Qualified plans are not the only option

If you aren’t a member of your local Costco warehouse, you may not be familiar with the monthly advertising magazine (Costco Connection) that features a few articles to break up the ad space.

Each issue contains a Q&A column with Suze Orman who gives advice on selected financial questions. Though this piece doesn’t typically crack the five minutes I spend skimming the magazine, the answer to this question caught my attention.

The question – “What retirement plan would you recommend to self-employed women who are making over the stated Roth IRA threshold of income?”

Ms. Orman’s answer is the perfect illustration of the limit of the typical financial planning mindset, as well as the complexity of the qualified plan rules. A “qualified plan” is one that meets certain requirements set out in the Internal Revenue Code that allow for certain tax benefits. She briefly touches on using a SEP (Simplified Employee Pension) and an individual 401(k) listing the restrictive contribution limits put in place by the IRS, and then refers the questioner to a tax professional.

So women who earn a decent living are limited to plans that restrict the amount they can invest and require the expertise of a tax professional? I think we have a better option.

First of all, don’t invest until you have a sufficient amount saved. Savings and investments are different terms and they are often used interchangeably, so be careful what you are asking for. It’s possible the woman asking the question has her savings in order, but the numbers tell a different story for the majority of Americans. The beauty of focusing on savings first is that it provides piece of mind in case of an emergency (or opportunity), and there is no need to consult a tax advisor.

The gold standard for savings vehicles, that happens to also be something you can utilize for retirement income, is a properly designed Participating Whole Life Insurance policy (PWLIP). Ms. Orman did not list this as an option for retirement because she has publicly derided whole life insurance while not understanding any of the benefits offered. This is unfortunate for the woman who wrote in and any other Costco member who happened to see this bit of advice.

The bottom line is there are options outside of the world of restrictive, fee-laden, qualified plans when it comes to savings and retirement income. The combination of a PWLIP and the use of the Perpetual Wealth Code is one such option. No IRS contribution restrictions, no fees to eat away at the growth of your capital, and no penalty for accessing your capital when you find an opportunity worth funding. Self-employed women (and men) would do well to check out this option.


Stop the Madness

We cannot solve our problems with the same level of thinking that created them.” – Albert Einstein

It’s possible this quote is trotted out too often, but I love this timeless piece of wisdom for two reasons. First, it reminds everyone that how we approach a problem has a major impact on how it is solved. Or not solved, in many cases. Often the solution is hidden from view because of how we have chosen to see the problem. The second reason to love this quote is a bit more snarky. It is the perfect response to virtually any proposed government program. Now the point of this post is not to make a political statement, but to respond to news that the House and Senate are working on bills to “improve the issues with today’s retirement policy.”

The US Senate recently introduced the Retirement Enhancement and Savings (RESA) Act and the House is working on the Setting Every Community up for Retirement Enhancement (SECURE) Act. There are at least two published objectives to these plans, though there may be more hidden beneath the surface.

The first problem these acts purport to solve relates to access to qualified retirement plans. Roughly 66% of Americans currently have the option to contribute to a qualified (401k, 403b, etc.) plan, and legislators feel that is not enough. If only the rest of these employees had the chance to contribute to a retirement plan, they would definitely be saving. So goes the thought process of a governmental bureaucrat. As someone who oversees a qualified plan for a small business, I can assure you this is not the case. Some people have priorities that do not include locking money in a qualified plan. Whether the priority is to save money elsewhere or spend $1.01 for every dollar earned, forcing more businesses to offer qualified plans will not change the behavior.

“Guaranteed” income is the second goal of the new plans making their way through Congress and the short version is that they are trying to make it easier to incorporate annuities in qualified plans. Certain annuities can provide income for life and having this as an option may help participants feel better about their cash flow.

There is much excitement in the press about how these changes to the broken retirement system are bi-partisan, but there is no mention of why the system is broken in the first place. Why is it so expensive for employers to offer these plans in the first place? What is the real benefit to participants who choose to put money into the plans? How have these plans done for current retirees and what issues need to be addressed based on that data? Sadly, these questions are likely not going to be answered by the folks in DC. Just too busy.

What if I told you there was a way to solve both of these issues without making any adjustments to the current 401(k) structure? In fact, the solution has been around for hundreds of years. Start by saving at least 10% of every dollar you bring in. You can do this by opening up a savings account, so no need to involve the 401(k). If you have any “bad” debt (credit cards, student loans, car/boat loans, etc.), negotiate with your creditors so the total spend each month is no more than 20%. If your only debt is a mortgage, increase your savings to 30%. If you are currently spending more than 70% of your income on your lifestyle, examine where the money is going and consider how your future self would feel. Once you have decided where your values and your spending align, adjust your spending to meet the 70% threshold.

If you are leery of keeping your money in a savings account, you have options. The gold standard for this process is a properly designed Participating Whole Life Insurance Policy (PWLIP) that emphasizes growth in cash value. The growth is guaranteed, your capital is accessible to you at any time tax free, there are no IRS-imposed limits on amount of contribution, and the tax free death benefit can be used however your family or charitable organization wishes.

Forget the 401(k)

Several months ago the Wall Street Journal published a piece arguing that we need to create a new form of retirement plan. I love this idea for many reasons, though I disagree with the specific solutions provided in this piece. Below are the features the Journal promotes to improve the current system along with my perspective.

Universal Availability – as of 2017, private employers offered retirement-plan coverage to 66% of workers. The argument goes that it’s tough for people to save for retirement if their employer does not offer a retirement plan. While this sounds obvious, it also ignores the fact that saving does not require a government-approved “qualified” plan. There are plans currently available. They just may not be deemed worthy by the federal government.

Easy to Convert to Regular Income – we have been trained to focus on how big we can grow the number in our qualified plan, rather than think about how best to translate that into future income. Based on what we are all saving for (passive income years) this should have been the first, and biggest, feature of the “new” retirement plan. One suggestion refers to making the first $1,000 of income tax free to reduce the burden of converting the pile of cash to income. What if there was a way to make it all tax free?

Extended Retirement Income – how much money will you need to ensure you have income for life? That’s the proverbial million dollar question and the Journal offers up an example of a firm using annuities to help employees with their financial plan. The example is complex, but annuities can be a good option to solve this issue. Sadly, this product is not often included in qualified retirement plans. Another tough-love piece of advice is that people need to save more of their income during their active earning years. A minimum of 10% of your current income is a good place to start.

Account Portability – from 2004 to 2013, former employees abandoned roughly 16 million retirement accounts with balances of less than $5,000. The total funds amount to about $8.5 billion in retirement funds that have been orphaned. How could this be? Why would someone simply leave potentially thousands of dollars in a retirement account? The same reason employers struggle to set the accounts up in the first place. It’s a pain. Clearly there are plenty of people who have decided their time is better spent doing practically anything but navigating the steps to move money from one qualified plan to another.

Accounts Should be “Hard to Raid” – the Journal argues that the current qualified plan system is too easy to access when the cash is needed. While I will concede this is possible, I have a hard time with the argument for two reasons. First, this is money that was earned by the person saving it, so it’s theirs to do with as they please. Second, we have to treat savers as adults who are responsible for their own decisions. It may not be the wisest choice to withdraw money from a qualified plan and pay the 10% penalty, but that’s up to the individual. Adding extra “security” to the account to make it even more difficult for the owner to access their capital is something I cannot get behind.

So I agree with most of the general points presented by the Journal, and there is good news. A process and product capturing the benefits listed above is already available. In fact, what they describe can be found in a product many savers used prior to the invention of the almighty 401(k).

A properly designed Participating Whole Life Insurance Policy (PWLIP) allows you to save for your passive income years in a tax-advantaged policy, taking advantage of guaranteed returns and no management fees. All while having access to your capital if an emergency or an opportunity arises. These policies are not limited by your employer and are very flexible when converting to passive income during retirement. Contributions are also not limited arbitrarily by the IRS.

Please reach out with questions about how to take advantage of what a PWLIP has to offer. I look forward to talking with you.


If you would like to read the full WSJ report, click here.