All Forum Posts by: Thomas Rutkowski

 I'm calling BS on funds exceeding 10% since 2007. Very few funds managed to escape the crash and still return 10% from the 2007 highs. That would take 20-20 hindsight to predict. It was very easy to return 10% annualized returns if you start from the bottom of the market in 2009.

What happens to her wealth if she doesn't have life insurance? It goes to her heirs via will/probate. If you store your wealth in cash value life insurance, then it passes to your heirs with none of the difficulty of probate. Plus whatever death benefit the policy carries. Its a very efficient wealth transfer vehicle. While she is alive, the cash value provides about 2-3X the income dollar for dollar of what a brokerage account or IRA would generate. That's another of Ramsey's mistakes. He focuses on asset accumulation rather than income. These videos explain why life insurance can provide so much more income than the 4% Rule:

http://www.screencast.com/t/qGRSvvDwlm

http://www.screencast.com/t/KrzwDvJBV

Well, in my example she DID need the money. But that's fine. I'll play along. By my calculations the market (S&P500) has had an annualized return of only 3.5% per year since the peak in 2007. Dave told her she could expect 12% per year. She has a "sizable" gain (32%), but that only got her money back and a 3.5% annualized return. At 12%, she should have close to 1.5X of her savings back in 2007.

Do you want to see what the numbers would look like if she had put her money into that "Evil" life insurance that Dave hates? Here's my analysis: http://www.screencast.com/t/Bw0YvlntBKOi

 I've heard dozens of horror stories from people who lost everything in the last two market collapses. Even if they had put 15% away, had they followed the advice Dave gives to "Gayle" on p.148 of TMM, they WOULD have lost most of it. With absolute certainty.

For those of you who haven't read Total Money Makeover, Dave recommends to Gayle, who is 57 years old, that she put her money into growth mutual funds that "he says" average 12% annual returns. Growth mutual funds have higher average returns because they are riskier and more volatile than the stocks making up the broader S&P 500 index, which has a 25-year annualized return of 9.6%.

Anyone who put their life savings into technology mutual funds in 2007, received a very painful and costly lesson that you need to trade high returns and volatility for lower returns and safety as you get older.

The clients I deal with today that are approaching retirement age are in the exact position "Gayle" was in back in 2007. Now couple her stock market loss with the loss of a job or business as the economy went to hell. Had "Gayle" put her money into tech mutual funds in 2007, she would have lost 50-60% of her retirement fund. If she further lost her job and needed to tap into her IRA or 401(k), she would painfully find out that the IRS is going to tax every dollar of withdrawal at full-income tax rates AND a 10% penalty on top of that. Now the 40-50% remaining savings is looking more like 25-30%.

Thanks for the great advice Dave!

I unfortunately come across clients all the time who are scrambling because they have no savings as they are nearing retirement. All too often they live in houses that are completely paid off. Its the American dream, right?

The problem is that they have all of their assets tied up in the walls of that house and it isn't doing a thing to contribute toward their retirement income. Every dollar of principal that you pay down on a mortgage is a dollar sitting idle. It will never generate an ROI and you will have a hard time getting it out when you need it most.

I've seen people with no savings whatsoever, at retirement age, living in $1M homes that are completely paid off. The students of Ramsey will say "Bravo!" But these people have a $1M net worth that cant generate $1.00 toward their retirement income! With proper, prior, planning, I could have done something. 

I cringe when I hear about people blindly following Dave Ramsey's advice. Debt can get you in trouble, but if you want to get the most out of your money, you need to use debt. Here are my thought from a recent biggerpockets post:

https://www.biggerpockets.com/blogs/7595/47603-you...

If you are going to invest in real estate, you really need to find a middle ground. Debt is a financial tool that nearly all successful large businesses use. Dave's target market is people who cannot manage their finances. If you are getting into real estate investing, you need to run your business like a business.

@Joshua D. - I don't want to turn this into a life insurance thread, but "using" not "investing" in permanent life insurance is a very powerful strategy that will improve your real estate investing results. Dave Ramsey doesn't understand how life insurance works. Many life insurance agents don't. If he did, he would never make a claim like "Why should I have to pay interest to access my own money?" Policy loans are loans "Against" the cash value of a life insurance policy, not "From" the cash value. That is a HUGE difference! 

It means that the insurance company is loaning you "Their" money and the collateral is "Your" money. Since your cash value is earning interest at the same time your loan is accruing interest, you now have a simple mechanism to access your cash, and your capital gains!, tax-free. Its also a myth that there is no cash value for 3 years. I can design a policy with 85-90% cash value to premium from day one.

My own policy averages over 8% annual growth (tax-free, mind you). The interest rate on policy loans is 4.2%. Anything I make in excess of 4.2% adds value on top of what my cash value is earning. I have $1.70 of assets working for myself for every $1.00 I paid in premium.

You can absolutely increase your total returns by leveraging high cash value life insurance. I think a lot of the responders are missing the point. The topic was not whether life insurance was a good investment or not, it was "whole life AND Real Estate".

Any investor putting their own cash into deals can make more money by putting their cash into life insurance first and then leveraging the cash value to make their investment.

Think about it! If you can put your money into an account where it is earning 7-8% (tax-free!) and you can use that account as collateral for a loan, then ANY investment you make that is greater than the cost of money will ADD to the return on the cash value.

Let's look at the very first premium of an overfunded policy (I'm being conservative)

Return on Investment   10.00%

Policy Loan Rate    4.25%

Cash Value Growth Rate   7.00%

%CV/Premium   0.85

Premium/Investment   $100,000

Tax Rate   28.00%

Regular Investment (No Insurance)

Investment   $100,000

Rate   10.00%

Gross Profit    $10,000

Tax    $2,800

Net Profit    $7,200

With Insurance Leverage

Premium    $100,000

Investment 1 (Insurance CV)    $85,000

Rate     7.00%

Profit    $5,950

Investment 2    $85,000

Rate    10.00%

Gross Profit    $8,500

less Interest Expense    $3,613

Taxable Income    $4,888

Tax    $1,369

Net Profit     $3,519

Total Profit      $9,469  (31.5% Higher)

Because you can put your money to work in two places at once, a single $100,000 premium gives the investor in this example $170,000 of assets working. This works even if there is no spread between the earning rate and the borrowing rate on the policy.

Now multiply this out times many years of premiums and reinvestment of the "side fund" gains back into more premium which can be further levered.

Life Insurance is an amazing financial tool.

Here's a video explanation:

https://www.youtube.com/watch?v=js-m1gkxf_g

http://screencast.com/t/GRhgYfvz1Z