Thread by @roncaruthers

1. A 401k vs a properly structured cash value life insurance account.

This is going to be a long thread, but I will go through the fees, the growth, and the withdrawal phase of each using a 34 year client that we recently set an account like this up for.

2. First off, my client had $1,000 to invest each month, and her company didn't offer a 401k.

One of the big complaints about life insurance is that 'the fees are really high'. You hear that from peeps on Twitter, in the media, and from @DaveRamsey and @SuzeOrmanShow .

3. Interestingly enough, Suze used to sell life insurance before she got her show, and you can find tons of quotes online from her about how great it is if it's set up correctly.

Go do a quick Google search if you don't believe me.

4. One more thing before I get started:

I'm a licensed financial advisor, so I also manage money in the market for my clients, and I've taken extensive tax courses, though I never sat for the CPA exam.

So, save me the 'you just sell insurance' BS. Look at the math, and decide.

5. First, let's discuss the fees of a life insurance contract, if it's set up properly ('properly means we are being as efficient with the money as we possibly can, according to IRS code section 7702, and TAMRA and TEFRA limits)

In English, we're maximizing the living benefits

6. OK, FEES vs a 401k:

In this client's case, her fees over the first 10 years will be $21,050. This is taken directly from the company's illustration and includes everything.

Assuming the 401k earns 7%, and the managment fee is 1.5% (even after including the hidden fees)

7. The 401k fees paid would be $17,371. So, Suze and Dave are right! The life insurance IS more expensive!

But not really by all that much.

At the end of 20 years, the total fees on the LI will be $34,158, vs the 401k which will be...wait for it:

$81,022!

What just happened?

8. The LI is more expensive in the first 12 years, but then it gets much more efficient, while the fees you pay on any mutual fund or managed account just get higher as the account grows.

But it gets much worse for the 401k.

9. At the end of 30 years, the fees are $57,090 for the life insurance.

For the 401k, the fees are $222,943 at the end of 30 years.

A difference of $165,853!

When @DaveRamsey says life insurance sucks, and then refers you to his 'hand-selected' money manger, do you see why?

10. OK, now let's talk about account growth.

At the end of 10 years, the life insurance account will have $145,878.

It will have $487,022 at the end of 20 years,

And it will have $1,211,080 at the end of 30 years.

11. By contrast, the 401k will have $225,058 at the end of 10, $605,679 at the end of 20, and $1,249,392 at the end of 30.

So, in the early years, the 401k will have more money, but at the end of 30 years, they will both have about the same amounts.

But....

12. This is one of the most important points:

YOU CAN ACCESS THE LIFE INSURANCE MONEY WITHOUT PAYING TAXES BEFORE YOU RETIRE.

Yes, you can borrow from a 401k, but only if your company allows it, and you have to pay it back when THEY say.

With the LI, YOU control this.

13. So, during those 30 years, my client can access those funds to:

-pay for college;
-start a business;
-invest in real estate;
-buy a car;
-whatever she wants

And, she can pay back the money when and how she feels like. AND it's all tax free.

14. Most 401k's limit you to borrowing $50,000 and you have to pay it back over 5 years.

And, if you switch jobs, or the company gets sold, you have to pay it back immediately, or the whole amount will be taxed and penalized.

15. Now let's talk about her distributions in retirement.

At age 67 (I picked this because it is now normal retirement age, but she could just as easily take the money sooner)

She will have $141,500 TAX FREE for the rest of her life, up to age 120.

Key words: tax free.

16. Assuming she is in the 25% tax bracket, she would have to take $196,528 to 'net' $141,500, because she deferred the taxes on it.

If socialists take over the government and raise everybody's taxes to 70% (or some equally ridiculous number, she'd obviously have to take more).

17. But, sadly, the 401k money will run out by the time she is 76.

So, let me repeat: she will have a lifetime tax free income stream of $141,500 that will last to age 120, OR she will run out of money at age 76

And she retains access to her money during her working years.

18. Since life expectancy for her is age 88, you can see the devastating effect of running out of money 12 years early.

Also, she would have paid $527,427 in taxes withdrawing her money from the 401k.

If she had simply paid the tax upfront, it would have only been $99,000

19. So, she would pay $428,427 MORE using the traditional 'tax savings' plan that the government offers and encourages you to use.

It's a great plan for people who suck at math.

And the only reason she isn't paying even more is because in the case, she ran out of money.

20. Look, it's your money. Do what you want with it, but I tell all my clients: Put away as much as they'll give you a match on. But if you're not getting a match, or God forbid, you're self-employed, do NOT lock up your money for decades for the 'privilege' of pay 5x as much.

21. End of lesson for today.