Posted on May 27, 2008 @ 3:44 pm - Written by BawldGuy
I’m proud to introduce David Shafer, a very smart guy. Today’s topic, EIUL’s have been a subject close to my heart. Though I’ve written about it several times here, and at BloodhoundBlog, I thought it was time to bring in an expert.
NOTE: David used numbers even more conservative than I would, which is just fine by me. For example, even though the performance of the S & P over the last half century is around 8%, David uses 6.5%. Why don’t I care? ‘Cuz I’ve never had a client complain when real life performance exceeds projections. Duh.
When BawldGuy asked me to blog on equity indexed universal life insurance (EIUL), I thought no problem, since I had been blogging on it for a couple of years on both my site and others. Then he asked me to look at the archives from Bloodhound to see his previous blogs and I knew I had to write something a little different. In order to make sense of EIUL contracts you really need to understand the misinformation that underlie the arguments being put out by folks in books, the mass media and blogs on both sides of the issue. You need to be clear on what your wealth creation plan is and what it isn’t. So bear with me for a few paragraphs as I burn down the straw-men arguments before we get into the mechanics of EIUL’s.
Usually these discussions surround a common theme, EIUL’s versus mutual funds inside a tax deferred wrapper (401K, IRA’s). First let’s talk about mutual funds. Mutual funds were designed to reduce risk or as financial experts describe it variance. They were a boom to Wall Street as mutual funds induced many folks to invest in stocks, something they were not inclined to do in the past. They have been around for 2 generations so we have plenty of data to tell us accurately how people do investing in mutual funds. Read the rest of this entry »
Posted on July 21, 2007 @ 2:37 pm - Written by BawldGuy
Did you know this market doesn’t necessarily mean your property can’t sell for a higher price than the latest so-called comps? It just takes a pro who gets it.
You’ll also see what changes have arrived from the IRS relating to 401(k)s. It’s not only significant, to say the least, but more empirical evidence of what I’ve been saying all along.
If you’re a Harry Potter fan, you’ll be interested to read how some of the real marketing pros look at how the last book was handled. There will be two links instead of one. It’ll make a lot more sense if you read them in the order I put them. Seth and Liz are mega-brains, and their insights to business are almost always uncanny.
Doug Quance writes Top Dollar Sales Price Is Still Obtainable Even In Buyer’s Market showing that he knows what most agents don’t, and he absolutely gets it. He even admits he was wrong at first. My kinda guy. A definite MUST READ.
Max Whitmore, one of my favorite experts, gives an excellent overview of the recent changes in how 401(k)s are treated — not only from the taxpayer’s viewpoint — but from the employer’s side too. If you read me consistently you know what I think of 401(k)’s. Max’s piece, First Anniversary of 401(k) Changes Looms has inspired a post I hope to write in the next week or so on the subject. This is a MUST READ and a half. 
Liz Strauss says she would’ve gone farther than Seth Godin’s post Keeping a secret on the subject of the latest Harry Potter book. In her post Hope Seth Doesn’t Mind if I Go Even Further, Liz shares what she might have done. I’m thinking the money earned by the second approach might have been astounding. What do you think? Another MUST READ.
“…and remember. The daily Bawldys have approximately 1/365th the value of our annual awards.”
Posted on July 3, 2007 @ 11:13 pm - Written by BawldGuy
The short answer is F.I.U.L. or Fixed Indexed Universal Life. (Yeah, as in life insurance.) It’s not really used as life insurance, though that’s one of its benefits. It’s great for a second basket to complement retirement income generated by your real estate portfolio.
You are, whether you want to or not, at a fork in the road. Do you take 401(k) Drive, or F.I.U.L. Boulevard? Here are some thoughts for you to ponder. The road you take will quite probably make the difference between a retirement income, and a RETIREMENT INCOME. I’m not talking about the difference between $3,000 and $5,000 a month. I’m literally talking about retiring on an after tax income of 2-5 times what most folks ever make while working full time before taxes. This shouldn’t be a difficult decision.
What’s an F.I.U.L.? It’s known generically as investment grade insurance. Big help, huh? Compare it to your 401(k) which takes your money annually, allowing you to avoid (defer) taxes on each year’s contribution, until you retire. At that point you begin taking money out on which to live. The money you take out is taxable at normal income tax rates.
If you’re relatively young, allow me to predict your future. Eventually, you won’t be able to get enough……..tax free income. Relax, this is a normal life progression — or at least that’s what they taught me at analysis 101-103.
The F.I.U.L. also takes periodic payments, but instead of using before tax money, payments are made with after tax money. There’s no tax deferral for payments made into a F.I.U.L. When you retire, you take money out on which to live, just like you would with your 401(k). There’s a huge difference at this point. The income is 100% tax free for life.
Over time your cash value and the death benefit grow nicely. When you die, your heirs pay no, nada, nil, as in zero taxes. Generally speaking, this amount is not only massively larger than what your heirs would net after tax from your 401(k), but it’s also pretty likely it will be a much larger sum than the 401(k) was before estate taxes.
This post isn’t meant to give the richly detailed substance of both approaches. My goal here is simply to touch on the substantive differences between the two approaches.
- The 401(k) contribution is tax deferred while the F.I.U.L. is not.
- Distributions from your 401(k) are taxable at prevailing income tax rates — F.I.U.L.’s are tax free.
- Upon your death the estate taxes will decimate your 401(k) — F.I.U.L.’s aren’t even part of your estate, and therefore not subject to tax.
- Need emergency cash? 401(k)’s will cost you in taxes, and sometimes penalties. F.I.U.L.’s? No payback, no taxes, no…….nothin’. Just take the money — it’s yours.
What if, at 25 you began putting $500 a month into an F.I.U.L., and you do it until you’re 65, what do you think the result might be?
Over $200,000 a year income, tax free, for life.
Your 401(k) would have to generate about $300,000 a year income to equal that, because it’s subject to income tax. And that’s assuming rates don’t go up — not a smart bet at this point, believe me. To generate that much income you’d obviously have to invest way more than the $500 monthly.
Are you starting to see a trend developing here?
This is all in preparation for a post I’ll be publishing at BloodhoundBlog next Monday on this very subject. There have been some folks who have taken umbrage with my claims. My numbers are not my own. I’ve consulted with an expert, who uses numbers generated from proprietary software custom made for the $600 Billion company who specializes in F.I.U.L.’s. (Aviva Inc., who recently purchased Indianapolis Life.)
For those really, really picky folks, the software provider is Aviva–Fiserv 2.90.0.20.
They pay out the annual dollars, death benefits, and cash values I’ll be talking about, (including the $200,000 mentioned above) based upon their own in-house analysis. Their software reflects this.
The 25 year old I used above as an example, is my own daughter. She’ll be 23 this month, and is currently finishing up her degree in child development. This means she won’t be making huge paychecks any time soon. She’ll probably never earn six figures in a year. But by putting in a lousy $500 a month for 40 years, she’ll retire with over $200,000 a year in retirement income — none of it subject to income tax. Even if she never owns a home, never invests in real estate, (fat chance ) never owns one stock or bond, or wins a bet at the race track, she’ll retire better than most folks who did all those things, by far.
Now, imagine a Purposeful Plan that incorporated investment real estate and an F.I.U.L. policy. Imagine 20 years of real estate investments that merely did ok, relatively speaking. If she didn’t buy her first investment property until she was 30, by the time she was 50 she’d be working by choice — probably well before that. Being more conservative than I am usually, she’d likely have a minimum of $10,000 tax sheltered monthly income by that time. She’d then limp along on that modest sum ’till she was 65, whereupon she’d begin collecting the aforementioned additional $200,000 a year.
Between her real estate net worth, and her F.I.U.L. cash value, she’ll be worth no less than $2-4Million when she’s 50, and at least $10Million at 65. Her income at 65 will no doubt exceed $30,000 monthly, the vast majority of it either tax sheltered or tax free. And because of her genes, she’ll probably live to at least her mid-90’s, maybe longer. And she’ll have that incredible income the whole time.
Her peers who decided to go with the good ole 401(k)? They’ll be able to go on cruises with her — as long as she’s buying.
Posted on July 2, 2007 @ 9:05 am - Written by BawldGuy
Today we’ll examine what really happens over the life of a 401(k) — especially as it relates to income taxes. This may be the most successful bait & switch maneuver you’ve seen. Later in the week I’ll give you an alternative for your consideration.
What’s the big draw to the 401(k)? Duh! I get to contribute to my retirement savings while simultaneously deferring taxes on that very contribution. Sounds like a pretty good deal doesn’t it? After a little more scrutiny you may find it’s more like being near the tiger while he’s jumping through the flaming hoop — hardly a draw for the average guy. Let’s take a look at the whole plan.
First, let’s assume you put as much as you can possibly afford each year from the time you’re 25 until you’re 65. Let’s also assume those contributions have saved you almost $100,000 in taxes along the way. What’s bad about that you ask? Nothing on it’s own merit, but you want to look at the big picture, right? Let’s say you manage to build that account to a whopping $1,000,000 — a healthy figure.
Let’s also assume you’ll make an 8% yield on that million bucks for your retirement. That’s $80,000 a year! Congratulations are in order, right? Well, let’s keep going. Most folks will have done their level best to pay off their home’s mortgage, because Grandpa said that was best. Your kids are long gone too. That means you did two good jobs right? Well, that’s one way to look at it, but as it relates to your income taxes, you’ve eliminate two of your best and most reliable tax deductions — oops.
For easy math let’s use a combined state and federal income tax rate of 1/3. If you think that won’t apply to you, remember two things.
1) You have very few or no tax deductions for an income that very well may be more than you’ve ever made in your life while working full time.
2) With Social Security about to reach absolutely crisis point, (less than 3 workers per SS recipient) do you honestly believe future income tax rates won’t be higher? It’s a no-brainer. Even if they’re not, the 1/3 tax rate will apply to more folks than not.
In four years you will pay more taxes than you deferred in 40 years! And the best (worst) part? You did it on purpose. If you live only 20 years after you retire, to 85, you’ll have paid in excess of half a million bucks in income taxes!
Epiphany — You avoided paying a dollar of income tax so you would have the privilege of paying $5-10 instead.
Tell me again what a great deal 401(k)’s are. There’s more to the bait and switch.
When you die, the estate (death) tax will almost divide your estate in half. (It’s different for different amounts.) So not only do you get ripped off by income taxes galore while you were alive, but your heirs get absolutely annihilated. Is that what you envisioned when you first opened your 401(k)? Probably not.
What if…….
Is there a better way? What if you could avoid 401(k)’s, and instead invest in a vehicle providing you retirement income which will be — tax free — for life. And those nasty little rules about borrowing, and forced distributions that go with 401(k)’s? This approach doesn’t have those rules. In fact, you can borrow without paying back — no penalty. When you die — the huge cash left over will not even be part of your estate, and therefore not taxed — period.
I’ve barely touched on what’s going to happen to those who take the 401(k) approach to retirement. When planning for retirement, a Purposeful Plan utilizing capital growth techniques while investing in real estate, combined with my preferred alternative to 401(k) plans, will result in an immensely superior retirement. If you’re interested in a retirement income in six figures, most of it either tax sheltered or tax free, you’ll want to take our approach very seriously.
So the next time you hear or read about how great 401(k)’s are, you’ll know what they’re not telling you. There’s a better way.
Next up: What is the alternative?
Posted on June 23, 2007 @ 6:24 pm - Written by BawldGuy
A recent referral finds Josh and I involved with a local family. The main players are the father ‘Don Sr.’, a 75 year old ball of fire, and his son ‘Don’ and daughter-in-law ‘Diane’. Dad has been told he has less of a life expectancy than he should because of ongoing health problems. His agenda is to provide, at his passing, the largest estate possible for his heirs.
His son has some cash, but Dad has the lion’s share. They’ll combine the total of just short of $300,000 to invest in real estate, in order to grow the capital for the future of his kids. Dad’s providing his cash via some annuities he acquired, which will involve paying some significant penalties. He’s wanting to understand why I would tell him to pay them, and invest — the crucial question. Note: Dad doesn’t need the income, as he is a triple-dipper with income aplenty.
The penalties will total nearly $100,000! OMG! Relax, it’s not nearly as ominous as it might first appear. Let’s take a look.
With their cash on hand they’ll be able to combine forces for about $2MIL in purchases, with allows for a healthy cash reserve (Sominex) account of $50,000. The properties will be in various growth regions.
Don Sr. wants to leave his family a healthy estate. He’s not satisfied with it’s current status, and why should he be? There’s nothing in his estate except his home that’s an appreciating asset. We’re now looking at how long it might take to make up for almost a hundred grand in penalties incurred while accessing his capital.
If, in the next five years his properties grow at an annual pace of only 3%, his investments will then be worth just under $2,320,000 — a gain of over $300,000.
Now tell me how worried he is about regaining his lost ‘penalty’ capital. If his properties rise by only 5% a year, (remember, these are areas in high demand) his investments will have grown to just over $2,550,000 — over a half million dollar gain.
Can we please stop crying about the lousy hundred grand now?
Over the next 13 years the original capital will grow significantly — enough to retire on easily. How easily? That requires a crystal ball, and mine’s a little foggy these days. Suffice to say, if the next 13 years are like any 13 you may choose at random over the last half century, they’ll be more than ok.
Don Sr.’s kids will be taken care of for life. We’ll have to wait and see at what level. Of course, everything’s relative. Don Jr. will retire several years before his sister. But compare what would have happened had Dad just sat on his annuities. His invested capital would have kept generating income while he was alive. But it wouldn’t have appreciated a penny. Annuities aren’t, for the most part, meant to grow, but rather behave like a sleeping, sated lion after a kill. They’re simply not growth vehicles. They’re for cash flow. Even if he and Don Jr.’s real estate investments start out somewhat slowly, they’ll eventually go up in value over 13 years. This will result in the benefit he’s hoping to generate for his kids.
Nobody will be complaining about the hundred grand it cost to pull the orginal capital from Dad’s annuities at that point.
And for the record, Don Sr. now completely understands why that hundred grand, though an impressive figure now, won’t matter a hill of beans when his kids hit retirement age. Like I said, he’s a ball of fire.