Don’t Eat Your Seed Corn: Create an Income Hedge During Retirement Instead

We continue our series about modern alternative investments. They use newer methods with attributes investors generally did not have access to a generation ago. The methods include proactive approaches to improving potential returns, creating durable income, managing risk, using asset types not correlated with paper assets, and using strategies capable of limiting tax liabilities.

The topic was influenced by my late, great grandma Beulah who told me long ago as I was about to withdraw money from my savings account to waste on a remote control car, “Don’t eat your seed corn in the winter; you won’t have anything to plant and grow in the spring.” She was of course referring to an old dilemma faced by the pioneers during harsh winters. But it was just as suitable for my situation. She had a knack for sharing her pertinent wisdom at the most opportune times. I didn’t buy that remote-control car. Instead, I planted the seeds and a few years later I bought a real car. Thanks Grandma!

Today we focus on how to create an income hedge to get you through down stock market years during your retirement rather than being forced to sell when your asset values are lower. The strategy includes utilizing a hybrid insurance wrapper to address sequence risk and tax liabilities. We see it as an investment wrapped in a modern day IUL (indexed universal life) program. Okay we admit it: Insurance is not our favorite topic, and it might not be yours, either. We all squint at the prospect of modifying our ideas about investing, but sometimes changes in our environment force us to re-think things. Today we’ll walk you through some of the basics surrounding this modern alternative method.

Sequence Risk and Withdrawals During Retirement

The following tends to be the most concerning question coming from the massive wave of those nearing or already retired.

“How much can I withdraw from my retirement savings each year without running out of money?”

Well, it’s probably not the commonly touted “4% Rule”. But in our opinion, the answer certainly isn’t simply reducing your distribution rate to the newly suggested amount of 3% or even 2.6%. To us, that is not the solution.  

This graph was constructed using 20 years of returns[i]and a 4% withdrawal rate to illustrate sequence risk. We used real historical returns, but we changed their order to highlight sequence risk. In the Late Negative scenario, all negative returns are stacked in the last years; negative returns stack in the first years in the Early Negative scenario.

Despite 4% withdrawals, the Late Negative scenario portfolio gains value until the end of the 13th Year.

Meanwhile, the Early Negative scenario portfolio stays under water in all but the last two years. At the end of the seventh year, the Early Negative scenario portfolio falls to 29% of its original value, a 71% drop.  

1 The amount that may be available through loans and withdrawals, as defined in the contract. 2 For federal income tax purposes, tax-free income assumes (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); and (2) the policy does not become a modified endowment contract. See IRC §72, 7702(f)(7)(B), 7702A. This information should not be construed as tax or legal advice. Consult with your tax or legal professional for details and guidelines specific to your situation. 3 Any policy withdrawals, loans and loan interest will reduce policy values and benefits.


By planning ahead with a properly-funded IUL policy, you have an additional source of retirement income. This planning strategy can help you avoid selling for a loss after a market downturn, while providing the life insurance protection your family needs today.

Can you imagine watching your life savings erode in the first few years of retirement and, after seven years, finding your value is only a fraction of its original value?! Do you think investors would stick with the plan all those years (assuming they live long enough)? It’s nice to see the two portfolios’ values are equal at the end of the 20-year period, but that’s only an artifact of reordering the same returns. It is those first 18 years that would try any investor’s commitment to a 4% withdrawal plan (or any other plan).

Taking Withdrawals from a Different Source

What if, instead of taking withdrawals from the investment portfolio during negative return years, an investor:

  • funds an account guaranteed not to lose value because of market volatility;
  • takes tax-free withdrawals from the guaranteed account, instead?

Here are the key takeaways:

  • Hybrid Insurance Wrappers utilizing IULs link the returns to an index like the S&P 500 Index.
  • If the index growth rate is negative, then the insurance company does not reduce the account value; rather, it’s unchanged. It is this guarantee that gives this withdrawal plan its legs.
  • The insurer, based on its claims paying ability, guarantees a certain participation rate in the index. For example, if the IUL has a 50% participation rate and index growth equals 10%, the insurance company credits the account 5%.
  • Growth in the IUL is tax deferred.

The IUL withdrawal method works for many investors, but not all. In our opinion there is no “one size fits all” strategy. We can help you decide whether this method might work for you. Also, IULs are sold only by prospectus; this is an introduction to a potentially useful method, not an offer to sell an IUL. The idea is to avoid eating your own seed corn even if you must stretch your mind around IULs.

[i]Blanchett, D., Kowara, M., Chen, P. (2012). Optimal withdrawal strategy for retirement income portfolios.Retirement Management Journal, 2(3), 7-20. Retrieved from

[ii]Frank, Sr., L. R., and Blanchett, D. M. (2010). The dynamic implications of sequence risk on a distribution portfolio, 23(6), 52-61.

[iii]Annual total returns in the S&P 500 Index from 1999 through 2018

The opinions, news, research, analyses, prices, or other information contained in this article are provided as general market commentary and do not constitute investment advice. Financial Fortitude and its affiliates are not liable for any loss or damage which may arise directly or indirectly from use of or reliance on such information. Financial Fortitude has taken reasonable measures to ensure the accuracy of the information.

The opinions expressed and material provided are for general information and entertainment and should not be considered a solicitation for the purchase or sale of any security. You should not rely on any of the information provided by Financial Fortitude as a substitute for the exercise of your own skill, judgment, and due diligence when determining the appropriateness of any investment.

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