Author Topic: Investment Order  (Read 192866 times)

bender

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Re: Investment Order
« Reply #50 on: February 11, 2018, 02:49:05 PM »
I propose adding a step for USA investment order.  The last step before funding a taxable account should be to fund a 529 plan, if applicable. 

I've been researching this since the new tax law went into effect, and it seems to be the right move in my situation and likely for many others as well.  If you plan to help your children pay for college (or private K-12 with new law), stashing money in a 529 plan is better than a taxable account. 

I understand this isn't for everyone, but I think people can benefit from this investment advice.  I think some of the other buckets like mega backdoor and HSA are fantastic, but probably applicable to fewer people than 529s.

Of course there are some risks associated with 529s that could trigger tax penalties if the money isn't used for education.  Even with that risk, most parents who plan to help their children pay for education should consider funding a 529 after other tax advantaged accounts are funded.

I understand the rationale for funding your own retirement first, and generally agree with that sentiment.  For those planning to help children with educational costs during early retirement, the 529 is a valuable tool that will reduce your overall tax burden.  When you get to the bottom of the list and are funding the taxable account, you're doing pretty well anyways.  I'm thinking most parents who are well off enough to retire before their kids finish high school will want to help their kids pay for education.  There's no reason why you can't save for both goals.

« Last Edit: February 11, 2018, 03:00:38 PM by bender »

Radioherd88

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Re: Investment Order
« Reply #51 on: February 12, 2018, 04:16:43 PM »
Ok so this thread is super - and as a result i got the following plan in action for 2017:

1. 401k maxed out for wife's employer
2. Traditional IRA's maxed out for both of us
3. ESPP maxed out for wife's employer plan
4. HSA maxed out for wife's employer plan
5. FSA maxed out for my employer plan

I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth. This has also led me back to re-evaluating the rest of the retirement plan and looking for advice:

I have the option to contribute to a 403b or 457 through my employer, and hadn't considered this until i read the other post that talks about the IRA conversion pipeline that allows you to withdraw this penalty free - so my question is, should i also aim to max this out instead of what i have currently been doing (which is adding approx 18k per year to my principal mortgage*)?

* I must confess, that we are paying PMI of approx 2k per year on the mortgage as i was given some bad advice at the time of taking out our loan (my bad), so once i realized this, i became hell bent on removing it. In hindsight, this 18k per year could grow to cover the pmi and interest savings over the next 15 years (planned retirement date), so should i start putting this aside to get the tax savings (especially now that the ira conversion is possible with these two options)?

Thanks as always Mustacheville!

MDM

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Re: Investment Order
« Reply #52 on: February 12, 2018, 05:00:49 PM »
What's the thinking for choosing Roth over tIRA under the new tax brackets? Choose Roth at 12 percent and under, and tIRA for 22 percent and up, all else being equal?
Unfortunately all else can be difficult to define and rarely equal.

Good point on the new brackets, though.  Updated the rule of thumb accordingly.

It would be good for people to compare current marginal tax saving rate vs. predicted marginal withdrawal tax rate instead of relying on a rule of thumb that has so many exceptions.  But people want rules of thumb....

MDM

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Re: Investment Order
« Reply #53 on: February 12, 2018, 05:10:47 PM »
I propose adding a step for USA investment order.  The last step before funding a taxable account should be to fund a 529 plan, if applicable. 

I've been researching this since the new tax law went into effect, and it seems to be the right move in my situation and likely for many others as well.  If you plan to help your children pay for college (or private K-12 with new law), stashing money in a 529 plan is better than a taxable account. 

I understand this isn't for everyone, but I think people can benefit from this investment advice.  I think some of the other buckets like mega backdoor and HSA are fantastic, but probably applicable to fewer people than 529s.

Of course there are some risks associated with 529s that could trigger tax penalties if the money isn't used for education.  Even with that risk, most parents who plan to help their children pay for education should consider funding a 529 after other tax advantaged accounts are funded.

I understand the rationale for funding your own retirement first, and generally agree with that sentiment.  For those planning to help children with educational costs during early retirement, the 529 is a valuable tool that will reduce your overall tax burden.  When you get to the bottom of the list and are funding the taxable account, you're doing pretty well anyways.  I'm thinking most parents who are well off enough to retire before their kids finish high school will want to help their kids pay for education.  There's no reason why you can't save for both goals.
See updated version.  Does that capture it well enough?

bender

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Re: Investment Order
« Reply #54 on: February 12, 2018, 07:54:43 PM »
Looks good - thanks MDM!

MustacheAndaHalf

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Re: Investment Order
« Reply #55 on: February 13, 2018, 06:41:53 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

MDM

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Re: Investment Order
« Reply #56 on: February 13, 2018, 07:15:02 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work
Once one contributes $1 to a 401k, for that year contributing the maximum amount can only help make a tIRA deductible.

Not only must one be eligible, but money (from either the employee or employer) must go into a retirement plan for one to be "covered by" a retirement plan at work.

401k contributions do lower one's MAGI. 

Radioherd88

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Re: Investment Order
« Reply #57 on: February 13, 2018, 08:41:30 AM »
I just came to do my taxes and realize that the Traditional IRA is not deductible (seemingly due to our maxing out of the 401k), so the plan is to convert these to Roth.
More likely it's because your income exceeds the IRS limits for IRA deduction.  Having access to a 401(k) through work alters the income limit, but it shouldn't matter if you contribute or not.
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Ok right - it is our AGI then - even after 401k and a potential 403b/457 max, our AGI will still be above the max (lucky us) - so really the traditional IRA has no value in this case and we should resort to Roth right?

Should the roth IRA take priority over 403b/457 - i know the investment order post suggests so, and that's what we currently have as our priority.

How about maxing out 403b/457 vs paying off mortgage to remove PMI?

Thanks for the info!

MDM

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Re: Investment Order
« Reply #58 on: February 13, 2018, 09:36:19 AM »
...even after 401k and a potential 403b/457 max, our AGI will still be above the max (lucky us) - so really the traditional IRA has no value in this case and we should resort to Roth right?
Yes, if you are above the tIRA deductibility limit but below the Roth contribution limit.

Quote
Should the roth IRA take priority over 403b/457 - i know the investment order post suggests so, and that's what we currently have as our priority.
If you can max a 401k and 403b/457 and still be above the tIRA deductibility limit, you should probably be doing all the above.

Quote
How about maxing out 403b/457 vs paying off mortgage to remove PMI?
Depends on the PMI interest rate.

Radioherd88

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Re: Investment Order
« Reply #59 on: February 13, 2018, 03:30:36 PM »
Quote
How about maxing out 403b/457 vs paying off mortgage to remove PMI?
Depends on the PMI interest rate.
[/quote]

Well Interest rate on mortgage is 3.75%, but 6.4% of our payment each month is PMI until it drops off - approx 15k worth of payments into the future....*

*Side note i can't get my mortgage provider to tell me for sure that if i was to pay down enough to cover 20% of the loan sooner (e.g. tomorrow or in a few months) that the PMI would definitely come off automatically, but from what i've been told elsewhere, this is a legal requirement right? 

It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....

MDM

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Re: Investment Order
« Reply #60 on: February 13, 2018, 03:36:03 PM »
It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....
See PMI Payoff ROI? and Getting rid of PMI? What % "return" would I get for paying down my mortgage? for some thoughts.

MustacheAndaHalf

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Re: Investment Order
« Reply #61 on: February 13, 2018, 09:37:58 PM »
MDM - That's true, I stand corrected.  Contributions to a 401(k) cannot hurt your eligibility, and those just above the limit can use 401(k) contributions to lower their income and potentially allow IRA contributions to be deductible.

Radioherd88 - They might require an appraisal before they drop PMI.  I doubt they will accept your property tax bill's figure (with it's automatic appraisal), but it might be worth sending them a letter with a copy of that information and requesting they drop PMI since you have 20% equity.  A letter is a bit better from a legal point of view, and might get a better response.  You can call them, but it's in their best interest to stall (in terms of money, not in terms of customer service).

Radioherd88

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Re: Investment Order
« Reply #62 on: February 14, 2018, 04:08:14 PM »
It would take around 60k to have paid down enough to remove PMI, but i'm struggling to get my head around the math of how much i would save in taxes and compound interest if this was all going in a 457b in VTSMX for the same period to determine if i should just let it run....
See PMI Payoff ROI? and Getting rid of PMI? What % "return" would I get for paying down my mortgage? for some thoughts.

Great, thanks MDM - some calculations for my wkd....

Radioherd88 - They might require an appraisal before they drop PMI.  I doubt they will accept your property tax bill's figure (with it's automatic appraisal), but it might be worth sending them a letter with a copy of that information and requesting they drop PMI since you have 20% equity.  A letter is a bit better from a legal point of view, and might get a better response.  You can call them, but it's in their best interest to stall (in terms of money, not in terms of customer service).

Indeed - i have already called them multiple times, and the most response i can get out of them is "well, we would do an appraisal and take it from there" - but i have to pay for the appraisal..... And the reason i am asking is i don't want to pay down the extra amount unless i  know for sure it will remove PMI, so it's a bit of a frustrating circle trying to get someone to confirm that when you reach the 78-80% of loan to value ratio that it 100% comes off...

rudged

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Re: Investment Order
« Reply #63 on: March 14, 2018, 07:13:39 PM »
This ordering is appropriate for investors in the US.

[stuff deleted]

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            


Please clarify why you advise maxing a traditional IRA before maxing your employer sponsored 401k (403(b) or 457). Is it simply a matter of you get to choose which company to invest in and therefore can choose more desirable investment options (e.g. my 403(b) doesn't have Vanguard associated investment options (VTSAX), but if I set up a traditional IRA through Vanguard, I'd have access to VTSAX)? Or is this simply an admonishment that when you have the option, you should avoid employer sponsored options?

MDM

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Re: Investment Order
« Reply #64 on: March 14, 2018, 07:30:52 PM »
This ordering is appropriate for investors in the US.

[stuff deleted]

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            


Please clarify why you advise maxing a traditional IRA before maxing your employer sponsored 401k (403(b) or 457). Is it simply a matter of you get to choose which company to invest in and therefore can choose more desirable investment options (e.g. my 403(b) doesn't have Vanguard associated investment options (VTSAX), but if I set up a traditional IRA through Vanguard, I'd have access to VTSAX)? Or is this simply an admonishment that when you have the option, you should avoid employer sponsored options?
It's that the "more desirable investment options" are usually associated with IRAs, not 401ks.

But note the parenthetical remark in #5: e.g., some 401k plans have institutional shares, which are even better than Admiral shares (or the equivalent Fidelity, etc., share classes).

tomdrake

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Re: Investment Order
« Reply #65 on: March 19, 2018, 10:55:07 PM »
Hello, here is another question for fellow Canadians (hopefully you are staying warm, it's snowing again here!!) What do you think about Robo-Advisors??? I just learned about this, still reading The Internet :)
here is the site that I have found to be quite useful: https://youngandthrifty.ca/complete-guide-to-canadas-robo-advisors/

Thank you!

i dont think its a country specific question - so i'll chime in... robo advisors are decent but will charge you a higher rate than any value they provide.  You're at this site and have passed the pack by getting here.  You should manage the money yourself and you'll save alot of fees over time.

Thank you!! I am still very very new at this :). I am trying to understand and learn on how to actually do it myself, don't feel confident enough yet. BUT i have to move my investments asap, since we are currently with someone that is charging a lot. So I was thinking to get a robo-advisor for now, and continue to gain knowledge until I can just do it myself.

Maybe someone from Canada will chime in with the equivalent of dump it into vtsax and forget about it but that's what I'd do while I was learning. Not pay higher fees in between.

I'll take you up on that. Here in Canada Vanguard just launched VGRO, which is 80% equities and 20% fixed income, with a 0.22% MER. You can buy this ETF through Questrade for no commision. I do like robo-advisors for the ease of getting people to invest, but this new ETF is almost as simple.

Further reading:
https://www.newswire.ca/news-releases/vanguard-introduces-three-new-asset-allocation-etfs-672114863.html
https://maplemoney.com/questrade-review-best-discount-broker/
https://maplemoney.com/best-robo-advisors-canada/

lilactree

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Re: Investment Order
« Reply #66 on: February 16, 2019, 11:47:39 AM »
USA-specific question:

Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?

 

MDM

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Re: Investment Order
« Reply #67 on: February 16, 2019, 12:18:58 PM »
Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?
At a quick glance I'd say "no" because
- paying off very high interest debt provides a guaranteed high return.
- HSAs and traditional IRAs also reduce adjusted gross income.

But if you have done a deeper drill and have a worked example showing why a different order is better...?

lilactree

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Re: Investment Order
« Reply #68 on: February 16, 2019, 01:03:32 PM »
Thank you, MDM. I have not done a deeper drill; I'm pretty much a novice. If I somehow ever do, I'll share my findings.

robartsd

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Re: Investment Order
« Reply #69 on: February 19, 2019, 08:54:52 AM »
USA-specific question:

Would the investment order be different for a family that is trying to use Public Service Loan Forgiveness (PSLF)? e.g. would maxing out a 401K then move up in priority since adjusted gross income and thus income-based payments be lower?
I would think that student loans that might qualify for PSLF wouldn't have interest rates high enough to place paying them off above tax advantaged savings. While it is true that you could slightly reduce the payments to the loans by lowering AGI, I don't think it would be worth the cost of the extra interest on the high interest loans (hair on fire debt that should have been avoided) especially after considering the tax impact of the increased balance of the loans at forgiveness. At most adjusting for a PSLF strategy would increase the threshold interest rate for the first loan payoff line a little bit.

andrew08

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Re: Investment Order
« Reply #70 on: March 07, 2019, 09:01:55 AM »
You should assign an investment order account to an AuC if the maintenance work is to continue across a period limit (for example, end of the year) or if the asset is to be activated as a line item

MizB

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Re: Investment Order
« Reply #71 on: April 01, 2019, 09:08:11 PM »
This ordering is appropriate for investors in the US.

In the lists below, thinking "first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc." wherever "401k" appears is likely correct -            
   unless your governmental 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
   Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.

"Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~3%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - your earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k.  See Mega Backdoor Roth IRA.
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey.  If your own retirement is in good shape, and you choose to provide significant help for children's college costs,
   a 529 plan may be appropriate.  Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

Speaking of things to do first, see Getting started - Bogleheads if this is all new.  Working through that post and the links therein is also a good refresher, even if personal finance isn't completely new to you.

The emergency fund is your "no risk" money.  You might consider one of these online banks:            
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001      

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See            
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/         
for some thoughts.            
               
For those concerned about "locking up" money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5.

If one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.  The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

If your 401k options are poor (i.e., high fund fees) you can check
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/         
for some thoughts on "how high is too high?"

The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service.
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service

Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:            
   https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795      
   http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income.  E.g., pension you can't defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.

Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!


MDM

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Re: Investment Order
« Reply #72 on: April 01, 2019, 10:12:25 PM »
Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!
It would be better to ask this in the Case Studies board.

See How To: Write a Case Study Topic.  Good luck!

MizB

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Re: Investment Order
« Reply #73 on: April 01, 2019, 10:19:43 PM »
Hello, I am hoping to get advice on where to invest next:

I have already saved an Emergency Fund, paid off all debt, have about $60K in index funds, and maxed out my TSP (401K). I work for the Federal Government and don't have the ability to contribute to an HSA or do a mega back door roth. I make $160K and therefore can't contribute to a Roth and won't get a deduction for a traditional IRA. Is it still worth contributing to a traditional IRA or should I stick with taxable accounts? I have $100K in savings and can't decide whether to buy a place or invest. I would really appreciate any advice you fellow mustachians have!
It would be better to ask this in the Case Studies board.

See How To: Write a Case Study Topic.  Good luck!

Oh! New poster....thanks for the tip. I will try that!

MrThatsDifferent

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Re: Investment Order
« Reply #74 on: April 24, 2019, 02:16:59 AM »
I’ve got a mate from the UK that would be interested in an investment order for that. Anyone got one?

robartsd

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Re: Investment Order
« Reply #75 on: April 24, 2019, 10:15:17 AM »
I’ve got a mate from the UK that would be interested in an investment order for that. Anyone got one?
You can check out the UK Tax discussion board. Unfortunately the dominance of North Americans in the general areas has our UK mustachians using it as a pretty general place for UK discussion (their only sticky is a directory to UK based journals).

So far I know that the UK has the following types of tax advantaged accounts:
  • Pensions (employer sponsored plan similar a 401k in the US)
  • SIPP (similar to the US traditional IRA)
  • ISA (Individual Savings Account - like Roth accounts, but without withdraw restrictions)
[li]LISA (Lifetime ISA - government adds 25% to your contributions - can withdraw for: first home purchase, old age, terminal illness)
[/li][/list]
I believe the biggest problem for our UK friends is that only the ISA provides access to funds in early retirement. Pensions and SIPPs are typically available at age 55, LISA is available at age 60, State Pension (similar to Social Security) kicks in at 65 or later. I don't know of any early withdraw schemes similar to the options we have in the US (Roth conversion ladder, SEPP, low 10% penalty).

letsdoit

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Re: Investment Order
« Reply #76 on: May 13, 2019, 07:27:10 AM »
This ordering is appropriate for investors in the US.

In the lists below, thinking "first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc." wherever "401k" appears is likely correct -            
   unless your governmental 457 fund options are significantly worse than those in the 401k/403b -         
   due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
   Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.

"Max _____" means "contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses."            

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).            
            
Current 10-year Treasury note yield is ~3%.  See            
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
            
WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.            
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - your earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)            
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k.  See Mega Backdoor Roth IRA.
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey.  If your own retirement is in good shape, and you choose to provide significant help for children's college costs,
   a 529 plan may be appropriate.  Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs.

Speaking of things to do first, see Getting started - Bogleheads if this is all new.  Working through that post and the links therein is also a good refresher, even if personal finance isn't completely new to you.

The emergency fund is your "no risk" money.  You might consider one of these online banks:            
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001      

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.

If you are renting, you may not be throwing away as much on rent as you might think.  See            
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/         
for some thoughts.            
               
For those concerned about "locking up" money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5.

If your 401k options are poor (i.e., high fund fees) you can check
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/         
for some thoughts on "how high is too high?"

The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service.
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service

If one can swing the cash flow, getting in and out of an ESPP is ~"free money".  But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn't the same.  The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts. 
 - For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2. 
 - For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.

Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),            
   putting money into that business might come somewhere before, in parallel with, or after step 5.         
            
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:            
   https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795      
   http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income.  E.g., pension you can't defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.


457 b governemtnal vs: non governmental.
some ppl say that if yours has a Roth option, then it is definitely governemtal (altho some gov't 457s do not have ROth).  is there another way to tell?  and , why does it matter?

MDM

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Re: Investment Order
« Reply #77 on: May 13, 2019, 10:01:44 AM »
457 b governemtnal vs: non governmental.
some ppl say that if yours has a Roth option, then it is definitely governemtal (altho some gov't 457s do not have ROth).  is there another way to tell?  and , why does it matter?
If the employer is a private company, it's not governmental.  If the employer is government run (e.g., a school district) it is governmental.

See 457 plan - Wikipedia and Non Governmental 457b Deferred Compensation Plans | Internal Revenue Service for details on differences.

mtnrider

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Re: Investment Order
« Reply #78 on: May 13, 2019, 10:33:31 AM »
This ordering is appropriate for investors in the US.

0. Establish an emergency fund to your satisfaction            

8. Invest in a taxable account and/or fund a 529 with any extra.            


I'd like to suggest that Series I Bonds from Treasury Direct are appropriate for US investors as an emergency fund.  Depending on your age and risk tolerance, they may also be appropriate for taxable accounts.  I Bonds are US government issued bonds that are indexed to inflation.  They often return around the same amount as a high yield savings account or CDs, but are tax deferred.

I Bonds are tax free if for used education, depending on your income.  If you're bumping up against the gift tax in a 529, consider I Bonds. 

They are not without some complication.  There is a purchase limit of $10,000 per year.  They must be held for a year before you can redeem them, and if redeemed within five years, there is a 3 month interest penalty.

https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Minion

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Re: Investment Order
« Reply #79 on: June 05, 2019, 12:52:30 AM »
Would be awesome if someone could update this for Germany - not sure if there are many other DE mustachians  around?

Gatzbie

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Re: Investment Order
« Reply #80 on: June 27, 2019, 05:26:54 PM »
Newby questions here

I’m trying to do calculations to estimate my withdrawal tax rates:

Step #2: Does take “current traditional balance” mean just your pre-tax 401k & traditional IRA balance? Or is Roth IRA/Roth 401k included here too?
Step #3: Does take “current taxable balance” mean just your brokerage account money?

Step #5:Does "traditional accounts"  mean just your pre-tax 401k & traditional IRA balance? (Same as Step#2)





« Last Edit: June 27, 2019, 05:33:06 PM by Gatzbie »

MDM

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Re: Investment Order
« Reply #81 on: June 27, 2019, 05:58:12 PM »
Newby questions here

I’m trying to do calculations to estimate my withdrawal tax rates:

Step #2: Does take “current traditional balance” mean just your pre-tax 401k & traditional IRA balance?
Step #3: Does take “current taxable balance” mean just your brokerage account money?

Step #5:Does "traditional accounts"  mean just your pre-tax 401k & traditional IRA balance? (Same as Step#2)
Yes to all the above.

Traditional is not Roth.

secondcor521

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Re: Investment Order
« Reply #82 on: August 03, 2019, 10:13:29 AM »
@MDM, in the WHY section, step 4, you may consider adding a note that effects on ACA subsidies and FAFSA EFC function as separate parallel taxation systems and thus can add to the overall marginal tax rates, which affect the current vs. future marginal rate evaluation.

Although that adds to the complication of an already fairly complicated rule of thumb post, so I will respectfully leave it up to you to decide if the addition is worth the increase in complexity.

Last year with my personal tax situation the combined effect of ACA+FAFSA seemed to be about 12 percentage points of marginal rate, so it can be a fairly significant factor.  But I am FIREd with kids in college, which may be a small target audience.

MDM

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Re: Investment Order
« Reply #83 on: August 03, 2019, 10:24:19 AM »
@MDM, in the WHY section, step 4, you may consider adding a note that effects on ACA subsidies and FAFSA EFC function as separate parallel taxation systems and thus can add to the overall marginal tax rates, which affect the current vs. future marginal rate evaluation.

Although that adds to the complication of an already fairly complicated rule of thumb post, so I will respectfully leave it up to you to decide if the addition is worth the increase in complexity.

Last year with my personal tax situation the combined effect of ACA+FAFSA seemed to be about 12 percentage points of marginal rate, so it can be a fairly significant factor.  But I am FIREd with kids in college, which may be a small target audience.
Good point.

Currently, the ACA effect is included in marginal rate calculations done by the case study spreadsheet (CSS) - provided one enters the inputs needed - but the FAFSA EFC is not.

Is the FAFSA EFC calculable from entries already needed, and calculations already made, by the CSS?  Or does it require significantly more inputs?

MDM

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Re: Investment Order
« Reply #84 on: August 03, 2019, 10:37:15 AM »
Is the FAFSA EFC calculable from entries already needed, and calculations already made, by the CSS?  Or does it require significantly more inputs?
Based on https://ifap.ed.gov/efcformulaguide/attachments/1920EFCFormulaGuide.pdf, it appears to require
- much more input from the spreadsheet user, and
- much more work from the spreadsheet developer
than currently needed.

Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.

secondcor521

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Re: Investment Order
« Reply #85 on: August 03, 2019, 10:59:12 AM »
Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.

Agreed.  Thanks.

MDM

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Re: Investment Order
« Reply #86 on: August 03, 2019, 11:42:02 AM »
Unless there is a way around the above (e.g., someone already has a CSS-compatible spreadsheet and is willing to share), I don't see the EFC being included in the CSS marginal rate calculation.  But a note about that effect in the IO post seems doable.

Agreed.  Thanks.
Modified version below.  Further suggestions welcome.

4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.

   For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth.
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.
   The 'Calculations' tab in the Case Study Spreadsheet (CSS) can show marginal rates for savings or withdrawals*.
   Remember to include all income-dependent effects in your marginal tax rate.
      The CSS does include most federal and state brackets, credits (Child Tax, Education, ACA, Earned Income, etc.), phase-ins, phase-outs, and IRMAA tiers.
      It may not include some state tax details, FAFSA Expected Family Contribution, and other items irrelevant to most but important to some.

secondcor521

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Re: Investment Order
« Reply #87 on: August 03, 2019, 06:15:24 PM »
^ Looks good to me.  Thanks!

EscapedApe

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Re: Investment Order
« Reply #88 on: October 30, 2019, 12:22:31 PM »
Thanks to everyone who contributed to these lists.

I came upon the FIRE community eager, but also really overwhelmed on how to approach the FIRE journey with the optimal first steps. This info really breaks things down nicely. I've learned a lot just by Googling the terms that appear in the lists.

Buffaloski Boris

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Re: Investment Order
« Reply #89 on: February 20, 2020, 01:46:47 PM »
This is a great list, and generally speaking I really like the order.  I do want to revisit the 529 issue, though, as several states actually offer STATE tax deductions or credits to contribute to a 529 plan.  Roughly 30 states do that. So not only are earnings used for higher education expenses free of tax, you also get a a deduction or credit up front.  That's a lot better than a Roth IRA. 

Example.  Let's say you have a kid and live in Virginia and plan on contributing to their college education.  So if you're single, that's up to $4000 you can deduct. If married, $8,000.  Multiply that by the marginal tax rate of 5.75% and you're talking a nice instant return for investing in a 529. 

Radioherd88

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Re: Investment Order
« Reply #90 on: May 03, 2020, 08:43:06 PM »
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?

Taxable upfront, but there is no contribution limit, and it grows and can be withdrawn tax free;

You can buy the minimum life insurance benefit, and max the investment portion

It doesn't count towards provisional income
If the stock market crashes, you get a 0 for that year rather than a minus 20/30/40 for your portfolio (very attractive to me) - the downside is your gains would be capped in the good years, but over time, crashes are harder to recover from
You can get a long term care provision meaning if you need long term care it pays for that care from the death benefit
If you die, your investments and life insurance are passed on to spouse/children - so although you are paying for this premium, you are getting a service in return
The overall fees can be comparable to an IRA fund over the lifetime (not a really cheap IRA fund), but if you still with it your premium reduced with age

I recently stumbled across this because of the ability to have the protection against negative market years and feel it might be a valuable addition to a portfolio for that and the protection it has against long term care costs torpedoing retirement plans....

Anyone any experiences thoughts on where it should be in the list?

MDM

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Re: Investment Order
« Reply #91 on: May 03, 2020, 09:05:03 PM »
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

Radioherd88

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Re: Investment Order
« Reply #92 on: May 05, 2020, 04:39:30 PM »
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

mtnrider

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Re: Investment Order
« Reply #93 on: May 13, 2020, 08:58:02 AM »
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

Insurance products may be "meh" as in investment if you are in the highest tax bracket, and already using every single tax-deferment strategy, and you have a long time horizon, and you've talked to a fee-only financial advisor who suggests you look into one.  Otherwise they are usually bad.  You can google this, but it's generally true that the return on life insurance products is low, lower than you'd think.  You might as well be in US bonds.

The cliche is that life insurance products are usually sold, not bought.

You may wish to read this series: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

Radioherd88

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Re: Investment Order
« Reply #94 on: May 13, 2020, 09:22:02 PM »
Has anyone considered where or when an Indexed Universal Life LIRP (Life Insurance Retirement Plan) belongs in the order?
It does not belong.  If you would like to discuss "Insurance Order" feel free to start such a thread.

That sounds like a terrible thread, but I am actually surprised there isn't one already....

Yes, obviously it is insurance, but is no one considering long term care insurance to protect their portfolio from being pilfered in such a scenario? Or are we all happy to self insure by not paying an insurance premium and put more into taxable accounts to grow?

What interests me in the UIL LIRP and makes me think this becomes a conversation between the taxable brokerage account is the 0 loss aspect that can help protect against market crashes and bring your $ out ahead of a taxable brokerage - and you can touch it without counting as provisional income in RMD years - it has it's advantages if you stick with it long term?

Insurance products may be "meh" as in investment if you are in the highest tax bracket, and already using every single tax-deferment strategy, and you have a long time horizon, and you've talked to a fee-only financial advisor who suggests you look into one.  Otherwise they are usually bad.  You can google this, but it's generally true that the return on life insurance products is low, lower than you'd think.  You might as well be in US bonds.

The cliche is that life insurance products are usually sold, not bought.

You may wish to read this series: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

I'm aware insurance is bad, mmmkay - i dislike insurance - i have highest deductibles where possible just to protect against catastrophe and reduce premiums.

What attracts me to the Indexed Universal Life LIRP is that it unlocks the potential to have a portion of your portfolio that is invincible to market crashes - meaning if that happens when you are about to FIRE, you can draw on that portion and wait for the market to recover before you touch the rest. There are plans that provide 0 loss indexes in down years (capped return at 12-14% on the plus years), and over the life of the insurance the premium cost is the equivalent of 1.5%. Yes 1.5% is still high compared to the index funds i currently invest in, but for a fee of 1.5% to unlock a 0 loss option, and provide long term care and death benefit, I figured there's be some that this appeals to..... apparently not!