What’s Black & White And Better All Over Than A 401(k)?
Posted @ 11:13 pm - Filed under Financial Planning, Purposeful Planning, Retirement Income, 401(k)'s & IRA's
The short answer is F.I.U.L. or Fixed Indexed Universal Life. (Yeah, as in life insurance.) It’s not really used as life insurance, though that’s one of its benefits. It’s great for a second basket to complement retirement income generated by your real estate portfolio.
You are, whether you want to or not, at a fork in the road. Do you take 401(k) Drive, or F.I.U.L. Boulevard? Here are some thoughts for you to ponder. The road you take will quite probably make the difference between a retirement income, and a RETIREMENT INCOME. I’m not talking about the difference between $3,000 and $5,000 a month. I’m literally talking about retiring on an after tax income of 2-5 times what most folks ever make while working full time before taxes. This shouldn’t be a difficult decision.
What’s an F.I.U.L.? It’s known generically as investment grade insurance. Big help, huh? Compare it to your 401(k) which takes your money annually, allowing you to avoid (defer) taxes on each year’s contribution, until you retire. At that point you begin taking money out on which to live. The money you take out is taxable at normal income tax rates.
If you’re relatively young, allow me to predict your future. Eventually, you won’t be able to get enough……..tax free income. Relax, this is a normal life progression — or at least that’s what they taught me at analysis 101-103. 
The F.I.U.L. also takes periodic payments, but instead of using before tax money, payments are made with after tax money. There’s no tax deferral for payments made into a F.I.U.L. When you retire, you take money out on which to live, just like you would with your 401(k). There’s a huge difference at this point. The income is 100% tax free for life.
Over time your cash value and the death benefit grow nicely. When you die, your heirs pay no, nada, nil, as in zero taxes. Generally speaking, this amount is not only massively larger than what your heirs would net after tax from your 401(k), but it’s also pretty likely it will be a much larger sum than the 401(k) was before estate taxes.
This post isn’t meant to give the richly detailed substance of both approaches. My goal here is simply to touch on the substantive differences between the two approaches.
- The 401(k) contribution is tax deferred while the F.I.U.L. is not.
- Distributions from your 401(k) are taxable at prevailing income tax rates — F.I.U.L.’s are tax free.
- Upon your death the estate taxes will decimate your 401(k) — F.I.U.L.’s aren’t even part of your estate, and therefore not subject to tax.
- Need emergency cash? 401(k)’s will cost you in taxes, and sometimes penalties. F.I.U.L.’s? No payback, no taxes, no…….nothin’. Just take the money — it’s yours.
What if, at 25 you began putting $500 a month into an F.I.U.L., and you do it until you’re 65, what do you think the result might be?
Over $200,000 a year income, tax free, for life.
Your 401(k) would have to generate about $300,000 a year income to equal that, because it’s subject to income tax. And that’s assuming rates don’t go up — not a smart bet at this point, believe me. To generate that much income you’d obviously have to invest way more than the $500 monthly.
Are you starting to see a trend developing here?
This is all in preparation for a post I’ll be publishing at BloodhoundBlog next Monday on this very subject. There have been some folks who have taken umbrage with my claims. My numbers are not my own. I’ve consulted with an expert, who uses numbers generated from proprietary software custom made for the $600 Billion company who specializes in F.I.U.L.’s. (Aviva Inc., who recently purchased Indianapolis Life.)
For those really, really picky folks, the software provider is Aviva–Fiserv 2.90.0.20.
They pay out the annual dollars, death benefits, and cash values I’ll be talking about, (including the $200,000 mentioned above) based upon their own in-house analysis. Their software reflects this.
The 25 year old I used above as an example, is my own daughter. She’ll be 23 this month, and is currently finishing up her degree in child development. This means she won’t be making huge paychecks any time soon. She’ll probably never earn six figures in a year. But by putting in a lousy $500 a month for 40 years, she’ll retire with over $200,000 a year in retirement income — none of it subject to income tax. Even if she never owns a home, never invests in real estate, (fat chance ) never owns one stock or bond, or wins a bet at the race track, she’ll retire better than most folks who did all those things, by far.
Now, imagine a Purposeful Plan that incorporated investment real estate and an F.I.U.L. policy. Imagine 20 years of real estate investments that merely did ok, relatively speaking. If she didn’t buy her first investment property until she was 30, by the time she was 50 she’d be working by choice — probably well before that. Being more conservative than I am usually, she’d likely have a minimum of $10,000 tax sheltered monthly income by that time. She’d then limp along on that modest sum ’till she was 65, whereupon she’d begin collecting the aforementioned additional $200,000 a year.
Between her real estate net worth, and her F.I.U.L. cash value, she’ll be worth no less than $2-4Million when she’s 50, and at least $10Million at 65. Her income at 65 will no doubt exceed $30,000 monthly, the vast majority of it either tax sheltered or tax free. And because of her genes, she’ll probably live to at least her mid-90’s, maybe longer. And she’ll have that incredible income the whole time.
Her peers who decided to go with the good ole 401(k)? They’ll be able to go on cruises with her — as long as she’s buying.
This entry was posted on Tuesday, July 3rd, 2007 at 11:13 pm and is filed under Financial Planning, Purposeful Planning, Retirement Income, 401(k)'s & IRA's. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.