top of page

Strategies for a Balance between Steady Gain and Risk Control

 

Family Financial Research & Innovation Institute (FFRII)
August 25, 2024​

BALANCE YOUR LIFE,
SECURE YOUR FUTURE.

The Hidden Loss of Keeping Money in Savings Accounts, Checking Accounts, and CDs

 

Let's face the reality: your money rots in the saving accounts, checking accounts, and certificates of deposit (CD) accounts. While these saving vehicles are commonly used financial tools, keeping large amounts of money in these accounts can often result in a phenomenon many investors overlook: money can "rot" or lose value over time. 

​

Savings accounts offer a safe place to store money and provide a modest interest rate. However, these rates are often significantly lower than inflation rates. For example, from 2020 to July of 2025, the average annual inflation rate was 4.24%. During the same period, the saving accounts with the most competitive rates, such as the American Express High Yield Saving Account, have an average Annual Percentage Yield (APY) of around 2.31%. The average APY of national saving accounts were much below 0.5% prior to COVID-19. In other words, the purchasing power of your money decreases even though the nominal amount in your account increases. 

​

This situation is similar in the CD accounts. The average APY of national 5-year CD was about 0.3%-1.5% in 2020, 0.3%-1.0% in 2021, 2.0%-3.5% in 2022, 3.8%-5.5% in 2023, and 4.5%-6% in 2024. This averages an APY of 2.76% during 2020-2024, still well below the average inflation rate. The national average 5-year CD rate never went above 3.0% from 2009 to 2019. In addition, CDs typically come with penalties for early withdrawal, which can deter access to funds if needed before the term ends (matures). This lack of liquidity can be a significant drawback, especially during economic downturns or personal financial emergencies.

​​

We don't have to spend too much time talking about the checking account. Zero or Minimal Interest: Checking accounts typically offer no interest or very minimal interest rates. The primary purpose of these accounts is to facilitate transactions (which is why they are called checking accounts), not to grow your savings. As a result, money in a checking account doesn't earn significant returns, contributing to its gradual erosion in value due to inflation. It is universally suggested by financial advisors that family should only keep two months of living expense plus a 30% cushion in checking accounts, and put away the rest for better gain. In addition, the high accessibility of funds in checking accounts can lead to overspending. Because money is easily accessible, individuals may be tempted to use it for unnecessary purchases rather than investing it in higher-yielding opportunities.

​

The opportunity cost of keeping money in low-yield accounts can be substantial. Investment and saving strategies offered by our providers, such as Indexed Universal Life (IUL), Variable Universal Life (VUL), Fixed Indexed Annuities, and a balanced portfolio, can provide the potential for greater long-term growth. Over extended periods, the difference in returns between traditional savings methods (e.g., checking, saving, and CD accounts) and higher-yielding investments becomes more pronounced. â€‹â€‹

Most retail investor or traders lose money

​

Investing in the stock market is often seen as a path to financial growth, but data suggests that many retail investors—individuals buying and selling securities for personal accounts—end up losing money. â€‹Trading individual stocks can be exhilarating, especially when it results in significant short-term gains. However, maintaining consistent profitability is extremely challenging.

 

According to a study conducted by the University of California, Berkeley, 75% of individuals attempting to trade stocks professionally give up within two years, with 80% of their trades being unprofitable [1]. ​A notable study by Dalbar, Inc., a financial services market research firm, examines investor behavior and performance. Their annual report, "Quantitative Analysis of Investor Behavior," reveals that over a 20-year period, the average retail investor’s annualized return was significantly lower than the return of the S&P 500 index. For example, in the 2022 report, Dalbar found that the average retail investor's return was 2.4% compared to the S&P 500's 7.6% annualized return over the same period. The Senior Vice President of Crews Bank & Trust reported that the average return for 20-years ending in 2015 was 8.2% for the S&P 500, while the average investor only earned 2.1% [2]. Studies indicate that inadequate research, emotional biases, high trading costs, difficulty in market timing, lack of diversification, impatience, and limited access to professional advice contribute to suboptimal investment outcomes. Moreover, individual traders operating through taxable accounts frequently incur short-term capital gains, which are taxed at higher rates compared to long-term capital gains. ​​​​

The striking but unaware opportunity cost

​

Many individual investors may have the mind of hitting a 'jackpot' stock to become rich in a short time. This is not happening for majority of investors who don't have decades of experience in trading. However, for most people the time spent on goofing around in the stock market results in a substantial opportunity cost. The same situation applies to the families who cannot decide what high-yield investment strategies to use, but end up putting their hard-earned money in the saving or CD account for years and even decades. To illustrate the opportunity cost, consider two hypothetical scenarios based on the statistics cited above:

​

  • Scenario A: An investor actively trades stocks with the goal of achieving high short-term returns or a family who end up saving their money in the saving accounts for many years. In both cases, we assume an annual return of 3% based on the statistics described above.

  • Scenario B: Another investor employs a long-term, steady gain strategy, investing in a diversified index fund with an average annual return of 8% over the same period.

​

Let's recalculate the future value and opportunity cost for an initial investment of $50,000 for both scenarios. For an initial investment of $50,000 over a 10-year period with monthly compound, the future value of the investment under the long-term steady gain (Scenario B with a 8% annual return) would be approximately $110,982. In contrast, the same investment in the active trading strategy and saving or CD accounts (Scenario A with a 3% annual return) would grow to approximately $67,467. The opportunity cost of choosing the active trading strategy over the long-term steady gain strategy is $43,515. 

 

For an initial investment of $50,000 over a 20-year period, the future value under the long-term steady gain strategy (with a 8% annual return) would be approximately $246,326, whereas the future value under the active trading or common saving account strategies (with a 3% annual return) would be approximately $90,305. The opportunity cost of choosing the active trading strategy over the long-term steady gain strategy is $156,021, which is more than 300% of the initial investment . This illustrates the significant financial impact of opting for a lower-return strategy compared to a more stable, long-term investment approach over an extended period.

​

That being said, active trading is likely to cost money (unless you are a investment genius), not doing anything for your savings will absolutely cost money! Many financial solutions are designed to offer steady returns while providing peace of mind to investors. For instance, products like Indexed Universal Life Insurance (IUL) combine investment opportunities with a safety net, offering returns linked to market indices but protected by a guaranteed floor. Similarly, fixed annuities provide predictable returns with minimal risk, ensuring that investors can enjoy financial stability in their retirement without the stress of market volatility. These options not only aim to grow your wealth steadily but also offer the security of knowing that your investments are safeguarded against significant losses. By choosing the right financial solutions, individuals can achieve their long-term financial goals while maintaining confidence and tranquility in their investment strategy. Contact us today for a free consultant to explore our solutions and services that can help you grow your wealth for a future with better certainty.

How can Indexed Universal Life (IUL) insurance help grow wealth?

 

Indexed Universal Life Insurance (IUL) has gained popularity as a versatile financial product that combines life insurance with investment opportunities. It offers a unique blend of insurance protection and the potential for investment growth, appealing to those seeking both security and financial growth. Here’s a closer look at the benefits and the steady returns associated with IULs:

​​

Indexed Universal Life (IUL) Insurance is a type of permanent life insurance that provides both a death benefit and a cash value component. The cash value grows based on the performance of a specified stock market index, such as the S&P 500, but with a built-in floor to protect against market losses. This structure offers the following benefits:

​

  • Flexible Premiums: Policyholders can adjust their premium payments, allowing for flexibility in how much and how often they contribute.

  • Death Benefit: Provides financial protection for beneficiaries, ensuring a payout upon the policyholder’s death.

  • Cash Value Growth: The policy’s cash value grows based on the performance of a chosen stock market index, but without direct investment in the stock market. The growth is typically subject to a cap (maximum return) and a floor (minimum return), ensuring some level of return even in market downturns.

  • Unlike CDs, one of the primary liquidation advantages of an IUL is the ability to access the cash value accumulated within the policy. Unlike traditional life insurance policies where the cash value may be less accessible, IULs offer policyholders the option to borrow against or withdraw from their cash value. This feature allows individuals to use their policy’s funds for various purposes, such as funding a major purchase, paying for education, or managing unexpected expenses.

​

Great Returns with Safety Net

  • One of the standout features of an IUL is its potential for great returns coupled with protection from market volatility:

  • Participation in Market Gains: IULs offer the opportunity to participate in market gains through the index-linked growth mechanism. While there is usually a cap on the maximum return, it allows policyholders to benefit from positive market performance without directly investing in the stock market.

  • Protection from Losses: Unlike direct stock market investments, IULs include a floor (often 0% or 1%) that guarantees no loss of cash value due to market downturns. This means that while you benefit from upward market movements, you’re protected from negative returns.

  • Consistent and Predictable Growth: The combination of a cap on returns and a floor for losses provides a balance of potential growth and risk management. While the returns may not be as high as those of more aggressive investments, the steady growth can be appealing for those seeking stability.

​

Long-Term Growth Potential

IULs are particularly suited for long-term financial goals due to their steady growth potential and flexibility:

  • Compounded Growth: Over time, the cash value in an IUL can benefit from compounded growth, especially when premiums are consistently paid and the index performs well.

  • Tax Advantages: The cash value growth in an IUL is tax-deferred, meaning you do not pay taxes on the growth until you withdraw funds. Additionally, policy loans taken against the cash value can be tax-free, provided they are repaid according to policy terms.

  • Flexible Withdrawals and Loans: Policyholders can access the cash value through withdrawals or loans, providing a source of funds for emergencies or other financial needs.

​

Examples of Top-Performing IUL Products

  • Transamerica IULs: Known for competitive cap rates and strong participation rates, Transamerica's IUL products have consistently delivered solid performance, with returns in the range of 6% to 8% in recent years.

  • Nationwide IULs: Nationwide’s IUL offerings are recognized for their attractive returns and innovative features, providing annual returns between 6% and 8% depending on market conditions and policy specifics.

  • Lincoln Financial IULs: Lincoln Financial’s IUL products have demonstrated strong performance with returns typically ranging from 6% to 7.5%, driven by high cap rates and flexible policy features.

  • Allianz IULs: Allianz is another top performer with IULs offering returns in the range of 6.5% to 8%, benefiting from their strategic use of cap rates and participation rates.

​

The best-performing Indexed Universal Life Insurance (IUL) products in recent years have achieved returns between 6% and 8%, driven by strategic adjustments in cap rates, participation rates, and effective management of market volatility. When evaluating IULs, it is crucial to consider not only the potential returns but also the product’s features, fees, and overall alignment with your financial goals. Consulting with our financial strategists, who can help you identify IUL options tailored to your needs.

Achieving a Resourceful Retirement with Annuities: A Comprehensive Guide

​

Planning for retirement involves more than just saving money; it requires a strategy that ensures financial stability and peace of mind throughout your retirement years. Annuities have emerged as a valuable tool in this planning process, offering a range of benefits that can help secure a comfortable and worry-free retirement. Annuities have seen increasing popularity in recent years as more individuals seek stable income solutions and financial security for retirement. The following statistics provide a clear picture of the growing trend and interest in annuities:

​

  • According to LIMRA (Life Insurance and Market Research Association), annuity sales in the United States reached approximately $286 billion in 2023, a notable increase from $251 billion in 2022. This growth reflects a 14% rise year-over-year.

  • The National Association for Fixed Annuities (NAFA) reported that fixed indexed annuity (FIA) sales increased by 21% in 2023, with total sales amounting to $99 billion, up from $82 billion in 2022.

  • Annuity products accounted for 19% of the total U.S. retirement income market in 2023, up from 17% in 2022. This increase indicates a growing preference for annuities among retirees and those planning for retirement.

  • A 2023 survey by the Insured Retirement Institute (IRI) found that 45% of pre-retirees and 55% of retirees have expressed interest in annuities as a way to secure guaranteed income during retirement.

  • In a 2024 report, the Allianz Life Insurance Company found that 62% of financial advisors believe annuities will become increasingly popular due to their ability to provide predictable income and financial stability.

  • A study conducted by Morningstar in 2024 revealed that 30% of new retirement plans include annuity options, up from 25% in 2021, showing an increased integration of annuities into retirement planning.

​

Here’s how annuities can contribute to a well-funded retirement:

​

1. Guaranteed Income for Life

One of the most compelling advantages of annuities is the guarantee of a steady income stream for life. This can provide retirees with a reliable source of income regardless of market conditions or how long they live. Immediate annuities, for example, start paying out almost immediately after you invest, offering a predictable income that can cover essential expenses and enhance your quality of life.

​

2. Financial Security and Peace of Mind

Annuities can alleviate concerns about outliving your savings. With traditional investment accounts, there’s always a risk that you might deplete your funds too early, especially if you experience unexpected expenses or market downturns. Annuities, particularly those with lifetime income options, ensure that you receive regular payments for as long as you live, providing financial security and peace of mind.

​

3. Protection Against Market Volatility

For those worried about market fluctuations, certain types of annuities, such as Fixed Indexed Annuities (FIAs), offer a blend of growth potential and protection. FIAs link returns to a stock market index but include a floor to protect against negative returns. This means that you can benefit from market gains while avoiding the risk of losses during downturns, helping to preserve your retirement savings.

​

4. Customizable Payout Options

Annuities offer various payout options that can be tailored to your specific needs and goals. You can choose from single-life annuities, which provide payments for your lifetime, or joint-life annuities, which continue payments for the lifetime of you and your spouse. Additionally, you can select options that include a guaranteed period, ensuring that payments continue to your beneficiaries if you pass away before the term ends.

​

5. Tax-Deferred Growth

Annuities provide the advantage of tax-deferred growth, meaning that the money invested in the annuity grows without being subject to annual income taxes. This can be especially beneficial in retirement planning, as it allows your investment to grow more efficiently over time. Taxes are only paid when withdrawals are made, typically during retirement when you may be in a lower tax bracket.

​

6. Estate Planning Benefits

Annuities can also play a role in estate planning. Some annuities come with options to provide a death benefit to your beneficiaries, ensuring that your heirs receive a portion of the invested funds if you pass away. This can be a valuable feature for retirees who want to leave a financial legacy for their loved ones.

​

7. Potential for Additional Benefits

Many annuities offer optional riders that can enhance your retirement plan. These may include inflation protection riders that adjust your income to keep pace with inflation or long-term care riders that provide additional benefits if you need assistance with daily living activities. These optional features can add flexibility and value to your annuity, tailoring it to your specific needs.

​

Examples of Annuities for a Wonderful Retirement

  • Immediate Annuities: Provide a guaranteed income stream starting almost immediately after your investment, ideal for those who want predictable payments right away.

  • Fixed Indexed Annuities: Offer the potential for higher returns linked to a stock market index while protecting against losses, providing a balance of growth and security.

  • Variable Annuities: Allow you to invest in a range of funds, with the potential for higher returns, though they come with market risk and fees.

  • Deferred Income Annuities: Begin payouts at a future date, allowing for accumulation and a guaranteed income later in retirement.

​

​​

​

​

References:

[1] https://www.forbes.com/advisor/investing/what-is-day-trading/

[2]https://www.crews.bank/blog/sp-500-vs-average-investor

​

bottom of page