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.


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).


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.


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 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.


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

By Walter Hamilton (originally published on

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.


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IUL or 529?

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

There are a variety of programs that offer tax benefits to help you save money for your kids college education. Some of them offer immediate tax deductions and income tax deferral and some don’t. Most require that the money be spent on educational expenses or there will be a tax penalty, or at least loss of the tax benefits. Most importantly, when the kid finishes school, the money is normally used up. I’m going to tell you now about one of the greatest financial tools you will ever see or hear about.

An IUL (indexed universal life insurance policy) for a child gives you the opportunity to leverage a small amount of after-tax money while your child IS a child into a LIFETIME of tax-free financial benefits. To maximize the benefits for college, the policy should be bought ASAP after the child’s birth. There is no medical exam needed; the child just needs to be born healthy. These policies are issued very quickly.

Obviously, the chances of a young child dying is very small, thus the cost of insurance is extremely low. Part of the money you pay into the program will cover this cost of insurance plus any fees, and the rest will go into the cash value account. Like any other IUL, the growth of the cash value will be tied to the growth of a stock market index that you will choose, most often the S&P 500. Please note that your account is not actually invested in the market, the growth rate is simply determined by the market.

When the index goes up, your account will earn interest. When the index goes down, you will be protected by a guaranteed floor of 0%. Your cash value can NEVER go down because of the market, making this a very safe place to put money. To pay for this floor, there will be a “cap” to how much of the market growth can be credited to your account. If the cap is 14% and the market goes up 10%, your account will earn 10%. If the market goes up 20%, you will earn 14%. If the market goes down, you will earn 0% and your cash value will stay the same. With a cap of 14%, your cash value will grow somewhere between 0 and 14% every year, after the cost of insurance has been deducted.

How does this work out? Assuming the market continues to grow at its 30 year average rate of 8.39% and you put just $100 a month into the account through age 18 (then STOP), you should have tax-free access to $10,000 a year for each of four years of college, PLUS a $50,000 tax-free distribution at age 35 (house down payment?), PLUS a tax-free distribution of $250,000 at age 55 (pay off or pay down the house?), PLUS tax-free annual distributions FOR LIFE of over $200,000 a year starting at age 67! On top of this, the death benefit will have gone up from $115,000 at issue to over $1.6 million at age 66, with no additional out of pocket cost.

These distributions are just illustrations and are not set in stone. There are a million variations on when and why you might take the tax-free distributions. We assume that the parent (or a grandparent) will buy the insurance for the kid and will own the policy until they believe the child is ready to take over ownership of the policy.

Can you deposit more than $100 a month into one of these polcies? Yes, to a limit.

Does the child have to be an infant? No, but to maximize the growth, should be as young as possible.

Is the growth guaranteed? No, it will depend on the growth of the index tied to the account.

Are there any other catches? Yes. Two people –  parents or grandparents –  must have a life insurance policy with the same company. It can be a term policy, whole life, or IUL.

Any other questions?


Michael Goodman

Life Insurance Agent, Santa Clarita, CA


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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)

1984 – 1.4% 1994 – -1.5% 2004 – 9.0%
1985 – 26.3% 1995 – 34.1% 2005 – 3.0%
1986 – 14.6% 1996 – 20.3% 2006 – 13.6%
1987 – 2.0% 1997 – 31.0% 2007 – 3.5%
1988 – 12.4% 1998 – 26.7% 2008 – -38.5%
1989 – 27.3% 1999 – 19.5% 2009 – 23.5%
1990 – -6.6% 2000 – -10.1% 2010 – 12.8%
1991 – 26.3% 2001 – -13.0% 2011 – -0%
1992 – 4.5% 2002 – -23.4% 2012 – 13.4%
1993 – 7.1% 2003 – 26.4% 2013 – 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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