Point Weak — Shout Loud — Keeping Up With Everything Frank Doesn’t Know

by Jeff Brown

Real Estate Investments Broker

Author website

Several days ago I wrote a piece talking about qualified plans, better known as IRA’s and 401(k)’s. It was titled 401(k)’s IRA’s & Urban Myths, and discussed some of the false beliefs many people have on the subject. It also brought an alternative to the table — investment grade insurance.

Though you should read the post to get context, in a nutshell here’s what I said.

By putting your tax deferred money into qualified plans you’re setting yourself up for a nasty surprise upon retirement. Your income will be taxed at a rate for which most folks won’t have planned. Therefore, they should stop contributing to those plans and begin putting that money instead, into investment grade life insurance. It’s not really for the insurance, but has some really cool results — especially when compared side by side with qualified plans.

For instance, the income produced by the insurance which from now on will be called FIUL – Fixed Index Universal Life, is tax free for life . You’ll notice maybe what it’s not – a VUL or Variable Universal Life. One guy decided I was talking about VUL’s — wrong again. He was a reasonable guy, wanting to maybe hear from my in-house expert. He will. I often find it entertaining the way some wish to compare apples to lizards when they disagree. One such example is a guy who wanted to compare the results of $350/mo into FIUL’s vs $750 into his qualifed (employer matching) plan. As good as your investment guy might be, nobody is going to beat someone who is investing more than twice the amount as the other guy. It’s a silly comparison. Now to give him the benefit of the doubt, I did compare taking $350/mo vs $500/mo — and the 401(k) lost big time. (For the record, the annual after tax retirement incomes were the same, but the FIUL income was available for life, not subject to rising future taxes, and upon the death of the taxpayer there was literally no tax owed, as it wasn’t part of his estate in the first place.)

I will tell you that even when a worker puts in $500/mo in their 401(k) and are matched 50% with an additional $250 by their employer, they still lose when compared to what they could have accomplished with a FIUL — at only $500/mo. Only when an employer matches your contributions dollar for dollar do you come out better staying with your qualified plan — and so few employers do that today. And when they do, it’s usually limited to something like 3% of the employee’s salary. If that’s all they’re matching, it’s a safe bet, my way will still beat them, depending upon how much the taxpayer can afford to contribute annually.

Anyway, it seems some folks feel threatened, when someone comes along and moves their food dish. One guy who runs a company providing 401(k)’s for their employees was miffed about this quote:

First, immediately stop contributing to your 401(k) — it’s a scam.

I stand by that statement, but the comment also included a request that I stop throwing hand grenades. He said the statement should have been more qualified. Since there are two exceptions to the ‘scam’ remark, I’ll grant him that point. But throwing grenades? How hyperbolic do we have to be to make a point? At least be funny on purpose. 🙂 The reality is 9 of 10 folks who reach retirement having counted on their 401(k)’s for security are going to be bitterly disappointed. It’s not even a mild stretch to say the world ‘scam’ is going to enter their heads when it dawns on them how they were misled by this approach to retirement planning.

He cloaked his comments under the guise of demanding ‘transparency’ which is a blogging cover-all communicating nothing in most cases. But that’s another post for another day.

I’ve commissioned (good one, eh?) my in-house guy to write a two page Word doc covering what I said in the post. It puts to rest, once and for all, all the woefully incorrect and misleading claims and complaints voiced via comments.

It all boils down to the following

Qualified plans are taxable as soon as you take the money out — FIUL’s are not.

Qualified plans will be taxed to death upon your passing — FIUL’s aren’t even a part of your estate — period.

Qualified plans are subject to penalties in addition to taxes if withdrawn ‘early’ — FIUL’s are not.

Qualified plans will force you to take money at certain ages — FIUL’s will not.

And those are just the highlights.

When I was young and used to argue with Dad about real estate and business in general, there would come a point at which he’d just start laughing out loud. It would never fail to infuriate me. He would then push me over the edge with his favorite M*A*S*H analogy.

One time Colonel Potter was trying to convince Hawkeye and BJ to be nice to Frank (Major Burns) who was a constant thorn in their sides. Potter said, “Look, I realize there are some things Frank doesn’t know, but he’s a decent guy. Can’t you just get along?” To which Hawkeye responded, “But Colonel, it’s so damn hard to keep up with everything Frank doesn’t know.”

When I’m wrong I’ll admit it quickly. My perfect record was wrecked long ago. But please, when you think I’m wrong, coming in with guns blazing, and venom flying makes you look foolish when you have no clue what you’re talking about.

Grandma warned me as a very young man that when folks begin their side of a debate with loud voices and character assassination, it means one of two things — either they realize their point is fatally weak, or they simply don’t know what they don’t know. Either way they tend to look foolish when the facts finally come out.

With the exceptions of Roth IRA’s and those plans in which the employer is matching (in an unlimited fashion) their employees’ contributions dollar for dollar, going the FIUL route is by far the best way to go. Those who debate this fact of life no doubt still believe carburetors are superior to fuel injection — fuel injection?. Oh crud, now I’ve moved another food dish. 🙂

If you wish to get a copy of my financial advisor’s two page explanation of what really happens when you compare these two schools of thought, I’ll be more than happy to send it to you. Just email me (I will not keep your email address) requesting it, and I’ll get it to you quickly. Better yet, why don’t you give Doug Johns a call? His office number is 858-481-1168.

And Eric — I’m sending you this document first. Thanks again for the original question.