Comments from throughout the post have been added to OP
As it seems the Bunker is on a revolving path each month and many different views are shared regarding personal finance, we can use this post as a depository for questions. Notice I did not say debate. Until things change, below is verifiable proof from reputable sources, Warren Buffett being one, financial planning is not about how much you earn on your investment but about how much you get to keep.
Whole life insurance, from certain mutual companies, is imperative to maximizing retirement income. No ifs, ands or buts.
In this academic article, Dr. Wade Pfau provides mathematical proof that "buy term and invest the difference" is not the most efficient means for creating retirement income. His analysis concludes the use of insurance products creates exponentially more income by including actuarial science (insurance products) in your planning to improve cash flow later.
In this article, Business Insider shares with us that Warren Buffett, the greatest investor of all time, uses insurance "float" to earn billions of dollars over his career. "It's really no wonder that Warren Buffett is the second richest person in the world." You can also use insurance "float" within whole life insurance to maximize cash flow, specifically, retirement cash flow.
*Many will try to disprove the above tenets but they will not use facts or mathematical based arguments. They will believe and try to make you beleive they are using facts but they have not taken the time to apply the principles mentioned above to any calculations. They will digitally scream and pout but, to no avail.
Below is the application of said tenets. A comparison between a Life Insurance Retirement Plan and a 401k. Yes, the LIRP has more being contributed, $50,000 compared to $18,500 in the 401k. That is kind of the point. We can't put anymore into a 401k because the IRS says no. The first $24,000 (married) contributed to the LIRP is pre-tax just like the 401k. However, the 401k pays 20% tax at distribution.
Below is using the same WL policy but implementing "float." Notice the CV has greatly increased due to the additional earnings from the float return being applied as "Loan Pay". Also, income increased to $125,000/year vs $105,000/year in the previous illustration.
The last illustration is the actual policy print out from one of the companies we use. This illustration was based on info from WarEagleG*. The CV is less than the previous illustration because the float interest can not be applied into their software.
*G has yet to implement said plan.
Requested $18k/$18k comparison.
Fine print: The WL CV includes $10,000/year in recouped expense opportunity cost starting Year 5. The 401k contribution increases 2% each year based on inflation/raises/potential company match (all of which are variable). The S&P growth is a flat average the entire illustration. No sequence of returns risk. This favors the pro-qualified plan argument.What's not included is any potential SS benefit and how the 401k will reduce the amount available due to SS benefits becoming taxable after surpassing the Ordinary Income threshold.
Rebuttal's
@vanmichel
"Your numbers for the 401k don't make sense. You quote it as 6.79% annually but then you add in 2% inflation. The 7% historical rate of return already accounts for inflation. If you're going to add in inflation as a separate calculation, you need to use the actual historical return of the S&P which is closer to 12%."
As was mentioned in the footnote, the 6.79% return helped your argument. Average annual return is a gimmick and the real number to use is the CAGR. Also, inflation was applied to increasing the 401k contribution and showing how much you would need to bring in to spend $85,000/year 29 years from now. I also did not include sequence of return risk during the distribution phase, while keeping taxes lower than even today's rates. The illustration is the best case scenario for your strategy.
I can give you the best avg. market return period, 1970-1999, which had an avg. annual return of 14.86%. Set the withdrawal rate to 4% and use the same periods sequence of returns and you will run out of money in year 14. It's not about how much you make but how much you get to keep.
[/QUOTE]"You're also withdrawing too much money from the 401k. An $85k withdrawal rate requires at a minimum, $2.125 MM just using the 4% rule. A more conservative rate of 3.5% needs $2.429 MM."[/QUOTE]
I'm withdrawing too much money?!?! Why do you not want to have more in retirement? By saying the illustration is withdrawing to much money, is saying your strategy requires you and others to fail.
Academia has found the actual withdrawal rate is 2.6% if you want a 99% probability of success. Problem is 2.6% in today's dollars is only $55,250 of the $2.125MM. Also, a $25,500 contribution (which is 2.08X the avg. for a person with $100k annual income and exceeds the $18,500 limit) each year into a 401k for 29 years only grows to $1,726,639.51. You're missing $400,000 to even make it 14 years. This is exactly why you must add actuarial science to your planning.
"Using an extremely conservative growth rate of 7% and inflation of 3% (aka only 4% annual return) on the $2.125MM, your portfolio ends with an average of $1.576MM after 40 years of retirement NOT including any social security or a pension."
Please see above for why this math is not correct.
[U]@Weagle09[/U]
Hah. Your position starts to lose ground and your first reaction is to claim it’s over my head. The only reason I can’t post a clear model that disproves your position is because I can’t replicate your funny money insurance projections and favorable assumptions. I’ll add the taxability of social security and an arbitrage on the loans and still show you that the qualified plan plus match ‘first’ provides better outcomes. You also fail to explain the state of the market at the time of or nearing retirement affects the arbitrage on the loan and wherewithal to pay back the policy loans.
No, you're actively choosing to not understand. I provided an illustration where a total of $716,000 was contributed to a 401k (far exceeding the avg. contribution/match as shown in a diagram above) vs. $536,000 into WL. The inputs for the 401k are about as favorable as they can be given the circumstances. A steady 6.79% return throughout the total duration, ignoring sequence of return risk, and a 20% tax rate in retirement on income over $150,000 in future dollars (currently taxed at a higher rate). The WL only has a return of 4.5% but still provides a few more years of income while providing a death benefit! For you accumulation folks (@Duf-diver, @WarEagleG, @vanmichel), notice the CV of the WL never exceeds the 401k value during the Accumulation Phase. But, but, but...
You can't duplicate the "funny money insurance projections" which proves the WL to be a ruse? Of course you don't understand, you don't want to understand. We've explained, in elementary detail, how it works.
Failing to "explain the state of the market at the time of or nearing retirement affects the arbitrage on the loan and wherewithal to pay back the policy loans." Umm, the state of the market will only negatively affect the 401k, as the WL carries no inherent market exposure! The two rates involved in the arbitrage are based on the same Moody's bond rate. The rates move together! The rates move together!
The very fact you're able to recoup opportunity cost from expenses, by using float, is one of the reasons the WL outperforms the 401k. It's not my fault the 401k monies can't provide that benefit and it certainly is not a knock against the WL because it can!
As previously mentioned, this topic has completely surpassed your ability to comprehend even the simplest statements. I'm showing you how you can create more income in retirement and you refuse to try to understand. Why? This strategy is beneficial for you. It will allow you to spend more money and create a legacy. Why are you fighting a helping hand? You've got to ask why.
As it seems the Bunker is on a revolving path each month and many different views are shared regarding personal finance, we can use this post as a depository for questions. Notice I did not say debate. Until things change, below is verifiable proof from reputable sources, Warren Buffett being one, financial planning is not about how much you earn on your investment but about how much you get to keep.
Whole life insurance, from certain mutual companies, is imperative to maximizing retirement income. No ifs, ands or buts.
In this academic article, Dr. Wade Pfau provides mathematical proof that "buy term and invest the difference" is not the most efficient means for creating retirement income. His analysis concludes the use of insurance products creates exponentially more income by including actuarial science (insurance products) in your planning to improve cash flow later.
In this article, Business Insider shares with us that Warren Buffett, the greatest investor of all time, uses insurance "float" to earn billions of dollars over his career. "It's really no wonder that Warren Buffett is the second richest person in the world." You can also use insurance "float" within whole life insurance to maximize cash flow, specifically, retirement cash flow.
*Many will try to disprove the above tenets but they will not use facts or mathematical based arguments. They will believe and try to make you beleive they are using facts but they have not taken the time to apply the principles mentioned above to any calculations. They will digitally scream and pout but, to no avail.
Below is the application of said tenets. A comparison between a Life Insurance Retirement Plan and a 401k. Yes, the LIRP has more being contributed, $50,000 compared to $18,500 in the 401k. That is kind of the point. We can't put anymore into a 401k because the IRS says no. The first $24,000 (married) contributed to the LIRP is pre-tax just like the 401k. However, the 401k pays 20% tax at distribution.
Below is using the same WL policy but implementing "float." Notice the CV has greatly increased due to the additional earnings from the float return being applied as "Loan Pay". Also, income increased to $125,000/year vs $105,000/year in the previous illustration.
The last illustration is the actual policy print out from one of the companies we use. This illustration was based on info from WarEagleG*. The CV is less than the previous illustration because the float interest can not be applied into their software.
*G has yet to implement said plan.
Requested $18k/$18k comparison.
Fine print: The WL CV includes $10,000/year in recouped expense opportunity cost starting Year 5. The 401k contribution increases 2% each year based on inflation/raises/potential company match (all of which are variable). The S&P growth is a flat average the entire illustration. No sequence of returns risk. This favors the pro-qualified plan argument.What's not included is any potential SS benefit and how the 401k will reduce the amount available due to SS benefits becoming taxable after surpassing the Ordinary Income threshold.
Rebuttal's
@vanmichel
"Your numbers for the 401k don't make sense. You quote it as 6.79% annually but then you add in 2% inflation. The 7% historical rate of return already accounts for inflation. If you're going to add in inflation as a separate calculation, you need to use the actual historical return of the S&P which is closer to 12%."
As was mentioned in the footnote, the 6.79% return helped your argument. Average annual return is a gimmick and the real number to use is the CAGR. Also, inflation was applied to increasing the 401k contribution and showing how much you would need to bring in to spend $85,000/year 29 years from now. I also did not include sequence of return risk during the distribution phase, while keeping taxes lower than even today's rates. The illustration is the best case scenario for your strategy.
I can give you the best avg. market return period, 1970-1999, which had an avg. annual return of 14.86%. Set the withdrawal rate to 4% and use the same periods sequence of returns and you will run out of money in year 14. It's not about how much you make but how much you get to keep.
[/QUOTE]"You're also withdrawing too much money from the 401k. An $85k withdrawal rate requires at a minimum, $2.125 MM just using the 4% rule. A more conservative rate of 3.5% needs $2.429 MM."[/QUOTE]
I'm withdrawing too much money?!?! Why do you not want to have more in retirement? By saying the illustration is withdrawing to much money, is saying your strategy requires you and others to fail.
Academia has found the actual withdrawal rate is 2.6% if you want a 99% probability of success. Problem is 2.6% in today's dollars is only $55,250 of the $2.125MM. Also, a $25,500 contribution (which is 2.08X the avg. for a person with $100k annual income and exceeds the $18,500 limit) each year into a 401k for 29 years only grows to $1,726,639.51. You're missing $400,000 to even make it 14 years. This is exactly why you must add actuarial science to your planning.
"Using an extremely conservative growth rate of 7% and inflation of 3% (aka only 4% annual return) on the $2.125MM, your portfolio ends with an average of $1.576MM after 40 years of retirement NOT including any social security or a pension."
Please see above for why this math is not correct.
[U]@Weagle09[/U]
Hah. Your position starts to lose ground and your first reaction is to claim it’s over my head. The only reason I can’t post a clear model that disproves your position is because I can’t replicate your funny money insurance projections and favorable assumptions. I’ll add the taxability of social security and an arbitrage on the loans and still show you that the qualified plan plus match ‘first’ provides better outcomes. You also fail to explain the state of the market at the time of or nearing retirement affects the arbitrage on the loan and wherewithal to pay back the policy loans.
No, you're actively choosing to not understand. I provided an illustration where a total of $716,000 was contributed to a 401k (far exceeding the avg. contribution/match as shown in a diagram above) vs. $536,000 into WL. The inputs for the 401k are about as favorable as they can be given the circumstances. A steady 6.79% return throughout the total duration, ignoring sequence of return risk, and a 20% tax rate in retirement on income over $150,000 in future dollars (currently taxed at a higher rate). The WL only has a return of 4.5% but still provides a few more years of income while providing a death benefit! For you accumulation folks (@Duf-diver, @WarEagleG, @vanmichel), notice the CV of the WL never exceeds the 401k value during the Accumulation Phase. But, but, but...
You can't duplicate the "funny money insurance projections" which proves the WL to be a ruse? Of course you don't understand, you don't want to understand. We've explained, in elementary detail, how it works.
Failing to "explain the state of the market at the time of or nearing retirement affects the arbitrage on the loan and wherewithal to pay back the policy loans." Umm, the state of the market will only negatively affect the 401k, as the WL carries no inherent market exposure! The two rates involved in the arbitrage are based on the same Moody's bond rate. The rates move together! The rates move together!
The very fact you're able to recoup opportunity cost from expenses, by using float, is one of the reasons the WL outperforms the 401k. It's not my fault the 401k monies can't provide that benefit and it certainly is not a knock against the WL because it can!
As previously mentioned, this topic has completely surpassed your ability to comprehend even the simplest statements. I'm showing you how you can create more income in retirement and you refuse to try to understand. Why? This strategy is beneficial for you. It will allow you to spend more money and create a legacy. Why are you fighting a helping hand? You've got to ask why.
By making payments you're increasing the pot available to float. Every premium payment dollar is credited for future income but half of the payment is available Day 1 to use as float. Either you can use it or you let the insurance company use it. You'll have better return if you apply the float to other investments, debt, expenses, etc.
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