Case Study

The Miller Family

I met Rick and Sherry in 2011 when they came to one of my seminars. They had suffered in the market from 2000 – 2010 and their 401(k) balance was finally above $500,000 again. They were desperately looking for answers. During the seminar, I explained how the market truly works. I took a bold stand against 401(k) plans and all other forms of tax-deferral. I explained the hidden fees within various types of investments. I discussed inflation, our country’s deficit and the direction I expect taxes to go in the future. I answered questions about Social Security, discussed life expectancy and the need for Long-Term Care. About halfway through the seminar Sherry raised her hand and asked, “If everything we’ve been told to do doesn’t work, then what are we supposed to do?” I remember telling Sherry that was a great question and thanked her for asking it.
I began to explain Indexed Universal Life Plans. How they are life insurance policies and should not be feared. I explained that when these policies are properly designed they can be used for accumulation and produce tax-free income during retirement that lasts longer because of the added feature of arbitrage. We talked about Indexing Strategies and how you can receive “stock-market-like” returns without being directly invested in the stock market. I explained that the only way to get money out of a 401(k) plan or any other traditional retirement account was to actually liquidate or “spend down” some of the asset. It didn’t take long for them to realize the money could not possibly last a lifetime. Future market volatility and high expenses, added to the fact they now need more to live on than they originally thought due to inflation and higher taxes spelled financial disaster.
When the evening came to a close, Sherry was the first one to go to the back of the room to schedule their Complimentary Consultation. I overheard her say to my scheduler, “first available”. I was pleased they wanted to meet with me sooner rather than later but I saw a look of fear in their face and I felt badly for them.
A couple of days later, Rick and Sherry sat in my office telling me their story. They were high school sweethearts who had been married for 32 years. They had three children and two grandchildren. Mark had followed in his dad’s footsteps and was making a significant contribution to the business while Billy had gone the route of a veterinarian and Sarah, mother of two, had become a high school science teacher. The business had one partner and no debt. Their investments included a 401(k), variable annuity, and some mutual funds. They had no long-term care or life insurance.
Rick and Sherry were very curious about Indexed Universal Life (IUL). They asked me to explain how their money could go up when the market went up but not lose when the market went down. Once again, I used the old layaway story to explain how these products grow money safely. Then I walked them through the example I used toward the end of chapter 9 where the index goes up 10% in year 1, gives it all back in year 2, then gains 10% again in year 3. After explaining that gains are locked in and can never be lost due to market fluctuations, I calculated the average annual return of the IUL over those 3 years at 7% while the average annual return of the index was 3.33% (less than half) during the same time period. I watched Rick and Sherry become both sad and excited at the same time. They were excited about the future but completely sick they had not heard about this option years ago.
Rick looked at me and said, “Can I shut down the company 401(k) plan?” He was sick that he had gone down the wrong path all these years and felt responsible for encouraging his employees to do the same.

The next week I met with Rick and Sherry and proposed the following:

Miller Family Proposal

  1. Stop all contributions to tax-deferred accounts immediately – 401(k), Variable Annuity
  2. Transfer their tax-deferred assets into index products to protect them from future market losses.
  3. Establish an IUL Retirement Plan for both Rick and Sherry to generate tax-free income for their retirement.
  4. Terminate the company 401(k) Plan. Hold a staff meeting to educate the employees on the IUL option. Offer to match their contributions into these new plans.

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Rick Miller                                                                                                             Date

___________________________________________________
Sherry Miller                                                                                                       Date

___________________________________________________
Jonda K. Lowe                                                                                                   Date

Rick and Sherry had no problem with #1. In fact, they had stopped their 401(k) contributions before they came back for their second appointment.
Step 2 was to transfer the $95,000 variable annuity, which was loaded with fees and exposed to market risk, into an Indexed Annuity. Although the income generated from this investment would be partially taxable when withdrawn, an Indexed Annuity would protect the asset from future market risk and lower the expenses. The thought of saving money and protecting their principal was music to their ears.
Next, I had taken the current balance of the 401(k) along with the value of the new Indexed Annuity and projected them into the future 8 years using a modest rate of 4%. I explained to Rick and Sherry that you cannot accurately project the future value of a variable product but that projections involving fixed-indexed products were much more accurate since they cannot lose money when the market goes down. $600,000 averaging 4% over the next 8 years would grow to $821,141. Rick and Sherry had their eyes set on retiring at age 65. My recommendation had them retiring at age 60, 5 years early. We would need $76,006 per year, which is the $60,000 Rick and Sherry desired, adjusted for 3 % inflation over the next 8 years.

Up until last week, Rick had been contributing the max of $19,500 to his 401(k) plan. These dollars would now be redirected to an IUL Retirement Plan. I explained that since we are dealing with Life Insurance and want to minimize the expenses within the policy we should consider placing the policy on Sherry. Sherry was 2 years younger than Rick and the cost of insurance for a female is cheaper than the cost of insurance for a male the same age. Besides, Rick had had a scare with cancer. It just made sense to go this route and they agreed. My goal with this particular policy was to fund it for 8 years and then let it accumulate for another 10. Rick and Sherry would contribute to age 60. Retire. Defer their Social Security benefits to age 70. Spend down the 401(k) and Indexed Annuity assets from age 60 to age 70. At age 70 they would claim their Social Security benefits and begin receiving tax-free income from their IUL Retirement Plan.

Up until last week, Rick had been contributing the max of $19,500 to his 401(k) plan. These dollars would now be redirected to an IUL Retirement Plan. I explained that since we are dealing with Life Insurance and want to minimize the expenses within the policy we should consider placing the policy on Sherry. Sherry was 2 years younger than Rick and the cost of insurance for a female is cheaper than the cost of insurance for a male the same age. Besides, Rick had had a scare with cancer. It just made sense to go this route and they agreed. My goal with this particular policy was to fund it for 8 years and then let it accumulate for another 10. Rick and Sherry would contribute to age 60. Retire. Defer their Social Security benefits to age 70. Spend down the 401(k) and Indexed Annuity assets from age 60 to age 70. At age 70 they would claim their Social Security benefits and begin receiving tax-free income from their IUL Retirement Plan.

Rick spoke up and said, “shouldn’t we take Social Security as soon as we can get it? After all the fund is going broke!” After we had a little laugh, I explained that I believed Social Security would go through some changes but that the program would still be around when they went to retire. Granted, I don’t have a crystal ball but the fact that today nearly 61 million people receive Social Security benefits 70% of which are retired workers and dependents tells me if Social Security goes away, a revolution would break out! I went on to explain that for every year you defer your Social Security benefits you receive an 8% increase until you reach 70 years of age. By waiting until 70 to receive benefits, he would receive the maximum benefit available. There was one more reason I recommended deferring the benefits to age 70. I explained to them that Social Security benefits were subject to taxation. Rick sat up in his chair and said, “You mean I’m going to pay tax on a tax?” I replied, “that’s the idea but if we plan correctly you won’t fall prey to that tax.” I explained that if your combined income exceeds $44,000 then 85% of your Social Security benefit is taxed as ordinary income. Clearly Rick and Sherry’s income was more than $44,000 but I quickly reminded them that I had recommended they deplete their 401(k) and Annuity assets prior to age 70 and then live on Social Security benefits and tax-free income from the IUL. With the 401(k) and Annuity asset depleted, the only income they would receive would be Social Security and income from the IUL, which is considered a “loan” and therefore not part of their adjusted gross income. Sherry jumped in and said, “If we take Social Security at age 62 we would pay tax on 85% of what we receive but if we wait to age 70 we get to keep it all?” That is correct. Sherry’s face lit up.

Rick was ahead of me and asked when I wanted to talk with his employees about IUL Retirement Plans. Terminating the 401(k) Plan was not in question. The assets would be distributed to the plan participants. They would have the option of rolling them over, moving them into an IUL Retirement Plan or spending them. Rick and Sherry hoped that they would move them into an IUL Retirement Plan and even decided to offer matching funds if they did so.

Rick and Sherry were pleased with my recommendation. It addressed all of their concerns and put their retirement plans back on track. In fact, by implementing the changes now they would have the option to retire 5 years earlier than they had originally planned. I could tell that was a nice surprise.