Option traders should invest in insurance.
Many of my connections in the real estate world took the initiative this year to learn about option trading and are actively relying on this strategy for income and wealth creation. Congratulations if you have taken the personal initiative to learn more about this strategy and are relying on this approach to income in retirement.
Personally, our goal is to have a trading account of $500K and to earn on average 2% which is $10,000 a month. However, I am well aware, since I have been trading actively for about 2 years, that not every month will earn a profit of $10,000. But in retirement, I will rely on this income. And the biggest risk to me is to have a month or 2 or 12 that I don’t earn 2%. A period when my account is down. And because I rely on this income, I withdraw the income from my account when it is down.
Just to put some numbers behind the problem.
- Say my account is worth $500,000. It earns 10% one month. $550,000. And I take out $10,000. That is 1.8% of my balance. My account is now $540,000.
- Conversely say my account is worth $500,000. It drops 10% in one month. $450,000. And I take out $10,000. That is 2.2% of my account. My account is $440,000. That is 80% less than option 1.
When my account is down, in addition to the loss, I encroach on capital to a much larger extent. This increases my risk of running out of money in retirement.
My account dropped 10% … but I need to make 20% to catch up to option 1.
What’s the solution?
The solution is to protect your assets. And wealth insurance is the perfect solution to this problem. In retirement our cash value insurance policy will have 3 to 4 years’ worth of income.
We will be in retirement, if all goes well, for 30 to 40 years. There will be bad investment periods. We can go to our insurance policy’s cash value for (tax free) income. And give our investments the time and capital to rebound. With insurance, we will not be forced to withdraw funds from our trading account in periods when our investments are down.
In fact, we can access the cash values, when the market is down and increase the funding to our trading account.
Insurance is our permission slip to fully invest our funds. Without the insurance, we will have to self fund a 3-to-4-year income buffer. That’s a lot of money sitting on the sidelines for a long period of time.
Additional Benefits of Cash Value Insurance
The obvious one is you have the insurance coverage that you want, and need should you die prematurely.
But wealth insurance also protects you if you live an exceptionally long life, as the tax-free growth grows exponentially over time. Having the insurance policy allows you to create an income from other assets knowing the value is replaced in the later years of the policy.
And as a reminder, we are not locked out of our investment into the insurance plan. There is a big line of credit, called cash value, that we can use for wealth strategies during our wealth building years. We funded our trading account from our insurance policies.