401K: Continue Contributions or Stop?
Rental Property Investor · East Grand Forks, MN · Member since 2018 · 10 posts · 21 votes
I recently purchased my first rental property with no money down. I did so by necessity as I am cash broke! However, I do put a substantial amount of money into my 401K account every pay check. I have always been relying on having a very nice nest egg waiting for me when I retire, but like many of you, am starting to realize that I don't want to wait until I am 65 to enjoy it.
For the last 10 years I have been so focused on building up my 401K, but now for the 1st time I am really considering stopping all contributions to focus on real estate investing. I ran the calculations and found that my projected 401K value when I retire will be cut in half if I stop contributing now (age 36) and leave what I have in there.
I'm looking for advice! Have any of you taken the plunge yet, how has your experience been? Any recommendations??? Thank you!!!
Matt
@Matt Hangsleben this is a tough question. I stopped contributing to mine years ago when I learned at a financial education seminar that if the employer doesn't match, it doesn't make sense to keep contributing to the max amount. If your employer matches, I would continue to contribute, but lower the contribution. If you do that, however, you need to take the additional monies that you now have (after taxes now) and put it into a fund that you will use for some other investment. It's far too easy to spend it. The idea is that through your real estate and other investments, you won't even have to dip into that 401(K) later on, so the fact that it will be far less won't be an issue. But that really depends on how you plan to ramp up your investing. If I were you (and I did this) I would consult with a registered investment adviser about overall wealth planning and your goals...and I don't mean a financial advisor..there is a difference. You don't want someone trying to sell you products, you want someone trying to help you analyze your current status, where you want to go and how much you will need.
Another option, which is not as well known as 401k and Roth IRA is cash value life insurance that grows with the stock market but does not go down when there's a market crash or decline. You can contribute and use the money for whatever you want and it's liquid (you can touch the money without the 10% penalty). I am not an expert on that but I can refer you to one if that is of interest to you.
Cash value life insurance is not an investment, it is a rip off. The fees will eat up most of your earnings. You should never combine life insurance and investments, buy enough cheap term insurance to protect your family but keep your investments separate, you will do much better.
Spoken from someone who clearly doesn't have any understanding of life insurance. In a properly designed and overfunded policy, the fees amount to about 15% of the premium dollars in the first 10 years. After the surrender charge period is over, and assuming the client is still putting premium in the policy, they will give up about 6% as a premium charge. These fees impact the premium only. It is a set back, but it certainly doesn't as you say, eat up most of your earnings.
The cost of insurance, should hover around 0.25% for the remainder of the policy life. That is on par with the fee structure of an index mutual fund. If this is "most of your earnings", I feel very sorry for you.
The beauty of permanent life insurance is that the policy owner can leverage that remaining 85% and put it to work in another investment just as if they leveraged another property. Their money is literally working in two places at one time.
Permanent Life insurance is a financial tool that can allow any investor to make more by doing the same thing they were going to do anyway.
Don't feel sorry for me, my investments produce 12-20% return, without any fees, surrender charge, I don't have to pay any premiums, no commissions, I don't have to pay interest to borrow my own money to put it to work in another place, etc.
This is 100% my money, working 100% for me and producing returns at least twice as much. Feel sorry for your clients, who could do the same but instead are feeding you and the insurance company.
Something to consider: In many states retirement accounts can be exempted from collection or bankruptcy. You are about to take on serious risk by investing in real estate, and will hopefully reach a level of passive income that you really don't need those retirement accounts at the end of the day. But until then it will always be nice to have a debt-proof nest egg to fall back on.
It also makes sense to at least continue to contribute to your 401k up to the level that your employer is matching. That employer contribution is free money. On every dollar you contribute yourself, your employer is providing you with an immediate 100% return on investment. You will have to work hard to match that rate of return elsewhere.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
If you take a loan on your 401k the interest rate is like 4% and the interest is paid to you (it goes back in your 401k). You can still contribute and get your 401k match while the loan is out. It’s a great loan, I highly suggest it if you know the difference between a good deal and a bad deal in real estate. Wallstreet has brainwashed too many people into being afraid of using their own money.
In one post you call permanent life insurance a "middle class" product and then in this second you offer this poor advice? Wow!
The extremely wealthy use permanent life insurance. It is safe, principal-protected, and bypasses probate when the death benefit is paid.
The amazing thing about the cash value of a life insurance policy is that you can borrow against it to invest in other assets. When I take a loan against the cash value in my policies, the interest is tax deductible. More importantly, the cash value is still in my policy earning interest/dividends. When you borrow from your 401(k), that money is no longer in the account so it is not earning anything. And, you cannot deduct the interest on the loan as a business expense.
So let's look at an example using some hypothetical numbers...
Let's just say that the money in the 401(k) could have earned 9%.
401(k) Loan rate is 4% (your number)
Policy Loan interest rate: 5%
Tax bracket: 40%
Real estate return: 10%
When you borrow the money from the 401(k) and use it to invest in real estate, you have to pay tax on the entire 10% gain because the interest on a 401(k) loan is not tax deductible. Now you have 6% left. And you owe 4 of those 6 percent to your 401(k) account. Nice move! you just traded a 9% return with the tax deferred for a 2% net return.
So lets say that the cash value in my life insurance earns a measly 6.4% (Mass Mutual's current dividend rate). I get a line of credit against the policy by giving the bank an assignment of collateral. I use that loan to make the exact same real estate investment. I am only going to pay tax on 5% because the loan interest is a business expense. After taxes, I'm left with 3% PLUS the 6.4% that the cash value securing the loan earned during the same period. That is a 9.4% net return compared to your 2% return.
Even if you didn't use your 401(k), this still works better. That 10% return on a cash investment would only net 6% after tax.
If you don't understand something, don't comment on it here.
Don't feel sorry for me, my investments produce 12-20% return, without any fees, surrender charge, I don't have to pay any premiums, no commissions, I don't have to pay interest to borrow my own money to put it to work in another place, etc.
This is 100% my money, working 100% for me and producing returns at least twice as much. Feel sorry for your clients, who could do the same but instead are feeding you and the insurance company.
LOL! I'm not going to go through the math with you again. You've been trolling life insurance on BP for many years and still come back with these same tired arguments. As a former life insurance salesman yourself, you should know that you do not pay to borrow your own money. Using your logic, I shouldn't have to pay to use the equity in my home for a loan either.
I can invest in the same exact things you do, and I'll make more than you by leveraging the life insurance.
What you first need to determine is the asset allocation that you want to have across your entire investment portfolio, including ALL asset classes, including stocks, bonds, real estate, etc.
There is no one-size-fits-all asset allocation. It needs to be based upon your need, willingness, and ability to take risk (I know that's an overly used statement, but it's true).
For example, based on my own interpretation of economic data and my beliefs about certain things, I've chosen an asset allocation 50/35/15 -- 50% rental properties, 35% fixed-income securities, and 15% publicly traded stocks. Put another way, I'm 50/50 between real estate and securities.
I've chosen this allocation as the best for *me* for a variety of reasons that aren't important here. But having made this decision, it makes all other decisions easier. For example, I bought two houses last year, and I now own four rental doors and one vacation home that I'm currently occupying myself. Due to the massive appreciation last year on my Seattle-area rentals, my real estate equity is now significantly more than 50% of my total portfolio. So, I may not buy another property this year, and will likely max out the $56,000 maximum solo 401k contribution in 2019, whereas in 2018 I only put in about $44,000. In addition, I will be bolstering my municipal bond holdings in my taxable brokerage account every month, in order to get back to my target asset allocation.
So, start there. Determine the AA that's right for you, and then use that as the guiding star for making these other investment decisions.
Exactly what I said. I am a landlord who has acquired over 1,000 units and I have no financial products to sell. Beware of those who say something is a scam because they are selling something else :)
The way I look at it is this: I have an 8% "savings account" in a properly structured cash value life insurance policy so while I am looking for my next deal, my money is growing at a good rate tax free.
Financially astute people don't do what the masses do. The masses have been taught to study hard, get a good job with a 401k and save money in the bank.
I don't have a job but I have apartment units that pay my bills. My "safe money" grows faster than in a bank. And my wealth grows exponentially everyday through buying more and more apartment units.
Hi Ann,
The way it works is the cash value life insurance is designed with a small death benefit that increases over time. Every time I pay a premium, a small part of that goes towards the cost of insurance. The rest goes to a cash value account that grows based on a stock market index (say like S&P 500). I have access to that cash value and on average, it grows by about 8% interest (that's even after factoring in the cost of insurance). That is tax free through making a policy loan or withdrawing my principal. Either way is fine since, on average, the growth of S&P500 is higher than the interest rate.
I am not a life insurance agent or a certified financial planner so I am not an expert so you can look one in your area. One caveat though - not all life insurance agents are good with this type of cash value life insurance. It has to be designed properly (more cash value and less on the death benefit). Otherwise, your cash value growth will not be good (and this is when people say it's a scam).
I think we are at that point where the frenzy to get into real estate will be the undoing of many. People are willing to take out their life savings, pay withdrawal penalty and taxes, only to dump it 100% into real estate. Running from an "overpriced" stock market into an "overpriced" real estate market. When the music stops and everyone goes running for the chairs, many people will find their chair is gone.
This isn't a one or the other situation. There is no reason people can't fund retirement accounts and buy investment properties.
The retirement accounts are tax advantaged and have bankruptcy or divorce protections (I know nobody is ever going to file bankruptcy or get divorced - said every person before they filed bankruptcy or got divorced, because life is unexpected). The other factor is "favorable to the masses". What that means is so many people put money in retirement accounts, that the government protects what the masses do. Nobody is protecting real estate investors. After the last crash, they bailed out owner occupied but not landlords.
I love real estate and it is my main wealth vehicle, but having money in retirement accounts (ROTH in my case for 0% tax withdrawal) just makes sense as part of an overall strategy.
@Josef Faisal Yes, excellent books. I have read them both!!! thanks for the recommendation!!!
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
It doesn't really matter who's product you use. These strategies work with any permanent life insurance product. The infinite banking folks would have you believe that it has to be a dividend paying mutual company, but that is nonsense. I gravitate to the carriers with the lowest fee structure. They will undoubtedly have the best long term performance.
A minimally funded policy is what you get when you call up an agent and ask for a $1M policy. Its your basic whole life. You'll get the lowest premium that will get you $1M of death benefit. This policy will have the worst cash accumulation because its all about the death benefit. The polar opposite is an overfunded policy. This is the highest premium that you can possibly pay for the least amount of death benefit. This one will have the most cash value. You'll know if its properly designed if the end of year cash value for the first year is about 85% of the premium.
If its any less than that, the death benefit could be lower. IBC policies usually come in at about 65%. They leave too much death benefit in their designs. Its hard for this leverage strategy to work when you have to make up a 35% setback.
I go through the fees and expenses with all of my prospective clients. Most leave with a policy and a better understanding of how life insurance works than most agents. They know they are getting the best design possible. That comes at my expense. Its my commissions that are reduced by lowering the death benefit to the absolute minimum.
This is a good tutorial...
https://www.biggerpockets.com/blogs/7595/77981-whole-life-vs-indexed-universal-life-life-insurance-101
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
If you take a loan on your 401k the interest rate is like 4% and the interest is paid to you (it goes back in your 401k). You can still contribute and get your 401k match while the loan is out. It’s a great loan, I highly suggest it if you know the difference between a good deal and a bad deal in real estate. Wallstreet has brainwashed too many people into being afraid of using their own money.
In one post you call permanent life insurance a "middle class" product and then in this second you offer this poor advice? Wow!
The extremely wealthy use permanent life insurance. It is safe, principal-protected, and bypasses probate when the death benefit is paid.
The amazing thing about the cash value of a life insurance policy is that you can borrow against it to invest in other assets. When I take a loan against the cash value in my policies, the interest is tax deductible. More importantly, the cash value is still in my policy earning interest/dividends. When you borrow from your 401(k), that money is no longer in the account so it is not earning anything. And, you cannot deduct the interest on the loan as a business expense.
So let's look at an example using some hypothetical numbers...
Let's just say that the money in the 401(k) could have earned 9%.
401(k) Loan rate is 4% (your number)
Policy Loan interest rate: 5%
Tax bracket: 40%
Real estate return: 10%
When you borrow the money from the 401(k) and use it to invest in real estate, you have to pay tax on the entire 10% gain because the interest on a 401(k) loan is not tax deductible. Now you have 6% left. And you owe 4 of those 6 percent to your 401(k) account. Nice move! you just traded a 9% return with the tax deferred for a 2% net return.
So lets say that the cash value in my life insurance earns a measly 6.4% (Mass Mutual's current dividend rate). I get a line of credit against the policy by giving the bank an assignment of collateral. I use that loan to make the exact same real estate investment. I am only going to pay tax on 5% because the loan interest is a business expense. After taxes, I'm left with 3% PLUS the 6.4% that the cash value securing the loan earned during the same period. That is a 9.4% net return compared to your 2% return.
Even if you didn't use your 401(k), this still works better. That 10% return on a cash investment would only net 6% after tax.
If you don't understand something, don't comment on it here.
When you give money to someone (say a whole life company) say $10,000 with a hope of borrowing your own money back later, that is so stupid, think about that. Why not never pay them the $10,000 in the first place, invest your own money. Ridiculously low returns on these whole life policies. Here is example number two from my own life today, I have another whole life policy that has only cost me $15 a month, so very small, didn’t bother me much, so kept it going. I called this morning and cancelled it, I’ve been paying since 2016. I asked the lady how much I’ve paid in, she said $500 and some change, I asked her what my cash value is, she said $29 and some change!!! What a rip off. Then she was like this will be fully funded when you are 65 (I’m 34), term would have been a much better decision for me, the policy was for 10k-American Income Life. If you can’t beat a return life that over 33 years, you are really on the wrong website. Think about inflation too! I don’t care to keep the debate going, at this stage I’m decided and you probably are too.
I do use the 401k as a self banking tool, but only because I have a match, otherwise it’s no good for a guy like me, at least not at these overinflated stock prices.
I've seen many debates here on BP and other forums about infinite banking and for the mos part they devolve into ad homineim back and forths between the two camps, much like this one is shaping up to become.
Is there any resources which you could point someone to that clearly lay out these products, fees, returns, risks, so that someone could model out some scenario returns? For instance you mention Mass Mutual; is there a term sheet of some sort which spells out the details of their offerings that I can then take and compare to another companies product?
I've seen you post a few times about "properly designed policies" What exactly separates a proper from improper policy design?
Also, do you sell these products yourself?
Infinite banking is just a process not a specific product. My guess is it was created by a life insurance sales man to sell more insurance.
The process is just borrowing against your whole life insurance instead of paying the bank interest. You pay yourself interest. Not a bad concept assuming you have lots of consumer loans. Arguably it would be better to not have so many loans. Instead of a car loan, just pay cash for a decent used car.
The way I look at whole life insurance as an investment is by asking, where does the money go?
Here is where it goes:
- Agent commission/admin costs
- Term life (risk pool for those who die early)
- Stocks (minority)
- Bonds (majority long term low risk)
Looking at it logically, why wouldn't I just get a low cost term policy and invest the rest myself in bonds or other low risk investments? Or better yet in real estate with high returns!
In my experience insurance agents push very hard to sell whole life policies. So hard that it is obvious these policies pay very lucrative commissions.
No. Infinite Banking is not a process. It is a sales system devised, as you suspected, by insurance salesmen. Specifically, Nelson Nash. Policy Loans are mandated by State Statute in all 50 states.
For example: https://statutes.capitol.texas.gov/Docs/IN/htm/IN.1101.htm
The law very specifically states that insurance companies are required to make loans to their policy holders secured by the cash value of those policies. I just find it absolutely astounding that someone can read this far and still think that you are simply borrowing your own money and paying yourself back with interest.
Read the blog post that I linked to. You can see exactly how a life insurance policy works under the hood. The insurance company itself is buying term and investing the difference. Its nothing but the client saving up their own death benefit with the shortfall made up by the risk carried by the insurance company... in one year term pools.
You can talk about consumer debt all you want, but the fact is, if you were going to invest the money anyway, then you'll make more by getting the cash into a life insurance policy and then leveraging it. It will be working in two places at once. If the investment goes bad, you are no worse off.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
If you take a loan on your 401k the interest rate is like 4% and the interest is paid to you (it goes back in your 401k). You can still contribute and get your 401k match while the loan is out. It’s a great loan, I highly suggest it if you know the difference between a good deal and a bad deal in real estate. Wallstreet has brainwashed too many people into being afraid of using their own money.
In one post you call permanent life insurance a "middle class" product and then in this second you offer this poor advice? Wow!
The extremely wealthy use permanent life insurance. It is safe, principal-protected, and bypasses probate when the death benefit is paid.
The amazing thing about the cash value of a life insurance policy is that you can borrow against it to invest in other assets. When I take a loan against the cash value in my policies, the interest is tax deductible. More importantly, the cash value is still in my policy earning interest/dividends. When you borrow from your 401(k), that money is no longer in the account so it is not earning anything. And, you cannot deduct the interest on the loan as a business expense.
So let's look at an example using some hypothetical numbers...
Let's just say that the money in the 401(k) could have earned 9%.
401(k) Loan rate is 4% (your number)
Policy Loan interest rate: 5%
Tax bracket: 40%
Real estate return: 10%
When you borrow the money from the 401(k) and use it to invest in real estate, you have to pay tax on the entire 10% gain because the interest on a 401(k) loan is not tax deductible. Now you have 6% left. And you owe 4 of those 6 percent to your 401(k) account. Nice move! you just traded a 9% return with the tax deferred for a 2% net return.
So lets say that the cash value in my life insurance earns a measly 6.4% (Mass Mutual's current dividend rate). I get a line of credit against the policy by giving the bank an assignment of collateral. I use that loan to make the exact same real estate investment. I am only going to pay tax on 5% because the loan interest is a business expense. After taxes, I'm left with 3% PLUS the 6.4% that the cash value securing the loan earned during the same period. That is a 9.4% net return compared to your 2% return.
Even if you didn't use your 401(k), this still works better. That 10% return on a cash investment would only net 6% after tax.
If you don't understand something, don't comment on it here.
When you give money to someone (say a whole life company) say $10,000 with a hope of borrowing your own money back later, that is so stupid, think about that. Why not never pay them the $10,000 in the first place, invest your own money. Ridiculously low returns on these whole life policies. Here is example number two from my own life today, I have another whole life policy that has only cost me $15 a month, so very small, didn’t bother me much, so kept it going. I called this morning and cancelled it, I’ve been paying since 2016. I asked the lady how much I’ve paid in, she said $500 and some change, I asked her what my cash value is, she said $29 and some change!!! What a rip off. Then she was like this will be fully funded when you are 65 (I’m 34), term would have been a much better decision for me, the policy was for 10k-American Income Life. If you can’t beat a return life that over 33 years, you are really on the wrong website. Think about inflation too! I don’t care to keep the debate going, at this stage I’m decided and you probably are too.
I do use the 401k as a self banking tool, but only because I have a match, otherwise it’s no good for a guy like me, at least not at these overinflated stock prices.
LOL! Can anyone read? You are not borrowing your own money. You are getting a loan from either the insurance company or from a 3d party bank.
Using your own example...
If you invest $10,000 at 10%, you end the year with $1000 of income. In the 40% tax bracket you will give away $400 of that in taxes leaving you with $600.
If I put $10,000 of premium in an overfunded policy, I have $8,500 of cash value that will earn $544 in dividends this year. I can also get a line of credit for $8500 at 5% interest from a bank. So if I take that $8500 and make the same 10% investment, I finish the year with $850 of revenue and interest expense of $425 leaves me with $425 of taxable income. After paying 40% income tax I am left with $255.
I have gained a net of $799 to your $600.
Have you ever seen an exponential growth curve? Would you rather have $8,500 growing at 7.99% or $10,000 growing at 6%?
Hater's can hate all they want, but I'll take the orange line. This is $50,000 going into a policy for 5 years. The alternative investment yielded 8%.
I get it: you have such an awesome product to offer, with such great benefits but everybody else are so dumb, they don't get your complex explanation of the numbers and benefits. Is that the way you see it?
Who invented "infinite banking" concept? Life insurance salesman. You call yourself a financial advisor, but the only conclusion of your advice is to sell ALL of your clients cash value life insurance policy. You don't have any other products to offer/sell. Doesn't sound like financial advisor to me, but another insurance salesman.
You said: "Would you rather have $8,500 growing at 7.99% or $10,000 growing at 6%?"
Well, I would rather have $10,000 growing at 12%+ interest, without having life insurance company in the picture. These are very simple numbers that most people can understand.
If you chose to call "haters" those who like to think for themselves, who prefer alternative other than the one you are promoting - that is your choice. But you don't need to insult people who don't agree with you. The readers here are wise enough to discern through all this and make their own decision how to invest in a way that would benefit them the most.
@MattHangsleben
I may be a little biased to this since I have only had one career position that involved the option of a 401k. I was in the same scenario that they did not match my contribution at all. As soon as I knew they didn’t contribute I immediately stopped my contributions as well and started putting the same amount towards my investing strategies. You are further than me in the sense that you have a nest egg already for a 401k where as I maybe had a few grand. As long as the money you would be putting into your 401k can be invested with the same or better returns that a 401k would produce. That should be the plan!
Happy investing!
@Ed Moran
I’m in the same boat. I have to max out mine and my wifes, or we get rocked on taxes. It’s as good as losing 8% gross income for us.
@Matt Hangsleben I have been going over this with a friend of mine as well. Glad you brought it up.
I think I am going to cut my contributions back to the max amount my company matches and with the difference plus the amount I just received as a yearly raise into something else. I have yet to decide if that something else is simply an index fund or an ally savings account.
If you take a loan on your 401k the interest rate is like 4% and the interest is paid to you (it goes back in your 401k). You can still contribute and get your 401k match while the loan is out. It’s a great loan, I highly suggest it if you know the difference between a good deal and a bad deal in real estate. Wallstreet has brainwashed too many people into being afraid of using their own money.
In one post you call permanent life insurance a "middle class" product and then in this second you offer this poor advice? Wow!
The extremely wealthy use permanent life insurance. It is safe, principal-protected, and bypasses probate when the death benefit is paid.
The amazing thing about the cash value of a life insurance policy is that you can borrow against it to invest in other assets. When I take a loan against the cash value in my policies, the interest is tax deductible. More importantly, the cash value is still in my policy earning interest/dividends. When you borrow from your 401(k), that money is no longer in the account so it is not earning anything. And, you cannot deduct the interest on the loan as a business expense.
So let's look at an example using some hypothetical numbers...
Let's just say that the money in the 401(k) could have earned 9%.
401(k) Loan rate is 4% (your number)
Policy Loan interest rate: 5%
Tax bracket: 40%
Real estate return: 10%
When you borrow the money from the 401(k) and use it to invest in real estate, you have to pay tax on the entire 10% gain because the interest on a 401(k) loan is not tax deductible. Now you have 6% left. And you owe 4 of those 6 percent to your 401(k) account. Nice move! you just traded a 9% return with the tax deferred for a 2% net return.
So lets say that the cash value in my life insurance earns a measly 6.4% (Mass Mutual's current dividend rate). I get a line of credit against the policy by giving the bank an assignment of collateral. I use that loan to make the exact same real estate investment. I am only going to pay tax on 5% because the loan interest is a business expense. After taxes, I'm left with 3% PLUS the 6.4% that the cash value securing the loan earned during the same period. That is a 9.4% net return compared to your 2% return.
Even if you didn't use your 401(k), this still works better. That 10% return on a cash investment would only net 6% after tax.
If you don't understand something, don't comment on it here.
When you give money to someone (say a whole life company) say $10,000 with a hope of borrowing your own money back later, that is so stupid, think about that. Why not never pay them the $10,000 in the first place, invest your own money. Ridiculously low returns on these whole life policies. Here is example number two from my own life today, I have another whole life policy that has only cost me $15 a month, so very small, didn’t bother me much, so kept it going. I called this morning and cancelled it, I’ve been paying since 2016. I asked the lady how much I’ve paid in, she said $500 and some change, I asked her what my cash value is, she said $29 and some change!!! What a rip off. Then she was like this will be fully funded when you are 65 (I’m 34), term would have been a much better decision for me, the policy was for 10k-American Income Life. If you can’t beat a return life that over 33 years, you are really on the wrong website. Think about inflation too! I don’t care to keep the debate going, at this stage I’m decided and you probably are too.
I do use the 401k as a self banking tool, but only because I have a match, otherwise it’s no good for a guy like me, at least not at these overinflated stock prices.
LOL! Can anyone read? You are not borrowing your own money. You are getting a loan from either the insurance company or from a 3d party bank.
Using your own example...
If you invest $10,000 at 10%, you end the year with $1000 of income. In the 40% tax bracket you will give away $400 of that in taxes leaving you with $600.
If I put $10,000 of premium in an overfunded policy, I have $8,500 of cash value that will earn $544 in dividends this year. I can also get a line of credit for $8500 at 5% interest from a bank. So if I take that $8500 and make the same 10% investment, I finish the year with $850 of revenue and interest expense of $425 leaves me with $425 of taxable income. After paying 40% income tax I am left with $255.
I have gained a net of $799 to your $600.
Have you ever seen an exponential growth curve? Would you rather have $8,500 growing at 7.99% or $10,000 growing at 6%?
Hater's can hate all they want, but I'll take the orange line. This is $50,000 going into a policy for 5 years. The alternative investment yielded 8%.
Okay, not borrowing your own money then. Borrowing against your own money...? Say I default on the loan, do you liquidate all or some of my life insurance policy to pay for it? I really am truely asking because I don’t understand this stuff. It sounds like you may structure it a better way than the two policies I just cancelled. To pay a bit over $500 and have a $29 cash value roughly two years sounds crazy to me. I am guessing when I‘m 65 years old 10k won‘t buy as much for me as my $15 a month will today, so I bailed. I also don‘t think I‘ll need leverage on 10k at 65 years old, I’m hoping to be swimming with dolphins by then. Also, I was not offended by the hater comment, in your defense I did call it a crappy middle class investment. You likely are helping some people that are not good at managing their money.
@Harrison Sharp you don't have to pay back a 401k loan when you leave the company. you simply set up a plan to continue the repayments with the 401k company. I just did exactly that. Pulled loan jan 2018, left company jan 2019 and started making payments direct to fidelity the same month with no changes to the loan or payment amount. However I was vested so that might make the difference.
@Matt Hangsleben
From what I have been educated the Roth 401k has no taxes because you pay now. This is a best bet for you likely. When you sell property in the future you will likely pay taxes. A Roth 401k is a nice hedge.
Taxes will likely go up. Where else are we going to pull money out of thin air? It’s a safe bet I am willing to make.
OTHER GREAT POINT PEOPLE
SHARED: When getting loans and trying to do deals, cash is king. So if you want to grow fast I’m real estate that extra cash will help!!
Those are the two sides unless I am missing something? Do what is best for your goals! Congrats on taking advantage and educating yourself now :)
I think the answer is it------depends. Anyone that gives you a definitive answer either way isn't considering all factors involved. For example:
1.How much money do you make know?
2.When do you want to retire?
3.What is the annual income (with inflation) you would like to have when you retire?
4.What other vehicles will you place the money into? Roth vs. real estate vs. individual stocks.
@Mike Lauer This is exactly where I am at. I'm 33 and over my job that I have been at for 8 years. They are starting to cut back my days and it has me thinking a lot about what I want to do next. I have no interest in staying in the field that I work and shooting out resumes is a bore to me. I want to be on my own! Mine and my wife's student loans are paid off and we maxed out our 401k's and IRA's over the past 2 years. I made some pretty good stock picks but I still don't think its good enough. We've owned our home for almost 5 years and I've become extremely handy since being a homeowner. Carpentry has been my trade that I got a knack for. I've laid down floors (laminate, doing luxury vinyl plank this month in my basement) I've installed base and crown molding, I tore down and rebuilt our closet in our bedroom and built custom doors, I installed wainscoting in my sons room and actually built a bar, server and dining table for our dining room! I also power washed our flagstone and re-set it with fresh polymer and sealed it. Anyway, I'm all about sweat equity and it just clicked that I can actually save a ton of money if I do some or all of these things for a flip or rehab a rental property and charge more in rent. I plan on scaling back my 401k so that I can build capital faster and also getting my real estate license so that I can save thousands on commissions. I'm am so excited to get going and this website is very encouraging. Knowledge is power. Best of luck!
@Joe Splitrock I agree with you. You're basically talking about diversification. In my case, I'm heavily in the stock market and no real estate other than our personal home. I still want to contribute to my 401k and IRA but want to scale back to increase capital so that I can get into real estate. Both is definitely the way to go for me, especially since I'll be new in the real estate game. You offer good advice. Diversify!
Who invented "infinite banking" concept? Life insurance salesman. You call yourself a financial advisor, but the only conclusion of your advice is to sell ALL of your clients cash value life insurance policy. You don't have any other products to offer/sell. Doesn't sound like financial advisor to me, but another insurance salesman.
You said: "Would you rather have $8,500 growing at 7.99% or $10,000 growing at 6%?"
I am simply here defending the use of life insurance against life insurance trolls like you who don't understand it. Life Insurance is not all I do. But even as a Fiduciary, I am still confident that I have my client's best interests at heart when I recommend on overfunded life insurance policy for their retirement savings. There is very little commission in an overfunded policy. You guys listen to one Dave Ramsey episode and you think you understand life insurance. An overfunded policy will deliver 2 to 3 times the after tax income of a typical IRA/401(k). Its not about the accumulation. Its all about the income.