The IUL Versus Qualified Plans for Income

The 400% Solution:

 

This may be the most important post I’ve added to this website. If you are making regular deposits in a “qualified” retirement program – a 401k, a 403b, 457, TSA, or traditional IRA – and IF the purpose of these deposits is to build a retirement income, then you MUST read this carefully.

The following comparisons will show the amount of after-tax retirement income you can expect to build by making deposits to a qualified retirement plan from different ages, then we’ll compare that income to the tax-free distributions you might get from an IUL (indexed universal life insurance) policy.

In each example, we’ll assume the qualified plan will earn 8.39% interest from start through age 90 (8.39% is the 30-year average of the S&P 500 index), even though few people actually earn that high a rate in their qualified plans (annuities don’t pay that much and the mutual funds typically offered in qualified plans also do not average that much over long stretches). We are also NOT assuming any matching funds because the trend for this is downward, and every company has its own policy on whether to add matching funds or not. The IUL will also assume that the performance of the S&P 500 will continue as it has for the last 30 years, but will have a floor of 0% in any year and a cap rate of 14.5%. However, NONE of the examples given are guaranteed.

THE 25 YEAR OLD

If you start a 401k or other qualified plan at age 25, depositing $200 a month through age 65, you’ll have $782,113. If you assume the same rate of interest through retirement as you had during the growth years (8.39%), and expect to die by age 90, you can withdraw $74,783 a year. HOWEVER, if your money earns less in retirement, or if you live longer than expected, you will run out of money too soon. ALL advisors will tell you that withdrawing 9.56% of your qualified money each year is too aggressive. For many years, it was believed that a 4% draw rate was a safe rate. But current research indicates that even that rate may be too aggressive, especially if you experience a market crash early in retirement. So, most advisors now recommend withdrawing just 3% per year (see article here).

If you withdraw 3% per year, the expected income becomes $23,463 per year, all taxable unless it’s from a Roth. If you’re just in the 15% federal tax bracket, this amount will be reduced to $19,944 per year. Keep in mind that most qualified plans will not average 8.39% growth for life and, if you have other income, you may be in a higher tax bracket; and either of these will reduce your after-tax income.

By comparison, if you put the same $200 a month into an IUL through age 65, you can start taking tax-free distributions of $92,850 per year (if you are a woman; a man would receive a little less) for life, regardless of how long you live, PLUS your heirs will receive a tax-free death benefit when you die. This example also assumes that future performance of the S&P 500 will mirror the past performance, which probably won’t happen. If the S&P 500 does not perform as well, your distributions from the IUL will be lower; however, if the S&P 500 does better than it has, your distributions will be higher. But, if the market performs as projected, the tax-free distributions from the IUL will be 465% higher than the after-tax distributions from the qualified plan (396% higher than a Roth).

THE 35 YEAR OLD

If you start at age 35 and put the same $200 a month into a qualified plan to age 65, then begin distributions at age 66, your money should build to $323,765. 3% of this is $9,713 per year before taxes. If the tax rate is 15%, then you get $8,256 after taxes.

If the same money went into an IUL and the market performs as expected, a woman may be able to take distributions of $35,994 per year, tax-free. This is 436% higher than the qualified plan and 371% higher than a Roth.

THE 45 YEAR OLD

If you start at 45 and put the same money into a qualified plan through age 65, you should have $123,680. 3% of this is $3,710 per year before taxes, $3,154 after taxes at 15%.

The IUL for the 45 year old woman produces $13,273 per year, tax-free. This is 421% higher than the qualified plan and 358% higher than a Roth.

THE 55 YEAR OLD

The qualified plan for the 55 year old builds to $37,396. 3% is $1,122 per year, $954 after taxes.

The IUL produces $3,205 per year, tax-free. This is 336% higher than the qualified plan and 286% higher than a Roth.

CONCLUSIONS

At most ages, an IUL will produce significantly higher after-tax retirement distributions than if you put the same money into a qualified plan or a Roth. ALL options produce a lot less income if you don’t get started early! While all options are affected by the growth of the stock market, money in an IUL is guaranteed not to go down because of the market. Is your qualified plan protected from drops in the market?

There are many more caveats and qualifications that I go through with clients. If you have questions about any of this, please let me know.

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Posted in Life Insurance

401(k) funds studied for less time than car purchases

By Walter Hamilton (originally published on LATimes.com)

Americans know that 401(k) retirement plans are important, but they spend only a moderate time researching investments and are often confused about how to pick the best funds, according to a new survey.

Nearly nine in 10 workers view 401(k) plans as essential employee benefits, far outdistancing disability insurance, extra vacation days and the option to work from home, according to the poll by Charles Schwab Corp.

But the typical employee spends only about two hours analyzing 401(k) choices, roughly half the time spent researching car purchases or vacations.

Half of poll respondents said their 401(k)s are more confusing than the medical plans.

Only about one-quarter of survey participants have sought professional advice with their 401(k)s, according to the survey. That’s far less than the 87% who pay a professional to change the oil in their car.

“With so much at stake, the industry needs to take a more active role in delivering personalized investment advice to help individuals’ 401(k)s work harder for them,” said Steve Anderson, head of Schwab Retirement Plan Services.

One-for-all default investments, such as target date funds or balanced funds, can’t be expected to meet the individual needs of workers,” he said. “The industry can do better.”

However, earlier research has shown that employees must be extremely careful about 401(k) advice.

It’s not in the brokerage house’s best interests to make things simple. It’s better for them to offer a wide array of funds for two reasons: 1) Those customers who are financially astute demand it and 2) a wide variety of funds makes it easier for their sales weasels to work…

A study by the U.S. General Accountability Office in 2011 found that what passed as education offered by firms running 401(k) plans often was little more than a sales pitch designed to push high-cost investments on unsuspecting employees.

Follow Walter Hamilton on Twitter @LATwalter

 

From Michael Goodman -

If you want to discuss your retirement planning.  Let me know.  I can show you ways to increase your retirement income while keeping your money safe from market losses, turn some or all of it into tax-free distributions, allow you to access some of your money at any time and for any reason without taxes or penalties.  Do you just want to follow the crowd and get what they get?  Or would you like to learn another way that may be better for you?  The conversation is free.  Send me an email.

Just remember, I can only offer advice to residents of California.

 

Posted in Annuities, Life Insurance

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