Budget Review

**psuicyde king** · 02-16-2013, 02:55 PM

Originally posted by artwest

If you are throwing $500k a month into stocks, you will be fine...you are also pulling off a miracle if your net income is 9.5k per month. I am guessing that you are only putting $500 per month into stocks.

Why are you putting $1.5k (18k per year)into a fund that you only spend $5-10k per year out of?

In my opinion, for a 32 year old, your IRA and Roth IRA are pretty good shape. I think you should be putting at least 10% and as much as 15% of your gross income into your IRA.

I assume the 10k in short term cash is your Emergency Fund. If your net income is $9.5k, then your EF should be more in line of around $30k.

As far as how much you will need in retirement, that is something that you can only guess at. Only you know what you want to do when you retire and no one knows how much your investments will earn or how much inflation there will be. I suggest that you put back as much as you can, 10-15% of your gross income is a good figure, in my opinion.

Thanks for the comments, artwest. You are correct on the 500/month into stock. That little typo changes context quite a bit

You raise a good point regarding the 18k into short-term savings. To me, short-term savings equates to any pre-retirement, personal expenses. (not that my stocks could also be used for this purpose if needed). For example, down payment on a house in a couple years, vacations, engagement and wedding/honeymoon in the next year or two.

The long-term savings are more retirement-focused, as I'm not currently eligible for a 401k, and am targeting a 3m retirement fund so I can retire with my current standard of living, and accounting for inflation.

**MonkeyMama** · 02-16-2013, 09:14 PM

Originally posted by psuicyde king View Post

My specific questions:
1) Are my savings patterns healthy?
2) What should my "target number" be for savings at retirement? (I don't trust the calculators, though I've used about 10)
3) Am I on track for retirement (given the above)?
4) Any recommendations for change?

1 - Yes, you are saving about 30% of net income? For long-term?

2 - General rule of thumb is to save up 25 times expenses. This just equates to a safe 4% withdrawal rate to cover expenses. I think at your age is hard to pinpoint, but can use this calculation for a loose estimate of how you are doing.

3 - With your current savings and savings rate you should easily reach your retirement goals. $2 million covers the 25 times expense rule. $3 million is your goal. If you keep up current savings momentum you will easily exceed both these goals over the next 30 years. (& if something slows your savings rate down, as life tends to happen, would still be within $2 mil - $3 mil, most likely).

4 - BTW, what kind of life insurance do you have? $1k per month sounds very expensive? This just really stands out to me.

**psuicyde king** · 02-17-2013, 08:10 AM

Hi MonkeyMama - thank you for the your thoughts!

Originally posted by MonkeyMama View Post

1 - Yes, you are saving about 30% of net income? For long-term?

That is correct. I consider (maybe incorrectly) long-term to be retirement-focused. I'd only pull money out of this for an emergency, or to put into an investment that is also geared for post-retirement payout.

Originally posted by MonkeyMama View Post

2 - General rule of thumb is to save up 25 times expenses. This just equates to a safe 4% withdrawal rate to cover expenses. I think at your age is hard to pinpoint, but can use this calculation for a loose estimate of how you are doing.

I think this means...with inflation, I can assume my expenses will be 10k/month. So I need 10k * 12 months in a year * 25 = 3m. Did I get that right?

Originally posted by MonkeyMama View Post

3 - With your current savings and savings rate you should easily reach your retirement goals. $2 million covers the 25 times expense rule. $3 million is your goal. If you keep up current savings momentum you will easily exceed both these goals over the next 30 years. (& if something slows your savings rate down, as life tends to happen, would still be within $2 mil - $3 mil, most likely).

Interestingly enough, my current savings rates (if industry-accepted growth rates hold true) will put me right at 3m, matching the target mentioned above.

Originally posted by MonkeyMama View Post

4 - BTW, what kind of life insurance do you have? $1k per month sounds very expensive? This just really stands out to me.

It is a fixed life insurance from Northwestern Mutual. I pay 1k per month for 1m of life insurance, which grows as an asset for me. Essentially, when I'm roughly 60, that asset will be 1m in mutual fund (transferrable to cash) for me to withdraw.

Thanks so much for your help!!

**MonkeyMama** · 02-17-2013, 08:39 AM

Originally posted by psuicyde king View Post

It is a fixed life insurance from Northwestern Mutual. I pay 1k per month for 1m of life insurance, which grows as an asset for me. Essentially, when I'm roughly 60, that asset will be 1m in mutual fund (transferrable to cash) for me to withdraw.

Thanks so much for your help!!

These life insurance policies are generally terrible investments.

I am just surprised nobody is commenting more on this. I would just research a bit and make sure this is really a good deal for you. Does the $1k per month premium never change? If you invest $1k monthly for 30 years is a 6% return to get to $1 million. So sounds a heck of a lot better than I have ever seen in an insurance product. What is the catch here?? It also has to have some cash value now? So would be counted as an asset.

I understand these are also used in estate planning, but don't see why you would need this with the current $5 mil+ estate expemtion.

You are aware that a $1 million term policy (To age 60) probably only costs about $500 per YEAR? I know it doesn't give you $1 million at age 60, BUT then you could invest $11,500 per year (the difference) to that end.

**The_Wiz** · 02-17-2013, 09:45 AM

Originally posted by MonkeyMama View Post

These life insurance policies are generally terrible investments.

I am just surprised nobody is commenting more on this. I would just research a bit and make sure this is really a good deal for you. Does the $1k per month premium never change? If you invest $1k monthly for 30 years is a 6% return to get to $1 million. So sounds a heck of a lot better than I have ever seen in an insurance product. What is the catch here?? It also has to have some cash value now? So would be counted as an asset.

I understand these are also used in estate planning, but don't see why you would need this with the current $5 mil+ estate expemtion.

You are aware that a $1 million term policy (To age 60) probably only costs about $500 per YEAR? I know it doesn't give you $1 million at age 60, BUT then you could invest $11,500 per year (the difference) to that end.

Agreed. Much better ways IMO.

**psuicyde king** · 02-18-2013, 08:52 AM

MonkeyMama and the_wiz:

I totally hear what you are saying. When I looked at term insurance, it just was disappointing to me that I'd be renting the coverage, and would lose the money if *gasp* I live til retirement. The permanent insurance felt much more appropriate to me. It's an asset when I retire, and allows me to extract money out of the current cash value at any point in time.

Here's a quick primer, I can provide a sheet that shows the year-by-year cash value and total value, if it's helpful. Just ask.

That's just my original opinion, but having reviewed the same information, I'd LOVE to hear from you to make sure I'm not doing something silly here.

Note: I'm happy that my future wife will have the option to work or not. Assuming she doesn't, and that we have kids, I want the 1m to be there if something should happen to me.

PLI Unique Asset

**BMEPhDinCO** · 02-18-2013, 09:03 AM

I think you are on the right track, although not as conservative as I hope to be. I'd try targeting more 20% of gross, or even 18% of net if possible into retirement.

Also, don't assume inflation ends when you decide to retire, if you live until 90, that's another 30 years of inflation to account for!

I'm trying to hit around $2.5 million for my husband and myself - that would give us around $7-8k per month with inflation for living until 95 if we retire at 67ish. If you want closer to $9.5-10k, you should be aiming for closer to $4-5 million, not $3.

Finally, while it is admirable for you to want to support your future spouse, keep in mind that will reduce your savings soon (ie, first wedding, house, etc, then more long term on food, health insurance, life insurance, cars, etc that both of you would need), so if you can boost up savings a bit now, that would help.

**MonkeyMama** · 02-18-2013, 09:47 AM

Originally posted by psuicyde king View Post

MonkeyMama and the_wiz:

I totally hear what you are saying. When I looked at term insurance, it just was disappointing to me that I'd be renting the coverage, and would lose the money if *gasp* I live til retirement. The permanent insurance felt much more appropriate to me. It's an asset when I retire, and allows me to extract money out of the current cash value at any point in time. {I have a 30 year term, so that is all I pay for 30 years}.

Here's a quick primer, I can provide a sheet that shows the year-by-year cash value and total value, if it's helpful. Just ask.

That's just my original opinion, but having reviewed the same information, I'd LOVE to hear from you to make sure I'm not doing something silly here.

Note: I'm happy that my future wife will have the option to work or not. Assuming she doesn't, and that we have kids, I want the 1m to be there if something should happen to me.

PLI Unique Asset

On your last concern, the point is you can have your cake and eat it too. I pay about $500 per YEAR for a term policy that would leave my family with $1.3 million, if something were to happen to me. If you saved the difference, you would easily amass $1 million by the time you hit age 60. The term insurance just buys you a backup plan in the interim. IT is very inexpensive. You don't have to lose that security.

There are several things I do not like about the insurance plan. #1 - it sounds too good to be true, so just sets off red flags. There are obviously risks being taken.

My first thought was just that you were putting a lot of eggs in *one* basket. On the presentation you provided it even said on the dividend rates "Guarantees rely on financial solvency of insurer." That's the thing. If the insurance company goes down, that's it. Is there any underlying insurance on the product? Cash is FDIC-insured. Investments are also insured. I quickly googled and saw one insurance company say their life insurance was insured under FDIC. That is a $250k limit per account. The other $750k could be lost. At the least, see what the underlying insurance is, for the specific product you own. What happens if the company does become insolvent? {I thought off the top of my head that most brokerages were like $500k insured. I doubt the full $1 million would be insured?}.

So, just be careful. Are you aware of what the current cash-out value is? Versus how much you have actually paid in? That is a good place to start. If the full investment is insured, and the cash value is actually a decent return on what you put in... & if you are happy with it today, make sure to continually re-evaluate. At face value, their quoted returns seem unsustainable for the long haul. They bank on you not paying attention and not being pro-active. You also risk unecessary taxes and penalties if you decide to back out later. It's just kind of a mess, generally.

**psuicyde king** · 02-18-2013, 11:10 AM

Originally posted by MonkeyMama View Post

On your last concern, the point is you can have your cake and eat it too. I pay about $500 per YEAR for a term policy that would leave my family with $1.3 million, if something were to happen to me. If you saved the difference, you would easily amass $1 million by the time you hit age 60. The term insurance just buys you a backup plan in the interim. IT is very inexpensive. You don't have to lose that security.

There are several things I do not like about the insurance plan. #1 - it sounds too good to be true, so just sets off red flags. There are obviously risks being taken.

My first thought was just that you were putting a lot of eggs in *one* basket. On the presentation you provided it even said on the dividend rates "Guarantees rely on financial solvency of insurer." That's the thing. If the insurance company goes down, that's it. Is there any underlying insurance on the product? Cash is FDIC-insured. Investments are also insured. I quickly googled and saw one insurance company say their life insurance was insured under FDIC. That is a $250k limit per account. The other $750k could be lost. At the least, see what the underlying insurance is, for the specific product you own. What happens if the company does become insolvent? {I thought off the top of my head that most brokerages were like $500k insured. I doubt the full $1 million would be insured?}.

So, just be careful. Are you aware of what the current cash-out value is? Versus how much you have actually paid in? That is a good place to start. If the full investment is insured, and the cash value is actually a decent return on what you put in... & if you are happy with it today, make sure to continually re-evaluate. At face value, their quoted returns seem unsustainable for the long haul. They bank on you not paying attention and not being pro-active. You also risk unecessary taxes and penalties if you decide to back out later. It's just kind of a mess, generally.

I do see what you are saying, and am becoming a bit concerned that I got into a plan that isn't ideal. Surrendering now would be a big decision, as I'd like forfeit my recent contributions (2 years worth) for only 6k back.

There's another angle to this, which I'd like your opinion on. Maybe I should keep it as a valid replacement for a Roth IRA, which I am unable to contribute to?

Here's what I'm thinking: I love the Roth IRA, but am over the limit and cannot contribute. I believe permanent life insurance behaves the same as a Roth IRA, from a tax perspective. I think that means that I should evaluate any reduced value (commissions, etc) that reduce my returns on LI. If that is <= the cost of term insurance, then it's a valid replacement for the Roth IRA contributions.

Am I confusing myself, or is this a logical thought?

Note: In 2012, the policy beat it's projected dividend return. My Net Death Benefit and Net Cash Value are both ahead of the projections on the sheet I reviewed before signing up in 2010.

**MonkeyMama** · 02-18-2013, 04:41 PM

There is no comparison between a ROTH IRA and a life insurance policy.

Life insurance proceeds are always tax-free. The problem is you have to die for your heirs to receive the tax-free benefit.

The money is tax-deferred, yes. But you can achieve the same end with regular IRA contributions. & in fact, these days you can then turn around and convert those into ROTHs. I will find a link on non-deductible IRAs and backdoor ROTHs for you. Yes, sounds a little bit complicated. But then you have full control over money, can diversify as you wish, and avoid expensive insurance commissions and fees. Which is why most tax advisors choose this route.

Unfortunately, life insurance are generally sold as *tax-free* because if you cash it out early and it never made a profit, there are no taxes. The same would be true for *any* investment. If you lose money in the stock market, you don't have to pay taxes on that either. The insurance industry WAY over-sells the tax benefits.

To be clear, the life insurance has 2 tax benefits:

1 - The life insurance proceeds are tax-free at death. (This would be true for term life, too).

2 - The investment returns are tax-deferred. You can achieve about the same with non-deductible IRAs and ROTH conversions. This would be more useful if married, at $11k per year contributions. (Less useful if you never plan to marry - limited to $5500 per year. But I'd still bet you'd pay less taxes with taxable investing than you'd ever pay to the insurance company in fees).

You'll pay taxes on life insurance if you ever cash it out while alive. If you made any profit. This is not true for a ROTH, if you wait to retirement age. Before retirement age the two are kind of the same. After death, ROTHs retain their tax-free status for your heirs. Though life insurance proceeds are tax-free, they lose their tax-deferred/tax-free status after your death. So basically, your heirs would pay taxes on future investment returns, unless they were able to tax shelter in some manner.

I'll find some links for you.

Bottom line: I can see the draw of the tax deferral, but am skeptical if you are really saving that much in taxes that it is really worthwhile. (You might be paying more in fees than you are saving on taxes?) I could be wrong. It won't hurt my feelings if you stick with it.

**MonkeyMama** · 02-18-2013, 04:45 PM

Backdoor ROTH Links:

Backdoor Roth IRA - Bogleheads

Non-Deductible IRA Contribution & Roth IRA Conversion Rules � My Money Blog

**psuicyde king** · 02-20-2013, 01:12 PM

Hi MonkeyMama,

Thank you so much for the perspective. I think I'm good on this forum thread.

I'm going to open a separate thread specifically on the topic of whole life insurance. I'd like to see if any others have a perspective - if you're willing to continue to share your thoughts there, that would be awesome!!

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