Lake season is almost over.
Did you also look at your calendar and freak out when it said August? Just like that, it seems like summer '16 is in the books.
I recently was having dinner with a good friend of mine and we were talking about Minnesota's favorite summertime activity: boating on the lake. In my opinion, there's nothing that beats floating away doing nothing.
My friend is a new dad with an 8 month old, and so naturally we talked about all the trials and tribulations involved with being responsible for a tiny infant - including how to handle him on a boat.
One of the things we talked about at length was infant life jackets. Sure, you see pictures like this when shopping for them:
But actually, your experience with an infant life jacket probably goes like this:
Aww, look how happy they look!
The thing is, no matter how much they hate life jackets (actually, I think most adults hate them too), they're a necessary element of safe boating. It's really important that you take all the measures you can to stay afloat. That way, no matter how much you sink down into the lake, your head remains above water.
Since I'm a finance guy, I of course thought of some ways that this classic lake lesson applies to income protection.
What if there were a way that you could take part in market gains (float along with a high wave) but never eat the losses (sink underwater)?
Spoiler: There is a way, and it's awesome.
How it Works
Say that you reposition a portion of your retirement dollars into a product, and choose indices that you want to tie your upside earning potentials to (like the S&P). Each year, you'll get an interest credit on the money in the product based on the returns of the index, up to a cap.
So, for example, let's say you put $100k into a product with a 4% cap, designating the S&P as your index of choice (it's the most popular). If the S&P goes up 10% that first year, you'll get 4% interest credited on your policy. Now, you have $104k - and here's the kicker:
It can never go down.
So the next year, if the S&P drops, you keep your $104k and your starting point for the index is the new lower number.
You could also select a plan where you designate how big of a downside you're comfortable with. This works similar to above, but you select a downside cap (i.e., -10%) and based on the performance of the index you can get returns anywhere from -10% to +15% (for example). You can never experience losses lower than the cap you chose.
Remember, income protection trumps income growth over the long run.
If you lost 30% one year, it would take a 43% gain just to get you back to where you started. If you never have to make up for the losses in the down years, smaller amounts in the up years lead to less volatile and positive performance over the long term.
Got it? Good.
Enjoy the lake - and the infant life jacket pictures - while they last!