Real Time Example — Why You Wanna Do Things On Purpose
Posted @ 9:57 pm - Filed under 401(k)'s & IRA's, BawldGuy Axiom, EIUL, Purposeful Planning, Retirement
For nearly two years now, I’ve been doin’ my best to convince folks to take a step back when it comes to job related retirement plans, mostly 401k’s. Not content with criticizing them generally, then with specificity, I also offered what I believe to be an incredibly superior alternative — the EIUL. (Equity Indexed Universal Life — it’s an investment grade insurance policy.)
For the record, the photos in this post have as much to do with its substance as most dollars invested in 401k’s above the employer’s match do with a happy retirement. (Dude, that was harsh.)
The primary exception to my advice to abandon 401k’s, is employer matching. To the extent your company is puttin’ in a buck for every buck you are, keep doin’ it. Duh. ‘Course even then yer gonna face some daunting crappola (technical investment term), when you enter the pre-retirement and retirement phases of your life. 100% of that crappola will be income tax related — and no, it won’t be taxpayer friendly. Still, having your savings doubled before you even get started lookin’ for return ain’t bad.
Before continuing, be clear on something near and dear to my heart. We make nothin’, zero, nada, zilch when our clients redirect some of their dollars from 401k’s to EIUL’s. Not even a courtesy referral fee of any kind. We don’t want it. Then why do we do it, when we could just as easily advise folks to invest that redirected capital into real estate?
That one’s easy — ‘cuz it’s the right thing to do. Duh.
I’ve met/talked with far too many regular folks in the last several years who’ve lost 30-50% of their nest eggs in the stock market. Up ’till very recently, they lost it in NASDAQ. Wanna know what it’s like to lose six, or in some cases seven figures in what amounts to the blink of an eye? Exactly, me neither. Now it’s happened again. The DOW, almost faster than we could watch it happening in real time, goes from 14,000+ to 12,000+ to around 8,000 points give or take.
For those folks who continued giving more than the amount matched dollar for dollar by their employers, their nest egg has been devastated. My heart goes out to them. So many of them have seen their potential retirement income shrink to very discouraging levels. It’s likely many more have even seen their planned date of retirement postponed. If you’re 40 or 50-something, and you just lost 1/3 of your 401k, it’s gotta be hard to even begin to think about the inevitable consequences of such a development.
BawldGuy Axiom: It’s not low returns that scuttle good plans. It’s the time it takes, usually measured in years, to make up for significant losses. Those lost years can never be replaced.
Can the investor eliminate losses from their real estate investment portfolio? For those who’re laughin’ at that question, thank you from the bottom of my BawldHeart. Nobody, over the long haul, can avoid the occasional loss. I speak from painful experience. But when there are alternatives that allow the avoidance of loss? At least explore them. Duh
If for the last decade, the average taxpayer with a 401k had only contributed the amount matched dollar for dollar by their employer, the losses incurred this month would’ve been irritating, but still left them in positive territory. Since the average taxpayer has made less than 5% annually on their Wall Street ventures the last 20 years, the dollars invested over the employer match haven’t exactly set the world on fire. Add to that the huge losses inflicted this month, and you’ve discovered why I’ve been advising folks to stop the practice.
Let’s do a ‘what if’ here. Assume a taxpayer is contributing $10,000 yearly to their 401k.
If the taxpayer makes $100,000/yr and their employer matches up to 3% of that figure, our advice would be to put $3,000 in the company’s plan and the other $7,000 into an EIUL. In those 10 years your 401k would’ve grown to roughly $75,000 — until that is, this month. It’s now worth, giving you the benefit of the doubt, about $55,000 or so. On the other hand…
The EIUL money? In the same 10 years it grew to roughly $95,000 — again, until this year. Then what happened, you ask innocently? This year it grew by only a paltry 2%. So at the end of this year, that $95,000 grew to $96,900. You may be underwhelmed, but don’t come to any conclusions yet.
Where would the taxpayer be if they’d kept on puttin’ the entire $10,000 into their 401k? After 10 years they’d have about $126,000 give or take. Until this month. Now they’d have around $90,000.
Insert drum roll here.
The way most taxpayers do it — they now have about $90,000 in their 401k after 10 years.
My way? $55,000 in 401k + $96,900 in EIUL = $151,900. Choose, go ahead, take yer time. No rush.
I dunno. Thinkin’ maybe I was on to something when I begged folks the last couple years to end their participation in Uncle Sam’s own Purposeful Plan for retirement. The government has been baiting its citizens with nickels and dimes in yearly tax savings early on, while taking dollars in taxes from them when they begin drawing money from their 401k’s in retirement.
It’s worked incredibly well — for the government.
This post is in response to several private requests. They wanted to see a more or less real time example of how the two approaches compared. I hope this helped, or at least cleared up some of your questions.
Surely if you’ve been hurt by this sudden crash in the stock markets, the horse is not only outa the barn, but no doubt already in the next county by now. Given that reality, let’s look to the next 10, 20, 30 years, OK? I’m not givin’ you advice here on your non-real estate investments, though it’s my clear intention here to show you a potentially better way. Though I don’t shy from giving real estate investment advice, I’d rather send you to an EIUL expert.
If what I’ve been sayin’ here resonates with you, contacting David Shafer should be your first move. I told him I was gonna link to him, so he’s more or less ready for ya. 
Getting started on your own Purposeful Plan is begun by contacting me to begin an ongoing conversation about what you want your retirement to look like. Have a good one.
This entry was posted on Monday, October 20th, 2008 at 9:57 pm and is filed under 401(k)'s & IRA's, BawldGuy Axiom, EIUL, Purposeful Planning, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
