Impersonal Finance

If the 401(k) and Roth contributions are all you can contribute, then you can stop here. However, we will assume that if you continue reading, you have more money you want to allocate towards retirement. That’s great, between these two vehicles and what I am about to explain, you will be well on your way to retiring early and comfortably.

5. Permanent life insurance is an under utilized, misunderstood, yet spectacular option for retirement savings. I really do not care what Suze Orman or her ilk say about insurance. Truth is that they really have no idea what they are talking about. Their job is to speak in generalities without learning about the pros and cons of each product and each company. Here is what they won’t tell you. Life insurance works exactly like a Roth IRA with three distinct advantages: 1) it can be accessed pre-591/2 years of age and 2) there are no contribution or 3) adjusted gross income limits. We call a permanent life insurance policy a Roth on roids. It acts like a Roth, only potentially much more powerful.

Think about this for a minute. You max out your 401(k) match and you still have $10,000 that you want to contribute. Take $5,000 and max out your Roth. Ask most advisors what they recommend for the remaining $5,000. The likely response would be to go back to the 401(k) and it’s future tax implications (we will get to that in the next couple of entries). Why wouldn’t you want to pay the tax now and have every cent you earn come out tax free? To quote John Shibley of Lenox Financial, “It’s the biggest no brainer in the history of Earth.”

6. So, you’ve decided to follow my advice and look in to a life insurance vehicle for retirement savings. We are obviously dealing with someone open minded and intelligent so I’m a happy man. The next logical question should be: What kind of life insurance policy should I be looking at? That is a great question and fortunately I have a great answer. It absolutely depends.

Now, now. Please don’t swear at me or log off the site. I am about to elaborate. There are three basic types of permanent life insurance and almost all company specific products fall in to these categories:

Whole Life (WL) - Conservative, but consistant. Cash value will grow slowly and steady, and premiums will never increase

Universal Life (UL) - A bit more risky. Interest rates may slip to the point where the cost of insurance is canibalizing the cash value to keep the policy in force. This can be alleviated by dumping more money in to the policy. Premiums are more flexible than whole life. You can add more or add less depending on your cash flow in a given month or year.

Variable Universal Life (VUL) - In layman’s terms, this is investment grade life insurance. Whereas the cash value in a UL is invested by the insurance company, you control the VUL investment options with “subaccounts” which kind of act like mutual funds. You can be as aggressive or conservativeas you want. The upside is potentially staggering, but the downside is that there is no guaranteed cash value at the end of the road.

7. Thankfully, you are done. At least in terms of retirement contributions. Pat yourself on the back for a job well done.

401(k)s are marvelous investment tools if used correctly. Now that you know how to do that, I truly believe you will be better off than those who use the 401(k) like so many talking heads suggest.

Also, at some point I will probably do a life insurance primer, but for now I just wanted to cover the basics. You can do more research on your own or email me if you have specific questions. I will elaborate on some of the minutiae of the topics covered . Stay tuned for that.

I need to get this out in my first real post. My biggest retirement pet peeve in the world is when people who are Roth IRA eligible, max out their 401(k) instead of contributing something to their Roth. It boggles my mind that people do this and it is a travesty that advisors recommend it (and they definitely do). Let’s take a step by step approach to this fallacy and how to efficiently manage your retirement portfolio. For the purposes of this discussion, we will assume that your adjusted gross income (AGI) is within the Roth eligibility requirements.

1. If your employer has a match, take the match entirely. No investment offered anywhere can beat free money. If the match is 3%, contribute 3%. It really is that simple.

2. Do NOT contribute more than the match. If you truly need the deduction, then take it. I won’t argue with you, but I still think you’re better off without the deduction.

3. Open an Roth IRA. I personally like American Funds, but if you’re comfortable with another Roth option, that’s fine too.

4. If you had enough money to max out your 401(k), presumably you have enough to max out your Roth. The maximum contribution in 2008 is $5,000. If you are married, you should be maximizing your spouse’s Roth as well.

You might be thinking that at this point, if you still have disposable income, that you should contribute the remaining amount towards your 401(k). No! No! No! Seriously, you will need to break this “401(k)s are the greatest retirement vehicle in the world” habit. Contribute up to the max. No more and no less.

To be continued…(post was a little too long)