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Cashing in 401k, pay penalties to buy whole life
04-07-2009, 06:27 AM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Cashing in 401k, pay penalties to buy whole life
Here's another one of those savings strategies articles, but embedded in it without editorial comment can be found this
Savings Strategies - WSJ.com
where
Quote:
Mr. Olds, ..., decided that saving for retirement through a 401(k) was too constricting. So, based on advice from friends and online research, he moved his savings into a whole-life insurance policy that generates tax-free growth and still gives him access to his money.
...
He closed out a 401(k) account totaling $50,000 in 2008. After taxes and early-withdrawal penalties, about $30,000 remained, which he used to buy a whole-life insurance policy through a local broker. .... For example, he borrowed $23,000 [against his policy] to buy a Dodge Caravan, which he's paying off at 8 1/2% interest over a four-year term. "I feel like I'm driving my retirement plan," he says.
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Don't shoot me. I'm only the messenger. But the WSJ makes this sound like a such a great deal, I'm wondering if anybody else here has done this?
(No, I'm not really wondering.)
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04-07-2009, 07:43 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
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That people start cashing out their retirement plans and willingly eat the taxes and penalties just to get out, well, it seems like a "death of equities" moment to me...
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-07-2009, 07:52 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,391
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He decided to pay taxes plus penalties plus insurance fees plus whatever the broker marked up the whole life product now, so that he doesn't have to pay taxes later on his withdrawals. Somehow I don't believe this is a smart move.
here is another questionable move:
Mr. Olds wasn't concerned about giving up matching company contributions to a 401(k), because his investment in the insurance policy, which pays dividends, protects him from the volatility that has recently devastated the stock market.Mr. Olds wasn't concerned about giving up matching company contributions to a 401(k), because his investment in the insurance policy, which pays dividends, protects him from the volatility that has recently devastated the stock market.
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04-07-2009, 08:00 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Posts: 10,252
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I'm sure whole life insurance agents will be using this portion of the article to get more commissions. They can say, "Look it was written up in the WSJ, so it must be a valid way to make me you wealthy!"
OTOH, if everyone did this, then maybe it would make a dent in the Federal budget deficit. I just can't imagine paying $20,000 in taxes and penalties in order to borrow $23,000 at 8.5% for a Dodge Caravan. The guy has absolutely no common sense. I wouldn't want to do any business with him either after reading this article.
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04-07-2009, 08:04 AM
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#5
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 145
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What strikes me is the ignorance of these individuals. Since when have IRA ore 401k options been only equities?
I've encountered this thinking in my own social circle. To many people:
Investments = Stocks
Mutual Funds = Stocks
401(k)'s = Stocks
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04-07-2009, 08:10 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,391
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I suspect that the individual in the article really wanted to spend the money. And his insurance agent gave him the (flawed) logic that allowed him to do so. I suspect that in his misguided mind he thinks that by making car-payments to the WL insurance policy he is "saving".
So he gets the car and he is "saving" for retirement. And he doesn't have to bother with that pesky 401K.
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04-07-2009, 08:13 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: North Oregon Coast
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Quote:
Originally Posted by randyman65
What strikes me is the ignorance of these individuals. Since when have IRA ore 401k options been only equities?
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True. As far as less volatile options, looking at my 401K there's a money market fund and three different bond funds, including a GNMA fund.
Someone in my plan could probably go 50/50 between the money market fund and the Ginnie Maes, get the dollar-for-dollar match on the first 5% of their pay and keep deferring taxes (and avoiding penalties and sales fees). And in the end, they'd probably have more money than with this insurance product with very little volatility.
And they'd still have the ability to borrow against it, just as with the life insurance policy.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-07-2009, 08:21 AM
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#8
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Dryer sheet wannabe
Join Date: Dec 2007
Posts: 20
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I did not read the article but I suspect many individuals will be forced to withdraw money out of their 401k's in order to maintain their high current standard of living.
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04-07-2009, 08:24 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
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Quote:
Originally Posted by spazz
I did not read the article but I suspect many individuals will be forced to withdraw money out of their 401k's in order to maintain their high current standard of living.
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The high standard of living which has been increasingly fueled by debt over the last three decades or so -- exactly what helped get us into this mess.
The sooner we collectively accept that the prosperity experienced in the first 2-3 decades after WW2 was an unsustainable bubble and we stop borrowing to prolong it, the sooner we'll recover, albeit at a "saner" standard of living.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-07-2009, 08:26 AM
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#10
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 145
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This also highlights the very, very poor job that plan sponsors and advisors do in educating workers about their retirement plans. I am fortunate in that I participate in TIAA-CREF, which not only has some unique options, but has an advisor who provides one-on-one consultations at least twice a year on site and has a nearby office where any participant can schedule an appointment.
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04-07-2009, 08:28 AM
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#11
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 145
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I also noted that one retired couple had an income of about $100k, including pension and social security. While that isn't a very high income, it should be comfortable in a Texas or Colorado retirement. But I also noted that they were carrying two mortgages in two different states. That certainly brings its own burden.
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04-07-2009, 08:32 AM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by LOL!
Here's another one of those savings strategies articles, but embedded in it without editorial comment can be found this
Savings Strategies - WSJ.com
where
Don't shoot me. I'm only the messenger. But the WSJ makes this sound like a such a great deal, I'm wondering if anybody else here has done this?
(No, I'm not really wondering.)
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What did P.T. Barnum always say: "There's a sucker born every minute"
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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04-07-2009, 08:34 AM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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04-07-2009, 08:49 AM
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#14
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 145
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We sometimes forget that most people do not educate themselves financially, and get a great deal of their financial information from people trying to sell them something. This gentleman received advice from friends and an insurance salesman, the former who were apparently unqualified to give advice and the latter who was making money from him.
As others have noted, he's giving up a 100% return on the matching funds. Also notable is that he locked in a 40% when he cashed out the 401(k), and I would tend to agree that in reality he didn't like the loss and found a way to rationalize getting his hands on the money right away.
FWIW, I can take a loan from my own 403(b) at a current 6.59%, but the assets must be in a stable value fund yielding less than 6%. There is no free lunch - the 8.75% he is paying for his minivan is likely significantly higher than the return on the underlying asset. What's more, he pledged his retirement account as security for depreciating asset.
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04-07-2009, 09:11 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by randyman65
FWIW, I can take a loan from my own 403(b) at a current 6.59%, but the assets must be in a stable value fund yielding less than 6%. There is no free lunch - the 8.75% he is paying for his minivan is likely significantly higher than the return on the underlying asset. What's more, he pledged his retirement account as security for depreciating asset.
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Wow, that policy loan interest rate is pricey at 8.75%........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)
This Thread is USELESS without pics.........:)
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04-07-2009, 09:13 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: North Oregon Coast
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Quote:
Originally Posted by FinanceDude
Wonder why he's paying 8.75% on a car loan??
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Because in theory he's "paying himself" the interest because he borrowed money from his own account.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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04-07-2009, 09:16 AM
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#17
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 145
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I'm quite sure that the "advisor" praised benefit of borrowing money from himself, which benefits the insurance company which enjoys the interest rate spread.
There is almost a certainty that anything someone tries to sell you primarily benefits them, while things that require research or effort to purchase tend to benefit the buyer.
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04-07-2009, 02:37 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Sep 2008
Posts: 2,171
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If I remember the books correctly, use of whole life insurance as a retirement plan is more or less the same as what's advocated in The Last Chance Millionaire and Missed Fortune by Douglas R. Andrew, although I don't recall whether he advocated cashing in an existing tax-deferred plan or only switching over future savings to the insurance. Search the archives, you'll find a number of threads on it.
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04-07-2009, 04:37 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2005
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this may not be as silly as it sounds... i dont remember all the nuts and bolts of it but pretty much the ira king ed slott uses life insurance policies ,ira,s and 401k's combined to pass thru some pretty heavy duty tax strategies...
there are tremendous uses of the life insurance to escape estate taxes to the kids ,,,hopefully someone remembers ed slotts stratagy as i forgot how its utilized
i did find a little bit on it but his stratagies can get a lot more refined and complex... i just may get his book
http://fortboise.org/useful/IRAadviceSlott.html
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04-07-2009, 07:13 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Dec 2007
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Quote:
No no its a customer is born every minute
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