Smart retirement or getting screwed?

[Spiffster]

Question is, am I on the right track with my current investments, insurance? I would like to make this brief and to the point. My wife and I gross about $110,000 /year. Here is what we have:

Total Per Month / Product
Insurance:
$910 / $500k in whole life ea ($1m)
$51 / $500k in term 80 ea ($1m)
$36 / Disability for myself (wife did not qualify)
Investments:
$583 / Wife's 401k (14% includes 4% match from employer)
$413 / My 401k (8% includes 4% match from employer)
$600 / Roth IRA ($300 each)

We are both 31 years old. I think we are WAY over-insured IMO. We also have an American Funds account with $60,000 ($68k a week ago) but we no longer contribute to that account. I think it performs like **** considering the sales fees we had to pay on class A funds. All products other than the 401k were advised by our NWM financial planner. We have paid over $20k into the 2 WL policies. Im not sure if this guy is on our side or is just trying to make money. I am terribly confused by all this so that's why I am here asking for help. Thanks in advance!

[danieldroga]

If you happen to know the background of that guy, you will certainly have an idea on whether to trust that guy or not. However, as I can see with the figures that you have provided it is quite good enough for your retirement investment.

[artwest]

Whole life is a scam.

Since you all ready have term life, I would cash in the whole life as soon as possible.

How much debt do you have? The first step in becoming wealthy is to be debt free. Pay off all of your debt as soon as possible. If that means cutting back on contributing to retirement savings then that is what you should do. If necessary, you could also cash out your AF account to pay off debt.

You also should have an easily accessible emergency fund. You should have some money in either a savings, money market or interest bearing checking account. You can start with about $2,000 until you are debt free, then build it up to 3-6 months expenses. If your AF account stays intact, you could use that as a secondary EF.

[Spiffster]

Thanks for the feedback, I appreciate it. There appears to be a huge debate about whole life insurance though I have read both sides of the story. People that back WL say that the North Western Mutual WL is one of the few exceptions and can be a decent investment. Not the case? The guy at NWM says that should provide $75k of tax free income at the age of 65 not to mention a cash value of $1.2 million at that age. Apparently these numbers are based on past performance... I do need to have fixed income as part of my portfolio right? Can I have the WL adjusted downward to lower the premiums? I must say that I also like the idea of having an investment that doesnt tank when the market goes belly up. I get sick to my stomach when I lose money.

Also, we have no debt other than our house (4.375%), and a small car payment (1.9%).

[Spiffster]

Any other opinions? Thanks.

[Petunia 100]

Never mix insurance and investments. Buy the insurance you need (term) and choose quality, low-cost investment vehicles for your investment dollars. The "tax free" income is the return of your own capital. Yes, it is true that it is "tax free". Everytime you write a check or hit the ATM, you are getting "tax free" income, yet no one suggests spending your own money is a good investment because it is "tax free".

One truth in investing is that the more expensive the investment product, the harder it is for YOU to earn a profit. Costs compound against you. The higher the costs, the less your money is working for you. Insurance wrap M&E fees, sales loads, 12b-1 fees, high annual expense ratios all should be avoided if your goal is to grow your money. These fees can siphon off tens of thousands to hundreds of thousands of dollars of YOUR money over your investing lifetime. Keep that money for yourself and your family.

Were your Roths sold to you by this insurance salesperson? Are they inside an annuity wrap?

[ez1]

Are you maxing out your Roth IRA contributions? I would do that (by taking out of your 401-k contributions, but not so much that it drops below your maximum for the company match) because your tax rates will definitely be higher when you retire than they are now.

[Spiffster]

The Roth IRA maxes out at 5k a year right? We are putting in 300 dollars a month each so 3600/year each. Not sure what an "annuity wrap" is but all of the roth funds are going to something called "Russell LifePoints Variable Balanced-B". Thanks for your help guys. Probably gonna drop WL and take our lumps. Pisses me off...

[yourmoney]

Originally Posted by Spiffster

Thanks for the feedback, I appreciate it. There appears to be a huge debate about whole life insurance though I have read both sides of the story. People that back WL say that the North Western Mutual WL is one of the few exceptions and can be a decent investment. Not the case? The guy at NWM says that should provide $75k of tax free income at the age of 65 not to mention a cash value of $1.2 million at that age. Apparently these numbers are based on past performance... I do need to have fixed income as part of my portfolio right? Can I have the WL adjusted downward to lower the premiums? I must say that I also like the idea of having an investment that doesnt tank when the market goes belly up. I get sick to my stomach when I lose money.

Also, we have no debt other than our house (4.375%), and a small car payment (1.9%).

Spiffster, I would do one of two things about the WL. Your first option would be to side with anti-WL. The basic argument should be compelling: if you can do it with WL, you can do it with term + normal investments without paying the fees. The WL guys try to push this tax-free stuff, but you can get out of so much tax with 401k and IRAs you don't need to worry about it. Further, you can always put more savings in non-deductible 401ks, which compound tax-free, or you can buy muni bonds that pay tax-free interest. Cancel the WL policy, get everything you can out of it, keep paying term, and put the rest in Roth IRA and/or non-deductible IRAs.

A second option about WL would be to look very closely at the numbers, get out a spreadsheet, and actually try to model various outcomes of compounding with IRA and the cash balance on WL taking into account management fees etc. If the numbers really come out ahead, keep WL and cancel term. Let me know if you want help modeling.

Spiffster, do you have children? I ask because $1m each in life insurance seems like a lot. Without children I would shoot for enough coverage to pay off all debts and the funeral. Did he give you a reason for so much coverage? Sounds like commission hunting to me.

You mention that you really like having an investment that doesn't tank when the market goes belly up. Have you considered focusing on bonds? Not bond funds, which fluctuate wildly with interest rates, but straight-up bonds? You stick in $10,000, the bond pays you so much interest every year, then you get back the $10,000 at the end of the bond's life. It might be for you. Check out the book Bonds: The Unbeaten Path to Secure Investment Growth for a defense of the all-bond strategy and explanation of how to invest in bonds intelligently.

[Petunia 100]

Originally Posted by Spiffster

The Roth IRA maxes out at 5k a year right? We are putting in 300 dollars a month each so 3600/year each. Not sure what an "annuity wrap" is but all of the roth funds are going to something called "Russell LifePoints Variable Balanced-B". Thanks for your help guys. Probably gonna drop WL and take our lumps. Pisses me off...

It sounds like an annuity wrap to me, it has "variable" (as in "variable annuity") in the title and it was sold to you by an insurance person. An insurance person is not licensed to sell investments, they are licensed to sell insurance products. Therefore, can sell you an investment "wrapped" inside an insurance product. You pay an additional layer of fees for this, typically quite expensive (2% - 5% per year is very common). That may not sound like a lot, but over the years, it adds up to a substantial sum. The important point is that you get NO BENEFIT WHATSOEVER for having paid these extra fees. Therefore, why pay them?

You should be pissed. Annuities inside IRAs are obscene, IMO. I feel strongly that they should be illegal.

On top of that, you are in B shares!! Your salesperson has done you no favors.

[Petunia 100]

Sometimes I am not very articulate. Did you understand what I meant about your WL being "tax free"? There is no special attribute of whole life which makes part of the withdrawals tax free. Any return of your own capital is always tax free. You have handed over money which has already been taxed, and you get that portion back tax free. Any growth of your money is fully taxable. So its not that the whole life policy has magically made some of your money tax free, its that you have already been taxed on that money. You gave it to the insurance company to hold for awhile, now they are giving it back.

[Petunia 100]

Originally Posted by yourmoney

You mention that you really like having an investment that doesn't tank when the market goes belly up. Have you considered focusing on bonds? Not bond funds, which fluctuate wildly with interest rates, but straight-up bonds? You stick in $10,000, the bond pays you so much interest every year, then you get back the $10,000 at the end of the bond's life. It might be for you. Check out the book Bonds: The Unbeaten Path to Secure Investment Growth for a defense of the all-bond strategy and explanation of how to invest in bonds intelligently.

If you buy an individual bond, it goes up and down in value with interest rates too. Just because you don't see it priced every day doesn't mean the value is constant. If you want to sell your bond before maturity, you will not get face value if interest rates have risen since purchase. It is also quite difficult for a small investor to diversify bond holdings without using a fund. Just a few things to keep in mind for anyone who decides to go this route.

[Petunia 100]

Spiffster, here is a little calculator for you to play with.

Investment Fee Calculator - See How Fees Reduce Your Returns


You also might try Googling "impact of costs on investment returns", to read what much better writers than me have to say on this subject.

[Petunia 100]

And I was able to locate the prospectus for your fund, which is indeed a varaible annuity. I learned that the annual expense ratio of the fund is 1.26%, part of which has been temporarily waived (that part is good news). This does not include the cost of the annuity wrapper. You can find out what those fees are by referring to your contract, or by asking the salesperson who sold you this product. You want to know about mortality and expense fees, portfolio fees, and contract fees. Those are the common ones, there may be others as well. You aren't necessarily paying all of them, it just depends how your contract is structured.

Go to page 210 to read about your fund:

http://media.nmfn.com/pdf/annuityacc...n_type=pdfform

For comparison purposes, you can invest in a Vanguard Target Retirement fund at a cost of 0.19% per year. That is one-fifth of the cost of your fund BEFORE factoring in the additional annuity wrapper. I would be shocked if the additional cost is anything less than 2%, I suspect it is more.

[yourmoney]

Originally Posted by Petunia 100

If you buy an individual bond, it goes up and down in value with interest rates too. Just because you don't see it priced every day doesn't mean the value is constant. If you want to sell your bond before maturity, you will not get face value if interest rates have risen since purchase. It is also quite difficult for a small investor to diversify bond holdings without using a fund. Just a few things to keep in mind for anyone who decides to go this route.

I don't want to get into a big argument or anything, but if you're saving for retirement with buy and hold, then price fluctuations don't matter and return of principal is as safe as the security is safe. So for an investor looking for peace of mind, individual bonds that keep paying their coupon regardless of fluctuations are a great option to consider.

[Petunia 100]

I don't want to argue with you, either. I respect your opinion even though it differs from mine. Some people prefer individual bonds, some don't. That is all well and good.

In your first post, you stated that bond funds can fluctuate wildly due to interest rate changes. That is absolutely true. I am pointing out that bond fund prices fluctuate because the individual bond prices fluctuate. An investor can't escape that volatility by buying individual bonds. They don't see those fluctuations the way they would if they owned a fund, but the fluctuations are happening nonetheless.

[Spiffster]

First of all, thanks everyone for the feedback. The more I research and learn about investing the more I feel I got screwed by NWM. Here is what I plan to do:

Keep the WL, mainly because my dad swears up and down by it and thinks its good to have. 10+ years from now 1000/mo wont be all that much anyway. We will treat this as savings + insurance, nothing more.

Cancel Term keep disability. $500K/ea in life insurance from WL is plenty. (We are planning on having only 1 kid within a year or so)

The Russell LifePoints Var-Bal-B fund is indeed an Annuity. Im going to cancel the Roth IRA contributions and move over to Vanguard IRA and MAX contributions out for both of us. I should be able to roll my current IRA into the Vanguard one right? Also, if I change employment, I should be able to roll my old 401ks in too right?

Any more suggestions on funds to contribute to with Vanguard considering I wont retire for another 35 years? (I stress too much, but can handle a moderate level of volatility)

Thanks again, you guys have likely just made my retirement (and every year leading up to it) that much more comfortable!

[disneysteve]

Originally Posted by artwest

Whole life is a scam.

Since you all ready have term life, I would cash in the whole life as soon as possible.

Originally Posted by Petunia 100

Never mix insurance and investments. Buy the insurance you need (term) and choose quality, low-cost investment vehicles for your investment dollars.

Originally Posted by yourmoney

Cancel the WL policy, get everything you can out of it, keep paying term, and put the rest in Roth IRA and/or non-deductible IRAs.

Originally Posted by Spiffster

Here is what I plan to do:

Keep the WL, mainly because my dad swears up and down by it and thinks its good to have. 10+ years from now 1000/mo wont be all that much anyway. We will treat this as savings + insurance, nothing more.

Cancel Term

Spiffster, you came here asking for advice on your situation. Every response gave essentially the same advice. Certainly, you are still free to do as you please. Just understand that whole life is a horrible rip-off. Just look at your own situation. You are paying $51 and $910 for the exact same coverage (500K). How does that possibly make sense? I understand you want to honor your father but just realize you are wasting a tremendous amount of money to do so.

[photo]

Originally Posted by Spiffster

The more I research and learn about investing the more I feel I got screwed by NWM.

It really does sound like it. However, don't beat yourself up, because the experience has made you more judicious. We all live and learn.

Keep the WL, mainly because my dad swears up and down by it and thinks its good to have.

For some reason, (some of) the older generation is absolutely hooked on whole life. My impression is that they were told growing up that it was the smart investment. I disagree vehemently. I don't know, maybe it was at one time, but it's also very hard to argue with "dad." Ultimately, though, we have to do our own research and make the decisions we feel are best for us. I've made different decisions from my my parents, and oddly enough, they're now asking me for investment advice.

[Spiffster]

Im still up in the air about WL, but treated as a savings account it doesnt sound all that bad to me. I can borrow against it, and after 10 or so years it will pay its own premiums which wont change no matter how old I get, folks in my family live to be almost 100! The term stuff will go way up from 50 dollars, and the WL will have cash value. Of all the WL policies out there, NWM's seem to be very competitive... im not trying to convince anyone that WL is worth while, just giving my reasoning behind keeping it.

BUT lets say I lower it to 400K though and keep contributing the same payments, should self fund faster right? And if I die at 90 my family should still get the 400K, is that correct?