Retirement-Savings Strategies for High Earners
Ask SmartMoney: Retirement-Savings Strategies for High Earners Retirement-Savings Strategies for High Earners By Stacey L. Bradford Published: September 1, 2005
QUESTION: I'm a 37-year-old physician with an annual income of about $500,000. I max out my 401(k) plan, and don't qualify for a Roth IRA. I'd like to make additional contributions to retirement savings, and have looked into using whole life insurance as an option for tax-deferred savings. Is that a wise idea, or should I look to more conventional investments options such as stocks, mutual funds or real estate? When is whole life a good investment, and how much should be invested in it? — Anonymous
ANSWER: Maxing out a 401(k) is a great first step toward securing a comfortable retirement. For many people, however, it's not enough. Someone making $500,000 a year would need a nest egg worth $8 million to $10 million in today's dollars to maintain his or her lifestyle in retirement, says Harold Evensky, a certified financial planner based in Coral Gables, Fla.
Investing in a whole life insurance plan, however, isn't the best way to get there. Here's why.
Whole life can make sense in a number of situations, including estate planning, but it should never be used as a primary investment vehicle for people simply looking for tax-deferred savings, says Evensky.
Remember, this is a life-insurance product.
In order to get the death benefit, the providers charge a pretty hefty administrative fee and commission that can slash annual investment returns by as much as three percentage points. Policyholders are also charged surrender fees if they choose to abandon the product before a certain date. For more on whole life, read our story.
For investors who are dead set on finding a tax-deferred savings vehicle, variable annuities are a better option. The administrative fees tend to be much lower than those for whole life. Vanguard, for example, says it offers a product with an annual fee of just 0.58%, compared with the industry average of 2.35%.
While variable annuities can make sense for the tax-weary, however, they aren't a panacea, says Patricia Powell, a certified financial planner based in Martinsville, N.J.
They're more expensive than many mutual funds, and when it comes time to make a withdrawal, the money is taxed as ordinary income rather than capital gains, which have a maximum tax rate of just 15%.
Making matters worse, Powell points out, an investor would face a surrender fee if the funds weren't held for a certain number of years, and a 10% federal penalty if withdrawals were made before age 59 1/2.
In other words, your money is locked up for a long time.
A better solution for a high-earning person in her 30s is to invest in a balanced portfolio (a combination of stocks, mutual funds and bonds) with a bias toward growth, says Steven Kaye, a certified financial planner in Watchung, N.J.
Since mutual fund and brokerage fees are likely to be lower than those for variable annuities, you'll accumulate more money over the long run. Sure, a balanced portfolio won't be tax-deferred, but as we mentioned earlier, the tax rate for capital gains is a mere 15%.
"That's the lowest rate any of us have seen in our lifetimes," says Kaye.
One way to avoid paying Uncle Sam too much money is to buy what the industry calls tax-managed funds, says Christine Benz, associate director of fund analysis at investment-research firm Morningstar.
These funds offer competitive returns on both a pretax and after-tax basis, she says.
Benz particularly likes the tax-managed funds managed by Vanguard.
Another possibility is to consider exchange-traded funds, or ETFs, which also have the potential to be tax efficient. On the bond side, you can always consider tax-free municipal bonds.
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Please note – The journalist did not touch on Self-Directed IRAs and Real Estate.
Pity! See http://www.trustetc.com/
QUESTION: I'm a 37-year-old physician with an annual income of about $500,000. I max out my 401(k) plan, and don't qualify for a Roth IRA. I'd like to make additional contributions to retirement savings, and have looked into using whole life insurance as an option for tax-deferred savings. Is that a wise idea, or should I look to more conventional investments options such as stocks, mutual funds or real estate? When is whole life a good investment, and how much should be invested in it? — Anonymous
ANSWER: Maxing out a 401(k) is a great first step toward securing a comfortable retirement. For many people, however, it's not enough. Someone making $500,000 a year would need a nest egg worth $8 million to $10 million in today's dollars to maintain his or her lifestyle in retirement, says Harold Evensky, a certified financial planner based in Coral Gables, Fla.
Investing in a whole life insurance plan, however, isn't the best way to get there. Here's why.
Whole life can make sense in a number of situations, including estate planning, but it should never be used as a primary investment vehicle for people simply looking for tax-deferred savings, says Evensky.
Remember, this is a life-insurance product.
In order to get the death benefit, the providers charge a pretty hefty administrative fee and commission that can slash annual investment returns by as much as three percentage points. Policyholders are also charged surrender fees if they choose to abandon the product before a certain date. For more on whole life, read our story.
For investors who are dead set on finding a tax-deferred savings vehicle, variable annuities are a better option. The administrative fees tend to be much lower than those for whole life. Vanguard, for example, says it offers a product with an annual fee of just 0.58%, compared with the industry average of 2.35%.
While variable annuities can make sense for the tax-weary, however, they aren't a panacea, says Patricia Powell, a certified financial planner based in Martinsville, N.J.
They're more expensive than many mutual funds, and when it comes time to make a withdrawal, the money is taxed as ordinary income rather than capital gains, which have a maximum tax rate of just 15%.
Making matters worse, Powell points out, an investor would face a surrender fee if the funds weren't held for a certain number of years, and a 10% federal penalty if withdrawals were made before age 59 1/2.
In other words, your money is locked up for a long time.
A better solution for a high-earning person in her 30s is to invest in a balanced portfolio (a combination of stocks, mutual funds and bonds) with a bias toward growth, says Steven Kaye, a certified financial planner in Watchung, N.J.
Since mutual fund and brokerage fees are likely to be lower than those for variable annuities, you'll accumulate more money over the long run. Sure, a balanced portfolio won't be tax-deferred, but as we mentioned earlier, the tax rate for capital gains is a mere 15%.
"That's the lowest rate any of us have seen in our lifetimes," says Kaye.
One way to avoid paying Uncle Sam too much money is to buy what the industry calls tax-managed funds, says Christine Benz, associate director of fund analysis at investment-research firm Morningstar.
These funds offer competitive returns on both a pretax and after-tax basis, she says.
Benz particularly likes the tax-managed funds managed by Vanguard.
Another possibility is to consider exchange-traded funds, or ETFs, which also have the potential to be tax efficient. On the bond side, you can always consider tax-free municipal bonds.
--------------------------------------------------------------------------------------------
Please note – The journalist did not touch on Self-Directed IRAs and Real Estate.
Pity! See http://www.trustetc.com/
posted by REISkills - Real Estate Investing Tips and Advice at 9:29 AM
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