Some of the Most Offensive Advice Given in SSOYA Comes from the Chapter on IRA-Savers
Again, because the author uses flawed math, the numbers from her chapter create a good financial outcome for the reader. However, when real world numbers are used, that is not the case.
Some of the statements in Chapter 10 are just incredible like there is a plan to increase your monthly cash-to-spend in retirement by up to 50%. The author is basically stating the instead of funding a retirement plan (IRA or 401(k), you can use the “S.A.F.E.T.Y. Fund™” to double your retirement income. Assuming anywhere near the same gross rate of return in the invested dollars in an IRA/401(k) as well as in a “S.A.F.E.T.Y. Fund™,” this is mathematically impossible.
The tenor of this chapter is to tell readers that it is better to fund a “S.A.F.E.T.Y. Fund™” rather than a tax-deferred retirement account and incredibly, if you have money in such a plan, it is better for you financially to cash in such accounts and then fund with that money, you guessed it, a “S.A.F.E.T.Y. Fund™.”
The author suggests that readers “should pull your funds out as quickly as possible” from IRAs, 401(k), and 403(b) plans when reaching the age of 59 ˝.
If you lived in the same fantasy land as the author where money does grow without expenses in a “S.A.F.E.T.Y. Fund™,” then this advice would make sense.
Since most people like to live in the real world, let’s look at the problems with this advice.
1) When you take your money out of an IRA or 401(k) plan it is immediately taxable.
2) If you take the money out as quickly as possible to fund a “S.A.F.E.T.Y. Fund™,” two very bad things happen.
a) When taking the money out in lump sum, you are most likely moving up your personal income tax bracket and are paying more taxes on the distributions from the IRA/401(k)/403(b) plan then you would in retirement. For example, if you had $300,000 in an IRA and removed it all at once, even if you assumed your income that year was zero (which it won’t be); nearly 50% of the money would be taxed at the 33% tax bracket.
b) It make NO sense to lump sum fund a “S.A.F.E.T.Y. Fund™” and this chapter again illustrates the authors lack of knowledge about how to use cash value life insurance as a wealth building tool. If this example client poured $300,000 into the “S.A.F.E.T.Y. Fund™” (cash value life insurance policy) in lump sum, the amount of required death benefit the client would have to purchase in order to be allowed by the IRS to remove money tax free from the policy in retirement would be unbelievably high. The required death benefit would be so high that it would kill the use of the policy for retirement income.
3) Using cash value life insurance (which is the author’s “S.A.F.E.T.Y. Fund™”) for someone over the age of 60 and certainly over the age of 65 to build wealth is very difficult.
In general, using cash value life insurance as a wealth building retirement vehicle for someone over 60-65 is nearly impossible because as a client gets older the costs of insurance significantly increase. Couple the much higher costs of insurance in a “S.A.F.E.T.Y. Fund™” for someone over 60 years old with the fact that the client must pay income taxes on the funds removed from an IRA/401(k)/403(b) plan creates a sure fire loser situation.
Caveat. Crafty life insurance sales people who use rates of return in excess of 8% and with variable loan options in life insurance policies (not discussed on this web-site), can make the numbers dance and make this solution work so long as the client waits until age 70-75 to remove money from the policy for “retirement income.” This is very risky and unprofessional for an advisor to advocate without full disclosure of the pitfalls and the likelihood that such a plan will fail.
You may have heard the statement: If it doesn’t smell right there is something wrong with it? It’s sort of a gut reaction to something when you first look at it.
Just think about removing money from a plan (IRA/401(k)/403(b)) where the money is growing tax deferred and then have a life insurance agent tell you based on the teachings of SSOYA that you should take the money out (in lump sum possibly), pay immediate taxes on that money and then reposition that money into a cash value life insurance policy (the “S.A.F.E.T.Y. Fund™”) which somehow is going to create more retirement income for you.
Does that make sense? It should as the numbers do not support it due to the costs of insurance and the taxes due to reposition the money. Don’t fall prey to this sales pitch.
What if you are under the age of 59 ˝? The theory being that if you are younger, the costs in the “S.A.F.E.T.Y. Fund™” life insurance policy will be lower right? True, but when you remove money from such an account before age 59 ˝ you have to pay a 10% penalty. Again, these numbers DO NOT work.
Summary on IRA/401(k)/403(b) rescue
It doesn’t work unless you use very unrealistic numbers. It also proves again that the author of SSOYA does not understand the use of life insurance as a wealth building tool (which is ironic since her entire boo revolves around funding a “S.A.F.E.T.Y. Fund™” which is code for funding a cash value life insurance policy).