There’s a mindset that has always befuddled me. It’s origin seems to be grounded in the belief that if I’ve believed X for years, than something proclaimed to be superior to X just can’t be true. Furthermore, the evidence I point to, is how many people agree with my belief in X.
Huh?
The world’s population believed the earth was flat, and that the sun circled it. They were wrong. However, when Copernicus found empirical evidence to the contrary, he was wrong, because he was virtually alone. (Sometimes I think Greg Swann is directly descended from Copernicus.) 🙂 The central argument against him was — all, 100%, totally — false data based upon a long held belief — which was based upon subjective interpretations of bad science — and anger at having their food dishes moved. How dare Copernicus?!
Those arguing for 401(k)’s as superior to F.I.U.L.’s (Now, often referred to as E.I.U.L.) are no doubt sincere in their beliefs. The problem is, when they retire, they’ll notice the guy next door who opted for the insurance approach, and realize very quickly, sadly too, I’m sure — they were sincerely wrong.
I watched NOVA last night, and they said without reservation that the earth is still round, and it revolves around the sun, not the other way around.
My hope is, this post hits its intended target: Those who run companies. Employees who are relying upon the experts made available to them — by their employers.
Before I continue, let me correct a mistake made in one the previous two posts. I’d misread a ‘3’ for a ‘2’ and subsequently wrote 20 instead of 30 years for one of my examples. My error — as I reviewed the document, it indeed read 30 years, not 20. This resulted in misstating one of my numbers. This didn’t change the outcome of the piece though, as you’ll shortly see for yourself.
As we get into the nitty-gritty of the actual comparison of 401(k)’s and F.I.U.L.’s, let’s establish exactly where I’m getting the numbers, and if the source I’m using is credible. 🙂 I do this because it became clear after my first two posts that there are a small percentage of readers who object loudly, and in some cases rudely when their food dishes are moved.
I’m using Doug Johns for my source. He’s an expert of many years with various retirement strategies, specializing in asset management, and investment grade insurance as a source for tax free retirement income. He uses a couple firms, one of them a monster company, Aviva, which is a $600 Billion operation. They offer as one of their popular investment vehicles, the F.I.U.L. (Also known as E.I.U.L.) Aviva, not too long ago, bought out Indianapolis Life — probably with money in their change drawer. 🙂 They are consistently awarded high ratings in the industry. In other words, they’re solid, respectable, and they know what they’re doing. I’m using their numbers, which are, by the way, generated by their own software.Their software was used exclusively by Doug for the numbers used in this post.
Since I know there will be some, even after they find out the earth is round, not flat, who will insist on knowing this. I’ll even include the source and name of the damn software used to arrive at the numbers used below. For those who will insist I’m either all wet, making it up as I go, or just flat wrong, the software used is Aviva–Fiserv 2.90.0.20. Aviva wanted the numbers used by experts selling their policies, to be absolutely unassailable — so they created their very own software to ensure just that. If some are still not satisfied with the numbers in this post — that’s absolutely OK. Just don’t ask me to explain any further — I don’t care if you disagree. 2 + 2 = 4 and always will. You simply can’t do these numbers on your $19.95 calculator because the mathematical process used to arrive at the insurance numbers is not as simple as arriving at the 401(k) figures.
I only understand their equations conceptually myself — and I’m not losing sleep. They’re the experts. These numbers aren’t new to them. I strongly urge you to contact an experienced financial planner who will then be charged with running your own personal scenario for you.
(I do understand there are two factors in the insurance equation which don’t exist the in the relatively simple numbers of the 401(k)s. They are cash value and death benefit. When those are factored in, all the calculators out there go off the tracks.)
Once you see the results of that scenario, you will cease caring so much about your food dish being moved, and more about how to get the heck out of your relatively worthless 401(k) 🙂
Message to the folks who’ve been rather, um, unkind — most of you will be the only ones suffering from your head-in-the-sand approach to new information. The problem though, are folks who should know better, those who have the power to impact dozens if not hundreds of regular folk — (their employees.) I beg you to reconsider your position. You’re contributing to a significantly inferior retirement for your employees, simply because your food dish was moved. Please, pull your head out and become their hero. Set aside you ire for the messenger, and take the new info to your employees. At the very least, find an expert and listen to them.
OK, let’s get going.
The Fixed Index Universal Life insurance approach is one that must be structured correctly from the start, by an expert, so that the tax free status remains intact. That structure is clearly laid our in the Internal Revenue Code, which I will not bore you with here. It’s analogous to doing a tax deferred exchange — except you’re not deferring any taxes. It’s all tax free. There are many so-called real estate investment experts who screw exchanges up every year. That only proves they were incompetent, not that the tax deferred exchange is difficult to execute, or worse, fraudulent. I’ve personally executed over a hundred exchanges, many of them involving several properties moving into even more properties, while simultaneously involving multiple states. I’ve yet to have one disallowed — not one. How do you know that’s true? Easy — I’m alive to tell you it’s true. 🙂 What would you do if the agent you hired screwed up your exchange, costing you $100,000? I rest my case.
That’s a long way of saying I’m simply not going to argue here, or address any inane comments about the tax free status of the F.I.U.L. It’s tax free – period. If you don’t believe it, then don’t do it. Unlike Hawkeye and Trapper, I don’t have to keep up with everything some don’t know. I’m trying to inform here — and begging folks to contact a financial planner familiar with the vehicle in question. Caveat: Not all planners are experts with this approach. If you need help finding one, I’ll step up and get you one quickly. I will make no money from any referral I may give you — though I reserve the right to an occasional free meal. 🙂
Let’s revisit my daughter for a bit.
She’s 23 this month, (Friday actually.) and a year or so from her degree in child development, a career not known for its high pay scale. I’ll pay for her at first, until she finds a job after graduation. It’ll be $500 monthly. It’ll go on until she’s 63. She’ll end up with an annual income of about $208,000, tax free, for life. What would an employee have to do to match that, using a 401(k)?
Before I answer that, let’s review what convoluted logic must be followed to conclude 401(k)’s are the way to go.
The big draw is the tax deferred treatment of the original contributions made by the taxpayer. Let’s say counting federal and state taxes your combined marginal tax rate is 1/3. This means the next dollar earned will be taxed at that rate. (state & fed)
If a taxpayer gave $9,000 yearly into their qualified plan for 40 years, they’ll save, in most cases, less than $100,000 in taxes, total.
Yet, when that taxpayer retires they’ll have generated an annual income, before taxes, just short of $311,000. (We used identical annual yields over the 40 year contribution period for both approaches.) Pause to note: Again, don’t whip out your calculator and apply the same equation used to arrive at numbers for 401(k)s for the insurance numbers — it won’t work. Stop it. 🙂 This taxpayer, giddy no doubt with his incredible income, will now face an annual tax bill of just under $103,000! (Probably more, but we’ll stick with that figure.) Oops. Let that sink in for a few moments.
It’s probably at this point he realizes his employer not only gave him some very questionable advice, but assisted him in screwing the pooch royally. (I’m not even going to address here the fact that at 70.5 years old the government will begin forcing minimum withdrawals, even if the taxpayer has no need or desire to do so. This can, in many cases, result in literally running out of money in the 401(k) before the taxpayer actually dies. Nice, eh?)
In just his first year of retirement using the 401(k) approach, he realizes he’s paid more in income taxes than he deferred for the 40 years it took him to get to that point.
That can’t be a pleasant epiphany.
Let’s say he lives for 20 years. Assuming taxes don’t change, he’ll have paid over $2 MILLION in taxes in half the time it took him to defer less than $100,000. In fact, he paid more taxes in his first year of retirement, than he saved in the entire 40 year contribution period.
Tell me again how smart that approach is? 🙂
This means the advice his employer offered him, said or at least implied the following:
We’re going to save you a dollar in taxes (total) over 40 years in return for the much sought after privilege of paying a dollar every year of their retirement until they die. Solid thinking. Try this on your 10 year old at home. It’s even money, if he gets at least C’s in math, he’ll think your joking inside of 60 seconds.
This is where epiphany #2 hits our taxpayer. 401(k)’s are the result of Purposeful Planning used by Uncle Sam. His Plan was to produce the maximum amount of cash flow from Baby Boomers through income taxes at retirement — and upon their death.
By the time this Baby Boomer taxpayer dies, the cause of death may very well have been taxes. 🙂
My daughter, you’ll remember, put in $500 a month for 40 years. To equal her income after taxes, the 401(k) will have to be fed 50% more — $750 a month. Do you know anybody employed by a firm who matches contributions for as much as the employee wishes to invest? There may be some, but I’ve not run into one yet. They usually limit their matching to 3-6% of income. If the employee earns $60,000 yearly, he’ll only be matched up to a whopping $300 a month — and that’s best case. Woohoo!
So far my girl puts in $500/mo. for 40 years and gets $208,000 a year, tax free, for life. Her buddy next door who works for the employer who judged this subject as unworthy of his time, gets the same, after paying six figures of taxes every year. Of course his monthly investment was higher. Duh
Do you think with the Social Security crisis on the horizon, along with the aging of the Baby Boomers, that taxes are going to remain what they are today? If you do, I’ve got some sub-prime loans you might be interested in buying. 🙂
Go to the tax schedules for married filing jointly and look up the bad news for taxpayers earning over $310,000 a year in your state. In California their combined fed/state marginal rate would be over 40%! So I’m being generous with my 1/3 combined marginal rate. Even if you live in a no-income tax state, you’re marginal rate will still be at least…….here it comes………..33%.
Do I hear an “Uncle!” out there yet? 🙂
A few days ago Brian Brady hit the nail on the head with his post, Missed Fortune and the Wall Street Journal: The Value of a 50 Cent Financial Planner Is…About a Half a Buck. In it he refers to what he calls Boomer Economics, which is what I’ve called Grandpa Economics. 401(k)’s have taken advantage of that kind of antiquated thinking. The government put tremendous thought into these qualified plans. They needed universally attractive bait to get employees (taxpayers) to buy into their story. To the average person, paying less taxes is always a show-stopper. So congress thought, give them a tax break now, and they won’t stop to do the long term numbers. Turns out they were right — for the most part folks haven’t done the long term numbers.
I made the decision to ignore many more comparisons — but the whole beating a dead horse thing convinced me to just let them alone. They’ll be bonus surprises for those folks staying aboard the 401 train. 🙂
Well now you have them. And we haven’t even touched what happens upon your death. It makes how they (gov’t) treated you while working and retired, look like a great time at the prom. 🙂
Hint: your 401(k) is part of your estate. It will be taxed until your heirs bleed.
F.I.U.L.s are not part of your estate. The balance transfers to your heirs — untouched — as in untaxed.
Believe the numbers, don’t believe the numbers. I don’t have a dog in this fight, except as it relates to my family and my clients.
Good luck out there.
Chuchundra says:
Jeff, your math makes my head hurt.
It reminds me of the old puzzler about the three men who each pitch in ten bucks to rent a room that cost $30 (it’s an old story). The manager discovers that they should have only been charged $25, gives the bellboy five dollar bills and tells him to give the money back to the men.
On the way to the room, the bellboy figures that the three men will have trouble splitting the five dollars among them and decides to keep two dollars for himself, delivering only a three dollar rebate.
Now the question is this. Each man paid ten bucks and got one back in return, that’s nine dollars. Nine times three is 27 dollars, plus the two the bellboy got makes 29 dollars. Where did the extra dollar go?
I’ll have a more cogent response for you tomorrow, but, in the mean time, please answer me this one question. With FIUL, do I have to keep paying premiums for the life insurance portion until I die? If I don’t and the policy lapses, what happens to the money that I took out “tax free”?
July 25, 2007 — 7:21 pm
Jeff Brown says:
Chuch – respond as you will – I care not.
It’s up to your planner to deal with your questions. 🙂
July 25, 2007 — 7:36 pm
Jeff Kempe says:
>Jeff, your math makes my head hurt.
Not to worry! Marshall Loeb is coming out with the condensed version shortly.
July 25, 2007 — 9:06 pm
Robert Kerr says:
Jeff, given two future retires:
1) the “flat Earther” to whom you refer: the classic, old-school investor with little debt and a huge 401(k)
and
2) a modern, new-school, Brown and Brown, Inc. investor: superb cash flow, but loads of debt
What happens to each when the person finds himself unemployed or with enough underperforming investments to fall behind on the massive debt service?
Which one still retires with a sizable next egg and which one loses everything?
July 25, 2007 — 9:56 pm
Brian Brady says:
I’m going to try to explain a few things here for the St. Thomas crowd.
It’s not about the retirement assets, it’s about the product of those assets; income in retirement.
How much do you need for $80,000 after-tax per annum, assuming 8% return on investments?
FIUL: about $1,000,000
401-k: about $1,500,000
How much will the government confiscate of that nest-egg when you’re 70.5% ?
FIUL: none
401-k: about $40-50K per annum for 15 years
It’s not about how much you make, it’s about how much you KEEP.
July 25, 2007 — 10:29 pm
Brian Brady says:
You’re selling fear to make your point.
You know how this works. When you segregate equity by increasing debt, you are placing it in an arbitrage position by investing the proceeds from an after-tax cost of funds of 4% into a tax-free accumulation at 9%…over TIME
Can I guarantee that blue-chip stocks will perform at 8-10% per annum over a ten year period? Of course not. They just have for the past 7 decades, consistently. In the face of war, good times, war, hyper-inflation, terrorist attacks, and a whole bunch of Yankee World Series victories.
Could this 20 year period ahead of us be the two decades where equities perform below 4% per annum? Sure. I could also get hit by a bus tomorrow but the numbers are actually on my side…so I cross the streets using the crosswalk to improve my odds but I still cross the street.
Is this strategy for my father at 69 years old? Nope, it’s not. But it worked for him when he was 40.
This isn’t new thinking, guys. Leverage and arbitrage has been the preferred investment strategy for the wealthy for decades; only the mega-wealthy used real estate.
July 25, 2007 — 10:42 pm
Jeff Brown says:
Robert – I think you infer a tad too much on the whole debt thing. I have clients who do in fact have debt. The difference is that there’s a difference between debt, and ‘loads of debt’.
Debt for the sake of having it makes no sense, I agree.
That said, debt as a tool, can be analogous to a hammer.
In the wrong hands it’s downright dangerous, even potentially fatal. In the hands of a journeyman carpenter it can help create wonderful and useful results.
Cash flow, as you put it, ‘but loads of debt’, is contradictory. An investor may indeed owe $5Mil on his portfolio, but if the LTV is 60% – his cash flow is not only abundant, but relatively safe and stable – able to weather predictable economic downturns.
The so-called modern, new-school approach, as you describe it for my clients is incorrect. First of all you can’t have loads of debt with high LTVs and ‘superb’ cash flow.
That concept is oxymoronic on its face.
An investor either wants growth, or cash flow. To strive for one, necessarily retards the other – it’s axiomatic.
Since I’ve never had a client lose a property due to poor planning, too much debt, or any other reason, I’d be unfamiliar with what they’d most likely do.
Our clients, without exception, have generous cash reserves for the very situations you ask about. There will always be tough times, or Murphy’s Law, or just about anything else you and I can imagine together.
>a modern, new-school, Brown and Brown, Inc. investor: superb cash flow, but loads of debt
Again – that’s an oxymoronic statement. It’s like dry water. Pick one or the other – you can’t have both. You know it and I know it. We agree. I’ve never tried to convince anyone they could use say 10% and end up with ‘superb’ cash flow. Only an idiot would assume that as an agenda.
Which one retires well and which loses?
Frankly Robert, Grandpa thought he retired pretty well in his old rickety free and clear home with his penurious pension and Social Security check.
There are those, and we can certainly live together, who believe if you use a hammer for what a hammer was meant to do, you’ll be able to create something worthwhile.
My clients do well in normal and good times. They weather bad times because they’ve planned for it purposefully, and are prepared.
This correction is a birthday party at Chuck Cheese compared to the S & L mess, wouldn’t you agree? No client lost property back then either.
Pick your own method Robert, but presenting my approach as promising superb cash flow with massive debt is something I’ve never done, or ever will do. It’s silly.
July 25, 2007 — 10:50 pm
Jeff Brown says:
Brian – Simply and elegantly put.
I see in my office folks who can grasp these very simple concepts in an hour or two of frank discussion.
Grandpa doesn’t want to hear it though – and that’s his right. Arbitrage and similar concepts are as new as mowing your lawn – just not to some folks. We’re all ignorant to differing degrees. The difference is though, we don’t know what we don’t know. Then when someone tells us, we can react with gratitude, because they’ve taught us something, or we can react as if they’ve broken the laws of nature.
It all comes down to choice, doesn’t it.
Again Brian – elegantly put – and absolutely correct.
July 25, 2007 — 10:56 pm
Jeff Brown says:
Brian – The only thing worse than the blind leading the blind is those with eyes who will not see.
Sometimes I actually believe there are those who would argue against gravity until the moment they ran out of air and into mother earth.
You da man. 🙂
July 25, 2007 — 10:59 pm
Brian Brady says:
Hey! I came off a tad too harsh. Point of disclosure:
For whom is this strategy SUITABLE ? This strategy is suitable for the couple who bought a home in San Diego, in 1990, on a 30 year old’s income only.
That 35 year old is 47, now. His kids have been through college (or soon will be). His spouse is working and his income is triple what it was 15 years ago.
His mortgage, however, is still the zero down VA loan he obtained and refinanced for lower rates only, in 1990. His home was purchased for $162,000. Today, that home is worth $600,000 and the mortgage is about $100,000. He can afford a $480,000 loan on his increased cash-flow and spouses cash-flow.
So why segregate the equity and invest now with a higher payment instead of investing the “difference”?
Simple. Mortgage loans = simple interest. VULs = compound interest.
I hope that explanation is a bit less crass.
July 26, 2007 — 12:04 am
Chuchundra says:
Just as an aside, the shape of the earth was known to be a sphere well before the birth of the great Polish astronomer Nicolaus Copernicus. In fact, circa 200 BCE the Greek philosopher and astronomer Eratosthenes measured the circumference of the earth using nothing more than some sticks, a long piece of rope and his powers of reasoning. His measurement was off by about five percent.
July 26, 2007 — 4:25 am
Jeff Brown says:
Chuch – You’re 100% correct! Way to go. 🙂
July 26, 2007 — 9:00 am
Chuchundra says:
OK, so lets have a quick look at what Jeff is saying here about these FIUL investment vehicles.
This investment vehicle is so complex and the calculations to determine the yield so byzantine that we can’t run the numbers ourselves. Even Jeff, a financially savvy guy and a serious investor in this product, only understands the equations “conceptually”. If we want to calculate our projected returns, we must rely on software. Sofware that was designed and built by the company that’s trying to sell us this product. I’m sure there’s nothing fishy about that.
Moving on, Jeff is again stressing the complexity of this investment
In other words, if we hire the wrong “expert”, the tax-free “income” we’re hoping for becomes taxable and we’ve gone through this whole thing for nothing.
So quickly sum up, this is an investment that is difficult to understand, too complex to calculate on our own and so finicky that if it’s not done just right, the tax-free benefit we’ve hoped for can simply vanish. We must trust our investment advisor, who stands to make a healthy commision from our investment, that the numbers are right and that that the tax-free benefit is as he described. I’m not quite sure what you’d call someone who purchases this kind of investment, but I think P.T. Barnum has a quote or two that applies.
This comment is getting too long already, but let’s do a couple more hit.
Why would you do that? There’s no way an EIUL, larded up with fees of all kinds, insurance costs and commission, is going to match the yield of a no load index fund. Not to mention the rate caps these types of plans usually have, limiting your returns during the most profitable years.
Throughout this post, we are exhorted to “do the math” and “2+2=4” and — bizarrely — that “the Earth is still round”. Unfortunately, there’s not much math to do here. I can do the tax math (which Jeff gets wrong, by the way), but I can’t run the insurance numbers or check his figures. on the returns. I am happy, however, that addition still works and that we continue to live on an oblate sphereroid.
July 26, 2007 — 9:34 am
Eric says:
All costs and obligations factored in.. is this something you could recommend to someone initially only able to put in 50-100 dollars a month into an investment vehicle?
The 401k at work, doesn’t match which is a shame because I could use the tax savings gained from larger contributions.
So with a non-matching 401k, FIUL’s look like a better bet if you truly think long term enough to get past the “tax free contribution” benefit of 401k – which I can.
But the benefit of a 401k is that they have it open for even the most minor contribution amounts making it easier for those of us that may have fallen behind before and who are now just getting on the ball.
Do you see any issue with using this vehicle as a beginner’s investment?
July 26, 2007 — 10:42 am
Jeff Brown says:
Eric – You get it. Stop putting money into the black hole of your 401k and start your FIUL immediately – no matter how small the monthly payment you can now afford.
As your income rises you can increase your investment amount.
Make real estate a priority, but not at the expense of sacrificing your FIUL payments.
If you need help with getting started with the FIUL, please contact me through my blog at http://www.bawldguy.com — I’ll hook you up with the right guy.
Good luck!
July 26, 2007 — 10:49 am
Chuchundra says:
Eric, you should really think about a Roth IRA. If you’ve only got $50-$100 a month to play with, you’re probably in such a low tax bracket that the tax benefit from a 401K contribution wouldn’t be worth much to you.
There are a lot of serious advantages to a Roth, especially for a young person just starting out. Contributions to a Roth are made with after tax dollars but the distributions are tax free. Just like a FIUL, only without all the fees and commissions.
Plus you can tap your Roth to buy your first home. Uncle Sam lets you draw out up to ten grand, tax and penalty free.
July 26, 2007 — 11:11 am
Jeff Brown says:
Eric – I don’t wish to comment in depth on what Chuch has said. Suffice to say, his ignorance on the subject is impressive. I don’t mean that with any disrespect whatsoever. But facts are facts. Roth IRAs are a step in the right direction, but don’t in full comparison even begin to compete with FIULs.
July 26, 2007 — 11:19 am
sean carr says:
Hello Brian,
Do you know of any online tools for making estimates about FIUL performance? Or if not can you recommend a good source of reading to become versed in this type of investment vehicle before talking to a professional. If nothing else I’d like to at least be able to ask the right questions. I’ve found the information online from some of the large companies selling these policies to be a bit cursory.
Thanks in advance,
Sean
July 26, 2007 — 1:00 pm
Brian Brady says:
http://www.lifeinsurance.net/about-variable-universal-life-insurance.htm
http://www.nasd.com/InvestorInformation/InvestorAlerts/AnnuitiesandInsurance/Equity-IndexedAnnuities-AComplexChoice/index.htm
These two will get you started.
Buy Missed Fortune, the book, to understand the concepts.
July 26, 2007 — 2:01 pm
Jeff Brown says:
I hope Brian has something for you. My experience with online ‘tools’ for this particular vehicle is disappointing to put it mildly. This is why, (I surmise) the big companies specializing in FIULs have, for the most part, commissioned their own software for the task.
July 26, 2007 — 2:08 pm
TJ says:
What happens if the index on which the crediting method is based significantly under-performs the illustration and/or the COI rises dramatically? All of the illustrations that I have seen for IUL products are deterministic in nature; in the real world the crediting is going to be stochastic. Granted, this is also the case/risk with 401(k) investments, except that if these negative things occur within the context of a 401(k) you may have decreased cash flow but don’t potentially lose your “tax-free” status.
If an IUL “blows up” all of the gains become taxable as income. Assuming that this happens several years into the distribution phase of someone’s life, the tax liability (without the means to pay it) could be disastrous.
As I’ve posted before, I am not totally opposed to these strategies, but they aren’t perfect and they certainly aren’t as “risk-free” as some would make them out to be.
July 26, 2007 — 3:03 pm
TJ says:
Jeff, what could possibly be your objection to Chuch’s recommendation for a Roth, especially for a small monthly contribution amount?
July 26, 2007 — 3:13 pm
winjr says:
“Why would you do that? There’s no way an EIUL, larded up with fees of all kinds, insurance costs and commission, is going to match the yield of a no load index fund.”
Right on, Chuch. Any proper analysis would add up those fees and then future value them at whatever applicable discount is being used, then offset the result against the expected future benefit.
Additionally, it appears that the analysis, what there is of it, completely ignores the fact that contributions to a FIUL are funded with AFTER-tax dollars, so the statement …
“My daughter, you’ll remember, put in $500 a month for 40 years. To equal her income after taxes, the 401(k) will have to be fed 50% more — $750 a month.”
… is simply incorrect. It ignrores the fact that the $500/mo contribution to a FIUL was originally a $750 before-tax salary payment.
July 26, 2007 — 7:15 pm
Robert Kerr says:
Robert – I think you infer a tad too much on the whole debt thing. I have clients who do in fact have debt. The difference is that there’s a difference between debt, and ‘loads of debt’.
…
Pick your own method Robert, but presenting my approach as promising superb cash flow with massive debt is something I’ve never done, or ever will do. It’s silly.
Jeff, is this your podcast?
http://tinyurl.com/39h88p
I hear someone advocating multiple, highly-leveraged properties and interest-only or negative amortization payments.
Buy property, put as little down as possible, pay the minimum allowable and use leverage to generate cash and finance more property, more leverage, bigger “baskets.”
Create a chain of cash flow, with one property’s cash flow financing the next.
Under ideal conditions, that creates a very nice ROI but also a high debt load and tremendous risk in a down market.
Any disruption in the cash flow can cause one to fall irrevocably behind on the debt service. When that happens, the problem can cascade and all the property, along with all the cash flow, is lost.
Am I wrong?
July 26, 2007 — 7:28 pm
Chuchundra says:
It’s nice to see a few more “flat earthers” come out of the woodwork.
A few more things before I’m done:
If you have an employer match for your 401K, you’re a fool not to take it. Even if it only works out to be fifty bucks a month, that’s still fifty dollars that you’re getting every month for free. Fund your cockamamie FIUL after that if you like, but at least fund your 401K to get the maximum amount of free money from your employer
The tax estimates Jeff uses are way off. It seems that he’s estimated taxes on $311K using the 2006 tax rates. However, we’re looking at this 40 years out. Thanks to Ronald Reagan (I’m a Dem, but give credit where credit is due) by law, federal tax brackets automatically adjust every year to compensate for inflation. Assuming a modest 3% inflation rate over 40 years, the tax estimate is off by a factor of two.
I hate to pile on, but Jeff hasn’t really made any arguments, except perhaps that taxes are to be avoided. The only thing he’s saying about these FIULs beyond that is that they’re good. He knows they’re good. His experts say they’re good. Anyone who thinks otherwise is some sort of flat earther. And, oh by the way, these plans are way too complex for me to explain beyond that.
Yeah…I think I’ll keep my 401K.
July 26, 2007 — 8:24 pm
Brian Brady says:
“what could possibly be your objection to Chuch’s recommendation for a Roth, especially for a small monthly contribution amount?”
I want that one, Jeff.
Early withdrawal is subject to taxation and penalties. Borrowing against the cash value of a life insurance contract isn’t.
Roth IRA’s are a good start but their lack of liquidity fails the LSR test of a suitable investment for home equity.
“If an IUL “blows up” all of the gains become taxable as income.”
Clarify please, TJ. I don’t understand “blowing up”
“Why would you do that? There’s no way an EIUL, larded up with fees of all kinds, insurance costs and commission, is going to match the yield of a no load index fund”
A categorically incorrect statement. Fees have little or no bearing on managed accounts’ performance; the management of the underlying “fund” does, net of fees. I disagree with Jeff on the product selection and prefer VUL products versus indexed-based products. Insurance companies have historically been the best investment managers over time. The “insurance” part is a mere bonus. You invest in VULs for retirement because of the tax advantaged status and superior investment managers.
“As I’ve posted before, I am not totally opposed to these strategies, but they aren’t perfect and they certainly aren’t as “risk-free” as some would make them out to be”
I stipulate that in my July 25th 10:42PM comment, TJ. All investments, including $99,999 in a FDIC-insured bank carry risk. We mitigate that risk through diversification and proper investment management.
This strategy is not the cure-all tonic but it certainly is underutilized as a retirement planning tool. That’s point of these discussions.
July 26, 2007 — 8:31 pm
Brian Brady says:
“but at least fund your 401K to get the maximum amount of free money from your employer”
Stipulated, Chuch. It’s just a numbers game with that comment.
“Fund your cockamamie FIUL”
That’s just xenophobia, by your own admission.
“The only thing he’s saying about these FIULs beyond that is that they’re good. He knows they’re good. His experts say they’re good. Anyone who thinks otherwise is some sort of flat earther”
Your “open mind” has certainly closed without any research, Chuch. A discussion is a sharing of ideas..informed ideas. You’re coming to the table with little or no food. I’m not saying your argument doesn’t have merit but your lack of curiosity is surpisingly disappointing.
July 26, 2007 — 8:37 pm
Jeff Brown says:
TJ – No objection at all. Compared side to side, every aspect considered, even though, as I stated in my response, Roth is a step in the right direction — it still falls very short of FIUL.
But I’d never object to a Roth – it’s just not the best way to go. That said, it’s light years ahead of all the rest of the qualified plans.
July 26, 2007 — 9:20 pm
Jeff Brown says:
TJ – FIULs have a floor of 2%. So when your 401k loses money because your stocks run into a year with a net loss, I’d go up 2%. Over the last 55 years it’s averaged out to roughly 8.5% for the S & P index.
Lose ‘tax free’ status? Your expert planner would have to have been a moron for that to happen.
In all my research I’ve yet to find either an expert planner or an investor who either has experienced a so-called ‘blowup’ or heard of one second hand.
July 26, 2007 — 9:25 pm
Jeff Brown says:
Chuch – I don’t think the FIUL is for you. 🙂
July 26, 2007 — 9:27 pm
Jeff Brown says:
winjr – you’re so misinformed it’s impossible for me to decide where to start. So I won’t. Stay in your 401k – I think it’s perfect for you.
July 26, 2007 — 9:33 pm
Jeff Brown says:
Robert – You use different financing in different markets and different economic conditions for different types of investments, for different types of investors.
That podcast explains the proper way they’re used. It assumes the investor and/or the advisor understands how to use neg/am financing as a tool. It also assumes they know when not to use it.
I use hammers to Robert, but not to screw in light bulbs. 🙂 There’s a time, place, vehicle, market, etc. for every type of financing.
July 26, 2007 — 9:37 pm
TJ says:
“If an IUL “blows up” all of the gains become taxable as income.”
Clarify please, TJ. I don’t understand “blowing up”
In order for all those “tax-free” distributions from an insurance policy to remain “tax-free” the policy has to stay in force. If the policy lapses, ALL of the distributions in excess of the contributions are taxable as ordinary income.
July 26, 2007 — 11:36 pm
TJ says:
“Lose ‘tax free’ status? Your expert planner would have to have been a moron for that to happen.
In all my research I’ve yet to find either an expert planner or an investor who either has experienced a so-called ‘blowup’ or heard of one second hand.”
Really? Read some of the messages from http://www.financial-planning.com/phorum/index.php and you will find plenty of advisors who have seen it happen.
Why haven’t any of the proponents of the Missed Fortune strategy addressed my question/comment about the potential for the future COI to get out of control?
July 26, 2007 — 11:41 pm
Jeff Brown says:
TJ – And I’ve seen plenty of tax deferred exchanges blown up by the IRS, but none of mine or any of my expert colleagues. Why? Because we know what the heck we’re doing.
Why haven’t any of the proponents of the Missed Fortune strategy addressed my question/comment about the potential for the future COI to get out of control?
Why do you think so, Frank?
July 27, 2007 — 9:53 am
Robert Kerr says:
I use hammers to Robert, but not to screw in light bulbs. 🙂 There’s a time, place, vehicle, market, etc. for every type of financing.
As best I can tell, there’s exactly one job: to retire comfortably.
Also, as best I can tell, you’ve changed your entire toolbox now, from multiple, highly-leveraged properties to investment-grade insurance.
Is that correct?
So, I wonder: What about all the people who followed your advice from last year and are now saddled with multiple depreciating properties and option or neg-am ARMs on all of them in a down real estate market?
You’ve got them changing light bulbs with hammers.
July 27, 2007 — 12:32 pm
Jeff Brown says:
You crack me up Robert – thanks for the laugh break. 🙂
Of course I haven’t changed anything. I’ve simply added another very cool option on our menu. Our clients’ response? They love it, and for the clients we felt were candidates for this vehicle, every single one of them have enthusiastically opted in.
How would it be my entire tool box now when I don’t earn a cent from anything to do with it? It’s the right thing to do with some investors, so I do it. Over the years I’ve changed many things I do, because times change, markets emerge, new financing comes online, or new vehicles begin to make sense.
Number one in my operation Robert is the client. Sometimes that means I recommend courses of action that pay me little or nothing. It’s all about doing the right thing.
You’re becoming a bit of a one-act pony Robert, and it’s becoming a tad boring. If you don’t like what I say or do – then don’t do it.
>You’ve got them changing light bulbs with hammers.
Cue the laugh track. 🙂
July 27, 2007 — 12:51 pm
winjr says:
“winjr – you’re so misinformed it’s impossible for me to decide where to start. So I won’t. Stay in your 401k – I think it’s perfect for you.”
RFLMAO! I’m a tax attorney and CPA with 25+ years experience. Yeah, I’ve made my living being misinformed.
July 27, 2007 — 2:59 pm
Jeff Brown says:
winjr – are you an expert on FIULs (EIULs)?
July 27, 2007 — 3:23 pm
Brian Brady says:
“In order for all those “tax-free” distributions from an insurance policy to remain “tax-free” the policy has to stay in force. If the policy lapses, ALL of the distributions in excess of the contributions are taxable as ordinary income.”
Absolutely, TJ. No doubt about that. That’t the hitch and there is no free lunch. It must remain qualified as a life contract or the tax-favored status disappears. One can mitigate that risk by “pre-funding” the account with enough to invest and pay premiums in perpetuity in a side fund so it can fund the 5 or 7 pay test.
You can’t screw up the strategy or you’re stuck. Good point.
July 27, 2007 — 6:28 pm
Brian Brady says:
“RFLMAO! I’m a tax attorney and CPA with 25+ years experience. Yeah, I’ve made my living being misinformed.”
Point of clarification. The last word of your comment should be “misinforming” rather than “being misinformed”.
July 27, 2007 — 6:31 pm
Jeff Brown says:
Geez Brian, who was your straight man last year? 🙂
July 27, 2007 — 6:37 pm
winjr says:
Nice swipe, Mr. Brady, and just like the author of this piece, a comment that does nothing to invalidate my initial premise, so please be so kind as to comment on the following analysis:
A few ground rules: We MUST assume that the investment performance of each vehicle is equal. Our analysis doesn’t turn on which manager is better, nor can it. Instead, it turns on the tax structure. For this reason, we will also assume that each manager charges the identical fee for his/her services.
In vehicle number 1, the 401(k), a full $750 is contributed by the employee monthly. Since none of this contribution was subject to federal income tax going in, the entire amount, plus all earnings thereon, are subject to federal income tax coming out, and must be withdrawn incrementally no later than the year following the year in which the employee turns 70 1/2.
In vehicle number 2, the life insurance product, only $500 is contributed each month, because that’s all the employee has left of his discretionary $750, after-tax. The other $250 has already gone to Uncle Sam.
We will assume that the employee’s marginal tax bracket remains constant throughout his working career. At the end of 20 years, who has the bigger pot? Well, of course, the 401(k) pot will be bigger. Lets assume that the 20 year period marks the end — the life insurance policy now begins to pay its annuity, tax free, and the 401(k) must be drawn down (as determined actuarially via IRS tables) and taxed in full. Here’s where the 401(K) disadvantage becomes obvious. However, to determine which vehicle is the winner, YOU NEED TO PRESENT VALUE THE EXPECTED ANNUAL INCOME TAX HIT FROM THE 401(K) AND SUBTRACT IT FROM YOUR END-OF-20-YEAR BALANCE.
Well, not surprisingly, most retired folks can expect their marginal tax bracket to be less than when they worked. (We will ignore rate changes subject to the whims of Congress, but a truly informed opinion and analysis presents alternative scenarios to the client.) So run the numbers — plug in different after-retirement marginal brackets and see at which bracket rate you break even. Don’t forget to do your present value calculation using the same percentage return you assume for the underlying assets.
A note on the what happens when you die: Internal Revenue Code Sec. 2042 provides that life insurance proceeds are includable and taxed in a decedent’s estate if the decedent, at the time of his/her death, exercised any “incidents of ownership” over that policy (such as being able to change beneficiaries, etc.). To keep a life insurance policy OUT of a decedent’s estate, it becomes necessary for the decedent to NOT OWN the policy. This means, of course, that the premiums (in our case, the $500/mo.) must be IRREVOCABLY gifted to, in most cases, a trust. Needless to say, this is not the soundest of strategies when the decedent doesn’t expect to hold a taxable estate upon his death, and really is a non-factor except for your exceptionally wealthier clients (assuming the current federal exemption amount holds).
Your comments, please?
July 27, 2007 — 9:16 pm
Brian Brady says:
“Your comments, please?”
Much better, Sir. Sorry I had to swipe to bring out the discussion.
Here is where I believe you’re incorrect:
“Well, not surprisingly, most retired folks can expect their marginal tax bracket to be less than when they worked”
That’s just not valid. Most retired folks face a higher tax bracket at age 70.5; they’ll have gobs of untaxed money coming at them.
“Gobs” is my highly technical jargon for “a lot of”.
I’ll post up a case study this weekend. We can hash it out there with your invited and valued contribution to the discussion.
July 28, 2007 — 1:05 am
winjr says:
No, you swiped for the sake of swiping. Had you wanted discussion, you would have said: “Prove it”.
“That’s just not valid. Most retired folks face a higher tax bracket at age 70.5;”
I disagree, completely. Sure, I’ve got a few clients kicking around in a higher bracket than when they worked, but the majority of my clients are NOT earning pensions in excess of their highest lifetime salary, nor is their total income in excess thereof. I have approx. 30 retired tax prep clients. Of those 30, only 2 are taking down annual income in excess of their highest lifetime salary.
The analysis becomes even more skewed in favor of the 401(k) for retired folks when the current dividend and capital gain 15% tax treatment is considered. Why? Because the first dollars of 401(k) distributions are taxed at the lowest marginal bracket; they’re not lumped on top of the dividend and capital gain income and taxed at a higher rate. I’m not going to get into a discussion that incorporates the AMT — I think its a little beyond the scope of what we’re attempting to establish here.
I expect this to be the point at which somebody jumps in and says “Well, heck, if your client isn’t earning more in retirement than when he worked, somebody did something wrong!” But that’s nothing more than a “My Investment Guy vs. Your Investment Guy” argument and, frankly, there really isn’t much new under the investment sun, just reiterations of past products meant to tweak an extra percent or two if everything goes well. The only real changes to investment strategy and, therefore, opportunity, come when THE TAX CODE CHANGES.
“they’ll have gobs of untaxed money coming at them.”
More than their highest salary? So Joe Doctor who peaked at $350,000 for the last ten years of his practice has built up his 401(k) to such an extreme level at 70 1/2 that his annual required minimum distribution will be in excess of that amount, even using a joint and survivor annuity table? If he’s married, and his wife is the same age, then the divisor is what? Around 32? (I’m guessing … I’m at home currently, not in the office). That means his 401(k) has grown to over 11 Million dollars at 70 1/2? Maybe, but that would require a fairly heavy front-loading of lifetime max salary.
But even IF the individual’s retirement tax bracket is higher than when he/she worked, I can think of at least one reason why the 401(k) might be preferable: The deferral period allowed. Joe Doctor, married, retires and begins the take down. He dies and the 401(k) (now an IRA, of course), rolls over to his wife. She takes down until SHE dies. Her designated beneficiary is her son, age 50. Assuming she was in pay status on the day of her death, now son gets the IRA and what is he allowed to do? That’s right … he can take this down over HIS actuarial lifetime. Extraordinary! The actual required payout period has been stretched to the point of being decades longer than the initial deferral period. The math doesn’t lie — under these circumstances, you can plug in a post-retirement tax rate higher than the pre-retirement tax rate, and still come out ahead. (We are ignoring, of course, but only for purposes of this discussion, the presumed tax bracket of the son.)
In any event, your statement that “most retired folks can expect their marginal tax bracket to be less than when they worked” notably does not imply that ALL retired folks can expect this result. (My position is that not even MOST retired folks can expect to face a higher bracket in retirement.) In any event, the entire point of this exercise is to demonstrate, hopefully in the clearest fashion for all to see, that proper tax planning is never obvious, and it is rarely universal in its application. Making bald, unsupported, unreasoned proclamations that “XYZ Insurance Product kicks the 401(k)’s Butt Every Time!” is irresponsible and insulting to anybody who’s been professionally trained to crunch and understand the numbers.
I’ve given my prior analysis some additional thought, and have concluded that the proper analysis should actually pin the present value determination as of a presumed date of death. Does anybody here know why?
July 28, 2007 — 7:30 am
Chuchundra says:
Less than one in 5 of all Americans 55 and older have retirement accounts of $250K or more and almost 40% of them have less than $25K saved. For the overwhelming majority of Americans, high taxe rates are not going to be a major concern during their golden years.
For most retirees, even ones with relatively well-funded savings plans, their major concern will be inflation, not taxes.
In fact, since your Roth contributions are made after taxes, you can withdraw them at any time and pay no tax or penalty. Earnings can be withdrawn tax-free to help finance the purchase of a home or cover you if you’re disabled. You can withdraw earnings to pay for education expenses, paying only taxes but no penalties.
July 28, 2007 — 9:30 am
Brian Brady says:
“Making bald, unsupported, unreasoned proclamations that “XYZ Insurance Product kicks the 401(k)’s Butt Every Time!” is irresponsible and insulting to anybody who’s been professionally trained to crunch and understand the numbers.”
Ok..prove it…with numbers
July 28, 2007 — 9:40 pm
Brian Brady says:
“I’ve given my prior analysis some additional thought, and have concluded that the proper analysis should actually pin the present value determination as of a presumed date of death. Does anybody here know why?”
I’m guessing you’ll discount back the estate tax implications. (Emphasis on “guessing” )
July 28, 2007 — 9:42 pm
Brian Brady says:
“I’ve given my prior analysis some additional thought, and have concluded that the proper analysis should actually pin the present value determination as of a presumed date of death. Does anybody here know why?”
Or…you’re trying to determine the expected after-tax benefit of a 401-k
July 28, 2007 — 9:44 pm
Michael Cook says:
Its interesting to see the progression of the comments here. I have been absent for most of the week, so sadly I didnt get to get in this at the beginning.
First, I would like to thank Jeff for writing such a thought provoking article. 49 comments and still going, thats great.
Second, I think this discussion is really falling into two different investment theories. There is also some bad math going around. Sorry Jeff and Brian, but I think you guys are the major culprits. The $750 pretax comparsion with the $500 after tax is a clear miss. Additionally, “equalizing the stock market return, with the return of the FIUL is also incorrect. While the volitality of stocks can certainly be argued, there is no way you can put equal returns out there. A reasonably invested 401K, should have an expected return of 10%. This number comes from my reseach and Jeff’s own article he wrote on his home blog last week.
Finally, there is no way to know what will happen in the next 40 years. Taxes could be higher or lower, but what is certain is that if an investor chooses a vehicle that is taxed now, they should have the right to invest that money. Based on the time value of money, most people will probably make more money working now than when they retire.
I think it is very misleading to suggest that $200,000 a year 40 years from now is more than a person’s current income. Even at base rates of inflation, that is simply incorrect. They might be in a lower tax bracket with $200,000 than they are now with $50,000. If you think I am crazy, think back to the inflation rates of the 70’s and early 80’s.
July 29, 2007 — 8:20 am
Brian Brady says:
“A reasonably invested 401K, should have an expected return of 10%.”
As can a reasonably invested VUL policy.
This post has gotten completely off track
July 29, 2007 — 9:21 am
TJ says:
“Additionally, “equalizing the stock market return, with the return of the FIUL is also incorrect. While the volitality of stocks can certainly be argued, there is no way you can put equal returns out there. A reasonably invested 401K, should have an expected return of 10%.”
One word: dividends.
July 29, 2007 — 9:22 am
TJ says:
“”A reasonably invested 401K, should have an expected return of 10%.”
As can a reasonably invested VUL policy.
This post has gotten completely off track”
Brian,
Two points…
First, the topic of Jeff’s article is about using Fixed Indexed Universal Life, NOT Variable Universal Life. There is a huge difference in the two products (i.e. DIVIDENDS).
Second, even if we were talking about VUL as opposed to FIUL, I would challenge your assertion that one can expect 10% returns with a “reasonably invested VUL”. There are costs associated with the VUL (COI, premium loads, etc.) that simply don’t exist with a 401(k).
July 29, 2007 — 11:14 am
Brian Brady says:
There are costs associated with the VUL (COI, premium loads, etc.) that simply don’t exist with a 401(k).
Now we’re back to costs versus performance, an argument that’s been shown to be mutually exclusive since the first 5 year performance of a no-load mutual fund.
Is anybody…ANYBODY..interested in a meaningful discussion about how clients could make money with one or both strategies or are your egos so large that capitulation or compromise is beyond your comprehension?
July 29, 2007 — 12:04 pm
TJ says:
Hey, I am always interested in a meaningful discussion. I’ve sold VUL, FIUL, 401(k) plans, etc. In my opinion they all have a place, but the original articles (and their author in subsequent posts) laid out the premise that 401(k)’s and Roth IRA’s were a “black hole” into which money was being thrown. This couldn’t be further from the truth.
Further, you can’t just dismiss my point about costs. I don’t want to read into your comment too much, but are you suggesting that the costs of a VUL/FIUL (namely the COI) aren’t relevant? These costs don’t exist in a 401(k)/Roth IRA. To do a fair comparison, you HAVE to take these costs into account.
Also, you didn’t address my comment that the original article was discussing FIUL, not VUL. Big difference, and if we are going to have a meaningful discussion, we should at the very least acknowledge the differences.
For what it’s worth, I myself have both “traditional” retirement vehicles (Roth IRA, 401k, etc.) and a heavily over-funded VUL. So I see the value in both approaches. Also, I have used FIUL strategies with clients in the past. All I am saying is that it isn’t the “magic pill” that the original articles paints it out to be, and many of the assumptions used to compare FIUL’s to 401(k)’s are wrong and don’t acknowledge the very real risks inherent in the FIUL strategy.
July 29, 2007 — 12:55 pm
curious says:
winjr, Thank you for your comments on the 28th. It was getting very fuzzy for the novice until your response. I have a friend who stumbled upon this blog and asked me to check it out for him. Your comments clarified some things for me. I have money in traditional, Roth and 401K and feel very comfortable with them. Unlike the FIUL they are easy to understand and therefore easier for me to feel comfortable investing in. Thanks again for your input.
Chuch, I’d also like to thank you. A long time ago I heard that the person who’s volume rises first in an argument is the person who’s run out argument and it sounds to me like you and winjr have been the ones to keep your voices steadiest in this blog.
July 29, 2007 — 3:15 pm
Mike Thoman says:
Brian and Jeff, I’m disappointed.
Before I continue that train of thought, let me say that I read all of your posts here on BHB, and have been for at least all of this year, and have come to respect what the two of you have to say. I almost always learn something, and always enjoy reading in any case.
But catching up late on this post (just reading it today – yes, I go back and catch up if I miss a few days), I find a heavily condescending, insulting tone, direct insults, and a complete disregard for anyone who challenges the two of you. If this is a broadcast, then nothing that I say matters to you, but then I know not to put any weight to anything you say. If this is a conversation/debate, then it needs to come back on track.
Jeff, if you wrote this post to persuade and educate, I think you’ve wasted your time and ours.
I hope some of the questions posed can be answered so that those of us that have an open mind can be improved.
August 1, 2007 — 9:41 am
Michael Cook says:
Jeff,
Perhaps a follow up article is in order? Despite some of the negativity out there, I have learned a ton from this discussion. Hell, I didnt even know what a FIUL was before this. I also learned that we have some very sharp readers out there. Everyone here has added tremendous value to the orginal article. Next time I decide to write an investment article I will certainly step my game up. Thanks to all.
August 1, 2007 — 4:38 pm
Michael Cook says:
Church,
I have been racking my brain for three days over that $30 puzzle you opened with, can you help me out? What am I missing?
August 1, 2007 — 4:41 pm
TJ says:
Any further commentary on these comments? This is a great topic and it is interesting to read the differing opinions.
August 7, 2007 — 3:12 pm
For Church says:
I just found this topic and it’s an interesting thread of discussion.. Michael, it’s only 25. there’s no 30.
the math was wrong that’s why it was confusing:
3 man paid 9 each = 27 dollars
the boy took 2 dollars from THE BOSS, not these 3 man:
27-2 = 25 dollars to the boss.
September 19, 2007 — 2:28 pm
Dave Shafer says:
Will a EIUL product match a 401K funded with mutual funds?
Hmmm, Well let’s look at what people actually get as a return from mutual funds.
There are many studies out there of this fact, the most famous are the Dalbar Inc. studies.
Any guesses??????
Drum roll……….
About 10% under what the market returns!!!!!!
Many reasons for this but it is beyond the scope of this reply.
The 401K folks like to set up a straw man and then compare the EIUL to it. That straw man is a mutual fund that returns what the market does. Truth is most folks aren’t able to “buy” index mutual funds with low expenses in their employer’s 401K. And the truth is that average consumer of mutual funds can’t deal with the downside variability of their funds.
Facts, are tough nuts to crack. But I willing to bet the return on a EIUL will be better than -10% from the future market return.
Do you even know what the EIUL’s invest in to produce their return???? It’s not equities!
December 17, 2007 — 2:33 pm
Jeff Brown says:
Thanks Dave.
December 17, 2007 — 3:08 pm
Brian Brady says:
“Do you even know what the EIUL’s invest in to produce their return???? It’s not equities!:
They buy index options, right Dave?
December 17, 2007 — 3:53 pm
Dave Shafer says:
Yes, Brian. They first invest in fixed return bonds (including mortgage backed bonds) to cover their expenses and the guarantee return. The rest in invested in index options. If the index has a negative return, then the options are worthless. If it goes up then you get the upside. Most of these options are sold with a cap, hence the cap in EIUL’s. For the EIA’s because there are much more problems with folks cashing out there has to be more liquidity to cover the risk.
The point is all the arguments/comparision over fee’s and expenses for EIUL’s v. mutual funds is moot because the investments are completely different.
Most of the people who argue over fee’s and expenses do so to avoid having people look at the reality of the investment. My fees are lower than your fees arguments, although attractive to a certain psychological group, are really meaningless compared to the comparision of the strategies.
December 17, 2007 — 4:49 pm