Episode #14: Your Personal Wealth Report - Part 1 of 3

When deciding where to put your money towards retirement, there are really only three places, or "buckets", you can select from: (1) a taxable bucket, (2) a tax-deferred bucket, or (3) a tax-exempt bucket. In this episode of Money Script Monday, Kevin goes over a sample Your Personal Wealth Report that compares the account values of each bucket against an Indexed Universal Life (IUL) policy and shows you how they may perform throughout your retirement.


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Video transcription

Hi there. My name is Kevin Nuber. And thank you for watching today's "Money Script Monday," video. Today is going to be part one of a three-part series in which we're going to be covering the IUL Wealth Report. This report has many components to it and in this first video we're going to be talking about is how Indexed Universal Life compares to some of the more traditional places that people are going to save for retirement.

IUL vs Various Alternative Values & Cash Flows

What we're going to do is we're going to go year by year and we're going to look at a summary of the policy. We're going to show account values of all the different places that you could put your money. We're going to show accumulative cash flow that you're going to be able to take in retirement, net of taxes. And we're going to break this down into a summary that's going to make it very easy for you to compare Indexed Universal Life to these other traditional places that you save.

Three buckets of money

In order to compare IUL to the other types of places that you can save for retirement, we first have to define what these other places that you can save actually are. While there's millions of different types of investment products that you can choose from in retirement, if I simplify them all down to three different buckets of money, there's really only three places that you can put your money.

Taxable Account

This is a great place as the first place to save money because everybody needs to save up an emergency fund in order to pay for things in case of emergency. From a liquidity standpoint, a taxable account is by far the best place to put money. But from an efficient standpoint, it's the worst place to put money because every time you earn interest on the account, you're going to get taxed. So this is not the best place to accumulate assets. It's the best place to keep money for an emergency fund.

Therefore what ends up happening is everything over and above an emergency fund, ideally, you're going to save it to a tax-deferred account.

Tax-Deferred Account

This is something like a 401(k), a SEP-IRA, a 403(b). Anything in which you're putting after-tax dollars into you're deferring the taxation. So every time you earn interest, it's being deferred, you're not paying taxes.

But in retirement, when you start taking the money out, it's completely taxable at that point. This is by far a much more efficient place to save money than a taxable account because you're deferring the taxation. This is an ideal place to accumulate money for retirement, which is why conventional investment advice states to put money into tax-deferred accounts. However, in retirement it is a very inefficient place to take money from because of the 100% taxable nature of that account.

Tax-Free Account

This is the best place to put money, one that is exempt from taxes. Both when you accumulate, when you earn any interest in the account, and also when you take money out. The problem with this account is that you're limited to how much you can put in per year and if you make too much money, you're not allowed to make any contribution anyways. The people that make a lot of money are the people who have the tax problem and are the same people who cannot contribute to these types of accounts, which creates a problem when planning for retirement. Due to the inability to participate in a tax-free account.

Account or surrender value by age

With this graph, I want to show you exactly why most people say to put money into a tax-deferred account, which is a 401(k). This is the blue line.

In Episode 13 called "Three Biggest Risk during Your Retirement", I talked about how saving for retirement is very much like trying to climb to the top of Mount Everest. When you climb to the top of Mount Everest, all your time and energy is put into what it takes to get to the top of the mountain, just like planning for retirement. We all have a stated retirement goal of how much money we want on the day that we retire. And if we get to that destination, which is that dollar amount, then we declare a success. But the problem is that 85% of the people that die when they're trying to climb the top of Mount Everest, they die on the way down the mountain.

This is true for retirement; people don't plan on the descent. They plan on how to get to the top but not on the way down. And because a tax-deferred account is completely taxable during distribution. Although you're making a lot of money and if you're trying to summit, you're going to have the most amount of money or tax-deferred account.

However when in retirement because of the taxable nature of that account, you're going to crash and burn very quick if that's the only place that you're going to be taking your retirement income from.

The IUL, which is the green line, you can see that that lasts into perpetuity mostly because of the tax-free nature of the income that you're taking out.

IUL versus various alternatives yearly breakdown

This is a year-by-year ledger that shows exactly what we're looking at on the previous screen. What we've done here is I've taken an IUL and I'm comparing it to the three different types of accounts, the taxable, the tax-deferred, and the tax-free. They're all assuming the same exact interest rate of 6.5%. With the IUL policy, there's fees coming out, which are the insurance costs, and on the other accounts, we're assuming a 1% total expense. This includes fees to your investment adviser, mutual fund expenses, anything.

What we're going to say is, under these assumptions, all of them are earning around the same. "What bucket of money is going to last the longest?" Each bucket has $25,000 of after-tax money going into it. This results in less than $25,000 starting in year one in the IUL. We have more than $25,000 in the taxable account. Notice the tax-deferred account is $36,000. That's because in order to put $25,000 of after-tax money into the 401(k), we actually had to pay a lot more into that account. We can pay more into it. When you are putting pre-tax money into a 401(k), you can actually pay more into it than you would in an IUL. And the tax-free, again, would have more than $25,000 going in.

If we just look to the very first year, we would conclude that the IUL is not a good place to put your money and that the 401(k) would be the best place to put money, which is why this is the conventional investment advice.

However, if we look out here into the future, after a person has paid in $500,000 of assets, once again we see that there is $945,000 inside the IUL, $742,000 in the taxable account, the least efficient, the worst place to try to accumulate wealth, the 401(k) or tax-deferred account has $1,267,000, by far the highest of any of these accounts, the tax free would have $912,000. If we just looked at the highest account balance on the day you retire, it is easy to conclude that the 401(k) is the best place to put your money, but, again, that is like planning to only summit to the top of Mount Everest without having a plan on how to descend the mountain.

What ends up happening is during retirement, the descent down in retirement, when we take out $80,000 per year from the IUL, after-tax, tax-free money, we also take out $80,000 per year from the same taxable account, and the account runs out of money very soon, again, very inefficient. But in order to take the same amount of after-tax money from the 401(k), we have to draw out $111,000 because you have to pay taxes on that. And that's why, coming down the mountain from a 401(k) is very, very steep. The tax-free account, like the Roth, is just $80,000 as well.

We saw on this previous screen that we ran out of money on the taxable account. This is first because it's the least efficient. By taking $80,000 out per year, at age 82, the 401(k) runs out, and that same year, the tax-free account runs out as well. What we find here is that the IUL will continue to pay that $80,000 into perpetuity, forever. The descent down the mountain is going to be the safest and most successful with an IUL simply because of the tax-free nature of how that income works.

So from this comparison of various alternatives, we can easily see that IUL compares very favorably to the three most common places that a person would put their money. That is, the taxable account, the tax-deferred account, and the tax-free account. We're not saying that the IUL should be where everyone puts all of their money, but there are situations in which it compares very favorably to these other three types of accounts.

Your Personal Wealth Report

Now that we've looked at the Wealth Report, we'll be able to see that IUL compares very well with things like 401(k)s and taxable accounts and Roth IRAs. And it's a legitimate place in which you can save money for retirement and take money for an income stream. But this is really just one factor that we actually look at when we're doing an IUL Wealth Report. There's many other things that we have to take into consideration in order to identify and compare it to our three major retirement risks.

In the next video, we're going to be going over the cost of the IUL. Most people think that life insurance might be expensive, but you'd be surprised to find that Indexed Universal Life over the long run is the same and even cheaper in many situations than other more traditional investments and places that you're currently saving for retirement.

Thank you, everybody, for watching. My name is Kevin Nuber, and tune in next week for part two in this video series.

About Kevin Nuber

Kevin Nuber is the Vice President of Field Support at LifePro. He coaches hundreds of financial professionals on how to build effective financial strategies that achieve their clients' long term goals and helps them stay educated on the latest industry trends.