Here's a piece from Money magazine that I'm in total agreement with. It's in response to a reader who asks about her insurance agent who wants her husband to forego funding his 401(k) plan and instead invest for retirement through a universal life policy. Here's Money's response:
It may be a good way for the agent to plan for his retirement. He gets a nice commission for selling you the universal life policy - which directs part of your premium toward insurance coverage and the rest into an investment or savings component that can grow in value over the years.
But although I'm all for insurance as a way to protect a family in the event a breadwinner dies - in which case, basic term insurance works just fine - I think it's a lousy way for you and your husband to save for retirement.
The piece then lists the reasons the author feels this way. Good stuff!
And just in case there are some of you out there ready to say "but what if...", there's this added to the article:
Now, I expect some insurance agent and advisers - many, in fact - would say that once you've maxed out on options like a 401(k) and IRA, then life insurance becomes a splendid way to save for retirement. But I don't agree.
Me neither. If you want to see Money's reasons for not agreeing, click through on the article link above.
My take:
- If you want to save for retirement, see Best of Free Money Finance: Retirement Posts.
- If you want/need life insurance, buy term life invest the difference.
A good litmus test for evaluating a financial advisor is to ask them to prioritize funding your 401k versus an IRA (or other investment) with them. In nearly every case the right answer is to fund the employer-based program before funding other sources. If you hear otherwise, suspect a conflict of interest.
Posted by: Duane Gran | October 16, 2006 at 12:47 PM
In the Money article, the questioner mentioned that their employer was not matching their 401K contributions, and they were in their 30's.
In that case, I'd consider funding a Roth IRA before the 401K. Given their age, they'd have time later on, perhaps with a different employer that matched contributions, to defer taxes on some savings. Might possibly be in a higher bracket later as well, as their careers developed.
Posted by: Mike | October 16, 2006 at 01:20 PM
I think you should have a balance for retirement in both a 401k and a Roth IRA if possible. The Roth gives you a lot of latitude that traditional IRA's don't and the earnings are tax free. Fund the 401k up to the match, then start funding a Roth if you are able. so I guess that means I don't agree with the litmus test as described by one reader.
Posted by: kevin brosious | October 16, 2006 at 06:07 PM
I think the operative words in Duane's litmus test is "with them". If they want you to fund an IRA with them before funding your 401K, they're trying to climb into your pocket. More honest advisors would use the ancient algorithm: fund the 401K to the match, then fund the Roth IRA to the legal max, and then either fund the 401K to its plan/legal max or fund into a taxable account.
Posted by: Foobarista | October 16, 2006 at 06:51 PM
THey should recommend funding the employer account up to the matching maximum since you get 100% return on investment guarenteed. After that I'd look for someone suggesting a Roth IRA to the max and then finish funding the 401k to the max, although I think there could be valid reasons for varients.
Posted by: Brendan | October 17, 2006 at 07:06 PM