Why Keep A VUL Whose CV is More Than The Original Coverage.

[J.R.]

ROI Correction

John and James, you are both right when it comes to an "approximate" return, but your numbers do not reflect a definitive answer.

In order to find out the most accurate ROI on any investment you cannot use the average formula because it is a misleading and inaccurate depiction of the return. It can be used to get an "idea" as to how well things are working out, but is far from the truth.

The only answer that matters is the after-tax rate. Anything else is "fluff" and should be taken with a grain of salt. You have to use the CAGR formula(http://beginnersinvest.about.com/od/investing101/a/aa081504.htm) to determine the real annual growth for stock, funds, real estate, etc. for any period over 1 year. We all know how to calculate the first year return, so there is no need to debate that topic.

 

[James]

[

1999 2000 2001 2002 2003 2004 2005
Investor Return % 30.9 -2.7 -3.0 -26.1 48.9 17.7 11.8
Total Return % 32.5 -1.9 -2.8 -26.6 49.3 17.9 11.9
+/- Category * -37.1 5.3 4.8 2.6 3.7 5.2 5.7
% Rank in Category * 70 35 34 41 29 23 15

I can only respond to the years you posted,in fact it would equal a 8.6% yearly gain. rule of allocation that they suggest.

8.6 yearly gain?

30.9 - 2.7 - 3.0 -26.1 + 48.9 + 17.7 + 11.8 = 77.5/7 years = 11.07% average annual return. Who taught you math?[/quote]
I did the math for ya guy, go review it and show me where I'm wrong? Your average doesn't take into the effect of the down years. Let me try this again, a Loss of principle means one needs a greater gain the next year to catch up to the loss. Once again, if you have a hundred dollars, first year you have a 50% loss and the second year you have a 50% gain you will not be even, its not real hard to understand John.

 

[James]

My investment rule #1 for those that are seeking to build wealth, make enough to save! Wow what a concept! I don't deal or try not to deal with people that fall under the 8hr a day for xx amount per hour or XX per month and then expect that to take care of all of ones needs. It simply isn't possible, the guy or gal that makes 25-50 grand thinking that within this structure they can retire in comfort is smoking crack or they might as well..

Listen, I might be misunderstanding you and you might be misunderstanding me. You're sitting down with one your friends who's 35 years old and self-employed and to date has saved and invested zero. He also has no life insurance a wife and three kids. He's doing quite well and tells you that he has $500 per month to play with. He'd also actually like to retire before age 70 and live a decent life.

Your advice would be?

Take that 500 dollars and invest in something to increase his income, obviously he aint doing that well if he can only invest 500 dollars a month. Of course life insurance would have to be taken care of not to mention DI and a form of LTC what ever that may be.

If he was a good manager I would likely offer him to come into the Rug Dr. business, DME or Photography Fund Raising and let him help in building one of the business up. More then likely his meager investment of cash and time would pay off greater than any stock investment you could come up with.

 

[Crabcake Johnny]

I don't know where your bitterness for the market comes from except maybe you have some negative investment experiences. Basically, to each his own. I have a lot of fun in the market and the returns have been great.

I do agree with you that people need to work on income in their working years. Instead of someone who's earning $40,000 a year and self-employed trying to figure out how they're gonna retire, they should instead take your advice and focus on how to increase their income.

 

[James]

I don't know where your bitterness for the market comes from except maybe you have some negative investment experiences. Basically, to each his own. I have a lot of fun in the market and the returns have been great.

I do agree with you that people need to work on income in their working years. Instead of someone who's earning $40,000 a year and self-employed trying to figure out how they're gonna retire, they should instead take your advice and focus on how to increase their income.

I have no bitteness to the market, I have just reasonable knowldedge on what it can and can not do. I'm also a strong believer of small business and the historic position of it. It has been eroded by large faceless corporations that serve nothing but its own self interest.

Plus show me any string of results from any Mutual Fund and likely it'll fair far worst then the one you posted, as more than one study has shown the "Actual Return" is less then 4%. Plus take into the effect of the mindset of the CFP and the general mindset of todays "Retirement Planning", it has proven to be worthless as in being out of reach for the vast majority of people as noted by the President of the CFP Organization just last year in response to the studies that are now out in the public format.

 

[Crabcake Johnny]

No problem - I have a few funds with T. Rowe and I love them. Here's one:

http://www.troweprice.com/common/indexFundFacts/0,0,ticker=TRREX,00.html

Past five years - 24.95%
Since inception - 16.22%

It's actually a very nice fund. Great returns and very dependable.

And you are right and wrong. You are correct that mutual funds as a whole don't return crap. They are over-blown as some kind of "investment mecca" when in fact after fees and inflation you might as well put your money in passbook savings.

However, that doesn't mean you can't average 15% if you actually do a bit of research. But actually mutual funds are not a major part of my investments. DRIPs are and they're kicking ass - never discount the power of dividends.

And I'm in Assurant - have been since the IPO and I'm up 110%.

 

[James]

No problem - I have a few funds with T. Rowe and I love them. Here's one:

http://www.troweprice.com/common/indexFundFacts/0,0,ticker=TRREX,00.html

Past five years - 24.95%
Since inception - 16.22%

It's actually a very nice fund. Great returns and very dependable.

And you are right and wrong. You are correct that mutual funds as a whole don't return crap. They are over-blown as some kind of "investment mecca" when in fact after fees and inflation you might as well put your money in passbook savings.

However, that doesn't mean you can't average 15% if you actually do a bit of research. But actually mutual funds are not a major part of my investments. DRIPs are and they're kicking ass - never discount the power of dividends.

And I'm in Assurant - have been since the IPO and I'm up 110%.

No you're up nothing unless you have taken your profits, a key mistake made by many. Then you have the worrisome duty of protecting ones profits, now enters the Annuity! Its like the Assurant stock being up, when do you sell? If you don't sell now then when? Wait till they start going down? Its a problem that there isn't a good answer for. Whenever I buy stock if it doubles I'm generally out but there there has been a few I kept over the years such as Chrysler even though I have sold the majority of it.

In other words there is no gain in any investment untill an actual gain is taken.

 

[Crabcake Johnny]

Well, in my case I'm doing just fine since '92. I know when to hold 'em and know when to fold 'em. And you're right - being up means nothing if you hold on too long and your gains are erased. I've also learned a few expensive lessons in my younger days. But I researched the annuities - 4.5% gain on average. Then take management fees and inflation and you literally have no gain - zero.

Sometimes it just comes down to personality. I'm self-employed because I love the concept of unlimited earning potential. Take that away and my desire and drive goes away. Why would I want to participate in any investment where I didn't enjoy the rewards? That's like Assurant calling me up tomorrow and saying "Listen John, here's our new deal. We guarantee you won't ever make less then $40,000 a year but in return for that we'll take everything you make over $100,000."

So is that a good deal? If you suck it's a great deal. If you rock it's a horrible deal. Well....I rock in the market, so an annuity for me not only sucks the life out of me but it's a sucker bet.

I'll let Assurant ride a long while longer. I know it obviously won't return 50% annually on average, but I have it pegged as a very agressive growth stock returning at least 15% annually after inevitable adjustments.

 

[Crabcake Johnny]

I used to be a guard at the Riviera casio in Vegas when I first got out of the Marines and there's great story about attitude, fun and money I love:

A husband and wife went to Vegas. They got into the casino and the husband immediately wanted to head to the roulette table but the wife decided to go check into the room. As her husband started to gamble she kissed him, wished him good luck then headed up to the room.

The husband started with $20 and immediately got on a roll, soon getting his earning up to $100 then $1,000 then $5,000. He actually started to attract quite a crowd as his insane luck got him past $20,000 - $40,000 and now up to $100,000. At $100,000 he pushed it all onto red for a final ride. There was now a huge crowd cheering him on but alas the ball fell on black and he lost everything.

As the crowd screamed his wife came back downstairs and heard the commotion. She ran over to her husband and said "what was all the shouting for?" The husband shrugged and said "I have no idea, I only lost $20."

 

[Crabcake Johnny]

Index fund or annuity equivalent - which really comes out on top? You guessed it - regular taxable fund. I guess the annnity agents don't want to mention the M&E charge:

NOTE WHO PAYS THE NICE COMMISSION THE AGENTS GET - THE CLIENT! - This is NOT the case in regular no-load funds where the only fee is just the management fee - which is lower than the annuity fees.

Mortality and Expense Charges
The first fee typically imposed by an annuity will be what's known in the industry as a "mortality and expense" (M&E) charge. This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract. In general, these fees in a variable annuity will be charged as a percentage of the average value of the investment and will probably be quoted in terms of "basis points." A basis point is 1/100th of 1%. Thus, an M&E charge of 115 basis points means a fee of 1.15% will be assessed against the value of the investment. According to the National Association of Variable Annuities (NAVA), the industry average M&E in 1997 was 1.15%. In a fixed annuity, these charges are usually incorporated in the insurance company's determination of the periodic interest rate or the annuity payment amount during the distribution phase.


WHICH COME OUT AHEAD?

The fees and expenses imposed by annuities indicate they are undoubtedly costly to own, and they absolutely are not meant for the short-term investor. Get out early, and the surrender fees could swallow a large hunk of cash that would take years to recover in a taxable alternative. Additionally, of the over 11,000 mutual funds in existence in 1999, expenses exclusive of loads average between 1.2% and 1.5% (depending on which study you use) compared to the nearly 2% in management and M&E fees charged by the typical variable annuity. For no-load funds, expenses average only 90 basis points, less than half that of the average variable annuity.

Assume you are a long-term, buy-and-hold investor who wishes to invest $20,000 in either a taxable S&P 500 index fund or a similar S&P 500 index subaccount with identical expenses within a tax-deferred variable annuity. Assume the investment in either option will earn an average annual return of 11.2%, of which 4.5% comes from dividends. In the taxable account, you will pay income taxes on dividends as received. The annuity will impose an M&E charge of 1.15% each year. Which investment will give you the most money after taxes at the end of 20 years?

After paying income taxes at a marginal rate of 28% on your annual dividends, the taxable account would have a net annual return of about 9.9%. At the end of 20 years, the investment would have grown to $132,125. Your long-term capital gain would be $112,125 taxable at 20%. After paying your tax of $26,425, you would be left with a total of $105,700.

The annuity would have a net annual return of 10.05% after the M&E charge (11.2% -- 1.15%). At the end of 20 years the investment would grow to $135,778, or some $3,600 more than the taxable account. Your gain would be $115,778. All of that gain, though, is taxable at ordinary rates. If taxed at a marginal rate of 28%, your tax bill would be $32,418. That means you would net $103,360, or about $2,300 less than that of the taxable account.