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Comparing EIUL versus 401K with Mutual Fund February 24, 2014

Posted by shaferfinancial in Finance, Uncategorized.

I haven’t done this in a while, and have had several folks ask for it, so I thought I would do this comparison again. Their will be two comparisons. First, comparing putting money into an 401K versus putting money into an EIUL. Second, taking money out of a 401k, paying the penalty, and putting it into a EIUL. Here is the first comparison. I will add a second post for the rest of the analysis.

For simplification I am using a Male, age 45, in good health. Younger folks get more of an advantage to the EIUL.

I assume a 25% total tax rate [higher tax rates create additional advantages to the EIUL]
I assume $12,500 pre tax dollars going into the 401K, which means $10,000 into the EIUL after tax.
I have the payments going until SS retirement age of 67.
I have retirement income starting at that point.

A little discussion is needed first. The strategies and expenses are very different between the 401K and the EIUL so it is tough to compare side by side each year. So, instead of creating that apples to oranges comparison I simply compare how much annual income one can have at retirement. For the 401K I do two calculations, one what the average person has gotten from their 401K/mutual fund investments over the last 20 years and what the actual index got. I do this because it would really be a big disadvantage to the 401K by using REAL returns. The reader can make their decision as to their ability to get higher than average returns in their 401K. For the EIUL, I use the 20 year look-back at current cap rates which is lower than REAL returns over the last 20 years. I am also assuming tax rates don’t go up. So in short, I am creating an uneven playing field with the 401K having a tremendous advantage over what has happened.

At age 67, putting in $12,500 into a 401K with an S&P 500 Index inside and NO expenses this saver would have $585,047 using actual data for the 22 years. The accumulation value in an EIUL with expenses and the same actual returns would be $623,771. But this is just the beginning. The 401k Saver must pay income tax on any money he takes out, while the EIUL saver will get tax free distributions. But, there is more. The 401K saver can only take out 4% safely because of sequence of return risk [this is the generally accepted ratio]. While the EIUL saver can take out a higher percentage because there is no sequence of return risk.

Let’s review:
At age 45 a man in average health puts in $12,500 annually in his 401K with an index fund with 0 expenses until he retires at age 67. He then starts taking our 4% per annum for retirement income. At the same time he puts in $10,000 after tax dollars into his EIUL for the same time period. At retirement he starts to withdraw tax free dollars.

At age 68:
401K disbursement will be $23,401 before taxes [$585047 X .04]. But wait he needs to pay taxes on that. Assuming the same 25% tax rate he is getting $17,551 after taxes.

Making the same assumptions for returns [actual 22 year returns] at age 67 he has $623,771 is cash value AFTER EXPENSES. He will be able to take out $58,279 per year until age 90 tax free.

What Wall Street wants you to do $17,551 annually.
What I suggest you do, $58,279 annually.

Any questions?

OK now lets get back to reality on the 401K. There will be expenses. People will make mistakes because of emotions. Dalbar has been tracking actual performance of investors for the last 15 years. Here is their 20 year average for investors in mutual funds: 4%.

So using a 4% average, you would have $445,223. That is after expenses and based on actual investor returns. However, that is really not the real number you would have, because that is an average number and doesn’t take into account the large negative numbers in the data set. But for our purposes this is fine to use because it points to the complete failure of the strategy being pushed by Wall Street and the government. So for those who are wondering that means $13,375 annually [$445,223 X .04 X .75].

Now you know why the median 401K is well south of $50K and even for the older age groups less than $100K.

Real numbers [well at least on the EIUL side], real comparison.

Those that are new to the concept of saving in an EIUL might be wondering why such a big difference. I have been writing posts on this for years now, but here is a synopsis:

1. You end up paying more taxes if you defer your taxes to a time after you have compounded gains in an account. The old adage, rather pay tax on the seed rather than the crops at market helps people visualize the difference.

2. Sequence of returns matter. Large negative years hurt more than large positive years help. If you can cut off the negative years as the strategy inside an EIUL does, even with a cap on the positive returns you end up with much higher accumulations. Further, large negative years at the end of your savings years or the beginning of your retirement years would destroy your ability to use the money as income. You simply don’t have time to make up for the loss in value.

3. With little expenses at the end of your savings years when the accumulation is highest, you gain an advantage over a vehicle which charges expenses by a ratio throughout all years.

4. The loans you take out of your policy are at little or no cost in an EIUL.

5. If you are the wrong side of the death curve and die early, the insurance will complete your financial planning for your family.

6. If you want your money early, you can get at it without penalties or taxes. Never underestimate this because about half of all people take money out of their 401Ks early and pay a hefty penalty for doing so.

7. You control your money not your employer.

8. Since death and taxes are the only sure things, this is a way to take advantage of both.

9. You sleep better not worrying about when the stock market will swoon.

10. The historic data is so overwhelming in favor of the EIUL that you have to wonder why anyone would go that way once they understand it. Bottom line stock market investing is much riskier than most people understand, so why bet your retirement on it?


1. Phil - June 3, 2014

What is meant by:
“However, that is really not the real number you would have, because that is an average number and doesn’t take into account the large negative numbers in the data set.”

Doesn’t the average, by definition, take into account all positive and negative values?

shaferfinancial - June 3, 2014

Average rate of return in a data set with negative numbers overstates the actual return because negative numbers hurt more than positive numbers help. Simple thought experiment: You invest $1000. First year, goes down 25%. Second year goes up 25%. Average rate of return 0%. Actual value= $937.50. [$1000 X [1-.25]= 750…$750 X 1.25= $937.50]. So average rate of return of 0%, yet loss of $72.50.

Imran Makani - October 8, 2014

You are right about that. Average and Actual are two different things. Lot of people think if they are averaging something positive that means they are ahead of the game. They really need to check the actual return.

2. Ap999 - August 11, 2014

I save a high amount, and diversify as much as possible. I personally do both here, I max my IRA/401k, then max my IUL to the limit, the rest goes into a taxable account containing low cost index funds(Vanguard). Am I on the right track here? I am 30 years old.

shaferfinancial - October 8, 2014

Sounds like you are doing well.

gregturn - November 1, 2014

There’s a little secret not widely mentioned. You can beat out market hiccups, fees and taxes when you flood your accounts with lots of cash. It’s the same effect as how paying off a loan at break neck pace makes the interest irrelevant.


3. gregturn - November 1, 2014


Is the dalbar rate “average” or annualized? I guess I assumed it was an annualized (geometric mean) figure, but that may have been a faulty assumption on my part. If it’s arithmetic mean, it’s an even worse indictment of the mutual fund industry!

4. shaferfinancial - November 1, 2014

Greg, annualized.

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