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What's Your Safe Money Plan for Retirement? Don't overlook these five facets of true financial security.

By Pamela Yellen

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Opinions expressed by Entrepreneur contributors are their own.

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Paper wealth is meaningless when it comes to true financial security.

Or, more accurately, there's an enormous difference between paper wealth and real wealth. With investments, until you sell an asset and lock in any gains you have (hopefully) accrued, all you really have is a bunch of numbers on paper. This applies to your retirement and investment accounts, your college savings plan, your real estate appraisals and the valuation of your business.

In order to have true financial security, the numbers on your statements must be locked in and not subject to the whims of the market or economy. You should also be able to access your money for anything you want, any time you want, without having to ask permission or sell or liquidate assets.

In previous installments, I've discussed why it is so important for small business owners and self-employed professionals to have a safe and secure "Plan B" for retirement. Now I'd like to address how to do that.

Warren Buffett, who is arguably the most successful investor in history, has two simple rules for successfully building wealth:

Rule #1: Never lose money.

Rule #2: Never forget Rule #1.

Business owners and self-employed professionals take calculated risks in their businesses, but they should not risk their financial security when it comes to saving for retirement. Instead, they need what I call a Safe Money Plan. As with Buffett's rule, there are two core principles to such a plan. It should allow you to:

  1. Get a little richer every single day.
  2. Never lose your principal or gains.

Five aspects of a true safe money plan:

  1. Guaranteed annual growth.
  2. No loss of principal or gains in a market crash.
  3. Liquidity – you can access your money whenever and for whatever you want with no restrictions or penalties for doing so.
  4. Control – you should control the money in your plan – not the government.
  5. Favorable tax treatment.

When you look at traditional investments -- stocks, mutual funds and ETFs, bonds, gold/silver, real estate, currencies and art or other collectibles -- every one of them violates Buffett's two rules. They also lack most or all of the five characteristics for a true safe money plan.

Related: Retiring at 27: Ambitious, Lazy or Crazy?

In researching and investigating more than 450 financial products and vehicles, I found a little-known strategy that meets all five requirements listed above. It allows you to know the guaranteed minimum value of your savings on the day you retire and every step along the way.

It's based on an asset that has increased in value every single year for more than 160 years, through every period of economic boom and bust, including the Great Depression. The asset is a supercharged type of dividend-paying whole life insurance.

Many people have a knee-jerk negative reaction when they hear the words "whole life insurance." Some financial advisors complain that the cash value in a whole life policy grows too slowly and commissions are too high. But the kind of whole life policies I'm talking about differ in two critical ways from the kind most financial advisors know about:

  1. A significant portion of the premium you pay goes into riders or options that accelerate the growth of your equity or cash value in the policy, especially during the early years. That lets you use your policy as a powerful financial management tool from day one.
  2. Because most of your premium goes into these riders -- which pay the insurance agent a very small commission -- the total commission the advisor receives is slashed by 50 to 70 percent.

Why haven't you heard about this retirement planning method before?

Unfortunately, many advisors and insurance agents emphasize policies that come with a big commission. However, there are financial advisors willing to forgo that paycheck who have advanced training in setting up these kinds of policies.

Some folks may think age or health concerns disqualify them from using this savings method, but that is usually not the case. There are plans available for people up to age 85. Many business owners and professionals start their plans after age 60.

Related: 13 Reasons Why Your 401(k) Is Your Riskiest Investment

Health issues don't necessarily rule out participating, either. If you have health concerns, you don't have to be named as the insured person on such a policy. Someone else you have an insurable interest in – such as a spouse, children or a business partner – can be the insured. As long as you own the policy, you control it and the money in it.

How dividend-paying whole life insurance meets all five requirements

  1. Guaranteed annual growth. Money you save grows by a pre-set and guaranteed amount every year, allowing you to know the minimum value of your plan at any point along the way. The growth is greatest when you need it most -- in retirement -- giving you built-in protection against inflation.
  2. No loss of principal or gains in a market crash. All gains are locked in the moment they are credited to your policy and don't evaporate in the event of a market crash or economic downturn. The cash value of the policy is guaranteed to grow predictably every year, along with the value of the death benefit, allowing you to leave a legacy to people and causes you care about most.
  3. Liquidity. Traditional retirement plans like 401(k)s and IRAs come with restrictions, including how much money you can contribute, how much you can borrow, when you must pay it back or face taxes and penalties, how long you have to wait to access your money and when you must access it or pay penalties. With the kind of safe money plan I advocate, you have access to 85 to 90 percent of your cash value quickly and for whatever purpose you want. This allows business owners to act as their own source of financing while saving for retirement, their kids' college and other life goals.
  4. Control over your money. Life insurance policies are private unilateral contracts, which is a fancy way of saying the company can't change the rules without your consent. In addition, there are no government limits on how much you can put in, no government restrictions or penalties for early withdrawals or for waiting to take withdrawals and no Required Minimum Distributions, unlike 401(k)s, IRAs and other government-controlled plans that force you to take withdrawals -- and pay taxes on them -- when you're 70.
  5. Favorable tax treatment. Tax advantages of this specialized form of dividend-paying whole life insurance are part of the tax code. You can access both principal and gains with no taxes due under current tax law. Similar to a Roth plan, you make contributions on premium payments with after-tax dollars, and can then access the money with no taxes due.

There are many other benefits of saving this way. For instance, you can use your cash value to finance business vehicles, equipment, office buildings and more and to qualify for deductions for interest paid and depreciation (consult your CPA or tax advisor for details).

The income you take from the plan is not included in income totals the IRS uses to determine how much you pay in taxes on your social security, and the cash value doesn't count against your kids when they apply for federal student aid.

Related: Small-Business Owners, Employees Save More for Retirement Than Before Recession

Unique among savings plans, this strategy lets you recapture interest you'd otherwise pay to banks and other financial institutions.

It's interesting to note that our nation's banks own billions of dollars of guaranteed, high-cash-value permanent life insurance -- about $135 billion of it, according to the latest available statistics. That's because banks are legally required to have a foundation of very safe liquid assets, known as Tier 1 capital. Life insurance is considered to be so safe that bank regulators allow life insurance policies owned by banks to meet their Tier 1 capital requirements.

One final, powerful benefit of this plan is peace of mind. Since it requires no luck, skill or guesswork, you can be confident that you and your family can reach your personal and business financial goals without taking unnecessary risks.

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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