The Retirement Planning Guidebook - Wade Pfau's latest and best

[pb4uski]

.... Including a whole life policy under assets makes sense from an estate tax point of view. If the decedent owned the policy, then the proceeds are considered an estate asset. Most people with large amounts of whole life transfer ownership of such policies to an ILIT (or similar trust, possibly) to get the proceeds out of their estate.

Typically, life insurance policies name people (spouse, kids, etc) as beneficiaries so the are not part of the estate and therefore not subject to estate tax.

When Death Benefits Are Taxable
The death benefits paid on life insurance policies can be subject to an estate tax in two situations.

• The whole amount of the death benefit is included in the estate and subject to estate tax if the estate is named as beneficiary.
• The whole amount of the death benefit is included in the estate and subject to estate tax if the deceased both owned and was insured by the policy on their date of death.4

Most people name individuals as beneficiaries, so the death benefit doesn't become part of their estate. The second consideration is usually what causes an estate to owe an estate tax.

Source: https://www.thebalance.com/are-life-insurance-death-benefits-subject-to-estate-tax-4012617

 

[SecondCor521]

Typically, life insurance policies name people (spouse, kids, etc) as beneficiaries so the are not part of the estate and therefore not subject to estate tax.

Yes...but the second bullet in the portion of The Balance's web page that you quoted seems to me to imply that named beneficiaries are a necessary but not sufficient condition to get the proceeds out of the estate of the insured.

So:

1. I own a policy on my life naming my estate as beneficiary -> Included in my estate
2. I own a policy naming my kids as beneficiaries -> Included in my estate
3. An ILIT owns a policy on me naming my kids as beneficiaries -> Not included in my estate

My parents' policies went from condition 2 to condition 3 above for exactly that reason. It was explained to them (by the very nice estate attorney, naturally) that an ILIT was necessary.

Said another way, moving from condition 1 to condition 2 above doesn't help vis-a-vis estate taxation.

 

[pb4uski]

Yes...but the second bullet in the portion of The Balance's web page that you quoted seems to me to imply that named beneficiaries are a necessary but not sufficient condition to get the proceeds out of the estate of the insured.

So:

1. I own a policy on my life naming my estate as beneficiary -> Included in my estate
2. I own a policy naming my kids as beneficiaries -> Included in my estate
3. An ILIT owns a policy on me naming my kids as beneficiaries -> Not included in my estate

My parents' policies went from condition 2 to condition 3 above for exactly that reason. It was explained to them (by the very nice estate attorney, naturally) that an ILIT was necessary.

Said another way, moving from condition 1 to condition 2 above doesn't help vis-a-vis estate taxation.

The solution is easy, make the kids the owners but you continue to pay the premium... that puts it outside the estate but you give up some control. Make the kids the owners, don't tell them, continue to pay the premium and online access.... you maintain control and keep it outside the estate.

Most people name individuals as beneficiaries, so the death benefit doesn't become part of their estate.

 

[SecondCor521]

The solution is easy, make the kids the owners but you continue to pay the premium... that puts it outside the estate but you give up some control. Make the kids the owners, don't tell them, continue to pay the premium and online access.... you maintain control and keep it outside the estate.

A poor man's ILIT, essentially. Yes, that would mostly work, except for I'm not sure how the Crummey thing would work in that scenario. (When my parents did their ILIT, they gifted the premiums into the ILIT every year, and the trustee (my sister) sent out Crummey letters saying we could, if we wanted to, take the premium money out of the trust. We then might not get any of the life insurance, but there was some Crummey reason for the letter. We never did take any of the premium money out, and my sister then just used the money to pay the premium on the one non-paid up policy.)

 

[MC Rider]

I'll put that on my list. A similar book and probably easier to read is Bob Carlson's The New Rules of Retirement, though it is 5 years old now. I read it before I pulled the trigger.

I ordered this one. It sounds a lot more digestable. I don't want a lot of heavy duty numbers.

 

[JohnnyBGoode]

Generally speaking, I think Pfau's approach (and those like him) that like to drown people in data are deluding themselves that they can eliminate uncertainty by simply throwing more math at the problem. No one knows what their life or lifestyle will be 20 or even 10 years down the road. But at the same time, this highly detailed approach doesn't take into account that we are free agents who can adjust spending going forward if we need to.

I'm a firm believer in the 80/20 rule and I think we can get to 80% certainty with just 20% of the effort by using common sense, basic research, reading forums like this or Bogleheads, and using historical calculators like FIRECALC. Trying to close that 80% certainly to 100% is, I will claim, impossible. If retirement planning is a passion/hobby you like, as it certainly is with Pfau, then go for it and read that book cover to cover.

For me, I will be quite happy with a summary!

 

[PatrickA5]

I've been reading the book, but perhaps more like thorough skimming than reading. I'm done with Chapters 1-3 and I don't know how long I will last. It's quite heavy for my taste. However, the way he lays out how to prepare for retirement made me question whether his approach is reasonable for an average person (I probably fall in such a category myself or at least I felt very average while reading this PhD's book).


Well, I made through 80 pages. It's not bad as a textbook but it's intimidating because now it made me feel that our funded ratio is probably less than 1 because I should use an extremely low rate for our assets going forward? He's either right that we are underfunded or wrong and is making me to oversave.

I've read a couple of his books and have to admit it's a hard read even for those of us that are "into" this sort of stuff. It might be my age, but after I read a chapter - trying my best to comprehend his formulas, terminology, etc, - and then put it away for a night or two, the next time I pick up the book I've already forgotten what it was he said in the previous chapter. I think Pfau needs a ghost writer that can put his works in a little easier to read (comprehend and retain) way.

 

[Koolau]

I'll leave Pfau unread. Like all the other gurus. I'll just figure it out myself.

Right on. I guess after 16 years of this FIRE'd thing, I must have done SOMETHING right - I have more now than when I started. My time horizon is no longer 30 years (down to 26 at age 100). Hey, I have enough.

 

[AbbA]

Including a whole life policy under assets makes sense from an estate tax point of view. If the decedent owned the policy, then the proceeds are considered an estate asset. Most people with large amounts of whole life transfer ownership of such policies to an ILIT (or similar trust, possibly) to get the proceeds out of their estate.

Yes, I agree that whole life insurance policy should be under Assets, but my surprise was having such a policy at all because it's an expensive insurance product. People are usually advised to buy a term life insurance instead of universal or whole. Or do people consider buying whole life insurance once they become quite wealthy (not sure what number of millions defines wealthy in this case) just for legacy planning purposes?

An update:

I have to say that overall it's a pretty good book if you overlook annuities. Maybe Wade Pfau isn't really pushing to go for annuities, but sounds very conservative plus being a PhD in retirement research academia you cannot cheer for stocks too much. It would probably be considered irresponsible, IMO.

Even though I kind of attentively skimmed through the book, the reason I liked is that everything related to retirement preparation is right there in the book. I would say that it's so comprehensive it can be intimidating for inexperienced (me too, btw).

It was interesting to read about SS and what goes into SS claiming decision. But overall Wade advises to use one of the SS calculators (including Mike Piper's free calculator) and decide then what to do.

It was also interesting to read about Medicare and the soup of complex flavors that goes with it. Per author, it would be best to discuss all the options with a good independent MC broker especially before starting MC. My take away on this topic is being careful when considering Advantage plan and most likely it's better to go with Medigap plan for us.

Ch.10 "Tax Planning for Efficient Retirement Distributions" is fascinating and sounds very complicated. I don't know how we'll approach our distributions yet, but it was interesting to read about various issues with tax planning in one long (50 pages) chapter.

There is also good info on legacy planning and non-financial aspects of retirement but I didn't really read them.
Overall I would say it's a good book for those on the journey to retirement, but not so much for the knowledgeable folks on this forum and who are already retired.
The author says that he's planning to update this book in a few years (I suspect when tax rates revert back to the higher brackets). If he does, I might consider buying it at that time. We're quite a few years to SS and MC, so lots of things might change until we must start planning for them.

BTW, Wade Pfau isn't aware of any good retirement calculators that he could recommend to DIY'ers but he considers doing research on them in the future. He claims that his Funded Ratio is the simplest and probably most reasonable. My problem is that I don't know what discount rate I should choose for my calculation if I wanted to explore our Funded Ratio and I don't know if his zero discount is overly conservative. I think it is but I am also not very well versed in NPV or FV to know if I'd choose the right rate either and fool myself as if we are over or under-funded.

 

[Luvtoride]

AbbA, thanks for the comprehensive and objective review of the book. I am reading it now and am only through the first couple of chapters including risks. I agree with your assessments about the level of details and how thoroughly Wade covers every topic. As a “intermediate” level retirement planner there is still much that I can and am learning here that will help me with my journey.

I will give a “review” when I am further through or completed reading the book.

 

[kevink]

Adding my thanks AbbA for your helpful review.

I agree with you on all points and you've pointed out what I tried to when I initially posted about the book: it's the single most comprehensive reference resource for retirement planning I've seen. That's why it's recommended so strongly by the likes of Mike Piper, William Bernstein and others we all know and respect. It's value, at least for me, is as a kind of retirement encyclopedia that sits on the shelf to refer to as key decisions need to be made, and for DW and I to re-read together.

Since I posted about the book I've also spent some time on the McLean Asset Management site I (where Pfau is the principal) and having done so I understand more clearly the visceral dislike of him expressed by many in this thread. It's not just his fondness for annuities but the whole safety-first-and-last mindset and tendency to default to assumptions that most people will use an FA and be just fine paying 1% (or more) for the service that don't play well with the generally well-read DIY crowd here.

Since I turn 65 at the end of this year and DW is only 58 another value we're finding in the book is being able to read key chapters (e.g. about Medicare and SS planning, order of withdrawal from accounts) together so she feels more empowered and up to speed with decisions that will impact both of us. As is so often the case in couples I've always done the investing and she's managed the household budget and this gets us literally on the same page and makes her feel more capable of stepping in and dealing with things. Having it saves a whole lot of time searching for comparably reliable info on the topics covered on the internet.

 

[brett]

I have read, or started to read some of the books.

When we determining our ability to retire early, how best to invest safelty, etc it really came down to a common sense budgeting process. Plus some very basic back of the envelope calculations. Being comfortable with numbers helped.

I did have a retirement software program to confirm our numbers. I certainly did not input things like utilities, food, travel for the next 25 years. We budgeted like we do now...after cash total spend. Adjusted for inflation, adjusted for an significant increase in travel.

Over ten years....the spend numbers were spot on. The only two variables were out of range. Estimated inflation was lower than anticipated. Investment income was significantly higher that estimated. But who knows what the next 10 years well bring in terms of inflation of investment returns.

I believe the biggest component in the entire exercise was common sense and some basic math.

 

[braumeister]

I just read Pfau's new book (well, a lot of it) and my impression is that it's excellent. I would definitely recommend it to anyone nearing or in retirement.

Not a book to be read normally, it's one you would keep handy and just dip into the section you're interested in (there's a good TOC).

Actually, I like it so much I'm considering buying a copy when this one goes back to the library.

 

[kgtest]

Sorry, I'll pass... I've given up on Pfau... over the years he's just turned into an annuity salescritter with a PhD.

Yeah I'm not a fan of annuities. TO me that is just another important risk. Fee's themselves are risks to retirement, and I didn't see him mention that in that review.

I try as hard as I can to:

- Pay as little interest as possible.
- Pay as little tax as possible.
- Pay as little fee's as possible.

And I work for the largest annuities shop in town. Probably one reason I can ER is because of all the fee's these contract holders pay in helping boost my base salary.

My current expense ratio for all $$ invested is .059%. That is not something to brush over IMHO. Lower your expenses, increase your gains. Don't buy insurance policies when your portfolio will ultimately become THE insurance policy.

One exception, if the workplace is offering a super reasonable rate on a group life insurance policy ge that. My DS passed away, and as she battled cancer was able to continue the policy and pre-pay the premium ahead. So her DS was able to collect a 300K check recently that cost her little to nothing. IF you are unhealthy and have a history of folks passing early during their working lives it would THEN be worth considering. Otherwise, annuities are basically you playing a game against an institutional group of actuaries that almost cannot be beat. The other time its good is if someone has a hard time themselves managing to save anything and are chronic/habitual/addicted to spending. Like a gambler with an addiction. Or someone with a HSN addiction. My .02 worth what you paid.

Focus on saving, and maximizing that return on investment...while maximising your accumulation phase opportunities of income growth...ie getting decent raises Y/Y.