The 1% solution (sometimes 2%) is an economic theory of protecting assets and human capital with 1% of your entire assets during your working years. Many advisers use it as a rule of thumb, but like all theories there are exceptions to the rule. But that being said, it’s an easy method to remember and apply. Consider the financial applications in everyday life.
Protecting family income by insuring the family breadwinners is one of the cornerstones of defensive financial planning. Life insurance can not only replace the income lost due to the death of the breadwinner, but also can pay off indebtedness and fund the future dreams of its surviving family members. And along similar lines of thought, it’s wise to protect business partners with life insurance that can fund the succession plan or protect a key employee of the firm. Spending or setting aside 1% of your total assets can deliver meaningful protection and some peace of mind
Some degree of wealth accumulation is a financial goal of most Americans. Setting aside 1% of your total assets to fund tax deferred accumulation and tax-free distributions is a play on saving for retirement as well as a way to create tax diversity in your portfolio. There are four types of cash value life insurance policies that use varying crediting methods like dividends, interest rates, domestic and foreign indices, as well as subaccount investing in the market.
Estate planning isn’t always about the wealthy defending their estate against taxation in the transition from one generation to another. It’s also about funding legacies for your children, grandchildren and favorite charities. It’s about creating wealth where there’s little. It’s funding the future of your progeny. 1% of your total assets is not a lot in the big scheme of things. Holding back 1% to fund and protect your family’s future is the ultimate optimization of the use of your money.