Category: Qualified Plan

Have I Saved Enough Money?

Andrew Walberg and I had been friends since first meeting in Mr. Carlson’s government class when we were juniors in high school.  He was so much fun to be around, always positive and upbeat.  I had not heard from him in a while so I was surprised to hear his voice on the other end of the telephone.

“Hey, this is Andy.  How have you been? I’ve known you’re in the financial services business, but I have never taken the time to talk to you,” he started.  “I want to come and talk to you but first I am calling to find out if you would be willing to talk to my dad.  He is now 55 and is getting really nervous about retirement.”

“Of course I would talk to your dad.  How can we set up an appointment?”  I said.

“Well, he is right here do you want to talk to him now?”  Andy said.

“I am going to put you through to my assistant and she will set up an appointment.  Why don’t you come to the appointment also, if it is ok with your dad.”  I said.

The following week at the set time, Andy and his dad Karl, came to my office right on time.  I extended my hand and said, “Wow, it is so good to see you. How have you been?”

After a few pleasantries, we got down to business.  Mr. Walberg was overly nervous about whether he was going to be able to retire and if he had saved enough.

“I am going to tell you right now Mr. Walberg, you probably have not saved enough.  The reason I say that is most Americans your age has not saved enough.  Plus you just said you are nervous about being able to retire.”

“Ok, you are probably right,” Mr. Walberg said.  “But one of my main questions is should I start saving more?”

“The short answer is yes,” I said grinning.  “But let’s take a look at where you are at currently.  I am going to use my Truth Concepts software – in particular the Qualified Plan calculator.  I am going to ask you a few questions so we can get an accurate feel for where you are now and how to get to where you want to be.  First question:  When did you start your current job?”  I asked

“I changed jobs when I was 34, and have worked at this place ever since,” he answered.

“And how much would you say your adjusted gross income has averaged?

“Probably right about 100k.”

“So did you put money in your company’s 401(k)?”  I asked

“Well, I had to work there for a year first, but yes, as soon as I could I started to put money in.  And I rolled $25,000 from my previous company’s program,” he recalled.

“Great.  You have been wise to set that money aide.  I will put those numbers here,” I motioned to my screen.  “How much have you been putting into your account every year?”

“Well, when I first started the company would match us 100% for the first $3,000.”  Mr. Walberg said. “I just figured I would go for the match and double my money.  I have done that faithfully every year since.”

“Great. Do you know what kind of return you’ve had on that account?”  I asked him. “If you’ve been lucky probably around 8%.”

“I am not completely sure what my returns have been,” Mr. Walberg said.  “It goes up and down. Some years it seems like it goes up only by the amount I put in, but the last statement said something close to 6% I think.  Go ahead and use 8%.”

“Now, you said your adjusted gross income was right at $100,000,” I said.  “I will enter that here. Now, let’s look at my calculator.”

“Almost a million dollars?” Mr. Walberg exclaimed.  “If I had that much I would not be here talking to you. I don’t have that much in my account.  Nor have I enjoyed almost an 11% return on my account.”

“This calculator is doing calculations just based on what we put in.  With a nice match from your employer, it seems like there should have been a 10.79% gain.  However, there are a few factors we haven’t incorporated yet.  Before I discuss those though, I wanted to show you this number,” I explained.  “You may not have been given all the information when you signed up for the 401(k).  You see all these years you have been paying management fees.  Generally, those fees, paid from your account, are in the ballpark of 4%.  But to be on the conservative side I will put 3%,” I finished and motioned to my screen.

“That number is pretty close to what I have, but still a little high,” Mr. Walberg said.

“Before we make any changes, I want to point something out,” I told him.  “Mr. Walberg…”

“Please, just call me Karl,” he interrupted.

“Ok, Karl.  Did you notice that the rate of return on your account dropped from 10.79% to 7.87%?  In other words, those fees you have been paying have basically wiped out the match you got from your employer. Notice here that the amount of management fees of $206,016 is very close to the benefit from your employer match of $214,931,”  I explained as I pointed to the various numbers. Those fees result in a reduction in your account balance by half a million dollars.”

“Ouch!” he groaned.

“Yes, that’s a painful realization, but don’t get down on yourself.  You have done the best you could with what you knew,” I said to him.  “Not to throw salt in that wound, but remember this money will still be taxed.  If you walked away today and just paid the income tax, ignoring the 10% early withdrawal penalty, how much would you have?” I asked.

“Only $300,000?  that is definitely much less than I was thinking.  I appreciate you trying to console me, but this isn’t going to work – I should have saved more,” he lamented.  “Which is the main reason I am here.  I am now 55 and can add $15,500 – as ‘makeup contributions’- to my current $3000 contribution, so that would make it $18,500 a year going into my 401(k) for the next 10 years until I retire. Do you think that’s a good idea?” he asked.

“Well, I like to input the numbers so you can see the whole truth for yourself. Let’s look and see if that information helps you make the decision,” I suggested.

“If you continue to do what you are currently doing – $3,000 with your employer match for another 10 years – you will have $352,881 after taxes,”  I said pointing to my screen again.

“Now, if you increase your contribution to $18,500 how much will you have?”  I asked.

“Almost a half million,” Karl said looking at his son.

“Okay, use that calculator there on my desk and subtract the amount that will result from your current path ($352,881) from the amount you’ll have if you contribute $18,500 every year ($490,481),” I said.

“The difference is $137,600 dollars,” Karl announced.

“Okay, now reason with me a minute. For 10 years you are going to put an additional $15,500 dollars per year into your account or a total of $155,000 to get a net gain of $137,600,”  I asked.  “Does that make sense to you?” I continued.

“Well, of course not. How is that even possible?” Karl said, clearly frustrated.

“You have to remember that a portion of that additional $15,500 each month is actually Uncle Sam’s money he is allowing you to put into the account,” I explained.  “But be certain, he collects his money at the end. Are you open to an alternative approach?”  I asked.

“Sure, especially if it beats this,” Karl smiled.

“How about you go ahead and pay your taxes on the $15,500 now – that would leave you with a net of $12,090.  Then put that $12,090 into a tax-advantaged vehicle like a whole life insurance policy,”  I said.

“Why on earth would I want to do that?”  Karl looked more frustrated than ever.

Smiling, I said, “Before you rush to judgment, hear me out.”  I called up an illustration for a maximum funded policy using the $12,090 per year as the total premium.” As you can see here, in 10 years you will have $127,393 in cash value.”

“But that’s less than the $137,600 I would get with my 401(k),” Karl was quick to point out.

“Yes, you are right, it is a bit less” I assured him. “But let’s talk about that cash value for a moment. Your cash value is essentially tax-free, with the continued growth being tax advantaged.  Do you think taxes are going up in the future given all the debt Uncle Sam is building up?”

“Money to pay for the government debt has to come from somewhere,” Karl commented astutely. “Money in my 401(k) would still need to be taxed.” Karl’s face changed. “If taxes are going up I might end up with less than the $137,600,”  he mumbled. “I guess being tax-free and tax-advantaged could be valuable.”

“In addition to the cash value, you will also have a quarter million dollars of paid-up, permanent life insurance,” I said. “How much do you think it would cost to get a term life insurance policy for $250,000 for the next ten years? About $6,000.  So the extra cost for the whole life policy is approximately $4,000. But guess what happens the first year after you retire – when you are 66?  Your cash value will increase about $5,000 even though you do not put another dime into it.  And, it will continue to increase that amount – or more – every single year.”

“Whoa, that is actually a smarter way to go because I wind up with retirement money and the death benefit that increases every year. I’d come out way ahead,” Karl realized.

“Another benefit you need to consider is the fact that no one will be telling you when and how you must remove the money. Are you familiar with required minimum distributions?” I asked him.

“Yes, my uncle was blindsided by that a few years back,” Karl said. “I have a question, what if I decide to keep working; can I continue to contribute to this whole life policy?” Karl asked.

“Yes you can and the numbers shown here will just get better,” I confirmed.

Finally, Andy chimed in, “That policy builds more money each year.  Maybe I should do the same thing and put money there instead of maxing out my contributions.”

“That is a great idea Andy; we should look at numbers for you as well. Let’s set up an appointment.” Turning to Karl I said, “For now, let’s get the paperwork completed for your account.”


-Jason Henderson for Truth Concepts

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The Whole Truth About Qualified Plan Contributions (John & Jane Jones Pt. 3 of 9)

Mark Twain reportedly said that he tried to not let his schooling get in the way of his education.  I think he was describing a paradox similar to what most advisors know as the “arrival syndrome.”  Said in yet another way, your education should be an ongoing process.  Such is the case with your clients.  We recommend that you schedule regular discussions to help your clients understand the whole truth about money.  And, of course, we are totally biased in thinking the best way to help your clients, is by illustrating situations with our calculators.

I admit it had been far too long since I had met with John and Jane Jones.  In our previous two meetings, they had come to understand the power of Jane’s whole life policy in helping them get out of debt.  They had also learned that even small differences in money owed can have a huge impact on their overall financial situation.

When we were able to meet again, Jane and John were both anticipating their 30th birthdays coming in about 6 months. To begin our third meeting together, we reviewed what we had discussed before.  They had also updated their client fact finder sheet, and I was anxious to talk to them about those newly revealed facts.

Both John and Jane had been diligent at work and both had been rewarded with a $5,000 annual raise.  Their raises were actually awarded to them almost 5 years before, a short time after our initial meeting, but they had not told me. I should have uncovered that fact in my questioning,  hadn’t quite asked enough questions in our subsequent meetings.  Around the same time they were given raises, they also hit anniversary milestones at work and became eligible to participate in the company’s sponsored 401(k) plan.  They told me how they had met with an investment professional who had explained the wonderful tax benefits and the “free” money they would get from the company.  In fact, they repeated his words to me, “There is no better place to put your money.”  The “free” money or company match was 50% of their contribution, up to 2% of their salaries.  In other words, the max contribution by the employer would be $500 a month.

“How do you feel about your decision to participate in the 401(k) at work?”  I asked John.

“Well, it has been awesome these last 5 years, “John answered quickly. “Both the investment professional and our accountant said the returns are phenomenal.”

“What has been your return thus far?”  I asked.

“So far we’ve gotten a 4% return, and as you can see,” he said, pointing to the statement on my desk, “we already have $29,125.” John proudly stated.  “I know that doesn’t sound like a huge number, but our accountant tells us we are really getting about 15% return when we consider taxes.”

“Isn’t that a good feeling to have a good sum of money in an account somewhere?”  I stated.  Both Jane and John nodded in agreement.  “I am going to put your numbers into my rate calculator and verify what your accountant is saying.  When you started, you had a zero balance of course.  You have been putting your entire raise of $5,000 a year into your qualified plan.  But if the money just came to you as part of your income, you’d only get $3,750 because you get a tax deduction at your 25% tax rate.  Your current balance as you said is $29,125.”  I then pointed to my computer screen and said; “Yes it looks like the number is about 15%.”

“Wow, there are the numbers,”  John said.  “Oh but wait, you forgot the company match.  Some of that 15% is because we work for such a generous company.”

“Yes, you are right.”  I corrected myself.  “I am glad you pointed that out.  As I said to you before and I say often to myself, my family and others; when making a financial decision, it is always good to have the whole truth.  With that in mind, let’s take a closer look at things.  Since you two seem to have a good grasp of things, I am going to use a more sophisticated calculator.  This one is specialized for analyzing qualified plans.”  I quickly put in their numbers, being sure to include their employer match and pointed to the screen.  “Here are the numbers.”

“Something is not right,”  Jane said or maybe asked.  “Our account balance is $29,125 not $30,981.”

“You don’t miss much do you, Jane?”  I complimented her.  “Do you know why my number is different from your statement?”  I asked her.

After a moment of silence, she simply said, “No, but I am guessing you know.”

“I wouldn’t be a good advisor if I didn’t know what was going to come out of a calculation before I did them,”  I said.  “Actually you do know why there is a difference, you’ve just forgotten.  I am pretty sure the investment professional that came to your work to help you get enrolled in the plan, told you they had some of the smallest fees in the industry.  Well, when we put those fees 2% fees in, we should see a number that agrees with your statement.”

“I’m not sure that makes us feel more comfortable.”  John retorted.  “I know your calculator has the same numbers as our statement, but wow that is a lot of fees we’ve had to pay so far,” John complained.

“When will you stop paying those 2% fees?”  I asked John.

“I guess never,” was his response.  “But now I see something that doesn’t seem right to me.  Our accountant says – and you verified – that we are getting 15.06% on our money.”

“Yes, you’re right again, but you are getting ahead of me – but that is awesome.”  I smiled and said to John.  “I am going to put in the effect of your tax deferral.  You are in a 25% tax bracket so when I put that in your rate of return is…?”

“Exactly what we’ve said – 15%,” John said sounding a little more relaxed.

“Okay, let’s shift gears a minute and talk about how accessible this money is to you,”  I suggested.  “Let’s say for some odd reason you needed or wanted to take money out of this account. How much of a penalty or tax would you be required to pay?”  I asked.

“If I remember correctly, we will have to pay our income taxes and since we are not 59 and 1/2 years old we will also have to pay a 10% penalty,” was Jane’s response.

“You are right – at least as the law now stands.  But it could change right?”  I said.  “I will adjust my calculator to show what the tax cost and penalty would be if you withdrew your money.” Pointing to the calculator I asked, “Now what do you see?”

“Something I do not like.”  John frowned as he spoke. “This calculator is telling us that the actual rate of return on our money if we decided to use it today is a measly 0.32%.  That is not what the accountant or the investment professional told me.  And, it’s not a number I find anywhere on our 401(k) statement.”

“How many people do you think would sign up for a program like this if that number were discussed?”  I asked John.  “I am willing to bet there would be very few.  But let’s not dwell on the past because there is nothing you or I can do about it.  But when you learn new information, you might want to change it if possible or make a different decision next time.  Let’s imagine the economy improves and you are able to get 6% from now until you turn 65.  At that time you decide to use your money.  Do you see your effectual rate of return is 4.18%?”

I continued, “Please take note that your net account value is $410,341.  Please write that number down so you’ll to be able to remember it.  The next question – and I already know the answer, but here it is anyway: Would you like to have more money than that?  Of course, you would. The easiest path to achieve that is simply getting a higher rate of return.  But for a moment, let us just assume you decide to drop your contribution to $1,000 annually. What does that do to your rate of return?”  I said pointing to the calculator.

Before he could answer I continued, “it went up didn’t it?  Just so you know, the rate of return went up because a higher percentage of your contribution dollars were being matched by your employer.  However, as expected, your net account value went down to $174,454, right?  When we subtract that $174,454 from the previous number of $372,798 we get $198,344.”  I handed John a basic hand-held calculator and allowed him to verify my numbers.

“That is what I get,”  John said.

Now if we were to use a different financial tool, say a whole life policy, we would need to make sure we made up that $198,344, right?”  I asked them.

“Right,” Jane chimed in.

“Since we fund the policy with after-tax dollars, we will have to pay our income taxes up front.  So instead of having  $4,000 to use, we will only have $3,000, i.e. $3,000 is the result of $4,000 minus 25% taxes.  Are you following me?  I want to be clear here, you do not get a tax credit when you put money into a qualified plan.  When you earn money, you have a choice to either include that money and pay the tax, or not include it as part of your income and avoid paying the tax on it immediately.  However, you will pay tax on it when you do include it as part of your income – in other words when you take money out of your qualified plan.”

I quickly put into the funding calculator a $3,000 annual premium for a male age 30 with a preferred health rating.  Then I asked, “If you use that $3,000 and pay the premiums on a whole life policy, what will be your projected cash value at age 65?  And how does that compare to the qualified plan?”

John and Jane looked at each other and smiled and then Jane started to talk. “For some reason, I knew you were going to show us something better.  The difference is not huge –  $198,344 less in our qualified plan, but having $209,820.  Again, not huge, but about a 10% difference.  John and I were talking about this on the way over.  We are losing our confidence in the economy in general and in the stock market in particular.  The numbers in your calculator for our qualified plan are based on the market always going up.  The numbers here in the whole life policy, have guarantees, and the track record of the life insurance industry is much more reassuring.”

“I have never told you, but my uncle is a dentist.  He followed to the ‘T’ everything his financial planner told him to do.  He thought he had the world at his feet and was planning a comfortable retirement late 2008.  But then the market went south.  Well, the short of the story is, he is at work today trying to recover what he lost in the downturn.  I simply like the safety of the whole life route.”  Jane finished.

“Other than the track record and the guarantees, why do you like the whole life route?” I asked Jane.

“In one word, CONTROL,” Jane said rather emphatically.  “With the qualified plan, just as you have already shown us, we do not have the ability to use the money in there.  Our money is locked away in a type of prison until we are 59 and 1/2.  Sooner or later we are going to have children and I am hoping I can stay at home and help them learn and grow.  But I am not confident we will have enough money from just John’s salary. I am thinking I will need to start a business where I can stay at home.”  Then looking at John she said, “Where will we get the money to start a business?  Certainly not from our qualified plans because of the steep penalties and tax bite.”

Without looking at me, John answered Jane, “You’re right, I am feeling the same way.  I like the whole life route so much better.  In fact, I am going to HR this afternoon and cutting my qualified plan contribution to $1,000.”

John then addressed himself to me and said, “Thank you.”


-Jason Henderson for Truth Concepts 

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How do you include the state income tax for capital gains tax?

Increase your capital gains rate box by the state income tax rate.
Increase your state income tax rate is 7% and your clients’ federal capital gains tax rate is 15%, then you’ll put 22% in your capital gains rate box.

Please note: there is not a federal capital gains tax deduction for the state income tax paid as there is for federal income tax.  See the calculation below:

This first part the software handles automatically.


[ezcol_1half]Federal Income Tax Rate 
Federal Capital Gains Tax Rate
State Income Tax Rate

[ezcol_2third]Marginal Federal Income Tax = 15 * (1-.07)
State Income Tax
[/ezcol_2third] [ezcol_1third_end]= 13.95%
= 7.00%
= 20.95%

This second part you must put in MANUALLY.


[ezcol_1half]Federal Capital Gains Tax  Rate
State Income Tax Rate
[/ezcol_1half]= 15%
= 7%
= 22% [ezcol_1half_end][/ezcol_1half_end]

Again you’ll put 22% in your Capital Gains Rate BOX
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Truth Tip: Comparing Taxable vs. Tax-Deferred Accounts

We received this excellent question from a Truth Concepts user this week:

Q. I am trying to do a comparison between using a qualified plan and a non-qualified plan.  I understand pretty well how to use the Qualified Plan calculator, however I want to show an “apples to apples comparison” assuming everything else is equal i.e. ROR, management fee, etc., but with the client paying taxes each year on their investment gains, so that at retirement the money they have to spend is tax free.

A. That will be easiest on the Accumulation Calculator.  I’ve made it easy because there is a “duplicate” button on the top left, so put your data in, push “tax deferred” on the right, then duplicate the calculator and push “taxable” on the right for the second one.

Great question!

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Truth Tip, Qualified Plan

To get spread sheet detail, turn on “term ins. and emp. cost” button. (This works whether or not you have term insurance or employee costs that you wish to add.)

Close anytime (top left corner of spreadsheet) and to view again, click button again and then “inputs.”

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Truth Concepts on

Visit Truth Concepts on Today!New Truth Concepts Client Presentations!

We’ve been busy loading up our Truth Concepts YouTube channel  with videos for you! Now there are 15 videos featuring Todd Langford and/or Truth Concepts software.

The YouTube channel houses our Truth Concepts, Truth Concepts Academy, and Summit videos, as well as several presentation videos and  Banking for Life excerpts and outtakes with Todd Langford.

Eight of the newer videos are from a client event at a local insurance brokerage. We recorded and “screen captured” Todd’s presentations and divided it up by topic. (FYI, Todd’s presentations followed a presentation by Nelson Nash, you’ll hear him refer to Nelson who is in the audience.)

Truth Concepts: How Banks Make Money (1 of 8)

Even most bankers don’t understand this. (If a bank has a 6% spread between the savings rate and lending rate for customers, they are NOT making 6% on their money!) The reality of bank profits – especially when interest rates are low – is frankly shocking. Approximately 15 minutes.

Truth Concepts: Maximum Potential (2 of 8)

As we mentioned in an earlier email, many advisors like to use this calculator in their first meeting with a client. It outlines what a client’s full financial capability and demonstrates that if you’re saving too little, a chasing higher rate of return isn’t necessarily the answer. Approximately 10 minutes.

Truth Concepts: The True Cost of Paying Cash (3 of 8)

Todd explains opportunity costs and why they matter so much. (Not suitable viewing for Dave Ramsey fans!) Approximately 7 minutes. 

Truth Concepts: Qualified Plan (4 of 8)

Todd examines the real rate of return in a typical qualified plan. What impact does a company match, a typical fee, and taxes have on the dollars in a 401(k) or other tax-deferred retirement plan? It’s not a pleasant surprise to see how much of “our” money ends up in someone else’s pocket!  Approximately 14 minutes.

Truth Concepts: Funding Calculator (5 of 8)

Todd Langford discusses whole life cash value in the context of other savings vehicles (with some interesting commentary on the “safety” of FDIC-insured accounts) and busts the “buy term and invest the difference” myth with hard numbers and compelling logic.  Approximately 16 minutes.

Truth Concepts: Car Financing and Borrowing (6 of 8)

Todd shows the reality of “0%” vehicle financing, then compares the results of making major purchases through bank loans, cash purchases, certificates of deposit or whole life cash value. Emphasizes the advantages of having and using your own capital.  Approximately 23 minutes.

Truth Concepts: Real Estate (7 of 8)

Todd explains the advantage of participating mutual company dividends and analyzes the powerful potential of using cash value to finance other assets and sound, cash-flowing investments. See how leveraging your cash value can produce exponential benefits when combined with other strategies and investments.  Approximately 11 minutes.

Truth Concepts: Laffer Curve on Cash Flow (8 of 8)

Todd gives a contextual history of income taxes and how lower taxes can actually translates into more money for BOTH taxpayers and the government.  Approximately 5 minutes. 

Visit Truth Concepts on Today!

Click on links for individual videos above or view all available videos on the Truth Concepts YouTube channel at:

Can you see the potential of using Truth Concepts software to analyze various financial strategies and communicate with clients about essential financial concepts?

Join Todd in Houston for our next LIVE 3-day training for hands-on training with Truth Concepts calculators. At this writing, our next event is October 22-24, 2014 in Houston, TX. See our Truth Training page for current dates, details and registration.

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