retirement income

The 401(k) Versus the IUL (Part One)

The 401(k) Versus the IUL (Part One)
Which One Is Better For Building a Retirement Income?

Advantages and Disadvantages of the 401(k)

    I have noticed that the most popular article on this site is a comparison between the 401(k) and an Indexed Universal Life policy (IUL), which I wrote almost two years ago. So, I’ve decided to re-visit this subject in a more complete way (in two parts). I hope you find this useful and will offer your comments at the bottom.

I am a licensed life insurance agent. I don’t sell securities, I’ve never worked in a Human Resources (HR) Department, and I admit I’m not an unbiased judge. But if there are any errors in the paragraphs that follow, I hope you’ll point them out.

(If the “Comments” section is not available below, then you’re viewing this page in the main blog section. Just click the Title of this post, or any of the other posts, and you’ll be sent to a page with just this article, with the Comments section below it.)

Advantages of a 401(k)


    The 401(k) is a retirement savings program sponsored by many businesses, which offer this program instead of a classic pension program. Here are the reasons you might want to use a 401(k) to save money for retirement –

1. The 401(k) features an automatic payroll deduction so you don’t have to fight with yourself about whether to save the money or spend it. You may contribute up to 15% of your pay, up to a limit of $17,500 unless you’re over 50 years old, in which case you may contribute an extra $5,500 per year.

2. Many employers offer “matching” funds, where the employer matches your deposits up to a certain level each year, say 4-10% of your pay.

3. You get a tax deduction for the year in which the money is deposited into your account (the payroll deduction, not the matching funds), reducing your income taxes for that year.

4. You’re given a choice of investment options provided by your employer, most often a selection of mutual funds that invest in different segments of the market and allow you to tailor your investment to the level of risk which you are willing to accept.

5. Finally, when the stock market goes up, the account grows tax deferred until retirement.

Please let me know if I missed any of the advantages. In theory, the 401(k) offers a way to force you to save money, tax-deferred, for the future. But there are problems with this program.

Disadvantages of a 401(k)

The main problems of the 401(k) programs involve a lack of access, lack of control, risk, expenses, and the building of a future income tax problem. Let’s look at these –

1. Once money has been deposited into your 401(k) account, it is difficult and/or expensive to spend this money prior to age 59 ½. Most early withdrawals will be subject to a 10% penalty and will also be taxed as regular income. There are some exceptions, but they are strictly limited (if you’re a first time home buyer or have certain hardships like medical expenses, funeral expenses, job termination after age 55, or if you become disabled are examples). It is possible to borrow money from your 401(k) (at 5% currently), but the money must be paid back with interest within five years or it will be treated as an early withdrawal. If you are fired or laid-off before all payments have been made, the outstanding amount will be treated as an early withdrawal. In addition, any money borrowed stops earning interest that would have contributed to the growth of the account. There is also the “72(t)” option, where you may be allowed to take regular withdrawals over a period of time. However, these withdrawals must continue for at least five years and you may not add money to your account during these years, which will seriously limit the amount of growth over time and greatly reduces the income you will have in retirement..

2. Once you begin contributing to a 401(k), you may be able to increase or decrease the percentage of your income being deducted, but you cannot change the maximum limits allowed. You have no control over the amount of matching provided by your employer; who may increase the amount, decrease it, or do away with it entirely. You normally cannot choose to close the account and move it without quitting your job. If you don’t like the investment options provided by your employer, you cannot change them. If you want to start taking regular withdrawals before age 59 ½, you cannot do so without paying taxes and penalties. If you don’t need to take withdrawals at age 70 ½, the government will force you to do so (so they can start collecting all the deferred taxes) by charging you taxes and penalties on the money you didn’t withdraw.

3. Money will be invested in the stock market. When the market is going up, this is a good thing. But when the market is going down, your savings can be wiped out. This is not just a theoretical problem. Many people who retired near or soon after the market crash of 2008 found that their retirement dreams had been shattered by market losses. While the market came back in late 2012 and 2013, many of the people wiped out in the market crash were no longer IN the market and, thus, did not share in the gains. The fallout from the last market crash includes the facts that many seniors have been forced to continue working long after age 65, or they have had to dramatically scale back their retirement plans. Did you know that the largest employers of seniors in the U.S. are Walmart, McDonalds, and Burger King? Is that how you want to spend your retirement years?

4. The expenses charged against 401(k) accounts have been a secret that the securities industry did not want leaked. (there is a video from the “60 Minutes” tv show on this website that talks about these expenses, view it HERE) But in 2012, it became a legal requirement for certain expenses to be reported on the annual reports that show how your 401(k) is doing. These are just the charges by the company managing the 401(k), however, and do not include charges rung up by the mutual funds when they buy and sell stocks. Very few people are aware of all the charges and expenses that are reducing the amount their account grows each year.

5. Because the money deposited in a 401(k) gets a tax deduction when it is deposited and grows tax-deferred, all withdrawals become fully taxable as ordinary income at the time of withdrawal. Many people do not realize that the amount of taxes they saved when building their account will be paid back in just a few years, with all money withdrawn after that being assessed NEW taxes.

Here’s an example – Let’s say you earn $100,000 per year and deposit 15% of your income ($15,000) each year. That’s roughly $5,000 a year in tax savings (if you have kids and a mortgage, your tax savings are actually much less). If you were 35 when you started your account and saved for 30 years at this rate, you would have saved $150,000 in taxes and your account value has grown to, maybe, $1,200,000 by age 65 (a 6% annual growth rate). They used to tell retirees they can safely withdraw 4% of their savings per year but many advisors now know that that is too aggressive because we are living a lot longer than we used to be. If you withdraw 3% per year, that’s an income of $36,000 a year. This income is all taxable and, odds are, the kids have left home and the mortgage has either been paid off or paid down, so your deductions are much lower than they used to be.

In addition, your income will be high enough that part of your social security income will now be taxable (currently, if filing an individual return, additional income between $25k and $34k causes 50% of Social Security income to be taxable; over $34K causes 85% to be taxable. The rules for joint returns are – income between $32k and 44K are 50% taxable, with joint income over $44k 85% taxable). If you earned $100k per year, you’re going to earn the max Social Security income of $2,533 (currently), bringing your total income (not including your spouse’s Social Security income) to over $66,000. If you only have to pay 25% taxes on your $36,000 income plus ½ your social Security income ($15k), you’re paying $12,750 a year, paying back your $150,000 in tax savings in less than 12 years.

If you had more tax deductions while working, your tax savings from the 401(k) deposits will be less and you’ll pay back the savings sooner. If you earn better than a rate of 6% on your 401(k) savings, your taxes will be higher and will pay back the savings sooner. If your employer offered matching money, your account growth and retirement income will be higher, and you will return the tax savings sooner. If your spouse has retirement or Social Security income, your taxes will be higher and you’ll pay back the savings sooner.

The bottom line here is – the tax deduction you get when depositing money into a 401(k) is overrated and assumes that your tax rate will be lower in retirement than it is when working full-time. Overall, tax rates are at historically low levels currently and the U.S. has accumulated a MASSIVE debt burden. Do you really think tax rates will be LOWER when you retire? And please note: when you die (regardless of age), your heirs will get the balance in your account and all of the money will be taxed to them as regular income that year.

Is there a better way to save for retirement?  I Believe there is.  In Part two of this series, we’ll examine the Advantages and Disadvantages of an IUL.


Michael Goodman

Life Insurance Agent, Santa Clarita, California

The 401(k) Versus the IUL (Part One) Read More »

The 401(k) Versus the IUL (Part Two)

The 401(k) Versus the IUL (Part Two)

Which One Is Better For Building a Retirement Income?

Advantages and Disadvantages of the Indexed Universal Life Policy (IUL)


Advantages of an IUL

An IUL is an indexed universal life insurance policy and this is not the kind of life insurance your parents bought (term or whole life). The first universal life product was created by the life insurance division of a securities firm (E.F. Hutton) around 1980 for one purpose – creating tax-deferred growth. In those days, firms allowed the wealthy to pair a small term life policy ($5,000) with a tax-protected cash growth account (the top marginal tax rates were over 80% in those days). You could put $100,000 in the cash value account and the interest would grow tax-deferred. Sued by the IRS, the Supreme Court ruled that existing policies were legal but the IRS was allowed to force insurance companies to make their future universal life policies look and act more like life insurance products. So universal life policies are only for people with a need for life insurance (most adults do) and cannot be called “investments”, but they still offer wonderful living benefits for those that are aware of them. These benefits include –

1. Part of the money put into an IUL (the “premium) will pay the cost of insurance and part will go into the cash value account. When you die, regardless of age, your family and/or heirs will receive the death benefit free of income taxes. Depending on how your IUL is set up, the death benefit may include just the face value ($100K, $500K, $1,000,000, etc) or it may include the accumulated cash value also.

2. The premiums paid into an IUL are NOT tax deductible, but the growth in the cash value IS tax deferred, the same as a 401(k). There are few limits for the amount of money that can be placed into an IUL, the major limit being that there must be a certain relationship between the premium and the death benefit.  If too much money is deposited relative to the face value, the entire account becomes what is called a “modified endowment contract”, or MEC, and the account loses its tax benefits. But, when properly set up, the account will not be a MEC and the insurance company will monitor it to make sure it never becomes a MEC. Beyond this, there is no limit to how much money can be paid into an IUL, making it much more useful for many people, especially high income earners.

3. Indexed universal life policies are famous for the flexibility of the premiums. In any year, you have the option to cut the premiums to the minimum amount needed to keep the policy in force, or to increase the premiums and “overfund” the cash value up to the limit allowed before becoming a MEC. This allows the owner of the policy to tailor the policy to work best for his or her own unique situation, and also allows for changes when emergencies force them. At your annual review, you can also change the index tied to the growth of the cash value and you can also change the crediting method (fixed, annual point-to-point, monthly average, etc).

4. In an “indexed” universal life policy, the growth in the cash value is tied to a common stock index, like the S&P 500 index. When the S&P goes up, the cash value goes up. However, when the S&P goes down, an IUL does not.  The cash value either remains the same or goes up by a fixed amount (1-2%), depending on the company and product. This “floor” that protects the cash value from loss is one of the most important aspects of an IUL.  It is key for the long term growth of your retirement savings to avoid losses at all times, but especially when nearing retirement age.  This is also the reason why securities that do not have a “floor” will ALWAYS underperform the average of the stock market.

If you look at the performance of the S&P from 2000 to 2009, the average return (including dividends) was 1.21% per year (the annual returns were -9.10, -11.89, -22.10, +28.68, +10.88, +4.91, +15.79, +5.49, -37.00, +26.46, according to Wikipedia).  Using this average would lead you to believe that a $1,000 investment was worth $1,127.81 at the end of the ten years. But it was not. An investment of $1,000 was only worth $908.83 at the end of these ten years.

Why the difference, and why is this ALWAYS the case with investments that do not have a guaranteed “floor”? Because the annual return results do not apply to the same starting numbers each year. In 2000, you lose 9.1% from $1,000, leaving you with $909. Then, in 2001, you lose 11.89% from $909, leaving you with $800.92. In 2002, you lose 22.10% from 800.92 and have 623.92 left. See how the end of year numbers are changing? So, if the market goes up by 28.68% in year 2003 (as it did), your account only goes up by 28.68% of $623.92, which is $179.94, becoming $802.85. Those annual numbers do not apply to the original investment amount of $1,000, the starting number changes and is often a much smaller number. If the annual return over a given period includes ANY negative numbers, the actual performance of the investment is GUARANTEED to underperform the average.

Here’s another, simpler example – what is the average rate of return if an investment goes up four years, then down four years by the same percentage (let’s use 50%).  Four years of plus 50% followed by four years of -50% is an average rate of zero, right? But do the math. $1,000 goes up to $5,062.50 after four years of 50% growth. But after four years of 50% losses, you don’t have the $1,000 that you started with, you have just $316.40!!!  So, when some securities guy quotes the average return of some segment of the market over a period of time, don’t expect to get that return unless you know for certain that the market is ONLY going to go up each year and will never go down.

An IUL pays for its important protective “floor” by using a cap on upward performance in good years. The cap will vary by company and product, but is often in the 12-16% range. So, if the S&P 500 goes up 10% in a year, you get 10% added to the cash value in the IUL. But if the S&P 500 goes up 20%, you will get the cap of, say, 12%.  This is why we say that, when the market goes up, the cash value of our clients goes up. But when the market goes down, our clients are protected.

If you apply this strategy to those same years of 2000-2009 and use the exact same index, the average rate of return in an IUL with a cap of 12% and a floor of zero was 0, 0, 0, +12, +10.88, +4.91, +12, +5.49, 0, +12 = 5.78%. Keeping in mind that, for many people, the costs of insurance in an IUL are typically LESS than the fees and expenses in a 401(k), would you rather have the 401(k) that went down from $1,000 to $909 from 2000-2009, or the IUL that goes up from $1,000 to $1,745.42 while using the same index during the same period? Note that the IUL NEVER goes down because of market performance and does not suffer from the same “average rate” accuracy problem of securities that have no guaranteed floors.

5. If you thought the indexed growth and guaranteed floor were great, listen to this – most of the cash value in an IUL can be accessed at any time by simply asking for a policy loan. There are no qualifications for a policy loan, as long as there is sufficient cash value to provide the money. The effective interest rate will be zero, or very close to it, because insurance companies use “wash loans.” This means that the interest charged on the money borrowed will be the same or close to the money earned by the same amount of cash value.

When you get a policy loan from an IUL, you are not removing the money from the account as you do in a 401(k). With most companies, the loan amount won’t earn the full indexed growth rate (it’s normally a fixed rate), but it will continue to earn money, which will offset the interest for the policy loan. In addition, the money never needs to be repaid by the borrower. If you don’t repay it, the money will come out of the death benefit when you die. Policy loans can be used for anything you want, like emergencies, college tuition, a new car, the down-payment on a house, a vacation, to invest in a business.  The possibilities are nearly endless. You just need to keep in mind that any money not repaid will lower the income that you can draw later and/or the death benefit. Keep in mind that policy loans from life insurance are not subject to income taxes. Borrowed money never is.

6. Since borrowed money is not subject to income taxes, this means that you can build a retirement income with an IUL that is free of income taxes by using policy loans.  This LIVING BENEFIT simply swamps the 401(k)! I recently presented an
illustration to a 24 year old male (an illustration is a document that shows the possibilities and describes all the options and rules of an IUL) that is starting his first full time job after doing a year in an MBA program. He’s starting at $65,000 a year, with an annual bonus of 5-10%, so I assumed he could put $4,000 a year into his policy for ten years, then increase that to $10,000 a year after that. The face amount of his policy would start at $389,000 and would go up each year as his cash value increases.

When he dies, his heirs will get the face amount AND the cash value. Because he’s young, a non-smoker, in good health, and his face amount starts low, his cost of insurance is very low and the cash value builds very quickly. In the illustration,
which uses a growth rate of 7.62% (the average growth rate of this indexed strategy over the last 25 years), at the end of ten years, he has paid $40,000 in premiums but his cash value is already over $44,000 (all insurance costs and expenses have been deducted). From there, it gets very exciting.  At the age of 65, he can stop making premium payments and has $1,853,111 in cash value. If he waits three years and starts taking loans at age 68, he can borrow $245,745 per year, TAX-FREE FOR LIFE!

Since this is technically borrowed money, it will not make his Social Security income taxable. Isn’t that a pretty good return on total premiums of $350,000? If he were to die at 65, his family and heirs would get a TAX-FREE death benefit of $2,260,794. If this same money had been put into a 401(k) and earned the same net rate of return after expenses, the income would be fully taxed, 85% of his Social Security income would be taxable, and when he dies, his heirs would get the cash value and a massive tax bill!

I told you at the start that I am not an unbiased judge of these two financial tools, but I have tried to keep this analysis factual. But, I hope you can see why I am such a fan of IUL’s.

The Disadvantages of an IUL

This is the shortest section of this post because there are very few disadvantages to putting money into an IUL. Here they are –

1. The premiums paid into an IUL policy are not tax deductible in the year paid and not all of the money deposited in an IUL will be credited toward the cash value since part of the money must be used to pay the cost of insurance and other fees.

2. The upside growth potential of the cash value when the stock market is climbing may be limited by the cap.

3. If the stock market index tied to the policy does not grow for an extended period of time, or if the average growth rate is less than the percentage used in the illustration, the projections made in the illustration will prove to be overly optimistic and the performance of the cash value will be lower.

4. Access to the money paid into an IUL will be limited during the first 5-10 years.


I know this post (and the post before it) was long and I want to congratulate you for making it to the end. Please, tell me what you think. Which tool is better for building a retirement income? Is it a 401(k)? Or an IUL?  Thank you!


Michael Goodman

Life Insurance Agent, Santa Clarita, California


The 401(k) Versus the IUL (Part Two) Read More »

Retirement Planning Shouldn’t Be Stressful

Don’t Let Retirement Planning Make Your Palms Sweat

by Casey Dowd, The Boomer, Published March 28, 2013, FOXBusiness

Read more:

It used to be that when we turned 65, it meant it was time to leave the labor market. But now, boomers are delaying retirement-some, indefinitely.

The state of the economy coupled with unknowns like life span and how much we are going to need to fund our golden years has made the thought of retiring nerve-racking and seemingly undoable.

Nearly three-quarters of Americans find thinking about retirement saving and investing to be a source of stress and anxiety, according to the 2013 Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey released earlier this month.

The survey also uncovered misperceptions among pre-retirees about when they will stop working and begin taking Social Security benefits, which could jeopardize their retirement income.

Michael Doshier, vice president of retirement marketing for Franklin Templeton Investments answered the following questions about the findings in the survey:

Boomer: What did the survey find regarding anxiety and stress towards their retirement savings?

Doshier: Given the great importance and heightened anxiety surrounding retirement income, this survey is part of our efforts to better understand the topic and to bring useful insights to the marketplace. Some of our key findings are:

  • Stress/anxiety towards retirement begins earlier than commonly understood. The level of stress/anxiety that comes from thinking about retirement savings and investments peaks for those 6-15 years from retirement, with 39% of that group citing moderate/significant stress vs. 32% for 1-5 years from retirement and only 27% of those who have been retired one to five years.
  • Writing down a retirement income plan/strategy reduces stress related to retirement. People actually have a pretty good idea of what to expect when it comes to expenses during retirement, but have much less understanding of their income sources and  how they operate.
  • Anxiety regarding retirement income is reduced when one works with a financial advisor and has a written retirement income plan that they understand.

Boomer: What are the two retirement transition periods, and when do they happen?

Doshier: This finding has significant implications for both the financial services industry and consumers. Instead of one five-year window just before and just after retirement, when common wisdom says people are really gearing up and making changes for retirement, we found there are actually two periods, where much different actions are taking place and very different emotions are involved. We have named these two the financial and lifestyle transitions:

The financial transition is when people start thinking about – and taking action on – the financial aspects of their life in retirement. They look at how much they have saved/are saving. They begin thinking about how they are going to afford to retire and evaluate their investment portfolios.

Our survey found two key things about the financial transition period:

1)      It begins happening much earlier than is generally assumed (about 11-15 years prior to retirement)

2)  It tends to be more stressful than actually entering retirement.

The lifestyle transition is the period when people actually enter retirement. They are changing their lifestyle from one that is dominated by a consistent daily work routine to one in which work is not taking up the majority of their time. This transition appears to be less stressful than the financial transition just before.

Boomer: What are some of the top responses to making adjustments to retirement plans due to insufficient income?

Doshier: Surprisingly, the least attractive option involved changing to a more aggressive investment strategy. We believe this is due to the volatility in the market over the past decade and feel this has the potential to have serious, long-term effects as more people begin preparing for retirement. The top response was to delay retirement and work longer, with 62% saying this is what they would do if they faced a financial shortfall. This is troubling as we know that around a third of those we surveyed who retired before age 65 did not do so by choice – i.e. it was due to other circumstances like health issues and company downsizing.

The next most common response also involved continued employment: 45% said they would increase their sources of income (i.e. work part time). This was followed by reducing retirement expenses or lowering lifestyle expectations, at 44%. Interestingly, as people grow older, they are less willing to delay retirement or seek part-time work and are more likely to reduce their retirement lifestyle. Just 11% would consider a higher risk growth-oriented investment strategy that offers the potential for increased return while accepting increased risk of loss.

Boomer: What did the survey find about people’s tendency to work with a financial advisor?

Doshier: Those who have never worked with a financial advisor are more than three times as likely to indicate a significant degree of stress and anxiety about their retirement savings as those who currently work with an advisor. Not having worked with a financial advisor was also generally associated with less understanding about the practical aspects of retirement. For instance, 58% of those who have developed a written retirement income plan have a high degree of confidence about how much of their income will be replaced by Social Security, vs. only 35% of those who have not.

Boomer: What is meant by the term “Refocus Your Strategy” regarding retirement?

Doshier: Generally this means moving your strategy from an accumulation focus to one that is built with the idea of creating a sustainable retirement income. The refocused strategy itself will be different for everyone, as everyone’s situation is different. But a common thread is that if people don’t take the time to stop, assess their retirement goals and concerns, consider their expenses in retirement and understand the sources of income available to match those expenses, then they are not as likely to be ready for retirement.

Retirement has a lot of emotional as well as financial drivers associated with it. We strongly believe that working with an advisor who understands the complexities of retirement, including the emotional as well as the technical, to write out and regularly monitor a retirement income plan – even if retirement feels a long way off – is the best way to not only “retire” successfully, but to live with less anxiety and stress before you are retired.

NOTE FROM MICHAEL GOODMAN: Retirement planning doesn’t need to be stressful.  This article points out the importance of having a plan for retirement income and expenses and meeting with an advisor that can help guide you through the planning.  I offer FREE consultation and planning assistance and my clients never write a check to me or my company.  All you have to do is call me to set up an appointment.  My new direct line is – (714)585-2371


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