About David Shafer
Hello. I have been fortunate to combine my two professional interests, finance (B.S. Florida State Univ.) and social science (Ph.D. Brandeis Univ.), into my work as a Wealth Coach. This blog is dedicated to creating knowledgeable consumers who with a better understanding of wealth creation, finance, and money will be able to build a better future for themselves and their families. I believe the current state of financial/retirement planning is really about what Wall Street and the Lenders want individuals to do, as opposed to what the evidence demonstrates works for folks. Hope you find the ideas and information useful, educational, and entertaining. If you find this blog unique and interesting please go to my wealth coaching web site: www.shaferwealthacademy.com.
You can contact me directly at dave@shaferwealthacademy.com
Yours in wealth creation,
David Shafer
Right on!
“I believe the current state of financial/retirement planning is really about what Wall Street and the Lenders want individuals to do, as opposed to what the evidence demonstrates works for folks.”
You couldn’t be more right. The evidence to your point is all around us. Well said.
Yes,
It is obvious once you learn how to see it!
Hi David,
Here’s a question that I would value your opinion on.
I’m looking very seriously at an opportunity to market an EIUL, specifically the Life Builder option from Aviva, as a retirement funding “option” for small business owners in their 30’s and 40’s. The company I’d be working with is focusing specifically on the small business person who doesn’t spent time with financial planners or a retirement plan of their own. I work with this niche now selling health and employee benefits. I am finding that small business people are often underfunded for retirement or not funded at all.
Seems that there’s lots to like about the upside of this Aviva Product for this kind of client looking to be somewhat conservative, (decent cap @ 12% and reasonable floor of 2%, plus little to no tax on the distribution), but one thing stands out as a potential red flag. Maybe it’s in line with retirement funding investments of this risk class, but I’d like an impartial opinion.
I have a sample Aviva illustration showing a contribution of $300,000. over 25 years at an assumed rate of 7.95% , that results in a nice $86,000 per year non taxable income at age 65. (The death benefit varies but the lowest it ever gets is $500.K)
However the “minimum guarenteed” column at 2%, shows the net cash value after 25 years, coming in at just under $200,000. I guess that reflects the contributions + the 2% minimum, minus the total fees over that time.
I know that’s it’s worst case and not very likely, but is a 33% loss of total contributions, in line with this type of products “potential” downside? I know that stock portfolio’s can do worse and even get wiped out. Mutual funds aren’t always so great and most everything has commissions and fees. So how does this compare to other funds out there with regard to the potential loss?
Aviva seems to be a solid company and well respected, but it just seems like a lot. I like the simplicity of the product and I think there’s lots of hard working types who just don’t have the time or patience to work with financial planners, that would feel the same.
However I can’t sell something wholeheartedly unless I feel comfortable I’m recommending a winner. Please straighten me out. I appreciate any time you can throw at this.
Best Regards,
Brian.
Hallowell, Me.
Brian,
Several points. 1st you said that your clients are often not funding a retirement plan or at least underfunding it. So whatever you do will put them in a better position than what they are now in. Life Insurance has been used for business planning for a long time and this would be my thinking on it. As a business owner they can pay themselves a bonus, which is a business deduction to pay for the life insurance and even another bonus to pay for the income tax on the bonus. The life insurance can act as a way their heirs can extract value from the business if the owner dies prematurely. Since many small to medium businesses are totally dependent on the owner and fall apart rapidly if the owner dies, this is a great way to extract value from the business. And if everything goes well, and the owner sells the business, then the cash value built up is additional bonus value from the business. So in that sense this is a no-brainer for small business folks.
As to the specifics of the product, the guarantee is really not important. Bottom line if the S & P 500 Index doesn’t return 2% for 20 years then we are all in trouble. Load up on canned food and ammo, because the $$$$ has hit the fan. The economy would implode and all retirement plans will be history.
Here is the point; business owners can take tax breaks to fund the EIUL, extract value from the business, and have access to a pool of money tax free (if set up right) to use for whatever needs they have be it retirement income or travel. And it all remains beyond the reach of lawsuits (except divorces). Is there a cost? Yes, but compared to the costs of other strategies it is a reasonable cost.
Don’t get into the straw man argument of which strategy gives a higher rate of return.
Now here is a trick of the trade. Have the owners fund the EIUL as quickly as possible (5-8 years), even if this means having a lower face value. You can always add another policy if their cash flow improves. And make sure you structure it to minimize the life insurance under IRS rules. The quicker you fund it, the better the strategy works as you overwhelm the cost of insurance early to maximize cash value on which to get interest on.
Feel free to e-mail me at dave@shaferwealthacademy.com for further disussion.
If your client still qualifies for Roth IRA contribution then buying 20-30 year term and investing the difference into the Roth will give him much more equity after 30 years. Consider no-load, low fee index funds such as those from Vanguard (0.21% fee compare to 4-6% premium expense of the EIUL, i.e. the cash value have to make at least that much just to break event). Event with the Prime Money Market Fund (almost a safe guarranty) paying only 3-4% return, he still ends up better than the EIUL because expense eats up a lot of his capital in the first 10 year of EIUL and reduces his earning potential. You know how the power of compound interest works. A little now (if you consider 4-6% a little) makes a huge different in the long run.
Once again you don’t seem to get the point. Business owners have a different calculus than your average employee. They have cash flow to deal with and if successful lots of it. They have an asset to protect and finally they hopefully have taxation issues. We are talking about how to hedge large amounts of cash flow against taxation and still get a decent rate of return. A business owner has a wealth creating asset, his/her business so they aren’t looking to create wealth only preserve it. As such life insurance works well to solve their problems; wealth protection and a tax hedge.
As for employee’s I have covered this several times in posts. The point is that neither EIUL’s nor Mutual Funds work well for creating wealth. The data is out there for all to see. Even your hero, Bogle, admits this. Vanguard along with others have looked at individuals’ rate of return from mutual fund ownership and found it to lag the market index between 7-10%. I have also blogged on why this is. If your theory is that someone will make a financial outlay every month for 30-40 years without fail, then you need to rethink your theory. It just doesn’t happen and that is the bottom line.
Why do people who invest primarily in mutual funds end up with so little wealth?
Hi David,
Thanks so much for your response. That really addresses the concerns I had. I like your idea of funding the product with ‘bonuses’ which are tax deductible. Hadn’t thought of that one. I think the rest of what you said leaves me very comfortable with providing this kind of product to my clients.
Your response to Minh regarding employees vs. owners is a question I had as well because you hear so much re: Mutual funds/ Vanguard etc. Your point that they are two very different investor types make good sense.
I like your common sense approach. I wish I had come across it earlier in life. If you lived in my town, I’d buy you lunch and pick your brain a little more. In lieu of that I’ll just keep up to date on your posts. Thanks again for your time.
Best Regards,
Brian
Thanks Brian, Where is Hollowell Maine? I am in Bartlett New Hampshire for the summer!
Hi David,
Hallowell, which is Maines smallest city, is 55 minutes north of Portland, Maines largest city. We’re a suburb of Augusta, which is the capitol. We are considered the Antique capitol of Maine as our main street is lined with shops, among other things. Very cool downtown.
We have a locally famous restaurant called Slates in the middle of all that. If you end up over this way, drop me a line. We’ll grab lunch there.
Thanks again for you’re insights and have a great summer.
Best regards,
Brian