I heard about Douglas Andrew's Missed Fortune 101 when somebody recommended it for the “Best Financial Book I've Ever Read” series on FreeMoneyFinance. (FMF is merely the messenger, so don't shoot him! :)) It immediately drew criticism from other readers. I posted a comment after reading part of the book and reading the reviews on Amazon.com.
Well, I read the rest of the book at Borders today and I'm not even going to post an Amazon link to it. Please don't waste your money on this book. (EDIT: Actually, why on Earth not? If you really want to see how bad this book is, why not check it out? Or, you might think I'm full of malarky, and this post might convince you even more that you want the book.)
The main point of the book is that you should free up those “lazy, idle dollars” that are “trapped” in your home to use arbitrage to purchase safe, tax-free investments vehicles. This mystery vehicle — which he doesn't mention until Chapter 9 and teases you along the entire way — is investment-grade life insurance products.
Build up a lot of mortgage debt — as much as you can, in fact, because it's tax-advantaged debt and your “friend” Uncle Sam is helping you with that debt — so that you can buy life insurance and get a better return than you're paying to service the mortgage debt. And when you want to tap into your investment (which you can do at any time you wish, unlike 401(k)s), don't do a partial surrender but instead take out a loan. It's just a difference in nomenclature, really, and loans are tax-free, he says.
This book has got to be about the biggest billboard advertisement for mortgage brokers and life insurance companies that I've ever seen. You definitely can't judge this book by its cover — you need to read the majority of the book before you get to this!
It beats the tax savings of mortgage and home equity debt to death over the first eight chapters. It rarely, if ever, mentions that you're paying a lot more in interest to the lender than Good Old Uncle Sam will ever give back to you in tax savings through the mortgage interest tax deuction.
It drags out every lame excuse about why it's a bad idea to prepay or accelerate your mortgage payments, including:
“No matter how much extra you pay against your principal, the next regular payment is still due.” (p. 107)
Yes, until you make the last payment. Then you're done! Paying extra against your principal brings this point closer. Or this one:
“Equity is good, but maybe it shouldn't be all trapped inside the home.” (p. 108)
Mr. Andrew often uses these negative words about untapped home equity, like “trapped.” Or:
“You shouldn't prepay your mortgage with inflated dollars.” (p. 110)
If he uses this to mean dollars that are inflated in value, then you're also paying more interest in “inflated” dollars. Or
“You don't earn interest on your down payment.” (p. 110)
True, but you're paying less interest to the lender because you borrowed less.
That, and some of the reasoning is not only wrong, but also insulting to common sense and probably dangerous if someone were to follow it. Here's his reasoning about how using leverage increases your assets and paying cash decreases your assets (paraphrased):
Borrow $100,000 from a $100,000 home that you own free and clear, and you have doubled your assets — you now have the $100,000 home and $100,000 cash. Pay cash and you've decreased your assets — what once was two $100,000 assets is now only one. (from content on p. 112)
You see the big flaws here?
Neither activity increases or decreases your assets in the simple analysis. If you borrow $100,000 from a house, yes, you get $100,000 cash, but you also owe a mortgage of $100,000, which is a liability that cancels it. Or, you can say that you don't own the house anymore — the lender does — and all you have is the $100,000 cash. Likewise with the second example, you didn't own the house in the first place, so you only had your $100,000 cash. Afterwards, you had a $100,000 house. No change.
In part 2 I'll continue with dissecting his “disadvantages” of accelerating payments on your mortgage.
In the meantime, again, please don't waste your money on this book. Instead, I recommend real wealth-building books like Stanley and Danko's The Millionaire Next Door, Masterson's Automatic Wealth, or Bach's The Automatic Millionaire.
Thanks for the warning – even for a beginner like myself his logic is obvious bs, judging by your review and inclusions of material.
I am one of those "financial planners" who have read and use Missed Fortune 101 as a base for my seminar and consulting. Some of the stuff he teaches I don't sgree with, but I do think people need to be more "liquid" then what they are. I also believe that people MUST take advantage of there 401(K) especially when companies match! So from a "common sense" stand point, what interest rate would you pay to get a guaranteed 50% return on your investment? Would you borrow money from your home at 6% to put it in your 401(K) to get a guaranteed 50%, plus an extra tax deduction? I just don't recommend using an insurance policy as an investment.
Hi Rick,
Thank you for your thoughtful comment. I hope that this is a thoughtful response! 😉
401(k)s are very appropriate investment vehicles, especially with the matching from the employer. Getting that match is like getting free money. No issue with me there — I do it!
If I could borrow 6% to get 50%, sure, I'd borrow as much as I could. (After making sure it's legal, of course! 😉 )That's a 50% ANNUAL return I'm talking about. However, the 6% and the 50% you're talking about do not represent the same thing.
The 50% matching from the employer is a ONE-TIME match on the contribution — you don't get the match for that money every year. (Granted, the matched amount compounds at the same rate as the contributed principal, but that rate is probably far lower than 50% unless your company is in a boom.)
The 6% you borrowed, unless you pay the principal down, will cost you 6% again and again each year. (OK, maybe 4-5% with the deduction.)
The first year — the year you get the match with the borrowed money — it's a windfall. You borrow $10,000 (say) and contribute $10,000 to your 401(k) and get a $5,000 match. Great! Now, the $15k in your 401(k) earns whatever it earns, and you owe an extra $10k.
As long as you're earning more in the 401(k) than it costs you to service the loan, you're ahead. If the return goes down (or you lose some principal, which can happen with company stock), you surrender some of your gains, but you still owe the payment to the lender.
And, though a 401(k) is probably more liquid than real estate, I don't think you can take money out of it without cost. If you take money out as a loan, you owe interest. If you take a distribution, you owe taxes and may owe a penalty.
I don't know what situation your clients are in where you'd recommend this. It could very well be quite appropriate for some of them.
I guess I'd ask why they need to borrow to fund their 401(k). It would seem preferable to fund it with money they don't have to borrow.
Thanks again for your comment and thanks for reading my blog!
mbhunter:
I don't recommend people (for the most part) refinance their home and take the equity out and invest it for a lot of reasons. I recommend "interest only" type mortgages. Let's says that instead of paying a 5% fully amortized principal and interest only loan on a $200,000 loan (the payment would be $1073.64), on an interest only loan, your payment would be $833.33 per month, a difference of $240 per month. Now if you take that $240 per month, put it in your company's 401(K) with a 50% match, you are now putting $360 per month into your 401(K) every month (Remember the company matches 50% on everything you put in),in 30 years that account would grow to over $250,000 assuming a 5% rate of return ($20,000 in 5 years). In 30 years you could take the $200,000 and pay off the mortgage and have $50,000 left. Now I don't know if I would recommend taking the whole $200,000 out at one time and paying off the entire mortgage. I don't have a crystal ball what things will be like in 30 years, so don't know what tax consequense will be like (if any)! (We still haven't even touched upon reverse mortgages and why people with their home paid off are refinancing!).
Are there tax consequences, probably, but I didn't even mention $2,880 tax deduction you get every year for putting the money into the 401(K)! If you're in the 34% tax bracket, you now have almost an additional $1,000 you could put into that account with still a 50% company match. Now in 30 years that account would grow to………almost $350,000! If yiu assume a 6% rate of return, that number goes up to nearly $420,000! With almost $30,000 available in 5 years! Now keep in mind, we don't recommend people invest in company stock type investments. We are looking for something safe and conservative.
The point is this. Alan Greenspan (THE MONEY GUY) said in a speech MOST people should not be in 30 year FIXED mortgages, yet most are. Why are they when the average person will refinance or sell their home 3 times in a 7 years period of time? because our parents told us too! The same parents who retired from a company after working for them for 40 years and always lived in the same home! Americans do not have savings. When you make a 30 year commitment, you have no idea what is going to happen in that time from job security, to health, etc.
You could have $100,000 equity in your home, lose your job and I guarantee you are not getting a loan, won't be able to refinance the house and get the money out, etc. Unless you do something "illegal," or you can qualify for a loan just based on your spouses income.
This fascinates me.
Doesn't anyone strive to own property free and clear anymore? I personally don't want to owe anybody anything, and I'll get there a lot faster if I pay down the principal. Interest-only loans look cheaper, but you pay the lender a LOT more interest in the long run.
I also don't get the argument against fixed rate mortgages — even from the Maestro himself. I think ARMs are incredibly risky right now — not worth the initial lower payment — because we're coming out of a period of stupidly low interest rates. Sure, rates may go down, but I'd rather not find out. If people are left holding the bag, I want to be far away.
If people are moving three times in seven years, ARMs might be all right. But if you end up not moving, where are you then? Your payment goes up if interest rates rise. Further, if the loan is interest-only, you might end up upside-down on your mortgage if property values don't continue going up every year.
Lastly, I can see how I might not immediately qualify for a loan if you lose your job, since there's no income to pay it back. But $100k in equity is a pretty good cushion in most cases — and hopefully it isn't the only asset you have. As a last resort, after everything else is exhausted, you can sell the property and rent elsewhere for quite a while on the $50-70k in proceeds from the sale. Basically, having the cushion gives you more options than not having the cushion.
1. You can get interest rate only mortgages that are fixed. You don't end up owing anyone anymore interest, remember you are making interest only payments, not principal payments.
Let me ask you a question, would you invest $1,200 a month for the next 15 years (for a total of $216,000) to get $58,000????? That's exactly what you get with a regular mortgage. After 15 years on a 30 year mortgage for a $200,000 mortgage @ 6.00%, you still owe more than $142,000 on that $200,000 mortgage!!!!!! Let me repeat that, after 15 years on a 30 year mortgage, you still owe 70% of what you borrowed! Depressing when you think about it isn't it? The majority on the first 18. 5 years the payments are going to interest!
Now we can argue about I have to pay something to live there. Right, but why pay more for an "investment" that is losing money than you have to? People need to understand that their home is their asset, NOT their mortgage!
2. Every "high income, high net worth" person I know has an ARM, even though they could "afford" the 30 year fixed. Look at Donald Trump the most famous billionaire and how leveraged he is when he doesn't.
3. Now your last statement about hopefully have other assets, you could sell the home and live off the $50,00-$70,000 left over. Why lose the $30,000 to $50,000. Why not have that $100,000 in something liquid so you don't have to sell those first 15 years ????
The thing to remember here is that you are making a 30 year committment and there are a lot of things that are variable in those 30 years. Your home is the asset, not the mortgage!
We have a difference in philosophy here. I suppose I wouldn't be a very good client 😉
1) I don't think I've ever thought of my mortgage check as contributing to an investment. It's paying off a debt. I expect to pay back more than I borrowed.
2) Even though a good chunk of my payments go toward interest at the beginning, some of them go toward reducing my debt. Interest-only loans would do nothing to reduce my debt. In that case, I don't have to worry about just the majority of my payments going toward interest — ALL of them would!
3) I don't pretend to know what kind of mortgages Donald Trump has. Leverage is good only if you can earn more than you pay out on the debt that controls the asset — that's how The Donald or anyone else would make money with leverage. Being highly leveraged when there's no return on the asset controlled is financially reckless.
4) Having an ARM or having a fixed-rate mortgage depends on your situation. The ARM shifts the interest rate risk to the borrower; as a result the lender can charge a lower rate initially because the lender knows for sure that later they will be able to make money on the loan. The fixed-rate has a higher rate because the interest rate risk remains with the lender. If 30-years go above 10% and my mortgage is 6%, oh well, I win. I'd like to protect myself from the interest rate risk, because it's a substantial risk, and because I don't expect to move soon.
ALL my clients say the same thing when they start out, but almost 70% "see the light."
I have started reading the book and for someone who has an MBA in this stuff, it was still somewhat confusing to me, so I understand the negatism.
Scott Burns even wrote in an article: • Overstating tax benefits. Every illustration in the book is based on a 33 percent state and federal tax rate. In fact, few face such tax rates. Certainly, the Prudents, the $70,000-a-year couple on Page 161, don't face a 33 percent tax rate. They face a 15 percent federal tax rate plus a possible state income tax.
Mr. Burns needs to check his tax tables! Because right from the IRS tax tables a married filing jointly has a 25% tax rate for income $58,101 – $117,250 and to assume an 8% state income tax rate on top of that, isn't too far off.
I can go through thousands of scenarios, but everyone's financial goals and situations are different. It boils down to peace of mind. But most people have credit card debt that they are paying double digit interest rates on and that will take 30+ years to pay off and non-deductible interest.
I am in an industry where people will be available 24/7 for customers, they will wash their cars to get their business, give them a tank of gas, etc. Me, I am only available during normal working hours and will only take on 10 new clients per month and the customer has to come to me! In addition, if they just decide not to show up for their appointment (without calling ahead of time to cancel), I respectfully tell them "I can't help them."
I leave you with this and wish you all the best. You talked about having $100,000 equity in home. Does the value of your home change whether or not you have $100,000 or $0 equity in your home (of course not). But take that $100,000 and buy an additional $500,000 to $1,000,000 in real estate with it and wouldn't that change your financial situation?
Unlike Mr.MBH,I have had an adjustable rate mortgage of one kind or another for the last 19 years. ( Yes, as per Mr. Greenspan, I have ( for the most part) paid below average rates and saved a small fortune in that time period. I believe the next 20 years to be much of the same.
And no, I don't ever strive to pay down my mortgage. Why should I? Because you know who is going to pay off my mortgage for me in the end? That's right. The life insurance company. That's who.
No, I won't be around to enjoy that, but my wife will. And in the meantime, I take dollars I would be paying to the mortgage company, and I invest them.
Is this sinking in yet?
Second, I have actually used Mr. Andrews advice, and my assets are growing like weeds, AND I get to sleep well at night because they are not subject to stock market volitity or even a crash like 1997, 2000, and of course the next one that will surely come at some point.
I say this because even though the tax benefits of a 401k are obvious, you live will the false notion that you are safe and secure in stock mutual funds as a form of investment for your 401k.
( Yes, I understand you probably have some bonds too, which can also lose money if rates rise)
What you have not lived through ( and what you have forgotten in your lame analysis)is that unless you have 25 years to withstand a stock market drop, ( yes, you might, but lots of people don't) your portfolio is going to lose a lot of it's value at some point in time.
Unless you have years to make that up, your portfolio is going to suffer lack luster returns at best.
Do you think someone in say their early 40's can take a 20-25%% hit on a stock portfolio that took them 20+ years to accumulate? No they can't. Not if they want to retire at 55 or better.
So maybe you should read Doug's book again. His methods work. But sadly you don't understand them because you fail to grasp how real life really works.
I don't blame you really. You haven't been through a stock market collapse, or you were never in danger of losing your home.(and thus giving up all those prepayments you made to the mortgage company.)
You need to re-read the book, and maybe, just maybe, you'll see that after 30 years of doing this, the guy knows what he's talking about.
Thanks for your comment, Don. I appreciate the time that you've taken to post your views.
Mr. Andrew's strategies may be appropriate for some people. I seriously doubt they're appropriate for most, and almost certainly not for me.
If it's working for you, fantastic. You have my blessing, and I pray that it continues to work for you. If a college student can make over $100k in less than a month selling pixels on a webpage, then I'm sure that people can do well this way, too.
Perhaps I've become more skeptical after being once bitten. Despite your suggestion to the contrary, I have suffered losses in the 2000 crash — one of my holdings went down 99%, actually, because I didn't see what was going on in time. Since then, I've taken more responsibility for my finances and look over things more closely.
I know that I don't want to depend on a positive spread between my insurance return and my mortgage rate for my financial well-being. There are way too many things that can go wrong for me to even entertain the option.
If Mr. Andrew could make his points in the book without using emotionally-charged language like "lazy, idle dollars" and the like, and without making confusing comparisons like I've outlined in my original post, then I could take his ideas more seriously.
I have no doubt that Mr. Andrew knows what he's talking about. And he, like any other author, is entitled to sell his ideas. The way these ideas are sold really rubs me the wrong way, and on closer inspection I don't agree with most of his thought process, and I certainly don't agree that this investment strategy is the slam-dunk that he makes it out to be.
Just as one final comment, I suppose lately the notion of not being perpetually in debt does seem like it's not real-life, and maybe from another planet. Since so many people have so much debt, it seems almost normal to live beyond one's means, and abnormal to actually own anything free and clear.
I guess that makes me a wierdo. But removed from reality? Eventually I'll own my house, and I'll be alive to see it, God willing.
I won't have to die to finally pay it off.
Hey MBHunter, the fact is that with the type of logic you are talking about, you are basically running from debt instead of moving towards wealth. Noone says you have to pull all of your money out of your home and put it in a life insurance product that you are not comfortable with, but there are many things that can achieve goals for you that you would never even think of otherwise if you were to stop running from any sort of debt. There is good debt when other peoples money is used to put money into your pocket. Besides, last time I checked, there was risk in real estate as well… I think had a great example of a very conservative plan with the interest only savings being put into a 401K or whatnot. You still pay off your home in 30 years (although I would probably just throw a party and PRETEND I paid it off) and you have an extra 50 grand to do whatever you want with. Anyways, you are obviously a good guy, but I think there are alot more options out there for you that dont necessarily mean you have to place it all on black.
But I am not washing your car for business either…
Hi Daniel,
Thanks for the comment! I appreciate that you took the time to respond.
Your point is well taken. Debt is not always a bad thing, especially when it's used to make more money.
I just don't think it's advisable to borrow, with the debt being secured by the roof over my head, to invest the money somewhere that I don't have direct control over the performance of the investment. There's nothing I can do to improve the performance of my life insurance policy's rate of return. Or the S&P 500. Or the price of gold. I just buy and hold until I sell. Those are the only points of involvement. I'll do that with discretionary savings. Not with borrowed money that I have to keep paying back even if I lose everything of what I invested in.
I suppose that you could make the case for borrowing for capital equipment used to produce something, because THAT'S something you can control, do due diligence, pound the pavement, etc., to achieve a return. Or buying real estate, fixing it up and/or renting it (again, active involvement here) for income — not solely for capital appreciation as a lot of people are doing now.
I do have some other side ventures, but I've started out small (I'm neither a born salesman nor a born businessman, but I'm learning) and haven't had to borrow to do it. So, if it goes down the tubes, I'm not tethered to any debt because of it.
As for my mortgage, I don't see any other place I can put my money right now where I can be guaranteed better than 4% rate of return (in terms of interest payments saved). This is after funding my 401(k)-type plan and my IRA, and after accumulating some living expenses. I don't need the money right now, so why not reduce the amount of money the lender gets from my mortgage?
As far as debt goes, mortgage debt isn't the worst debt you can have. But that doesn't mean that more of it is better, and unless I can see an investment opportunity that (a) will mostly be within my control as to its performance and (b) is at an AWFULLY good price, I'm not going to tap into my equity to get it.
Those of you who dispise this book are severely missing the message. The book explains clearly why equity in a side fund is better than equity in your house. I can show you 10 out of ten times, how taking 200,000 in equity out of your house, will generate a higher retirement, than sending $1000.00/mo extra to your mortgage company just to pay it off early. Having a side fund gives you safety, so if you HAVE financial trouble, you won't have the trouble of needing to access your equity and not be able to get it. And coming from an HR background, most companies only MATCH 401(k)s up to a percentage of contributions made. Those matching dollars, typically will end up paying the TAXES due on the 401k money when accessed in retirement, so its a wash anyway. The point is simple. Its not a BILLBOARD for the insurance and mortgage industry. Its about responsible retirement. SURE.. we're going to pay interest on our mortgage forever.. if we want. But we always have the choice to pay it off with what we have invested. Its always better to keep that money safe, and set aside. And, the example of the 100,000 asset and the 100,000 mortgaged home.. its a WASH on DAY ONE ONLY.. once the cash and the home appreciate.. and the equity is continually moved to the side fund.. the assets grow much quicker.. due to compounding.. you are missing the real meat of the process. Give me an example of why you feel this info is BS, BOGUS.. whatever you want to call it.. and I'll show you examples of how its the best idea out there for a safe secure retirement.. you still want your money in a 401K that can tank 40-60% like it did in 9/11???? How can you PLAN a retirement when you your money has no PLAN.
Hi Erik, thanks for your comment.
I can see from the responses that there are a lot of people who see the upside of Mr. Andrew's methods.
Mr. Andrew's argument with the $100,000 house, cash, etc. is just wrong. No matter how hard you try, you won't double your money taking all of the equity out of your house, because you acquire a mortgage at the same time, which is a liability for you. $100k + $100k – $100k is not $200k. You can USE the $100k home, but you don't OWN the home free and clear.
People would be best served building up a side fund the old-fashioned way — saving and putting it in a money market or a bank account or something like that. Insurance has exhorbitant costs associated with it, and borrowing against your house to buy insurance is adding insult to injury except under the most optimistic of circumstances.
The road to riches is rarely this easy. If it were, why aren't more people doing it? Perhaps, indeed, you and the rest who follow Mr. Andrew's advice are striking financial oil here. If you're following this advice, I really do hope that it works out for you, and I'll chalk it up to my skepticism that I'm not a millionaire now because I didn't follow the same path. However, I also won't be heavily leveraged if the tides turn on you.
We've both placed our bets. Let's see what happens, shall we?
Thanks again for your comment.
I believe several of Mr. Andrews points are well articulated; however, here are a few points to think about. The MF plan will work for most "disciplined" people. I am a mortgage planner and work with various financial planners who recommend this type of plan to their clients, and I've seen many homeowners build quite a bit of wealth using their equity to build up side funds and acquire more real estate. I've also seen many homeowners take cash out from their home and buy: (1) boats, (2) expensive cars, (3) luxury type personal goods, and other various depreciating assets. The MF plan will only have a chance to succeed for those people who are well disciplined with equity from their home. I have seen quite a few people squander equity from their homes on these types of items, thus defeating the purpose of this plan and putting them in a worse financial position.
Hi Nate,
Thanks for your comment.
Your point about putting the money borrowed from equity to good use vs. blowing it on depreciating assets is an excellent one. Dipping into equity to buy a boat, in most cases, is dumb.
How you use the money you take out of your house has to be a REALLY good investment before it should be considered. Mr. Andrew's choice of investment didn't seem to make the grade now. That, and recent rumblings about tweaking the mortgage interest deduction adds more uncertainty. Rules can and do change, just as returns on invested assets and interest rates can change. There may have been a time when arbitrage made sense, but that time doesn't seem to be now. (I couldn't do the same thing with my current life insurance policy — I'd lose money every month.)
I'd say that people who post stuff on sites like this have NO idea what they're talking about. I will say, for an average American, you can't take a book like this word for word either. Seek the advice of a QUALIFIED Financial Advisor. You wouldn't try to do open heart surgery on yourself. Why would you think you can manage your finances at a high/efficient manner?
Hi CJ,
Thanks for your comment. I'm not exactly sure whose side you're on from your comment, but I'll be the first to admit that I have a lot to learn about managing my finances.
Viligance in understanding what you're investing in is essential, be it through your own research or through the advice of a qualified financial advisor. Ultimately, it's up to the individual to be responsible for his/her finances. If you believe that you would do better with a financial advisor, that's part of being responsible, but at the same time it's irresponsible not to monitor the advice being given.
Having been both a Mortgage Planner and a Debt Elimination Specialist for the last 16 years I can see both sides of the story make sense.
On one side we have the argument that on a 100,000 @ 6.5% with monthly Principle and Interest Payments of 632 per month that you will pay a total of 127,520 in interest.
Also, the tax advantage for paying 6,467 (the first years interest)@ 15% tax bracket is only 970 in the difference in the amount of taxes and that 5497 is going to the lender's pocket.
For years I have told clients of mine that it is much better to pay the 970 in taxes and keep invest the 5497. After all that makes perfect sense right?
Now let's take a look at the other side of the coin…We have the same 100,000 and monthly payments of 632 per month.
We invest that 100,000 in something (it really doesn't matter whether it is insurance or a 401K)that is either tax deferred or tax free earning 6%.
Now if you are saying that you cannot find an investment returning that then I would suggest doing some research online at different stocks or yes even insurance annuities you should be able to find some investment earning a 6% return on your money.
Let's take a look at just one years interest would be…well it would be 6,000 now that seems like we are losing money but remember the tax savings of 970 and we have 6970.
No much in the earnings dept. but that is only one year each year the investment will grow and the interest paid will decline if you make regular principle and interest payments.
I don't think it is the case of whether the concepts work, afterall, the concepts of using equity for building wealth has been around for awhile and as we can see from the posts here that it is working.
I think the key here is what is our risk tolerance. There is no right or wrong way to create wealth in this day and age it is really only a matter of choice.
Hi George, thanks for your comment.
You're right in that it's a matter of risk tolerance. I'd like the prospect of making more than $503 ($6,970 – $6,467) the first year if I'm going to be borrowing $100,000. That's a 0.5% return the first year, and if the investment rate of return dips, I still owe the interest on the loan. I could make $500 by putting $15,000 in an internet savings account for a year, and not owe anyone a dime.
I still think that this method of investing (borrow to invest) can be dangerous unless there's a substantial spread between the loan rate and the investment rate of return — one that isn't likely to go away and doesn't depend on mortgage interest deductions, which can go away.
mbhunter-in your posts, "believe","think","hope","suffer","think"… how much of your analysis is fear/emotion based as oppossed to fact based.. I wonder
MF-Skeptick, thanks for your comment. You point out something that I've caught myself doing a few times in my posts. What facts are you looking for that you didn't see?
I've read the book and looked at where one's money would go if one took the book's advice. Regardless of whether or not the ideas work on paper, the rules can, and do, change. Some assumptions: The mortgage interest is tax-deductible. Well, that's under fire now. You borrow at X%. Well, that rate can go up. Your cost of insurance is this. Well, that can change too.
Do I know that these things will materialize? Of course not — no one does. I "feel" that it's dangerous to take on a lot of debt to buy life insurance knowing that my differential rate of return is nowhere near secure for the long term. It might not turn out that way, but I don't want to find out that it did turn out that way and that I also owe a lot of money. There are safer ways to build wealth.
The 401k has to be the biggest boondoggle ever created by the US Congress. There are certain things for sure in life. Taxes, Death and that Taxes will go up not down over time. Never invest heavily into something that gives you tax advantage going in but not coming out such as the 401k's and IRA's, now the Roth? That's an animal of another stripe, you pay taxes going in and free of taxes coming out. On average any tax savings you realize with 401's and IRA's will be given up within 2-3 years when you start taking funds out of these saving vehicles, something most so called Financial Advisors who are basically nothing but schills for the Securities Industry will not tell you.
I have my 6 License, it took two weeks people and it wasn't that hard! Now my 7 License, it took 3-4 weeks of reading the books and practice test on the CD which is basically the test. Now the 7 license cost about 400 dollars and consumes 4 weeks, less if I devoted full time to it. Now comes the 63 and or 65. Not much harder and yes more time but really it's a joke at best. Yet though I charge more for fees then I could of with just an Insurance License. Yet though, I don't understand my brethen touting nothing more the a 7 or even a 65 License as being expert in anything other then knowing how to run a computer program and kicking out paperwork that means nothing!
Now I'm all in favor of the stragedy that Mr. Andrew suggest and with the new Roth 401 there is yet another vehicle you can use outside of a good heavily funded EIUL or a good particapting WL Policy. With the new Roth 401 you can dump 15 grand a year and grow and payout tax free which is quite powerful! Even though with MF, the insurance cost is nominal if you have it built correctly, something most Financial Advisors or even Insurance Agents really aren't good at. Most Agents or Financial people peddle these contracts but rarely understand how they are built. If you invest in this theory it is of utmost importance to find an expeirence agent that knows how to put these EIUL's or WL Policies together because if done wrong you could end up with a mess and greatly indebted to good ole Uncle Sam if these policies ever lapse or ends prematurely.
Happy Thanksgiving and to all a very Merry Xmas to everyone!
Hi James, thanks for weighing in.
Sounds like you're progressing well on your certification. Congratulations!
You bring up good points. I like the point about making sure that your financial advisors completely understand the products that they're suggesting to you.
Another point that bears mentioning is that the tax rules on any tax-advantaged account are always subject to change. It would be political suicide for Congress to change the rules on Roth accounts, but even if they did, what could we all do? Not much, except follow the new rules. Thus, it pays to keep abreast of proposed changes that affect retirement accounts, and adjust accordingly.
Noticed the thread. Food for thought for all of the people who disagree with Doug. How much $$ do you keep in your mattress? None right? No one does that, yet tons of people are in a hurry to get a quarter million in their walls. When you bought your house, did you care close the previous owner (if any) was to paying it off? Of course not. When you separate the hundred grand from your house, the situation hasn't changed: you still have a roof over your head, you just happen to have 100 grand (or 117 months give or take) to pay your mortgage if you lose yur job, market tanks etc. It's leverage, and it's how money moves and how the rich get richer. Anytime you want to pay the house off, you simply liquidate the 100 grand from wherever it was (in Dougs case the policy) but why? Hope that helps. There is good discussion here. happy Holidayz
Hi Gman, Thanks for your comment!
I've probably said this a few times in this thread and the other thread on Mr. Andrew's book, but it bears repeating.
If you can find an investment that will have a very good chance of outpacing what you're paying on the borrowed money, great. Go for it! I wouldn't do so on predictions or historical data, because one thing will be certain in all of that: I'll owe the money, plus interest, that I borrowed.
As for the job security hedge, I don't want another payment on my hands just to protect myself. I'll build up a savings cushion and use that as my safety net. I have no need to borrow for that now.
People have seen an incredible rise in the values of their homes over the past few years, and it seems that everyone wants to tap into that windfall. And just as there are homeowners wanting to get their hands on that equity, there are plenty of people who will help them do it — and who will get paid very handsomely for helping them go further into debt.
One thing you might want to concider is this. If you were in Florida in a 800,000 home. The hurricane hit you, and you lost your job or your restauarant or whatever it is you do to produce income to pay your bills. Where would you rather be? With a home owned free and clear and a small side fund that you’ve accumulated over the years by “saving” each month? OR would you rather have an 800,000 home with an 800,000 mortgage AND 800,000 in the bank to help get you through the tides.
I can see the con’s to Doug’s methods, however, the key to any prudent investment includes “liquidity” and “saftey”. Do you think the banks are just flying by giving mortgages to everyone in Florida to help them out of their finanical troubles? If you try to tear apart saftey in the “market”, then you might want to try to look at the saftey in the home. Katrina and other disasters like medial emergencies prove that you can essentially “lose” all those savings in your home if you can’t access them.
My Two Cents
Hello,
I just attended a Seminar on "Missed Fourtune 101" and I think that some of the post's are missing one important thing. When you take 100K out of your home worth 100K, They wash out when Assets an Liabilities are combined but they don't when you look at your total wealth. You actually have 100K worth of cach and a home that is in your name worth 100K. This is a clear distinctioni between the pure accounting model. The fact that the home appreciates while your "Holding it" is pretty important because you get the appreciation. On the investment vehilce side of the equasion, you can find Life Insurance Policies that provide floors and ceilings that can be pretty attractive. If you got one that had a 1% floor and a 17% ceiling tied to the S&P, wouldn't that be enough? Yeah, it's not like the .COM returns but who really expects to do that consistently? the S&P average is about 9.5% over the long haul. That is a pretty good rate considering the housing market is a few percentage points lower than that. The tax free status of the proceeds looks attractive also. I would agree though that this is not for the non-committed or the weak at heart. You need to be diciplined to make this work but you can't argue the numbers…
Hi Paul, thanks for your comment.
My commentary on Mr. Andrew's $100k house example is in the main post, so I won't repeat it here.
The numbers that you've provided set up exactly the kind of scenario I'm worried about. What if we entered a bear market? A 1% floor doesn't even keep up with inflation. I wouldn't want to be paying 5% or more to earn 1%.
With Mr. Andrew's plan, at least two people make money assuming that the client doesn't die a month or two after signing the policy: the bank that owns the HELOC and the insurance company underwriting the policy. A third person — the client — may make or lose money. Given the current climate, I'm betting against the client making money, doubly so with the scenario you spell out.
Owning my home free and clear, frees up current earnings to save and invest.
Becoming truly debt free and living within my means, is the best feeling of freedom I can think of.
Lee Eakin
James got it right. 401K/ IRA's are a crock. Defer a few pennies now and oh by the way, defer the tax calculation also. Do you think it will be lower? Doubt it.
I'm all for living within my means, as long as I can do what ever I want with out restrcitions.
Lastly, ask Senator Lott if it was a good idea to have a 800K home, paid off of course. Katrina came along and he loast half his equity. I don't know about you, but I feel if he had the cash in a side fund, he would be in a much better position. Even a bargining position. Heck, Maybe the banks would have helped him fight the Insurance companies that were suppose to protect his investment, I mean home.
Thanks Lee Eakin for the vote of confidence!
John, thanks for your comments as well!
I'm wondering how it's possible to live within your means AND do whatever you want without restrictions. Doesn't seem like they go together.
Interesting thread. I am a mortgage broker and have just started learning about the MF concepts.
Thanks for posing the questions and challenging the theories.
It seems to me the MF camp is winning the debate here.
I haven't seen a proof on owning the home free and clear yet other than "it Feels right, I sleep well at night knowing its paid for."
Hi Brian, thanks for your comment!
I see what you mean about the MF supporters outnumbering those who don't, but being the underdog has its merits 😉
I'm not sure why "It feels right; I sleep well at night knowing it's paid for" isn't enough reason. Until it is, you have to find a way to make the mortgage payment. And if you follow the MF ideas, you'll have to find a way to make the mortgage payment AND the payment on the borrowed money you used to buy the insurance.
No one wants to own anything anymore. Apparently, they just want to owe.
$100,000
(i'm going to greatly simplify the numbers, exact to the penny means nothing when doing a 30 yr projection)
30 yr amortized –> after 30 years, you have a)paid up house, b)no house payment, and c)about $200k ($100,000 original loan, and about 100k in interest, assuming about 6%) paid out over that 30 year period.
30 yr interest only –> $500/mo interest payment, $100 in an interest bearing account (money you would've paid to principle in a 30yr amortized at 6%). at 30 years, you will have paid a total of $180,000, and your growth account will, at 6%, will be at $100k. Take your 100k, annuitize it, and you'll end up with roughly 8000/year in income. Use $1000/year to buy a 100k life insurance policy.
So let's compare the two:
30 yr amortized: $200k cost out of your pocket. $33k in tax savings for a 33% tax bracket. Paid up house. No Income. Property Tax u'll still have to pay (and you'll lose your house if you cna't pay your property tax). You'll have no home loan, therefore no tax deduction (for example for your 401k income)
30yr interest only: $6000/year mortgage payment, $100k life insurance policy, $60k tax savings, $6000/year tax writeoff, $7000/year life income. If u've got a 401k, then that 6k/year alone will represent a 2k/year tax savings over the 30yr amortized schedule.
there are better ways to do it, but this is a pretty middle of the road method.
also, during the 30 years of an amortized schedule, or the 30 yrs of interest only and invest the difference, your financial outlay is EXACTLY THE SAME. Under a 30yr amortized, u pay about $600/month to the lender. Under the 30yr interest only and invest difference, u pay $500 to the lender, and $100 to an interest bearing account.
Money out of your pocket, exactly the same.
As for tax savings, you're getting a deduction on just $100k over 30 years with the amortized schedule while you can deduct $180k over 30 years in an interest only situation.
As for making the payments, you've now got a life annuity that'll pay for the house and property tax, and a life insurance policy that will also pay for the house, and a deduction on your 401k income during retirement.
For both, if you miss enough payments, you'll be in the same boat: no house.
Also, 401k's are for pre-tax dollars and i agree they are one of the worst things to be brought upon americans. if you think about it…. the government is allowing u to put away money tax deferred so that they can then collect tax on a larger balance… and let you, the american tax payer, do all the work, and bear all the risk. To add insult to injury, if you think u can outsmart uncle sam and just not withdraw money, then at age 70 and a half, you'll be force to or face a penalty. Also, irregardless of need, if at anytime before age 65 that u were to touch any of it, u'll lose about half (33% tax bracket, 10% federal penalty, 6% state penalty). They tease you by saying you can take 50k out for a house. What they don't tell u is that that 50k has to be paid back in 5 years or else it'll be taxed and fined. Also, if u so happen to get enough social security, then there's also the very real possibility of those social security checks bumping u up to a higher tax bracket. Or even put u in a spot where u'll pay taxes on the 401k income AND the social security money.
whatever you do with your money is at your discretion. And do whatever suites you. i think that the main point illustrated here in this blog and these comments is that here in the US, we've got so many options as to keep all of you guys up at night. And that in itself is both a wonderful and horrible thing. :o)
Pxl, thanks for your comments.
Will lenders lend at a fixed rate with only interest due? That surprises me.
All of the tax savings could go away if the tides turn in Congress. The tax breaks are nice, but will they be around in 20 years? I don't know. But I don't want to do long-term planning assuming they will be. I seem to remember that Congress changed the rules about passive real-estate losses in the mid 1980s — a lot of mediocre money-shufflers were hung out to dry. What's to say that the mortgage interest deduction won't go away when we pass $10 trillion in debt as a country? Nothing.
You didn't mention that 401(k)s often have company matching that is triggered when you make a contribution. Not contributing is like throwing free money away.
I want to reduce the commitments on my money rather than increase them.
hi mbh
ya, i get what you say about sax savings. but the above still holds true even if you take the tax deduction out of there. just one less item in the lists.
and you have to agree that inaction due to fear for what's coming tomorrow only breads and leads to procrastination. so we all have to do the best we can with what we've got to work with… not much different from changing your 401k fund allotments… you use whatever information you have now and do the best you can.
i will give you that the 401k match is a great thing, when compared to anything else conventional out there. But this matching comes at the price of liquidity. You can't touch it until you hit age 65. and at that point, you have to pay taxes on that.
So let's say you have $500k saved up in your 401k… if we assume an average of 6%, over 30 years, then that means about a $250/mo contribution and a 100% company match. Then, at age 65, you retire, and you want to preserve your principle… what's the point of saving for 30 years if you're going to lose it all… and the general concensus amongst financial institutions is that a withdrawal rate of 4-5% will give you about a 90% of never running out of money during retirement. so 5% of 500k equals $25,000/year. In a 15% tax bracket, that nets you $21,250/year in income.
alternatively (i'm not promoting the MF principals, just looking at it objectively) doing the same thing with, say, an appropriately designed life insurance policy to minimize insurance and maximize cash value, will get you to about $250,000… using the same assumptions of $250/mo contribution, 6% interest, 30 years (a little lower due to cost of insurance). Now, take a loan or withdrawal from the policy, which has tax free treatment, and that $250k in cash value will generate about $30,000 in income. And on top of that, you'll have about $150k of the life insurance's face value.
so choosing to accept the free money will net you a $22k/year income and no liquidity. Doing it with techniques described in chapter 11 of MF will net you $30k/year, 90% liquidity, and $150k in life insurance. That's a 36% increase in net spendable income.
and how is contributing to a 401k for the spectre of a company match not increasing commitments? Having a 401k commits you to put away money and not touch it until age 65.
I don't call what I'm doing inaction. I call it getting out of debt!
Aren't you charged interest on those loans you take from your life insurance policy? Isn't that why they're treated as tax-free: because it's a loan, rather than income?
yup, u sure are charged interest on the loan, say 6% on the 30k. but you're making that same 6% on 250k, so in this case, the interest is a wash.
Let's face the facts; this is an emotional topic on both sides of the fence. You got Mr MBHunter, joe average consumer, and other folks who have either implimented the program or are a financial planner that is implimenting the program. Wanting to pay off the house and wanting to separate equity for liquidity and safety are both emotional decisions that may or not be based on logic and fact.
1)…there is a difference between compounded interest and straight interest. A bank account earning and compounding at 5% will greatly outpace a note costing 5% over a long term. A 5% bill at 100,000 note will always be $5000, where a 5% investment on your 100,000 will only be $5000 first year and grow beyond that from there.
2)….you can get a 30 year fixed interest only mortgage. These are FHA standard loans…nothing fancy.. This eliminates the objection of if the fed increases the rate down the road on my ARM
3)…The IRS can do anything they want with taxes and deductions. If we consider them eliminating the mortgage writeoff to cover government debt, we also need to consider increasing the tax brackets as well, reintroduction of estate taxes, re-establishing the "success tax" of the eighties etc. The IRS is a variable that we cannot really consider into the equation other then the fact that we will always pay taxes. That and the fact that the write-off on the mortgage is really just icing on the cake for the strategy.
3)…There are full disclosure insurance products that have below industry fees and expenses, extreme liquidity and allow you to borrow funds out of a policy at what’s called a zero spread loan….where it's contractual that they will charge you 6 and credit you 6% for the IRS purposes of showing a loan.
In the end, it's all a big emotional decision to go one-way or the other. However, emotion aside, separating home equity for savings or to at least just set up a HELOC for a rainy day reserve is a financially prudent thing to do.
Mb hunter, if you don't agree with the strategies, at least recognize the importance of liquidity and safety with your building of home equity.
BTW, as a disclaimer, I am a bit biased being a financial professional myself, however, looking at it from a consumer, in the end, it all comes down to comfort level and emotion…nothing else.
Eric, thanks for the comments. Very clear observations, and some points that haven't been brought up before.
Maybe I haven't said this before, but I do agree that having a cushion of liquid assets is prudent. I'd prefer to build up a cash savings account instead of running first for the HELOC, but either way it does give liquidity before you need it.
Regarding point 2 — is there a balloon payment at the end of the 30 years?
Regarding your point 3 — you said it well in the last sentence. The issue I have with MF101 is that there is so much emphasis given to the tax breaks on the mortgage interest; it's more than just icing on the cake, it's a good part of the cake!
Thanks again for your comments!
Hey MB. I appreciate the comments. Liquidity and safety are key. Building a cash savings account is of course the prudent thing to do, but the majority of Americans do not have this luxury..many do, however, have a significant equity position in their real estate.
There is a baloon payment, but the hope is one of 2 things, either the person refinances before that point in time, or the person has saved the diffrence in their mortgage payment that will cover the cost of their mortgage ballance.
LOL, Doug does tend to focus a bit on the tax writeoff, but looking objectively at the other points without the tax writeoff, the strategy is still very sound.
This is a great debate. For all of the people that think they need to pay of their mortgage. I recently met a friend of mine who's father is 65 and very wealthy and retired. I finally had the courage to ask him how he became so rich and this was before the Missed Fortune books!
His answer "I never paid off my mortgages on my properties. Why would I want to pay off my properties? There is no way I would have the wealth that I have now. The equity that my properties have is dead money if I don't use it" He then asks/tells me "Have you ever tried refinancing or taking equity out of your home when you aren't working?" I said "No". He tells me "Believe me when I tell you won't be able to get at the money when you really need it" Now this is the Reader's Digest Version and notice I used plurals in his answer.
Here's what he did – Had I/O mortgages before they were fashionable. Took the money he was making and invested in 401K's, stocks, mutual funds, life insurance, and other real estate. Everytime his properties (again plural) went up in value he would refinance and add to his positions and also do 1031 exchanges on his properties (which is a whole another discussion and not even included in Missed Fortune) He kept repeating the process for over 30 years. He did would not tell me his net worth, but he did tell me he is liquid for $10 Million. Liquid folks…not assets! Liquid. All starting from one little house he never paid off…
Now mbh or anyone else that believes paying the house off is the way to go, I have $10 million other reasons why that is not the route I will be
taking…
Great you paid off your home, congratulations! What if something unforseen happens like earthquake, fire, tsunami,landslide, mudslide etc…Do you think you can still have all your equity or sell your home for the full price? Great example of being "asset rich, cash poor". If you had the side fund like they have mentioned, aren't you in a better position? Examples are homeowners who are still suffering because of "Katrina", multi-million $ homes in Malibu, etc (mudslide), San Diego, Chatswoth fire in California…where is their so called EQUITY???
mr MB HUNter's analysis does not find its target. You spend to much time taking single sentences or groups of sentences out of the context of the original thought. Perhaps you should spend a bit more time carefully reading all the pages of this book to fully grasp the power of the arguments. Be aware: the concepts in Missed Fortune 101 are not for dilletants. One must think carefully about all facets of the topics expressed.
This is probably one of the greatest blogs I have read on the subject of personal finance. While both sides make well aimed arguments I have only really seen one person make as close as possible a draw between the two methods, although it seemed a bit more biased towards MF side. I believe we have all really missed the point that science and study can help! For instance, why not make a hypothetical person or family with certain variables about them like income and years left to retire…etc., and put both lines of thought to the extreme tests, both enduring the worst of situations, and the best of situations to see which really fares better in both at the end of 30 years. Im sure that through this method you will find that no matter what method you choose youll always be right, others will be wrong, and youll be happy with the results. But also a point in mind is that for any of these wonderful concepts to work there is still one underlying factor for anything to succeed and that is "discipline" to stick by your plan to the end, like a diet…or money diet I suppose.
P.S. another great way to find extra money to invest that I believe both lines of thought will agree with is that if you use your side fund…whether it be a savings account or a WL policy is to have that earning interest and raise your health and auto insurance deductables so that way your premeums will be smaller thereby having more dollars going towards retirement.
a) IRS currently disallows mortgage interest deductions for loans used to fund single premium annuities or single premium life insurance policies, folks. OK so they don't check too closely *except* in an audit. Want to rerun the calculations including back taxes and penalties owed upon audit? Or count on having paid premiums in over a few years so it won't *look* like a single premium intent? Hmmmmmm indeed! This scheme fails on the "Z" factor… being able to sleep at night. Sorry, but my clients are old fashioned… they prefer their nights sleep, and so do I!
b) One of the great investment tests is, "If things go south, how bad is it?" Life insurance is marvelous at what it does, but being an investment is not one of those things. If things go south in the early years, one could cash in the policy to pay off the additional mortgage, more or less. In the middle (accumulation) years, cashing in the policy is accompanied by an income tax bill on the gain. In the later years… don't even think about it; the only prudent way out of the total policy loan interest due is to die so the death benefit makes you whole… which works, if your life in 30 years fits what you plan today.
c) How many of us could have predicted our circumstancees today, 30 years ago? Better not make that bet with your house!
Update on item (a) above… I called the IRS… interest on a loan used to purchase single premium life, endowment or annuity contracts is NOT deductible as investment expense. But home mortgage interest (the money used for practically *ANY* purpose) IS deductible, within the $100,000 of “equity debt” loan limitation.
So I stand corrected! Thought I’d better report.
I am a real estate professional located in a high profile area of California. Lately, I have had two insurance agents, both young men, try and sell me on this idea and book. They were hoping to form an alliance with me. Oops, I have a B.S. degree in Finance and an MBA with an emphasis in Finance, this from a decent school.
Therefore, It was all up hill for them. If one follows their concept, a person looses a minimum of $76,000 over 30 years, and this is at an 8.5% monthly compounded rate of return on the invested portion. If I use the 1.5% amount that I was told was the “guaranteed” return, well now I am $166,000 short of paying off $200,000 interest only house with the invested portion, not to mention the extra interest paid to the bank. In all, at 1.5%, it costs $317,755 more over the 30 year period to do what is suggested.
And, of course, we all can assume that the guaranteed amount will most likely be the average return. Wow, is the insurance company making money, some of the best commissions paid are from annuities, by the way.
I would never advise any of my clients to do this. Never!
K
Interesting subject… I'm attending a seminar on this tomorrow, and am reading Mr. Andrew's first book. I am near retirement age and have a large 401k, and my home is paid in full. However, I now pay both federal and state taxes because I have no mortgage!! I am in the 33% tax bracket. It seems that the arguments, all well meaning, are missing the point. Some folks are in situations where Mr. Andrew's program works while others (younger, no large 401/IRA's, owe mortgages) can't make his program work in their circumstances.
What's wrong with me using 401k money to pay my new loan mortgage and give me a tax break, plus have a million dollar life policy, plus I still own and live in my home, and finally I begin collecting $74,000 a year tax free in the sixth year? That's what this program does for folks in my situation.
ElieA-
I think you had it right the first time. I'm not sure who/what capacity the person was you spoke to at the IRS, but the regulations clearly prohibit a mortgage interest deduction to purchase tax-exempt investments.
April 4th, 2006 at 3:08 pm
a) IRS currently disallows mortgage interest deductions for loans used to fund single premium annuities or single premium life insurance policies, folks
What facinates me is anyone who shoots down a concept based on flawed outdated data. Or does not understand the mechanics of the products described or believing all the products of the same type perform the same. You are no different than the same authors who write about annuities and do not differentiate between EIA and VUL. Lastly, most people are smart enough to read and make their own opinion. Not listen to some trashing fool. Like the book, love the concept and would advise anyone to read it.
There is one thing that is missed by all with the tax value of interest deductions – with recent tax reform you need to have more than $10,300 dollars of writeoffs until you exceed the standard deduction of married filing joint – so when you have a $200,000 mortgage wit a 6% interest only mortgage you only receive $1700 of additional benefit over your your standard deduction (only 15% of $1700 = $255 of tax benfits) NOT 15% of 12000 = $1800 as most of the people would have you believe.
I was directed to your site by a friend. I, like "K" am in So CA and whereas she in Real Estate, I am a Financial Planner.
The thread is interesting, but like K, the majority of posts either are from the financially ignorant (8.5% return?, please) or from agents who are young (and well, less than bright).
I specialize in retirement planning and annuities… they must be carefully chosen and indeed, as K suggests, the insurance companies will always win and will never ever give away money without costs.
EIA UL is now touted as MF's key…. since this thread started, the market lost 214 pts in one day and they have barely ret'd 4%/yr over the last 5-6 years and interest rates are approaching 7% for a second. Add'ly surrender charges and long terms create lock-ins but great commissions for the agents pushing this swill.. who rarely if ever have a home or cash.
The advice MBH gave was great…pay off your mortgage, max out your 401k/IRA/403b (couldn't believe the lunacy quoted on withdrawls…it's 59 1/2, with a 72t, 45-50 yrs old…On matchs, they are usually 50%, capped and remain nonvested until retirement.. do any of these people have a 401k?)
Additonally, 401ks are never liquidated as lump sum and are usually partially converted to annuity. To suggest a side investment based on home equity?… don't lose your job or have a baby.
I am saddened to read so many people feel their life is a series of multiple payments.. house, VIsa, car, insurance, 4 more Visas etc… they will experience 4-5 job changes, possibly fired once or twice, relocate 3-4x and have 50/50 chance of divorce… sure read MF, then place it in the fireplace for its true use…
MBH, you are a wise man.
I concur with MBH and "I". I have been in the insurance business for over 22 years and seen just about all the "gimicks" used to sell life insurance. And MF is doing just that, using a gimick to sell large quanities of life insurance and earn large commissions. Check out Andrews website. He is charging $8000 per student to learn how to sell his concept. Then read Shane Johnson's article, “Once we were lost.” Salt Lake City Weekly 29 December 2005. It would appear Mr. Andrew's has refunded peoples premiums in full with interest. Why? To be a nice guy. No way!
Will increasing the mortgage interest payment really produce the same after-tax results as a deductible qualified plan contribution? In the book, the “indirect deductions” are used to purchase a life insurance policy with a $6,000 premium. If a person is making $150,000 per year and is that 33% tax bracket and has a 6% arm he will end up exactly the same dollars at the end as if he used that same $6000 for his 401K vs. had a $6,000 interest deduction for their home.
Wow!! Great discussion. Just a few things to say – why is everyone assuming a 30 year mortgage? How about a 10 or 15 year mortgage and buy a house you can really afford. If you have to move every couple of years you've built a lot more equity in the house. I know, I know what value is equity in the house? All I can say my friends is "it ain't yours until you pay for it".
Wow. Don't know where to start but the bottom line is "you don't know what you don't know". If some of the folks who commented negatively about MF actually read the book and studied the concepts they would realize that they have simply been responding based upon their current biases. The bottom line is that if you separate equity from your home for liquidity, safety and rate of return you will be much better off in the long run. However, those that may spend, rather than conserve, their separated equity would be much better off with a 15 or 30 year amortizing loan. But for the majority of financially disciplined investors an interest only loan that maximizes tax savings, allows for increased liquidity, cash flow and asset accumulation is the way to go. It doesn't take a genius to know that if you borrow at 7% on an interest only loan you only need to invest tax favored at 5% to do much better in the long run. So many people are simply misunderstanding these concepts.
If you don't have a mortgage do you truly own your house? Don't you always have a partner in the ownership of your house called the government who assesses taxes on your house every year. If you don't pay those taxes they can still take your house even if it is mortgage free.
The point is take control of your own life. Do what you feel is best and when you need money try to sell your house when all the baby boomers are trying to do the same because they all thought that equity in your house is like money in the bank.
We are now in a soft real estate market. If you put your house on the market, your "equity" would be less today that it would have been 12-18 months ago. So did you lose money. If you were forced to sell would you lose more money or "equity", your cash in the bank. The answer is probably YES! Take control of your assets and don't do what you've always done. Change is good.
We are currently in the middle of following the MF plan. But I can't bring myself to complete the final step of a interest only mortgage. All of your discussions have made valid points. I'm still confused. We are only a few years (5-6) from paying off our home of 20 years. It has doubled in value during this time (which I didn't notice anyone took into account when figuring the cost of the loan.) And everything that anyone owns depriciates the minute we take it out of the store or parking lot, except our homes, so is it really such a bad investment to have paid off? Does anyone out there have a definitive answer to help us decide what to do?
This original thread goes back many months and I appreciate it still being relevant.
My wife and I just watched a one and a half hour DVD of a MF presentation that was very impressive. I wrote some notes and we discussed some of these same issues that are on this site. I Googled this site hoping to find something to help us make a good decision, and both sides have good points. We have 26 years left on our mortgage owing about $145K. We are about 10 years from a company funded retirement which I will take in a lump sum, and a 401(k) that matches dollar for dollar up on the 1st 3% of contributions, and hopefully some SS payments that will begin at age 66.
The concept of having the $100K home mortgage, and $100K equity taken out as "liquid" is understandable. The part that did not seem logical is that of the thinking that I now would have $200K in assets. In one pocket, I have the $100K, and in the other I have a contract to pay the bank $100K for the house (that they let me live in only if I keep making payments.) And if I decided to sell that "asset" for $100K, I take that $100 and give it to the bank to pay it off and that leaves me with…$100K.
I wish I could say that I was less confused about what to do. I think that I need to see more best and worst case scenarios layed out in black and white in order to figure this all out. Is there a non-profit group (with no axe to grind) who can help us?
ARGH!!!
Pulling out equity from your house in order to buy life insurance products? Sounds like a wonderful book thanks for the warning.
I attended a financial seminar recently and several advisors mentioned Missed Fortune to me. Now that I have read the book I am very interested in reading your comments.I've been in the financial service industry for over 35 years and have seen many different financial concepts that help people create wealth. There is always an element of risk when you invest and this concept may not be suitable for everyone.But for the family that has equity,the cash flow to handle the increase in mortgage payments and the time to allow their investments to grow I think this may be a great idea. The truth is that most people have under saved for retirement and they have done a poor job of investing their own money. Just look at the returns of the S&P500 over the last 5 years! I have a bit more reading to do but in the meantime I'm keeping an open mind.
I have a twist for you (yes I am a fan of MF but for different reasons) Instead of risking equity pullout and subjecting it to the markets fluctuations, why not take the equity and put into a perm WL policy PUA account. Then, either hurry up and pay off that heloc or wait for the house value to catch up with the loan and refi, all while keeping the tax deduction. I'll take 5-6% tax free, liquid, and a DB in my left hand while paying 4% (after tax) mortgage and enjoying the deduction. Check out nelson nash's book. I think most of what MF says is cool, but I like everything guaranteed. don't take policy loans- build up comfortable cash amounts (whatever that is to you) and take THAT out, then repay yourself a little more than what you would have paid on a normal policy loan. That works EVERY time. No surprises, and everything is absolutely in stone at all times. If we start concerning ourselves with law changes, try owning a home that you worked to pay off early and someone serve you eminant domain or a friendly lawsuit because they slipped on your property. Now you lost everything- unless that is, you worked your insurance options properly:)! Great thread and everyone keep it up, as the opinions are always educational.
Gman
One more thing-
I think saying when you take out 100K of Equity on a 100K house gives you 200K is a stretch, but when you think about practicality vs. emotion, you now have 100K (albeit with a payment, but 600 bucks out of 100K is small over the long term) and you're still sleepin' in that house, eating dinner there, etc. So your life didn't change whether you own it or not. You just now have 100 G's to work with. Very, very carefully. 🙂
Has anyone ever heard of the Home Ownership Accelerator from CMG Mortgage?
It seems this home loan would serve both sides of the fence on this discussion. It is a 1st lien line of credit that incorporates a full service checking account from GMAC Bank. Why this is important is that any funds you have sitting in checking, savings or any other accounts that yield less than the mortgage rate, you can park in this new checking account which reduces the principle on your home loan instantly. The loan recasts every time money is debited or deposited to the account so any funds in the account have effectivly reduced your princilple balance therefor saving you interest based on the new principle balance. At the same time you have full access to the funds anytime you need them via ATM Visa, checks and online billpay. It pays the home loan in half the time as a fixed rate while at the same time allows you to have instant access to those funds.
Wow! This concept is a boondoggle for the mortgage industry looking for ways to help dried up revenues!
This book and concept is primarily being driven on a speaking circuit in the mortgage industry with the purpose of having mortgage brokers partner or open investment branches to push MF's investment vehicle or "tool", universal life.
Why? 1)The mortgage companies and brokers want you to refinance with them with huge loans and increase their revenue.2)They want to make more money on these loans by convincing you that "interest is your friend" and you should not worry about your interest rate because you are going to be rewarded by even higher interest rates on your "bucket" 3) make huge commissions on the sales or referal fees to the poor folks who go down the hall and buy their $200K UVL policy. Does anyone know what first year commissions are on one of these babies? Huge!
Another important and very dangerous assumption made by MF is that these policies return on average between 8 and 9%. What!! Not even close.
Thus your arbitrage as MF describes is really non existant. I work in the 9th largest mutual insurance company in the US and our internal safe investment return is currenlty below 6 and crediting below 4% I don't think the big boys allow the agents to do illustration on anything above 6%!
MF says it's time for us individuals to make money like the banks and CUs have done for years;"Borrow at a low rate ind invest at a high rate". Well one thing I have noticed is that usually the banks, CUs and Life companies loan at higher rates than which you can safely borrow….that's how THEY make money. Where does your loan come from? Gee a bank.
Also,There is not as much liquidity in these things as one thinks and huge penelties for early termination (thus the huge commissions).
Finally, If I was a mortgage broker looking to build an investment arm to my business and follow MF's strategy, I would make sure I buy plenty of insurace…Professional Liability Insurance! Because in 5 years the class action suits will be rampant from those who were financially hurt with the promise of artificially high returns on a UVL policy. Look to the guarantee…that's closer to what you will get.
I do believe we all should have a side fund for emergancy needs to get us through market downturns or personal hardships. Hopefully someone with the means to have paid off their mortgae will have built a side fund alraedy. If I had no extra money and lived paycheck to paycheck and had no mortgage, I might think about a HE loan and put in a versy safe place and get the tax benefit and modest return incase I need to "peel" some from this fund to get me through a tough time. But any safe investment is usually not going to pay higher than what the bank just loaned you at. Is that a crazy thought?
Jomama- If you borrow at 6.5% on an interest only loan the return on the life insurance contract only needs to be 4.5%-5% for the concept to work. If you are in the industry I am surprised that you don't know interest on a mortgage loan is tax deductible and the insurance cash value grows tax fee. I would much rather have my equity seperated growing and compounding tax free at 4.5% -8% tax free than buried in my home earning a 0% rate of return. Obviously you only skimmed the book.
Marc C. What do you think the real credited rate will be AFTER Mortality costs and fees in the long run on these policies? You are all dreaming if you think it is close to what MF represents in all his illustration (between 7 and 8 after 1 % mortality (insurance) and fees) Please!!! The tax savings has limits depending on income and how much one can deduct each year. Also what about Alternative Minimum Tax consequences. The only way he addresses this is a small part that says "talk to your tax consultant".
Jomama,
I have run the numbers and, if structured correctly, (the least amount of insurance allowed for the max contribution) the numbers are accurate (F&G has a good EIUL product). I am in the 33% federal and state tax bracket and I have an interest only loan at 5.375%…my after tax cost of my mortgage is only 3.6%. Even if I hit the Alt. min. tax the numbers still work fine.
MBH – Thanks for taking on this "seemingly" controversial topic; It provided me an interesting discourse and investigation into Mr. Andrew's book (I was recently solicited by a "mortgage consultant" to use Andrew's concepts with my financial planning clients). I would encourage all who are condidering the adoption of Mr. Andrew's strategies to read IRS Publication 17, specifically the parts concerning deduction of mortgage interest and life insurance proceeds, and then obtain a good book to learn the guts of permanent life insurance. Those who take the time to understand what he is suggesting and the IRS rules that govern might decide to rethink his proposed strategy. If you take two things away from this post, please let them be this:
1. The lending and the insurance industries are highly profitable sectors, especially when the capital markets are good.
2. Risk and Return are indeed related.
Hey MJ, On point #1, yes but so is the financial planning industry. On point #2 yes, which is precisely why a fixed rate insurance product might be the way to use this strategy. The point is of course that you don't have to chase higher returns if you get the acumulation and the distibution tax free. Having read the relevant IRS rules, I fail to see your point. Yes, you are limited to $100,000 over basis + any money spent on fixing up your house or adding to it for the mortgage interest deduction. Don't see any limitations on life insurance though especially, one that is funded using the 7-pay rule. So you are going to have to be more specific on your issues with this strategy to be helpful.
To 'K': With and MBA in finance, I hope you can explain(provide numbers)your proposition that you lose on an 8.5% return over 30yrs…What start #s were you using?
Additionally, (I agree with the likely lower rate of return) what would be a good guaranteed floor rate ROR?
Responding to what "J" Says. The 401/IRA question seems to be resolved–unless you have a way out of getting taxed on those withdrawals at the end…?
Plus, if you lose your job or have a baby, how does home equity help? If it's out of the home somewhere safe, earning even a modest return where you can get to it, aren't you 'safer'?
Just trying to figure it all out…
I have tried to located the article [Once we were lost.” Salt Lake City Weekly 29 December 2005]mentioned in these posts but have not been able to find it. If anyone has a link, I would appreciate it.
Thanks Saint for the link to the article.
Points out the limitations of this strategy although lacked any factual dimension. The investment side of the strategy must be tailored to the individual. If the insurance rating is low then the cost of the insurance becomes the main issue. If you don't wan't or need the insurance then put the money into an annuity or other investment vehicle. The mortgage deduction has its limits, but it is only the icing on the cake so to speak. Nothing in the article invalidates the strategy only points out that the consumer needs to understand what they are doing. After a 4 hour seminar and a personal consultation if you don't understand what you are doing then don't do it.
Exactly!…I posted the link not to bash the MF concept or even the similar IBC…I just wanted to show people the article of what happens when people dont do thier due diligence and see current tax laws…I firmly believe that this concept is great in that it provides leverage and protection of equity. Many examples of this can be seen with the recent katrina losses….and just to let most people know that just because you dont live near a hurricane area or even tornado or earthquake area…you can still get flooded, especially with the changing climate that has been producing rain in some areas, those areas with inadequate drainage like folks in El Paso, TX they have had thier homes flooded not once…twice…but over three times due to rain. Some people have lost everything…thier policies didnt cover flooding. Roofs will not get replaced for one year due to back ups with so many damaged homes!
Also if you want to see more of Murphys law in effect…read the September 2006 issue of Money magazine with the article called "After The Flood"…which talks of a poor couple salvaging what they have left…drops in salaries, not much federal assistance($4,358 from FEMA for emergency relief and rental assistance)they even had insurance which ammounted to $240,000…which they had to jump through hoops to get, rather than one stop to an insurance agency for a check…if you ask me I would have done the MF plan and had side flood insurance as well…so you could get the best of both sides!
Favorite tools: Financial calculator and spreadsheet software with graphics, it has the knack of taking emotions and fears out of the equation.
Then you can address Fear#1 with scenario#1, fear#2 with scenario#2 etc and see where you fit and can sleep at night.
Why "life insurance products"? because they're the only ones who give guarantees (Brokers, isn't the ONLY time you can use the term guarantee associated with "life insurance"? (besides lame CD's aka certificates of dissapointment…)
Furthermore, amongst life insurance products, only a specific one works.
Additionally, how about the magic of compound interest on a lump sum in a tax free vehicle as opposed to the use of after tax dollars paid in order to get a portion of the mortgage payment back 15 to 4 months later (if you file at the last minute like me). The clock starts all over again every year in the taxable world while it's suspended in the tax free vehicle.
By illustrating how far one is from their goal of retiring, let's say ten years, do the math…
IF the client had the discipline to keep a budget and not spend the extra "cash" freed from going from a fixed loan to an interest only. then do the math: mortgage costs, projected tax free value of the vehicle chosen, when is the break even point? Sooner than you think given today's rates.
Hopefully this works for you (usually when 10-15 years from retirement, has enough equity to make it worth it, good credit for great mortgage rate and good life product, want to catch up and stay on track)
I have read every single comment posted here. I am new to this thinking and in the infancy of knowledge and research. My impression after reading this site is that I have absolutly no idea which way to is better. I have found no clarity only more murkiness. I am just a guy trying to learn and do what is best for my family. I have been looking into this concept for several months, admittedly not real hard until, well this week. I first heard about the concepts from a group that promotes the "Bank on Yourself" plan. I have found the concept to be extremely interesting and have been looking into the interest only mortages to free money to contribute to the plans I have seen. I do not want more monthly debt, but plan on keeping my out of pocket the same and investing the difference. Can anyone tell me more about "Bank On Yourself" and the products they use? Can anyone talk as simple as possible for those of us who have never been in this environment before, but want to learn and make good decisions.
This thread has been great, and even though I have not seen a absolute right or wrong, I feel I am learning. There probably is no absolute wrong or right for every individual, but those of us who are less educated need more road signs and ways of consuming the knowledge you all seem to have. Thanks for all the info, I will keep reading and glean as much as I can.
Thanks again,
AFG
I didn't make it down to the end of this thread, because it would've taken me forever. But after reading the 1st 10-12 replies to the original post about Missed Fortune 101 being "Horrible Advice", I had to chime in. I'm a Real Estate Equity Advisor, like a financial advisor, I help families reach their investment portfolio dreams through equity re-positioning, but I do not do it through stocks/bonds/mutual funds, I do it through Real Estate. The people who have posted about this advice of leveraging your home, and taking the equity out as being "horrible advice" I promise you will NEVER reach financial freedom through a 401k/pension plan investing.
Most people (non wealthy) focus on paying off debt….30yr fix mortgages for example, so they wont have a mortgage pmt at retirment. Reason? Their 401k/pension plan wont be nearly enough to reach their retirement goals, so THOSE people need to have their mortgage paid off. If you have a net worth of 6mil at retirement through proper equity management strategies, will you care if you still have a mortgage of 500k? No! But if your "follow everyone else" retirement planning strategies are only going to leave you with a marginal acct (200-500k), then a mortgage pmt would eat up most of your income. 96% of retiring Americans depend on Govt., family, friends, charity, or continuing to still work to support themselves, NINETY SIX PERCENT!! So go ahead, keep following your parents, neighbors, and co-workers advice of equity management strategies….I'd rather learn from the wealthy people on how to create wealth. And wealthy people use Leverage as much a possible.
Lets look at an example. Joe Knowsitall has a 30yr fixed mortgage at 6% for 250k ($1500/mo pmt), on a house valued at $500k. He contributes $500/mo + $250 from his company for 30yrs to his retirement plan, earning him 8%. At the end of 30yrs, his house is paid for, and he has $1.1mil. If hes in a 30% tax bracket, that will produce $61k/yr income forever, assuming its still earning 8% and Joe just withdraws only the interest. And this is even assuming Joe never re-fi'd, never moved, and never had an emergency that he needed that money trapped in his house….very UNLIKELY!
Mike Wealthymindset too has a house valued at $500k, and owes $250k. But Mike pulls $150K out with a I/O loan @ 6%, so now his $400k loan pmt is $2000/mo. Notice both Mikes' & Joe's pmts for retirement & mortgage are the same, $2000/mo. To remain somewhat liquid, Mike puts $50k in a safe side acct. and makes a modest 6%/yr. The other 100k he uses to put 10% down on real estate, allowing him to purchase 1mil worth of real estate, also earning 6%. In 30yrs, he would still owe $400k on his home, but his side acct of $50k would now be worth $287k. And his real estate would be worth $5.743K. His total portfolio is worth 6mil, but he still owes $1.4 on his home & investment properties. So his net worth is $4.6mil, versus Joe who has $1.1mil, even though they paid the same $2000/mo and Joe even had his employer help him.
So go ahead, payoff your house like everyone else is, and depend on your 401k like the other 96% of Americans. If Im worth 6mil, I dont care if I have a $400k mortgage, it depends on what you choose to focus on…Debt or Wealth? That's what we do for our clients everyday!! Thanks!
Toby
I am wondering why it is you think people should try and pay off their mortgage when they are on average moving every 5-7 years in an economy where you don't keep a job for 30 years any more. I also don't understand why you wouldn't use insuranced backed investments? Your 401k being tied directly to the stock market takes dives right along with the market. There are insurance based investment products out there that are tied to the stock market but grow when the market is going up but stay at zero(don't go up or down)when the market is dropping. Doesn't it make sense to invest in these type of products since if you have all your money in your 401k or mutual fund and the market takes a dive then when it starts going back up it may take years to get back to even. With my Equity Indexed Annuity I have been earning 9%+ over the last few years and it only moves up not down like a 401k. I also don't understand why I wouldn't want to get into a mortgage product that would allow me the lowest possible payment freeing up additional dollars to drive into my investments that is going to compound interest for me rather than lining the pockets of the lender with my principle balance, so that they can sell that money to make more money and have it compound interest for them? Also, if I did take say 20-50K out of the equity of my home maybe leaving myself with a mortgage at 80-90% of the value of my home and then took that money and put it as a lump sum investment to maximize how fast my dollars compound along with the additional money I am driving into my investments monthly with the lower mortgage payment using interest only and other similar mortgage products? Doesn't an insurance based investment tied to a stock index compounding interest. I am thinking of also buying some Equity Indexed Universal Life Insurance so I have a policy with a face value of 500k and at the same time it has another feature tied to an investment vehicle. You telling people not to buy the book Missed Fortune 101 is one thing, but you telling them that all of the concepts are ridiculous I believe is incredulous on your part. I would rather have my money compounding interest for me out side the walls of the house where if I need to I can get my hands on it rather than be a victim if it burns or gets blown down or washed away, rather than try to get the money out of it when I am already in trouble. Why can't I at some point in the future if I want to just write a check for the mortgage balance after the money has been compounding interest for me for years rather than be at the mercy of a lender if I want to get 10k out at some point in the future to remodel my kitchen and have to pay what ever interest rate the lender might allow me? I think you are missin' the boat on a lot.
I couldn't of said it better myself Vicky, although I tried in my post right above yours. Why are people still trying to use 40-50yr old techniques for retirement, that didnt even work that well 50yrs ago? Look at the state of retirees these days!
If you are so hard up on paying off your house, let me give you a better way. Say you owe $200k on a house worth $400k. On a 6% 30yr fixed mortgage, your pmt is $1200/mo. If you make you reg. pmts. you'd pay off that house in 30yrs…great! Meanwhile your neighbor has the same mortgage, but decides to takes out $100K, so he now has a $300k mortgage. He gets a 1% Option Arm loan, so his pmt is only $965. Thats $835 less then a fully amoritized 6% loan would cost him a month. To offset the negative amoritization, he puts that $835 savings every month in a safe side acct. earning 6%, along with the lump sum of 100k. This liquid acct can be accessed at any time for emergencies (health, loss of job, divorce, death, etc.). With this loan, he'd add apprx $10k to the balance of his loan every yr. So after 14yrs, he'd owe $440k, but his side acct would have accumulated $449k. He'd pay off his home, if he wanted, 16yrs FASTER then the 1st example. At 8%, he'd have $457k in just 12yrs, 18yrs faster then paying a 30yr mortgage.
I dissagree with the mortgage products that some here and DA suggests. Here's why. Interest only loans and option arms carry a higher interest rates.The strategy suggests refinancing every few year (3-5 depending on amount of appreciation). The first 3 to 5 years of an amortizing loan is mostly interest. So you are able to get a lower rate on either a fixed rate loan or a variable (fixed for 5 years)rate loan by around .5% and still the majority of the loan payments are interest. The lower rate makes the arbitrage earn you more. As for the option arms they only allow the lower payment till your loan amount has gone up 10% which usually takes only a couple of years. And remember even though your payment is lower your underlying interest rate is higher so you are actually paying more money for the loan for the ability to increase your cash flow. And when you reach 110% of loan value you are forced into a amortizing situation with a higher interest rate. It seems to me that rates do matter and the lower rate on a amortizing loan makes more sense. Remember one of the best things about this strategy is the ability to not have to chase huge rate of returns on your side fund and have that added risk. The lower you can get the mortgage rate the less you have to worry about rate of return on your side fund.
Hey at first glance-
Vicky and Toby would be most correct. To answer your question however, you only need to understand one concept. No matter who says it or how they say it, owning your home outright is strictly an emotional goal. There's not a number you can run where keeping equity out of your house and moving that money (discipline is the key word here) where it has a chance to move faster than the historical growth of a house. Where you put it is the big question. Some people like the market. Doug like VUL. Being conservative I happen to prefer straight WL and have already built my bank via the Heloc (I post here because I know it works- I'll got 24-36 months with no income right now. i can't say that for 401(k) homeowners). I hope that helps. But remember, paying off your house is an emotional thing, not a good financial choice no matter how you slice it.
-GMan
Addendum to above:
Keeping equity out of your house and moving that money (discipline is the key word here) where it has a chance to move faster than the historical growth of a house value will ALWAYS afford you the opportunity to make more money in the long run. Adjusting the risk of the side account is where the opinions vary.
Sorry about the incomplete thought!!
Well to prove my point even further, the Fed Reserve Bank just published a 47pg. report on equity re-positioning. They too now agree that equity re-positioning is a viable option to a numerous amount of US home owners. Below is just a few key points:
The Fed is finally coming around. They conducted a study to determine whether it’s better to payoff your mortgage or instead invest your money in a tax deferred retirement account. The answer will not surprise you, as you've heard us talk about the benefits of integrating the mortgage into a client's financial plan for quite some time.
* We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts (TDA).
* We show that about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar, depending on the choice of investment assets.
* In aggregate, these mis-allocated savings are costing U.S. households as much as 1.5 billion dollars per year.
If you would like to actually read this detailed report, please be sure to email me. Thanks!
Hello
I recently moved to the Bay Area from Canada and have been trying to figure out the market here.
Here are my observations so far:
If I bought a home when I moved here 6 months ago with a 20% down I currently would be out 90% of my investment. So to me it looks like owning a home or Enron stock is about the same.
Right now my "downpayment money" is invested and throwing off enough income to pay my rent in the same house that I would have bought. Rent is between 25% and 50% of the total cost of ownership of the same house. Even if I bought a house and paid it off in 30 years I would still have to pay 1.25% in property taxes (currently about $1100/month) so it would be impossible to be in the same position I am in now even with a paid off house that got free maintenance.
When my dad was in the same position as me mortgages were 2-3 times annual income (and people still took 20 years to pay them off), now I am looking at 8 times annual income so a good deal for him is a bad deal for me.
The housing market seems screwed up locally, homes built around elementary schools should be designed and priced for first time buyers (the people having babies) instead they are building executive family homes that only emtpy nesters can afford. Whats up with that? I suppose if I said yes to the drive through bank teller when she asked if I want to supersize my mortgage I could swing it but it would tie up all my cash flow and 50% of my portfolio into one illiquid high maintenance fixed asset. Yikes. I cannot even delude myself into thinking that the housing market will go up here as I cannot imagine who would be able to afford to buy my house (other than newly retired folks who don't want stairs and don't need to live in a scool zone) Yikes
Am I missing something?
Many people posting seem to think that owning paying off your house is the best thing to do and that worked for all the baby boomers out there but the math is not a slam dunk for me. I even wonder if the people living here could even afford their own homes now with 20% down.
Until now those same baby boomers will have to sell to my generation and please note my generation is much smaller than the boomer one. I hope you let in enough immigrants to fill this population gap or sales are going to get tough.
Don't get me wrong I would like to lord over my own castle and this strategdy (MF) seems like the only one that will leave my family better off than renting. I hold no delusions about this being easy though.
Maybe I should just quit my job and take my 'downpayment money' buy a house outright in El Paso Texas invest the rest and retire at 34 instead of trying to grind it out in the East Bay area of San Fransisco.
Your absolutly right if you do that…home prices in El Paso are very low compared to East Bay…I ve seen some very nice homes go for $250,000 here that would easily cost 3 to 4 times the amount in California!….and cost of living is quite low too…so are gas prices…job outlook is a bit small….but whats odd is there seems too be a big boom here because I think someone let the cat out of the bag about the Real Estate here….
"Doesn’t it make sense to invest in these type of products since if you have all your money in your 401k or mutual fund and the market takes a dive then when it starts going back up it may take years to get back to even. "
Hold the phone — That only rings true if you cash out at that time. I thought the principle of "Buy Low, Sell High" still applied? Isn't that the whole concept behind dollar cost averaging? Some of my best gains in the 401k funds have been because I kept putting money into the same funds after the market tanked. Now, the market is at a record high, and guess what, my mutual funds are looking pretty good. We're talking about a 5 year turn around. I can weather that storm anytime.
I'm meeting with my new life insurance rep in two weeks (my former rep retired). One of the big questions I have for him is how did my contracts do compared to those rosey projections I saw when I signed on the dotted line? I'm not sure my income even makes my premiums. The statements I get from this company are far from easily understandable — my mutual fund statements are crystal clear.
Don't get me wrong, I find the idea of getting a return on my equity great, but I don't always trust the motivations of the person who is giving the advice. Secondary gain tends to cloud one's judgement.
mbh -I've been a mortgage advisor for 15 years. (and unlike many mortgage people – who are nothing more than salespeople I have a degree in finance and all of the applicable securities lics.) The MF concept is simply a sales tactic. Does it work – sure – in the right circumstances and you better know what your risks are. For those that are arguing the concept so hard, why don't they simply look at a comparison of taking the same amount of cash that they would make with a monthly payment on a mortgage and use their 'disciplined' lives to invest it monthly. When you calcuate the NPV – that's net present value to many of you 'licensed advisors' you will find the accumulated value nominally the same – yet you've accomplished this goal without all of the risk of having a mortgage.
Dispelling the Financial Services Industry & MBH
Sorry MBH/Jomama/Elia/Jsm
You guys take small shots at MF 101 without looking at the complete strategy or the investment-grade insurance product.
The financial services industry sees this as a real long-term threat to their business. Otherwise, they would never even hint at investing home-equity money in the stock market.
On MBH's initial comment RE: Doubling of assets –
You are correct in the math, but you missed the point entirely ! It takes a bit of genius to understand the big picture. Moving the equity out of your home into an insurance product GIVES YOU 2 ASSETS AND 1 LIABILITY, but now you have your money working for you in 2 places AT THE SAME TIME. (The standard average annual appreciation of the home & the growth of the S&P 500 in the insurance product). One or both of the assets may be down in value during a recession, but generally speaking you will make money on both long-term.
Nowhere in his book does Doug Andrews promote this as a short-term get rich quick scheme, and everyone knows the stock market has increased in value in every decade since inception.
Gee, financial planners talk about a diversified portfolio, but give little or no consideration to diversifying what's either most Americans largest or second largest asset. Shame on them for having tunnel vision.
Lets look at the risk to this strategy – THERE ARE VIRTUALLY NONE so long as the agent/planner does a good due diligence with the prospect to ENSURE reasonably good credit history.
Lets play some worst-case scenarios to properly assess the risk-
Scenario 1 – FLAT OR NEGATIVE S&P 500 FOR 10 years; Where would your home equity money be better off ?
1. Right where it is (inside the home)
2. Diversified stock or stock/bond portfolio (Non-qualified plan)
3. Diversified stock/bond portfolio (Qualified plan)
4. Real estate
5. An Investment-grade life insurance contract
Before you answer, you need to consider there's a good chance you might be out of work or have to close the doors of your business during such a prolonged contraction of the economy. An emergency fund of 6 -12 months may not be enough, so most folks will have to start tapping their 401k(s) – talk about penalties & taxes & an inability to declare a loss on a 401k plan when the market is down. Take it a little farther to 15 yrs. and hopefully you'll realize it won't matter where your money is, because we are probably in a depression.
Scenario 2 – SEVERE INFLATION/HYPERINFLATION
The stock market is down & you're most likely losing money on the bond portion of your mutual fund portfolio due to rising interest rates.
Most EIULs have a fixed account which will allow a policyholder to capture gains from rising interest rates
One more thing to MBH
Your opinion on the RISK of using an insurance product versus keeping the equity in your home is flawed – There are numerous cases from coast to coast where equity in the home has been lost, i.e. landslides, Katrina, contaminated ground water,loss of a job, etc.
Separating the equity from the home is far safer than leaving it in the home. The real question is where to put the separated equity.
On Equity Indexed Life Insurance – You have CONTRACTUAL guarantees to particpate in 100% growth of a stock market index up to the cap. But it gets better – the gain is locked in at the end of the year, never to be given back in a future year. EIULs have been around since the late 1990s, but I am not aware of 1 company that has adjusted the cap downwards. If anyone else is aware of a cap adjustment, pleast post the company name here.
Another huge advantage to using an EIUL for the Missed Fortune strategy is you have a CONTRACTUAL GUARANTEE to about 85% of the money after the 1st year with no surrender charge, penalties, taxes, etc, so if the insurance company fails to perform, you can move most of the money back to the house or another investment. This built in guarantee helps to keep the insurance company from playing games with policyholders money since it would severely hurt them financially if the majority of the policyholders start to move the bulk of the cash value out of their policies. The key is finding a good EIUL which allows you to access the bulk of the cash value at anytime without huge penalties. I will not post specific company names here because I do not use the internet as a marketing tool.
Doug Andrews in Missed Fortune 101 has a slight bias toward EIULs, and here's why-
The money from your home has to have a contractual guarantee to not lose principal, but yet give policyholders the maximux potential for long-term growth
There is NO other financial product that will give a CONTRACTUAL guarantee to participate in most of the upward movement of a stock market index without risk, and never having to worry about capital gains or income taxes in the short or long term
Jomama
You demonstrate a lack of knowledge of EIULs with your comment above, and mutual companies do not market EIULs. The illustrated rate in EVERY EIUL is based on a long-term average of an index, so a 7-10% average (depends on the company and the average period) is a number that that HAS to be approved by the department of insurance in every state. Whole Life policies are the least transparent to the agent & policyholder, and they have proven to be an inferior product long term. Since the gain is locked in at the end of the year, you'll have a much better chance to achieve the average return of the market, since there are no down years – A much more stable and predictable rate of return !
EIULs are reshaping the insurance industry due to much better disclosure of the fees/expenses involved, as well as an easy understanding of how cash value accumulates. There is no AMT consideration on acquisition indebtedness, and Doug Andrews does not appear to be greedy by advocating moving every last cent of your home equity into an EIUL. On the contrary, he recommends about 40% of the equity be used for an EIUL.
EIAs comment on the IRS disallowance of interest deduction to fund a single-premium investment or insurance contract – Sorry you're showing some ignorance regarding insurance products. In every state, EIULs are NOT registered as "single premium" products and Doug Andrews never suggests fully funding them in the 1st year. On the contrary, he recommends a 3 to 7 year timeframe – Talk about making the insurance companies prove they can deliver on their promises.
Which has PROVEN to be more risky, insurance contracts or mutual funds.
On mutual Funds risk
1. Misappropriation of shareholders monies – How many mutual funds were guity of fraud in the last 20 yrs. versus insurance companies – Remember if your mutual fund is engaging in unethical/illegal practices, it won't matter where your money is inside the fund, because everyone will start to pull out – there are examples of this.
2. Potential tax liability on sales of stock even if the NAV is lower than your purchase price.
3. Where do you think the biggest segment of baby boomers will be pulling money from in the next 10 – 20 years ?
I'm going on vacation, but when I return, I'll post some more misconceptions on the fees and commissions involved of insurance agents versus other financial services professionals, as well other misconception posted by planners.
Sorry, I forgot to point to another lack of risk to this strategy. I'll draw a simple analogy
If your employer offered you $500,000 in company stock towards your your 401k, or $250,000 in company stock & $225,00 in an S&P 500 fund (Total=$475,000) with no risk of loss to principal, which would be a safer way to invest ? You need to seaparate emotion from logic to understand which is safer.
Forgive a novice, but how does investing in a tax exempt annuity or life insurance policy get around IRS law as stated below:
Mortgage proceeds invested in tax-exempt securities. You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. (this is from irs p936)
The other important point as I understand it is that you can only deduct taxes from a maximum of $100,000 in a HELOC.
Good question BN
1. Equity Indexed Universal Life Policies are not registered, nor are they governed by the SEC as a "security".
2. There are only instances in a life insurance contract which will produce a "taxable income" event.
a. Establishing a policy as a Modified Endowment Contract. This is normally done during policy inception, but can also be accomplished during the life of the policy. Doug Andrews' strategy involves the minimum amount of death benefit funded just below the MEC level to avoid taxation in the middle and back end.
b. Surrendering the policy – Most planners indicate this is a big concern, but you only have to keep a tiny amount of life insurance to keep the life insurance contract intact. I know of 1 company that only requires $1k of death benefit. Therefore, when you no long need life ins., you simply withdraw the cost basis, then take a loan on the remaining 97% – Neither withdrawing the cost basis nor taking loans against the policy are taxable events so long as the contract remains in-force.
If people are reading the first and last posts. Id like to point out that there are some major flaws in the original posters thinking.
you are seriously telling me if i have a mortgage on my property that i don't own my home? WHAT?!!? yes i do. They are still my walls to knock down or build onto etc. I don't have to get the lenders permission for anything and I don't have to report to them. Its my freakin house, free and clear or leveraged 100%.
therefore, 2 assets, 1 liability. the net is 100,000, but you do have GROWTH on two assets (appreciation happens regardless of mortgage balance) and growth in the side fund is there. growth…twice, with 2 assets, 1 liability.
seriously….don't criticize what you don't understand. Contact a professional to explain what your feeble mind does not comprehend.
Sorry Jonathan – but you are still wrong. EIUL. You are not paying attention to RISK!!! A monkey could have made money the last 10 years in the market. Lets see you try to do that now during more challenging times.
Real wealth is being free from debt. The LEVERAGED money game just gives salespeople the ability to 'professionally confuse' their clients. AS I SAID EARLIER – if you are so convinced of your strategy – why not pay off the mortgage and simply make monthly payments equivalent to what you would have made on the loan to the investment of your choice?
jsm
What risk(s) are you specifically referring to, and have you studied the EIUL ?
Your second paragraph is just plain ignorant, and based on emotion, not logic. Businesses borrow money constantly in the form of bonds and other loans to leverage debt into profits.
Why not pay off the mortgage early ? Several reasons.
Unless you are only a few payments away from paying off the mortgage, you are no safer than being fully leveraged. Of course, this would depend on the size of your emergency fund, and other investments.
But, try borrowing from your 401k after you've been laid off – you can't. You'll have to take a distribution
And, you cannot deduct losses in a qualified plan.
And, although the IRS may waive the 10% penalty in conjunction with avoiding foreclosure, they will not waive owing ordinary income taxes & it's possible to owe income taxes even if the NAV is lower than the purchase price.
You'll incur an "opportunity cost" by paying off the mortgage early. If you're paying 9% and only earning 6.5%, you'll still come out ahead due to the much better effect of compound interest versus the simple interest loan table. I've done the math using an HP12.
Why in the hell would anyone try to eliminate their biggest tax deduction when they're likely making the most money in their lives. On one hand, you're contributing to a 401k to get a tax deduction, while simultaneiously reducing your tax deductions on the other hand. There's a cancelling out effect at work here.
Paying off the mortgage does not give the homeowner any better ability to borrow the equity back out, since lenders consider the ability to repay the loan based on INCOME.
While creditors cannot seize your home, they certainly can put a lien on it. That's not a nice feeling unless I have one foot in the grave. I wouldn't want anyone to have 1st dibbs on my equity since I worked so hard to pay the house off
I'd rather have a nice pile of cash on the side. You see, separating the equity from the house gives the homeowner choice and control over the money.
Credit card debt – get rid of it
Installment debt – get rid of it
real estate debt – leverage it
Amen Dan Finan
It's amazing how most planners have failed to consider diversifying most American biggest or 2nd biggest asset. But they sure know know how to rebalance a portfolio.
I've seen the light…so have you
It's been awhile since I've been on this site (I have a few post starting at #88), and by reading the some of these comments, I see why I haven't been back in awhile. As a Real Equity Advisor, I'm also a registered Mortgage Specialists, and we apply these concepts to everyday people everyday to create wealth for them over time. The 1 thing we do differently is use equity to investment in real estate, residential.
I know from experience that 95% of the people who fight these concepts are NOT wealthy themselves, nor will they ever will be. I could state several facts about the state of America's retiress to prove this point, but I won't here, look it up for yourselves. But I will tell you that if following what everyone else does makes you feel better, go for it, you have tough odds to overcome….most people, 96% in fact retire needing someone else to support them. I would almost gaurantee you, that the people posting about how this is a scam, not financially sound, or whatever are focused on debt, rather then wealth….and while that may lead to no debt for some (for most it still wont), it will never lead to wealth.
A statement by "jsm" above is about as ignorant as you can make regarding wealth. He stated, " Real wealth is being free from debt"…is that right? Hmm, why do successful people & businesses, who have loads of money like Donald Trump, Donald Sterling, Bill Gates, Exxon, KB Home continue to borrrow money (leverage) to acquire additional assets?? Obviously you don't understand how money, leverage, or wealth works. JSM? When a company states they are "debt free", do you even know what that means? It does NOT mean they have no debt, it means their assets (which consumers do not buy) total more then their liabilities. Example, they have 1 billion is assets, and 900 million in liabilities, therefore having 100 million in NET WORTH, they can declare themselves debt free. I bet most of you have no idea what your net worth is.
Consider a recent article in the LA Times on the psychological state of consumers, or the masses, in this changing real estate market. One quote states, "The urge to follow the herd leads to….forgetting that bison sometimes stampede off cliffs”. That same line of thinking also leads consumers to falsely assure themselves that, “There’s always safety in numbers….and if they make a mistake, the misery can be shared" I could not have said that better if I tried….Investor (mindset) people know better. Bottom line, following advice from people who aren't wealthy (most of us) is financial suicide. Its your choice, be a consumer, and follow the masses, or be an investor and follow the paths of the wealthy few.
First of all, I am fascinated by this school of thought. I am a young loan officer just in the business 6 months! I have picked up the concept of MF through one of their affiliates "The Mortgage Coach", which I absolutely love and has helped me beat out my competition. What I didn't understand was how deeply embedded they are in the concept of MF. As a matter of fact, some of the sales scripts that Mortgage Coach sells is right out of the MF book! I couldn't believe it. I am now fully aware that all of these people like Tim Braheem, Dave Savage, Barry Habib, etc. are all interwoven into the philosophy of MF. However, at this point in my career, so young at that, I am trying to follow the great minds in the mortgage industry and become successful like them. Of course it is only natural for someone young like me to have a "mentor" if you will. I am just wondering which path to take in the mortgage business because I am so young and impressionable at this point. But I'm beginning to realize after reading the various arguments and two schools of thought, that it's just like religion- there's no right or wrong, it's just what you believe in. You put your whole heart into it and hope that you achieve the "dream" of financial freedom in the end.
P.S. Toby, where can I find a copy of that report by the Federeal REserve about re-positioning equity? Thanks!
Lisa, email me if you want the report. its like 44pgs, and most of it is pretty boring, but it shows that our slow govt. is finally seeing what wealthy people have seen for several yrs.
Toby
The only reason the MF concept exists is to produce large commission for insurance sales agents and mortgage brokers. Another toxic element has been added to the mix. We have seen mortgage brokers put clinets into negatively amortizing ARMS to fund life insurance sales. The Neg amortizing ARM's are currently (index plus margin) over 8% compared 30 year fixed market of 6%. The payment rate can be as low as .25% which mandates a horiffic loss of equity. The true cost of the mortgage cannot be offset by any "Safe" investment vehicle. As a mortgage broker and CFP with 20 years in the business I am ashamed that people in my industry would put commisions above doing what is right for the clients. Even with a decent mortgage the MF approach is a recipe for financial disaster.
The only wealth being created here is for insurance sales people and mortgage brokers who will contunue to conduct a spirited defense of this clearly flawed strategy.
John
As a newbie, I am going thru some of the MF senarios several times, with calculator and spreadsheet in hand. I'm hopeful that his concepts has promise but am struggling to get all the points.
As a newbie you can't get the calculations correct. Consult a competent CPA or "Fee Only" financial planner for advise. Do not consult anyone who might earn a commission on any of these products.
John
Quit parroting the financial press and 97% of all planners, who are not familiar with this strategy, but have only looked at 1 or 2 small aspects.
Have you ever come up with anything original in your life, or do you merely requote someone else who has not studied all the aspects of this strategy ?
I'm not impressed with your credentials, since you obviously can't enumerate the flaws.
NOWHERE in his book does he recommend pay option ARMS over traditional interest-only loans. Pay Option ARMS can be appropriate for those who totally understand the risks. To condemn all mortgage brokers and insurance agent is childish.
In other words, if you cannot specifically point out the flaws, you should restrain yourself from bashing a concept you have not analyzed thoroughly yourself.
Feel free to quote a "fee only" planners advice, since , since its very obvious they haven't studied this strategy.
No one will take you seriously unless you can prove yourself with math, as Doug Andrews has.
Steve
What points are you missing, and are you looking at MF 101 or MF ?
By the Way John
Since you're in a mood to bash the mortgage industry, are you a "small fee only" mortgage broker ? Or maybe you charge 1/4 to 1/3 of what would be the standard percentage for closing a loan.
If not, that's hypocritical
Personal attacks are the last refuge for scoundrels.
I am reading MF 101 (is MF better?). The intriguing concepts by Mr Andrews are enough to dig into the ideas further. Afterall if this is real, it can mean a better (financial) quality of life. It's certainly worth 2 hours a day going through the numbers and checking the web for the next month. You can make alot less money working 2 hours a day! I haven't gotten to the chapters (yet) about the tax free funding with insurance.
I won't get involved in the war-ing parties.
I had an epiphany the other day when a math professor friend of mine said, "the problem with Americans is their always looking for a quick answer from a "so called expert", or a paragraph in a book which validates what they've already heard from another "expert". That's okay with certain things, like buying pots/pans, maybe even a computer. But not with finances. Do your own homework.
Why would anyone be foolish enough to listen to a financial columnist who has no financial background (Scott Burns), to the tune of hundreds of dollars per year ? As a consumer, I would want to know how this EIUL has performed against an index fund over the past 10 years. Now, show me an actual statement on how its performed for a least 1 year, so I can cross reference it with the actual index.
Next, show me the guarantees of the insurance company, and they better be rock solid.
Lastly, how easy is it for me to get most of my money out if it doesn't perform, and there better not be surrender penalties, or back-end loads.
Commissions should be irrelevant if the gains in both vehicles is close.
You don't need to pay a financial planner to tell you not to utilize this strategy if you're financially irresponsible or have a basement-level FICO score.
Scott
MF 101 is a lot easier, and is really just a condensed version.
I read every post at financial-planning.com awhile back, and to be fair, the planners do have 2 or 3 valid concerns, to include the "Salt Lake City Weekly" artcle. However, no one followed up with answers, and I'm not about to help planners understand why this is a good strategy for most folks.
I know several agents/planners besides myself who have heavily promoted this strategy, and I can assure you that a GOOD due diligence is conducted.
Also, judging by what the planners wrote, they are not familiar with specific policy contract provisions which give the owner a helluva safety net/backout provision.
Gee, I wonder if they read prospectus' before they recommend a mutual fund.
It seems to me, as one of those MBA folks that have chimed in here, that you really need a solid understanding of how leverage works to analyze any of the options discussed. Furthermore, you must really understand yourself (in a Buddhistic sort of way) and what your risk tolerance is.
Would MF work for some people that have large amounts of equity in their homes today — probably yes. Is it risky – yes; so is every other investment (including T-Bills).
Do interest-only mortgages make sense — yes, if you have great financial discipline to cover your liability (and down real estate markets do happen).
Does a margin account make sense? Probably not for the majority of people, but it is the same principle as we are discussing here — placing a bet that you can outperform the penality associated with your debt (investment return > debt penality), including all the tax benefits/implications.
The comments about people willing to enter a highly leveraged position to build wealth are correct. The higher risk I assume, the greater the opportunity for returns. But also the higher risk I assume. The posters mentioned Trump (who btw would be really poor if his Dad's great investments and his "Apprentice" show did not pay off his bad investments), Gates, etc. as examples of individuals that use leverage. True. Those are the investors that did well, and there's thousands out there that did terribly when their investments did not return and the negative cash flow bankrupt them (see: what happens when I'm so leveraged that I can't cover my debts even though I have a ton of assets; see also: top reason for used car dealership to go bankrupt).
So it all comes down to risk tolerance. Everyone that I've seen on this board is right for the most part — the choices they have made are good ones for their risk tolerance. You can invest in low beta stocks or high beta stocks; annuities or T-bills; all have different risk/return profiles.
As a final note, I think this is a very health discussion where you can see people's risk tolerance very clearly (sometimes this manifests as emotion in their posts b/c they do not understand your risk tolerance position).
Please tell me what you perceive as the top 1 – 4 risks for this type of strategy.
I think it is riskier NOT to separate the equity from your residence. Their are plenty of examples coast to coast where the equity built up in the home has been lost.
Jonathan,
I tend to agree with you that the equity left in a home is wasted capital and therefore zero risk, but also zero return. However, it does require financial discipline to put that principal payment into a different investment and continue funding the investment (whether it is life insurance or equity investments or T-bills). For people without this financial discipline this manifestsas a risk.
Of course, you can argue that for a primary residence there is some risk mitigation in many states where a person's home is typically protected from bankruptcy.
Matt
In separating equity from the home, this strategy requires max funding a life ins. policy in 5 years. The client could use either 1 yr. CDs or a SPIA to accomplish this.
There are only 6 states which offer a full homestead exemption, and the maximum protected under the new bankruptcy law is $125K. Federal law under bankruptcy supercedes state law, so again, your equity is not as safe as you might think. While they may not seize your home, they can put lien on it.
I attended a MF seminar a couple of months ago. I was given the book and read it cover to cover. And although we have over $800,000 equity in our home, I just could not be sold.
I have a side fund of $325K earning 12-14%, none of which came from leveraging real estate. Some day we might use this side fund to pay off our 5% morgage (currently $485,000) or, depending on the economy and the market, continue to keep it invested.
The insurance agent had the gutts to try to convince me to move $200,000 out of my side fund earning 12-14% and into a EIUL policy with a guaranteed 2% rate of return. His justification was that I might not want to "hassle" with the investment transactions in retirement (give me a break)! It was at this point that I realized that he did not have MY best interests in mind. He just wanted to make a commission.
EIULs are not at all liquid on the front end and I would hardly call 2% (the guaranteed rate on the one pitched to me) a decent rate of return. So as far as safety, liquidity, and rate of return are concerned – the agent's presentation failed miserably on two out of the three.
And for whoever said that a person cannot become wealthy by paying off their mortgage is wrong. We've paid off two in our lifetime, taking the entire equity each tinme to buy up. Our net worth is over $1.3M not including our real estate equity. So I am living proof that it can be done the old fashioned way.
I agree that in exactly the right environment and with the recommendations of an agent that is in it for more than the commision (yeah right) the MF strategy might work. For me, however, its risks were far greater than its rewards. Someone who didn't actually WORK for the equity in their home (appreciation in CA from '01-'05) might feel differently – easy come, easy go.
1. Not sure what your "side fund" is composed of – Most likely qualified money versus a Roth which has had small contribution limits since '97. If the agent was suggesting using distributions from "qualified plans" to fund life ins., this is WRONG in most cases unless the agent can prove the tax benefits by doing a 72t calculations.
2. If the "side fund" is outside a qualified plan, there are several reasons why a good EIUL makes more sense (financially & legally).
3. What makes you think the bulk of the money is "illiquid" ? Did you ask the agent when you could access the bulk of the money, or are assuming this based on "other's advice" ?
Sounds to me you've heard some negative opinions from "others" who know either nothing or very little about EIULs.
If you are worried about the guarantee of only 2%, you completely misunterstood the strategy or did not ask enough questions.
I've worked with individuals with a networth greater than 75 Mil. and I assure you getting wealthy is only half of the problem. Their more worried about protecting wealth/assests from taxes, creditors, mother nature, etc.
This is only 1 tool, but a very effective one if the right EIUL is used.
JonnyD,
Thanks for your post. I really appreciate all the thought that went into them. I probably should have given more info up front.
My side fund is not part of a qualified plan. I invest in second trust deeds. But I will say that if you read the MF book there is a whole section on cashing in your 401K or IRA to fund the EIUL. Andrews bloviates about how 401Ks are a government scam because people pay more in taxes on the "harvest" (withdrawal) than they saved during the accumulation phase (he specifically highlighting the tax deductions on the contributions and does not seems to focus much on the tax deductions on the compounding as well). He does give some creedence to company match, but states that all it does is pay the taxes on the contribution it matches so it's pretty much a wash – not really much of a benefit to the investor according to Andrew.
I made almost $143K in my 401K last year. If I had made it outside my 401K I would be taxed an additional $21,450 that would no longer be working for me. When you consider the compounding on that kind of money over a period of years, it really adds up.
In addition, 401K contributions are automatic through payroll deduction and require little self-discipline once enrolled. This makes them a great retirement savings vehicle for the majority of the population who probably would never be able to save a big lump sum on their own without such a program. I think Doug Andew is way off base advising people not to invest in a 401K or IRA and/or advising them to withdraw these funds to invest in EIULs.
The lack of liquidity was based on the surrender charges if the money needed to be withdrawn from the insurance accountin the early years. For example, on a $200K policy (the pitch given to me), after FIVE years the surrender value was only $135,171. $200K in second trust deeds @ 12% will grow to $307,725 AFTER TAXES (a difference of over $172K) In addition, my second trust deeds run for periods of 1-3 years and pay interest only with a ballon payment at the end. If for any reason I should need the money before the balloon payment is due I can get the principal at a cost of about 1%. I'd say that that's pretty liquid and a heck of a lot cheaper than the surrender charges for the EIUL.
As for rate of return, the GUARANTEE was indeed 2%. So if the market was negative or flat, you'd earn AT LEAST 2% but if the market went through the roof it capped out. In the pitch given to me, the insurance salesmen used 7.5% but in small print at the bottom of every page there was a disclaimer that stated that the information was not guaranteed and was for illustration purposes only. Still 7.5% vs my 12-14% – even after I pay taxes, I come out ahead.
I hope this clarifies my situation and my experience. I welcome any more comments because I'm always eager to learn something new. That is why I went to the MF seminar in the first place.
Wow, alot of people have entered alot of conflicting info here. I think it just goes to show that everyone is different in age, attitude and situation. I've done the MF investment. It took 5 months to get all my questions answered and not once was I pressured by my rep. I spoke with CPA's, lawyers and successful business people before initiating the plan. Bottom line is its gonna be about 25 years before I retire. My house has over 400K in equity doing nothing. My companies 401K options (which I was maxing out)kept getting fewer and they dropped match from 5% to 3%. Now because so few people participate in the plan the max contribution is 9% by Federal rule. Now I contribute 3% to get the free match. And spend the same amount of money I was putting in my 401K funding this plan. Financially its a wash for me.
My plan guarantees 3% a year with Max of 14% based on a 50/50 split of the performance of the S&P 500 and S&P 400. Anyone who looks at a worst case scenario and says 3% for life is certainly not going to perform well with their 401K/IRA either unless they are uncanny fund pickers plus they'll pay taxes on every red cent. Bottom line is as of today I will get the 14% return for this year which I will never lose because it will compound forward on my anniversay date. After the interest on my loan and tax break I'm lookin at a 7% return on money that was doing nothing before and I'll never lose it to fluctuations in the market. My 401K got shot to hell in 2000. Lots of people close to retirement got a rude awakening as well. Now I sleep well at night knowing that another 50% loss in the market will get me 3% and a market recovery for years to come.
My advice is that if anyone is pushing you through this without months of planning leave his office and find someone reputable. My guy even finds the MF book to be way aggressive. If you take a few good stratgies from the book and implement them I think you'll be pleasantly pleased. I also think that comment on the book after having read it is ridiculous. Its like reading a Chiltons repair manual and calling yourself a mechanic. This method is highly technical and I've got an older gentleman who is a former day trader turned forclosure prevention expert turned insurance agent salesman pulling the strings to a fruitful retirement.
dancinmama,
The way the agent presented the concepts to you were wrong. However, I think you might be missing the point about managing your equity.
Do you consider your side fund to be safe, considering it is invested in second trust deeds? I am guessing you are an experienced investor in these notes, but suppose these loans go belly-up due to unforeseen circumstances? This investment certainly is not liquid. You personally may have enough in other side funds to weather any storm, but most people do not. I think liquidity is the most important reason to take equity out of the home in order to handle financial problems, as well as to have funds available for good opportunities. The rate of return is icing on the cake.
dad394,
You said that the rate of return is icing on the cake, but the only rate that was GUARANTEED to me was 2%. I know it could be as high as 17%, but I wouldn't count on that. What is YOUR rate of retun on these EIULs?
In seven years of investing we have had only one glitch. We loaned money to a developer who bought farm land that had been rezoned for residential use. After we invested and it was purchased, the County of Santa Barbara decided it could not be developed because it supposedly was a home for the tiger salamander (although any tiger salamanders that had ever existed there had been sliced and diced when the land was tilled). To make a long story short, we did not get any interest checks for about 8 months while the developer was battling it out with the county. Eventually he got it straightened out and we ended up geting our principle, back interest, and a 10% late penalty payment for each of the months that he was late. Had we needed that monthly interest to support ourselves, we would have been in trouble but for us it is a side fund for retirement. We have even loaned money to the same gentleman again.
We don't have our entire side fund inyested in just one deed of trust. Right now we are holding deeds on 5 different properties. We tend to lend to the same developers that we have been lending to for different projects over the years. We keep a close eye on their credit reports and the LTV of the projects that we lend money on. Is it 100% safe? No, but that is why they pay 12-14%. And other than that one minor glitch, the checks have always come in like clockwork.
It seems to me after reading various comments that we have gone from a logical debate and breakdown of each methods strength and weakness, to more of a whose "right" and whose "wrong" category, with the person doing the comments being "right" while almost everyone else being completely "wrong".
As a financial advisor, I have seen quite a bit in my career, but among the great diversity in recommendations given to my clients, there is one truth that supercedes any superlatives that salesmen can use: THE PRODUCTS THAT PAY THE HIGHEST COMMISSIONS ARE TYPICALLY THE LEAST BENEFICIAL TO THE CLIENT.
I have yet to see an EIA or an EIUL that I like. I'm not saying that they are not out there, but I have yet to see it after scrutenizing many companies. Equity indexed products linked to (generally the S&P 500) have 4 main factors: Participation rate, spread, cap and floor. One poster stated that his EIUL has a 1% floor and 17% cap. If we ASSUME a 100% participation rate, and a 0% spread (fee charged by insurance company that adversely effects return) and input those parameters into the annual return for the S&P 500 from 1/1/1953 to 1/1/2003 (a 50-year period eliminating the 2003-present market run-up as an anomoly), you will find that the cap was reached 22 times. The floor was reached 14 times, and 14 years fell into the 'in-between' return numbers. Assuming a $100k investment in both (WITHOUT REDUCTION FOR TAX CONSEQUENCES) the Equity indexed product would exceed the straight S&P 500 return at the end of the first year (-1.11% return), and over three years ending 1977-1979. For all other years, an investment in the S&P 500 would exceed the equity-indexed product. Also, I have never seen one with a 17% cap and a 0% spread. At the end of 1999, the EIA would be valued at $12 million vs. the S&P's $29 million, and at the end of the 50-year experiment (after the 2000-2002 down years) the EIA would be valued at 12.3 million vs. 18.1 million.
I have been researching this because I have a client who refinanced his home last year, and from the closing statement I gathered that he paid 3 points. There was no subsequent rate reduction to the client (basically, the mortgage broker pocketed a ton of cash). This same mortgage broker approached his parents, and recommended a system that appears similar to the MF 101 described by the above posters. I am not sure of the amounts or the parameters yet, as I meet with them on Monday, but I am at a loss to see how a couple in their mid- to late 70's should take a huge mortgage on their 2nd home to buy an EIA. My initial reaction is that the mortgage broker and "financial hack" made quite a bit of money on products that will not benefit the client. I hope I'm wrong.
One last point – I have found that EIA's are sold based on the "S&P's average return of 12.4%". While that is true, The salesmen rarely mention that the annual S&P 500 return has exceeded 12.4% on 25 occasions over the 50 year period from 1/1/1953 to 1/1/2003. The cap limits your returns during those periods of excessive returns moreso than your floor limits your losses, in my opinion.
It is amazing how much misinformation has been put forth concerning Missed Fortune. Douglas Andrew mentions numerous times that the funding of the policy requires 4 years and one day in order to avoid being a MEC or a single payment endowment. This 5 year period avoids all the regulations concerning not using mortgage proceeds for SINGLE funding of insurance polices.
A$100,000 limit has been tossed about, but this only applies to home equity loans, but not for mortgages. Most responders have neglected to include the policy's benefit. A nice benefit and a requirement to make all loans tax free. Those loans should be set up so even up to age 100, there should be no danger of taking out so much that tax consequences are triggered.
Much has been written about the rate of return. The book is probably overly optimistic. However, the net return can be as little as one percent less than the mortgage rate to still produce a profit. The effective mortgage rate is lowered by your tax bracket (plus the extra deduction might be enough to keep some of your earnings from being taxed at an even higher rate). Yes, the standard deduction is ignored, but if you have enough other tax deductions to be using Schedule A rather than the standard, then the additional mortgage interest deduction is all bonus and the standard deduction becomes a moot point.
There are other minor flaws in the book. If you don't make it to the 33% tax bracket, the combination of state and federal should have you coming reasonably close. You need expert help to make sure your side fund (used over the subsequent 3 years and 1 day) earns enough, after taxes, to at least equal your tax deduction adjusted "net" mortgage interest rate. I totally disagree with Andrew' dislike of Roth IRAs. You can't put that much in anyway and age 59 1/2 will sooner than you think. If someone decides to do this in a year or two, you could in the year 2010 take out a lot of money from your IRA or 401. Roth conversions are allowed in 2010 regardless of your earnings (no caps of any kind in 2010) and the tax can be paid half in 2011 and half in 2012. It should be unbelievably easy to use some of that conversion as your tax free "side fund" earning more than the mortgage interest costs you. As long as your Roth is 5 years old and you are 59 1/2 it is accessible to further fond your insurance policy.
This whole issue invokes strong emotions. Logically, putting unaccessible money which earns you nothing is a good idea. But it requires three things: you must be able to leave the money in the policy. It is there to earn tax free loans (withdrawals severly diminish how much it earns. This requires five years of funding and at least 5 years sitting there to reach a point where a substantial amount can be withdrawn annually starting with the 11th year. Sufficient discipline to park the money and leave is an absolute requirement.
Second is the ability to view your home equity as a means to make more money. If paying down the mortgage is emotionally more important to you than putting sleeping money to work for you, then your piece of mind is more important than the additional money. Finally, you need to have a policy that combines a lower (but still huge) commission and a historically high net return on money in the policy. This is the most important of all.
If you understand the book's concepts, then the idea of balloon payments and the passage of time is irrevelant. You will either have gotten a new mortgage, or possibly a new one every 5 or 6 years or you will have sold the house and have a new, possibly smaller retirement home.
There is only one way that leaving money in an IRA or 401 (beyond what is required for matching funds) sense. It requires that you will be in a lower tax bracket when you retire an access the money. People discussing Missed Fortune are likely to have built up a number of assets. This alone could put you in a tax bracket higher than your current one. The tax penduluum has been on the side of tax cuts lately. It may well swing to the increase side when retirement comes. If your tax rate is higher, then your IRA money and its growth will be taxed more. Any of that money that could have been put into a tax free earnings instrument would see you having more money than you will net from an IRA.
As to commissions, one cannot disagree. In one sense, they are immaterial. They are painful and will hamper the growth of your policy's cash value. But all that matters in the end is if you have a real arbitrage. After taking the benefit of your interest deductions, will you be ahead at the end of 10 years by moving money into a universal life policy and taking out a new mortgage. If the answer is yes, then you have to pay the piper.
Somehow left out the word death when talking about policy benefit. You have 2 to 4 times the death benefit of what you invest in the policy.
Can JGary post #128 email me his insurance agent and cpa contact information. I purposely put spaces in my email address to avoid getting harvested by spambots. Just remove the spaces: ayagmail @ yahoo.com
Skeptic
You're mixing up EIA with EIULs on caps/partipation rates. The most common crediting strategy (& easiest to track is annual point-to-point w/annual reset). The highest 1 available is indeed 17% & has not changed since product inception.
I doubt your competition is recommending an annuity due to the taxes & potential liquidity problems.
Other concerns would be loss of social security benefits, protection of home equity from creditors.
Take 30% off your $18 Mil. & what does that leave you.
Truth is, the gov't does not have to raise taxes directly to collect more revenue. Go 10+ years down the road and the inflation effect will most likely push you to the next higher tax bracket anyway.
Jonathan and Ted L,
I haven't seen an equity indexed UL or EIA with a cap as high as 17%, most likely because it's hard for the company to cover themselves if they offer a rate that high. I'm not doubting it, just haven't seen it. I'm comparing to EIA's because that's what my client told me that they have. I will see the contract tomorrow to find out for sure, but regardless, I have yet to put a client into a vehicle that they do not understand to the point where they could discuss it with someone else on some level… This couple have NO IDEA what they did or why they did it – a huge red flag to me. It appears that this MF concept is right for the right individual, I'm questioning if it's right for someone in their late 70's with failing health.
IRS publication 936 section II talks about home equity debt being defined as taking out a loan "for reasons other than to buy, build or substantially improve your home…" Taking cash out to invest in an equity indexed product falls into this category, and you are limited to taking a tax deduction for the interest on the LOWER of $100k or your home's FMV. You can pull this up on IRS. gov if you doubt me. How does MF get around this publication?
Oh, a couple of additions – even if a company was offering a 17% cap on EIUL, that's probably a GROSS rate, not a NET. The company has to take out charges precisely because they are giving a Death Benefit, so the Net return to the client is lower. If we cancel the charges on an EIUL to those on a good variable annuity, then you invest in an S&P 500 fund within the VA, you can effectively defer your taxes. I realize that withdrawal of premium then loaning value, or DB (tax-free) is a much more preferable way than withdrawing from a VA, but since this concept will only work for wealthy people looking to get more wealthy, what is the DB need? If it's estate planning, fantastic. I have yet to see the huge advantage of this concept (aside from the mortgage and insurance brokers' perspective).
The company that my client was sold was actually purchased by another company that my manager's brother works for. When we called him for advice about this concept, he said that MF 101 had been outlawed in 10 states. Does anyone know if this is true? I can't find anything on it, and this person is prone to exaggeration. Any info would be helpful. Thanks.
Met with the client today – This "graduate" of Missed Fortune 101 DID convince this couple (ages 77 and 71) to pull $400,000 out of their home. The result is increasing their mortgage from $350,000 at 6% to $750,000 at 7.375%, then invested the 400k into an equity indexed annuity. The EIA has a 3% floor and a 7.5% cap. I actually wanted to vomit. Do any of you people backing up the MF 101 strategy want to tell me how this is in the client's best interest? If this were my parents, it would make the news, because I would go to this bastard's office and beat him to death. How do these crooks sleep at night?
I was too angry to actually run numbers earlier, so I had to go to the gym and work it off. Prior to the introduction to the "MISSED FORTUNE" program, this husband and wife had 3 mortgages totaling $718,000 and were paying $43,080 annually in interest. After following the advice of this advisor who wanted to release their "IDLE DOLLARS", they now have 4 mortgages totaling $1,162,653.28 and are paying $86,837.33 annually in interest (that's right, they are paying $43,757.33 MORE in interest). On the plus side, they have a $400,000 EIA with a 12 year surrender period which brings their net asset loss to $44,653.28 (increase in mortgage amounts less 400k EIA) and IF the S&P returns 7.5% or better, they will only lose $13,757.33/year. That is the increase in interest less the $30,000 that they would gain in the EIA.
I can clearly see how they were Missing a Fortune. The mortgage broker made a ton, and the EIA salesman made a ton. I guess that is the fortune Mr. Andrews is referring to. Take advantage of retirees who are gullible.
I'm sorry to sound so irritated, and I can see how, in the right situation with the right vehicle, this program MAY be beneficial to a client. This clearly is NOT it.
Skeptic,
Unfortunately your clients were mislead by someone who simply read Missed Fortune 101 and then misused the concepts for their personal gain. It is unfortunate that unscrupulous individuals can take advantage of folks in this way. However, I would strongly suggest you read Andrew's book and understand that what he (and other like minded professionals) is suggesting is NOT what your clients did.
Mark
Some very interesting posts, been reading this for quite a few months now, after I finished the book MF101. I am very interested in this concept. How do I go about getting unbiased information? How do I know what is the best EIUL? I would like to do this for myself and help my friends and family with it. I just need to know the right way to go about it. Any help wold be appreciated.
Like "Skeptic", I too have seen families that have gotten absolutely ripped off in almost the exact same way as the couple he describes above. The client gave me all their documents (which included the MF 101 CDs etc.) and they got taken to the cleaners.
Here's my question, as I'm always open to hearing other's opinions:
I can understand the argument for using the equity in your home for other investments (the arguments above make sense). But can someone please logically explain to me how an insurance policy is a good investment? Everything I have read clearly states that insurance should never be used for an investment. Every insurance policy with a savings (outside of Whole Life) eventually implodes, unless you severely overfund it. So now they have no insurance and no money. Yes, I know there are always certain circumstances (as there is for everything in life). If you tell me that you have to overfund it to make it work, save your time. That's like trying to convince me I need to pay $50,000 for a $20,000 car, when I could go next door and pay $20,000 for the same car. Don't rip me off. But I'm talking about for the average person, how in the world is insurance a good investment?
RG,
First of all, comparing overfunding a life insurance policy to overpaying for a car is not valid because overpaying for a product is different than implementing a financial strategy.
If you implement the strategy of separating home equity, you want to put it into a vehicle that is liquid, safe, and offers a rate of return, in that order. If you read MF 101 you will see why most other financial vehicles do not offer these three features. For the average person, liquidity and safety is more important than for the wealthy, because the average person lacks liquidity and can't afford to lose their equity in a non-guaranteed investment, like stocks.
Apparently several people still do not get it. Doug Andrews and his book is incredibly true. This is what Robert Kyosoki and Donald Trump are out trying to educate people on. Most of the arguements you make against the book are the very reasons you need to listen. Now, I think there are better investments to put the money into than insurance, but until you have been in a situation that you need those funds out of your home desparately but cannot get to it you need not say this is bs. I have been there and have gone back and done exactly as Doug Andrews suggest, but I put the investments in better returning programs…the situation is tremendously different now and his advice is sound. I have witnessed many that needed this advice…it is sound and many of the wealthy use to increase their wealth…I have witnessed it. It is very true that you need to keep the biggest mortgage you can and keep your cash in your control not the banks…this will keep the banks at bay if you get in trouble. I recommend everyone read this book with an open mind. Do what everyone else doesn't want to do and you will get where you want to go most of the time. Not many see the value here and that is fine, but for those that do a wealthier future awaits them.
I have been reading everyone elses comments and it is funny that people cannot think for themselves. I would never want to buy an insurance policy of any kind. At the least it would go into CDs and other secured funds, but never an insurance policy at least with the entire amount. Insurance companies are not surving by paying out, remember that. So, when I read the concepts I thought they were great, but I can look right through the insurance portion of the book. That was great for him, but those investments would not be for me or my clients. I might go conservative but not crazy. So, read the book for the concepts and then seek out better investments with the equity. Observe how the coolaid is made, but make and drink your own.
Scott,
Where do you put the money?
Thanks
I think people are overcomplicating an inherently simple premise: IF you can borrow money and earn a higher rate of return on the money you borrow than you are paying in interest, you will have a positive net revenue situation.
Writing off the interest on home mortgages is irrelevant, as you will only be writing off the gain on the investments. If you are not outearning your outlay, you will be adding to your liabilities.
I have heard several times in this thread that one will never gain any type of financial independence thru a 401k or deferred savings plan. That is rubbish. I just retired from ATT in a low level craft position with close to million in my 401k. I annutized the whole amount with Vanguard(AIG) and Fidelity(fidelity ins group) via ira rollovers for an annual income for life of nearly 70k. This is more than I ever made while working. This does not include my ss or company pension. The average 30 plus year retiree that I worked with had at least 500k in their 401k. Saving one dollar at a time over long periods of time still works.- John
John:
Thanks for your voice of wisdom! And congrats on making it to retirement in a good position.
I think at the root of the matter is that people are still trying to believe in "Get Rich Quick". I haven't read this MF101 book (and I'm not inclined to — nor do Robert Kiyosaki or Donald Trump have ANY respect in my eyes), but what I'm reading makes me wonder how much of the "gain" from this method really remains on paper and how much of it is a real asset (besides of course the actual real estate property).
Maybe I'll never get rich, but I'd rather own my home free and clear and have the luxury of either working at a high paying job and socking away my cash in other investments, or the option to take a low paying job and the security of not needing to produce a huge monthly cash outflow. I'd rather live modestly and sleep well at night.
Why did so many people in this thread think it was mortgage/insurance vs. 401(k)/IRA as the only investment options? Aren't you forgetting that you can build up cash reserves outside of a 401(k) if its objectionable to you?
Finally, my biggest takeaway from this post was feeling vindicated in the opinion that I'll be better off never listening to the advice of financial planners and mortgage specialists.
I clicked through from the March Madness, and I'd just like to add that a large number of people in the UK have used (in the 90s) what sounds like very similar tactics, taking out interest only mortgages and investing in endowment policies.
Unfortunately, due to the stock market downturn in 2001, most of the endowment policies will not make as much as the value of their mortgages and many people are successfully claiming that they were mis-sold. (Try googling "endowment mis-selling").
Its a tactic that can work, but its pretty risky.
Does anyone have advice on investment options (other than the life insurance arena) that could generate a solid 6%+ rate of return.
Thanks in advance,
rudy
simple solution to all of the posts – why don't we take a poll of net worths – the people who recommend using the MF strategies and the advisors, CPAs, CFPs against and see who has the higher net worth. I think I know who will come out on top.
How I will pay-off my Home Loan for Free & Faster by borrowing more!
We did it! In the beginning of January my husband and I refinanced our house. We had built up a lot of equity and decided to remove $297,000 in equity in addition to the balance of $135,000 that we still owed for a total loan of $440,000 ( includes points & fees ) Our loan is fixed at 5.875% for 30 years with the first 10 years interest only.
The equity I refinanced out of my house is now working for me…making me income in the form of interest. It is my employee. Heres what my real numbers look like:
Using the WebMath compounding calculator at 6% the $297,000 I took out in Home Equity will grow to:
$450,614 at the end of the 7th year this is the year the interest will cover my interest only payment of $2154
At 10 years ( interest only ends )my payment increases to $3120 to finish paying off my loan in 20 years
$625,256 this is the 13th year when the interest will cover my new payment of $3120
$848,260 this is in the 18th year when I can pay-off my loan of $440,000 and have covered all the interest payments. So in effect the loan was free as my little employee made all the payments!
Will I pay-off my house then? NO!
If I wait one more year my interest will exceed my payment by over $1000
$1,240,213 this is the 25th year I will be making over $6201 a month in interest – $3120 = $3081 excess
$1,772,888 this is the 30th year. I am making over $8864 per month in interest. My house is paid off.
The 30 year accumulation assumes that I made all the payments myself and let the compounding continue to multiply on my original $297,000
I showed the points on the time-line to show when I could use the interest to make my payments if I want to. If you start to use the interest you make, the compounding will slow and the numbers will change. We are in control now…not the bank!
These are my numbers. Yours will be different depending on what you owe and how much equity you put to work!
I would appreciate any feed-back on my plan or any errors I didn't take into account! Thanks!
Laurie:)
Laurie,
Things can't quite work exactly as you are portraying it, and if this strategy was "sold" to you, it was sold in a very misleading and negligent manner.
It is true that your numbers represent quarterly compounding of $297k over the course of 30 years at 6%. HOWEVER, you would still have to be making the payments out of your pocket for the mortgage. That would allow this full balance to keep growing. To say that 'your little employee made all of the payments' is errant thinking, here's why:
Your quarterly compounding of 6% is equal to an APR of 6.1364%. Let's assume that I give you a raise to 6.1678% APR (6% compounded monthly, since that is easier to calculate in relation to a mortgage). Your interest off of your investment of 297,000 would be $1,485 in the first month, and your mortgage payment would be $2,154.17. If you TRULY use your investment to make your mortgage payments, you would eat up the balance to fully deplete your 297,000 in month 193 of a 360 month amortization schedule, since you are not earning enough in interest to cover your full payment. At that point, your mortgage balance would be about $358,179.43. So, using NO money out of your pocket, you went from a $135k mortgage today to a $358k mortgage in 16 years.
IF you are able to make all of your mortgage payments out-of-pocket AND you are able to maintain a 6% return on your investment, then this is an excellent strategy. You will pay out, over the course of 30 years, $1,007,456 in mortgage payments, and would have a balance of $1,772,888.89 (ASSUMING full tax offset/deferral AND 6% with quarterly compounding). But you should know that this strategy is not a no-risk proposition. If interest rates drop at any point in the next 30 years (assuming CD's since they are a fairly liquid, fixed investment) this would have a severely negative effect on your numbers. If CD rates climb into the mid teens as in the early 80's, you're the smartest person on the planet.
Best of luck to you, and I hope that you were not as fraudulently misled as I think that you were.
I can back up every number with an amortization spreadsheet that I will be happy to provide you with, if you'd like.
jsm,
I don't know if you've read from my above posts, but I have a client who is currently losing between $18,000 and $38,000 per year due to someone touting the MF 101 idea, then implementing it in the wrong situation. The "advisor" probably made about $60k in commissions from products NOT COUNTING any kickbacks he received from a shady mortgage broker. His net worth probably exceeds mine, however I choose not to put people in such a negative situation for my own personal gain.
I can see the value of MF 101 in very limited situations. I have essentially been implementing it myself before I heard it called MF 101, since I am investing heavily and carry an interest only mortgage, assuming that I will earn more on my investments than I will pay in interest. That is what this strategy boils down to – leveraging to earn. However, pawning this strategy off to naive people without articulating the risks, or telling the elderly that they are guaranteed to make money using this strategy when it is not the case is simply wrong.
I'll take it one step farther – when it is not in the clients' best interest, the client is basically the mark, and the 'advisor' touting the MF 101 strategy is the con man.
We started one of these Life Insurance Plans (Indy Life) on the advice of our financial planner. We are long term investors in Real Estate and have a high net worth. We were looking for the Life Insurance to be another "basket"..a diversification from being pretty heavy into not only Real Estate property but also owning Trust Deeds for cash flow.
We contructed a $500K "basket" and we can either fill it up or not…we will see how we like it.
Last year we funded it with reserve money taken earlier from a cash out re-fi on a rental property, the mortgage being paid by increases in rent from the renters.
This year, we are planning Roth conversions from a self directed IRA, offsetting the taxes of that conversion with accummulated depreciation.
The reason we like the Missed Fortune concept is that we will be in a higher tax bracket when we retire than we are now, which is not the case of many people with "Day Jobs…not those of us with only rental and portfolio income. Therefore, we do not want the big back end hit of taxes at retirement from the IRA.
By moving IRA money into an Indy Life Product that historically has returned about 8% (plus the death benefit) and being able to "borrow" the money back, we get the money at retirement tax free and pass it on to heirs tax free.
So if we decide to take out say 60K each yr at retirement to pay our bills, we pay 6% interest on it but are credited with 6% interest. We just take it out at the beginning of the yr, put it in ING and transfer 5K per month to the checking account to pay bills. Keep in mind, we will still have a few other baskets for cash flow also.
If we lost all our renters or had a major weather disaster and lost all our property (not likely because we own in different states) we still would have a steady income to pay our bills forever. Also, this insurance money is protected from creditors should we (God forbid) have a suit that was bigger than our insurance policy. So we would still have our bills paid even if we lost all our other assets. Like those who feel "safe" having their homes paid off, we feel safe having this insurance policy as a hedge against the perfect storm disaster.
We are using this product for diversivication and safety and we are not using our Home Mortgage to do it.
This discussion has focused allot of using home equity for investments. I wanted to offer another idea about how to effectively use the Missed Fortune plan.
I don't have an opinion about whether putting home equity into life insurance is a good idea. I think it has to be taken as a case by case study by a very experienced and open minded FP and and the client must be very clear about their risk tolerance and their financial goals.
Weath building is very personal and takes allot of time,thinking, studying and knowing yourself.
But for high net worth folks, this is a GREAT basket to add along with other investments IMHO.
I am new to this Blog and am sorry if I step on anyone's toes, but I was sorry to hear that the person who started this Blog vilified Andrew's theories.
Andrew's has brought to the public's attention a very old method for wealth building and it behooves us to study it carefully.
I really should learn how to spell "Wealth" Sorry.
Skeptic,
Thank You for taking the time to reply. I appreciate your advice.
First I would like you to know that I researched this idea through reading books, looking at both sides of the argument through forums such as this one and calculating the numbers on paper before making the decision to take out some of our Home Equity to invest in this way. We take full responsibility for our actions and did not seek or pay for any advice from a financial planner or advisor.
I was looking for a way to turn my house into an asset. I saw that I had three choices:
1. Sell the house, buy a less expensive house and invest the difference. ( Didn't want to! )
2. Rent out or lease my house temporarily ( Maybe! )
3. Refinance and take-out some of the Equity
I guess I did use the word "employee" in the wrong way ( because if it really was an employee…I've had a few… I would have to pay wages, social security, vacation time, etc. etc. 🙂 What I was trying to say in that " my little employee made all the payments" was that my Equity was earning money for me. I could pay back the $440,000 I borrowed in the 7th year as my $297,00 will have grown to over $450,614 but I would also have paid over $180,936 in interest. I wanted to show that if I wait till the 18th year the compounding interest would have grown to also cover all the mortgage payments I have made to that point. So thats why I said the loan would be Free. The interest I made off-set the interest I paid to the bank.
I did consider how much equity to take-out with how comfortable I was in making the monthly payment myself. I want to invest the Equity and let it continue to compound. In your example of using the equity to make the monthly payment…you said I would use up my $297,000 in approx. 16 years. Thats not logical for me at my age ( 48 ) but it sounds like a great reverse mortgage to consider later. As most peoples net worth is tied up in their house…enjoy your savings…why leave all your hard earned equity to your relatives!
I am aware that interest rates will change over the next 30 years. I also think that the interest I am paying 5.875% ( fixed ) is at a historical low and as mortgage rates increase so will CD rates. If I am able to get 8.75% the interest on the Equity will make my mortgage payment! ( then I could choose to save the $2154 I would have had to pay or take a day off or go on vacation. ) I really only need to receive 2.6% for the compounding over 30 years to off-set a loan at 6%.
Basically by having cash in hand ( my Equity ) we have alot more opportunities, safety net, and freedom to choose what to do with the interest earned and the original principal than someone who chooses to pay off their mortgage and never have access to the value of their house.
Wealth Hunter said it very well, "Weath building is very personal and takes alot of time, thinking, studying and knowing yourself. Not everyone can or wants to do what it takes to do this.
P.S. I would like to see an amortization spread sheet for my loan which is interest only for first 10 years and then fully amortized in the final 20 years. Thanks!
Wealth Hunter,
As you can see I copied and pasted your one sentence with the wrong spelling…sorry for not catching it myself before posting it!
Can you tell me more about investing in Trust Deeds? Thank You:)
Laurie,
I guess without knowing the terms (rate, payment) of your previous 135k mortgage, it's hard to say exactly how your strategy works. I would ask this, though – if you were to invest the increased portion of your mortgage payments, what return would you have to receive to equal 135k over 7 years? What I mean is, look at your previous conventional mortgage and where it would be in 7 years. Let's assume that the mortgage balance would have been 95k which means you would have gained 40k equity over those 7 years. Now assume that your payment went from 1145.17 to 2145.17. Had you continued with your previous mortgage and INVESTED the grand each month (at 6% compounded monthly), you would have 104,594 at the end of 7 years, and would be able to pay off your home with 10k to spare, similar to your projection of having 450k to pay off your 440k mortgage.
By taking out the additional equity, what you have successfully done is increase your interest deduction (assuming that you itemize).
Please understand that I am not knocking the strategy. I have said over and over that IN THE RIGHT SITUATION, it can benefit. Fortunately, for you and Wealth Hunter, you have not approached this blindly – I've noticed the word risk being used by you. Morons who are advocating this strategy as a 'no-risk, high reward' strategy are just plain wrong.
Many factors must be considered, including opportunity cost.
I would be happy to provide you with the spreadsheets that I have – how can I get them to you?
Wealth Hunter,
If you are considering a Roth conversion, that must mean that you are under the income threshold to allow this, or you are putting it off until 2010 when the income requirement goes away… either way, since you are a self described 'long-term investor in Real Estate', why are you under the assumption that your income will be significantly higher in the future? Are you planning on maintaining your rentals after the mortgages are paid and they are fully depreciated? I am planning on selling mine in my retirement. That being the case, remember that real estate is taxed as a capital gain, not as income. Even if the recapture comes into play, the tax rate will still be lower than the top tier income tax rate.
This can be deferred with a 1031 exchange to 'like-kind' property.
I typically recommend Roth Conversions whenever it is feasible to my clients, but I would not be quick to assume that your income will be significantly higher in the future. When and if you do decide to cash out of your real estate, look at tax managed investments. I have a client who I set up a well-diversified portfolio of tax managed funds that have returned 16.87% average annual over the last 6 years with 100% tax efficiency. I know that is below what real estate has done in some parts of the country, but not bad for no headaches.
Sceptic, I said we are "high net worth". This does not mean high income. We are invested for growth very aggressively right now. We plow back allot of money into our real estate since we are value investors. Therefore, the net is very low or in some years, negative. This gives us the opportunity to use the losses for Roth conversion or to sell and take some profits.
We have the losses to do all the Roth conversions but right now it is in the idea stage. I have to figure out the mechanics of how to actually convert.
Oh yes, income will be higher when we retire. We stay highly leveraged. We are putting off bigger cash flow for growth right now.
We've done allot of 1031's..moved up the chain….not buy and hold types..usually exchange up when the appreciation hits 30%.
After getting to our target amount of R.E. this year, our next step is to hold for a little more growth, then exit in a few years into cash flow products.
We are now looking into componentizing for the next few yrs, getting massive depreciation, then selling outright. Does anyone know of a firm who does professional componentizing in all states?
Sceptic…How in the world did you get 15.87 return (not adjusted for "tax efficiency") with "no headaches". Fabulous!
Laurie, So you can't spell Wealth either? 🙂 to answer your question about TD's…Pt Center Financial for the trust deed pool…very safe about 11.5% compounded in the IRA and somewhat less if you take out a monthly cash flow. It's not liquid for 2 yrs, then you can take it out. I have a few friends who are in the trust deed pool and we all like it…very professional company.. no-brainer income every month. But it is not eligible for 10-31's…
They also have participating T.D's that pay allot higher interest but I like the safety/simplicitys of the "pool".
However, sounds like Sceptic has an even better deal.
Wealth Hunter,
Sounds like you are in great shape – I had assumed that your income was well offset (gotta love that depreciation expense, huh?). In that case, especially in a situation of negative income, it would be a financial error NOT to convert your IRA to a Roth (or at least partially convert to take you up to the tax threshold).
There's one of two ways – Either convert now, if your accountant is good enough to find income offsets come 4/15/08, OR monitor your income and expenses closely this year, and in December, partially convert an equivalent amount that would take you up to the first tax bracket.
The returns that I mentioned were for a friend of mine who inherited a good chunk of change from his grandmother in April, 2001. He was already maxing out his Roth contribution, and wanted to invest in a way that would not generate a lot of gain and dividend income. I came up with a portfolio of Eaton Vance Tax Managed funds. Each fund is managed in a way to offset short-term capital gain and dividend income so that long-term Capital gains are paid when a person withdraws. I monitor all of my clients' accounts on Tuesdays, and as of 3/27, his average annual return overall was 16.87%. This is down a bit now, with the last two days' market downturn. We were fortunate to include a fair amount of foreign funds, but I'd rather be lucky than good any day of the week.
By 'no headaches', what I meant was he just parked his inheritance there, and watched it grow. Didn't have the headaches that go along with real estate investing like buying, selling, financing, stupid realtors/sellers, etc. If that is your full time job, that's one thing, but my friend had another career, and did not want to deal with that stuff.
In your situation, this MF 101 strategy could be a great benefit. As long as your life policy is not fixed or capped, and you have the full understanding that the strategy will work for you if the policy outgains the rate of the mortgage that you used to finance it. You are far from the naive marks who are told that they will become multi-millionaires with no-risk if they employ this strategy.
Skeptic,
You asked about the terms of my original loan before refinancing. We built a custom home in 1988…Original loan was for $209,800. We rode the adjustable rate loan down for 18 years to a low of 4.5%( payment $1206 ) in 2004. Never needing to refinance! In 2006 the rate had started to adjust upward to 6.12% ( payment $1324 ) So we started to look into refinancing as the next bump up was 6.88% ( payment $1378 ) and we knew we could lock in at 5.875% fixed.
Because we are self-employed ( the S quadrant if you read Robert Kiyosakis' Cashflow Quadrant )we were looking for other sources of income as we do not have a Business that produces income without our labor. Then I read… "How the Affluent Manage Home Equity to Safely and Conservatively Build Wealth" ( available free as a PDF on the internet but couldn't seem to be able to paste it here ) Then this lead to the reference to "Missed Fortune" and to this forum. It makes perfect sense to us looking at it from every angle.
Our house is now worth over $1.5 million so I think I was pretty conservative in only taking out $297,000 in equity and as I think about it more I wish we had taken out more.
I see what you say that we could have just invested the difference of our new payment vs the old and paid the house off in 7 years. But this strategy has nothing to do with paying off the house early or ever…even though you have the security of mind and cash available to do it at any time.
One more angle…Sorry:) What if I applied the interest I am making each month ( $297,000 @ 6% / 12 = $1485 ) against my payment of $2154 – $1485 = $669 My effective payment is now really $669 per moonth out of pocket. Remember my old payment was $1378 to pay-off my $135,000 loan for 12 more years. I could then save the difference between $1378 – $669 = $709 in a side account and still have my $297,000 sitting safely in the bank and only have an effective payment of $669 per month vs $1378 and have an excess of $709. All because my home equity is now working for me and helping me make my payments.
What do you think?
Wealth Hunter,
Thank You for your reply about the Trust Deeds. I tried to look up Pt Financial Center on the internet but couldn't find their website. Do you have it?
Sceptic, thanks for the heads up about the Roth Conversion. Between last yr and this yr, I think we may be able to convert all of it. Yep…love that depreciation!
Also thanks for the heads up about the Life Ins. I get nervous sometimes because it is had to find people who are old enough and are collecting on these policies so we felt good about it but still you hear the bad press. I do understand that anyone successful or smart in this world who is doing a good thing will likely get creamed by someone on the internet. We have to be careful where we place our money.
Skeptic-
The way the MF concept has been presented to me, the policy cannot lose principal due to the 'floor' on the policy. The risk I see is if the S&P 500 were to lose value for an extended peiod of time. In that case, I would be losing the difference between the after tax effective rate on my mortgage and the floor rate on my policy. Is that the risk you are referring to? Thanks in advance!
DM,
That's exactly it. The floor is going to be far below your mortgage rate, but there are other concerns as well. Equity Indexed policies also have a 'cap' to them. Not only do you limit your losses with the 'floor', you are limiting your gains with the cap. Typically, Equity Indexed agents sell these policies with some form of "The S&P 500 has returned an average of 12%, so your return, after the spread and cap will be x per year" and they make their projections based on that average annual return number. What they FAIL to mention, is that, over the 50 year period from 1953-2003, the S&P had a negative annual return for 13 years, but it had a positive gain of 20% or more in 19 years, 30% or more in 10 years and 40% or more twice over that period. When you remove these years of incredible gain (which the policy's cap effectively does) the average annual return takes a nose dive. For example, a policy with a 3% floor, 10% cap, 100% participation rate and 1% spread would be sold by saying "with the 12% average annual return, you can expect to hit your 10% cap every year", so you are expecting a 10% return. However, when you plug in the actual numbers and eliminate the high years, your return would have averaged 7.23% over 50 years compared to 12.39%.
So the risk that I'm referring to is twofold – the one you stated where the return on the investment is lower than your tax effective mortgage rate, AND the risk of limiting your gains in good years.
Laurie, I sent you that spreadsheet. Hope it helps.
Wealth hunter, you're welcome. I'm one of the few insurance agents who views life insurance as a 'necessary evil'. Few people are willing to pump the necessary amount of premium into a variable life policy to make it work for them, but it can be an excellent vehicle if structured properly.
Sceptic, by the time it is fully funded, it will only represent about 10- 15 % of our net worth. But you are right, we will be pumping allot into it over time and we are having to defer gratification.
The questions is whether to fund it from reserves or from taking money from an IRA.
Reserves are only making 5% in a liquid account so the 8% LI would be a good move.
The IRA is compounding at 11.5% and I hate to take it from that basket, but I understand an 8% tax free return is about the same.
If we take it from the IRA, offset taxes with depreciation, it just moves from one future basket to another.
If we take it out of the reserves, it leaves us a bit short. On the other hand if we bite the bullet and take from reserves, we keep a bigger Roth basket. Hard call. Any thoughts?
As I remember, our insurance investments are not in the stock market but in bonds and a smaller portfolio in R.E. that kicks the returns up above the bond return. Our insurance agent is a friend of our long term R.E. buyer's agent and he understands and loves R.E….different than most agents. We chose the floor of 1% and 14% top because these investments would not likely be anywhere close to the floor and we wanted a higher top end.
I ran across this blog while looking for more info on the concepts in the MF book. I have both volumes of MF & MF 101( FYI a new version called “The Last Chance Millionaire” is coming out in June of 2007) along with every other bit of information I can find on the subject. There are a number of other titles for this concept by other authors including: (Yes I own and have read them all)
• The New Life Insurance Investment Advisor
• Infinite Banking Concept
• Mortgage Mistakes and Misconceptions
• TaxFree Wealth
• Bank On Yourself
• Borrow Smart Retire Rich
• Your Circle of Wealth
• The Investment Alternative
• The Truth About Money
• The New Rules of Money
• Die Rich & Tax Free
• The Rich Die Richer and You Can Too
• And my favorite title, “Stop Sitting on Your Assetts”, which is a gret book to hand someone while holding your thumb onver the “etts” on the cover.
Additionally if you actually want to learn the reality concerning your money you should read.
• The Retirement Savings Time Bomb
• Parlay Your IRA into a family Fortune
• Pensions In Crisis
• What’s Wrong with Mutual Funds
• Blind Faith
• Prophecy (Rich Dad Series)
Also you might want to look at the Wall Street Fine Tracker (http://www.forbes.com/2002/10/24/cx_aw_1024fine.html ) don’t be surprised to find the company holding your money there. (BTW – How are they going to pay the fines? Oh that’s right they have our money! FYI They also get to deduct the fines from their taxes)
Additionally the Federal Reserve has jumped into the discussion with “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings.
One of our own federal banks—Chicago's Federal Reserve Bank—has determined that by accelerating mortgage payments instead of stashing money in tax-deferred accounts, more than one in three Americans are making the "wrong choice ," and are giving up potentially important arbitrage gains.
The mortgage overpayments, the Fed's recent report says, is a "mis-allocation" of funds that costs people $1.5-billion a year. If consumers changed their allocation by not sending excess payments to their mortgage company, and instead put that money in some form of tax-advantaged savings, they would reap a median gain of between 11 and 17 cents per dollar.
This is the very first time the Fed has compared these two kinds of "savings," write the authors. They conclude that "many households have significant amount of money" in both tax-favored and taxable accounts, but that a "large proportion" of American taxpayers apparently are not taking the smarter route to asset allocation, which would put substantially more money in their retirement savings.
The Fed's own experts now believe deductible mortgage interest can be an excellent choice for many taxpayers to use in structuring their retirement funding strategy, even though I do not agree with the report's narrow focus on only qualified plans such as IRAs and 401(k)s.
What's more, the paper says arbitrage is a "rather conservative" way of optimizing retirement wealth. Taxpayers gain when interest rates go up, since the newly invested amount earns higher rates than the mortgage debt costs. Should interest rates go down, taxpayers still come out ahead, because they are "likely to exercise their option to refinance," thus "reducing the downside risk of the arbitrage strategy."
The Fed report ends by saying that despite the risks (and remember—there are risks associated with all investment strategies), saving retirement money in a tax-deferred plan "has the additional benefit of providing a good hedge against the combination of housing price risk and liquidity risk."
Finally, the Fed says that taxpayers with incomes over $100,000 a year who use mortgage-deductible interest as part of an arbitrage strategy in retirement accounts would appear to have the most to gain, and the authors find it "puzzling" that more people who are in "better financial shape" than the average taxpayer don't take advantage of this kind of strategy.
The study also points out that:
• “46.1 percent of households are prepaying their mortgage by an average of $3,140 per year”
• “only 49 percent of households relied on advice from professionals”
• “having access to better financial information (financial advisor or personal education) substantially increases the likelihood of making the right choice”
The key reasons Americans make these mistakes are:
• “not having resources to make decisions”
• “greater emphasis on savings habits they ‘perceive’ as more liquid”
• “limited information on the cost-benefit analysis”
• “rational response to ‘institutional’ factors”
The actual quote from the abstract at the beginning of the report reads as follows:
“We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts. Using data from the Survey of Consumer Finances, we show that about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the tax deferred accounts. In the aggregate, these misallocated savings are costing U.S. households as much as 1.5 billion dollars per year…”
I noticed two schools of though here …those that have never run the numbers…and those that have run the numbers. Why don’t you check the numbers for yourself??? Guess which group says it won’t work? The bottom line is that you might want to stop listening to what others are saying and investigate for yourself. And oh make sure that you run the numbers.
great site be sure to catch my financial news blog
Great INFO…Tnx
Thank you for the great info Mr TaxFree. Does anybody knows what are the best Ins. companies for this strategist, and what are the guaranteed minimum floor?
hello there! I have been reading a lot of comments and feel that I am confused. Someone mentioned Doug's book. Can you tell me the title of it? Maybe after reading it, I can understand the concepts better.
Thanks
The title of the book is Missed Fortune 101.
One thing to consider, when you take out a mortgage to fund a retirement account, the WHOLE balance is working for you.
If you deposit 1000 a month to a 401k or IRA, like some people have mentioned, you will receive the interest/dividends from $1000 the first month, $2000 the second and so forth.
Another thing, I wonder what the difference of net worth is for the percentage is of homeowners that are in contra with Mr Andrew and the homeowners that are in favor.
From reading this blog, it seems like the people that are against his theory are middle income wage earner mentality and the people that are in favor are the rich…
Its hard to change old school thinking with the herd of sheep!
80%of the public are the herd and 20% are the herders 🙂
Let start by saying that I am a CMPS designated mortgage professional. I did not get a chance to read every comment as I would like, but I wanted to add to the discussion.
Missed Fortune, as with just about every book ever published, has an agenda. This book was to educate people about the investment-grade life insurance side of investing and was "selling"that point. However, even though he "pushes" that concept, the information in the book is accurate.
His anlaysis of the common "myth-conceptions" about mortgages is absolutely correct. You may not want to do the life insurance contract as he recommends, but there are a lot of strategies for you to increase liquidity and rate of return.
Ric Edelman, Bert Whitehead, Sanford Mappa and many others have written books about this subject, so don't stop at just Missed Fortune 101. After seeing the truths about mortgages and home equity, then decide what path is best for you.
I couldn't agree more… I didn't get to read all of the responses, but here is what I think a lof of you are missing:
Why let go of your money to allow someone else (banks) to earn money on it??
For example, if you are buying a $500,000 house and you put $100,000 down – you will get a better interest rate – this is true. But, if you can get away with putting less or zero money down, and can still afford the payments, then this is a better way to go. You will retain what you would have put down on the house and can invest it in other vehicles…
Let's say your house appreciates from %500,000 to $550,000 in a year…
If you had invested $100,000 of your own money, you turned that $100,000 into $150,000. Sounds good…
But, what if you had invested $0 of your own money and you turned that into $150,000… Sounds better…
In addition… the $100,000 that you would have put towards the house could potentially be put in a diversified portfolio, aiming to earn anywhere from 6%-9% or more depending on what vehicles you use to invest.
To me it seems like many people on this post are closed to these concepts, but financially speaking, it's a much better way of investing. However, You MUST be able to afford the payments.
General rule of thumb:
Put as little down possible as you can, with a fixed interest rate for as long as possible, so long as you can afford the payments.
Dude, it is neither right nor wrong. It is simply another way to look at things. Why don't you go talk to someone whose house just got forclosed on because they put too much down and then lost their job for a year. You can't be one sided with regard to structuring a mortgage any specific way. What may be great for one person isn't for the next. I agree with several of your points, but you are just as closed minded as the book's author by taking your stance.
I would challenge you to look at the numbers more concretely when making mortgage decision. Look at cold, hard, facts. That is the only way to make the best decision with regard to your mortgage.
In my 13 yrs in business as a financial advisor and wealth practitioner to multimillionaire clients, I routinely use Missed Fortune concepts. I began using these concepts with clients 5 yrs ago after using them on myself. I've successfully used these strategies in over 50 cases using cashout refinancing. Seniors who had barely enough income to live on became cash 'millionaires'…literally…using Doug's techniques and my planning with them. As a certified TEAM member of Doug's, his concepts have allowed me to personally acquire over $2 million of real estate with none of my own money (cashing out and using the equity as a down pmt for the next property) and also I'm putting away over 55k per yr to life insurance. I'm 37 yrs old. By the time I retire at 60, I'll have over $4 million of tax free cash in policies and (using a 7% annual real estate appreciation…conservative for my area) will have property values exceeding $10 million ($9 million of it pure equity). A $14 million dollar net retirement at age 60…not bad.
So I'd argue with ANY of the naysayers on here who take potshots at Missed Fortune…especially with MBhunter. For your info, MBhunter…Do you know what a BANK's biggest asset is? It's their DEBT! They borrow from depositors and lend to borrowers (ie: mortgages). They owe the depositors back..hence DEBT… They use arbitrage. Also, Mr. MBhunter…you might be interested in finding out that banks and large companies take out MULITMILLION DOLLAR LIFE INSURANCE POLICIES on their executives, with the corporation being the owner of the policy, so that the corporation can get TAX FREE cash due to the inside buildup of cash values!!!!!
Myself and my partner advisor have a saying in our practice…"Ya can't fix stupid!!".
Please folks, do yourself a favor before listening to some of the idiots on this blog who critisize Missed Fortune. Talk to someone like me who's doing it. I'll take out my 4 LIFE INSURANCE POLICIES and my 2 ANNUITIES and prove to you I walk the talk.
Now…go buy Doug's books!
Hi all,
I give MF to all my clients to read as it saves me a lot of introductory talking. MF addresses equity managment but it's not the whole story. To pay off you home early, using a 100K home will cost you nerly $57K in lost opportunity tax savings. It's what your tax savings grow to from having a mortgage. Buildind equity outside the home makes sense. The problem is the dicipline required.
Walt Disney used life insurance loans to build Disney Land.
Use your mortgage to put the kids thru college on and on and on.
There is another book I highly recoment called "Becoming your own Banker" written by Nelson Nash that shows how to use life insurance as your bank. This concept kicks in when you have exhausted the tax benefits of a mortgage.
As a financial advisor, I am bound by NASD not to advise my clients to borrow from thier home to purchase equity products and as much as I like MF and the concept there are limits.
Next time before you give your opinion on a best seller book, be sure to buy it first, take it home, don't read it in borders, if you do not have the money to buy it, send me an email, I have my membership card form borders, I get discounts and I can buy it for you. It is important you buy it and take it home, take your time to read it, read it until you are sure you understand it, otherwise if you give your opinion with out knowing what are you talking about, people, number one; will think you are cheap, number two, they will think you are stupid.
You did not go far enough with your comments.
Not only does the book use fuzzy math to reach predetermined conclusions, but it ignores the tax code and 264(a)3 specifically.
I was so put off by his book and the fact that he sells general public leads to advisors who make the unfortunate decision to pay 5k-8k to attend his training seminars that I decided to write my own book. My new book The Home Equity Management Guidebook will be out shortly and will tell readers the truth behind the concept of Equity Harvesting.
I believe the critics of this book are the same people that believe that paying off your mortgage is better? As I watch 6 investment properties decline as much as 30% in value- Missed fortune is a solid technique period. The numbers don't lie, and I will challenege the poster to put his bias to the side so he can become educated to the technique. This is not a new technique- there are several books out there on this topic. SO know your information before you comment on it.
Fred J,
I wonder if declining house values would be a problem if cash-out refinancing were used to fund the insurance policy. One then would end up owing more than the current house price.
I'm curious with the turmoil of sub-prime mortgages and people needing to refinance, coupled with (depending on location) a depreciation of housing values, how this impacts the Missed Fortune 101 strategy. Since one is only paying interest on the loan, and has no equity in the house, when needing to sell the house (or refinance if an ARM was used and a lower rate is desired), how does this impact the financial situation?
The concept of Equity Harvesting is sound. Maybe one needs to mathematically understand the difference between simple interest, used in paying down a "closed-end" traditional mortgage, and accumulating cash in a tax-favored account…such as a properly-designed, tax-advantaged, cash-accumulation life insurance policy. This works, for most homeowners, even understanding that the mortgage interest is non-deductible, according to current tax law, in most cases.
Would you rather have your accumulated home equity inside a home whose value is depreciating, or outside the home, earning a competitive rate of return, regardless of the real estate market valuation? Would you rather have your (previous) home equity under your control…in your hands…or in a home whose value depreciates to a fraction of its former value? How do you put a handful of air back into a flat tire? Only someone with little analytical skill, and/or ignorance of how money works, would attack this mathematically-sound concept.
The book in question, however, gives horrible advice on how to correctly explain, design, and administer the Equity Harvesting concept. For a thorough explanation of how this concept works, I highly recommend a new book, "The Home Equity Management Guidebook," by Roccy DeFrancesco. This book covers every aspect of Equity Management, and how different tax laws affect how it must be designed and administered for every suitable prospect. It's refreshing to finally see a book devoted to suitable participants of the Equity Harvesting Plan, rather than a self-serving sales book, with no regard for the welfare of mis-informed (and "fleeced") salesmen, and their mis-guided homeowner clients.
I have worked with this concept since 1985, before the advent of Home Equity Lines of Credit, and before passage of many laws that now govern how the components of this concept are pieced together. If you know how this works, there is no question about its validity. In my opinion, if you follow the advice of the "Missed Fortune" books, you're asking for big trouble!
The book is just another variation on "no money down". Then take the "money" and buy insurance. Its a dream come true for real estate and insurnace sales people. Only an idiot would believe the hyped principles in the book. If you can't afford a house – DONT BUY IT. If you don't need insurance DONT BUY IT.
Buy a modest house you can afford even if you have some financial setbacks. Put down a down payment. Dont let your GREED sucker you into believing the no money down, buy, buy, buy theory.
If you ave NO MONEY, you should not be buying anything.
The strategy is sound. However, the book leaves out important information especially around the tax situation. If you have no money, have a poor credit history, or lack the income to pull home equity out, then stay away from this and all other strategies to you get your financial house in order. Also, understand that this strategy in this book, at its base is a funding strategy for the EIUL products. Doug Andrews is a insurance salesman. The mortgage information in the book is not particularly good. The EIUL are great products for many reasons, but have up front expenses. You don't have to fund EIUL products with home equity, you can fund it monthly like some people do with their mutual funds. Finally, leaving home equity inside a home is affordable only if you have significant assets other than your home. Most people don't, hence the ability to leverage the only significant asset most people own. Finally, if you don't have 6 months liquid reserves available that is the first thing you should do either with home equity or by saving.
With any product or strategy, it is important to look at the individual situation. Seems obvious, but based on the massive generalizations I've been reading in this thread, I felt it needed to be said.
There are some fantastic uses for both EIUL's and FIA's. If you don't know how to use them or have some irrational hatred of certain products, then don't use them. However, before you steer someone away from them and from someone who knows how to use them, perhaps be big enough to admit you really don't understand them well enough to make a recommendation.
I read one person who back tested (rather incorrectly, based on my math) an EIUL product clear back to the 50's and reported how few times the EIUL out performed the index it is based on. Um, duh!!! It's not supposed to outperform the index. It can, under very volatile market conditions. However, it's designed to potentially deliver higher gains than most fixed products without the possibility of losing money. It's a safe-money alternative. Shouldn't be used as the only product in more than a single mutual fund.
As far as Missed Fortune goes, sometimes the math works, sometimes it doesn't. The important thing is to do all of the math and consider all the parts and pieces. Lots of times it doesn't help that much to borrow the equity, so you are just taking unnecessary risk. However, sometimes it does work. Consider this – your house may go up or down in value – most likely up, for the most part. However, dollars that you pay to buy the house do NOT compound. So your money inside the house grows at 0%. Now, for all the financial planner/advisor geniuses out there – how do you like an investment that pays 0% interest and makes you borrow the money to get to it?
I could lay out an example of the math working and another of it not working. However, I'm pretty sure the point of this thread is for people on either side of this issue to argue with one another without anyone really paying much attention to what the other people have to say.
dothemath,
My numbers are right on, if you'd like me to provide you with numbers or years, I'd be happy to. If you read my posts above, you will see why I am adding my opinion, and you will see that I actually agree with owning a home that is heavily leveraged. My point in laying out the returns of the S&P 500 from 1953-2004 is because I've seen many retirees stuck in these Equity indexed products who were sold by hacks telling them "The S&P has averaged 12.7%, and this offers a 80% participation rate, so you can expect over 10% per year". IMHO, EUIL's and EIA's offer little advantage over a properly structured guaranteed VUL or a VA with a guaranteed withdrawal benefit. In an investment, why would a person ever want to place a cap on your returns? If that is overgeneralization, I'm guilty. If an agent is fully disclosing what EI products are (fixed, with potential for greater returns than true fixed products), and explores options for the client before settling on the EIA or EIUL, that's fine. But, based on my experience, these products are being sold as having all of the benefits of the market without any of the risks. Completely not true, and by the time the client realizes this, they are stuck in a 12-15 year surrender period.
I agree – you need to analyze this on a case by case basis to determine if it's right for the individual, but I highly question the recommended products.
I've asked for years the question is it "smart" to pay off your home early or drag it out for 30 but consistantly get mixed answers. What say you? By going to a 15 year loan @ 4.5% I'm saving $159,500 in mortgage interest. I can't live long enough to reclaim that $$ via mortgage interest deductions so why would this be a bad idea?
Dummies! If you remove equity from your home, and place it in, yes, an IUL insurance policy, it will earn compounded interest. A lump sum, earning even a modest interest rate, will earn more than it costs you to pay off your mortgage, which you used to free up the money. And, yes, you can take your money tax-free, if done correctly, regardless of age.
Please read THE non-sales book on Home Equity Management by Roccy DeFrancesco, and you will see the light!
Either pay off your mortgage 10, 15, 20 years early, or invest your equity. Otherwise, your ignorance will kill you financially, by slaving away at a mortgage for 15 or 30 years.
It's not an opinion, it's a fact, for those people who can absorb the cash flow for the mortgage, to allow your liberated (invested) equity to earn interest, which it CANNOT do, inside a home!! Why let your largest asset earn 0%?
The greatest unknown financial strategy for the last 20 years. Anyone who doubts it doesn't undersyand the difference between simple interest (your mortgage) and compound interest (your "transplanted" equity).
To any consumer reading this blog,
Beware of "financial advisors" asking you to pull home equity to make an investment, especially if they get paid by your investment of that equity.
MBH gives sound advice.
Advice
Your response is rather sophomoric in nature
You would take advice from an admitted "Non-Financial" blog creator ???
Would you also
1. Not go see the doctor because he gets paid
2. Not get a mortgage because the financial institution/broker gets paid
3. Not invest for retirement because SOMEONE gets paid; even in a no-load mutual fund, someone gets paid
4. Not get your car fixed because the auto mechanic gets paid
Are you a finanical lemming or what ?
Do the math on paying 9% simple interest and earning 7% compound interest & you'll still come out ahead in this scenario
This has been a long thread but very educational. I started learning the Missed fortune concept about 3 months back and to this day I have to say I am still looking around. I do believe it is a great concept but you have to do the homework thoroughly. For anyone who might be interested, I am sharing my learning and experience during my MF “journey” in http://missedfortuneblog.blogspot.com/
I will post details about the real insurance products I have seen and will be seeing. cheers.
I was an Insurance Agent working for WFG. I did not know what I was doing, as all of the employees. I just followed what my managers said and what this book said.
I refinanced so many people to take cash from their houses to invest in an EIUL.
Now, All of them have lost the houses or are loosing it at this time. ALL OF THEM! 100%!!!
Some of them had almost finished paid their homes when they refinanced with me.
ALL OF THEM CAN NOT PUT MORE MONEY INTO THE EIUL ACCOUNT IN THIS DECLINING ECONOMY, so they are loosing the account…and the money.
I was said that if they can't make a payment, they could skip the payment, which is not totally true, because that is possible just once a year.
I had to quit this job when I really understood what is all of this about… but the damage was already done.
I am feeling so bad for my friends, family, clients… they trusted on me and I trusted in my manager and all of us trusted on this book.
SO MANY PEOPLE I KNOW ARE LOOSING HOUSES AND MONEY BECAUSE OF THIS EVIL STRATEGY.
I used to be a promoter of this book, now I say:
THE MISSED FORTUNE BOOK IS A LIE.
THIS STRATEGY IS COMPLETELY WRONG.
NOEL
Not so fast; only if you advocated Pay Option ARMs where the situation deemed it inappropriate would your "supposed" clients have lost money or their homes due to negative amortization.
I have PLENTY of clients who have not lost either their home or money. IN FACT, had you not separated the equity from the home, you definitely would have seen a decline the value of your residence.
Did you violate Doug Andrews rule of thumb which says no more than 40% of home equity should be used to fund an EIUL ?
Maybe you were misled by WFG or you didn't completely read the book.
Or you're a false poster
As I continue to state over and over, the concepts discussd in Missed fortune 101 are not bad. It's the use of "fuzzy" math and the fact that the book(s) do not deal with the realities of the tax code that make Doug's book very dangerous (and an E&O problem waiting to happend if you are an agent selling based off the teachings of the book).
Its unbelievable. People losing money and houses because they refinance and put the equity in the EUIL. The way I understood the concept that one refinances and takes out the accummulated equity to finance an EUIL. This is all done with an understanding that the homeowner has regular income to keep paying higher mortgage payments. The EUIL is for future benefits. One can fully fund it using equity by creating side buckets as explained in Missed Fortune so there is no more or minimal extra funding required. So even if the house loses value for a couple of years, as long as the owner needs to live somewhere he can continue in the same house and hope that house value appreciates in future. Problem will arise only if he/she has to sell it for some reason like job transfer. Otherwise, he can sit out the current housing boom bust. So how can one totally rubbish the concept? I don't understand. Is there something I am missing?….other than possibly the Fortune! 🙂
Tax Facts -ROCKY IS WRONG !
IRS Revenue Rule 95-53 references Section 264 (so it obviously cannot predate Section 264)
It specifies that unless an annuity contract is used as "collateral" for a loan Section 264 does not apply – SEE 2nd paragraph under HOLDING caption, as well as FACTS heading for distinction of when indebtedness is disallowed and allowed
Missed Fortune never advocates pledging or "assigning Benefits" as collateral
Jonathan,
Did you actually read IRS Revenue Rule 95-53. I suggest you read it. If you do, you will know that it supports my assertion that no interest is allowed even up to the 163 limit of $100,000 of home equity debt.
The court found that using an annuity as collateral helps prove that the intent of borrowing the money was to actually fund the annuity. Not that if an annuity is not used as collateral, the interest then becomes deductible up to the 163 limit.
The holding in its 2nd paragraph basically says that if it can be proved that the reason the money was borrowed was to fund the annuity and that reason "dominates the transaction," then the interest is not deductible.
Also, 264(a)2 is not the major headache with Equity Harvesting; it's 264(a)3.
By the way, I don't root for tax laws that are unfavorable to consumers just so I can tell people Doug Andrew's book is devoid of the proper information to allow advisors to give compliant advice on Equity Harvesting.
Quite the contrary, I like the concept of Equity Harvesting and wish 264(a)2 and (a)3 did not exist. I wrote a full disclosure book on the topic (The Home Equity Management Guidebook) so readers could learn the topic the “correct” way.
FYI, I’ll have a memo coming out in a few weeks where I will show people how they can pretty easily get around 264 and it will be based on a Supreme Court case.
Rocky – You are WRONG, WRONG, WRONG
You are obviously full of it & have not read it, so I'll quote word for word
"In CONTRAST to situatios in which an annuity is used as collateral for a loan, or a loan is OTHERWISE incurred or continued to purchase or carry an annuity contract, section 264(a)(2) generally does not apply simply because (i) an individual uses available cash to purchase an annuity contract and as a result needs to take out a larger mortgage loan to purchase a residence
"In both situations (I left out 1 situation for brevity), a purpose to purchase or carry an annuity CANNOT reasonably be inferred where the principal purpose of obtaining the mortgage is unrelated to the annuity contract and dominates the transaction. This would apply to residences other than a principal residence, since the taxpayer needed a place to live.
When I consulted a tax attorney, he said "available cash" simply means without collateralizing the annuity/life insurance contract.
He also said its applicability to 264(a)3 may not be so obvious, but no need to worry since 264(a)3 applies to all other insurance contracts/annuities besides single premium contracts, and the method of paying premiums is not the real issue. If one were really worried about its applicability to 264(a)3, then he/she could simply buy the annuity/life insurance with a single premium.
I wish I had time to put a more detailed response.
To be short, your reading of the Rev. Ruling is simply wrong.
You also show your total ignorance of the proper use of life insurance as no one in their right mind would fund a life policy for wealth building in lump sum to avoid 264(a)3 (which again is the biggest hurdle to avoid when using equity harvesting).
If you lump sum fund a life policy to avoid 264(a)3 the policy will either be a MEC and therefore, the client will have taxable loans in retirement or the client in order to avoid the policy from being a MEC will have to buy such a large death benefit that the policy will be a terrible wealth builder due to the expenses (which is why congress enacted the MEC rules in the first place).
I recommend you stop trying to play tax attorney on web-sites and deal with the realities of 264(a)2 and (a)3. there are ways around both that are legitimate. You are just not familiar with them otherwise you wouldn't be trying to twist rev. rulings in ways that make no senses.
Rocky
What part of "When I consulted a tax attorney" didn't you understand ?
The attorney made reference to the possibility of using a single proemium contract. I just restated what he sad
I believe in Miss Fortune 101. Being in the financial industry and lending this book really makes a point on how to leverage your home equity by putting your borrowed money (OPM) and put it in a Equity Index Universal Life Policy getting triple compound interest. And when you retire you get a tax free loan for the until your 120yrs old. Also, there are other rider benefits that which include (accelerated death benefit, chronic illness, and you have access if any emergency happens). The point is you have one assest(your home) allowing you to receive tax deduction on interest paid on your mortgage. Also, your money in the insurance policy has a cash value which receives an interest credit annually based on the S&P 500. You need to reread misfortune 101. This strategy is just a part of you personal portfolio.
Ruben
You're all ignorant idiots who don't understand leverage. Pay off your homes and be safe…then shut up! True millionaires understand leverage and liquidity!
You are wrong. We are not all idiots. Many are correct that MF 101 is a terrible read in that it uses fuzzy math and ignores the tax code.
As for the topic in general, it can be a terrific wealth building tool when "done right" for the "right client" with "full disclosure."
Because I believe so strongly in the Equity Harvesting concept that I wrote my own "full disclosure" book with verifiable math. Anyone who wants to truly understand the concept of Equity Harvesting and wants to be educated on how to use it in the "proper" manner might want might to pick up a copy of my new book: The Home Equity Management Guidebook: How to Achieve Maximum Wealth with Maximum Security.
This book is phenomenal, you missed the point. Cash value life insurance is a tremendous place to put long term dollars if you understand how it works, BUT MOST IMPORTANT YOU BUY IT WITH THE RIGHT COMPANY. i get 8% on my cash values for the rest of my life, compounding each year, in other words it's a guaranteed winner and that's not even with a variable product that's whole life. Here are some numbers, by the time i reach 65 i have funded my cash values with 294,816…here is the winner, i have 1,987,334 IN TAX FREE DOLLARS! you people that like your 401's roth's and ira's JUST GOT SMOKED. oh, not to mention i can get to this whenever i want with no penalty and i have a 2.3 million dollar death benefit as well. You see, the ones of you that just didn't get it in the book, turn within the first two pages and you'll find "one of the greatest forms of ignorance is rejecting something you know little or nothing about." Best of luck to all-by the way Bill Gates, Jack Welch, and Warren Buffet overfund this product heavily all the way up to the MEC line(for those of you that don't know what that means you may want to look into that, THATS HOW YOU GET WEALTHY-OVERFUND THIS PRODUCT UNTIL IT MEC'S) with Northwestern Mutual(Phenomenal Company)
Anything works if you do and you understand how you work
im like you, i wish i had more time to put in a more detailed response
to teach you something about a MEC and why people use this product. think about this, wealthy people arent wealthy because they are stupid. You can overfund a permanent life contract up until the MEC line and quit paying on it, and im not sure if you've ever seen the results of one of these but you need to check it out and then rewrite your previous statement. A MEC 7 pay product overfunded will beat ANY financial product out there period, it's proven. Again, the wealthy are wealthy because they've made wise decisions not dumb ass decisions. in other words the contract over the next 40 years cost you 200k, well, you put that 200k in it within the first 7 years and quit paying on it forever, sit and let it cook. Phenomenal, again this product when purchased with the right company is a no brainer.
You've got to be kidding me.
I consider myself an expert in overfunding life policies and equity indexed life specifically.
I was so put off by Doug piece of crap book (fuzzy math and an intentional disregard for the tax code) that I spent several months writing my own book telling advisors and general public reads the truth about the topic.
The truth is the topic can work, but the realities are that it's not for everyone no matter how much insurance agents want it to be.
Hows that home equity wealth now?
Roccy, you must stop pimping your book to have any credibility. Dougs book may have some fuzzy math but the concepts are real and work (Please dont tell me to read above and buy your book again).
In the next 20 years 75 million baby boomers will be reaching retirement. There will be a shift from 75% of the population paying for Soc Sec and Medicare for 25% to the opposite. The only way that can happen is for the Govt to raise taxes. If you are relying on tax deferred investments like IRA's and 401k's to fund your retirement you are in for a catastrophy. The Govt is going to conservatively own 50% and I believe its more like 75% of your retirement.
You would be much better off to just stick your money in mutual funds or other taxable investments then at least you will just have to pay 15% Fed long term capital gains tax instead of 30+% marginal income tax rate (though both will be likely significantly higher in the future the capital gains is sill likely to be half).
IUL is the best alternative. Read Doug's books (read Roccy's book too) but get yourself educated on this topic. The bottom line is if you want to be wealthy and live financially independent there are 2 things you must do:
1) take out the biggest mortgage you can and harvest as much equity as you can and 2) invest your money…home equity &/or earnings in non tax deferred investments like IUL policies.
A word of warning you must find someone who knows how to structure the Life Insurance contracts. They must be funded with the minimum amount of Life ins allowed by law and the maximum amount going to the investment componant. Life ins salesmen make their money based on the amount of the ins in the policy…in other words they make more money if they structure it all wrong for an investment. do your homework and proceed with caution but Correctly structured they realy will put you on the fast track to retirement.
Roccy, you must stop pimping your book to have any credibility. Dougs book may have some fuzzy math but the concepts are real and work (Please dont tell me to read above and buy your book again).
In the next 20 years 75 million baby boomers will be reaching retirement. There will be a shift from 75% of the population paying for Soc Sec and Medicare for 25% to the opposite. The only way that can happen is for the Govt to raise taxes. If you are relying on tax deferred investments like IRA's and 401k's to fund your retirement you are in for a catastrophy. The Govt is going to conservatively own 50% and I believe its more like 75% of your retirement.
You would be much better off to just stick your money in mutual funds or other taxable investments then at least you will just have to pay 15% Fed long term capital gains tax instead of 30+% marginal income tax rate (though both will be likely significantly higher in the future the capital gains is sill likely to be half).
IUL is the best alternative. Read Doug's books (read Roccy's book too) but get yourself educated on this topic. The bottom line is if you want to be wealthy and live financially independent there are 2 things you must do:
1) take out the biggest mortgage you can and harvest as much equity as you can and 2) invest your money…home equity &/or earnings in non tax deferred investments like IUL policies.
A word of warning you must find someone who knows how to structure the Life Insurance contracts. They must be funded with the minimum amount of Life ins allowed by law and the maximum amount going to the investment componant. Life ins salesmen make their money based on the amount of the ins in the policy…in other words they make more money if they structure it all wrong for an investment. do your homework and proceed with caution but Correctly structured they really will put you on the fast track to retirement.
James Bee – What company and product are you in that gets you 8% for life?
Thanks -Jeff
James Bee – Sorry had to post again for email notice.
Thanks -Jeff
Lucky,
Question : in today's economic situation with housing slump, global inflation, credit crunch, do you still recommend to take out max mortgage to invest in IUL? What happens when one owes more than the house value?
BTW, I don't see point in fighting over Doug's or Roccy's book. They have essentially the same message, Roccy has more realistice math. But what we need is an honest re-verification of the advise and ideas in the present worsening scenario. I am a homeowner since last 4 years, with little equity and growing family. How do I implement the IUL as part of my long term investment strategy? What cautions I should take?
I use LSW which is second to Midland in the U.S. when it comes to EIUL's. Their cash value is indexed against the S&P500 with a garunteed 2% floor and a ceiling of 17.5% (annual lock-in). A word of advice for you shying away from the missed fortune strategy or any other equity harvesting strategy – you are doing yourself as well as your potential clients a huge disservice not looking in to this. E.F. Hutton fought hard for his wealthy clients in the supreme court to approve this exact strategy into law in 1983. Before you slappies open your mouth and sound ridiculously stupid, keep it closed and read a book. 🙂
Wow! there sure are a lot of great post on here, i enjoy thoroughly talking about these conversations, but before i start i would like to say that there is not any one product out there that is right for everyone. each and every person and family are in a different situations, i.e…age, incomes, objectives, retirement ages, etc… all play a factor in different type of plan that's right for you.
Imagine with me for a second here and please be opened minded while reading and not think that every word you are reading you disagree with. what if i could offer you a box, yes that is right a box and inside of this box you stuff money into it until it is full. after it is full the money grows as well as the box, they both continue to grow until you decide yourself when to take the money out.
Let's say for example at age 50 your good friend calls you and tells you that he recently spoke with an investor that gave him some good advice. the advice was to purchase a piece of property. the investor tells him that this piece of property should double within 5 years and it would be a great investment. however your friend cannot afford it nor get the loan for the full amount of $500,000. so he tells you about this and he feels the only way this will work is that you split this piece of property with him, $250,000 each. (for all of you reading this so far, stay with me)
think about this with me. where are you going to get your $250,000 from to purchase half of this piece of property? If i had to guess you probably don't have it sitting in your checking account. You can't get it from your IRA, Roth, 401(k), or any other type of retirement plan. Ah, remember that box you had that you stuffed money inside for period of time, you can get it from there, not to mention no taxes or penalties. You can take it out( while still continuing to grow) oh, and after your money doubles from the property you can put it back in.
this box allows you lots of flexibility, choices, and options in a lifetime. Here me on this, there is only 3 things that could every happen to you in a lifetime. 1) you live a long healthy life 2) you pass away to soon 3) you become sick or have an accident and can no longer work. Remember the box that's working for us? 1)If you live a long healthy life you're saving money ( and getting a compounding 7.5% ROR each year-after taxes) 2) if you pass away too soon this box makes sure you're family is financially prepared to live without you, not emotionally but financially. 3) if you become sick or have an accident when everything else stops for you, i.e…you can no longer fund your 401 (k), ira, roth, or whichever other plan you have because you are not working and i hope you own disability insurance but that would not be to provide for a retirement plan, that would be to keep you and your family above water, so when all of your finances come to a halt after a disability, remember that box? It self completes and the box funds itself after a disability and continues to put the same amount of $ into it that you were. wow! that's a product that will take care of anything i will ever need financially. live, die, become disabled.
the story is permanent life insurance, it's a phenomenal tool if you understand how it works, here me again, if you understand how it works. This is not short term dollars that is what mutual funds are for, this is for long range dollars. This is literally a good product WITH ABOUT 3 COMPANIES AND THAT'S IT. it's based off of a mortality and expense charge, hey all of you reading this do me a favor. if you have any type of life insurance at all term or permanent go get you policy. inside of your policy you will find a "life ins. buyers guide" open it up and i want you to flip to the very back -where the company has hoped you would have thrown it away or stopped reading by this point, but literally on the last page in big bold letter it states "when buying life insurance look for companies with lower index numbers" -you know how i know this is what your companies guide says, because by law they all say the same exact thing from each company. this is a mathematical calculation of a mortality and expense charge, you see this company tells you how to buy this but no one wants to learn. the mortality and expense charge forms the ROR. that's why this product is bashed so much 1) because no one understands it 2) people don't realize there is only few companies that this product is good with, to make it easier for you all, ELIMINATE ALL STOCK HELD COMPANIES. this is a product to be purchased with a mutually held company.
so, in essence guys and gals i own a product, that essentially like owning a piece of property, that i put money into and i can withdraw from tax and penalty free. if i live too long this box keeps growing, if i die too soon my family will be ok. if i become sick or have an accident this company will continue to fund this product for me just as i was (Northwestern is the only company that has this waiver of premium clause)
By the time i reach 65 i will have funded this vehicle with $385,612. My cash value has grown to $1,797,816.( my cash inside of this mor than doubles every 10 years after the age of 60) Here me again, if you understand how this works there is not a better place to grow long term dollars- $1 can be used to handle 3 objectives 1) if purchased from the right company(mutually held-northwestern is the best for this strategy) 2) if used for long term dollars 3) if you stay committed.
Last thing, for all of you "buy term and invest the difference" people: The experts will tell you if you take 2 married couples today under the age of 60 that do not smoke or use tobacco, the average age of the second person to die is 92, people are living longer today than 20 years ago. most of the time it is the female that lives longer. "buy term and invest the difference" only works if you know for sure you are going to pass away early. Because if the guy makes it to 70+ yrs. his term has probably run out. here is the key: he cannot spend all of his retirement money from 401k, ira, or whichever because he has to leave his wife money to live off of for many years after he is gone because he no longer has life insurance, his term expired and is in no shape to buy more term because his health is obviously not what it was when he purchased his 30 level term at age 40. If he could purchase it the cost would be entirely too excessive.
Permanent life insurance is a phenomenal tool again if you understand how it works.
Can you tell me how much a Financial Planner would charge you for getting started with the Miss Fortune system. What is the percentage rate you pay your planner?
Please Advise
What system do you recommend?
James Bee – In your comments you spoke of three mutually held companies that offered this product. Other than Northwestern what are the other two companies that you would consider for purchasing this product from?
Thanks Jeff Jay
Hello, #1,2,3 are listed as follows: Northwestern Mutual, New York Life, and Mass Mutual. New York and Mass are great companies but they're not Northwestern (just for the record i do not work for Northwestern Mutual, in fact im not even in the financial service industry, i have done extensive research before putting a large amount of $ into a "certain vehicle") Here's why: Last Year Northwestern Paid back 4.7 Billion in dividends-which in 99% of cases rolled back over into the policy to buy more insurance which creates cash value. Mass and New York (remember both very good companies did not COMBINE to pay back half! WOW!
My personal opinion is that if a client wants to build wealth for retirement using cash value life, they should look to indexed equity life insurance.
While thre is nothing wrong with whole life, it will not work well in the context of equity harvesting/MF101.
Additionally, if you read the studies, the WL companies on average credit 2% less then what their illustrated rates are which is very disturbing.
Good to see the discussion is alive and well! To anyone out there, I have Doug and Roccy's book and love them both (thanks for posting here Roccy- would not have found your book otherwise) . The concept was introduced to me by my financial planner (not my ins agent) and a book called "The Infinite Banking Concept" by Nelson Nash. I was intrigued by the concepts from Doug, then clarified by Roccy- in the name of disclosure, everyone should read them both… I am three years into overfunding several WL policies (Guardian Ins Co.- Mutual WL) and have to say, where ever you get the money (I got sarted with a HELOC- but stayed WELL within my means with the new monthly payment and certainly enjoy the peace of mind of having a decent sized pool of cash liquid for emergencies), just GET STARTED. you need to look at this as at LEAST a 7 year plan of funding whatever policy you use. 20 years down the road looks WAY better in my policy than my IRA and 401(k) do right now. Point being, Take Doug and Roccy's advice of Equity management. I'm imagining if this year was my year of retirement had I not done what I did three years ago…. I'd own my house (greeaayyyyt- I FEEL so much better) but the reality is I am terrified to touch my nest egg that just cracked and is leaking all over the place due to the market conditions. I'm still paying (much higher?) taxes to live in my house- I own the home, not the tax basin. My term life expires this year and to renew it will cost me approx 18K per year, so all of a sudden my retirement money is both my and my wife's life blood, and it's down 25% while cost of living is up the same amount.
Doug, Roccy, Nelson- Thanks for a different way of looking at things.
"different isn't always better, but better is always different"..
I just got done reading MF101 for the second time and read this ENTIRE page! how's that for dedication?
If I can set up a fixed interest equity loan along with a Life policy whose floor ROR covers the Equity loan after the tax deduction it seems like I should do it, no? even a 1% ROR is better than 0%.
Even if the house value declines, that dosen't change the terms and if I wanted to sell the house I would just take out a tax free loan on the Life policy to make up the differance if I needed to.
Do I understand this right? Where do I loose?
Its interesting that since mid 2008 there have been no more postings.Could it be that the mortgage companies who lent the dollars are gone? Could it be that the 401k's mentioned back in 2005 are down 45%?
I read the original war and peace version of Dougs book in 2004. I refinanced my home into a pay option arm mtg reducing my payment by roughly 2500 and simply dollar cost averaged that savings into a min face EIUL since then in the 36 months. it now has over 120K in cash value .
I was in the mtg business and my industry has been wiped out effectivley all but a shell is left. In addition I opended another EIUL in 2006 after obataining by insurance license and after being quite intrigued by the industry and this one simple premium finance play written about in Dougs book. Those dollars have been earning a small sum of only 1% on the excess after mortality and expense charges but are safe.
My home has reduced in value by roughly 200K but I have the liquidity tucked away if I need it outside of the market safe and secure along with the added death benefit to look after my family in case I die prematurely. I dont care what anyone says about the strategy , I know it works and has protected me significantly in a very dificult ecenomic enviroment. in addition my pay option arm interest rate is 4.75% the last time I looked at my statement.
In response to Dab and Jeb above, I think overall the strategy is fine but taking tax-free loan option will work only after 7-10 yrs of funding the EIUL. One cannot take loan before that – at least that is what I was made to understand when I talked to the insurance agent. That one reason alone makes me nervous and all these days I just read about it but haven't done anything about it. What if I suddenly need money, not only I can not immediately get loan since I am less than 10yrs into a policy but I have to come up with extra cash for insurance premium to keep it in force. This in addition to existing mortgage and monthly expenses. Roccy, do you agree?
what I will say is that equity harvesting is for people who have a stable income and no need for the money in the policy for several years. this can be mitigated by using a high cash value policy but most agents won't sell them because the comissions are spread over 5 years.
Hi Roccy,
Can you refer me to an honest advisor here
in San Diego: I read you book and currently have
a VUL with ameritas.
thanks, John P.
I just ran across this blog, and was interested in the comments on both sides of Doug's book. I am a financial planner who has used a slight variation of Doug's advice to help many clients eliminate their non-preferred debt. I personally do not agree with borrowing money to invest. I do agree with utilizing all of your assets though. Let's say you have $75,000 in available equity in your home, but $40,000 in credit cards and car payments that you are paying a total of $1,200 per month for. If you re-financed at 5% your mortgage payment will only increase by about $200 to $400 per month (amortized over 30 years). Sorry I haven't put any of these numbers through a calculator, just off the top of my head.
Now if you re-direct the money you were sending to creditors monthly, the remainder of the $1,200 now about $800 to $1,000 per month toward a savings vehicle, such as investment grade life insurance earning 5% compound interest or more, you will have enough money in that account to pay your new loan amount off in less than 3 years if you choose to do so. The key here is that you now control all of your assets, as well as how and when you access the money to accomplish your financial goals. You might choose to use some of that money to pay cash for the car you're going to need to replace in a few years, then add whatever would have been the new car payment toward your savings. You will become so excited about how much money you are earning in interest you won't care about the stock market.
I also read where one person was saying they couldn't take a loan from their policy until 10 years into the policy. They need to check out another company. That one is not a good company to work with in this situation.
I hope my view is understandable since I am not a highly educated man, but a simple guy with a basic understanding of how interest works. In my book, "The Trinity Plan", I say that people who understand interest earn it, while those who don't pay it.
These EIULs and EIAs sales pitches sound so great that the SEC and FINRA have issued an investor alert against them:
http://www.finra.org/Investors/ProtectYourself/In…
These EIAs are bogged
Completing my thought from above…
These EIAs are bogged down with high fees and commissions, and promise high returns with little to no risk. Products like that do not exist.
I didn't clarify my original comment. Always use interest sensitive vehicles for this type of program. Never use variable products! I am securities licensed, and understand the FINRA warnings. Sorry for this very important ommission.
To clarify further, I do not recommend anyone to place their "foundational" money into anything tied to or directly into securities related products. This includes equity indexed and variable products. If you use the fixed interest rate products, then at some point you want to take some of your earnings and invest, that's a different story, but, to make a analogy, the grocery money should never see the blackjack table.
tom,
I'm guessing you are not from the industry or are a money manager for a living?
FINRA wants to regulate fixed indexed products because they think they have the power to and because of the money involved.
It's laughable to have FINRA try to regulate products that by design will never go backwards due to stock market risk when the advisors it regulates have done such a terrible job diversifying and protecting clients in the stock market (where most client are down 40% or more in the last 18 months as of the date of this post).
You should read john bogles book on the real costs inside mutual funds. It will make you sick and your opinion of FINRA will be changed.
…a giant additional cost, all the more pernicious by being invisible. I am referring to the hidden cost of portfolio turnover, estimated at a full 1% a year.**
John Bogle
John is referring to the additional cost of mutual funds in addition to the typical 1.5% mutual fund expense.
FIA and EIUL are not perfect products. I've yet to find one of those, but they are good products for certain clients trying to diversify themselves in a tough to predict world.
In the sixteen years I've been in this business I've learned that there are no bad products. But every product has the potential to do better for the owner in certain situations than another. I am conservative, and just do not like the potential of losing any money at the foundation level of savings. In my book "The Trinity Plan" I explain th edifference between these two terms, and how they can affect your fiancial future.
I appreciate your offer to teach me something about finance. I believe that the only mind that cannot be enhanced with knowledge is a closed mind. Eventhough I teach financial planners on a regular basis, I look forward to taking in your advice. Thank you! You can click on my name at the top of this message, and be taken to my website. From there please drop me a note so we can connect.
I've got to run now. I'm being interviewed on two television shows this morning about my thoughts regarding the Nation's economic situation, and how it relates to families today.
You're right Roccy, I am not an advisor, but I spoke with mine and he warned to stay completely away from EIAs.
"It’s laughable to have FINRA try to regulate products that by design will never go backwards due to stock market risk when the advisors it regulates have done such a terrible job diversifying and protecting clients in the stock market (where most client are down 40% or more in the last 18 months as of the date of this post)."
Yes the market is down 40% this year, can you tell me what the total return for the S&P 500 was for the last 30 years?
12.7% annually. What type of annual return is Douglas Andrews saying you can get in his books? 8.5% after fees. So even if you factor in the tax free loans, you still come out ahead investing in the market.
"John is referring to the additional cost of mutual funds in addition to the typical 1.5% mutual fund expense."
Which mutual funds? Vanguard mutual funds? His own company?
are you trying to provide this message board with commic relief?
most stock brokers do not understand FIAs or EIUL. What they know is that their BDs don't allow them to sell the products and if they do sell them it takes away from assets under management which is frowned upon.
It's all about asset allocation. Stock jockey's put everythig in mutual funds and stocks. hard core life agents tell everyone to put it into life or fixed annuities.
quality advisors will preach diversified asset allocation. but again, this is someome commical becuase stock jockey's do not understand fixed life or annuity products and life agents don't understand socks and mutual funds.
This is why most of the american public gets bad advice.
One last thought on asset allocation, using a 30 year historical rate of return of the S&P 500 is not helpful to a 65-80 year old who is in retirement and because some idiot stock jockey had him/her in a balanced portfolio of stock and mutual funds (that are down 40% over the last 18 months) the client has to go back to work or can't live the lifestyle he/she wants to in retirement.
It's not the products that are bad or evil. It's the advisors giving the advice and that would include whoever is telling you that FIAs and or EIUL do not have a place in many client's asset classes.
Advisors do not equal stock brokers. Well known and respected advisors like Scott Burns are saying to stay away from EIAs. They say they are burdened with hidden fees, commissions, etc. that eat away at your bottom line.
Advisors make no money off of sales of stocks/bonds/mutual funds.
"One last thought on asset allocation, using a 30 year historical rate of return of the S&P 500 is not helpful to a 65-80 year old who is in retirement and because some idiot stock jockey had him/her in a balanced portfolio of stock and mutual funds (that are down 40% over the last 18 months) the client has to go back to work or can’t live the lifestyle he/she wants to in retirement."
Amen, that retiree should have been investing in bonds well before retirement so that when they retired they would be almost solely in bonds. We are in agreement over the idiot stock jockeys who have no idea what a proper asset allocation should be.
by the way, i've talked to scott burns about his articles on these issues and it is clear he doesn't always fully understand what he's writing about. he's bright guy, but article writers who try to learn complex subjects in a short period fo time do not always get it right. Some of his comments on fixed products are accurate and some are not.
anyone talking about FIAs and hidden fees clearly does not understand the product. please forward me anything recent that scott has written so I can e-mail him and tell him where he is wrong.
There are no "fees" in most FIAs. what they have are "caps" that limit investment return. Some FIAs have spreads through participation rates, but they are open and obvious.
again, i'll state that if you want to be educated on these products, you can contact me directly. you seem like a bright guy and I can explain them to you in about 5 minutes.
Also, anyone comparing long term growth in stocks and mutual funds to FIA are missing the point. FIAs are not meant to obtain the returns stocks are over the long term. they are simply a secure bucket that never goes backwards and should go fowards between 4-6% maybe close to 7% if there is a bull run long term.
this is why with an asset allocation model FIA make more sense the older you get.
I went through your presentations you linked above.
They explain a lot of the what… barely any of the how.
What is funny about these FIAs is that the S&P you compared to returned 12%, yet the FIAs only returned whatever the cap value is. Regardless of the ups and downs, the investor is losing out on the difference over the course of those 30 years. The average worker retires between 55 – 65, they are living until 95, which gives them 30+ years, even if they invested in equity assests they would still get the averaged return of 12%.
So, while your investors are enjoying comfortable returns, FIAs are enjoying the difference even more, plus fees, commissions, etc.
If this is not how it works, then please explain in detail how.
i see this is quickly becoming a waste of time.
I offered to educate you on the products and if you want to learn about them drop me and e-mail and we can talk about it. the links i gave you are lay explanations of how products works so clients can determine if finding and advisor who knows them well and can speak with them about the products makes sense.
I figured since you clearly didn't understand the products some basic education might be helpful to you.
Also, if you think that a 60-80 year old should be in stocks, then you should bet a security license and start selling, you'd fit right in.
Bonds are ok, but so too are FIAs as an asset allocation model.
that's what asset allocation is about. putting some money in stocks, mutual funds and buckets that will never go backwards (FIA).
Some FIAs haver guarnateed returns (7% on an accumulation value and a lifetime income stream). yes, there are fees in these as well, but it's clear you know more about this subject matter than me so I probably don't need to explain how that product works either.
roccy
"the links i gave you are lay explanations of how products works so clients can determine if finding and advisor who knows them well and can speak with them about the products makes sense."
No, the links you gave a are a sales pitch. There is no background information on how the product actually works, no concrete numbers, no investment strategies, no nothing, just generalities. There are no fees, commissions, or risks listed.
"Also, if you think that a 60-80 year old should be in stocks, then you should bet a security license and start selling, you’d fit right in."
As I said before, I don't think so. My point was the 30 year window at 12% annual return vs. 7% annual return. Your FIAs invest in what? Index funds? You compared to S&P 500, so S&P 500 returns 12%, and your clients get up to 7% only in up years? That is 5%+ that the FIA is making and not paying out to its customers. Am I wrong? If so, explain why.
"Some FIAs haver guarnateed returns (7% on an accumulation value and a lifetime income stream). yes, there are fees in these as well, but it’s clear you know more about this subject matter than me so I probably don’t need to explain how that product works either"
Why are you getting abrasive? I'm only asking the questions that should be asked. If you offered solid answers I'll stand corrected. You didn't even answer any of the questions I listed in the previous comment, you never explained why or how I'm wrong. I'm only asking for the facts, and if the facts are not stated, for everyone here to see (not by calling you or reading yoru book), then that puts up huge red flags.
I also forgot to mention that investing in the S&P 500 yields dividends that are not passed on to the customer.
And…
Any gains from this annuity are treated as ordinary income by the IRS. That is the highest tax rate. However, if you simply bought the Vanguard S&P 500 index fund, the gains and dividends are taxed at a lower capital gains and dividend rate. So, with an FIA, you covert low tax capital gain and dividend income income into high tax ordinary income. Doesn't sound like a good deal.
Most comments are ignorant here. Roccy seems have a grasp.
I happened upon this blog by just doing a search on “Missed Fortune”, and enjoyed reading the entire history of comments. Appreciate the diplomatic way that MBH handles his responses to some attacks.
I evaluate financial risk for a living, so was very curious to see how the tone of blogs would change from 2005 to the economic environment of today. Those 2005-2007 supporters of MF seemed to love the idea of leveraging their home equity to invest in real estate. Focus on the upside, and ignore the downside. Probably has been has been a painful lesson in the concept of leverage.
Missed Fortune concepts do have their place, but as many have alluded to, know what you are getting yourself in for.
I am curious why you dont recommend using Insurance as an investment strategy. Would it not be wise to have diversify and at least have part of your wealth growing in a tax favored environment that does not a have a contribution limit or the 59 1/2 rule? Not sure that the market was the best place to have your money in the last few years…
Using cash value life can be a terrific way to build wealth. However, you will not learn about how to do so correctly when reading MF 101.
roccy
You know what really cracks me up is these so called professionals that think they know money and investing and how products effect a families over all financial welfare. If you are going to do a blog to bash a book you better give your viewers some math behind what you are saying. Know the tax laws and how your clients are becoming the perfect tax payers by you giving them bad advice. If you understood the effects of taxation and true compounding interest and how these Insurance contracts worked you wouldn’t be bashing Douglas’s book. Your clients will be the ones that ru out of money at retirement and get smashed with taxes when they can least afford it. Here’s some math for you so called professionals. If you put 6,000/year away into your 401k’s and IRA’s for 35 years you will save $70k in the form of tax savings in a 33% tax bracket, but if you retire to that same 33% tax bracket and need $50k to live on you have to take out 50% more just to pay the taxes due on the amount taken out. So you take out $75k to net $50k to live on and if you can sustain these tax hits for 20 years into retirement you will pay back old Uncle Sam $500k in taxes for your $70k in tax saving over the first 35 years. Now you wonder why our seniors are outliving their money. This is just the tip of the iceberg to what you don’t know and understand. So before you give your clients advice from your conventional wisdom run your own math correctly and prove him wrong. I would love to see that, oh so smart one with little knowledge. My clients never lose money, tey are in a safe truly compounding environment, and if they don’t reach their goal of retirement their families are taken care of. Life Insurance is a tool and your house is an asset period. Pay your house off then stop paying your property taxes, do you really own your house?
why are indexed funds being pushed and not vul’s?
I just got my life insurance license and picked up this policy from a client who swears they did the right thing they read missed fortune. i’m not very educated in this field yet, so it’s a little hard to understand I have there policy i’ve been trying to figure it out. first of all there ages were 56 & 50 house completely paid off. after meeting with Andrews they took all there equity out of there house refie’d into an interest only. and they each lump sumed a flexible premium life insurance policy he’s lumped $255,000 and she lumped $155,000 into this policy, its been 5 yrs since they’ve owned it. like i said i’m new to this field but honestly how does this make sense.
It’s an E&O disaster for agents using the book. If I was still practicing law, I’d seek out clients who received advice based on MF101 and the book would be exhibit #1 in the lawsuits filed.
Seriously why are people allowed to use this thread as an advertisement. I’ve had a Missed Fortune plan for years and it is working just fine, yeah the first few years stink but how can you say that the 12% return this year is bad? how can you say in 2008 when everyone else lost 50% that this is bad. Am I glad I took equity out of my home 3 years ago YOU BET! That money is safe in my policy and not consumed. Sad to see sharks like this guy on her pitching himself and not actually why he is all talk and no action! If you take the time to learn like I did you will see the benefits are huge.
@Mark I had my money in a vul and lost money eiul are nice because of they mitigate the loss mine has a guarantee of 1%.
If you want to only plan your future on certainty.. plan on death and taxes.. anything else is up in the air..
Interest deduction on your income taxes is unlikely (yes unlikely, if you preferr, look for above solution) to be eliminated anytime soon.. it’s been tried before numerous times unsuccessfully. MF strategies work, whether you “believe” in it or not.. you can debate numbers all day long, those that choose to argue agains, will argue against until kingdom come. Those that see the logic, will proceed accordignly. You are clearly ignorant of mortgage products so that throws out your credibility since you need to know that par well if you are going to argue against the concepts of MF101. Bottom line, you are an idiot.. go back to freeloading off of borders and other book stores where you read books for free.. and whatever other shanninigans you do to scrape a penny here and a penny there while you trip over the dollars… you wouldn’t be the first, and you won’t be the last…
To Rick. So Tired of hearing this. You are wrong on one thing. Your Home is Not you asset, unless you are making money from it. It is not your asset unless you sell it, until then its a liability. If it isn’t generating income then its not an asset. You probably think all homes go up in value too.
I just want to say, I recently watched a webinar by Doug Andrews.
Okay there are a lot of compelling things here. I’ve lived my life trying to buy a house and get out of debt, after 12 years of house payments I lost it in the divorce, I have nothing.
I have 0 retirement and I’m now 40 years old. And I’m still trying to get out of debt after I got out and now have lawyers fees, living expenses, and I won the prize and got the $18K debt that came with the one of 3 cars that wasn’t paid off. (I think my lawyer sucked)
Honestly, when I was in high-school I learned about compounding interest and decided I would never get into debt… very hard thing to do. I’ve been trying to get out of debt for decades now. With the attitude, when I get out of debt I’ll have more money to invest… (hasn’t happened)
I have nothing, I don’t even know if the insurance investing would work for me, I have no home, no 401k to flip. All I could do is start making payments to a life insurance policy that sounds like it is zero tax shelter if I ever let the policy laps… but if the policy never lapses… it’s a tax shelter… and there’s no tax shelter in the other plans that I see… not even a hope for it.
I’m still deciding. It feels like a scam. It makes insurance companies wealthy. I’d rather own a poker casino and just collect rake from people’s pots… there’s absolutely no risk there… but I don’t have that option.
Should I be considering Flexible Maxmimum Funded Insurance?
I recommend you got to http://www.www-missedfortune101.com; http://www.badadvisors.com and http://www.retiringwithoutrisk.com.
If you have any question after visiting these sites, click my name above and let me know.
roccy
Doug: ignore the self promotions on here and instead read the books and look into it for yourself. Sad that this thread has been hijacked by self promoters and many many comments get deleted! Makes you wonder if the self promoters are running the site…
I paid my 3600+ sq ft house off at age 40 and did set up a HELOC as a way to get quick cash (literally, seconds via the credit union website) if I need it. That was my “insurance” the first 1/2 year while I had less reserve money. But in the past year, I’ve saved up enough money by investing in ETF’s that pay monthly dividends that I could live a few years without any income. In fact, should everything continue, I’ve already got enough in my 401k to retire, enough saved up to cover all the bills several years, and it’s growing very fast. I could retire at age 47 if I wanted to. (I won’t due to cost of health insurance when you get it individually.)
Paying the house off has not locked up my money. It’s making it grow. This guy is on the radio right now. I’ve heard him before. He talks a lot but says nothing other than spewing fear and words like “inflation,” “housing slump.”
This is the worst advice I’ve heard in a long time, totally contrary to my experience in the past year. I don’t understand how he hasn’t been sued by those who take this “advice.”
Ninety-Five percent of American’s are broke at retirement following the traditional advice given by the main stream gurus. The other 5% of Americans are wealthy at retirement by RUNNING the complete opposite way of everyone else is going. Missed Fortune is my way of RUNNING the complete opposite way of everyone else and it has paid off a million times over. You all can be ignorant and listen to traditional financial advice or RUN, your choice, I’m just glad I opened my mind to the true concepts in the book.
First off you look like you are barely out of high school. Have you ever paid for a mortgage on a house? Have you ever lost a house to foreclosure because you missed 3 payments. While I understand that you think you are a guru, I would rather take advice from someone who has had the experience of paying for and losing a house. That’s where wisdom is built. You are regurgitating the advice they gave your parents 30 years ago and your parents may have been lucky enough to pay all their payments on time and not have their house repossessed by the bank after paying off 3/4 of it. I feel sorry that someone so young thinks they have the world by the tail. where you have your hard luck streak you may finally recognize the folly of your youth and long for days like this where you can talk like you have experienced life when you really are just barely started.
How about a homework assignment. Why don’t you go interview 100 people who have lost their homes to foreclosure and ask them what they think of paying off their house…. How much time/money and effort they lost because they played by the old rules….
The world is in a constant state of change. The old ways of thinking are no longer out of date after generations, but after seasons. If you cannot see how this safely secures your money in a location where it is earning interest you have missed the boat.
Yes, higher interest is a result if you use home equity, but what about the renter who wasn’t earning equity anyway?
If you happen to be fairly successful in life you dont have to use equity, but that’s not many of us. And paying 4% home mortgage interest to make 6,8 or 10% interest on the same dollar, makes it worth doing. You can’t buy equipment or employees for anywhere near that cheap.
I’m only 40 but I watched my parents nearly lose their home and friends who actually did lose their homes. I wont make the mistake my parents and friends did.
My advise to you… mortgage a house and see what you think of what it takes to “OWN” a home in the new economy. If you don’t lose it, your equity, your sanity due to inflation, recession, depreciation or just plain bad luck you will be one of the lucky ones who took 30 years out of your life to pay for something your grandparents paid off in 10 years. Times have changed, a house is NOT an asset to anyone but the bank.
I heard this guy on the radio touting a so-called “FREE educational seminar”. And the whole while he’s talking about stocks from 2000 – 2008 and CD’s. NO MENTION OF BONDS!!! That sealed it for me. This guy MUST be selling annuities and other high commission insurance products.
A lot of years have passed since this comment section began. I read that “Missed Fortune” book a couple years ago and followed basically the same principle, except used the home equity to buy back my pension in ’07, then retired. The HELOC did amortize this year, after 10 years, so I had to refi again, but the rates are still low. And though I made no principal payments in 10 years, I am otherwise debt-free, the pension is adequate, and the equity has risen astronomically. But I doubt I would ever borrow big like that again. For one thing, a lot of the lending rules have been changed; you can’t be sure you’ll qualify anymore. So many changes in 10 years, huh? Like the compounding interest people were counting on in the comments here, makes you wonder how it turned out for them.
Thanks for commenting, Kate.
I hope it continues to work out for you.
The house thing is worse than just being equal. It’s a liability because if you own the house worth 100k, you take a loan on that house of 100k, now you have a liability because you owe the interest on that loan!
Yeah, a lot can go wrong with this strategy!