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.

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

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

IUL or 529?

What’s the Best Way for a Parent to Save Money for College for a Child?

(I was reading an article about how the writer (a doctor with no background in finance or investing who writes about investing) was going to save money to send his kids to college and I thought he had a pretty good plan, except for one part.  Here is the response I gave him and how he responded. I found it remarkable that he was so unwilling to agree with the most obvious benefits of an IUL, and that his responses showed a willingness to label ALL consultants as scam artists.  Not a month goes by that I don’t read about some incompetent or unethical doctor, so I wonder how this guy would feel if I labeled all doctors as incompetents?  He calls himself the White Coat Investor and, after he deleted my last response, I added it here.)

I agree with most of what you’ve written, except for the use of the 529 plan. I believe an indexed universal life (IUL) insurance plan would not only provide more money for college from much smaller payments, it would provide a wealth of continuing benefits that would last the lifetime of your child. Yes, I’ve read your articles that bash whole life and I probably agree with 80% of what you’ve written and, yes, I’m a licensed agent that sells IUL’s, so you can discount my opinion by whatever factor you like. IUL’s have many advantages over both whole life insurance and 529 college savings plans and I will try to keep this response as factual as possible.

The numbers give IUL’s a wide advantage. 529′s provide tax benefits up front that go away if the money is used for anything else, and you access the money by withdrawing it, which means nothing is left afterward. You’re done. If you need life insurance, you’ll have to pay premiums for it for 30+ years.

With an IUL purchased and properly set up at birth, or soon after, just $100 a month for 18 years (a total of $21,600) in after-tax payments can provide $10,000 a year for four years of college (tax-free using policy loans that are either interest-free using a standard “wash loan”, or provide a negative interest charge using a variable rate loan that offers the opportunity to earn more on the collateral than is charged for the loan, AKA arbitrage). PLUS, the cash value continues to grow without any additional payments after those first 18 years and can provide another tax-free $50,000 disbursement around age 35, another one of $250,000 around age 55, then annual distributions of over $200,000 per year for life beginning at age 67, all tax-fre. In addition to all this, your kid will never need to buy an outside life insurance policy because the death benefit in this case grows from about $115,000 at issue to over $1.6 million by age 66 and continues to grows until death. Please note that ALL expected expenses have been deducted from these numbers, which came direct from an illustration using software provided by a carrier rated A+.

What’s the catch? There are two. One, for the child to qualify, at least one parent or grandparent must also have an IUL with the issuing company. Two, the indexed growth of the cash value will be tied to the growth in the selected index. Let’s use the S&P 500, which has grown at a real rate (without dividends) of 8.39% over the last 30 years (the average rate of growth is closer to 10%, but includes negative numbers which distort the average). In IUL’s the growth has a guaranteed floor of 0%, and adds interest equal to the rate of growth of the index, if any, up to a cap rate. If the cap rate is 14.5% and the S&P 500 grows 10%, you get 10% added to your cash value. If the growth is 20%, you only get 14.5%. But if the index goes down, you get zero. You can never lose money due to the market. So, if the market performs close to the historic averages, then the numbers I’ve given above are pretty accurate. If the market doesn’t do as well, then neither will the IUL. But if the market in general is doing poorly, how will the investments in your 529, or any other part of the market, be doing? And, yes, the interest percentage is only applied to the cash value after expenses, but isn’t that also the case of most securities investments?

One interesting things about IUL’s is that the expenses become a lower % of the cash value over time as the cash value grows. That’s not the case with money in a 529 or 401k. If a 401k has gross expenses of just 1% and a balance of $100k, then the expenses are $1,000. But the same percentage applied to a balance of $400k is $4,000. Say what you will about whole life, the expense rate in an IUL, as a percentage of the cash value, goes DOWN over time.

How can a baby IUL do all this? One, because the cost of insurance for an infant is so small that almost all of the premium goes toward the cash value, leading to a fast buildup of the cash value. Two, because of the time element. Having this money working throughout a child’s lifetime leads to massive growth over time.

 

He answered my post with this -

I disagree that using a permanent life insurance policy to pay for college is a good idea. I doubt I’ll convince you. But I want to make sure WCI readers don’t get the impression that I think this is a good idea.

While investing “just $100 a month” for 18 years to get a benefit of $40,000 sounds awesome, if you run the numbers (and bear in mind these are your projected numbers, not the guaranteed numbers which I’m confident are far lower) it reflects a rate of return of about 6.4% per year. I mean, I guess that’s exciting to people who sell insurance for a living, but it’s not very exciting to someone whose daughter’s 529 has had an IRR for the last 8 years of about 9% a year (yes, that includes the 2008 meltdown.) I’m not saying there’s no value in the IUL after you use it to pay for college, but that’s a pretty steep price to pay for that value. If I invested $100 a month at 9% for 18 years, I could have $13K per year for school and not have to worry about taxes, interest, taking loans, or worrying an insurance agent may be taking advantage of me. Seems like an attractive trade off for me.

With an IUL you might not lose money due to the market, but you can (and will, at least in the first few years) lose money due to the insurance, the company providing it, and the agent selling it. I’ve discussed all this elsewhere in my posts on IUL.

I’m not sure why you think 1% expenses in a 401(k) is a low figure. I view it as a very high figure. Expenses on a low-cost 529, IRA, 401(k) etc are ridiculously small compared to those in any insurance policy and have a very long way to rise before ever becoming close. I’m sure you’re very talented at selling these policies as a college savings tool though. A lot of people wouldn’t see through the arguments you’re making. However, I’ve addressed this all in my series on Myths of Whole Life Insurance previously. The only advantage of an IUL over WL is that you have the possibility of a higher IRR if the market does well (and of course, the possibility of a lower one if the market does poorly.)

You want to use it for your own college savings? Knock yourself out. It’s a free country. There are many roads to Dublin. But I think it’s a lousy idea that is used primarily by insurance agents to sell more insurance.

 

I responded with this -

Thank you for your response. I love a good debate. First of all, you made an incorrect assumption. I said the IUL would provide $10,000 a year for four years of college, but I didn’t say that was the total yield. Admittedly, it’s not much higher, though. There ARE expenses in the early years that cause the initial balance to be low. However, it’s a mistake to compare IUL’s and whole life. They are as different as elephants and alligators. The numbers I used are based on the 30 year performance of the S&P 500 and there is no guarantee the next 30 years will be the same. They could be the same, be less, or even be better. But we can also say that about the IRR of your daughter’s 529. There’s no guarantee it will continue to yield 9%, right? Nor can we guarantee that most people have your ability to choose an investment that yields that much with such low expenses. Most people can’t. With an IUL, the clients don’t need to be stock market gurus. I show them the historic averages and they choose one, which can be easily tracked in most newspapers or the internet. At the end of year one in my illustration the cash value is $941 after premiums of $1,200. My commission in this deal, since you’re so afraid of it, is the massive sum of $290 which, as you can see, is NOT deducted from the premiums.

While 9% per year sounds great; what’s she going to have after she’s spent the money? As I said in my first post, nothing. Are you saying it’s too much trouble to take out a tax-free loan at zero interest and have the $40K still there after she graduates? How much will she have to invest to get all the other tax-free benefits that follow – $50,000 for a big wedding or downpayment, $250,000 to pay off her condo later, $200,000 a year for life from age 67? Not to mention a lifetime of life insurance with no premium payments? ALL of these benefits come with ZERO additional out of pocket expenses. Not only that, but if she ever develops (I’m sorry to even think it) a chronic or terminal illness, she’ll be able to access the death benefit to help with the expenses. She can access her cash value with loans at any age and for any reason without taxes or penalties. Do these tax-free benefits REALLY not stack up? I mean, just do the math for the retirement years – which are $230,000 per year tax-free for life from age 67. How much would your daughter need to invest after graduation in a qualified plan to get that much after-tax income during those years?

I freely grant that IUL’s are not for serious investing. However, in 2014, the living benefits of IUL’s offer features that most people can use. It may not be right for an investment guru. But for many others, it’s an easier and safer way to secure some pretty nice benefits.

 

I thought I covered the holes in his argument, but he still denied the facts -

I disagree that IUL and WL are dramatically different. But that’s all semantics/perspective. No point in arguing about it.

I disagree that it somehow requires me to be a stock market guru to have achieved those 9% returns. I put half into the Vanguard Total Stock Market Fund half into the Vanguard Total International Stock Market Fund. I just bought all the stocks in the world and forgot about it. Not exactly guru-esque. Investing doesn’t have to be complicated and saving for college doesn’t require using a complicated financial product like IUL.

You say the $290 isn’t deducted from the premiums, as if that somehow means it doesn’t come from the client. Are you suggesting that the client does not indirectly pay your commission? I mean, basically the client pays $1200 and is left with $941 and you get $290. It doesn’t take a genius to see that $941+$290 more or less = $1200. And that presumably includes the investment return.

The interest isn’t zero. It might be a wash loan in whatever magical policy you’re discussing (since every one of these is different it’s nice to mention which one you’re discussing and send an illustration) but it isn’t zero.

The tax-free benefits you are so fond of aren’t free. They cost real money for the insurance company to offer. Insurance companies are not charities. They are charging what they consider a fair price for those benefits. If those are benefits that I do not need (and I don’t) then I don’t need to waste my money paying for them. For example, the wedding fund for that daughter is doing even better, 13% over the last 7 years. Of course, I started that one in October 2008, so perhaps not a very fair comparison.

For everything you can use IUL for, there is a better way to do it. It’s interesting that you can use a financial product in lots of different ways, but everyone one of them becomes an angle used by salesmen to sell more of them. It’s better to start at the beginning with your goal. For example, I want to give my daughter as much as I can toward college, but I only want to save $5,000 a year for the next 18 years for that goal. Is it more likely that she will have more money if I invest it in stocks in a 529, or if I use it to buy insurance on her? The data I have seen suggests it is more likely she will have more money if I invest it in stocks due to their higher return. So that is what I am doing. Even better, it’s even MORE TAX-FREE than buying insurance. Not only are all the earnings tax (and interest) free when I pull them out, but I get a state tax credit for making the contribution in the first place. So let’s move on to another goal. Let’s say, for some bizarre reason, that I want a death benefit on my daughter for the next 50 years. What is the best way to get that? Well, it’s probably to buy an annually renewable term policy, or perhaps buy a 30 year level term policy now and buy a 20 year level term 30 years from now. It’s very cheap, not complex, easy to price, and a very competitive market. No permanent policy needed.

The best financial products don’t require a sales job to get people to buy them. Complexity does not favor the purchaser.

 

Here is my final response to him -

Wow! I asked a simple question – how much would your daughter need to invest after graduation to have an after-tax income of $230,000 a year starting at age 67, and you’ve filled a page without even attempting the answer. Plus, you really don’t seem to grasp the truth, that IUL’s are great financial tools and are VASTLY SUPERIOR for saving money for a child’s college education, not because they produce the maximum return for college (which seems to be all you care about), but because they produce a good return PLUS millions of dollars in additional benefits at no additional cost and with no risk to the cash value!

You act as if every American with a 401K or IRA is earning double figures on their investments and paying less than 1% in total costs and fees. Well you might want to pick up a newspaper sometime because it’s not so! I work with public schoolteachers on a regular basis and many of them are putting money in 403b’s or TSA’s in the equivalent of passbook savings accounts, earning .10%-.25% because they are afraid of the market. Most of the others are putting money into mutual funds that are netting less than 5%. I’ve met several couples recently that paid thousands of dollars to registered advisors and are just now getting back to even after the crash of 2008. How dare you rail against all insurance agents, as if every one is exactly alike! Do you believe all investment advisors have the exact same skills and concerns and that ALL RIA make money for their clients? GIVE ME A BREAK!

TV shows like “60 Minutes” and others, not to mention just about every newspaper and magazine in America have run articles in recent years about how people with qualified plans have been getting KILLED in fees, many of them being charged 4-5% or more. The securities industry had to be dragged kicking and screaming into reporting even SOME of the fees that are charged on 401k’s two years ago. If you think your experiences in the market (assuming what you’re writing here is even true) are somehow typical of the experiences of most American workers, you’re insane. And these people aren’t even building a tax-free retirement income, they’re building a tax problem (not only will their distributions be taxable, it’s going to make most of their Social Security income taxable)!

I said the tax-free benefits of an IUL were tax-free and they are tax-free. My clients NEVER pay income taxes on the growth in their accounts, on the loans they take, or on the death benefit. What else does tax-free mean? If you want to talk about estate taxes, that’s a different story that applies to very few people.

And wash loans mean the interest charged on the loan is EXACTLY the same as the amount of interest charged on the loan. It’s guaranteed in the contract! But that’s not even the best kind of loan. But I don’t want your head to swim.

As for where the commissions come from, they come from a separate account at the carrier. THEY DO NOT COME FROM MY CLIENT’S MONEY. EVER! I said that it’s true there are expenses in addition to the cost of insurance in the first year, but the commission isn’t one of them. But who cares? I agree there are costs and fees deducted from the premiums paid into an IUL. There are also fees coming out of just about every kind of investment in America. What’s important is what comes out at the end.

It’s great if you’re getting 13% on your wedding fund. I hope you are! You’re building a bigger fund, but when it’s gone, it’s gone. But, she’ll actually get to spend more money over her lifetime if the money had been invested into an IUL (even WITH the state tax credit), AND she wouldn’t pay a penny for the life insurance after leaving for college. And if you think 50 years of term insurance is cheap, you’ve never seen a rate card! Term starts out cheap, but the premiums skyrocket at age 60, if not before (even for women!). And that’s if she stays healthy. Insurance companies love to sell term insurance because they know that they rarely have to pay off on them. They get abandoned when the prices start taking off, causing the former policyholder to die without life insurance. Maybe you think that’s ok, but there are lots of people that don’t. But here’s something you’re not mentioning – if your daughter wants grants (free money!) instead of loans (and I assume she does), the money in her 529 will count against her when she completes her FAFSA. But the money in an IUL would not!

It’s clear that you don’t understand the advantages of policy loans on life insurance, especially on IUL’s, so you should just admit it and move on (it’s not that tough, but I can only lead a horse to water …). What you’re writing here is just making a fool of yourself. I understand that if you just want to build a cash fund over a specific period of time, then there are better ways to do it than an IUL. But if you want to actually SPEND the most money, you NEED an IUL! If you want a primer on variable policy loans and the power of arbitrage, just let me know. Better yet, ask your daughter to read these and see if what I’ve written doesn’t make her curious. I’ll bet it does.

Finally, I tried hard to keep these posts factual and calm (until this one), but you have repeatedly responded with vitriol and disinformation. Get over yourself! There are smarter people in the world. And when you delete this thread from your site, as I expect you will, you’ll be able to find it on my website.

 

What do you think of these exchanges about the best way to save money for your kid’s college?

 

Michael Goodman

Life Insurance Agent, Santa Clarita, CA

 

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Posted in Life Insurance

Wall Street Math

 

WALL STREET MATH

By Michael Goodman

On January 1, 1984, the S&P 500 stood at $164.93. Over the next 30 years,
it grew to $1,848.36. The annual returns were: (read down the first column, down the second column, etc)

1.4% -1.5% 9.0%
26.3% 34.1% 3.0%
14.6% 20.3% 13.6%
2.0% 31.0% 3.5%
12.4% 26.7% -38.5%
27.3% 19.5% 23.5%
-6.6% -10.1% 12.8%
26.3% -13.0% -0%
4.5% -23.4% 13.4%
7.1% 26.4% 29.6%

If you total these up and divide by 30, you will get an average return of 9.84%
(not including dividends). But did the S&P 500 actually grow at a rate of
9.84%? Using my HP Business calculator to do the time value of money calculation,
I find that when $164.93 grows to $1,848.36 over 30 years, the actual annualized
rate of growth is 8.39%. What’s up?! Why is the actual growth rate 1.5% LESS
than the average rate? The answer is Wall Street Math.

Anytime you average a series of numbers that includes negative numbers, this
problem will arise. Just think about this simplified example. If you invest
$100 and it goes up 10% in the first two years, then goes down 20% in the third
year, what is your rate of growth? The AVERAGE of these three years is zero%
(10, 10, -20 = 0/3= 0%). But did your investment actually break even? NO! Your
$100 goes up 10% to $110 after one year; goes up 10% to $121 after two years;
then goes down 20% to $96.80 after the third year. You lost $3.20 over the three
years, a “growth” rate of -1.07%. When an investment goes down by
ANY amount, it must go up a HIGHER percentage to break even. If a $100 investment
goes down 20%, you now have $80, right? It now needs to go up by 25% just to
break even ($20/$80 = 25%).

The point of this is that it’s not unusual to hear Wall Street guys talk about
the average growth rate of the market over a period of time. BEWARE of averages
used to describe the growth rate of securities when there is a chance of loss.
Those numbers are NOT accurate.

How does this apply to your retirement and IUL’s (indexed universal life policies)?
If you turn all of those red negative numbers above into zeros, then change
the growth numbers that are larger than 14.5% into a 14.5 and average the numbers,
you get the growth rate of an IUL with a cap of 14.5% and a guaranteed floor
of 0%. That growth rate was 8.56% during the same years that the S&P 500
was growing at 8.39%.

Keep in mind that all IUL’s are not the same. Just as your investments in the
market have costs and fees, part of the premium paid for an IUL also goes to
fees and the cost of insurance. Every company charges different amounts for
the cost of insurance and other fees, and many companies have caps that are
less than 14.5%. To get an IUL with the lowest costs from a strong carrier, your agent must work with the right insurance companies and he’s got to know how to design a policy that
maximizes growth of the cash value.

The only way to know how an IUL compares to other financial options is to speak
with a good agent and get a quote/illustration. If you’re in the state of California,
send me a note HERE.

Michael Goodman

Life Insurance Agent in Santa Clarita, CA

 

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Posted in Life Insurance

Don’t fall into these Social Security traps

(I find that MANY of the clients I work with are not aware that the income from their pensions and “qualified” savings plans (like 401k’s and IRA’s) will make their Social Security income taxable. This is one of the areas where an IUL is especially effective for retirement planning, because the distributions from an IUL are income tax-free and will NOT cause your Social Security income to become taxable.

Michael Goodman)

(this article was originally posted on MSN.com and you can see it HERE)

By Kandice Bridges, BankRate.com

If you’re looking forward to turning age 62 so you can begin collecting Social Security benefits and live on Easy Street, you might get caught off guard. Some of the Social Security rules can be frighteningly complex. Because it will likely represent a large portion of your retirement income, it’s important to understand how the government program works.

For instance, there are limits on how much you can earn while collecting benefits, and if you exceed those limits, your Social Security benefits will get cut substantially. That’s just one of the snares that could trip you up.

Make sure you plan appropriately to avoid these six Social Security traps.

Trap No. 1: Social Security may be taxable

If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. Even income sources that are normally tax-exempt, such as income from municipal bonds, must be factored into the total income equation for the purpose of computing tax on Social Security benefits.

Eric Levenhagen, CPA and Certified Tax Coach with ProWise Tax & Accounting, says to find out whether any of your Social Security benefits are taxable, “Look at your total taxable income plus half of your Social Security benefit. Make sure you add back any tax-exempt interest income.”
When your taxable income, tax-free income and half of your Social Security benefit exceed $25,000 ($32,000 for married couples filing jointly), that’s when you’re in the zone to pay taxes on Social Security income.

Another unexpected income source that could impact taxes on Social Security: proceeds from a Roth conversion. If you’re thinking about doing a Roth conversion, do so before receiving Social Security benefits, says Steve Weisman, an attorney and college professor at Bentley University. “A lot of people considering converting a traditional (individual retirement account) into a Roth IRA should be aware that if they do that, they will end up paying income tax on the conversion, which will also be included for determining whether Social Security benefits are taxable,” he says.

Trap No. 2: Must take required minimum distributions

Required minimum distributions, or RMDs, must generally be made from tax-deferred retirement accounts, including traditional IRAs, after a person reaches age 70 1/2. The distributions are treated as ordinary income and may push a taxpayer above the threshold where Social Security benefits become taxable.

“This is a double-edged sword,” says Weisman. “If you are over 70 1/2, you are required to begin taking distributions from IRAs (except Roth IRAs) and other retirement accounts.”

“Here again, you take half of the Social Security benefits plus all other income to determine whether Social Security benefits are taxable. RMDs will be included and drive that up,” says Levenhagen.

You can’t avoid required minimum distributions, but you can avoid being surprised at tax time.

Trap No. 3: Some workers don’t get Social Security

Most people assume Social Security is available to seniors throughout the U.S., but not every type of work will count toward earning Social Security benefits. Many federal employees, certain railroad workers, and employees of some state and local governments are not covered by Social Security.

“Some of my clients have participated in retirement programs offered by employers that don’t pay into Social Security,” says Charles Millington, president at Millington Financial Advisors LLC in Naperville, Ill. “If your employer does not participate in Social Security, then you should be covered under the retirement program offered by your employer.”

However, certain positions within a state government may be covered by Social Security.
Find out whether your employer participates in Social Security or not and if not, whether your position may be covered by Social Security. Make sure you understand where your retirement benefits will be coming from.

Trap No. 4: Early benefits could be a big mistake

If you opt to take Social Security as soon as you are eligible, you may be doing yourself an injustice.

“If you delay taking benefits until age 70, you will see as much as an 8 percent increase in benefits for each year you delay,” says Steve Gaito, Certified Financial Planner professional and director of My Retirement Education Center. “In addition to receiving a higher benefit, the annual cost-of-living adjustment will be based on the higher number.”

“It’s hard to find that kind of rate of return on regular investments, so it’s good to delay if you can,” says Weisman.

Of course, life expectancy plays a part in the decision of when to begin drawing benefits. “You generally know how healthy you are and what your family medical history is,” says Ryan Leib, vice president of Keystone Wealth Management. “We advise clients to determine whether they think they will live longer than age 77. If so, delaying until age 70 will net you more in benefits than opting to start collecting benefits early.”

If you’re able to live off other funds and delay taking Social Security, you should seriously consider doing so. “Delaying taking Social Security until age 70 could mean the difference between cat food and caviar in retirement,” says Leib.

Trap No. 5: Windfall elimination provision

If you work for multiple employers in your career, including both employers that don’t withhold Social Security taxes from your salary (for example, a government agency) and employers that do, the pension you receive based on the noncovered work may reduce your Social Security benefits.

“Many people are not aware that their actual Social Security benefit may be lower than the amount shown on their statements or online because the windfall elimination provision reduction does not occur until the person applies for their benefits and (the Social Security Administration) finds out they are entitled to a pension,” says Charles Scott, president of Pelleton Capital Management in Scottsdale, Ariz.

Social Security applies a formula to determine the reduction. In 2014, the maximum WEP reduction is $408. There is a limit to the WEP reduction for people with very small pensions.

If you have worked for both noncovered and covered employers, don’t let the windfall elimination provision catch you by surprise.

Trap No. 6: Limits on benefits while working

You are allowed to collect Social Security and earn wages from your employer. However, if your wages exceed $15,480 in 2014, your Social Security benefits will be reduced by $1 for every $2 you earn above that level.

During the year in which you reach full retirement age — which ranges from age 65 to 67, depending on your birth year — you can earn up to $41,400 before $1 of your Social Security benefits will be deducted for every $3 you earn above that threshold. However, the money isn’t lost forever. You will be entitled to a credit, so your benefits will increase beginning the month you reach full retirement age.

At full retirement age, no income restrictions apply. “There is no penalty for additional income earned,” says Gaito.

If you plan on working beyond age 62 and anticipate earning more than $15,480 per year, strongly consider putting off Social Security benefits.

 

To discuss how to convert some of your currently taxable income into tax-free distributions, please Contact Me

Michael Goodman
Life Insurance Agent, Santa Clarita, California

 

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The IUL Advantage – Case Study 1

I’ve been talking to a potential client and would like you to check my math and give your opinion. This woman is a healthy 37 year old with a good job who will have a nice pension when she retires, but no Social Security. She has been saving $1,000 a month in recent years and depositing it in a qualified plan, where it’s been invested in cash because she’s afraid of losing her money in the market, so it’s earning no interest. She’s single and still lives at home with her parents, so she’s getting killed on taxes, but the tax deduction helps a bit. The beneficiary of her qualified plan is her brother.

Here’s my analysis – “If you continue on your current path, you’ll save $336,000 through age 65 (not including the money you’ve saved already). You’ll earn some income tax deductions (maybe $117,600 if you’re in the 35% bracket) but that’s it.

Let’s take a look at what might happen if you earn 6% on the same money. $12,000 a year saved for 28 years at 6% will grow to $822,337. But there are two questions –

1. How will taxes affect you later?

2. Where can you safely earn 6%?

Let’s talk about taxes first. If you stay on your current course and have $336,000 (plus your previous savings) for retirement and take out just the recommended minimum distribution (1/21 at age 65) to supplement your pension, that’s $16,000 per year, with all of it taxable. That’s about $5,600 in taxes, leaving you about $10,400 per year from all your years of savings.

Assuming you can find an approved investment for your qualified plan that earns 6%, your $822,337 will pay out at $39,158 per year, all of it taxable. 35% taxes will eat up $13,705, leaving you with $25,452 per year, net.

One other thing, if you were to die before reaching retirement, your brother would receive the balance in your account and MAY be taxed in the year he receives it as regular income, resulting in a huge tax bite.

But, do you know of any investments that are approved for your particular qualified plan that will consistently yield 6% without risk of loss? I only know of one that gets close. An indexed annuity with an income rider. Using one of these can achieve that last scenario with costs of less than 1% per year. You can even reduce the tax bite by putting $5,500 a year into a Roth IRA because the future payouts from the Roth will be tax-free. This strategy will get your retirement income up to about $30,000 per year, net.

But there is one other strategy that we have discussed, the Life Insurance Retirement Strategy. Using an IUL (indexed universal life policy) the way we have discussed, you would only put HALF your future savings into the IUL ($500 per month through age 65) without fear of market losses, then you could take $70,000 per year TAX-FREE for life (assuming the S&P 500 performs the way it has for the last 30 years and based on the expected cost of insurance and fees for a healthy 37 year old woman). That’s more than double the results from half the savings! (you could still put the other half of your savings into a Roth and increase your tax-free distributions even more!)

On top of this, if you die before reaching retirement (or after), your family would get at least $511,417, income tax-free.”

What do you think? Should she -

A. Continue putting $1,000 a month into a qualified plan earning nothing?

B. Put $500 into a Roth IRA and the other $700 into the existing qualified plan, with both accounts going into an indexed annuity that earns a guaranteed 6.75% with the income rider at a cost of less than 1% per year (and also gets a bonus of 10% on all premium deposited in the first 7 years)?

C. Put $600 a month into the Life Insurance Retirement Plan using an indexed universal life insurance policy (IUL) and max fund a Roth IRA?

D. Do something else?

Keep in mind that this client is very risk-averse, so stocks are not a good choice for her.

I welcome your opinions.

Michael Goodman

Life Insurance Agent, Santa Clarita, California

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