Roth vs. Whole Insurance vs. Cash
"Cash/CD's for a house downpayment = Good. Resist the urge to invest this money unless you're not planning on the house for at least 5 years. Roth IRA - Good. Amounts contributed are able to be withdrawn without tax penalties, though you would really need to be in a crisis for this to be a good idea. It's your long-term, retirement money. The earlier you start, the better. Use your 401K at work, if it's offered. Contribute to the Roth as much as you can, as well. Whole life (""Cash value"") life insurance: Be careful... Cash-value life insurance (Whole, Universal, Variable Universal) must be watched more closely as you age. Once they reach that ""magical"" point of being self-sustaining, you cannot relax. The annual cost of insurance is taken from the cash value, which your premium payments replenish. If you stop making premium payments, eventually the cost of insurance (which goes up every year) will erode your cash value down to nothing, at which point more premium must be paid to keep the policy in force. This often happens in your old age, when you can least afford the surprise, and costs are highest. Some advisors get messed up in their priorities when they start depending on the 8-10% commissions they are paid on insurance policies. Since premiums for cash-value policies are far higher than for term policies, you might get some insight into your advisor if they ignore your attempts to consider a term policy. Because of the insurance costs' effects on your cash value, these types of policies are some of the most inefficient and expensive ways to invest. You are better off not investing via a life insurance policy. You don't need life insurance unless someone depends on your financial contribution to their life (spouse and children, for example). Some people just like the peace of mind it brings, and some people want a lump sum to leave as a gift to their loved ones (which is an expensive way to leave a gift).  You can have these ""feel-good"" benefits with a term policy for much less money, if you must have them. Unless you expect to become uninsurable at some point in the future, you should consider using term insurance to meet your life insurance needs until it is no longer needed." "Week after week, I make remarks regarding expenses within retirement accounts. A 401(k) with a 1% or greater fee is criminal, in my opinion.  Whole life insurance usually starts with fees north of 2%, and I've seen as high as 3.5% per year. Compare that to my own 401(k) with charges .02% for its S&P fund.  When pressed to say something nice about whole life insurance, I offer ""whole life has sent tens of thousands of children to college, the children of the people selling it."" A good friend would never suggest whole life, a great friend will physically restrain you from buying such a product." You're extremely fortunate to have $50k in CDs, no debt, and $3800 disposable after food and rent. Congrats. Here's how I would approach it. If you see yourself getting into a home in the next couple of years, stay safe and liquid. CDs (depending on the duration) fit that description. Because you have disposable income and you're young, you should be contributing to a Roth IRA. This will build in value and compound over your lifetime, so that when you're in your 70s you'll actually have a retirement.  Financial planners love life insurance because that's how they make all their money. I have whole life insurance because its cash value will be part of my retirement. It may also cover my wife if I ever decide to get married. It may or may not make sense for you now depending on how soon you want to buy a home and home expensive they are in your zip code.  Higher risk, higher reward- you can count on that. Keep the funds in the United States and don't try to get into any slick financial moves.  If you have a school in town, see if you can take an Intro to Financial Planning class. It's extremely helpful for anyone with these kinds of questions. Advantage of cash: You can spend the money without having to pay any fees or taxes to get it out. Disadvantage: When inflation is greater than zero, which it has been for many decades, your cash is continually losing value. Advantages of an IRA (Roth or classic): Your money will usually grow as the investments return a profit. You get special tax benefits. Disadvantages: There's risk -- you may lose money. There are tax penalties for withdrawing the money before retirement. In general, you should only put money in an IRA if you expect to leave it there until you retire. Or at least, for a long time. Whole life is a combination of a life insurance policy and an investment. Advantages: Combines insurance and investment into one convenient monthly payment. Disadvantages: The investment portion typically has lower returns than you could get elsewhere. If you have no need for life insurance -- if you're not supporting anyone or you're confidant they could get along without you or you don't like them and don't care what happens to them when you're gone or whatever -- then there's no point buying life insurance, whole or term. You're paying for a product that you don't need. It's pretty common advice to tell people that instead of buying a whole life policy, they should buy a term policy with the same coverage, and then invest the difference in the premium. For example, if you were considering getting a $100,000 whole life policy that costs $50 per month (just making up numbers, of course it depends on your age, health, etc), and you see you could get a $100,000 term life policy for $30 per month, you will almost certainly do better in the long run to buy the $30 term policy and put the other $20 into investments. The catch to this plan is that there are usually transaction costs to investing. Even a discount broker like Ameritrade or Scott Trade charges around $10 per transaction. So if you tried to invest $20 each month, you'd lose half of it to transaction fees. Which means that in practice, you'd have to save that money up until you had at least a few hundred. And at that point many people find other things always seem to come up to spend the money on, so that while they start out with every intention of investing this money, they don't.
the cash is not penalty free. if you take up loans from the policy to pay for retirement growth essentially stops and the interest will eat away policy value over time. so instead of gaining 7-8 % per year and taking withdrawals, you would be taking loans and losing whatever the interest rate is.  Dividends are just the profits made from the company which is why its tax free. its considered a return of premium. you are just overpaying for the policy by its dividend rate.   whole life is a great vehicle for some situations, but it always comes after a 401k or other retirement savings. whole life doesnt even begin to make sense imo until you are making a few hundred thousand a year and need it for a business buy sell agreement or legacy money to leave children/grandchildren.  it doesnt scale well to lower incomes. "Buy term and invest the difference is certainly the standard recommendation, and for good reason. When you start looking at some sample numbers the ""buy term and invest the difference"" strategy starts to look very good. Here are the rates I found (27 yr old in Texas with good health, non-smoker, etc): $200k term life: $21/month $200k whole life: $177/month If you were to invest the difference in a retirement account for 40 years, assuming a 7% rate of return (many retirement planning estimates use 10%) you would have $411,859 at the end of that period. (If you use 10% that figure jumps to over $994k.) Needless to say, $400k in a retirement account is better than a $200k death benefit. Especially since you can't get the death benefit AND the cash value. Certainly one big difficulty is making sure you invest that difference. The best way to handle that is to set up a direct deposit that goes straight from your paycheck to the retirement account before it even touches your bank account. The next best thing would be an automatic transfer from your bank account. You may wonder 'What if I can no longer afford to invest that money?' First off, take a second and third look at your finances before you start eating into that. But if financial crisis comes and you truly can't afford to fund your own life insurance / retirement account then perhaps it will be a good thing you're not locked into a life insurance policy that forces you to pay those premiums. That extra freedom is another benefit of the ""buy term and invest the difference"" strategy. It is great that you are asking this question now while you are young. Because it is much easier to put this strategy into play now while you are young.  As far as using a cash value policy to help diversify your portfolio: I am no expert in how to allocate long term investments after maxing out my IRA and 401k. (My IRA maxes out at $5k/year, another $5k for my wife's, another $16.5k for my 401k.) Before I maxed that out I would have my house paid for and kid's education saved for. And by then it would make sense to pay a financial adviser to help you manage all those investments. They would be the one to ask about using a cash value policy similar to @lux lux's description.  I believe you should NEVER PUT YOUR MONEY INTO SOMETHING YOU DON'T UNDERSTAND. Cash value policies are complex and I don't fully understand them. I should add that of course my calculations are subject to the standard disclaimer that those investment returns aren't guaranteed. As with any financial decision you must be willing to accept some level of risk and the question is not whether to accept risk, but how much is acceptable. That's why I used 7% in my calculation instead of just 10%. I wanted to demonstrate that you could still beat out whole life if you wanted to reduce your risk and/or if the stock market performs poorly." "Buy term and invest the rest is something you will hear all the time, but actually cash value life insurance is a very misunderstood, useful financial product. Cash value life insurance makes sense if: If you you aren't maxing out your retirement accounts, just stick with term insurance, and save as much as you can for retirement. Otherwise, if you have at least 5 or 10k extra after you've funded retirement (for at least 7 years),  one financial strategy is to buy a whole life policy from one of the big three mutual insurance firms.  You buy a low face value policy, for example, say 50k face value; the goal is to build cash value in the policy. Overload the policy by buying additional paid up insurance in the first 7 years of the policy, using a paid-up addition rider of the policy. This policy will then grow its cash value at around 2% to 4% over the life of the policy....similar perhaps to the part of your portfolio that would would be in muni bonds; basically you are beating inflation by a small margin. Further, as you dump money into the policy, the death benefit grows. After 7 or 8 years, the cash value of the policy should equal the money you've put into it, and your death benefit will have grown substantially maybe somewhere around $250k in this example. You can access the cash value by taking a policy loan; you should only do this when it makes sense financially or in an emergency; but the important thing to realize is that your cash is there, if you need it.  So now you have insurance, you have your cash reserves. Why should you do this?  You save up your cash and have access to it, and you get the insurance for ""free"" while still getting a small return on your investment. You are diversifying your financial portfolio, pushing some of your money into conservative investments." Well, it really doesn't make sense to pay for either in cash. For these purchases, unless you're super wealthy, you won't be paying it in full. If you were to pay in full, then I don't see any practical point to withdraw that money in cash. "There are two types of insurance: whole life and term. I don't recommend whole life insurance, because you are insuring against something that will happen, your death. Maybe you could buy it if members of your family have a history of outliving the averages. This is called ""adverse selection."" Term is different: it insures against your UNTIMELY death. Many people I know take term insurance for the X years until their last child leaves college, or some other well defined ""term."" They don't want to die before this term but will be satisfied with the insurance as a ""consolation"" prize." There are several factors here. Firstly, there's opportunity cost, i.e. what you would get with the money elsewhere. If you have higher interest opportunities (investing, paying down debt) elsewhere, you could be paying that down instead. There's also domino effects: by reducing your liquid savings to or below the minimum, you can't move any of it into tax advantaged retirement accounts earning higher interest. Then there's the insurance costs. You are required to buy extra insurance to protect your lender. You should factor in the extra insurance you would buy vs the insurance required. Given that you can buy the car yourself, catastrophic insurance may not be necessary, or you may prefer a higher deductible than your lender will allow. If you're not sufficiently capitalized, you may need gap insurance to cover when your car depreciates faster than your loan is paid down. A 30 percent payment should be enough to not need it though. Finally, there's some value in having options. If you have the loan and the cash, you can likely pay it off without penalty. But it will be harder to get the loan if you don't finance it. Maybe you can take out a loan against the car later, but I haven't looked into the fees that might incur.  If it's any help, I'm in the last stretch of a 3 year car loan. At the time paying in cash wasn't an option, and having done it I recognize that it's more complicated than it seems. I'm concerned about your extreme focus on Roth. In today's dollars it would take nearly $2 million to produce enough of an annual withdrawal to fill the 15% bracket. If you are able to fund both 401(k)s and 2 IRAs (total $43K) you're clearly in the 25% bracket or higher. If you retire 100% with Roth savings, and little to no pretax money, you miss the opportunity to receive withdrawals at zero(1), 10, and 15% brackets. Missing this isn't much better than having too much pretax and being in a higher bracket at retirement.  One factor often overlooked is that few people manage a working life with no gaps. During times when income is lower for whatever reason, it's a great time to convert a bit to Roth.  (1)by zero bracket, I mean the combined standard deduction and exemptions. For two people this is currently (for 2017) $20,800 total. And it goes up a bit most years. "This is going to vary from insurer to insurer, and likely year to year.  Typically an insurer will set what it calls the guaranteed rate of return for whole life policies and will allow you to take loans against the cash value of your policy at some adjustment to that rate.  Also typically you pay the interest back to yourself less some small administrative fee. Some insurers have whole life policies called something along the lines of an ""accelerated cash value"" policy or a ""high early cash value"" policy, stick to these ones.  The commission structure is less favorable to the agent/broker but much more of your premium is recognized as cash value earlier. The benefit (for lack of a better word) to taking a loan against your own cash value over taking a loan from a bank is the severely reduced process.  There's no underwriting for your loan like there would be from a bank.  If you're laid off maybe you can't get a loan from a bank but you can scoop some money out of your policy on a loan basis or alternatively you can just surrender the policy and take the accrued cash value. Many people will poo-poo the value of whole life, but fact of the matter is your underwriting status can change in the course of your life and it's possible that in the future you won't be able to buy any life insurance.  There's nothing wrong with having something permanent to supplement your larger term policies. Personally, I view diversification as having money in a lot of different places.  This strategy is probably not as efficient as it could, but I don't like the idea of having all my eggs in one basket.  I have cash in a lock box at home, cash savings, CDs, a personal loan portfolio, bitcoins, index funds, individual stocks, commodity etfs, and bond funds spread in traditional 401(k), ROTH IRA and regular taxable accounts spread out to 6 different institutions.  I don't personally own any whole life, but I'll probably buy a small policy before my next 6-month birthday; I might as well put some money there too.  All of this is to say, do not put all of your money in a whole life policy, and do not buy all of your life insurance needs via whole life." "One can generalize on Traditional vs Roth flavors of accounts, I suggest Roth for 15% money and going pretax to avoid 25% tax.  If the student loan is much over 4%, it may make sense to put it right after emergency fund.  For emergency fund priority - I'm assuming EF really requires 2 phases, the $2500 broken transmission/root canal bill, and the lose your job, or need a new roof level bills. I'm in favor of doing what let's you sleep well. I'm also quick to point out that if you owe $2500 at 18%, yet have $2500 in your emergency fund, you're really throwing away $450 in interest each year. There's an ongoing debate of ""credit card as emergency fund."" No, I don't claim that your cards should be considered an emergency fund, per se, but I would prioritize knocking off the 18% debt as a high priority. Once that crazy interest debt is gone, fund the ER, and find a balance for savings and the next level ER, the 6-9mo of expenses one. One can choose to fund a Roth IRA, but keep the asset out of retirement calculations. It's simply an emergency account returning tax free interest, and if never used, it eventually is retirement money. A Roth permits withdrawal of deposited funds with no tax or penalty, just tracking it each year. This actually rubs some people the wrong way as it sounds like tapping your retirement account for emergencies. For my purpose, it's a tax free emergency fund. Not retirement, unless and until you are saving so much in the 401(k) you need more tax favored retirement money. I wrote an article some time ago, the Roth Emergency Fund which went into a bit more detail.  Last - keep in mind, this is my opinion. I can intelligently argue my case, but at some point, it's up to the individual to do what feels right. Paying 18% debt off a bit slower, say 4 years instead of 3, in favor of funding the matched 401(k), to me, you run the numbers, watch the 401(k) balance grow by 2X your pretax deposits, and see that in year 3, your retirement account is jump-started and far, far more than your remaining 18% cards. Those who feel the opposite and wish to be debt free first are going to do what they want. And the truth is, if this lets you sleep better at night, I'm in favor of it." "Insurance is a financial product to control risk. The fact that a loss would not be catastrophic simply makes the decision to carry insurance less critical. It is perfectly reasonable to be ""self-insured"" in this case. This is assuming we are discussing replacement of your property vs liability (which you have made clear). Like many other products one buys, a fine reason to purchase insurance is simply because one wants to. Just because you can absorb the loss, does not mean that you want to take on the full risk. I would be careful of your analysis here: Insurance companies on average make money by selling insurance, which means you lose money on average by dealing with them Insurance companies make money based on the cumulative probability that they will have to pay on multiple policies. To make money, they analyze the risk that in a given period they will only pay on a portion of their hundreds of thousands or millions of policies. This is a different analysis than the probability that you will have a loss on your specific asset.  Your risk of a loss is not equivalent to their risk of loss here. The argument that they only 'win' if you individually 'lose' is not a good one." "You would want to prioritize Roth and retirement over HSA. As the HSA is only for health and dental expenses, which you will always have, overfunding it will put you in a bit of a pickle for all of the life involved. For example, even if you or a loved one develop a strange & expensive ailment, the HSA will only cover the medical costs, but not any travel to specialists, hotel stays, home alterations, special vehicles, or lifestyle alterations (food, clothing). However, you will eventually stop working even if you are healthy throughout your life.  I would suggest that you treat the HSA as a part of your overall emergency fund, giving it a cap the same as you would normal non-retirement savings. Since you stated you have three young children, small and large medical expenses (such as braces, trips to the emergency room) are something that are almost guaranteed, thus having fairly large amount in the HSA would be very beneficial throughout their time with you. Once the children have left however, if you still have an overwhelming balance in your HSA, you may not want to add anymore to the HSA. Setting a cap for the HSA based off a certain number of years of deductible payments for medication would be a good place to start.  Roth accounts, whether it be within your company's 401k plan or the IRAs for yourself and your spouse, are single-handedly the best location for your money for long-term savings. Roth money grows tax-free, is immune to Required Minimum Distribution provisions, and will avoid estate escrow when going to one's beneficiaries. Even if you tap into the funds prior to age 59 1/2, you would only pay taxes on any investment growth, in addition to the 10% early withdrawal penalty. If you have established Roth IRA accounts and have an AGI that disallows you to further contribute to them, there is still a provision to get Roth funds contributed via conversion through what is commonly called a ""back door"" Roth." "Keep in mind, there are too many variables to address in a single post. I could (and might) write a full book on the topic. One simple way to comprehend your perceived observation. In the 25% bracket, you have $1000 of income and two choices. Net out $750, and deposit to Roth, or deposit the full $1000 to the traditional IRA or 401(k). Sufficient time passes for the investment to grow 10 fold. For what it's worth, 8% at 30 years will do that.  The Roth is now worth $7500 tax free. The traditional 401(k) is worth $10000 but subject to tax. At 25%, we're at the same $7500.  For those looking to invest more than a gross $18,000, the Roth flavor is an effective $24,000, as post tax, this is $18,000. I wrote a bit more on this in the whimsically titled The Density of Your IRA. This is really a top 10%er issue, as it takes quite a bit of income for the $23,000 combined IRA and 401(k) limits to be a problem.  In my writing, the larger case to be made is for taking advantage of the tax rate difference between the time of deposit and withdrawal. A look at the 2016 tax rates is in order.  Let's stick with 25% while working. Now, at retirement, but before social security, as that's another story, the couple has $20,600 in standard deduction and exemption, and both the 10 and 15% brackets to enjoy.  Ignoring any other deductions, potential credits, etc, let's look at a gross $80,000 withdrawal.   The numbers happen to work out to an average 10%, with the couple being in a marginal 15% bracket. A full 25% or $20,000 tax would be the break-even to the ""same bracket in/out"" analysis, so this produces a $12,000 benefit.  This issue is often treated as if there were 2 points in time, the deposit, and the withdrawal. For most people, that may be the case. Keep in mind, current law allows a conversion to Roth any time in between. This gives an opportunity to make a deposit while in the 25% bracket, and convert in any year the marginal rate drops back to 15% for whatever reason.  Last - I can't ignore the Social Security problem. Simply put, when half of your Social Security benefits plus other income exceed $25,000 ($32,000 if married filing joint) your benefits start to become taxable, until 85% of your benefits are fully taxed. This issue is worthy of multiple posts by itself. It's not a deal killer, just another point to consider. A very high income earner might be beyond these levels already, in which case the point is moot. A low income earner, not impacted at all. It's those who are in the range to navigate this that would benefit to take advantage of the scenario I presented above and spend down pre-tax accounts, while planning to use the Roths when Social Security starts. This should make it clear - it's not all or none. Those retiring with $2M in 100% pretax, or $1.5M 100% in Roth have both missed the chance to have the optimal mix." "Discussions around expected values and risk premiums are very useful, but there's another thing to consider: cash flow. Some individuals have high value assets that are vital to them, such as  transportation or housing.  The cost of replacing these assets is prohibitive to them: their cashflow means that their rate of saving is too low to accrue a fund large enough to cover the asset's loss. However, their cashflow is such that they can afford insurance. While it may be true that, over time, they would be ""better off"" saving that money in an asset replacement fund, until that fund reaches a certain level, they are unprotected. Thus, it's not just about being risk averse; there are some very pragmatic reasons why individuals with low disposable income might elect to pay for insurance when they would be financially better off without it." Actually, most insurance policies DON'T have a cash value if you don't make a claim.  The reason that some life insurance policies do this is that they are really tax sheltered investments posing as insurance.  With that in mind, the root of your question is really whether insurance premiums are wasted if you never make a claim. It really makes no difference if you are talking about EI, Auto, or Homeowner's insurance. My answer to that is no. What you are paying for when you buy insurance is financial risk avoidance. Look at it this way, you don't buy EI as an investment where you hope to get a return on your investment. You are buying the right to be protected against catastrophic financial difficulty associated with losing your job. Whether you claim it or not you did receive that protection. This is what drives me so crazy when I hear people talk about how an insurance company is ripping you off because you paid more in premiums than they paid out in benefits. Of course you did! If most people didn't pay in more than the company paid out there would be no financial interest for someone to form an insurance company. "Unquestionably I think the priority should be funding retirement through ROTH/IRA/401K over HSA extra.  Obviously you need to fund your HSA for reasonable and expected medical expenses.  Also there is some floor to your more traditional retirement funding. Beyond that what does one do with excess dollars?  Given the lack of flexibility and fees, it seems clear to do ROTH IRA and 401K. Beyond that what then?  You may want to decide to ""take some money home"" and pay taxes on it.  Do you have a desire to own rental property or start/purchase a business?  Upgrade your home? etc... If all those things are taken care of, only then would I put money into an HSA. YMMV but most people, maxing a ROTH IRA alone, will have plenty of money for retirement given a reasonable rate of return."