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I am wondering what the differences would with respect to a retirement plan prepared by a fee-only (NAFPA) firm that would charge $4,000 for the plan, and a retirement plan prepared for free by a full-service brokerage.

Comments, anyone?
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Greetings,

I am wondering what the differences would with respect to a retirement plan prepared by a fee-only (NAFPA) firm that would charge $4,000 for the plan, and a retirement plan prepared for free by a full-service brokerage.

Comments, anyone?


I would think the planner would have a different set of choices than the brokerage. Secondly, I would highly question that the plan is free from the brokerage. They may well be suggesting loaded funds and while you don't see an explicit fee, their funds will likely have higher expenses that you would pay, potentially for as long as you held the fund.

If you think you could take that full-service brokerage plan and swap no-load funds in its place, good luck as sometimes the funds the brokerage picks are hard to duplicate outside of loaded funds in some cases.

Regards,
JB
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Ideally both would come up with the same recommendations but I doubt it. A$4K is a pretty big price for a plan but if you have a substantial portfolio then a full service brokerage may end up costing even more. If I didn't have to actually pay for it this would be a marvelous test, to see the recommendations of both, do they recommend no load, no fee funds, indexes or specific stocks/bonds? Would they come up with the same asset allocation?
I tend to favor the fee only advisors over full cost brokerages but I prefer to manage my own assets even more. I paid for a financial plan 25 years ago when I needed one and it was good for me at the time. I was financially clueless and it turns out the funds were OK in retrospect but not what I would choose now.
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I am wondering what the differences would with respect to a retirement plan prepared by a fee-only (NAFPA) firm that would charge $4,000 for the plan, and a retirement plan prepared for free by a full-service brokerage.
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Welcome back!

The answer is: Total depends on the "Advisor."

In theory, [initial plan] the only difference is in the way the preparer is paid. The fee only, up front $4K, the full-service broker on commissions for you buying the products that are recommended. BUT, theory does not make a good bed partner with anyone in SALES.

If I had to stereotype -

The fee only will look at the whole picture of your dream and then plan where you can put your money, that would historically have brought you the return you need, comensurate with your risk, to get to the dream. - They show you why/were/how or will help you to buy the products which would probably be a significant portion in mutual funds, or similar (in diversification) vehicles. Then you go out and buy the ones you like within the targets set. And you may get some review times.

The brokerage will also have a line up of products that meet an asset allocation model they believe will get you the most return with the least risk. You will buy those vehicles and then they will montior the progress for you. When you buy, they will make the money, (which they deserve if you take their advice)-some of it from commissions or loads, which is straight out of your pocket - so it is not FREE. Of course they will call you on the phone when they think it is time to change--- and that is where a huge controversy comes in. Are they calling because you need to change or they need a boat? This will probably be in a wrap account, where they get a percentage of assets under management, and then invested in portfolios that the brokerage has.

So, as I recall you had $400K inherited to invest. $4k is one percent of that (and seems high but) do you want to spend 1% once. And then probably an hourly rate if you feel it is not tracking well, or do you think that the full service broker has enough better ideas to get a higher return and end up paying probably 2% a year?

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Caveat: I am a NAPFA member.

With the NAPFA plan, you should have a comprehensive financial plan not just limited to investments. Other areas addressed will be insurance and tax planning, retirement planning and projections along with estate concerns.

If the NAPFA planner uses low cost no load funds you will save a substantial portion of their fee in lower costs than what the broker charges.

To use a NAPFA planner or a full-service broker is a no-brainer, NAPFA.

If you are not comfortable with this planner, I suggest discussing your situation with another NAPFA planner.

Buz Livingston
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The free plan from the full-service brokerage will be a computer-generated, cookie-cutter thing. The broker plugs in a few mouse-clicks: your age, something about how aggressive you are, what obligations you will have at retirement, perhaps how many years left on your mortgage. I would hope for $4000 your "plan" would be more individualized.

Best wishes, Chris
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I am wondering what the differences would with respect to a retirement plan prepared by a fee-only (NAFPA) firm that would charge $4,000 for the plan, and a retirement plan prepared for free by a full-service brokerage.

Ah, both would be crap, but possibly come in different shapes.
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I would suggest that for $30 and some time on here you can learn everything that that $4000 free broker would tell you.
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The fact that they advertised it as "free" means they are crooks, or ignorant.

Seriously...

Brokerages will put you in funds with "B" shares... B shares have no up-front costs, but will charge some extra 12b-1 management fees, usually costing around 1% more a year than their A shares...

After 7 years or so, your B shares will change to A shares...

You'll end up paying an extra 1% a year for the next 7 years.... That is NOT free (They also have surrender charges to keep you from cashing out before the 7 years is up)

Ask the brokerage if they plan on buying B shares for you... Then ask them how much more B shares will cost you and how long until they turn into A shares...

Then ask them how they can honestly say their services are "free". (And then, if I were you, flip them the bird and walk out)

(That last step is optional) :)

That said, $4,000 for a plan seems a bit high to me... But I have no idea how much they are doing for you (retirement alone, or insurance, wills, etc. as well).

Also I suppose it depends on how much money you're investing... but I always thought fee-only planners were per hour.. not as a percentage of your assets.
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OK, thanks everyone. Lots o' comments in a short period of time. I did meet with a NAPFA financial planner for a free consultation. It was supposed to be an hour, but she spent two hours with me and answered all my questions. I was quite impressed with her and her firm, which advertises itself as the largest fee-only advisory firm in the area. And, as buzman noted above, the plan would be a comprehensive financial plan, not just limited to investments.

I am mainly interested in the investment part of the plan, but there are other issues as well. Things that I don't know how to figure out, such as pension and insurance decisions and how these will affect our retirement. For example, we don't know if my husband should take a full pension or a pension with a survivor benefit. This might seem like a no-brainer, but for our individual situation, it isn't. The plan prepared by NAPFA would take issues such as this into consideration, provide us with different scenarios, and give us recommendations. The broker says he will do this as well, but I do suspect that it will be more cookie- cutter, as Crosenfield says.

The brokerage plan is free, because I would not have to implement any of their recommendations. But then, what would be the point? I would have a plan that I wouldn't follow. I guess I am answering my own question. $4,000 seems like a lot for such a plan, but I do need one. I also like DrTarr's point about looking at that fee as a percentage of assets. So all of this is good food for thought.
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The fact that they advertised it as "free" means they are crooks, or ignorant.

Oh come on. This isn't fair. Fidelity gives you a free portfolio suggestion for having an account with them. My 401K and IRA are with them, and I haven't paid a single load or any fee other than reasonable expense ratio of my chosing. And for calling up and taking 10 minutes with them on the phone, you answer some questions and the computer comes up with a suggested set of funds and they send it to you.

No, nothing is ever really free, they do make money off you of course, but they'd make the same amount off of you if you didn't ask for the advice - so in that way, the advice is free.

You may argue they'd recommend more expensive funds or load funds. And heck, that my even be true (I don't recall, pretty sure they weren't loads though). But if they do there's no reason you can't pick similar but cheaper funds (indexes or just lower cost managed funds) and still be learning from their advice.


I am mainly interested in the investment part of the plan, but there are other issues as well. Things that I don't know how to figure out, such as pension and insurance decisions and how these will affect our retirement.

Goodnews, these are still all things on here that people can answer if you find the right board - there's this retirement investing board, and insurance board, boards for people who are already retired and may have experience with some of these issues, etc. You can discuss your situation, have ideas thrown your way, respond, and learn. And save a few grand.

Really, I have very little against a fee only planner, but $4K is a ton of money. Also, even with a fee only planner I'd still suggest you learn independently, because as nice as they may be, they can never know you as well as you do. And just as a broker may put you in a load fund, a fee-only planner may too, so it's not like you're guaranteed to have cheaper investing options through them. It's certainly arguable that they have less incentive to do so, but that doesn't mean they won't.

Are we talking $4K as a one-time fee, or would you need to pay this every time you want to talk with them, say annually? Imagine how much better that amount of money would do working for you in a retirement account, instead of gone.

If you really want their help, I have nothing against it, but perhaps you could get the fee down by only using them for certain complicated pension questions, etc and have them give a quick look over the rest of the plan you've come up with... rather than having them do it all for a hefty sum. As you can tell, I'm very put off by the amount of money that's being asked here.
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The $4,000 is a one-time fee. Then you can meet with them annually or whenever for a couple hundred dollars to assess and adjust.

I think that $4,000 is a lot of money. But my problem is that I now have a portfolio that consists of more than 80 different stocks and funds. Before, I was able to manage and track the portfolio that we had built up over time and which consisted of maybe 20 stocks and funds that we researched and picked ourselves. I don't have the time or knowledge to deal with this new portfolio -- it is overwhelming and I don't really know where or how to begin. That's why I'm thinking that I need a plan prepared by someone who hopefully knows what they are doing. Or maybe I should just leave things alone and hope for the best.

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That's why I'm thinking that I need a plan prepared by someone who hopefully knows what they are doing. Or maybe I should just leave things alone and hope for the best.

No, I wouldn't do the latter. You need to understand and be comfortable with what you have or your emotional 'risk' is huge and that leads to financial risk as well.

So you inherited more money and it significant confused the picture due to all the varying assets. Well, were you happy with your current retirement/financial plan before? If so... let's say that you had $200K and now you're adding $400K to it. Why not sell the $400K worth of stuff and use it to triple each of your existing holdings. Then you're in the exact situation you were in before.

Since you inherited the money, perhaps fairly recently, you're dealing with a stepped up cost basis, so the tax effects should be minimal (one of the very GOOD side effects of the estate tax), and hopefully whatever there is will pretty much cancel out.

If you weren't happy with what you had before, ignore the fact that you inherited money and make an asset allocation plan on your own. The use the new money as additions to the old to get you to your new goal, with however many funds and stock you feel comfortable in.

Perhaps then pay the advisor a couple hundred dollars to "asset and adjust" your plan, gather feedback, and ask your tough questions, rather than paying them a small fortune to create it for you.
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Just a quick note.

What you will get with the planner is a well balanced portfolio.

The vast majority of investors do not understand the risks they are taking with their investments due to inappropriate asset allocation.

buzman
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I admit to not having followed this thread except for the origianal post and the last several posts, but if capital gains is not an issue why not sell all those stocks and simplify? Put the money into Vanguard index funds, e.g. 30% total stock market, 20% total international stock, 10% REIT, 20% short-term corporate, and 20% intermediate-term corporate bonds; or one of Vanguard's targeted funds. Then decisions about how to take pensions and so forth can be made absent clutter, and any help with such decisions should be much less expensive. You know the answer to risk tolarence can only be made by the investor, and the Vanguard web site has tools that can help with such a decision.

db
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The $4,000 is a one-time fee. Then you can meet with them annually or whenever for a couple hundred dollars to assess and adjust.

I think that $4,000 is a lot of money. But my problem is that I now have a portfolio that consists of more than 80 different stocks and funds

If that is 1% of the money then it sounds worthwhile to me because you are coming up on the tax year-end and it is very possible that having a good professional get the timing of any tax related issues right might actually save you more than the fee. For example many mutual funds will have a taxable capital gins distribution sometime in December and getting the buying or selling timed just right can make a big difference that could save you money. The same goes with the year-end timing of stocks with a capital gains or losses.

It sounds like you have found someone that you like and can work with and even if you could get the same advice elsewhere cheaper then the worst case is that you made a one time 1% less than optimal choice which in the cosmic scheme of things is things is still doing pretty good. The real problem would be if you got a bad or indifferent advisor that could cost you big bucks over the long term.

Greg

P.S. If anyone tries to sell you an annuity it should be a red flag that they may not be looking out for your interests. They are almost (but not always) a bad choice because of high (sometimes hidden) fees and often below average performance, which just happens to pay the salesperson a large commission.

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GoodNews,

Well the good news is that you can get plenty of opinions on these boards, of course this is also the badnews....

>>
The vast majority of investors do not understand the risks they are taking with their investments due to inappropriate asset allocation.
buzman
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This post is one that I FIRMLY beleive! Plenty of folks have allocation models that they think fit their needs. But, if one just pulls a portfolio of out thin air, such as iamdb, (sorry db, not saying it came from air - just might not fit this situation) while it fits their needs does not fit yours. RISK - REWARD trade off can be way off from a total situation. For example, depending on DH retirement, the above allocation could put you into ~60-70% bond or bond like instruments. Thus you are probably shorting yourself some return.

I would not go to a planner just to figure out an investment strategy.
DeltaOne is right, you could learn all of this on these boards. But to get where you can make "good" choices concerning all aspects of retirement may take a while - in terms of years for some of the items.
Unless your are ready to tackle things like the survivor benefit-compared to a term policy, and how the retirement fits in (as bonds and how much), the tax issues, estate planning, long term care and claculating SWR.

This investment stuff is also about having fun. YOUR FUN, you seem to like learning about the stuff and making your stock choices. You had a portfolio of 20 stocks you picked yourself. Let your planner come up with the asset allocation model and then you can certainly pick out stocks and funds you like - infact the 20 you have would probably fit nicely, and wouldn't that be nice to know you have done pretty good so far!


Bottom Line -
If you are going to the planner to figure out what to invest in and how to get from 80 stocks to 20, NO!

If you are looking at the entire retirement picture, I would recommend you use the planner. You can still pick the stocks.









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There are definitely lots of different opinions :)

Unless your are ready to tackle things like the survivor benefit-compared to a term policy, and how the retirement fits in...

Yes, these are things we need to tackle at some point. Not immediately, but in 2-3 years or so. DH is a Fed, and there are various decisions we will need to make, and those decisions need to be considered in light of other factors. We are definitely not interested in buying any annuities, although we do have one that was given to my DH by his father about 10 years ago.

The following is the allocation of my new/inherited portfolio. I don't have the foggiest idea if this is a good allocation for me.

Money Market - 2.85%

Equity
Closed End Mutual Funds - 8.45%
Open End Mutual Funds - 48.53%
Stocks - 30.63%
Equity Total - 87.61%

Fixed Income
Closed End Mutual Funds - 5.52%
Preferred Securities - 4.02%
Fixed Income Total - 9.55%

Total Assets - 100.00%

I already have a list of some of the stocks I know I want to keep and maybe a couple of the funds. The stocks I am interested in keeping are AXP, AMGN, C, HD, JNJ, and WMT. Plus, the portfolio includes some other stocks that I already have, so I will keep these as well (GE, INTC, MSFT, SBUX). For the remaining stocks and funds, I just have no idea.

I get a headache just thinking about it :)
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DrTarr,

In my post I wrote "e.g.", then gave an example of a possible allocation. I ended my post by saying the most important question can only be answered by the investor. Now it may well be that a financial planner might feel a client's ability to take risk differs from their comfort with risk. I don't think I implied a one size fits all allocation. The point of my post was to consider simplification to a portfolio that can be understood and followed easily.

DrBell
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goodnewsonly,

I'm new to this thread, but I wanted to add some comments.

First of all, congratulations on taking the initiative to seek out opinions, recommendations, and ideas from those around you, including your consultation with a fee-only planner and posters on the Fool message boards. You are ultimately the only individual responsible for making your financial decisions, and I applaud you for asking questions first before proceeding with any quick decisions.

Your quote of $4,000 for a comprehensive financial plan from a NAFPA advisor may seem high at first, but consider what you receive. Not only does the plan include recommendations on investments, but I assume the plan identifies opportunities with your health benefits, insurance needs, tax issues, relevant estate planning items, and your personal legacy. A NAPFA planner is a fiduciary, an individual you trust that acts upon your best interests. In addition, it is likely that the planner you engaged holds certain professional designations, many of which require continuing eduction credits and ethics instruction.

Now consider what services you may receive from a full-service broker. Most importantly, a broker is not a fiduciary and is not obligated to act in your best interests. That means that once your transactions are complete, your broker is under no obligation to follow up on your plan (but he or she is likely to do so in the future because they will have a new product to sell, I mean, recommend). Also, your broker is most likely to focus on investments in your financial plan, since that is most likely how he or she earns money. Your tax, insurance, benefit, and estate issues may not be comprehensively addressed.

Now, not all brokers are bad, but you must admit that it is difficult for many people to ignore financial incentives when involved in business. Most brokers get paid when they sell products, so they are inclined to sell products that pay them appropriately. There is nothing inherently wrong with the practice as long as this method of compensation is clearly and explicitly disclosed to you. That means you are responsible for reading every word of every document handed to you, because important disclosure information is contained inside, and if you don't read it, it's your own fault.

So consider investing your $400,000 with a broker that provides a "free" plan for you. It's likely that the plan may recommend mutual funds. In order for the broker to get paid, these funds are likely to feature loads. Most common loads are front end loads (usually designated as class A shares of funds). Now when you buy A shares of mutual funds, most compaies give you what is called "breakpoints" if you buy enough of one fund. Let's assume a fund charges a 5.75% load for purchases under $50,000. They may lower the load to 4.75% if you buy between $50,000 and $100,000. This information is included in the prospectus of every fund (where applicable) usually deep inside on page, oh I don't know, 65.

Perhaps your broker's plan will recommend 10 funds for full diversification. That seems reasonable. Now your broker recommends funds from 10 different fund families because "each one of the fund managers has demonstrated the ability to consistently pick winners in each sector." Well guess what, since you aren't buying $400,000 worth of funds from the same fund company, you don't benefit from the reduction in loads. That means you might pay the full 5.75% up front load on all ten funds! Not all brokers will do this, but many on this board can relate stories where they have seen this happen. It mainly depends on the integrity and ethics of the individual you happen to deal with, so don't believe that this happens to each and every client on a daily basis (but it does happen frequently).

So the 5.75% load on your $400,000 investment? That boils down to a cost of $23,000 for your "free" financial plan.

Now the $4,000 comprehensive plan doesn't sound like such a bad deal after all.

Bill
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I think this load fund thing is a red herring, it's not the main point, and it's really not an issue.

If the plan is free but recommends load funds, who says you have to follow it? Pick similar fund without loads. Who even knows if they would do any load funds. And if the expense ratios are too high for your liking, pick similar cheaper ones.

I'm not talking about learning a ton about finances, I'm talking about having enough knowledge to avoid load funds, and maybe search for lower priced alternatives. Which I think our OP already had, or if not, probably does by now ;).

So comparing the planner to that is comparing it to an non-existant scenario. It's like a 'fake sale' at a store where they mark prices up 100% and then give you a 50% off sale! The savings are imaginary, as are your $19K of savings from your exmaple.

Given that our OP has the knowledge to pick reasonably priced alternatives to any expensive fund suggestions, there's no way you can say the $4K fee is cheaper. You get more for it, but you pay more. So the question comes down to personal preference. Do you pay more and do more for you, or do you pay less and learn to do more yourself. As well as a wide variety of intermediate options, such as making the plan yourself and just receiving input from a fee advisor for much much less than $4K.

It's a decision only the OP can make, but let's not confuse the matter with irrelevant math.
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It's a decision only the OP can make, but let's not confuse the matter with irrelevant math.

Delta,

You make an excellent point. The example given is an illustration of what happens to individuals that enter decisions without performing due diligence. The sad truth is that these scenarios do happen all too often and the investor realizes what happened far too late.

The OP should solicit as many opinions as necessary before feeling confident that a sound decision can be made. This certainly can include speaking with brokers. Perhaps by luck of the draw, the OP will encounter a reputable broker that will recommend low cost investment alternatives.

But yes, the $4,000 plan does not represent an instant $19,000 savings over a broker's "free" plan. But left to their own devices, investors can find themselves exactly in this kind of situation.

Bill
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Ummmm, what does OP stand for please?

I am still trying to figure out what it is that I need exactly. I'm not sure that I need a $4,000 plan. We have lifetime health and long-term care insurance through the federal government, so unless something goes amiss there, we don't have to deal with those issues. We don't need estate planning, since we have dealt with that.

We do have questions re: (1) life insurance vs. a survivor annuity and (2) what to do with our TSP funds when my DH retires. So while it would be good to get some recommendations on these issues, we don't need the answers TODAY. Certainly, there are always tax issues.

So what it maybe boils down to is that I need someone to look at these 30 funds that I now have and advise if I should keep, sell, and/or purchase other things that are more suitable to my situation. I don't feel confident that I can do this myself. I will meet with my broker and see what he has to say, but I am leery of broker recommendations for the very reasons mentioned above.

It doesn't seem that the fee-based advisor will make specific recommendations unless I enroll in the investment management service, where they would construct and manage a portfolio for me. When I asked about hourly consultation to help us with the life insurance and TSP questions, she said that these needed to be addressed within the totality of our financial situation (i.e., the financial plan).

So how to proceed from here? I'm just not sure yet.

The comments here have been enormously helpful to me in trying to think through these issues.
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OP stands for Original Poster: yourself in this case.

It doesn't seem that the fee-based advisor will make specific recommendations unless I enroll in the investment management service, where they would construct and manage a portfolio for me. When I asked about hourly consultation to help us with the life insurance and TSP questions, she said that these needed to be addressed within the totality of our financial situation (i.e., the financial plan).

There are countless ways advisors earn income through their services. This particular planner has chosen not to offer "a la carte" services (the specific investment recommendations you mention) unless you enroll in a plan. Not every advisor choses to run his or her business this way.

You can find additional advisors using the search feature on the CFP(r) Board website, http://www.cfp.net/search or through the Financial Planning Association, http://www.fpanet.org/plannersearch/plannersearch.cfm . These are two reputable organizations that should help you identify advisors that can provide the services you need.

There's no sense in paying for services you don't need. And certainly do not be pressured into an agreement because you're told that nobody will do the things you're seeking.

The comments here have been enormously helpful to me in trying to think through these issues.

This is a compliment to all the posters here at The Motely Fool. I believe I can speak for the community that we hope you feel you are receiving more value than the yearly subscription charged for access to these discussion boards (coincidentally, the reason why I continue to subscribe).

Bill
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>> It doesn't seem that the fee-based advisor will make specific recommendations unless I enroll in the investment management service, where they would construct and manage a portfolio for me. When I asked about hourly consultation to help us with the life insurance and TSP questions, she said that these needed to be addressed within the totality of our financial situation (i.e., the financial plan). <<

Yep, you need to find another fee-based advisor. $4000 is too much for what you need...

$1000-$2000 is probably more reasonable for them to just go over the stocks you inherited, and come up with a good asset allocation plan for you to invest in.

As for survivor annuity vs. life insurance, that's just plan math... They should be able to do that calculation for you and explain it to you very quickly. (It's usually better to do the life insurance)

The hard part is getting the numbers... You probably already know the two numbers for the annuity (How much you get just for you, and how much get for both of you with survivor).

For example, say the two choices are $1000 a month for just you, and $700 a month for both of you with survivorship... Next figure out how much life insurance you would need to generate $700 a month... that's $8400 a year... we usually go with a 4% withdrawal rate as a rule of thunb, so you'd need $210,000 in life insurance... If you can get that much life insurance for less than $300 a month, then life insurance is the way to go...

(That's just an example... but it shows how fairly easy the calculation is... The advisor can help you find the cheapest life insurance)

While we're answering post questions (like what OP stands for), how does one make text bold or italic?

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< i > Italic < /i > < b > Bold < /b >

(leave out the spaces)
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Well there you go. Thanks rrosenkoetter. I did the calculation you provided. I would need to replace $2,000/month for the survivor annuity, which would be $24,000/year, which would be $600,000 in insurance. More if it was for 30 years. Right now, we have the maximum under the federal program (which is less than $600,000) and the rates for that will increase considerably every five years. We can only convert to a whole life policy when DH retires because he would not pass a medical exam. So I guess I should forget about the insurance vs. annuity idea.

Maybe we don't even need the life insurance or maybe we could reduce what we have, both now and in retirement. That's another question I will add to my list. I'll also go check out the Insurance Board.

I believe I can speak for the community that we hope you feel you are receiving more value than the yearly subscription charged for access to these discussion boards (coincidentally, the reason why I continue to subscribe).

Absolutely, without question. I am so glad I found these boards!
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Maybe we don't even need the life insurance or maybe we could reduce what we have, both now and in retirement.

I left the rat race at age 49. I dropped all life insurance at that point. I dropped all but the firm-provided coverage several years earlier. When DW and I reached financial independence, there was no need to pay life insurance premiums any longer. I'm 55 now, still with no life insurance. If either of us died today, the survivor would have the same amount that both of us would have had if neither had died. The insurance racket is just that, a racket. Use term life while you need it, then get the heck away from those blood suckers.
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I left the rat race at age 49. I dropped all life insurance at that point. I dropped all but the firm-provided coverage several years earlier. When DW and I reached financial independence, there was no need to pay life insurance premiums any longer. I'm 55 now, still with no life insurance.

We dropped the non-work provided insurance on me when there was no longer need for day care for the kids. Once I stopped working at regular employment, I had no other insurance. At this point, my husband still has the life insurance provided free from work but we really have no need for it. If one of us goes, the other one has enough assets.

I think a lot of people forget that you insure events that you can't cover otherwise - and that goes both ways :)

rad
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I think a lot of people forget that you insure events that you can't cover otherwise - and that goes both ways :)

Now that's a secret that the insurance industry wants few to know. This is why brokers and insurance folks keep telling you that you need so much more than you really need to reach financial independence. For example, insurance folks will use rediculous withdrawal rates, growth rates, and inflation rates to make it seem that what you have is way too little take care of things. This helps them sell you more insurance and other useless financial products, which only line their pockets with fees and commissions.
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For example, insurance folks will use rediculous withdrawal rates, growth rates, and inflation rates to make it seem that what you have is way too little take care of things.

I had one guy tell me that I should have Term Life equal to ten times my annual salary. Yeah, right.

There's a lot of things I should have....
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I had one guy tell me that I should have Term Life equal to ten times my annual salary. Yeah, right.

You need to qualify that...

Do you have a lot already saved? Does your spouse work? How old are your kids?

I would say, that for many people, ten times their gross annual salary is about right... Probably a better way to calculate it is 20-25 times the expenses you pay....

For example, say I make $100,000 a year... but have little saved so far... With a $1,000,000 life insurance policy, my wife will probably be able to pull $40,000 a year out of that money every year for the rest of her life...

Fairly close to the $50,000 or so I was contributing to the family expenses (Say $30,000 went to taxes, $10,000 to 401k, $10,000 for expenses for me alone - like my car, clothes, etc).

My family may have to take a small hit in their standard of living, but they'll be okay financially....

Seems like a pretty reasonable rule of thumb to me


Now, if the kids are gone, and there's enough already saved in retirement for the spouse to live on alone, there's not as much need for large life insurance policies.

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I left the rat race at age 49. I dropped all life insurance at that point. I dropped all but the firm-provided coverage several years earlier. When DW and I reached financial independence, there was no need to pay life insurance premiums any longer. I'm 55 now, still with no life insurance. If either of us died today, the survivor would have the same amount that both of us would have had if neither had died. The insurance racket is just that, a racket. Use term life while you need it, then get the heck away from those blood suckers.

The OP was talking about using life insurance as an alternative to an annuity with survivorship included...

It's a fairly slick method of hedging your bets....

For example... Say you work at a company for 30 years... Your pension can be paid in two ways... Say $3000 a month as long as YOU live, OR, $2200 a month for as long as EITHER you or your spouse lives...

Now, most people are going to take the second option... In many cases, these pensions represent the majority of a couple's retirement funds... If the husband takes the $3000 a month option and dies first, the wife ends up destitute, living on Social Security alone...

So most people take the second option, getting a guarenteed $2200 a month for both of them as long as one of them is still alive... However, in this case... if the wife dies first, the husband just wasted that $800 a month... and is still stuck with $2200 for the rest of his life instead of $3000 he could have had...

Here's where term-life insurance becomes an interesting hedge... The husband takes the $3000 a month option, and then buys himself a $500,000 life insurance policy... I just checked and a 65 year old man in good health can get a 20-year term limit life insurance policy for $500,000 for about $550 a month.

So the couple now has $2450 a month to spend instead of $2200. If the man dies first, the woman inherits $500,000 which is enough to provide $2000-$2400 a month... If she dies before all the money is gone, their heirs actually get what's left of the principal.

If the wife dies first, the man can cancel the life insurance policy and be back to making $3000 a month... or he can continue the policy and change the beneificary to his children.

You have to do the math, and it doesn't work for everyone... It really depends on how much the pension fund tries to screw you (you'd be amazed at the gaps between single coverage and coverage with spouse).

It's a pretty neat trick though... and can be a good use of life insurance for older people.
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You need to qualify that...

Do you have a lot already saved? Does your spouse work? How old are your kids?


Exactly. That's why it isn't a good rule of thumb. Judging one's insurance needs involves much more than simply knowing how much they make. The analogy you used in your post shows that it has more to do with one's family situation (number of dependents, etc.) and age than annual salary.
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The OP was talking about using life insurance as an alternative to an annuity with survivorship included...

It's a fairly slick method of hedging your bets....


Yes, this is exactly what I talking about. And thanks to your example above, I am able to do the cacluations. Here's what I found:

For $452,000 in federal insurance on DH:

- between his ages of 65-74, we would have more income than the survivor annuity alone.

- between his ages of 75-79, we would have the same income as we would with the survivor annuity.

- at age 80 and above, we would have $500 less each month than the survivor annuity would provide.

The life insurance amount could be reduced at any time, but can't be increased.

So, would YOU hedge your bets? I just might, depending on some further calculations -- if he were to die during these varying age ranges, what would I end up with?

This is very cool....

Thanks a bunch.


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