio because owning stocks allows someone to support and invest in businesses they love.
What we ARE saying is adding IUL to the mix might be a good idea too.
Here's why:
For one, relying on one source for retirement income needs is generally not in anyone's best interest. 401(k)s, Social Security, stocks - none of the potential income sources were designed to be the sole provider in retirement.
401(k) plans were meant to be another option besides the pension plan because it was more expensive for companies and more unpredictable to fund. Even “‘[Many early backers of the 401(k)] say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days,’ The Wall Street Journal reports.”
And: “Social Security was never designed to be a primary income source. According to the SSA, it's really a supplementary income that's expected to replace about 40% of the average worker's wages during retirement.”
Thinking that one retirement income source will make for a comfortable retirement is like popping a multivitamin with a glass of water and expecting to be healthy. Vitamins are meant as a supplement to nutritious meals, exercise, regular check-ups, etc. Just as traditional stock accounts, Social Security, annuities, life insurance, amongst others, makes for a healthier retirement.
Should your millennial clients establish multiple sources for retirement income?
It depends...
When you read that “the economists at investing giant Vanguard predict that, over the next 10 years, annual U.S. stock market returns will likely average 3% to 5%. When you factor in inflation — which, luckily, Vanguard predicts will be below 2% — the real rate of return is expected to be under 3%,” you can see the benefit of a more conservative, predictable option like an insurance policy.
Let’s look at a few reasons why an IUL may be an option to consider:
- Because a policyowner is not directly invested in the market with an indexed universal life policy, they are insulated from market volatility. And yet, they’re still participating in interest and index growth up to a specified cap.
- An indexed universal life policy has tax advantages. There may be instances when withdrawals or loans could be taxable, such as with a MEC policy where gains are taxed when distributed. But a properly structured IUL provides multiple tax advantages, such as the ability to take loans generally without being taxed and access the money pre-59 ½ without causing a taxable event or a penalty from the IRS. This could be especially appealing to millennials who say they’re looking to retire earlier than 65.
On the other hand, accessing traditional stock accounts is a taxable event. And if tax rates go up, as many expect they will, it would be beneficial to pay taxes now (at a lower tax rate) and put after-tax money into a life insurance policy versus putting pre-tax money into a plan to pay taxes later when money is withdrawn (and the person may be at a higher tax rate).
The other tax advantage in a life insurance policy? The income tax free death benefit to beneficiaries (less any unpaid loans, which may be taxable). -
For millennials, now might be the best time health-wise to purchase a life insurance policy. Provided they can pass financial and health underwriting, the cost of insurance is the lowest it will be since costs increase as we age and our health deteriorates.
Sure, one objection to life insurance could be the costs, which can include administration fees, insurance costs, expense charges, and surrender charges. However, it’s important to remember that this also provides for a death benefit over and above just the straight account value that’s paid out in other vehicles.
- For the affluent millennial, an IUL does not have the income restrictions nor maximum contribution limits. In 2019, the maximum contribution to a 401(k) is $19,000 per year for those under 50, with an annual compensation limit and for a Traditional or Roth IRA it’s $6,000 if under age 50 with an annual compensation limit dependent on how you file your taxes (see irs.gov for additional information).
With the majority (53%) of millennials aspiring to become millionaires, according to survey conducted by TD Ameritrade, an IUL would allow them to max fund an indexed universal life policy (when structured properly) and leave a legacy by passing along an income tax free death benefit to their heirs. When we say "structured properly," we mean NOT set up as a modified endowment contract (MEC). When a client signs a life insurance illustration, first, they should understand that the projections are based on the funding pattern laid out in the illustration. Additionally, they should know whether or not the policy is being issued as a MEC. If a client is looking for potential distributions, they would want to carefully consider choosing a MEC as most would try to avoid that if income distributions are their goal.
You may not typically think of millennials as the ideal market for a permanent life insurance product like an IUL, but given their goals and current state of retirement savings, I would encourage you to explore this option with millennial prospects and clients as a way to supplement their retirement income needs.
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