Comments on: Real Time Example — Why You Wanna Do Things On Purpose

By: BawldGuy

BawldGuy — Wed, 22 Oct 2008 05:32:04 +0000

We do make a pretty good team, don’t we?

By: Joshua

Joshua — Wed, 22 Oct 2008 04:06:46 +0000

I think Jeff and David should go into business together and give the one-two punch for us so we don’t have to worry about it.

By: The Verdict Is In | BloodhoundBlog: National real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments

Wed, 22 Oct 2008 03:14:25 +0000

[...] Then why do we advise many of them to separate some of the real estate investment capital from their pile in order to acquire an EIUL? Simple — it’s the right thing to do. Yesterday I posted what happened to those who refused to believe me last year. [...]

By: BawldGuy

BawldGuy — Tue, 21 Oct 2008 19:38:41 +0000

And the congregation said, Amen! Thanks Dave.

By: David Shafer

David Shafer — Tue, 21 Oct 2008 19:14:43 +0000

Here’s my thinking on taking the company match.
1st, like Bawld Guy I get tired of dealing with that battle. Instead I have learned to fight the battles you can win and wait for an opportunity to win the war. Which brings me to the second point. In the current environment, most workers change jobs more than every 10 years (actually it is like every five years on average). Each time there is a job change you have an opportunity to transfer you 401K to an IRA. This opportunity means you can either transfer it into a brokerage IRA or even a self directed IRA and redirect the funds to stocks, low expense mutual funds or to real estate. These additional options allow a fruitful conversation to happen and perhaps even a purposeful plan. Once you have options to use leverage or more conservatively to employ long term value investing or even to purchase Berkshire Hathaway (not that I am telling anyone what stocks to own!) with its 21% 44 year rate of return! The point being once YOU have control of your funds you can become an active investor and improve the rate of return to actually build wealth.

Unfortunately you are still going to have to pay the taxman, but at least you have real money in which to pay!

Hopefully, you also funded a EIUL and real estate outside of the IRA, which allows you to skip the taxman for access to the majority of your wealth. If you are getting $100,000 of income from your IRA which is taxed and have a stream of income available from your real estate and EIUL that is even larger you are still in good shape tax wise.

However, David is right with the math of 401Ks and the match at higher than 25% tax rates. You are better off with your money outside of any tax deferred wrapper. You can even roll it out of 401ks paying the 10% penalty and the income tax and do better with it! I admit I don’t like anyone (even the government) telling me when and how I can invest/access my money, so for me a little pain now is well worth that freedom down the line!

By: BawldGuy

BawldGuy — Tue, 21 Oct 2008 18:14:19 +0000

Scooter — I tilted the numbers in favor of 401k’s and slightly against EIUL’s. I’ll stick with my numbers when applied in the real world with what both are really returning.

You point though, is well taken. It’s just that in the real world the difference is even larger than you and I are saying.

Thanks for hanging around, and please don’t be a stranger.

By: Scooter

Scooter — Tue, 21 Oct 2008 18:08:40 +0000

Bawld Guy –

I agree that it’s after tax income at retirement that counts. So one needs to account for taxes on both ends in this example.

Since it requires about $25K more over 10 years to get the 151K than the 90K, it needs to be accounted for. This still favors the EIUL in your example, but more like a 25-30K advantage than a 60K advantage.

Now, about that tax free income from the EIULs … that would give them a huge advantage over 401ks which are taxed at income rates (as opposed to capital gains rates).

By: BawldGuy

BawldGuy — Tue, 21 Oct 2008 17:51:15 +0000

David — Busted! You are correctamundo on my 180. I tired of those who wouldn’t do the numbers. Ironically, Dave Shafer has taken the same stance, though possibly for different reasons. I’ll let him speak for himself.

The tax advantages EIUL’s have over 401k’s are so monumental as to be laughable.

Mr. Shafer?

By: BawldGuy

BawldGuy — Tue, 21 Oct 2008 17:04:10 +0000

Scooter — What you say is correct — at least as far as it goes. The fundamental problem is what I alluded to in the post. Uncle Sam’s bait. It’s what you’re making your point with.

Here’s the rub.

That $7,000 saves the taxpayer the money you said. In CA it saves him roughly $2,500 or so. If he puts in the whole $10,000 a year, then as he ages and earns more, increases that to say, $15,000, he’ll likely end up with around $1.5 Million at retirement.

If he then switches from the historically poorly performing mutual funds to income instruments, he’ll be able to generate an annual retirement income of give or take, $100,000. Using your marginal rates, it would take at most, around 4-6 years for him to pay back all the so called ‘tax savings’ of the 30 years it took to get there.

The income from his EIUL on the other hand, will be tax free. Furthermore, when he dies, his heirs will not pay a dime in death tax, compared to virtually dividing his 401k in half via that tax.

Also, there’s no tax or penalty for taking money out for any reason from the EIUL, not to mention the fact it doesn’t have to be paid back if it’s been funded properly. The idea Scooter, is to hit retirement with the biggest NET income, (after tax) as possible. The 401k is the highest taxed approach to take.

So, I ask again — Why would anyone do that on purpose?

I think Dave will have a far more detailed answer than this one, as he’s the expert. Dave?

By: Scooter

Scooter — Tue, 21 Oct 2008 16:34:49 +0000

I agree that EIUL’s make sense as part of a balanced retirement plan along with real estate, 401ks and Roth IRAs. However, I have a question about the example above. You assumed that $7 k was put into EIUL versus the 401K. However, the 401k contribution was pre-tax. Can I contribute to an EIUL pre-tax ? If not, you must discount the amount available to invest in EIUL by some percentage to make an aplles to apples comparison.

For someone in the 28% Federal and 9.3% state (CA) marginal tax bracket, this reduces the amount available for investment in EIUL down to about $4400 in the example.

This makes the comparison much closer (I come up with something like 62K from the EIUL accounting for after tax contributions), so the difference is closer but still favors EIUL in the example.