indexed universal life

What “Tax-Free Retirement” by Patrick Kelly Says for Doctors

by Michael Goodman

Tax-Free Retirement by Patrick Kelly

Way back in 2011, I reviewed the book, “Tax-Free Retirement” by Patrick Kelly and gave it a strong recommendation. That review is one of the most popular pages on my site. Now that my practice is focused on doctors, I thought this would be a good time to look at what Mr. Kelly’s book recommends for doctors.

Chapter 20

In chapter 20 of Patrick Kelly’s 10th Anniversary version of “Tax-Free Retirement” (2017), Patrick writes, “Doctors have many unique attributes. And in my opinion, their unique attributes are what makes this group one of the most significant to benefit from the strategies in this book.”

He then lists four reasons why doctors are a great fit for using an indexed universal life policy (IUL) for retirement planning.

“Reason #1

Most doctors make more than $196,000 per year, which is the phase-out limit for being able to contribute to a Roth IRA. Therefore, they have no truly viable tax-free retirement option available to them other than life insurance.” (NOTE: in 2021, a married couple making over $208,000 cannot contribute to a Roth IRA, while the maximum deposit is only $6,000 unless you’re over 50 years old)

“Reason #2

Doctors are specialists. They have given their lives to be the best at what they do – and they are. However, this level of specialty often leaves little time for less urgent activities such as retirement planning”

“Reason #3

Doctors are often taken advantage of by snake-oil salesmen in the financial realm hocking half-baked, poorly-formed investment strategies promising wonderful returns.

“Reason #4

Doctors generally need a lot of life insurance for three reasons. One, they need to protect a large income for their families. Two, they usually carry high debt. Often this is due to starting out in debt from large medical school bills and low wages during their residency and internship years. Three, doctors as a group have one of the lowest life expectancies of any profession.”

Bottom Line

Most doctors that work at a hospital have a contract that provides a life insurance policy (usually a term policy) and a retirement plan of some sort (usually a 401k plan these days). But the life insurance policy often leaves them under-insured and the qualified retirement plan is likely to create an income tax problem later. Doctors in private practice usually have to pay for everything themselves, or through the organization that owns the practice.

When comparing the various options available to doctors that want to supplement the benefits in their contracts, or create a retirement plan by themselves, Patrick Kelly says on page 147 of his book there is “one superior option – life insurance!” Explaining why, he summarizes that life insurance offers an “unlimited contribution potential,” “grows without annual taxation,” “takes no time to manage,” “provides a huge sum of money to the physicians family in the case of an untimely death,” and “best of all, if structured properly, the policy can allow access to future money tax-free.”

What’s not to like?

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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


Wall Street Math Read More »

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

The IUL Advantage – Case Study 1 Read More »

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