Here is the scenario:

You’re either retired or getting close to retirement. Not to be rude, but you are “prime meat” for advisors. They love your demographic because it usually means a nice lump sum for them to work with.

You either get invitations in the mail or someone calls you to invite you to a “free” dinner. All you have to do is listen to a financial consultant’s (investment advisor, insurance salesman, etc.) presentation.

Before you decide to go, let me share a few tips with you.

1. Understand that the advisor is trying to SELL you something. Whether it’s his or her services or some kind of product or idea, the intent is to get clients.

2. Once you understand number 1, you would be wise to be skeptical of EVERYTHING they say.

3. If they are talking about some kind of insurance product (IUL, equity-indexed annuity, variable annuity, etc.), they’ll usually start off by trying to scare the audience with talk about how risky or volatile the “stock market” is, which is true. It is “risky”, but most retirees don’t have 100% of their assets in the stock market. If the salesperson starts throwing around numbers, BEWARE!

The S&P 500 Index that is quoted in the media is a price index. That means it does not include dividends. So, although a price index is a decent barometer, it is not good for
comparing investments because a person who invested in a mutual fund or exchange-traded fund that tracked the S&P 500 Index would receive dividends as part of their return. So, it is misleading on the part of the salesperson to use the S&P 500 Index price return when drawing a comparison to what they have to offer.

How misleading?

Take a look at the following graphic I took from a book I received recently. This book was published in 2015, so I’m not sure why they stopped at 2012 (I will note that 2013 and 2014 were both up years as you’ll see in a later graphic). He also has the wrong return for 2012. It should be 13.41%, not 10.20%. You can click on the graphic to see a larger version:

Table from pg 15

That table is based on the S&P 500 Price Return Index. Yes, the author does mention that the table does not include dividends, but I question his motive for not including them. The next graphic will show you why:

S&P 500 TR vs S&P 500 Price
NOTE: Does not include fees or taxes.

Obviously, leaving dividends out of the equation highly favors whatever product it is getting compared to. That’s why you should be prepared to ask the following question:

“Are the returns you are talking about real returns that include dividends?”

If the answer is “No” or “I don’t know”, you need to get up and walk out. They are being dishonest and purposely misleading the audience.

4. Ask about surrender periods and charges. Some strategies using insurance have long surrender periods of 7 to 15 years. A surrender period is a time period in which you must pay a fee in order to terminate your policy. The amount declines over the years.

5. Be wary of bonuses. Remember, there is no such thing as a free lunch. If a company is going to give you a 10% – 25% bonus, it’s coming from somewhere.

6. If it’s complicated, forget about it. Retirement planning doesn’t have to be complicated. The vast array of products (most of them unnecessary) is what complicates things. Insurance products are among the most complicated because there are so many of them and each company has its own spin, which makes them difficult to compare.

7. Ask them point blank how much they will make off your transaction. Don’t feel embarrassed to ask. It’s your money. If they say, “The insurance company pays me,” leave. That’s not the question you asked. If they avoid answering the question, don’t do business with them.

8. No matter how good the deal sounds, NEVER sign or agree to anything during that presentation. Instead, get as much information as you can and leave. Then, once you are home, read all the information and ask any questions you may have. I would even suggest you get a second or third opinion. Find a fee-only advisor through NAPFA.org and go see them. Expect to spend $250 – $500, but that’s a lot less than you could lose if you make bad decision.

Sadly, most of the people reading this blog post probably already know this stuff. Here’s to hoping this information reaches those who can use it.

For more information, check out this article from FINRA.

I agreed to look at another book about retirement. Last night, the book’s author emailed me and thanked me for agreeing to give his book a look. He included a link to a YouTube video he put together that explains his strategy.

What I found is his strategy is similar to Pamela Yellen’s Bank on Yourself strategy. UH-OH…haha. What’s different is he uses Indexed Universal Life Insurance. I AM NOT an insurance expert. I won’t discuss the intricacies of the policy. What I do want to discuss is how the interest is credited to the account holder (about 5:42 into the video). NOTE: Notice that he uses the average return of 8.12% (I get 8.13% when I calculate it), and not the average annual rate of return, which is 7.98%.

So the way this particular policy works is it will credit the policy holder’s account a maximum of 13% and a minimum of 0%. So, if the market returns 10%, you get 10%. If the market returns -10%, you get 0 (you won’t lose money except for inflation). If the market returns 20%, you get 13%. Pretty straight forward.

What I found interesting is the index they use in order to calculate the annual credit.

If you look, you’ll see a column titled “Actual S&P 500 Growth %”. This column represents the PRICE return of the S&P 500 Index, NOT the TOTAL RETURN. His numbers look like this:

IUL Account Credit

Now, what would the account look like if the insurance company used the S&P 500 Total Return Index? Let’s see:

IUL Account Credit Using SPTR

That’s quite a difference.

It’s important to point out that the insurance company is only using the S&P 500 as a guide for crediting the interest that goes into the account. The problem I have with this is that’s not how it is often sold to the buyer. It’s usually sold as a “What if you could get the return of the stock market without the risk?”

My point in all of this is just to make you aware of the way interest on most of these policies is calculated. They aren’t using the entire index. That’s important to know.

I’ll review the book once I receive it and have read it. Stay tuned…

If you want a good chuckle, watch this video:

First off, this insurance policy DID NOT have an annual return of 9.94%! It was more like 6%. It’s fine if you want to add hypotheticals in order to draw comparisons to other investments, but you can’t claim that those numbers represent YOUR return. They do not. How it is legal for them to make this claim is beyond me.

That’s not all…

Pay particular attention to the part where Paul Nick addresses “what if you invested in the stock market instead…” (10:17 in the video).

NOTE: He mentions a few times in the video that he’s “bringing some truth to the matter…” Gag!

He simply takes the annual price returns for the S&P 500 Index and plugs them into his spreadsheet and claims that’s what an investor would have received. HE CONVENIENTLY LEFT OUT DIVIDENDS! On top of that, he THEN adds a bogus 1% management fee (who pays 1% for an index fund) AND he taxes annual returns at 25%. His ending balance before the fees and taxes was $223,442. Take a wild guess what that number would have been had he been honest and used the S&P 500 Index Total Return?

Paul Nick's Example from Bank on Yourself

$749,628!!!!!!

That’s over $500,000 more than Paul shows in his example.

As you can see from the following graphic, DIVIDENDS MATTER!

S&P 500 Total Returns vs. Price Returns

I find it funny that he mentions dividends when showing how the insurance cash value balance grew, but left dividends completely out of the equation when he talked about the S&P 500 Index.

Here’s the deal: I know very little about the Bank on Yourself strategy. It could be the best thing since sliced bread (I doubt it). What I do know is that if the people behind it have to lie—and cling to their lies when confronted—in order to make their strategy look better, I don’t want any part of their strategy.

This is great. It’s free, but they would appreciate a donation. The work they are doing is important.

Join me in going through their series, Economics 101.

A lot of you may already know this. This is for those who don’t.

I’m on facebook a lot. One of the annoying things about facebook is the content changes so quickly. I can be reading something, exit facebook, come back, and the article I was reading is gone.

Then, one day I discovered a way to save articles. This is a really useful feature that I don’t think a lot of people know about. I have an iPhone, iPad, and Windows computer. I know the feature is available on all on three of those, so I would think it would be available on Android products too.

Here’s how to save links, articles, posts, and videos in Facebook iOS app:

1. Tap or click on the down arrow.

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2. Save the article, link, video, etc.

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3. To access your saved items later, click on the menu icon in the lower right corner of the screen.

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4. Open the Saved Items folder.

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This comes to us from Thomas Sowell’s “Basic Economics”:

“…a New York Times reporter writing about the problems of a middle-aged, low-income woman said, ‘if the factory had just let Caroline work day shifts, her problem would have disappeared.’ But, he lamented: ‘Wages and hours are set by the marketplace, and you cannot expect magnanimity from the marketplace.’

“Here again, the inescapable conflict between what one person wants and what another person wants is presented in a way that recognizes only one side of this equation as human. Most people prefer working day shifts to working night shifts but, if Caroline were transferred to the day shift, someone else would have to be transferred to the night shift. As for ‘magnanimity,’ what would that mean except forcing someone else to bear this woman’s costs? What is magnanimous about someone who is paying no cost whatsoever—in this case, the New York Times reporter—demanding that someone else be saddled with those costs?”