There's a book out recently by a “financial strategist” whose background is in insurance that advocates trying to avoid paying any taxes in retirement. This is actually possible to do. You basically only have enough money in traditional IRAs/401(k)s that it can be withdrawn in the 0% tax bracket (up to around $20K a year this year for a married couple taking the standard deduction). With little other income, Social Security is tax-free. Withdrawals from Roth IRAs are, of course, tax free. If you're in the 15% bracket or lower, long term capital gains and dividends from taxable accounts are also tax-free. Muni bond yields are also tax-free. None of this is earned income, so you don't pay any payroll taxes on any of it.Those who push strategies like this also tend to sell cash value life insurance, so they like to point out that loans from the cash value of your life insurance policies are also tax-free (although they don't mention as often that the loans aren't interest free.) So the strategy is minimal tax-deferred money, very tax-efficient taxable accounts, cash value life insurance, and a lot of Roth money through contributions to Roth IRAs, Roth 401Ks, and Roth conversions. I think the strategy is ill-advised for several reasons.
Tax Fear Mongering
The first problem I have with people advocating for this is that they do a lot of fear mongering. They like to say things like “Tax rates have never been this low so they're sure to go up in the future.” Well, tax rates aren't actually the lowest they have ever been. You may have noticed the increase in tax rates the last 5 years or so under the Obama Administration, but if you haven't, check out this link. The chart demonstrates that our lowest tax bracket has been both lower and higher than it currently is, that our highest tax bracket has been both lower and higher than it currently is, and that our average effective tax rate has been both lower and higher than it currently is (and remarkably stable, to boot). In addition, capital gains/dividend tax rates have been both higher and lower than they are now. There is absolutely nothing that is particularly different about tax rates now vs what they have been in the past. Tax rates do change with the political winds, but if all you're looking at is the historical data, it would seem just as likely that tax rates are going to go down as up. That argument is pretty easy to refute.
The next argument advocates of this strategy generally pull out is that “since our US debt is out of control and the Fed is printing money like crazy then tax rates are sure to go up in the future.” Several articles/books I've seen suggest tax rates are likely to double. While I won't deny that it is quite possible that tax rates will go up in the future, I don't buy that our national debt is particularly out of control by historical standards. Take a look.
This chart from The Atlantic shows that while our debt as a percentage of GDP is high, it certainly isn't anything particularly different from what we've had in the past. It was a whole lot higher in the 1940s, and we saw plenty of prosperity in the 1950s and 1960s (and if you go back and look at the other graph, the effective tax rate didn't go up during those decades.) I suspect that most people making this argument are either uninformed about history, or selling something (like books, ads, or more likely, whole life insurance.)
Lack of Understanding of Filling the Low Brackets
There are a lot of people who don't get this. It turns out that maximum tax rates can go way up between when you contribute to a 401K and when you withdraw your money and you can still come out ahead. Not only do you get decades of tax-protected growth, but you are also likely to have far less taxable income in retirement than when you are working. For example, you might have enough income while working to be in the 6th bracket, but since you need/have far less income in retirement, you might only be in the 2nd or 3rd bracket. So even if each bracket went up 5% or 10%, you STILL have a lower marginal rate in retirement.
You also may get to withdraw a significant amount of that income at less than your marginal rate. A typical doctor might save money at 33% by contributing to his 401K, and then withdraw a good chunk of it at 0%, 10%, and 15%, such that his effective rate on withdrawing is 10-20%. Obviously, saving taxes at 33% and paying them at 15% is a winning strategy. Who benefits from talking you out of maximizing your 401K contributions? Those who are selling an “alternative retirement account” i.e. cash value life insurance. I don't know if insurance salesmen are ignorant or conniving, but either way you probably don't want their advice on this question.
Lack of Understanding of the Cost of Roth Contributions/Conversions
Regular readers know I am a huge fan of tax diversification in retirement. By having money in tax-deferred accounts, Roth accounts, and taxable accounts, you can minimize your tax bill in retirement, which, all things being equal, is a good thing. I contribute to Backdoor Roth IRAs each year and when I was in the lowest tax brackets (residency and military service) I preferentially put money into Roth accounts. I may also do some Roth conversions in low income years and early retirement years. Roth is great. However, when you're in your peak earnings years and you have to choose between tax-deferred and Roth contributions, the right choice for most is the tax-deferred account. There is a very real cost to going Roth. For example, if you have a $17,500 401K contribution and you're in the 33% bracket, going Roth is going to cost you $5,775 in taxes. If it were a SEP-IRA (which you could then convert to a Roth IRA) with a $52K contribution limit, that would cost you $17,160 in taxes. That is hardly insignificant. Yet, that is what these folks are advocating you do. “Pay your taxes now, while they're low.” Well, 33% isn't low compared to the rate at which most people are going to be withdrawing money. Conversions are the same deal. They cost money, and if you're in a high bracket, they cost a lot of money.
Mixing Insurance and Investing
Perhaps the biggest reason I dislike this idea of going for a zero percent tax bracket in retirement is it causes people to “invest” in cash value life insurance policies that they wouldn't otherwise buy. Remember that I said that all things being equal, a low tax rate in retirement is great. However, all things aren't equal if you're paying taxes at high marginal tax rates in your peak earnings when you don't have to and they certainly aren't equal if you're earning the low returns available in whole life insurance instead of the higher returns available with more traditional investments like stocks, bonds, and real estate. Remember you buy life insurance with after-tax dollars. So you can put $17,500 into your 401K, or you can pay a life insurance premium of $11,725. If the 401K investment grows at 8% and then is withdrawn at a 15% tax rate, and the life insurance cash value grows at 4% and then borrowed tax-free (but not interest free) 30 years later, the difference is $149,682 vs $38,029. Which would you rather have? I don't particularly think that cash value insurance compares favorably with a taxable account, but I can understand why some conservative, highly taxed investors might find it attractive. However, when you compare life insurance to a 401K or Roth IRA, the insurance nearly always comes out looking terrible.
Trying to get into the 0% tax bracket in retirement eliminates the benefits of spreading your income out over many years (and thus fully utilizing the low, non-zero brackets). It can also cause you to make mistakes in the Roth vs Tax-deferred decision and in the Investments vs Insurance (masquerading as an investment) decision. The goal isn't to pay as little in taxes as possible in retirement. The goal is to have as much after-tax, after-expense money to spend as possible in retirement, at least when adjusted for risk taken. Don't fall for the Zero Percent Bracket argument made by insurance agents when selling their wares. Tax diversification is good, but only at the right price. Going for the Zero Percent Bracket will probably cause you to pay too high a price.
What do you think? Do you plan to pay zero taxes in retirement? Why or why not? Have you heard this argument from insurance agents? Sound off below!
I find it odd how a lot of “investment minded” folks love to bash whole life insurance. And yes I am speaking directly of whole life not VUL or the Indexed products out there that even us in the industry have a hard time explaining. Am I biased – absolutely! A solid dividend producing whole life product is a great part of a portfolio. Notice I said part of not all of! Those who bash it in my mind do not truly understand the power of the product and how it really works they just choose to go with the insurance companies are ripping you off, it’s a poor investment compared to the market or some investment with much more risk involved.
This post certainly won’t sway many but I ask you to do some research first before you run down a product. Other thing I find odd is most of us “dumb insurance guys” really don’t go around bashing investments. You rarely ever win by bad mouthing the competition.
All I know is that a product that provides cash while I am living – yes loans have interest but when your dividends are not affected by loans and pay full while your money is out you truly recapture the interest – long term care coverage if needed (via a rider) and tax free dollars to my heirs (whole life means my whole life!) can’t be such a poor investments for some of my dollars.
A ton of generational wealth has been created in the U.S. by the use of whole life insurance so those before the wise investors types knew something! I know my heirs will be very happy when the big bad insurance company hands them several hundred thousand dollars with zero tax implications.
Food for thought not looking to argue just trying to get some to understand it is not a bad place to put some of your money!
Invest wisely and do your homework 🙂
I disagree with your statement that it is not a bad place to put some of your money. It is optional at best and many, many people who purchase it regret their decision. That’s why 80% of purchased policies are dumped prior to death. Want to meet some of the folks who are pissed at the “dumb insurance guys” who sold them a policy inappropriately? Wander in here:
https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
Certainly your right to disagree – it’s your sight and I would not expect otherwise! There are a ton of bad policies out there so no need to look at your link just as there are a ton of bad investments out there. The product I speak of does not fit into any of those categories. Whole life, dividend producing, non-direct recognition, look it up there are few out there. And many who dump them prior to death made a poor decision that unfortunately only their heirs regret. Again I know you won’t agree despite all the information I could provide hopefully some that like to read will – enjoy the holiday weekend!
Very familiar with them. Still don’t like them. I mean, if you’re going to buy one might as well buy a
goodbetter one, but I wouldn’t even buy a “better one.”No problem I wasn’t asking you to buy! Good thing this is all just opinion and there are certainly many investments I’m sure you push to your doctors that I wouldn’t think twice about. And I’ll still argue you really don’t know all the ins and outs of a good policy. Not sure of your credentials but you can look mine up. Most that go with the Suzy and Dave approach of buy term and invest the rest don’t and they all have an agenda. Thanks for the debate it’s always fun !
What’s my agenda? I sell neither investments nor insurance. No dog in this fight. I’ve owned whole life. I’ve studied whole life. I’ve looked at hundreds of policies. I’ve talked with people who hate their policies. I’ve talked to people who love their policies. I’ve talked to those who sell it. I’ve got a pretty good handle on it. Still not a fan. It’s not appropriate for the vast majority of doctors, much less run of the mill Americans.
Kindly disagree. My guess is you do somehow have a dog in the race vs. just spreading the good word but honestly don’t really care. The fact is that it is a good part of a portfolio for most people, doctors included. Again structured correctly. Contrary to what you say a vast amount of people like guarantees. CD’s could be said to be a VERY poor investment but look at how much $$ is sitting in them across the banks in the US! You should always have some of your money in the market exposed to risk and higher returns. I use my WL as my bond portfolio because behind the scenes that is exactly what the investment is. My company has very little of it’s WL portfolio exposed to market risk. It’s not get rich quick it’s slow and steady to the finish line with a ton of benefits along the way. Contrary to what you say a lot/millions of people like that.
We will not agree on it so we will agree to disagree – have a great holiday and may your practice flourish! You have to work in one of the most messed up systems in the US so for that I’ll give you credit!!
okay I’ll bite. Please list and detail for me the pros and cons of such an investment. I’m 58 and retired and have lots of time to learn more. Thank you
Would love to John but have a busy day starting with a conference call in 3 minutes. I will respond later today or feel free to email me at [email protected] as to not use someone else’s blog for a one on one
Take your time and please respond here as white coat investor is always a great addition to any conversation. Thanks
PROS
Guarantees – yes it takes time with the typical policy structure but over time those are very nice conservative gains
Tax Free Supplemental Retirement Income – key word supplemental. Most critiques think we are trying to put all of someone’s money into a product like this – frankly just not true. Again structured properly you can access virtually all of your policies values on a tax free basis. You pay with after tax dollars but it grows tax deferred and again can access tax free. Again critiques like to say not so but they really do not understand the product completely – only tax ramifications are if you surrender the policy which you do not need to do in order to utilize the cash. is there a charge (interest on loan)/ YES but with a non-direct recognition policy we pay a full dividend even while money is loaned out so you really do recapture that interest. What bank pays you interest on money no longer in their hands??
Long Term Care Supplement – with a rider policy values can be used for Long Term Care. Those that say you can self fund LTC are insane at what can potentially cost over 10K a month – this is a very viable and inexpensive option you are spending death benefit in advance but the policy will still cover final expenses
Those are a few of the pros there is also tax free dollars to a charity or heirs if you don’t use it for any of the above and even if you use it for the above again if structured properly there will still be death benefit available.
CONS
Some would say you can invest in markets and make more and I whole heartedly agree. But a wise man once said it’s not always about the return on your money but the return of your money. It’s not a get rich quick investment it takes time so in your instance (age 58) maybe not what you are looking for – see contrary to belief most on our industry don’t just sell you something like this to make a buck – most of us work off of ethics and every industry has it’s bad eggs!
I have refuted a lot of the cons listed in this thread but I am sure more will come after this post.
I honestly don’t have the time to blog and defend and kind of regret getting in on this one – not my normal mode of operation but I saw someone ripping a good acquaintance of mine and jumped in!
If you want any further details you can email me no more time needs to be spent on this site as it won’t lead to anything that positive on my end
Just because LTC can cost $10K a month doesn’t mean it has to. The national data suggests an average of $7K for a semi-private nursing home, $8K for private and under $4K for assisted living. Remember that that cost essentially replaces all your other living costs. At any rate, even if it were $10K, that’s $120K a year. Yes, I think a multi-millionaire can afford to self insure that risk. Yes, I think most of my readers should retire as multi-millionaires. Hardly insane. I find buying WL for LTC rider to be a ridiculous idea. But given that you sell it for a living, I’m not surprised you don’t.
All sources of money left to charities are tax free. Everything except HSAs and tax-deferred accounts left to heirs are tax free. You don’t need life insurance to transfer assets tax free.
I agree that whole life isn’t a get rich quick scheme. It isn’t even a get rich slowly scheme. It’s not even a get rich scheme.
I’ll let the reader decide whether most in the industry sell something like this to make a buck or not. Here’s some readers that I’m confident will disagree with you: https://www.whitecoatinvestor.com/forums/topic/inappropriate-whole-life-policy-of-the-week/
I’m not seeing that you’ve refuted a thing here. I love that you have a “CON” section without actually listing any cons.
Seems to me you make a living doing just the same – you must not have many patients if you can blog all day. You come off as somewhat of a smart a$$ that knows everything and us dumb insurance guys are far less educated and inferior to your knowledge base, must be the doctor complex!
Cons – I don’t believe there are many thus the short list. No need to refute your points, it’s time wasted just like these many responses. You won’t change your view so move on to your next topic of advice for your many readers.
I help a lot of people on a daily/weekly/yearly basis and walk away from it with my head high knowing they are in a better position today than prior to meeting with us and no not everyone gets a WL policy – a good financial advisor has the clients best interest in mind which utilizes many products /accounts not just all market driven investments – you have a very one sided agenda and opinion which really makes me question your ability to be a good advisor – you certainly write like you are but I don’t see any credentials other than PHD
You already posted your one example and I could easily find someone to say the opposite
And FYI most people do not retire as multi millionaires and to think you can make them into it says a lot about your over confidence in your one size fits all advice. Glad there are guys like myself out there to help those who didn’t have the luxury of working with an investment genius like yourself or the ability to earn in the several hundred thousand range a year range!
Weird, an insurance agent going ad hominem in the comments section of a blog about whole life insurance. That never happens around here. Except every time. I have no doubt you feel there are no/few cons to WLI. If your goal is to change my view, you’re right, you’re wasting your time. Just like the last 100 agents.
Real financial advisors don’t sell life insurance. Insurance agents do. Selling insurance can be a noble profession, but not when you sell people a product they don’t need and by the time they understand it, don’t even want.
This blog isn’t written for most people. It’s not even written for PhDs (a degree which neither I nor most in my profession have.) It’s written for high income professionals who get targeted by insurance agents who want to sell them big fat whole life policies they will soon regret buying. You may not realize you’re not the target audience. You are actually the guy I’m warning my readers about. The point of my blog is to put commissioned salesmen masquerading as advisors who can’t even see a con to whole life insurance out of business.
I’d wish you good luck with your career, but I actually hope you have very poor luck with your career and are forced to either dramatically change your practices or quit altogether.
The problem with using it as the “bond portion” of the portfolio is that it doesn’t do most of the stuff you buy bonds for.
It’s lousy for shorter term investments (negative returns typical for first decade.)
It’s difficult to use for rebalancing the stock portion of the portfolio.
Even if you look at it as “it’s just the insurance company buying bonds for me” then why would you pay the additional costs of having the company do that instead of just doing it yourself?
Just because long-term returns are bond-like, doesn’t make WL a bond substitute.
[Ad hominem attack deleted.]
The ad hominem attacks by the whole life poster illuminate the lack of professionalism. Comments like I don’t have time to refute your points because you won’t change your mind are just a cop out for not wanting to actually engage point-by-point. A true professional will never ever ever ever ever resort to ad hominem attacks no matter how insulting the customer. I’m disappointed. I was hoping to see more interaction and details describing situations where certain policies might be a good idea but that has not happened. Feel free to apologize and come back and up your game. One of my favorite sayings is rather than Raise Your Voice reinforce your argument and I think it really applies here.
This might be the article you’re looking for:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
Thanks
I am appalled by your lack of professionalism. (But wait. By your own account, you are neither a financial adviser nor a PhD. So, what does that make you?) I am sure your readers are wise enough to see through your stubborn and erroneous conclusions. That may account for the low readership of your blogs. One reason you, along with the Dave Ramseys out there, can say what you say and get away with it is because you lack the licenses required for the profession. Were I, or any other licensed agent say what you are saying, our license(s) would be pulled and our practice sanctioned. This may clarify the point.
Suppose I, without any medical training, schooling or certification of any kind, begin not only dispensing medical advise, but attack certain medical practices as being detrimental to your well being. I would call it “The Blue Collar Physician.” I would rant and rave about a particular practice, commonly used by those licensed, medical professionals. I would demonstrate how many have even died from following the advise of these practitioners. Has anyone died following a dr’s visit? Sure. Many have also lost limbs as well as other organs. Yet to paint all physicians with the same brush, without looking at the circumstantial evidence, is the most ignorant act. Still, I could do it and the official regulating body could do nothing against me. Why? Because I am not licensed. The have no recourse. That is why you, Ramsey and others can trash the industry all day long. Does that make you right? Far from it. It does make you look foolish, though and your readers will either be wise enough to see through your tirade, or will painfully suffer the consequences of following your phony advise. The saddest part of all, however, is that, at that age, it is too late. There is NOTHING they could do to make up for loss of time and opportunity. Thus, you cause more harm than good.
My advice? Get licensed. Delve into the industry, so you can come up with your own pros and cons of each product available, with a measure of credibility. Then your eyes will be truly open to the many benefits attainable through life insurance. Until then, you are simply blowing hot air.
Stay on topic
I would encourage you to start that Blue Collar Physician blog. I think it would be really useful to consumers of health care. It certainly needs to be trashed at least as badly as the financial services industry. I hope you have a ton of success with it because it is an important message.
But your argument that “we’re not so bad, look at health care” isn’t a particularly strong one. Nor is “you should get licensed to sell insurance” which makes zero sense at all. Why would I pay for that license when I don’t plan to sell insurance? I certainly don’t need a license to “delve into the industry.” I’m delving just fine, seem to have plenty of credibility (certainly more than those who are scamming docs daily into buying insurance they don’t need and don’t want once they understand how it works), and am already well aware of the “many benefits attainable through life insurance.” I just don’t think those benefits are worth the cost for the vast majority of my readers. Sorry if pointing that out hurts your income. Oh no wait, I’m not sorry, that’s the whole point of my site.
If your product is so awesome, it will be obvious to my best-educated readers, but the more they learn the less likely they are to buy it. Weird. Awesome products don’t need an army of salesmen to get informed consumers to buy them. They sell themselves. 80% of WL policies are surrendered prior to death. People don’t want what you’re selling and they feel scammed when they realize what they’ve bought. Hardly my fault for trying to get them to see that BEFORE they buy it.
I was all ready to learn about the features and have them discussed in detail but the poster doesn’t appear willing unfortunately
Wow! Are you serious? Do you know how unethical that would be? Oh, wait, maybe you wouldn’t. I used that as an example of how foolish it would be for me or anyone to launch such a site, though apparently, the meaning went totally over your head. Your argument that 80% of WL policies are surrendered (even if your facts are accurate, though you do not cite your source.) is meaningless. An equal or greater amount quit their exercise regimen, a diet plan, a marriage, schooling, etc. Does that mean such activity(ies) were not worth pursuing? No, it just means such folks were distracted by other pressures in their lives or were misled by charlatans like you who tell them to quit. Shame on you.
To put it in a different way, tell me, seeing as how there are thousands of insurance agents, who have studied and delved into the industry, who have spent countless hours studying the products, and have gotten credentialed, who have paid claims to survivors and have seen the value of life insurance, who are practicing their field, many for a lifetime, all advising their clients in such a manner, you are telling me they are all wrong? Whereas you, who has, by your own accord not studied squat in the matter, are not licensed and refuse to delve into the product lines, you are the only one who is right? Your answer should tell your readers lots about your character. You are too much into yourself, man! You do not have all the answers. Stop pretending you do. If you really want to do a service to your readers, get licensed, see things from a different perspective, then you will know what you do not know now.
I hope you have very little success in your chosen career given your views on this subject.
The facts are correct, as discussed here: https://www.whitecoatinvestor.com/the-statistic-whole-life-salesmen-dont-want-you-to-know/
I’m disappointed you’re not familiar with them. Very disappointed. It seems like a rather critical thing to know before selling whole life insurance to people.
When people quit their exercise regimen or diet, they don’t walk away with losses of tens of thousands of dollars. But I agree that walking away from a whole life policy can be as expensive as walking away from a marriage. Very similar in many ways- you’re stuck until death do you part or else it’s going to cost you a bucketload.
I disagree that all insurance agents believe whole life is some magic panacea to the financial problems of my readers. There actually are some good guys out there. You are clearly not among them. But yes, those agents who think there are no cons to whole life insurance are all wrong. Whether that is because they don’t care about those they sell to or out of simple ignorance, it is difficult to say. I’ll leave that for the reader to decide.
But as for you and your ad hominem attacks, you can take those elsewhere. Have a nice life. I hope you enjoyed your last comment on this site as we don’t permit ad hominem attacks here.
Javier, you said this:
“…Your argument that 80% of WL policies are surrendered (even if your facts are accurate, though you do not cite your source.) is meaningless…”
Javier, Whole Life fail rate is 82% in the 50th policy year, and 86% in the 60th policy year. This comes from SOA/LIMRA’s own research. To see this for yourself, please search for this doc:
research-2007-2009-us-ind-life-pers-report(doc)pdf
Then please go to PDF page 16 and do the math on that lapse chart you find there at Figure 2 — Trends in Policy Lapse Rates
Javier, you call this excessive and egregious lapse rate “meaningless.” Each year Americans and Canadians pour billions of dollars into WL policies that end up lapsing (please see www(dot)iii(dot)org/fact-statistic/facts-statistics-life-insurance). Very many of these many thousands of folks who lost their death benefits and cash value in lapsed WL policies will have choice words for this failure. “Meaningless” will NOT be one of them.
Hope this helps and thank you for reading.
Real IULMath do you have a site or email address?
Hi Bethany. I’ve been working on putting up the site, esp to include tools to let folks analyze their IULs. These would let an IUL holder learn how soon her IUL will implode and how much extra premium she’d need to pay into her IUL to keep it from that sad fate. Which’ll almost surely add up to more total premium than what she’d have to pay for an equivalent Whole Life policy.
That would be great.. I will follow here and if you leave a comment then I will find it. My situation is unique as my primary investment vehicle has been real estate and I’m mostly interested in looking at getting my old 401k $ into a tax sheltered format which I could leverage, which is why the variable policies seemed interesting to me. But after all the above I am not so sure.
Your old 401(k) IS in a tax-sheltered format. Tougher to invest in real estate than a self-directed IRA that you could roll over to if you want. There are some rules about leverage in retirement accounts though.
Bethany, to be clear I’ve seen enough xULs to know the eval tool will just give ongoing validation that *no* completely carrier-based UL (e.g. IUL, original UL, carrier-directed VUL) is ever worth your money. The hard fact is that, for these “retail” UL products, the carrier offloads nearly all the policy burden onto you, the insured. The carrier has little reason to fight to maximize your return because all it’s contractually obligated to deliver to you is a 0–1% “index floor” return. For this, the carrier uses nearly all your cash value to buy boring old investment-grade bonds that deliver only 2–2.5%. With your few cash value dollars left over (5% or less of the total), the carrier typically buys index options–which may or may not pan out. You’re as likely to lose money as make money on these options.
A UL *may* be viable only if:
1) you can choose your own investment mix and;
2) you have enough assets and premium dollars to make the tax shelter worth it, and;
3) your manager can very flexibly and dynamically optimize your UL to minimize Cost of Insurance (COI) expenses and maximize returns, and finally;
4) you keep your management costs down to a dull roar.
Bethany if your net worth and income is high enough, you *may* get all the above with a Variable UL (VUL) tucked inside a Private Placement Life Insurance (PPLI) wrapper. You may even be able to transfer existing real estate into the PPLI. BUT a PPLI can be very complex, and expensive to set up. You’ll need to be super looped in at that early stage. Usually you use a law firm to set it up. The PPLI Wiki and the NYT piece titled “Tax-Free Life Insurance: An Untapped Investment for the Affluent” gives a decent intro to PPLI. Bear in mind the NYT piece is from 2011 and PPLI regs may have changed considerably since then. Domestic and offshore PPLIs can differ considerably. For the domestic PPLI you may need to show $200k/year income for two years and $5m in investments. Offshore PPLIs often have lower entry barriers and lower management costs.
Key —–> the carrier offloads nearly all the policy burden onto you,
[Post removed as poster has threatened legal action against this site.]
Wow. 3500 word comment posted on a blog post written 5 years ago that is only 1400 words long. That’s impressive, even for an insurance agent. You are an insurance agent, of course, even if you call yourself a “comprehensive financial advisor.” So no surprise that you think insurance is a great investment. It’s not, even if one can borrow against it tax free. The returns aren’t even bond like in anything but the very long run, and even then, they are lower than bonds. For the first decade they’re generally negative. How is that bond like? Would you buy a bond knowing you would have a negative return for a decade? Of course not.
At any rate, a real financial advisor doesn’t sell products, they sell their time. Just like an attorney, an accountant, or a physician. You sir, are a financial salesman. Your book is used by agents to sell whole life insurance inappropriately. Most purchasers of whole life insurance regret their purchase. A recent survey I did of physicians showed 75% of those who have bought it regret it. 80% of purchasers surrender it prior to death. That’s terrible for a product designed to be held for your entire life. The statistics are very clear. This is a crummy product designed to be sold, not bought.
Time is NOT vindicating the strategies in your book. You asserted in the book that tax rates were likely to go up, when, in fact, they went down since the book was written.
I love how you slip little words into your sayings to make them technically true, but misleading. Such as this one:
I did not make the claim that all policies charge a net interest rate. In fact, it is possible to buy a policy where the dividend rate matches the interest rate. That, however, does not mean it is an interest-free loan.
The fact remains that a goal of a 0% tax rate in retirement, the entire premise of your book, is counter productive. Tax diversification is good. Roth conversions can be good. Even a whole life insurance policy can be good in the right circumstances. But going for 100% tax free income in retirement is not. You owe the world an apology for writing that book. I don’t expect to see it though. Your argument is wrong. I’m not sure if you’re making that argument out of ignorance or because you’re trying to sell more whole life insurance or to help other agents to sell more life insurance. But the argument itself is wrong. That’s the problem.
[Post removed as poster has threatened legal action against this site.]
For some reason, your industry doesn’t seem to sell those policies to my readers. Instead, they sell policies that seem designed to maximize the commission charged. Maybe that’s why the Society of Actuaries notes that 80% of policies are surrendered prior to death. This M.O. seems fairly typical for your industry. So even if I gave that impression that most policies charge a net rate of interest on loans, that statement is likely accurate, even if there are some policies that have wash loans.
If you feel that the central premise of your book is that future tax rates must rise precipitously, I really think your argument is wrong. Tax rates don’t have to rise precipitously. As demonstrated in the chart on my post, the US GDP to debt ratio is nowhere near the highest it has ever been and it seems to be leveling off as noted here: https://www.macrotrends.net/1381/debt-to-gdp-ratio-historical-chart
Besides, even if it is decided to lower that ratio, there is a far more politically attractive method than raising tax rates: inflation. That debt can be inflated away very quickly at 1970s style inflation rates. What you did in your book is simply classic fear mongering about future tax rates that has real life consequences on people that follow the advice there. They buy inappropriate whole life insurance policies, make inappropriate Roth 401(k) contributions, and do inappropriate Roth conversions. Your advice is costing real people real money that they could be spending now and/or in retirement or leaving to their heirs. It needs to be debunked.
I know you feel that the future will vindicate your opinion. Even a broken clock is right twice a day. How long do we have to wait for rates to rise before we can say you were wrong? 5 years? 10 years, 20 years? If it’s 50 years, well, that’s irrelevant to the decisions people are making today for their retirement. It’s already been 5 years since you wrote the book and tax rates have only gone down. How much longer do we have to wait?
[Post removed as poster has threatened legal action against this site.]
I’ll check back with you in another five years and we’ll see if tax rates have doubled yet. Because a small increase isn’t going to make your recommendations right. I’m really curious to hear which 51 senators are going to vote for doubling tax rates.
By the way, you may not have noticed that IRA withdrawals aren’t subject to Medicare tax. That comes from payroll taxes.
David McKnight, do you still promote Indexed Universal Life (IUL) policies?
Thank you in advance for your answer.
http://powerzerotax.com/2014/04/27/dispelling-iul-fee-myth/
Yeah David McKnight. Something tells me we won’t be hearing any more from you about the fatally flawed IUL, of which you were once a big fan.
You cannot, in any way, defend these diabolically-designed meant-to-FAIL life insurance policies.
Happy New Year. I hope one of your resolutions is to make amends for the years you’ve spent promoting such terrible fraudulent instruments.
WCI you say: “…Society of Actuaries notes that 80% of policies are surrendered prior to death…” That includes Whole Life policies, the least awful of the cash-value policies.
Narrow the filter to just *retail* Universal Life policies (the original ULs, carrier-asset based VULs, IULs) and the failure rate will be HIGHER, likely well over 90%.
My n = 1. I’m a fee-only financial advisor who’s reviewed over 200 policies, mostly the so-called “Indexed” Universal Life (IUL) policies. In my experience, xUL (UL, retail VUL, IUL) failure rate is near TOTAL. Transamerica launched the first IUL in 1997, and due to industry hype and increasing collapses of the original ULs, IUL sales picked up in 2006, 12 years ago. Despite that, of the 125+ IULs I reviewed, exactly NONE were over 8 years old, and ALL were very sick cash-starved puppies.
Carriers and B/Ds design IULs to FAIL, stealing the insured’s death benefit and the many thousands of dollars he poured into this radioactive pig in a poke. For all his tooting his own horn and delving into tax law minutiae, if @David McKnight still flogs IULs like he used to e.g. here:
http://powerzerotax.com/2014/04/27/dispelling-iul-fee-myth/
…then David McKnight is essentially a FRAUD.
Thanks for reading. WCI, please keep up the good and necessary work to expose the modern-day snake-oil salesmen.
I don’t doubt that the surrender rate for universal life of any type, including IULs, is higher than the statistic for whole life. I don’t have that data, however.
I don’t know much about McKnight’s opinions about or use of IULs. This post was just about the book. Fraud has a rather specific legal meaning and I don’t recall seeing anything in the book that would meet that legal definition. Misguided. Wrong. Perhaps even designed to sell a product that is inappropriate for the vast majority, sure. But fraudulent?
Looking at your link, I see a ridiculous and easily debunked attempt to make IUL look better than a Roth 401(k) written for those who sell them to use against their clients like readers of this site.
As far as fraud, I see at the bottom of that link that McKnight is associated with Woodbury Financial Services. One of their other brokers was convicted of running a Ponzi scheme. Now that would be fraud. But I don’t see that McKnight was implicated in that despite being an advisor to that “exclusive group of financial planners.” I don’t see him listed on the Woodbury page currently so maybe he just used to work there.
https://www.financial-planning.com/news/former-questar-woodbury-broker-pleads-guilty-to-ponzi-scam
https://www.seattletimes.com/nation-world/broker-agrees-to-pay-victims-of-bismarck-mans-ponzi-scheme/
https://www.financial-planning.com/news/financial-advisor-who-pleaded-to-ponzi-scheme-gets-prison
Looking at his Brokercheck, looks like he was only there from 2009-2011. He does have a disclosure event that a client accused him of selling a VUL inappropriately. The charge was denied (I believe that means he was cleared of it.)
I don’t suggest David McKnight may be a fraud in a legal sense. But I do suggest it per how Merriam-Webster defines it:
fraud : one who defrauds : CHEAT
defraud: to deprive of something by deception or fraud
I stand by my word choice for him. McKnight’s been in the biz and flogging IULs for at least five years. He’s clearly a smart guy who delves deep into the numbers. So how can he not know that, even following the NAIC AG49 guidelines, that agents illustrate IULs way WAY too high at 6% and higher?
I have one question for you @David McKnight: What class of investments on G*d’s Green Earth do you know that will deliver a long-term CAGR of 6+% on an insured’s IUL cash value? A CAGR of 6+% return over the 40, 50, 60 years and more that the insured expects to hold his IUL? Really, we need to bump up that return to 7–8%, to overcome the lost earnings opportunity from the IUL’s very high fees (see Bishop link below).
We need to know the realistic CAGR figure because the agent sets the insured’s premium based on that illustration–the higher the illustration the lower the premium. If the actual CAGR doesn’t measure up to the illustration then guess what?–the insured is chronically underfunding his IUL. This virtually guarantees his IUL will FAIL as he ages into his 60s and 70s and the IUL’s COI charges start to blast into the stratosphere, inhaling his cash value. The insured often is clueless to this danger until the carrier sends a cash demand letter for thousands of dollars that the insured must quickly pay or lose his policy–lose his death benefit and all the money he paid into it (see topclassaction link).
Again @David McKnight I ask you: What class of investment do you know that will deliver a 7–8% CAGR over the very long term of the IUL? That’s the minimum the IUL’s cash value needs to return to ensure the policy survives, even at the low end of the rates agents typically illustrate them.
I look forward to your answer at your convenience.
http://thebishopcompanyllc.com/wp-content/uploads/pdf/indexed_universal_life.pdf
https://topclassactions.com/lawsuit-settlements/lawsuit-news/860119-transamerica-reaches-195m-life-insurance-rate-class-action-settlement/
WCI, when you study history, you’ll find that CODAs were created during the 1950s because taxes were high. The top bracket was over 90%. (Tax deferral is essentially rooted in CODAs.) And IRAs were created in 1974 by the government in response to CODAs, again because taxes were high. The top bracket was 70%. And the 401(k) started in 1978, once again because taxes were high. The top bracket was still 70%.
No one ever dreamed of a Roth-type vehicle, because paying taxes at those high rates made little sense. Tax deferral was invented BECAUSE OF high taxes. And deferral makes sense when taxes are high. We don’t get any conversation about Roth-type vehicles until Reagan. Why? Because tax brackets were lowered significantly. He lowered the top bracket from 70% to 28%. Only now did anyone start to consider paying taxes on money and having the gains grow tax free. Senator William Roth was such a man.
Senators William Roth and Bob Packwood proposed the idea of a post-tax, tax-free vehicle in 1989, just one year after the top tax bracket bottomed out to 28%. Why? Because taxes were historically low. It didn’t necessarily make sense to defer anymore. Again, deferral came out in high tax times. It took the senators until 1997 to get this vehicle approved by Congress and it’s now known as the Roth IRA.
When you take a step back and look at things historically and from a macro level, it’s clear to see why tax deferral was created when it was and why Roth was created when it was. Which begs the question as to why people are deferring today, especially with the Tax Cuts and Jobs Act. The combination of the current brackets/thresholds on federal ordinary income taxes actually gives us the lowest tax environment in the history of the Roth. If the Roth made sense in 1997, it makes even more sense today.
Not sure most are familiar with the term CODA. I had to look it up; it certainly isn’t in common usage any more. It stands for Cash Or Deferred Arrangement.
Your argument of using Roth now due to “historically low rates” doesn’t consider the effects of filling the brackets as you withdraw in retirement.
The “filling the bracket” argument is not a compelling argument. Here’s why. I’ve never met anyone (nor heard of anyone for that matter) whose only single source of income in retirement is an IRA. That’s just not reality. People have Social Security, pensions, business income, rental income, passive income, royalties, dividends, coupons, etc.
And something you may have forgotten (or at least most likely haven’t calculated) is that Roth income does not create Social Security benefit taxation and does not raise Medicare Part B premiums. Not only do you have the uncertainty and risk associated with potential higher taxes in the future, but with traditional IRA distributions you are also creating an ever-increasing tax on your own Social Security benefit and you’re raising your own Medicare Part B premium. It’s highly likely that you haven’t taken the time to calculate this hurdle as it exists today and what the hurdle might be if the government decides to raise Social Security taxation (which they’ve done twice already in 1983 and 1993) or raise the Medicare Part B premiums and lower thresholds (which they’ve been doing consistently since 2007).
The benefits of Roth are multi-faceted and therefore comparing a Roth to a traditional tax-deferred vehicle cannot be done in a vacuum. Add to everything I’ve already mentioned the fact that Roth IRAs also do not have Required Minimum Distributions (RMDs) and it becomes a difficult task to make a convincing argument to defer the tax in today’s landscape.
I disagree. While other sources of income absolutely do make Roth accounts relatively more attractive relative to tax-deferred accounts, they usually don’t eliminate this whole issue, particularly for a high earner such as those I blog for. Plus, let’s go through those other sources of income:
1) Social Security: Really shouldn’t be taken until 70. From retirement (?50, 55, 60, 65) until 70, it doesn’t exist as a source of taxable income. That’s why that’s such a great time to do Roth conversions. Plus, 15% of it is always tax free (and much more for lower earners.)
2) Pensions: Becoming more and more rare. By the time millenials retire only a tiny percentage will have any sort of pension.
3) Rental income: Most don’t have much, but if you do have a whole bunch, again, good reason to favor Roth contributions.
4) Dividends: Qualified dividends aren’t even taxed at all until a total taxable income of $77,200 (married). Totally tax-free. Same with long-term capital gains. The RMD at 70 on a million dollar IRA is only $36K. So you could have a million dollar IRA, $30K in social security income, and $15K in dividend income and that dividend income wouldn’t be taxed at all. Even if it is taxed, it’s only taxed at 15% federal up to a taxable income of $452K. That’s a deal. Not to mention that most people don’t save enough to max out their retirement accounts, much less build a significant non-qualified account. The yield on a very tax-efficient index fund is only 2%. 2% of $1 Million is only $20K a year.
5) Royalties: As someone with significant royalty income, I know how rare that is to have. Probably shouldn’t even be on the list. But sure, if you expect $100K in royalty income each year of retirement, favor Roth contributions/conversions. Still not a reason to buy whole life insurance.
6) Bond interest: If you’re in such a high tax bracket in retirement that taxes are a big deal, your bonds are probably going to be muni bonds, again tax-free.
Nearly every physician retiree is going to pay tax on 85% of their SS income, so that’s a non-issue there. The threshold for higher Medicare Part B premiums is more likely to come into play, but even at its maximum of $428.60 a month, it should be a relatively minor expense for someone with $320+ (married) in retirement income who is paying that amount. Below $170K (most docs) it’s only $134/month. That’s a rounding error and can easily be ignored.
Run the numbers. The effect of filling the brackets is still relevant, even if you have several of those income sources.
I’m in the 37% bracket. Even if I only saved 37% and then withdrew it all at 32% (or even 35%- up to $600K/year in retirement income) I’m still coming out ahead. More likely, I’ll be able to use that income to fill the 22% and 24% and maybe even the 12% bracket.
Seriously, once you run the numbers you’ll convince yourself (even if you increase the tax rates significantly) that contributing to tax-deferred accounts during peak earnings years is the right move for the vast majority. But if you’re a supersaver, expect large pensions, or have tons of rental properties/income, then yes, you may wish to do Roth contributions and do larger Roth conversions.
I mean no disrespect here, but I want to give you a hypothetical example that I think will help you put your advice/thoughts into perspective (at least from my point of view). Imagine that I had a website giving medical advice and encouraging people to fire their doctor because most doctors don’t know what they are talking about, they charge too much for their services, and I know better because well, I’m a financial advisor who has Google. The amount of respect you’d have for that person is probably what you should expect in your situation. The comparisons are compelling to say the least.
What I’ve quickly realized is that this conversation can’t go anywhere because we are in completely different worlds. I wouldn’t expect you to know what CODAs are, just as you wouldn’t expect me to know what something like intramyocardial coronary arteries are. These are things that only someone in their respective fields will study/know/understand. So for example, in your last post when you speak of your retirement (or retirement in general) as one which will take place with today’s tax brackets/thresholds, I don’t even know what to do with that as all of this is set to expire (at the latest) in just a few years. Going back to my hypothetical example, this is like someone eating poorly and not caring about the red flags in their blood work because they feel great in the moment. Meanwhile, you see where they’re headed and the next 30 years of their life, and desperately want them to take that into consideration.
There’s also a hint of arrogance in your writing/thread comments which is discouraging. My purpose in financial discussions is to help people with my specific area of expertise. And I don’t see much evidence that you are seeking advice or are at least open to learning. And that’s when I need to bow out.
Going ad hominem huh? I covered that argument for whole life insurance here, it’s # 29: https://www.whitecoatinvestor.com/myths-whole-life-insurance-part-6/
Thanks for stopping by. Sorry you didn’t find it worth your time to run the numbers. I think if you had you might change your tune, even if it was some stupid doctor that suggested you do so.
Dear WCI and Colleagues,
I am pathologist, 43 years old.
In 2011, a slick salesman got me to swallow the bait of an IUL from AXA, ATHENA INDEXED UL, SERIES 151 .
Here are the details…
Premium: $1,000.00 per month
Total Payments so far: $97,000.00
Policy Account Value: $49,659.67
Surrender Charge: $28,020.24
Loan Balance: $0.00
Accrued Loan Interest: $0.00
Net Cash Surrender Value: $21,639.43
Death Benefit: $2,000,000.00
Loan Interest Rate: 3.0%
Available Loan: $21,639.43
Maximum Loan: $21,639.43
Disability Premium Waiver
Living Benefit Rider
To be honest, I don’t really know what exactly all these numbers and verbiage mean, but I have a feeling that I have been totally screwed over. I understand that I have to take the blame, I did not do my homework. It just sounded like a good product.
What do you recommend I do? Should I get out, walk away, sunk cost, lesson learned? It’s gut-wrenching to walk away from this IUL after contributing almost $100 000 to it. But I don’t think that I should continue contributing to this horrible investment product? Throw good money after bad?
What would you do if you were in my shoes?
Thank you.
The numbers mean you’ve lost $76K so far. If you keep paying those premiums, you’ll probably lose more money. And that’s ignoring the opportunity cost of what you would now have if you had bought an index FUND instead of an index UNIVERSAL LIFE policy. Too bad they sound so similar.
Sorry. This post should help:
https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/
At least if you exchange to a low cost VA at Vanguard you can get $76K in tax-free gains before surrendering the VA. Wish there were a better option. I doubt this policy will get any better. I mean, if that’s how an IUL performs in a bull market….
@WCI,
This week, an independent advisor told me that some of these IULs, after 10 years, you can surrender them without paying the surrender charge/penalty. I am trying to find if that is applicable to my policy. I am almost at 10years. That will save me a chunk of money, but even so, a huge loss altogether.
Thanks for your feedback.
GJS, at what annual return rate did your agent illustrate your IUL?
Agents typically illustrate with figures starting at ~6.5%. Most illustrate above 7% ; a few will approach 8%
The agent uses this illustration to help calculate your premium level.
@Real IUL Math,
I don’t remember. I think it was around 7 or 8%. Would that have made much of a difference what % he used to so his illustrations?
He said that the return was linked to the stock market, with a ceiling, and that I could never have negative returns.
***spelling correction… I meant to type “show” not “so”
Hi GJS. The illustrated rate matters enormously. The agent uses this rate to calculate your premium. The higher the rate, the lower your premium. The logic being, the more your IUL earns on its own, the less you have to pay into it to keep it solvent.
The problem is, if your IUL doesn’t earn as much as that illustrated rate, then you are underfunding your IUL and you risk losing it all as you approach your retirement years when your constantly resetting Cost of Insurance (COI) rates start to blast into orbit and to hoover through the Cash Value you’ve built up over the previous decades.
The even bigger problem: Agents vastly and even de facto fraudulently overillustrate IULs. They typically illustrate them at 7–7.5% . The most return you can expect (the Compound Annual Growth Rate or CAGR) is only 2.5–4% over the 40, 50 , 60 and more years you expect to hold your IUL. In previous comments on this board, I delve into the details that explain why your IUL ekes out such a low return. Please scroll up to read them.
You can call AXA and ask them to do an in-force illustration at a 3.25% illustrated rate to see what that brings your monthly premium up to. Your premium will shoot up to $2,000 or more. Then ask AXA to illustrate it at 1.75% because the IUL’s fees soak you for another 1.5% resulting in a lot of lost income opportunity over your lifetime. IULs have the highest fees of any insurance product. If you hope to make your IUL survive into your golden years, you may want to get a third illustration, this time at 1.25% , to make up for the premium shortfall you’ve been paying for most of this decade. That may up your premiums to well over $3,000 per month.
You see where this is going 😞
About whether you should dump your IUL now or later, can you give us the details on your Surrender fee schedule? It’s usually given in dollars and cents per $1,000 of face value, e.g. $22.35 per $1,000. Typical Surrender periods start to taper off after 10 years and end after 15 years, at which time you pay no Surrender fees. We can do the math to see when’s the least damaging time for you to exit it.
Thank you Real IUL Math, I will try to get that information from AXA. Will keep you posted, thanks for your help.
GJS, you’re very welcome. Glad to help you how I can.
I’m sorry the agent got you into an IUL. You’re doing the right thing to get out of it ASAP.
@Real IUL Math, I got an illustration from Axa… it is 28 pages long! I cannot imagine all the small print BS hidden in there. Is there specific information that I should try to find in there that I can share with you?
@Real IUL Math,
I got an illustration from Axa… it is 28 pages long! I cannot imagine all the small print BS hidden in there.
I paid a retired life insurance actuary to evaluate this policy. These are his conclusions…
(1) What you give up with an IUL in exchange for the downside protection is corporate dividends that currently yield 2.18% annually (S&P 500), which is a lot over a lifetime. A mutual fund or a variable universal life (VUL) policy would include them. (2) There is a large loss in the contract that is not a tax deduction if the policy is surrendered; however, the loss could be transferred to a low cost variable annuity at Vanguard with the result that future VA earnings would become income-tax-free up to the loss transferred. (3) TIAA sells a VUL without agents’ commissions. The transfer charge and premium load is 1.75% in FL; the AXA illustration notes its premium load is 6%, 4% after year 10. TIAA also has a similar disability rider that should be lower in cost. (4) If you choose to keep the AXA IUL, you should know that premiums are flexible. You could stop them or lower them; the policy would remain in force as long as the surrender value remained positive. To lower the death benefit would incur a pro rata SC.
He also said: I’ve reviewed many IULs issued in recent years, all of whom, incl AXA, had ten-year surrender charges (SCs). Alas, this one has a 20-year SC.
What do you think I should do?
Thank you!
Hi GJS, you’re very welcome. Very glad to help!
I can’t give you specific advice as to what you should move your money in to because I haven’t seen the details of the Vanguard VA nor the details of the TIAA VUL. I can confidently tell you to get out of that IUL ASAP. Btw, the 20-year Surrender Fee period, with $40 SF per $1000 of Face Value from 10 to 20 policy years, is one of the more onerous I’ve heard of.
What should you do? The short more generally applicable answer: Avoid complex–and thus all-too-often fee- and contract gotcha! language-laden–instruments like variable annuities and actively-managed mutual funds, take your loss lumps, get term life, and invest AMAP into machine-managed ultra-low-load index fund ETFs like VOO. Esp since you’re young enough and earn enough, you’ll recover and be just fine and will come out far ahead even with the loss of tax shelter. The one possible exception: a PPLI (Private Placement Life Insurance) package. More on that below.
Now for the longer answer: Your actuary makes an excellent and underreported point–IUL returns don’t include dividend reinvestments. This because the vast majority of the instruments–95% and more–that your carrier uses to generate your IUL’s income are investment-grade bonds, which earn only 2.5–4%. For the remainder, the carrier buys mainly index fund options, not the actual index funds themselves. Thus, no dividends to reinvest. GJS, in your copious amounts of spare time (hahah) you can search on the white paper titled “Indexed Universal Life: the Good, the Bad, and the Ugly.” That gives excellent and damning details how an IUL works–and DOESN’T work.
GJS, you may earn enough and grown enough of an asset base that the PPLI is an option for you. In short, a PPLI is a VUL in which YOU (de facto, through your PPLI manager) can direct your VUL’s investments. For example, in the PPLI wrapper you can buy the actual index fund ETFs themselves–not just index fund options–and get that extra 2.18% of juice from the dividend reinvestments. PPLIs are getting more popular with high net worth folks.
The downsides: PPLIs can be complicated to set up–you have to go through a lawyer–and because it’s based on a VUL you are exposed to potential loss. But of all the Universal Life products, PPLIs offer the most potential upside. In addition to the fact your personal manager–not the carrier–manages your VUL’s investments, PPLI fees are relatively low and you compensate your PPLI manager based on asset amount, thus you motivate him or her to maximally grow your assets. For the details why PPLIs are the only viable Universal Life option, please scroll up in the comments here to read the PPLI post I wrote to “Grant” in April of 2017. You can find many law firms that specialize in PPLIs, which makes it feasible to call round and do your due diligence.
GJS, I hope this helps and that you’ll tell us what you decided to do! Any more questions, please feel free to ask.
Very nice article, which people need to make an effort to understand. I have run a number of simulations that show for an average household need of $100k before taxes, without a pension you generally need less than a 10% Roth. At about 18% marginal rate and above while you are working, going 100% Roth will only cause you run out of money sooner.
Just as a point of clarification to some of your math. In the example where your 401k contribution limits were $17,500. If you max out the Roth side you need to come up with $8619 in taxes and not $5775. Of course in the case where you are putting $17,500 of pretax earnings to savings, to make an apples to apples comparison, then yes you will get $11,725 into the Roth and pay $5775 tax. You just needed to make it clearer how much was going into the Roth, as many do try to compare $17,500 in traditional to $17,500 in Roth.
You know the post wasn’t written this year, right?
so many simply inaccurate comments.
I assume you are talking about/ to medical professionals.
Where I live Dr’s are well paid.
Many can not contribute to a Roth, they make too much you failed to mention this.
When you speak about a low tax rate in retirement you talked about a $20000 annual income. I don’t know too many doctors making several $100000 that would be excited about that level of income in retirement. You also said we have been in a lower as well as a higher tax environment. While this is true I think you’re missing a crucial point the debt had exploded and with all the Corona related relief plans it has gone off the charts. The country’s infrastructure is falling apart and it’s some point someone has to pay to build it backup.
Please take a close look at the tax rates in the thirties and also in the seventies. Significantly higher on top wage earners. This just might include physicians.
The other point you more than conveniently left out is the fact that a perminent tax free death benefit is part of it.
I’m not sure it’s worth paying attention to anything else you say when your opening argument reveals your ignorance about the Backdoor Roth IRA.
Maybe tax rates go up in the future, maybe they don’t. Maybe the debt is inflated away. Dunno. But the effect of filling the tax brackets will still be there and Roth conversions will still be a better option than buying whole life policies.
If you need a permanent death benefit, than buy one. The part you conveniently left out is that almost no one needs one and once they understand the cost, few want one more than what they could have bought with the money they used to buy the policy. Even if they wanted to leave money to their heirs, they are likely to leave more money, tax-free due to the step-up in basis at death, using traditional investments.
Nice try though. I didn’t expect you to agree with me given your profession. As Upton Sinclair said, It is difficult to get a man to understand something when his salary depends on him not understanding it.
Ron, for permanent policies, what percent of your sales are Whole Life and IUL? Roughly half and half? More WL? More IUL?
Percents either by policy count or premium amount is fine, whichever you care to give.
Thanks