In what order (of importance) should I work toward the following goals: max out annual 401(k) contribution, open an IRA, invest in life insurance?

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Answered by Kate Holmes , CFP®PRO+ in Las Vegas, NV
Hello! Unfortunately, there isn't a one-size-fits-all answer but I'll provide some guidance to help you decide.

If your 401(k) has a company match, you should absolutely take advantage of that. For example, if they match 50% of the first 6% (of your gross W-2 wages), you should contribute AT LEAST 6%. Beyond that, you should look at the fees within the plan, the investment options, and the underlying fees for each investment option. There are a lot of great 401(k) plans that include all-in fees for far less than you can achieve on your own due to the economy of scale of pooling everyone's monies together. So if the fees are low that's a great place to boost your savings.

If the fees are high or you don't think you'll be at that employer long, opening an IRA at an online discount brokerage (like Charles Schwab, TD Ameritrade, Betterment, Vanguard, etc.) is a good way to go. Set up automatic monthly deposits so you're in the habit of saving regularly and keep your investment costs down.

I'm not personally a fan of "investing" in life insurance. It's often an expensive way to go with little flexibility if you need to access the monies in an emergency. However, depending on your age and personal situation, life insurance can be a vital part of your financial plan. For example, if you have people that depend on your income (a spouse, kids, family) obtaining a term life insurance policy is an inexpensive way to ensure your loved ones are taken care of if something were to happen to you.

I hope this helps! | 02.18.15 @ 22:57
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Arin Moradian, Financial Adviser in Glendale, CA
It depends, what your financial goals and obligations are. If you have a family with kids. Life insurance should be your base, Regardless, why pick just one , do all.

-401k from a job has some benefits= pre tax money, tax deductible, can contribute up to $17,500 a year, and based on your company can take loans. Can't touch without a 10% penalty until 59 1/2.

- IRA is the same thing except lower funding $5,500 a year, and you can't take a loan.
If you want to diversify, consider a ROTH IRA for tax free money, or a whole life or variable life . | 03.04.15 @ 00:04
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
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Answered by David
I am a proponent of Indexed Universal Life Plans with a Living Benefit Rider. This type of Life Insurance gives you the best of all worlds for the following reasons:

1. It's like a 401k in that you can chose the amount you want to contribute monthly

2. Based on your age and monthly contribution, a life insurance policy is established for an amount that is within the IRS guidelines that allows you to withdraw your money TAX FREE at any age.

3. The Living Benefit rider is a no cost option, and allows you to access your life insurance face amount should you experience a critical illness like cancer, heart attack or stoke, in additional to chronic illnesses as well.. This tax free cash is available to use in any way you see fit, including paying bills, mortgage, college fess for the children, should your income suffer at work due to your illness, or even use it for life saving treatments that may not be available in this country.

4. When you are ready to retire, you can turn on a guaranteed lifetime income stream that you can not out live, and it's Tax Free cash.

5. Upon your passing, you will still pass on a death benefit to your heirs that is estate and inheritance tax free.

Please feel free to contact me for an illustration of exactly how this all works.

| 03.04.15 @ 17:02
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Pamela J. Horack, , CFP®PRO+ in Lake Wylie, SC
Everyone's goals and directions are different, but product information remains relatively the same. The important thing is to find products that fit your specific goals, not the other way around.

First, insurance is not an investment, it is a contract. You agree to pay the insurance company every month and they agree to pay your beneficiaries a certain amount. Don't think of it as an investment, but for its intended use - protection.

As for retirement savings, I'm a fan of 401(k)s and other employer plans where they match your savings. Be sure to save at least enough to get the match here. These accounts help you save in the same tax-advantaged method as a traditional IRA, so using that type of account for further savings is somewhat redundant. You can save additional funds in a Roth IRA which has tax advantages when you take the money out as opposed to when you put money in. This may help you have a tax-diverse pool of funds when you retire.

At any rate, take time to check with a financial planner to put together a plan that fits your retirement goals. | 03.16.15 @ 14:37
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Willard R. Brumbaugh, LUTCF in Victorville, CA
Eliminate consideration of an IRA. There is no tax-savings with Qualified plans. There is only tax deferral. And it is possible that your tax bracket at retirement could be higher than the average tax bracket of your working years.

Only contribute what is necessary to get the maximum employer participation - for the same reason stated above.

Pump as much as allowed and reasonable based on your budget into a competitive Whole Life or Universal Life policy.

However, I must take issue with David's points 2 and 4. Distributions are only tax-free up to the full return of your cost base. Anything further will be taxed, unless taken as loans. These loans are not tax-free. They are untaxed. This is important to know, since if the policy lapses, there will be income tax applied to what the IRS will interpret as gain. This is discussed in my article in InsuranceNewsNet Magazine.

A final comment on David's answer: Exchanging the policy for a guaranteed lifetime income most likely generate a taxable situation.
| 05.22.15 @ 03:28
Comments 2  
Martha Waters — An insurance agent will advise buying insurance. Consider the source of this advice. | 10.20.15 @ 15:22
Saving in WI — Whole life insurance should never be a consideration for life insurance, let alone an investment. | 08.08.16 @ 16:17
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Phillip Christenson, CFA in Plymouth, MN
Do not "Invest" in life insurance. Stay away from whole life, universal life, or any other junk life insurance policy. The fees on these policies are outrageous. If you need life insurance buy term insurance.

Find yourself a "Fee-Only" financial advisor as they will give you more objective advice about your situation.

As for your order of importance, in general, contribute to your 401k up to the match, then invest in an IRA (Roth) outside of your employer, then go back and max out your 401k. You might also want to consider the roth option on your 401k if available. Once your retirement accounts are maxed out you should consider opening an individual brokerage account. Just stay away from life insurance as an investment and you'll be just fine.

Some "financial advisors" receive large commissions by selling these products, which is why they recommend them. Conflict of interest? | 07.28.15 @ 20:12
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Willard R. Brumbaugh, LUTCF in Victorville, CA
With over forty-five years of experience, I can say with confidence 'Buy Term and Invest the Rest' (which I at one time believed) does not hold up well over the long run.

Competitive Whole Life and Universal Life policies' costs are comparable to and often less than what would be the premiums of Term life insurance. Assuming that the policy owner has the means for long-term savings, these deposits contributed into WL/UL policies generate untaxed interest that pays these costs. A person paying Term premiums must generate 30-50% more income to pay these costs compared to the charges absorbed inside the WL/UL policies.

The presumption that fee-for-service MARKETERS (because that is what they are) are more client-centered than commission agents is merely an opinion. I have been able to provide competitive products without having to charge for my knowledge and experience. If I, and others like me, can offer equally productive products without taking money out of our clients pockets, why should the clients have to pay extra for the service?

Something to think about: An agent having sold a WL/UL policy receives one first year commission. An agent selling a Term policy could get many first year commissions by re-writing the client every few years, that is until the client is no longer insurable.

Finally, contributions to Qualified plans provide no guarantee of tax-savings. The only justification for the employee is the company contribution. Many have found that the taxes they have to pay at retirement are significantly greater than what they thought they had saved. Ideally, if the company Summary Plan Document allows the employees to contribute to 401(k) Roths instead of traditional tax-
deferred contributions, in order to get the company match, I would favor this over the usual strategies.

There is much more that I could say, but this venue is not adequate. If anyone wants to know more, I would be happy to send copies of my complete report


| 07.29.15 @ 00:16
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Phillip Christenson, CFA in Plymouth, MN
I do not need to have 45 years of experience to know that there is no free lunch. Any sort of rider or added benefit to any financial contract costs money; a life payout, inflation, adjustment, guarantee return, return of premium, etc. These all cost the purchaser money in terms of premiums. The problem is you are losing the money that you could have earned by investing it yourself.

I’m not sure I understand your cost example. Please explain and show me a Universal Life or Whole life policy that costs less than a comparable term policy. Make sure you are accounting for the opportunity costs. While it is true that if you stuff enough money into a whole life policy it will generate enough income to pay the costs of the policy, so could a comparable portfolio built outside of the insurance policy pay for the cost of a term insurance policy with much more left over. This doesn't even take into account the additional liquidity you have by investing outside of a whole life policy.

As for Fee-Only (fee for service) versus commission based model it is obvious to even a casual observer who is more focused on the client’s needs. If product A provides a salesman with a 100% first year commission and product B provides 30% first year commission, which product is the salesmen going to recommend more often? What incentive does the “advisor” have? That is called a conflict of interest. Plain as day. If you can’t see that you are blinded by your large commission checks.

As well, this is why you are not held to a fiduciary standard, you could not sell these products if you were. Fee-only advisors are held to this fiduciary standard which means by law they have to act in the clients best interest which is why “fee for service” advisors never recommend these products, at least I have never heard of any.

Your “something to think about” example is ludicrous. An agent selling a term policy would not get many first year commission every few years. No one buys terms policies every couple years. And even if they did the total commission is much smaller on those products compared to the alternative polices you are suggesting. This is just a faulty example.

Finally, I’m not sure how you can suggest that the tax qualities of a 401k could actually be a negative. You really have to stretch the assumptions make that work.

Please send me your complete report as you suggested. I would love to see how you present the numbers to make it work.

If anyone wants me to take a look at a whole life, variable life, or any marketing materials they don’t understand I would gladly do it. I have seen far too money of these policies sold that are clearly not in the best interest of the client.

In general be wary of any policy or “investment” that you don’t understand or can’t be explained easily. | 07.29.15 @ 14:41
Comment 1  
Willard R. Brumbaugh, LUTCF in Victorville, CA — Phillip, I would be happy supply you with my report, along with worksheets that substantiate my point of view. Also, you assume I make a large commission on all I do. While I am not a Certified Bank On Yourself agent, I do practice the BOY philosophy. Thus, my commissions are nothing approaching what you imagine. | 02.10.16 @ 18:07
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
First of all, Investing in 401k by maxin out your contribution in my opinion is not good idea. I usually advise just put a little more than what your employer matchs. Then invest some of them in different investment vehicles (like annuity, Roth IRA, and stock market) Don't put all your eggs in one basket.

Most important of all, you need to invest in life insurance. Insurance protects your money whether you live a short time or longer. But again there are different insurances and purposes. You need to consult your trusted expert.
But to tied it all up, you need to have a revocable trust or some kind of protection in probate issues. | 08.07.15 @ 17:27
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Charlie Donaldson, MBA in Newark, DE
Ah, I could write a textbook on this topic...

For starters, know the difference between saving and investing. Saving will NEVER involve risk where investing will ALWAYS involve risk. Life insurance (with the exception of variable universal life) is never an investment.

Note: Anyone who tells you to "never use xyz product" is trying to sell you on a particular product themselves. ALL products have their place somewhere or they wouldn't exist. Thus, don't trust anyone who uses this phrase.

Question: Will your tax rate be higher when you take the money out or will they be lower? (If you have a crystal ball, please let me know!)

If you think taxes will be lower, then you want to defer taxes by using the 401k & traditional IRA. If you think they'll be higher then you want to use a Roth 401k, Roth IRA, or cash value life insurance.

Question: Do you want to be subject to the governments rules as to when you can or can't use your own money?

If you're OK with the government in your business use the 401k & IRA's. If not, consider using life insurance.

Within life insurance, do you want to assume any of the risk? If yes, consider a variation of universal life. If you don't want risk, use whole life. Just make sure you work with someone who can minimize your cost so that you're cash accumulation is maximized. Not all (in fact very few) life insurance agents know how to do this properly.

I could go on, but I think you've got the idea...
| 08.13.15 @ 19:17
Comments 3  
Willard R. Brumbaugh, LUTCF in Victorville, CA — Well said! | 02.10.16 @ 18:14
Willard R. Brumbaugh, LUTCF in Victorville, CA — In support of your comments NASDAQ had an average gain of only 1.30% in the 16 year period ending 12/31/2015, even though it had individual annual gains of 13.40%, 38.32%, 15.91%, 16.91% and 43.89%. With this awareness, I am much more confident in saving through properly funded life insurance than investing in the stock market. | 02.10.16 @ 18:25
Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC — William, What is the CAGR of the NASDAQ during this period? Cost basis is also something to consider. | 04.03.16 @ 22:08
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Stacy Marcus, CDFA™ CFEI™ in New York, NY
If your employer offers a match to your 401(K) contribution always take advantage of the full match and max out your own contribution. An employer match is "free" money - it is like getting a raise before taxes! A good financial advisor will help you allocate the funds you have available to save and invest to achieve your short and long term financial goals. | 09.30.15 @ 23:15
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by David Wasson, Insurance Agent in Rohnert Park, CA
My simple formula is 1) contribute to your 401(k) to the extent your employer matches your contributions, then 2) if you're allowed (there are restrictions based on your income) fund a Roth IRA for yourself and spouse, then 3) if your family also has a need for life insurance benefits on you use a good permanent (not term) life policy. Life insurance should be your last choice unless you also need life insurance. Be sure to get an illustration of how the 3 ideas compliment each other. | 02.09.16 @ 20:51
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
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Answered by Martha Waters
Please consider the source of the advice as you read these answers. Half these answers are from insurance salesmen earning commissions selling insurance products. This is biased advice. Unbiased advice can only come from a financial advisor who has a *fiduciary* responsibility to you. There are many types of "financial analyst" and "financial advisors" and there are a lot of acronyms for "specialists". Get advice from a CFP Certified Financial Planner - they have a fiduciary responsibility to give you advice in your best financial interest. Key words: fiduciary responsibility.

By the way, "fee only" is a little confusing: it includes those who earn money based on a percentage of your assets under their management control (AUM) AND includes hourly-based fee-only planners. Some AUM advisors have fiduciary responsibility and some do not. CFPs always have a fiduciary responsibility. I use an hourly-based CFP for advice. | 02.10.16 @ 14:54
Comments 3  
Willard R. Brumbaugh, LUTCF in Victorville, CA — I appreciate your 'heads-up', but please be aware that there are client-centered commission compensated insurance agents. | 02.10.16 @ 18:30
Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC — There are many designations of Fiduciary. For example I am an Investment Manager and a Fiduciary. From a client's perspective, A fiduciary must always do what is in their clients best interest. In my opinion, any relationship requires 3 things; Integrity, intelligence, & energy. We can debate the importance of Intelligence & energy to infinity. Without Integrity, the other two will destroy your values | 04.03.16 @ 20:26
Saving in WI — Willard, there is no instance were whole life insurance makes sense to any consumer. Whole life insurance only benefits the insurance agent selling it. I don't know how you can ethically sell whole life. | 08.08.16 @ 16:22
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
Answered by Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC
In order of importance, the first Rule of investing is Rule #1. Don't lose money. What is the second Rule. Go back to Rule #1.

Perhaps a better question could be, what is the investment (401K, IRA,) doing for me? What is the ROI this investment is offering?
Many folks want to "save" for retirement. What they don't understand is the expense of those savings.

For example
$100k in a retirement account (your choice of which)
50% tax rate.and 1% administration fee.

At a 5% CAGR, you have only one and a half% after taxes and the Admin fee.
At a 15% CAGR, you have six and a half% after taxes and the admin fee.

Let's dig a bit deeper and add Time;
That one and a half% rate will double your $100K investment in 48 years
That six and a half% rate will double your 100K investment in 11 years
How much time can you afford to save?

Yes, instead of a higher CAGR, you can increase your contributions, increase your time, and decrease your lifestyle expenses. Which RISK is more important for you? As an Investment Manager, my job is to eliminate the risk and get you where you need to be financially. This is our value proposition.

It's an individual answer;
Some folks can't sleep at night and worry extensively when they get a CAGR of 15%
We want you to sleep well at night. So, just leave the investing to us and if you need to make less. We can help you there too. Ethically. we prefer not to get paid using this approach.

We welcome your comments and you can contact us directly to discuss your situation in greater detail..

It's not what you make, It's what you keep that determines your lifestyle

| 04.03.16 @ 20:11
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 18:38
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Answered by

Kate Holmes
Kate Holmes , CFP®PRO+ in Las Vegas, NV

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