Retirement/savings alternative to 401k?

Question

Robert Leonard · Answer

@Tammy Wise

You are talking about podcast number 17.  I've listened to every podcast.    I have a healthy respect for differences of opinion, and I certainly don't agree with all of the different opinions expressed on the podcasts, but that podcast sticks out in my mind because it is the one that I think includes really bad advice. They've already been mentioned above, "don't invest in a company matched 401k" and "buy an EIUL (Equity Indexed Universal Life) policy."  Those are just bad ideas for all of the reasons mentioned above.

Dmitriy Fomichenko · Answer

The old saying "Buy term and invest the difference" makes sense. By doing so you can have inexpensive term life insurance policy for the years you really need it and at the same time can invest in the same investments (if you wish) that the EIUL would have been invested and get rid of all the fees and commissions paid to the insurance salesperson and the insurance company. It is never good idea to mix life insurance with investments.

The primary goal for the insurance company when selling products like this is to make money for them, not for you.

Nicholas Jasmine · Answer

Not participating in a 401k is bad advice.  401k is before tax contribution, and plus you get dividend based on what holdings you have.  This investment vehicle has made many people that I know and work with millionaires.  IMO, not participating in this is like not paying social security and medicare taxes.  Something to think about.

Anna Shaver · Answer

@Tammy Wise  As someone who has one and has had it for more than 15 years, I have been lazy and should have gotten rid of it long time ago.  It has not performed very well, I should have just invested in a S&P 500 fund instead, it would have done a lot better.  Even after paying taxes on my returns.

Maybe it is my fault for not seeing if we could switch ours into something with a better return within the policy.  We were really young and someone we trusted encouraged us to get it and setup what it was invested in.  The good news is that it does have a cash value and we will be cashing it out to help pay for my daughters college education.  We made very little, maybe $2000 - $2500 for each policy (on top of the value we will receive back).  The cash value is really the cost basis or what we have put into it.  Ironically there will be very little taxes on the surrender because we made no money.. LOL ;)

We could have increased the life insurance policy payout over time to increase what we could put into it but we didn't.  The investment portion is tied to the size of the policy so to increase the investment, we would need to also increase the life insurance, which at the time wasn't something we were interested in.

We will now just get a standard 20 year life insurance policy and call it a day.  I am actually doing this in the next month, getting the new policy set up and surrendering the old.  Because we have had it for so long there will be no surrender fee.  Other people on this board may have had a better experience.  The company offering it got a good deal.  They have $40K on top of the cost of the life insurance fees that they had without paying hardly any return.  We will be getting it back and I will write it off to a lesson learned, although it took me a long time to take action.

If you are considering it for an alternative to a 401k there was also mention on one of the podcasts or blog posts of using HSA medical account contributions which can grow tax free for medical expenses later in life when these costs will be higher, downside might be that the companies you have them with might not offer many investment options so the return might not be as good as your options in a standard investment account even taking the taxes into consideration.  It sounded like this option would be after you maxed out your 401K.  I think the individual yearly contribution is around $3000 and is around $6500 for a couple.  If you are interested you would need to confirm.   For me I have an old HSA account from when my employer switched back to standard benefits so it sparked my interest because it already has some money in it that I have been slowly utilizing.

If you are self employed the Sole 401K as a self directed account sounds very interesting.  You may want to check it out.

Account Closed · Answer

As @Terry Lewis mentioned it was probably an IRA or Roth IRA.

I haven't listened to many of the podcasts yet, but I personally would ignore any advice that includes NOT contributing to a 401k.  Especially if you work for a company that offers some level of company match.  That is free money you are leaving on the table.

The conventional wisdom on personal finance forums is to contribute to your 401k up to the level that maximizes the company match.

Account Closed · Answer

Interesting reading

Account Closed · Answer

I googled EIUL.  A biggerpockets thread was the first listing.  Among the top 5 results is two links with reasons why NOT to buy one.  I would have to do some reading to offer an opinion on it, but I am certain it won't change my opinion on 401ks.

If your employer matches contributions, it is free money!

Terry Lewis · Answer

IRA or even better yet Roth IRA?

Terry Lewis

Retirement/savings alternative to 401k?

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