More comments on my post
Missed Fortune 101 — Horrible Advice!
Please chime in here or there with your comments!
I'm the first to admit that I don't like any debt that isn't making me a lot more money than it's costing me.
However, I don't buy into the argument that I'm “running from debt instead of running towards wealth,” according to one of the comments. Assuming that I have debt, if I use $1,000 to pay off some debt, it has exactly the same effect on my net worth as if I use it to earn interest in a bank account. Decrease in liability, increase in asset, it doesn't matter — it's an increase in net worth either way. Now, if you have no liquid assets, that's a little precarious if something bad happens and you need living expenses. So it's good to have some cash on hand.
But after that, it depends where your money works the hardest. Every dollar I prepay on my mortgage starts “earning interest” in the form of mortgage interest not paid — more of the subsequent payments go toward principal than if you had just made your regular payment. So if I pay an extra $50/month toward principal, that amount “compounds” at the mortgage rate (minus a little bit because of the smaller mortgage interest tax deduction) and is rolled into the equity in my house. It's a lot of mortgage interest savings if you keep the mortgage any length of time.
Now, if I found an investment that was earning 10%, would I stop prepaying my mortgage? Absolutely! My money works twice as hard there. Until that magic investment comes around, I'll take what I know I can get with my mortgage prepayment. I want to see the return NOW, not when I die.
Interesting. I'd missed the original post, so it was fascinating reading the debate. I recently read Dr. Thomas J. Stanley's The Millionaire Mind, and I would say that MBH thinks more like a millionaire than the ones disagreeing with him. 🙂
MBH,
Of course it's a function of your mortgage rate but, I would say in the long run you would do much better investing your $50 per month in an index fund inside a Roth IRA than you would by paying extra on your mortgage.
Read Jeremy Siegel's books, you'll see what I mean. Granted, I'm talking about the long-run (30 years or so). That's not to say that from time to time over that 30 years you won't do poorly in the market.
JLP, thanks for suggesting Jeremy Siegel — I will check out his books. He's one I haven't read yet.
I actually have the Roth IRA, 401(k), and emergency savings already covered. The only thing left is to pay down my mortgage.
My crystal ball is in the shop, but let's just say that I'm selling my index funds now, and using the proceeds to pay down my mortgage. I think that the stocks are still expensively priced compared to other things.
Please understand that I'm not saying that you're wrong for recommending an index fund. It's a diversified, low-cost, relatively easy-to-understand investment, and historically it's outperformed many things. I just don't think that it's going to outperform most things anytime soon, and of course it remains to be seen whether I guessed right or not.
The main problem is that most people I know do not actually chase wealth. There are many lending vehicles that can work for people who are willing to take on risk and properly manage the risk to accumulate wealth faster. But in the long run it is better for most people to pay down their debt first. Many people will eventually use the extra money they aren't using to pay down their debt for their day to day expenses. There is also the risk that people will invest the money in investments where they do not clearly understand the risks or likely return. (Real Estate, Insurance, Stocks etc.)
It's a question of risk. Paying down debt is 100% risk free. Investing in a stock index fund may yield you a 12% return, but it also may mean you lose money.
With mortgage rates at historic lows, there is a lot more opportunity to take risks and make money, but it makes more sense to pay down a 6% mortgage than leave the money in a 4% Emigrant Direct bank account.
It also makes a big difference that MBH is already maxing out his retirement accounts. If he weren't, that would throw a different light onto the debate.
I have read Missed Fortune 101 and Missed Fortune. I believe it is most important to change your way of thinking and to look at the big (entire) picture, including tax implications.
Everyone has their own personal set of circumstances and depending on these and where you're presently at in your life (age, retirement, etc.) these may or may not be beneficial strategies to employ at the present time. I'm in the process of checking them out now, particularly since most of my retirement is in tax deferred accounts of some type and my mortgage is paid. Future taxes start to be a real concern as you get closer to retirement age.
Risk vs reward…its the same old problem…this is just a different strategy that you may apply now or later.
I have been in the financial planning industry for 10 years and am constantly studying the better ways to help my clients. When I first read these books, it was completly against everything that I counceled my clients to do and learned growing up from my parents.
The book makes complete sense, but, everyones situation is completly different. It's all numbers. To figure out a scenario for some clients to see if these concepts will and can apply for their benefit can take from hours to weeks by running many different scenarios.This must be done by someone who has a solid understanding on how these concepts function. And to say that one financial plan is good for everyone is not true.
I would invite everyone to run the numbers, then make the judgement to decide if the plan makes sense or not.
In this day and age in which we live, it's so easy for many people to denounce something just because it goes against what they have been taught all of their lives from their parents, for example like paying off your mortgage. Remember ladies and gentlemen, it's all numbers and nothing more. Find out.
Read the book!
read book and find it most intriguing. i have not completed but on the life insurance and annuities, would wonder how the fees and commissions would eat into these wealth numbers
I would suggest that one " run the numbers"… on the Missed Forture.
When it comes to Index Life Insurance,,, it not only the numbers, but the taxes that could be owe at some point.
If the Numbers Look good to you,,, Be aware, that the " tax free Loans" are only Tax free, if the Policy stay in force… if the policy ends before you do,,, the Gain, above the Basics ( what you put in the policy,) is report to the IRS on a 1099.. that Gain, becomes Taxable income that Year, the Policy Dieds… Image, for a Minute,have a IRS 1099 form ,,, for $1,000,000 or $ 100,000.. that all taxeable Income to you.. Not long term Capital gain Income, but regular Income.. that creates a Monster… That can be avoid,if you select the right Poduct, with a Guarantee, that the Policy will not Lapes.
Always, Remmeber, it your Life and your Plans,,, Monitor your Plans on a Monthly bascis , and adjust them,,, over time,,, Do wait, until, your about to "fail" to discover, their was a Problem. Many times, a few Extra Dollars each week, over 20 or 30 years,, means the Differents, in Success and failure,,,
All the Best, in recovering Your " Missed Forture".. or Perhaps a better term would be" Managing your Income to create a Forture, Since your going to earn a fortune over a lifetime,,, it up to you to save and invest it , for yourself and your family.
Having already implemented the Missed Fortune strategies for myself. If you could purchase an insurance product that was tied to the S&P 500 and each year the interest applied couldn't go below 1% or higher then 17%. Eliminating the downside risk.
Would you be interested?
Sorry I missed the comments popping up on this thread! Good comments everyone.
Happy Investor, if the insurance product has a 1% guaranteed rate of return, that's fine, but if I borrow against my house to buy the insurance as Missed Fortune 101 suggests, I can guarantee that that rate will be more than 1%. Even if I'm not losing money on the insurance, I'm losing net every year that the insurance underperforms the rate I'm paying for the borrowed money.
Regarding the tax benefits of mortgage interest, that's already coming under fire in Congress. People have come to expect that they can deduct their mortgage interest forever. Well, it ain't necessarily so!
Running the numbers is very important for any investment. I just fail to see how these numbers add up to a gain except under the most optimistic of circumstances.
In response to what Ken said about the capital gains. HE is absolutely right! If the policy discontinues or is no longer in force, then the capital gains will apply.
If someone really knows what they are doing, then they would know the different products that companies have.
One product in particular that I enjoy allows for a rider to be put on the policy at no cost until initiated. This will not ever allow for the policy to discontinue. There are details, but this overcomes the possibility of ever having capital gains! Ever!
Well,
Opinions are like…….I am always skeptical, and still am. I am reading the book and I will have to admit, that as I am finishing the book, everything i was questioning and balking at the beginning, is starting to make sense. I will let you know!
Thanks for your comments. I'm glad that there's a lot of discussion on the Missed Fortune threads.
One thing that a friend of mine did when running some numbers for a life insurance policy is that he took the most pessimistic, most conservative return on the policy, and showed me that alongside a more typical return.
The arguments in Mr. Andrew's book do not give pessimistic predictions. Running the numbers is fine, but make sure the numbers are conservative so that you're not blindsided later.
Ask Trent Lott senator from Mississippi if paying off your home is without risk. He lost his home that was worth 700-800K and received the max allowed form flood insurance of 250K. He lost over 400K of equity. If I spend 6% on mortgage and make 4% on my side fund and I am in a 33% marginal bracket It is a 0 wash situation but by year 2 I am ahead because of compound interest.
Missed Fortune concepts are sound. The strength of the arguement begins with liquidity and safety I would rather have liquidity and safety verses lazy idle dollars trapped in equity giving me no rate of return. These concepts though they are different are better…More people need to see that even borrowing at 6% and investing at 6% gives us all a safer position and a stronger longterm investment than the alternative of paying down our debt. Look at what happened in St. George Utah last spring. 12 homes were washed down the river. 6 homeowners were debt free and 6 were leveraged to the max. Who had the safer postion and who lost the most…..
You're all wrong! It's not a function of rate of return – it's a function of taxes.
Interesting discussion especially for unsophisticated homeowner/investors.
Having read the book, how does one locate a local,competent financial planner that can run alternative scenario's, doesn't sell insurance yet has knowledge of insurance plans and investment strategies.?
I have had exposure and calls on this concept. Could be advantageous in certain circumstances. I see a major problem with the surrender charges over a long period of time in the policies. No liquidity for unexpected contingencies. A no-load policy has no surrender charges and is fully liquid, as well as very cost effecient. Just counseled an individual who had attended seminar.
In response to Allust. You won't find this person. You can, if you look hard enough, find someone who can run the CORRECT numbers on the Missed Fortune Strategy. MBhunter needs to learn how to run the illustrations and he will find that the illustrations run correctly will show the "AVERAGE" of the S&P returns (AFTER taxes). If the insurance man is not aware of TEFRA, DEFRA & TAMRA then do not request the illustrations from them, because they don't have a clue of how to do it.
I would be interested in your "counse" to the individual who attended the seminar. What are the policy you recommended returns based against? If an individual is going to cash in a poicy within 10 years they need not get in a life ins. contract at all. I'm really interested in what you recommended. rw
I haven't read the "Missed Fortune 101" yet, but I have a feeling I know the direction it takes, which seems in line with my investment-debt repayment strategy. I would like to know, for those who have read the book, if its possible to still acheive the same kind of wealth without utilizing life insurance policies at all?
Advanced thanks!
I have read Missed Fortune, and have gone to Salt Lake City to hear it from the horses mouth himself. The concepts do make sense if done right, however there is a lot more to it then just taking money out of your home and investing it into a tax free life insurance product. It would be great if it ended there, however this policy must be structured to the "T" TEFRA, DEFRA, TAMRA are just some examples. Not only that, the mortgage that you choose if crucial as well. Insurance people always seem to forget about that part. Going to your local "loan officer" is just as bad as going to your local "Term Insurance" agent for one of these products. And dont think form a minute that you can just yank out hundreds of thousands of dollars, from the equity of that home and still write off that payment. Ever heard of "acquisition endebtedness"? Look, like all great concepts out there, it works, but nothing works like its supposed to, it done wrong.
This has been a great forum about Missed Fortune. I am a "evil" mortgage professional, so it makes me laugh to see the assumed view that everyone is in a "HELOC", or high rate second mortgage if they apply the concepts in regards to investing in insurance. The last responder made a comment about making sure you speak to a qualified and competent mortgage professional…AMEN brother…that is exactly what you should be doing. Too many people think they need to jump on ELOANs, or call Uncle Sammy, because "Wink…wink", he'll do my loan for no cost..(whoops he forgot to tell you he gave you the highest rate possible to keep your fee's at zero)….yes, it even can happen within families. Bottom line, you need to be carefull with your money. But has John (the author of this blog), or any of his supporters actually sat down and compared IRA, 401k, regular savings, mutual funds, money market funds, etc, and not considered what TAXES do to the bottom line. Yes there is the ROTH 401k, but what happens to the money after you begin withdrawing it. Is it reinvested, is it just sitting now in a money market fund. There are allot of questions to ask yourself, and one of the biggest is what is Uncle Sam doing to your savings accounts!! One thing I haven't read in any of these comments is what inflation is going to do to your savings. Here is the reality people, what your Financial Planner isn't telling you is that if your younger and think 1 million or two are enough to live well and prosper, think again! Most of us 30 somethings will need much more then just no mortgage and some home we can reverse mortgage. I admire people who are thrifty, but I'm not going to live like a pauper, because that is what your going to have to do if you follow the traditional, save it in a savings account, payoff the mortgage, and then enjoy retirement!
If some of you, who are not BIASED one way or the other, but who are truley seeking the right answer, I would recommend a couple things. 1) read Missed Fortune, 2) Talk to a independent financial planner 3) Talk to someone you know who has done well and is in that golden year period of their lives. 4) Break the numbers down, MATH DOESN'T LIE, only people with agenda's do.
Now for a word of caution regarding the MF push to buy Equity indexed funds. Personally I have purchased a policy and have invested a "Portion" not all of my funds into this vehicle. I also have a portion of my funds in investment real estate, and keep a 6 month "Rainy day" fund to take care of any of those "life" events that creep up on us all. But let me warn you, not all Equity Indexed Funds are the same. The particular one I am insurred in has some basic fundemental "saftey features", that I recommend you ask your insurance agent about. #1 Does your insurance allow a NET WASH loan, and will the loan affect principal? VERY IMPORTANT if you don't want to pay out the butt in taxes. #2 Will you be able to pull out approximately the same income each year until age 100. (would be a shame to owe the IRS millions at age 95, but I wouldn't put it past the government to nail someone that age.)
Anyway, exellent posts, very entertaining, and reaffirming that I'm doing a good thing for my clients, and my family.
I am trying to start a retirement plan very late,(10 year window)and have many questions that are receiving conflicting answers. MF101 hase caused me to look at some new posibilities, but I have several questions. It seems to me that I should be first fully funding the max allowed in a Roth for both my wife and myself. Then put the allowable max in a 401k, with my Co's matching 10%, and anything over that I can afford to put aside into some kind of after tax , tax defurred investment vehical. Does this sound right? But on to my questions; KC, why withdraw money from the Roth 401 if you don't need it for immediate expenses? If it's the best vehical, should't you just leave it there? And about Al Tiner's comment; if you lose your 'Trent Lott' house and have the thing mortgaged to the hilt with the 'equity' invested in a tax free insurance product, don't you still owe the full principal of the loan against the now defunct equity, and isn't it due and payable on demand? What bank or mortgage company isn't going to come after your assets? What would this scenario do to any financial plan you were designing based on the MF101 model?
Interesting discussion. However, you need to understand two concepts before you pass judgement on the strategy. 1st you need to understand arbitrage between simple and compound interest. This concept, properly understood along with the idea that interest rates are relative are the keystone idea's. CD's are now paying over 6%, while mortgage interest rates are around 6 1/2%. Three years ago CD rates were 3-4% and mortgage rates 5-5 1/2%. In the 1980's CD rates were 12-15% and mortgage rates up to 16-18%. In other words you can expect to get interest rates on an investment slightly lower than mortgage rates. But, tax deduction aside, the arbitrage between simple and compound interest will make you hundred's of thousands of dollars over the long run. Until you understand that, then you won't understand the strategy.
But alas, most people for emotional reasons will continue to try to lose their tax deduction and park cash in their houses in order to get a 0% return on their money.
Additionally, it astounds me that people feel safer parking cash in their homes instead of in some vehicle that pays interest. Not, I. I have employed the MF strategy and sleep well knowing I can access cash whenever I need it.
Unfortunately guys and gals the answer is there is no perfect investment out there that accomplishes all your goals without some sort of consequence. IRA's 401K's and Government sponsored programs that have tax deferred savings eat up the savings within 2-3 years. Universal Life in most cases have back end loaded insurance that can eat up your investment in the end if you continue to keep the insurance and the whole life which I did not see anyone mention has such a high intitial cost that it takes 10 year plus to catch up to normal investing.
Also, when comparing Missed Fortune 101 to normal financial planning most fiancial planners that I have met do not ever ever talk about the tax consequences when you finally do have to get the money. Mostly straight line thinking…if you invest x amount and get x rate you will have x amount when you retire. No different than Missed Fortune Concepts. You do have to make some assumptions. The best advice is do what you feel best fits your needs and personality. If you are a saver and can only sleep at night if the home is paid in full then pay the home off. SAVE SAVE SAVE. (Uncle Sam will Love You For all of your Hard Work) If you understand arbitrage as mentioned in the previous reply then find a good planner that will go over all the options so that you not the planner can make the best informed decision you can. No one plan is right for everyone.
Good luck and riches to everyone…at least you are all trying to get educated and help yourself
Ah yes. The debate…For disclosure, I am a CFP and have a Master's in Tax and Financial Planning. On MF 101, there are many redeeming qualities about the book, amoungst a few flaws here and there. I find the biggest problem with people who are considering this concept is themselves. The discipline required to stick with this strategy is high. If someone will follow through and give it at least 15 years to cook, this strategy is "likely" to be much better than paying down your mortgage. Also, keep in mind this concept is not new…not even close. Doug Andrew's book forced it into the spot light, but many advisors have been selectively recommending it to certain clients for decades.
On Equity Indexed Universal Life, there probably isn't a more flexible product available offering a higher internal rate of return. You could use mutual funds, stocks, other real estate, etc and achieve positive results. But as far as a mixture of good liquidity, competitive net rate of returns over time, safety and tax advantages, EIUL is a great choice. There was a comment earlier about a life policy not having any liquidity for the first 15 years or so due to surrender charges…that is simply not true. If the life policy is structured right, with the client in mind, it's at least 80% liquid from day one. Try getting even one dollar from a CD (another guaranteed investment) before the term is up. Get ready for some serious penalties. With a correctly structured life policy, you can access up to 80% day one with no penalties. Now, you have to be careful of not causing the policy to lapse, so again, don't do this unless you are certain you have cash reserves else where for emergencies.
The bottom line in judging investments is net income it generates for you…NOT the rate of return or nest egg size. These are important factors, but not absolute determinants. When you compare net cash flows from alternative investments, it's difficult to find something that more potential…not to mention all the other benefits of not having taxable income. You are free from congress raising their hand in a vote of raising taxes…which can be absolutely crippling to someone on a fixed income in retirement and the bulk of their income is from pensions and qualified plans. I am a fee-only advisor, not working on commissions, so i have no bias in what I say. I do certainly believe that this is not for everyone. Again, I say the biggest problem with the strategy is people not being disciplined enough to let it work. If you have any doubt about it, don't start. Continue to run the numbers and get completely comfortable.
Hope this helps a little. And yes, I have implemented these strategies…years before the book came out.
I have a BSEE, MBA, Series 65, Series 7, and I’m registered tax preparer in California and I’m registering as an investment adviser in California as well. In layman’s terms, I’m pretty good at math.
I first noticed this specific strategy in newspaper advertisements for seminars that basically said 401(k)s and IRAs were stupid and there is a technique using your home that was better. How can that be? There is NOTHING that beats the tax advantage of the 401(k) and similar plans in terms of self funded deferred retirement plan.
Researching the links to the seminar, they all lead to the MF101 concept. The basic premise of interest rate arbitrage is sound. Borrow money at 4% and invest 6% should make you money in the long run.
However, as they say the devil is in the details, and in my opinion MF101 twists interest rate arbitrage into a well disguised forum to sell unregulated investments wrapped in insurance (Fixed Equity Annuities) and mortgage loans.
Let's address the 401(k) plan or the less appealing traditional deductible IRA. Either one defers taxes on income. You don’t pay any tax until you start to withdraw upon it from retirement. Furthermore, you have taken income which would have been taxed at your highest tax rate and may have shifted into lower tax rates in the future. You will pay taxes in the future, but possibly some of it at lower rates.
For example, you deferred $1 income by electing to put it into your 401(k) plan. You haven’t been taxed on it yet. If you didn’t put it into your 401(k) plan, and were in the 25% Federal and 9.3% California marginal tax rates, you got 0.657 cents in your bank account. Now assume you never earn a penny in your 401(k) plan or contribute anything else, and you don’t have any other income in the future. All you are worth is this single dollar in your retirement plan. You are now in the 5% Federal tax bracket and 1% California income tax bracket, assuming that the tax rates have not changed. Because of your standard deduction, you don’t pay any tax. The $1 in your retirement plan can now be cashed out at the full $1 vs. 65.7 cents if it wasn’t in the retirement plan. Yes this is an extreme example, but you can see how you can come out ahead by contributing to the retirement plan.
You don’t pay taxes on earning on the annuity until you withdraw it, but it is taxed at the highest tax rate. And guess what, you already paid income tax on it once when you first earned it. Let’s take that same $1 of earnings. Because you didn’t contribute to the retirement plan, you only have 65.7 cents after tax. Now you put it into an annuity. Now the earnings are subject to the full marginal tax rate again. Assume you did as poorly as you did in the 401(k) and earned nothing. All you have is the 65.7 cents vs. the $1 after cashing out of the 401(k).
But I did not take into account of the investment expense of either the 401(k) or the annuity. Since the expense of the annuity is probably double that of the 401(k), the annuity is actually a bigger loser than my example.
You can make money on interest rate arbitrage, but not the tactics used to sell MF101 and annuity products. I didn’t go into other elements of MF101, but wanted to debunk the lie that MF101 strategy is better than contributing to your 401(k).
I've been studying the MF10 Strategies for 18 months. I'm in the P&C insurance business for 25 years and I feel I have a decent layman's grasp on finances.
Investor self-discipline aside, using an equity indexed universal life policy for retirement planning is a winner.
Why?
1. Like a 401K, IRA, etc, earnings accumulate tax-free.
2. Unlike other investments, gains become guaranteed principle. In down markets, cash values still earn at least 1%. In return, upside is capped at 17%. Not bad.
3. Unlike other mutual funds, index funds, stocks, bonds, etc., the Equity Indexed UL has a "lock-in & reset" feature. Gains/losses are newly measured from year to year. There's no catching up in other words.
4. The money is safe. Safe as a T-bill? No. But close enough.
5. Here's the best argument. Withdrawls of gains are net TAX FREE because although these withdrawls are charged say, 6% interest, the money is simulataneously credited with 6%.
I can only suggest that one fully investigate the benefits of the Equity Index UL contracts before closing the lid on this subject.
As Doug Andrew points out, it's better to pay tax on the "seed" rather than the "harvest."
interesting discussion…
I am of the opinion that this is probaboy the best investmnt anyone can make …with excess funds…after the 401k has been funded (to the max matched amount)…
the arbritrage effect is the secret….and NO ONE has yet pointed out the fact that you have an enormous amount of life insurance for your benefeciaries….
the insurance is 'free' as it is purchased with the tax deductible dollars of interest that you had been paying in taxes…
an increase in your mortgage….higher payments…amortized , the majority of the payment is interest…and deductible…
so , the effect is that uncle sam is paying for the insurance..
recently, I read that if each family would paln to 'take care of' their GRANchildren, only take 2 generations to have true security …financially, anyway…
thanks
"For example, you deferred $1 income by electing to put it into your 401(k) plan. You haven’t been taxed on it yet. If you didn’t put it into your 401(k) plan, and were in the 25% Federal and 9.3% California marginal tax rates, you got 0.657 cents in your bank account. Now assume you never earn a penny in your 401(k) plan or contribute anything else, and you don’t have any other income in the future. All you are worth is this single dollar in your retirement plan. You are now in the 5% Federal tax bracket and 1% California income tax bracket, assuming that the tax rates have not changed. Because of your standard deduction, you don’t pay any tax. The $1 in your retirement plan can now be cashed out at the full $1 vs. 65.7 cents if it wasn’t in the retirement plan. Yes this is an extreme example, but you can see how you can come out ahead by contributing to the retirement plan."
and because you are now 59.5 years old, 20 years later, 1 dollar isn't worth anything because of inflation and…
"Now assume you never earn a penny in your 401(k) plan or contribute anything else, and you don’t have any other income in the future. All you are worth is this single dollar in your retirement plan. You are now in the 5% Federal tax bracket and 1% California income tax bracket, assuming that the tax rates have not changed. Because of your standard deduction, you don’t pay any tax. The $1 in your retirement plan can now be cashed out at the full $1"
you are planning to be poor….you don't have any other income. so you don't want any passive income from investment properties or any other financial vehicle. your 401K tax-is-lower-when-im-older only works if you are planning to be poor. so many people retire having contributed to their 401's for decades with less than 20K in them and they are still paying taxes because they have to work until they are 75. (you have to take the min. distribution on your 401 starting at age 70.5 so you will pay those taxes)
so many people find themselves in the same or HIGHER tax bracket in retirement, making anything but a fully matched 401 that earns 7% per year worthless (and you can out perform that 401 and have a deal benefit with an equity indexed UL which isn't any more risky than having your 401 because the 401 is in the market as well, managed by someone who only had to convince your HR girl (no gender bias intended) that they could handle the fund. and how hard do they have to work to manage a fund and keep a captive audience to invest. once your in a 401, people keep contributing even if its making 1%, because they are a captive audience and thats what they have always been taught to do.
Very interesting rebuttal to a book you have yet to read.
Pre-paying the mortgage is fine if you wish to own your home, and not worry about making the payments in the future when you retire. Plus, you can harvest more of your income by not having the burden of a mortgage.
However, the equity markets average rate of return since the late 1920's is a little over 10% per year. That is accounting for all of the up and down years in the cycle.
Home equity has an average rate of return of 0% per year. So a homeowner who decides to pay off their mortgage makes a 0% rate of return on their money. The benefit is you now own your home outright, the drawback is you have hundreds of thousands of dollars sitting there making you nothing (unless you sell).
If you choose to payoff your mortgage, you should have an awesome AD&D Insurance policy incase something happens to you. Also, a good term insurance policy to match the length of the mortgage is something to consider.
The sensible option would be to refinance at a steady rate of every 2 to 3 years, pay off your debts, and take the equity out and invest it. Take the $50 per month extra that you pay into the mortgage, and dollar cost average that into a good dividend paying investment or an investment tied to a market index.
With the variety of mortgages available these days, you can do this with as little outflow of money as possible. With these mortgages you can actually have more money from your paycheck every month. Now you can have your cake and eat it too! You're making money on your money, a tradition that has been making banks profitable forever!
Sure you'll experience up and down years, and that's typical of investing. If you can't take the good with the bad, then keep your money in the bank and let the savings account rate grow your money and inflation eat it up.
So you don't own your home, well big deal. Oh, and what about the closing cost involved with the refi? Well, your home will generally appreciate just sitting there so those closing cost disappear in no time at all. If it costs a couple of thousand dollars to get multiple times that money would you do it? Of course you would.
Now take the person who refi's and fast forward to the future when they retire. Well, they still have a mortgage payment. Although, they have a significant investment portfolio built up from the increases in the equity they invested plus the money they would have used to pay down their mortgage (dollar cost averaged into an investment). They took the good with the bad with their investments but still came out ahead. A lot of the times, they end up with enough to pay off the house outright, and have money left over in their portfolio. A lot better off then the person who paid the house off entirely. They have more options in their retirement then their neighbor who paid off their home.
People do not get rich by owning things, they get rich because of leverage. If you decide to pay off your home, you single handedly eliminate a big asset that can provide leverage.
So be smart, don't pay off your home, let your money work for you. Make money on your money at all times. Use your 401(k) for a tax deduction, and use your home for your retirement account. It's not only a place to live, it's your own personal bank, so use it. Be smart and leverage.
MBH,
I disagree with you 100%, and I hope that your impact is minimal. For you to knock an idea that you know nothing about is irresponsible. Not only are you misleading yourself, but you are possible misleading others. Equity Indexed Universal Life is the greatest passive investment that exists today. Also, the individual’s mortgage payment doesn’t increase, because they would use either an Interest only or Negative Amortization loan. These types of loans are very appealing because they maximize your tax deductibility while maintaining your basis in the house. Obviously, if you are a financial jellyfish, this won’t work, because it requires that you save and invest, not spend the difference.
obviously Sir, you have no idea about how money works or that you can get better then 10% return on your money…It's ok cause it's people such as you who make the Banks rich and you wonder why you have no money for retirement or for your kids college fund. Oh and even if you did, you are wondering why you're paying sooo much in taxes and making the government rich…I know of many investments that have returned 18+% over the past 20+ years…but you wouldn't have known that if you didn't pay an advisor to find out about those types of things. Its a good thing that there are firms out there that can show you these types of investments ("tax now" and "tax never") without a charge to you… at least you would get a good education. Too bad you know it all
Dr. Mr. john chu,
you must be new to the investment advisor business or you are just misinformed like many others…to put it plainly after 3 years you are paying more in taxes from a government qualified plan then if you had taken the tax hit upfront and put the money into an investment grade insurance contract (even with the cost of insurance). I worked the numbers and you just past with a 70% or better on a couple tests. hope your clients know your not doing what is best for them…
Although I make a living investing, I decided to pay off my mortgage. I have gained a feeling of mental freedom allowing me to be more creative and productive than before I paid it off. Even now, I know I could take out the money and invest it and probably do nicely….I won't because it makes me so happy inside to not have a mortgage. It makes me excited to actually work harder in my business because paradoxically I feel I have been "rewarded" for my work up til now, and I feel motivated to earn more to get another "reward". I mulled it over and over, and now that it is paid off, when I think about how much more I could be earning with the money, I just tell myself at those times I am being a small thinker….because if I just had that so-called $250,000 in my pocket I could be earning…oh so much more…..I tell myself to go out and do it again!
The truth is, there does not have to be any risk at all to invest your cash vs. pay down your mortgage. For instance, a $50,000 mortgage on a fixed interest rate of 6.5% will have a payment of $316.03 per month for 30 years. At the end of 30 years, the mortgage balance will be $0, and you would have made total payments of $113,770.80. On the other hand, if you would have invested the cash in an annuity or other investment that guarantees a rate of only 5%, at the end of year 30, you would have an investment account worth $216,097. Keep in mind; this does not take into consideration any tax benefits of having a mortgage, or tax consequences for the investment account gain. It is purely an example of borrowing on a 30 year fixed rate amortizing mortgage at an interest rate of 6.5%, and investing the proceeds at 5%. If the example of borrowing at 6.5% and invest earning 5% is profitable, imagine if you can earn 6.5% or higher on the investment account….
I am a recent college graduate who picked up this book from the advice of a friend, and enjoyed the new financial perspective this book provided so much I finished it in one sitting. The principles in the book seem sound, but as they say "the devil's in the details." I just started my career which provides a steady income, and will have all my debt from college paid off next month. I recently moved back in with my parents (a temporary inconvenience) in order to save for a down payment on my first home. I was orginally planning on saving for a 20% down-payment (no small feat in my area), but after reading this book I am no longer sure this is the way to go. My question is this. Is it wise to borrow 100% of the cost of the home? (MF101 says yes, but in his examples people put down the 20%) How does the cost of Mortgage insurance affect the scenario?
Thanks for the lively and informative debate. I have read other books that say the best way is to not have debt, automatically save every month, etc., etc. None ever really talk about the tax ramifications down the road, especially if you end up in the same tax bracket or higher. I currently am contributing to a Roth IRA and my company matched 401K (only 2/3rds up to 6% –> so 4%) and need a place to put the rest of my money. Before this book it was going to be in paying down a mortgage…
Bottom line for me is this. It's hard to argue that equity returning 0%, is better than an investment vehicle with a gauranteed rate of return, as long as that rate of return is at least the same as (because of the compounding effect) what it costs you to leverage that money. Especially since you can use money that would have otherwise gone to Uncle Sam. I guess the tricky part is finding out which investment vehicle can do that (EIUL?). Off to do some research…
Cheers
The mortgage issurance can be taken out with an 80% first and a 20% second mortgage.
This has been really interesting, some good and some bad. I've been in the Financial industry for over 15 years, and I studied this concept for about 18 months before I personally implemented it for myself as one of my personal financial strategy (not the only one) so I know that if I would sell it only if I would do it. I also went through numerous different programs that offer similar strategies before adding the strategies in my company. I believe Doug did an awesome job in being as thorough as he can (NO ONE IS PERFECT) on educating people on the different "typical" investments – cd's , mutual funds, etc. and power of equity and right type of mortgage and using the equity index strategies. He did openly also talk about IRS laws pertaining mortgage deductibility and insurance tax regulations on chapter 9 thru 11 of missed fortune 101. This not new but like someone said, doug was the one to put into the spotlight. Ric Edelman "new rules of money" have also preached that its better not to payoff mortgage and invest the difference in some safe, investment account. Like someone says, this is not for everyone but No one should ever say that this is bad advice either because its a very sound advice. It is not for the financial jelly fish or people that spend every penny they see available but for most people especially baby boomers that got started late and they are equity rich cash poor, this is a very viable solution. One way to Turbo charge their retirement. Too many people that are naysayers seem to always focus on the down side and hardly ever look at the upside. When we talk about the 1% guarantee, someone always says …well but you're paying mortgage at 6.5% so you're losing money. Thats true but what about the times when the market does 10-35% growth and you are given a guarantee of up to 12 or even 17%. All we can go with is historical results but remember the only 3 straight years of down market (-0 growth) in the past 80 years was 4 years ago and historical average has been 10% and that's with the up and down side of the market. When you have a 0-2% principal guarantee with a 12% cap, it is justifiable to illustrate a 7.49% average growth or if you have a 1% floor and 17% cap, it would be justifiable to have a 9.38% illustration average. The other magic of the whole thing is also the loan provision and its crediting factor. Depending on the company, some have a 0 spread loan, some have variable loans where there are times you will make interest on money you borrowed (borrowed at 6%, credited in the account 7.49% so a net gain on even money you borrowed of 1.49%). and there are times that money you borrowed will actually cost you some interest. Again, based on historical results, for the most part you will still gain on money borrowed which is used as income during retirement years. This also why you can't just base everything on rate of return. An equity index universal life has great flexibility, growth potential, and results that I understand can be done many different ways…but you would need different financial instruments to achieve the same results which is fine, but MOST people do not take enough time to understand all those instruments. On top of that, there's the death benefit. I also ran numbers comparing long term total accumulation and actual net income. If you use the Equity Index strategies over or instead of a typical 401K way out perform the 401K when it comes time for withdrawals for income. A lot is due to taxation against a 401K and positive on the loan provision. Sadly i found too many people with 50-100-200K in their 401K do not know hardly anything about their funds. When a lot of them lost money during the down years, most did not know they have options to secure their funds. If that's the case, I'd rather put people into this strategy than your typical 401k or IRA for retirement….and the added benefit of life insurance. One last note, when people worry about the mortgage so much, or the equity, people forget to look at how unsafe our equity can be in our homes too. What about the fact that homes in many areas had lost money last year. One of my homes in california went from being $775K to $660K in about 1 year…what do you call that loss.
Would you be interested in reviewing on Mightybargainhunter.com
THE LAST CHANCE MILLIONAIRE
It’s Not Too Late to Become Wealthy
By Douglas R. Andrew
For the millions of Baby Boomers facing retirement, here is a brilliant—and refreshingly contrarian—guide to accumulating wealth and security regardless of age, income, or current assets.
http://www.hachettebookgroupusa.com/books/44/0446…
If yes, please forward a mailing address.
While there may be great debate about the strategies and investment vehicles mentioned in Missed Fortune, I believe all could agree that at least it makes you think a little bit. This is not the sort of education we receive in this country and considering the financial state of many families, we should get this type of education. Bottom line is everyone has to do what they are comfortable with. Even if you may be making more by refinancing the equity in your home, if you can't sleep at night because of it, this type of investment is not worth it for you.
What I think Missed Fortune neglects to talk much about is the time value of money. He demonstrates several examples of accumulating $1M over a 30-year period. Who thinks $1M in 30 years will buy you what $1M today will? If you assume even a modest inflation of 3%/year, over a 30 year period that's 90% so you would need almost twice as much money in 30 years as you do today. Even in his tax-free environment I believe this merits some discussion in his book. Aside from that I did learn quite a bit, whether or not I agree with his insurance vehicles.
I HAVE read "Missed fortune 101" and the most interesting aspect of using your "locked" up equity is 1.)the growth factor and liquidity of your investment grade life insurance fund, 2.) the tax deferral of the interest left on that loan when you start dispursements from 401k, IRA or annuity that are going to be taxable, 3.)the best of all is the growth in the life insurance policy is disbursed tax "FREE"
Too much noise. This is a relatively easy and good concept. The real issue is: where are the alternative Equity Indexed Universal Life opportunities that will get you 7.75% (net)??? If you can tell me some good oportunities, then it is a no-brainer to invest taken-out equity financed well below the 7.75%. Can anyone point me to the best EIUL vehicles???
MRL — My financial adviser took the course with Douglas Andrews and he put me in a policy called Master Choice Group Flexible Premium Life Insurance with Equity Index option by OM Financial Life Insurance company. I think it is out of Amsterdam. It follows the Index 500 with a minimum of 1% cap and a maximum of 17% cap. It also has an annual reset period which reestablishes my initial investment yearly and never lets it go below that point. This was for the equity money that I had in my house. It has averaged 9.18% over the last 17 years. It has no lapse guarantees and decreasing insurance premium rates because the insurance premiums are high at the beginning but only 1% of the policy value. My 401K was put in a different type of insurance policy with a little more risk but is being actively managed by Foxhall Capital Management Inc. which charges approximately 1.2% but has averaged 12.5% return over the past 12 years. Hope this helps.– SS
MLR,
Currently the best EIULs are with Old Mutual and if you are not doing home equity then Avia. Lincoln Financial has a pretty good product too!
The Missed Forutne Concepts are indeed contrarian. People tend to be affraid of things that they dont understand. Its obvious isn't it? The product for the OM product is currently averaging 9.18% tax-free which could be as much as 12.5%+ taxable.
Investing at a rate that is tax-deductible and getting a higher rate tax-free…need we say more? Let's not make this complicated!
Apperently all the concepts in the book weren't understood. The purpose of this concept is to LEVARGE your asset (Home) to INCREASE Cash Flow. Cash Flow for what? To Build a NEST EGG. If you're a person with enough cash flow to overfund your qualified retirement accounts and then some then maybe this strategy might not be for you. However, I can still make a compeling argument that even if someone with much money socked away should still consider the negatives of paying off your mortgage. #1 Tax consequence= even though you'll be in a lwer tax bracket when you retire you also have less deductions so having a mortgage will help you with deductions. #2 Safety = how safe is your money trapped in your home equity? If your in a down market like the one we're in your equity will drop hence you've lost money. #3 Liquidity = How liquid is your equity when you retire. What if you encounter health isuues or some unforseen event. You MIGHT not qualify for a refinance and if you have to sell in a down market guess what you won't sell it SO QUICK. Hence making it UNSAFE AND UNLIQUID.
In Conclusion, to all the people who try to dispell the concept of missed fortune. Try re evaluating your knowledge and consider expanding you financial horizon. To the ones who don't understand all the concepts keep studying the WEALTHY and see how they're doing it.
Pete Colon
Miami, FL
786-399-7412
There are many good IUL products. Its just a matter of doing your research and seeing which ones cap you out and wich ones have a lower Cost of insurance. You should look at the AmerUS-AVIVA, F&G product, National & Prudential.
Pete Colon
786-399-7412
EIUL is a scam, that's why Dateline NBC just did an expose on the people that sell them. What makes sense is a Northwestern Mutual WL policy that has averaged 7.5% – 9.0% over the past 30 years with relatively zero market risk. John Bogel the founder of Vanguard says that the average 60/40 investor who gets 8% ROR over time will make out fine. The more you can reduce the negative ROR over the years, the better the investment ROR will be. I belive in "interest cancellation", not leveraging your mortgage. You can take a 30 YR mortgage and reduce it to less than 10 YRS without paying anymore than you're paying currently with MMA software. A 3K investment in the S/W is worth the 50K of interest you can cancel in just 1 YR.
Jeff V
I challenge your above assertions with the following facts
1. Dateline's NBC special was on Equity Indexex Annuities ONLY, not Universal Life Insurance – 2 entirely different products
2. Whole life has proven to be the biggest sham on planet earth – just look at what MILLIONS of people were doing with them in the late 70s & early 80s – CASHING THEM IN !
Interesting comments on an on going thread (subject matter), but here are a few thoughts from a insurance professional with over 24 years experience.
1. If it sounds too good to be true, believe it, it’s NOT;
2. Check out the author, and I mean not what him/her state in their publications, but their credentials to be able to make their claims;
3. What connects do they have to any company offering any products in conjunction with the subject matter;
4. Are there any creditable resources to substantiate the author’s claims? And lastly;
5. Ask yourself one simple question: If this proposed idea, is so wonderful, why is not everyone promoting it?
I have personally read the authors books and found that 99.8% contain the same essential “message,“ any investment outside of his idea is poor planning. Regardless of the fact that one would be putting all their “eggs into one basket.” Only on one does he state any real warning.
As one who has reviewed several of the authors proposals, let me offer up some items:
1. I did not find any direct comparison of what the individual had to what was being proposed. WHY? It would seem prudent that one would want to see a direct comparison, would they not?
2. The idea being suggested that one can get a mortgage interest rate deduction beyond $100,000 is ludicrous, refer to IRC section 163a.
3. IRC 264a states very clearly that any interest on a loan to purchase a life insurance contract is NOT deductible. And this is what has been proposed.
4. He suggests “investment grade life insurance companies.” One individual in this thread claimed to be with “OM.” One of the companies the author claimed was an investment grade company. By their website (http://www.omfn.com/about/Financials.aspx) they are rated by AM Best as an “A,” Fitch “BBB” and by Moody’s as Baa1,” with no rating by Standard & Poor’s. This may not seem terrible, except when you look at the ratings of another company mention in this thread, Northwestern Mutual. There rating across the board from all four rating services is “AAA.” My simple question here would be, if you were one who needed surgery, would you want a doctor who received all “A’s” or partial “A’s) in medical school?
5. If one were to look at any proposal offering up an Equity Index Universal Life, one would find the “illustrated” interest rate around “7.5% to 9%” based upon some “look back period of the S&P 500 Index fund (10, 15, 20 0r even 54 years). Not bad rates, except the continuous annual growth rate of the fund has been only 5.9% since it’s incept in 1926 without the benefit of reinvested dividends!
A reasonable question here should be, “what proof do you offer to back your claims?” Then I would refer you to the following web sites and let you read for yourself.
http://www.seniormarketexpo.com/r/WPI/d/contentFo…
Burns, Scott. “What’s missing is reality.” Dallas Morning News September 3, 2005.
Burns, Scott. “If you follow author’s advice, you could lose a bundle.” Dallas Morning News December 29, 2005.
Cruz, Humberto. “Life insurance investment might be worth a very careful look.” Milwaukee Journal Sentinel September 10, 2005.
Cruz, Humberto. “Fighting back against those who target the elderly.” Tribune Media Services November 27, 2005.
Johnson, Shane. “Once we were lost.” Salt Lake City Weekly December 29, 2005.
Katt, Peter. Life Insurance Perspectives: “Missed Fortune 101.” February 2006.
NASD Investor Alert, “Betting the Ranch: Risking Your Home to Buy Securities.” March15, 2004
Although fortune 101 could be a good thing. A couple of things I found out the hard way is that you need to do this when your younger not when your ready to retire, Because it takes 7yrs to fully fund a life insurance policy in which time your premiums are extremely high and there's not much money to borrow until it is completely funded. Also your only allowed to put so much in th policy each year so you have to put the rest of your mortgage money into low interest liquid accounts probably 3%. so you can lose money in 3 ways. The difference between 3% and a 6.5% mortgage, high premium rates, and a stock market like we have now. Also once your money is in the insurance policy your stuck with the funds that the policy offers and nothing else. So after 7yrs not much of your money is left to borrow from. One other point is to make sure that your policy is a fixed indexed insurance policy and not a variable indexed insurance policy. The fixed index has the minimum and maximum cap, but the variable indexed is at the wim of the market ,and in this market, you probably would have lost half of everything (but there is the opportunity to make more) and not only had 7yrs but also the time it takes the market to recoup which is ok for some one a little younger and not ready to retire. Hope this helps to anybody whose making decisions about this type of investment.