Retirement & Cryptocurrency

What You Need to Know About Cryptocurrency and Your Retirement

Started as a small project, cryptocurrency has become a large and continuously growing part of the finance industry. These blockchain tokens are making way into retirement planning slowly. Recently, some major companies have opened their doors to cryptocurrency as an investment option. If you are considering cryptocurrency for your retirement planning, you need to know the risks that come with crypto assets.

It is no secret that the crypto ecosystem is fickle, and in retirement planning it is important to monitor and reduce risk so your assets last 20-40 years. However, cryptocurrency may offer retirees a solid diversification option.

The Newest of New Paradigm

While trends have been observed, analysists are still studying the ups and downs of the cryptocurrency ecosystem. Some experts will say that it is too risky to invest while others will say by not investing you are losing out even with the rules still being written and changing often. Cryptocurrency may offer diversification to your retirement portfolio. The risk lies within your decision to invest or not.

Market Volatility

You are likely very familiar with the success story of Bitcoin and Ethereum. Just this year alone cryptocurrencies have fluctuated significantly. In 2021, Bitcoin dropped $30,000 in value within 3-months.

New Cryptos Launched Often

There are over 13,5000 cryptocurrencies in existence. Some are considered overvalued, others undervalued, and others are predicted to be “just right” for long-term investments. But there are new cryptocurrencies added on the market daily, so when investing choose wisely.

Traditional Accounts & Crypto

Only a few plan sponsors allow for cryptocurrency to be invested in for retirement. There are options under cryptocurrency such as Bitcoin IRA or Bitcoin 401(k). You may rollover funds into a self-directed IRA that allows crypto investments if you qualify. Please note, a lot of the cryptocurrency ecosystem is not government regulated and poses greater risk than typical market stocks and investments.

Taxes & Recording

Record keeping is very important within cryptocurrency gains and losses. Within the USA, cryptocurrency is taxed the same as any other gain or losses on stock for long-term and short-term. However, the recordkeeping and reporting are not as established as with regular trade assets. It is primarily on you to keep accurate records.

The Exchanges & Brokerages

Cryptocurrency is traded on a crypto exchange mostly, but you can trade through a broker. While more expensive, brokers are often much less confusing. Purchasing directly on the exchange can get complicated fast.

At-Risk for Hacking & Theft

Unfortunately, being unregulated means cryptocurrencies are not as protected. There is a greater risk for theft and hacking. Heedless of your storage method—keep investment in the exchange, use external storage device, or store offline—there is a need to have extra precautions in place.

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Working Smarter, Not Harder: Leveraging Your Life Insurance Policy

An unconventional strategy for retirement, to maximize your life insurance policy is premium finance. Premium finance is where policyholders will pay substantial premiums via borrowing from a third-party lender—tying up the bank’s money versus your own capital. With some premium finance loans regular payments may begin shortly after the origination of the loan. However, there is a choice to capitalize interest into the arrangement with the expectation that the cash-value growth of the life insurance will outperform the accruing loan interest.

Premium financed life insurance allows the policyholder to purchase significantly more life insurance for a fraction of what is needed to support such a massive policy. This strategy keeps the policyholder’s other assets free to perform and produces an impressively tax-free internal rate of return for seemingly nothing out-of-pocket.

Ideally, the best method for premium financed life insurance polices is to create a compounding snowball effect for the cash value growth. The policy takes on the loan using built-in features. Moreover, it is when and if, the compounding cash value overcomes the hurdle of the premium finance loan’s interest rate. Future policy distributions may become death benefits to heirs, be tax-exempt retirement income, or possibly both.

How does premium financing work?

An affluent or emerging affluent individual with generally good health and a reputable credit rating may apply for a life insurance policy—be it for estate planning or retirement planning. For premium financing to occur, most of these policies will be whole life insurance or indexed-universal due to their stability and ability to offer higher loan-to-value ratio. With strong, long-term performance, the financed insurance policy will be funded at a maximum premium allowance for the first 4-7 years.

Depending on the situation, sometimes the borrower will pay the first premium themselves to avoid the need to post collateral. Often borrowers will involve a 3rd party lender to the larger premiums with the intent to begin interest-only payments directly to the lender. However, to fully capitalize on premium financing, borrowers roll the accruing interest into the loan with the high hopes the cash growth will outdo the finance loan.

This goes to say, the policyholder should prepare for posting collateral. If designed correctly, the life insurance can serve as the collateral due to its cash value growth.

Benefits to Premium Financed Life Insurance Policies:

  1. Ability to keep other assets active and growing.
  2. Replaces need to pay insurance premiums during your high-income working years.
  3. Potential for extremely positive arbitrage between cash value growth and premium finance loan rate.
  4. Potential of tax-exempt retirement income or greater death benefit payout.
  5. More cash value that compounds for you, not against you.

For more information on premium finance benefits and qualifications, listen to The Retirement Risk Show’s “Premium Finance: A Leveraging Method of Life Insurance” episode.

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