Written By — David Shafer
I always find it amusing when folks forget about the important things and instead concentrate on the minutiae. Not that the details aren’t important [they are], it’s just easy to go off the reservation getting into the small details. Whenever I talk to people about EIULs we start by talking about overall strategy. Once we have an understanding of overall strategy we can then talk about how an EIUL might fit into the big picture. But inevitably, clients want to delve down into the details of EIULs, and sometimes we get lost in those details. Because its my business to totally understand EIULs and to communicate that to clients, I often have to draw it back to the big picture. Sometimes I fail at that. Like recently when a potential client wrote me that he and his wife had decided to fund her 401K instead of fund an EIUL. We had gotten so wrapped up in the numbers inside the EIUL that we forgot the real reasons for choosing an EIUL [taxes, doesn’t drop below zero, etc.].
If you think that EIULs might fit into your overall strategy, let’s talk. But let’s remember why we like EIULs so much!
BawldGuy Here: Dave underlines a great point, which I try to make here as often as possible. Much of what keepin’ your eye on the ball, is simply keepin’ the big picture sharply focused. The idea in your overall Purposeful Plan is to retire sooner rather than later — with more rather than less — and with as much of your income as possible either tax sheltered or tax free.
The rest? Mostly happy talk.
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Hypothetically speaking, what if said client was only contributing up to the limit of their company match? As part of their strategy, are you postulating they should ingore a 100% match and invest in the EIUL instead?
Troy — I’m gonna let Dave answer your question, as he’s ‘the guy’ on this topic.
My question to you, acting as Devil’s Advocate: If you’d been executing your method of contribution for awhile, built it up to $500K, and it dropped to $300K almost overnight, how would you respond? On the other hand, if for the same time period you’d been investing with after tax money in an EIUL, you’d have experienced NO losing years EVER.
Folks takin’ the EIUL route lost nothing in the latest market crash. Furthermore, when taken over the last 20 years, they’ve not had a losing year once. How many with ‘employer matching’ 401k’s can say that? How much is it worth when 20-40% of the time, they’re not growing their capital, they’re playing catch-up from the last downturn?
Losing 35-50% of your last decade of earnings in a week or so, compared to never ever having a losing year. Talk to EIUL owners who weren’t even aware of the stock market crash to find out the difference. In that year they made 0-2% on their capital.
Make sense?
Troy, How are you doing? The potential client I talked about in my post did not have a company match. For those with a match, the call becomes less mathematically derived, and more about how sure you are about what will happen in your future. Bawld Guy is right for both emotional and mathematical reasons which I will comment on at the end. I think I will write my next post about this very subject since it is a great question, but for now I will outline the strategic issues in this decision:
Everyone thinks they will live a long and fruitful life, but that is rarely the case. Most folks go through a time period when they are pressed financially [job loss, sickness, etc.]. And 22% of males currently in their 30s will not live to retirement age. These two facts point to two issues with 401Ks. There are serious limitations to get at your money and when you do there are sometimes penalties and taxes to pay. Now if everyone was guaranteed to not need their money before age 59 1/2 and to live a good long time then if you got a match you would wan’t to use the 401K. But we aren’t guaranteed anything like that. So here is what happens FOR THE MAJORITY. They will access their 401K early and pay taxes and penalties.
Since most people invest in mutual funds inside their 401K some discussion needs to be focused on this. First, most employers only offer expensive mutual funds to invest in. In fact the average fees on employer based mutual funds is over 2%. Beside the fees there is the actual results of individuals investing in mutual funds. For the last 20 years the actual rate of return for individuals investing in mutual funds is 3.17% [Dalbar, Inc. Studies]. Another issue is the sequence of returns problem which is what Bawld Guy was talking about. If you happen to want to retire within 5 years either way of a serious bear market then you will have serious issues because negative returns are devastating and need large amounts of time to recover from [something retiree's don't have].
In my next post I will go into more detail about all this along with other issues. The bottom line is that it is generally not a great idea to assume the best possible future to make these decisions. It much more sound advice to consider what is likely to happen and proceed from there. Hope this helps and if there is anything particular you want me to cover in the post on this subject let me know!
And that’s why David Shafer is a contributor here. He flat knows what he’s talkin’ about — a slam dunk expert. He’s one of the best decisions I’ve ever made.
Oh, this is a great option for a family that has disposable income, needs life insurance, and has kids.
If you need a “reference” feel free to have them get in touch with me and I’ll happily show them our situation (3 kids between 13 and 1, one with Down syndrome, able to put $1,000+ per month into over-funding a policy) – and can show them our own projections.
Happy to do that for the BawldGuy or anyone else. It’s a good deal people just don’t know about.