Can you afford to risk your retirement with your 401(k)? One simple solution might surprise you…
So you have a 401(k) and it is the majority of your retirement savings. Have you ever considered what your retirement would look like if that account had 40% less in it?
How would that make you feel? Would you still be able to retire at the same age? What dreams and goals would you have to put off? Why didn’t someone warn you about the risk?
I am sure you could worry yourself sick just thinking about all these questions and more. So what do we do now? Are there any alternatives that will still allow some growth of my money without all the risk? The answer, I am glad to tell you, is YES!
There are other choices and they will mostly depend on your timeline to retirement: Today we are doing to discuss the IUL (Indexed Universal Life) option. Now I know exactly how you must be feeling. I felt the same way.
I said “I don’t need an insurance policy, I’m wanting to build my retirement account” Believe me, I was skeptical too. Most others are, also. However, when I started doing the research and compared the numbers, It started to make sense and I began to believe.
So hang in there with me and I think you may be as surprised as I was. In fact, I now have one for myself and am starting one for each of our sons and grandson. Do you know when the best time to get one of these is? I will tell you in a minute.
The key is knowing how to set it up. We need to take advantage of the IRS’s own rules which allow you to put in up to a certain amount to maximize the cash value while not becoming a MEC . When your policy is set up correctly, I think the numbers will amaze you. I know they do most of my clients.
These are first and foremost a life insurance policy, not an investment, and they also have the ability to build up a cash value. They can be purchased with a single premium, but are usually started with regular payments either monthly, quarterly or annually. When you pass away, your beneficiaries would receive the money, like any other life insurance policy.
Here are the nuts and bolts:
- You purchase a policy from an insurance company with after tax money.
- The value is based on your age, health, and premium paid.
- You have an instant death benefit available.
- Your money grows tax deferred.
- Growth is based on the index you choose to follow. (You can change this annually)
- You don’t invest directly in the index, the insurance company puts your money in an account that mirrors the growth of that index.
- There are caps, or maximums, on the interest you can receive.
- There are floors, or minimums, on the interest you can receive. (Usually 0%, but may be higher depending on the contract)
- There are fixed interest rates if you want to have guaranteed growth.
Now after you have the policy, here is how it can benefit you:
- Your death benefit may increase the longer you keep the policy, as well as the cash value.
- When you are ready to start taking out money, it comes out tax free as a loan against the death benefit. (This may reduce the death benefit available to your beneficiaries)
- Most IUL’s have ‘living benefits’ that allow income if you have a critical or chronic health issue, like cancer, heart attack or need to go into a nursing home.
- You may be able to stop putting in premiums at some time and let the cash value pay for the cost of insurance. (Other fees and charges may apply)
- When you pass away, your beneficiaries will receive the death benefit, tax free.
So the differences of an 401(k) and a IUL policy can be very important. Let’s look at them:
- The 401(k) is only worth what you put in it. The IUL has an instant death benefit.
- There are limits to how much you can put in your 401(k) and no limits in the IUL.
- You have to take out a certain amount from your 401(k) called RMD (required minimum distributions) but you can take out as much or as little as you want from your IUL. (You don’t have to take out any, if you don’t want to)
- There are specific times that you have to take out money from the 401(k) and not on the IUL.
- The money gets taxed on withdrawal on the 401(k) but not on the IUL.
- The 401(k) is in the stock market and can suffer major losses while the IUL is not in the market and can earn no less than 0% interest.
- The 401(k) stops paying when it runs out of money . (There could be penalties for lapsing or taking out all of the money from the IUL)
- The 401(k) is an investment account with no guarantees and the IUL has contractual guarantees from the insurance company.
Given the huge debt that the U.S. is currently in, most say as much as $17 TRILLION dollars, one of the few ways the government has to pay that off is through taxes. There are about $7 TRILLION dollars in 401(k)’s and IRA’s (individual retirement accounts) that are now, or very close to, being used for retirement. What better time for the government to increase the tax rates of those people to help pay off the national debt?
With an IUL, the cash value can be used for retirement, and is not taxable. It is simply a loan against the death benefit. This loan does not have to be paid back because the amount taken out simply reduces the death benefit.
Now, as promised, when is the best time to start your own (or someone you love) IUL policy? RIGHT NOW! Since these are based on your age and your health, you are as young as you will ever be and probably in the best health, too! It’s not too soon to start, even if you’re just a kid.
I think it was Albert Einstein that said ‘the most powerful force in the universe was compounding interest’. Start building a part of your retirement income as early as possible and allow compounding interest work for you with an Indexed Universal Life policy.
Of course, there are disclaimers: Always consult your tax professional (I am not one) regarding the tax implications of any investment or insurance policy, there may be additional fees, charges, penalties, etc… , the primary need for an life insurance policy is for the death benefit, the rules of the IRS are subject to change and may change the tax treatment of a life insurance policy.
Always do your due diligence, educate yourself on the specifics of a life insurance contract and understand what your agent is recommending and why.
If you have any questions or would like to see how an IUL might be beneficial for your retirement, please feel free to call me and we will discuss your particular situation, needs and goals.
If you found this video and article helpful, please share it with your friends, families and co-workers, anyone you can think of that is absolutely scared to death of losing their retirement dream due to a risky 401(k).
A special thanks to CBS television, 60 Minutes and producer Ira Rosen, and Steve Kroft, reporting.