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Going back to realistic financial planning; How it looks. March 25, 2009

Posted by shaferfinancial in Finance, Uncategorized.
Tags: , ,

For a minute let’s forget all the propaganda about investing for retirement we have had pounded into our heads our entire adult life.  Let’s start from scratch and build a strategy that takes into consideration as many of the future possibilities as we can.  Here is how I think it should look [I will of course use my favorite financial instruments for this example]:

Jane and Joe are early 30s with two young children.  They have $60,000 in income with Joe working full-time and Jane part-time.  A couple of years ago they bought a house with 10% down.  They are responsible financially keeping debt limited to their mortgage and a little left on their cars.  Joe puts $400/month into his companies 401K plan, which his company use to match, but now doesn’t.  They just made their last car payment on his car, it was around $400/month.  They have $5,000 in savings.

Without changing anything they have $800/month they can save/invest.  The goal for them is to establish a solid financial base over the next 10 years.  Then, hopefully, they will have moved up in salary and have more to invest.

I suggest a 50/50 split over the next 5 years with half their savings money [$400] going into an equity indexed universal life policy and the other half into their savings account at the local credit union.  I will assume they get 2% on their money over this 5 years.  After five years, they will begin to buy shares in an REIT [HCN] which is highly liquid and has historically paid 7% in dividends instead of sending the money to the savings account.  I assume $0 transaction costs for this as they will buy the shares through the companies dividend reinvestment program which actually allows them to buy shares at 2% below market.  This stage I call the financial backbone stage as all the rest of their investing will be connected to this stage.  After ten years, with no increase in amount of investing it will look like this:

In the savings account they would have approximately $34,000.

The cash surrender value of their life insurance would be around $45,000 at year 10.

The family would have had $500,000 insurance on Joe.

Not taking into account any possible REIT appreciation [or depreciation], just the 7% dividend payment the REIT will be worth $28,800.

So after 10 years, the family has $34,000 [savings account] + $45,000 in available cash value [EIUL], + $28,800 in HCN REIT for a total of $107,800 of liquid reserves.  This is the financial backbone for the family.  Remember, I never upped the amount of the monthly investments, while presumably the family income has risen as Joe progressed in his career, so there is some wiggle room for another car payment or emergencies without fundamentally changing the plan.  The kids are now almost teenagers.

So where do they go from here?  Now they have options, perhaps Joe wants to buy or start his own business.  Or perhaps they want to start investing in real estate.  Or perhaps Joe has taken the time to learn how to be a stock investor and wants to invest in the stock market.  There are really no limits at this point.  Notice how I haven’t tapped into the families other savings account, their home.  Since they bought at the height of the market, it might take a few years going forward for their home to get back to that initial value.  But they are paying down their mortgage, gaining equity.  Perhaps they want to move up to another home now, or they had to transfer for his job and had to get out of  the house.  Regardless, their financial backbone isn’t dependant upon the value of their home at any given time.

Bottom line is that they are in position to get much more aggressive with their investing.  They should continue with the EIUL premiums, move their investment totals up as far as they can, and decide what type of investment is best for them.  Whatever they choose, they should be able to ride out a market downturn, job layoffs, sickness, family emergency, etc.  In their 40s they have 20-30 years to accumulate real wealth.

Now, all my assumptions are fairly conservative.  They could be in much better position or slightly worse depending on the future.  But at no time in the ten years is the majority of their wealth riding in the stock market.  The stock markets’ ups and downs don’t effect them either psychologically or materially.  They can concentrate on their careers, family, etc. with confidence.  If they need some money, they don’t have to take penalties or pay huge taxes to get it. 

Now, back to reality.  How many folks in their 40s have panicked when the stock market dropped over 40%?  How many made bad decisions because of their emotions?  Well when you have almost all of your wealth riding in some 401K/IRA and it goes down significantly, what do you expect to happen?

Contact me for some realistic financial planning no matter what your age.  You owe it to yourself and your family to get back to basics.

*******Any specific stock or REIT mentioned in this post should not be invested in by my recomendation.  I do not have a license to sell stocks, not does the SEC consider me an expert in stock selection.  Do your own research before investing in any stock/REIT.  Don’t make investment decisions based on what you read in a blog or a magazine or on cable TV or what a relative mentions.******************



1. Joshua - March 25, 2009


Sounds like an excellent plan except maybe leaving out RE investment such as BawldGuy would suggest.

I have another question: Can you do a post breaking down what all of these “fees” are that EIUL’s have that take around 10 years to recover before breaking even?

I understand that basically we’re buying a life insurance policy using a static monthly amount, guaranteed returns with no upper limit, and low loan costs when we want to withdraw any of it. Plus the benefit of passing the entire amount to our spawn when we expire.

But what are these fees, EXACTLY, and how do our payments into a EIUL breakdown if we were paying the estimated $400 / month you mentioned in this post.

Thanks David!

shaferfinancial - March 25, 2009


There is room for real estate investing, just after you have built a base and have reserves [bawld guy insists upon reserves]!
As to the fees, it is not an uncomplicated subject. Roughly there is a 5-5.5% premium fee, there are policy issue charges, administration fees and of course cost of insurance. All companies have different fee structures. The ones I like have higher cost of insurance and lower fees elsewhere. Since I minimize the face value of insurance this is one way to keep the fees down. To give you an example, I recently sent an illustration to a potential client. This person was purchasing roughly a million dollar policy, funding it with $250,000 over 5 payments. Now the total fees assuming he lives to his predicted age, 84, are $56,460. Sounds like alot until you break it down by years and then it comes to $1,660/year. Now compare it to your average mutual fund, which has 2% fees and you see year one it would be $5,000 [$250,000 X 2%]. So unless you lose alot of money in the mutual fund your annual fees are going to be much more over your life. By the way, Vanguard 500 Index fund has a 1.25% difference in its return compared to the actual index for the last year. Where did that difference come from if the reported fees are only .4%?
When I give my clients an illustration of the life policy I can give them an illustration with the fees included. Any client that ask for it, receives it from me as this client did! The software from the insurance company does that for complete transparency of fees; do mutual funds do that for you? [see above Vanguard question]. I can also illustrate an internal rate of return to the client based on the speculative future returns I put into the software. In the above Minnesota Life example, the fees after year 10 average around $60 + cost of insurance. So when you have the most $$ in the policy the fees are very small which is the opposite of how mutual funds work, with the more you have the more the fees are.

But the bottom line, as the recent Kiplinger article points out, is not how little or how much the fees are, but how much money you have when you want or need the money. Hope this gives you a flavor for the fee structure and how it differs from mutual funds!

2. Joshua - March 25, 2009

Much better detail and helps me understand much more better (as BawldGuy would say).

Second question, what is the minimum amount you would recommend for anyone to invest in a EIUL product? In your example you stated $250,000 over 5 payments.

shaferfinancial - March 28, 2009

The best way to fund these are over five annual payments. However, you can fund these monthly over 20 or 30 years and still reap the benefits. I think $150-$200 a month is a minimum to overcome some of the fixed expenses in the policy and to be able to have a workable amount of cash value at retirement for the less than 40 crowd. Bottom line if you can’t afford the $150 month then you need to make other changes first.

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