I’m often asked about the relative value of investment capital and/or cash flow. The question refers to the present and future value of money. A simple example would be the query:
If you know the yield on invested capital will be 10%, what’s better to have — $100,000 in 5 years — OR — $55,000 today?
I’ll leave the answer to you. 
A reader made a comment. He asked if the income from an EIUL I’d quantified, was present or future value. The income was structured to begin 25 years from the inception of the policy.
My answer
Since it’s not realized for 25 years, it’s definitely not present value. A fair analogy would be those who use present dollars to buy real estate, borrowing more present dollars to finalize the acquisition. They plan to retire after slowly but surely paying the loan off with future cash flow + future job income, resulting in future debt free cash flow.
Much like the EIUL, real estate cash flow in retirement is, necessarily not ‘present value’.
Your question points out a downside to all cash flow generated by long term investment. We can never really know/understand the present value of future cash flow — at least until we’ve arrive at a particular point in that future. We can impute the unknowns in the equation to estimate it, but that’s all it would be, an estimate. Will it be worth more or less? The normal answer is that with assumed inflation, future dollars will be less valuable.
The thing is, though, the question you’d really like answered, is this.
How, given the aforementioned inflation assumption, how do we protect ourselves from less valuable future dollars?
Real estate values have, historically, pretty much tracked with inflation. The same is true of rents, more or less. Add the second retirement income basket that generates tax free income (EIUL), and you’ve successfully, at least to a great extent, insulated yourself from the dollar’s erosion.
The reason tax free income from the EIUL helps fight inflation, is more practical in nature. If your state/fed combined tax bracket is around 30%, this means the $100,000 EIUL annual income represents the equivalent of around $143,000. (just under) ‘Course, all that means to the real estate investor whose portfolio sports an EIUL, is that over a period of 15-35 years, retirement cash flows subject to taxes must be higher to produce the same income as those cash flows which escape taxation.
And the congregation replied, Duh!.
BawldGuy Takeaway: As Captain Obvious would say, “All retirement cash flow is, for those yet to retire, by definition a ‘future value’.” When a portion of that income is tax free, it effectively has helped shield the investor from years of inflation by the avoidance of taxation.
Therefore: In the above example, $100,000 of tax free income equals roughly $143,000 in taxable income. The major scoop here?
Tax free income in retirement is incredibly cool.
It’d also be cool if you called me at 619 889-7100. Rather write? Just click the Contact BawldGuy button up top. Together, we’ll figure out how to get you to the retirement you’ve always wanted. Have a good one.
This is why people must understand that an EIUL, BY ITSELF, is not enough to build a retirement strategy around. $100,000 25 years from now may be effectively like $50,000 today. It’s value is that your 401k probably won’t yield $100,000. But in both scenarios, you need SOMETHING ELSE to retire nicely, and that is real estate cash flow.
Exactly, Greg. What the EIUL adds is a second, stand-alone income source, AND that it’s tax free. The real estate income is also superbly reliable and better yet, offers the net worth allowing tax free cash in lump sump form if necessary.