IUL vs. 401(k) with Employer Match (I was WRONG (sort of))!

It’s tough to include all the needed information in this newsletter. So I created a 4-page download (no signup form required) to provide additional info on when IUL beats a 401(k) plan with a match and when it doesn’t. To download the summary, click on the following:

http://www.uploadedimages.net/content/PDFs/math.IULs.vs.401k.with.match.pdf

OnPointe IUL Comparison Software UPDATEthe OnPointe Software was just updated to allow users to set the employer match and percentage of pay (like dollar for dollar up to $2,500 or fifty cents per dollar up to $5,000). To learn about the industry’s most accurate IUL comparison software, click on the following link:

https://strategicmp.net/eiul-illustration-software

IUL vs. 401(k)s with an EMPLOYER MATCH

If you are NOT familiar with the math as to why an IUL policy can generate more after-tax cash flow in retirement than a 401(k), I recommend you read my book Retiring Without Risk (which you can download for FREE by clicking on the following link).

https://strategicmp.net/rwr-download

My answer when asked if an IUL is a better retirement tool vs. a 401(k) with employer match has been an emphatic NO! It seems impossible for IUL to beat a 401(k) where the employer literally doubles the employee’s contribution from day one. I’ll go through some examples and we’ll see how correct I was with my emphatic no.

The numbers don’t lie (or do they)? I used the following assumptions for the examples:

-25% income tax bracket before and in retirement
-1.2% mutual fund expense
-0.5% wrap fee (most plans have some kind of wrap fee)
-6.9% gross rate of return

I am ONLY going to focus on the employee’s contribution to the 401(k) plan that is matched by the employer. For the examples, I’ll use a $3,750 premium to put into the IUL every year and $5,000* to contribute to the 401(k) where the employer matches 100% up to $5,000 (so the total contribution is $10,000). I used preferred for the underwriting status of each example. Standard would not look at good.

Example 1: 25-year old, funding from ages 25-60, retirement cash flow from 61-90.

After-tax retirement cash flow? IUL wins by $10,377 a year.

-Tax-free borrowing every year from the IUL = $58,421
-Net after-tax withdrawal from the 401(k) =      $48,044

Example 2: 45-year old, funding from ages 45-65, retirement cash flow from 66-90.

After-tax retirement cash flow? IUL loses by $3,884 a year.

-Tax-free borrowing every year from the IUL = $15,460
-Net after-tax withdrawal from the 401(k) =      $19,344

Example 3: 55-year old, funding from ages 55-65, retirement cash flow from 66-90.

After-tax retirement cash flow? IUL loses by $4,030 a year.

-Tax-free borrowing every year from the IUL = $3,626
-Net after-tax withdrawal from the 401(k) =      $7,656

Mini-Conclusion

Unless the client is young, the 401(k) with a 100% match should beat funding an IUL.

Figures don’t lie, but liars figure

The point of the saying is that you can start with accurate data (“figures don’t lie”), but the data can be manipulated by someone knowledgeable and unscrupulous (“liars can do the figuring”).

The problem with any illustration software that has enough variable inputs is that it can be manipulated to make things look however the user wants them to look. The IUL illustration space is no different. I’ve seen illustrations given out that would be Exhibit 1 in a lawsuit against the agent should the client ever figure out they’ve been duped.

While I caution when choosing software, good software / accurate software can help you determine if IUL is a good tool for your clients and can also communicate the value to your clients (which will help show your value to clients and make more sales). 

                *Keep in mind that the example client is in the 25% tax bracket. So, a $3,750 IUL premium would mean a $5,000 401(k) contribution in the 25% tax bracket. 

Fee-Only Planners: the Good, the Bad, the Ugly

If you didn’t see last week’s newsletter, you missed a very interesting one. To read the newsletter, click on the following link:

https://strategicmp.net/fee-only-good-bad-ugly

Roccy DeFrancesco, JD 
269-216-9978
roccy@strategicmp.net