Advice needed on a "3rd Bucket"

[DrBenz]

Hello!

I've been a long time follower of this site and have gained priceless information in the past that was paramount in helping myself get set up for retirement. Currently I am finding myself needing some advice!

-Currently I am 30, single, no children, employed as an MD and am maxing out my 401k and IRA contributions. I have no debt outside of my home mortgage. With that being said I'm looking to set up a 3rd source for retirement. Currently my financial adviser is suggesting I set up a permanent life insurance policy with which the contributions would be at 1800 monthly for 35 years. His projections based on earning of 7 .1 percent is showing my break even point at approx 20 years --- Then at age 65 till 90 I would theoretically be able to collect approx 150k yearly. All of which would be tax free at that point.

My real questions or concerns here are there alternatives of where I should allocating approx $1800 of my after tax money? Annuities, Municipalities, bonds? Any help or advice would be greatly appreciated. I also have disability coverage at this time in case I am unable to work.

Thanks!

 

[pb4uski]

Run DrBenz, run!

Permanent life insurance is life insurance, and you have no need for life insurance. You need an investment, so don't buy life insurance as an investment. (Note: I worked in financial management for a mid-sized life insurer for 12 years, and later consulted in the insurance industry).

That 7.1% is only a projection and is not guaranteed. Only the first 5 years or so would be tax-free as any policy loans in excess of premiums paid would be taxable. Plus any tax-deferred growth from the policy would not be tax preferenced.

Look at what you would be guaranteed to receive if you cashed out after 5, 10, 15 and 20 years compared to what you paid in and you'll see it isn't that attractive. The 7.1% is a sham.. my whole life policy which is better than most is only paying about 5% currently and no insurer is earning over 7% on their investment portfolio. If the 7.1% was realistic, the FA would have a mile long line in front of his door.

I think you would be better off simply investing in equity mutual funds such as the Vanguard Total World Fund or Total Stock Fund. The dividends and capital gain distributions are taxed, but at mostly preferred rates and any appreciation is also taxed at preferred rates when you sell.

You will hear many stories from people who were talked into "investing" in permanent life insurance and later regretted it. Those who do not learn from history are destined to repeat it.

 

[EastWest Gal]

I'm an MD too, and wholeheartedly agree. If you ever need life insurance buy only term insurance. Invest in mutual funds or ETFs yourself. Read Bogleheads Guide to Investing, and Bogleheads forum for investing help. With your income and attitude, it won't be long before you will be FI.

Another thing, in 30 years, $150k might be only $50K in current dollars. Insurance is designed to pay the insurance guy, not you.


Sent from my iPhone using Early Retirement Forum

 

[Big_Hitter]

sounds like you guys need an additional qualified retirement program - profit sharing, cash balance, etc.

 

[DrBenz]

WOW!! Thank you pb4uski for your insight! And as well EastWest Gal thanks you.

That's precisely why I decided to finally ask the question on here, those were my exact thoughts and reservations on the deal. And I wasn't made aware of the fact that once my pay out reached my contributions that it as well would become taxed. I was already Leary and that's the nail in the coffin for me. My feelings were correct then in regards of being felt as if I was being "sold" to by a FA salesman.

So with all things considered self managing my contributations of $1800 a month allocated towards equity mutual funds or ETFs would be more sensible? It's a shame I can't set up a SEP IRA.

 

[gauss]

Can you setup a Solo 401k that will allow you to defer the full Annual Defined Contribution Limit of $53,000 (in 2015)?

Anything above the $18,000 amount will go in after tax, however you would likely be able to roll those funds over to a Roth IRA.

My wife and I were both saving in our employer sponsored 401ks over $50,000 and then rolling the contributions over to our Roths. The reason that we were able to do this was because
#1) The plan allowed after-tax contributions (not roth 401k!) up to the full legal limit
#2) In-service distributions were allowed

I have never figured out if solo 401ks could be used this way also.

Oh yeah , fire the financial adviser. He is obviously working to enrich himself and not you. Just invest in a Vanguard Balanced fund or target retirement fund. You will probably save hundreds of thousands if you make this change over the status quo over your career.

-gauss

 

[ERD50]

Get away from that so-called 'financial adviser '.

If you want to see him squirm, ask him to sign a document to attest that he is acting in a fiduciary role.


How The Fiduciary Standard Protects You | Bankrate.com

Currently, there are two standards that advisers and financial planners are held to -- the suitability standard and the fiduciary standard. The suitability standard gives advisers the most wiggle room ...

"You can satisfy the suitability standard by recommending the least suitable of the suitable options, as long as it falls within the general suitability test," says Barbara Roper, director of investor protection for the Consumer Federation of America.

The suitability standard invites conflicts of interest pertaining to compensation, which can vary greatly from one product to another.

"And you don't have to disclose your conflicts of interest. ... So what that means is often the products that are best for the broker have higher costs for the investor," Roper says.

The other standard of care, the fiduciary standard, basically charges advisers with putting their clients' best interest ahead of their own. For instance, faced with two identical products but with different fees, an adviser under the fiduciary standard would be compelled to recommend the one with the least cost to the client, even if it meant fewer dollars in the company's coffers -- and his or her own pocket.

...

"Ask one simple question: 'Are you acting under the fiduciary standard, and will you put that in writing?'" ...

You can hire someone as a fiduciary, but your are likely to get the same advice here for free, unless you have some complex situation. Give it a try.

-ERD50

 

[2017ish]

So with all things considered self managing my contributations of $1800 a month allocated towards equity mutual funds or ETFs would be more sensible? It's a shame I can't set up a SEP IRA.

Assuming no other pre-tax options (profit-sharing plan with the 401k?), I personally don't see much difference between ETF and open-end fund if the underlying premise for each is the same. I own Vanguard index funds and, in another account, the identical vanguard ETFs. There are recurrent debates (flame wars?!) at bogleheads about this, but if you buy and hold I don't see much difference.

In addition to the Boglehead site, you might want to take a look at whitecoatinvestor site--Jim Dahle is a late-30s ER doc whose site is geared to your situation (he is also a frequent boglehead commenter)

 

[eroscott]

Anything above the $18,000 amount will go in after tax, however you would likely be able to roll those funds over to a Roth IRA.

This is solid advice and seems to be a secret as I've had interviewed financial advisers tell me you can't do this. I did this backdoor method for years with Fidelity. Roth IRAs are the "bomb" as the kids say.

 

[RetireBy90]

I would suggest looking at real estate. You can find management companies that will do everything for you to include paying HOA dues and utilities if needed. A friend of mine needed to get an income stream from some savings and was able to get about $3K per month income from a $450K investment. Works out to about 8% return, and rents will go up over time, although perhaps not every year. Some use RE as another asset class along with equities and fixed income. It is like running a business, in that it will take a little attention from you, but you could invest say $100K down and buy a $400K property with a $300K loan. You could then use the $1800 monthly to make extra payments to get to a free and clear property sooner or you could just use the rent (and perhaps a small $200-$300 monthly contribution first couple years).


Many on the board have had or currently have RE investments and many have had and never will again. I think it is mostly due to problems with a poorly located property or trying to manage it them selves. My property is on the other side of the US, but I have a mostly reliable management company and found a good realtor


Just a thought on another investment that can throw off monthly income.

 

[Big_Hitter]

Assuming no other pre-tax options (profit-sharing plan with the 401k?),

probably difficult to do - you have minimum coverage issues and minimum benefits to provide to rank and file employees - wouldn't hurt to explore it though, IMO

 

[hnzw_rui]

Anything above the $18,000 amount will go in after tax, however you would likely be able to roll those funds over to a Roth IRA.

My wife and I were both saving in our employer sponsored 401ks over $50,000 and then rolling the contributions over to our Roths. The reason that we were able to do this was because
#1) The plan allowed after-tax contributions (not roth 401k!) up to the full legal limit
#2) In-service distributions were allowed

Question, if you have both pre-tax and post-tax money in your regular 401k, doesn't the conversion amount get pro-rated between the pre- and post-tax balance when you do a rollover to a Roth IRA?

 

[2017ish]

probably difficult to do [profit sharing in 401k]- you have minimum coverage issues and minimum benefits to provide to rank and file employees - wouldn't hurt to explore it though, IMO

Both of DW's groups (20 and 45 docs respectively) have done it. Definitely need to elect safeharbor contributions and jump some hoops, but worth it to enable the docs to maximize total pre-tax--plus gives the rank and file immediately vested employer contributions. But, OP could be hospital employed, which would likely negate this....

 

[gauss]

This is solid advice and seems to be a secret as I've had interviewed financial advisers tell me you can't do this. I did this backdoor method for years with Fidelity. Roth IRAs are the "bomb" as the kids say.

Typical FA's probably don't want to deal with this because not everyone is eligible.

It would take up too much of their valuable time (LOL) to determine if it is possible for each of their client's employer plans.

Glad to hear that you were able to benefit! I know it helped me to ER.

-gauss

 

[Big_Hitter]

Both of DW's groups (20 and 45 docs respectively) have done it. Definitely need to elect safeharbor contributions and jump some hoops, but worth it to enable the docs to maximize total pre-tax--plus gives the rank and file immediately vested employer contributions. But, OP could be hospital employed, which would likely negate this....

agreed - could be leaving lots of $$$ on the table but you have to pay to play

 

[DrBenz]

This is solid advice and seems to be a secret as I've had interviewed financial advisers tell me you can't do this. I did this backdoor method for years with Fidelity. Roth IRAs are the "bomb" as the kids say.

I can't thank all of you enough for the quick replies and more so the suggestions and insightful opinions.

Can anyone give me more information on how to put my after tax money in another solo 401k or IRA that I could eventually roll into a Roth IRA?

Thanks in advance. And I will definitely be checking out the other sources, references, and sites mentioned throughout this thread.

 

[pb4uski]

I think the suggestion was to do after-tax contributions to your employer's 401k plan in addition to the maximum pre-tax contributions that you seem to be doing currently.

So your 401k would consist of a pre-tax pot and an after-tax pot. When you leave, the pre-tax pot can be rolled over into a regular IRA and the after-tax pot can be rolled over into a Roth IRA. In effect, it is a loophole in the law that allows people to circumvent the Roth contribution limits and income limits. The Obama administration has proposed closing this loophole but in Congress that dog don't hunt.

 

[pb4uski]

Question, if you have both pre-tax and post-tax money in your regular 401k, doesn't the conversion amount get pro-rated between the pre- and post-tax balance when you do a rollover to a Roth IRA?

No, they are considered as separate accounts with different tax attributes.

What you're thinking about might be where one does a Roth conversion and your tIRAs include deductible and non-deductible contributions. In tIRAs the separate pots of money are not separately accounted for, even if you have them in separate accounts (like deductible contributions and growth in one IRA and non-deductible contributions and growth in a different tIRA).

 

[Travelwanted]

Great advice so far.

1-agree with run from the perm life. get term once you have spouse/dependents.
2-agree with dump FA
3-read "Bogleheads Guide to Investing" - it will save you tens of thousands (potentially per year!) in FA fees.
4-be very careful as an MD - you have a target on your back for people to lead you into bad investment decisions.

 

[eroscott]

I think the suggestion was to do after-tax contributions to your employer's 401k plan in addition to the maximum pre-tax contributions that you seem to be doing currently.

So your 401k would consist of a pre-tax pot and an after-tax pot. When you leave, the pre-tax pot can be rolled over into a regular IRA and the after-tax pot can be rolled over into a Roth IRA.<snip>

My wife did it after she "left" (megacorp had her train people in other countries to do her job first tho).

However, I was able to do it annually with Fidelity. I guess the main advantage would be if you wanted other investment options beside what was in the 401K. 401Ks have great low-fees but if you have enough money in that post tax then you can get in to Vanguard Admiral or Fidelity Advantage for their low fees.

 

[gauss]

Question, if you have both pre-tax and post-tax money in your regular 401k, doesn't the conversion amount get pro-rated between the pre- and post-tax balance when you do a rollover to a Roth IRA?

Fortunately this is not the case with our plan. Pre-tax amounts are not allowed to be withdrawn before age 59 1/2 or termination from the company.

The after-tax amounts are available for withdrawal at anytime, however there is a pro-rata amount of the the taxable earnings that must be taken at the same time.

Both amounts (taxable and after tax) are accounted for separately and shown on the quarterly statements. The company also added a third option - Roth 401k but that is not what I am talking about here.

Within the time limit (60 days if memory serves), I rollover the full amount to my Roth IRA with careful attention to the paperwork that I submit. In general I need to have funds available to makeup for any withholding that occurred in the check (ie 20% of the taxable amount).


I receive a 1099-R from the employer 401k that shows the full amount of the distribution and the taxable amount based on the amount of earnings included in the withdrawal.

The Roth IRA will then issue in June a 5498 showing the amount of the rollover contribution.

If people are doing this the first time, I suggest that they do a small amount at first (ie a few thousand dollars) so that if anything is done not quite right, the amount of the error will be small.

BTW- Technically I don't think this is referred to as a conversion.