Missed Fortune 101

[a_slew_of_mice]

Has anybody read this book? I was recommended this book and was wondering if anybody else had read it.

Basically, the strategy the author recommends is to over invest in life insurance policies. The advantage is that it's tax free and completely liquid. Seemed logical by the way my friend described it.

[Puf2006champ]

I have read this book and I found it rather interesting (I have read many finance books). His math and logic all seems to make sense in that you can legally avoid taxes by going the whole life insurance (correct me if my memory is wrong) versus the 401K.

What concerns me is that he is recommending something that, you would think, would be obvious to any financial professional or author. I know that these people are often wrong, but this is a pretty big gamble to take if nobody else seems to be recommending the strategy. Also, if everybody did go the route recommended in the book, there would be a huge decrease in taxes collected. In other words, the government would fix things so that this money is taxed.

It is a good read for those people looking to go beyond "invest money into you 401k and watch it grow."

Pufchamp

[captZEEbo]

Are you sure life insurance policies are tax free and completely liquid? I'd need to see some more specifics wrt amounts etc.

[Nomad84]

I read this book and at first it seemed like he was making some very interesting points. For example, he promotes the use of arbitrage when you are able to borrow home equity at a low rate and invest it at a slightly higher rate. He also expresses the importance of only using equity to invest in things that are essentially guaranteed. He demonstrates that by keeping equity low, you can amass significantly more wealth than by paying off your mortgage earlier. I appreciated the fact that this book shows an alternative to most other personal finance book because it proves that debt is not necessarily evil and it's not necessarily in your best interest to get out of debt as soon as possible. However, later in the book, I changed my opinion.

Part of it may be my misunderstanding of his insurance-related savings strategies. He promotes the overfunding of insurance policies as a means of amassing wealth that can be accessed tax free without penalties. It's been a little while since I read it, so I can't remember my specific gripes, but in several instances, I disagreed with his math. For example, he says that one benefit of overfunded life insurance policies is that if you die soon, the proceeds of the policy will pass to your heirs tax free and will significantly exceed the cash value of the fund. While this may be true, my understanding of how these policies work (and I may be totally wrong) is that they would have gotten the same benefit even if you had not overfunded the policy. If that is true, then you could have bought the policy and not overfunded it, died, and your heirs would still get the same benefit in addition to the excess amount you would have invested in the insurance policy. If this is correct, then you are in essence giving that excess money to the insurance company if you die with cash value in your fund (can anyone confirm this?) in hopes that you will deplete the cash value before death or at least earn enough excess investment returns to make up for this "loss" when you die. Maybe the insurance strategy still makes sense, but I didn't like that he conveniently ignored this characteristic of the strategy.

I also was rather annoyed by the author's selective consideration of the time value of money. In particular, he repeatedly pointed out how one of the biggest drawbacks to a 401k is the huge tax burden when you withdraw money in retirement. He says that it is much better to pay taxes now and invest it tax free. While I agree that it may be better for various reasons, one of his big arguments is that paying $1000 taxes now on $3k of income is vastly better than paying $30k on taxes upon withdrawal after that account has grown to $90k. It doesn't really matter if your money multiplies 30x either way. (2/3*3000)x30=2/3*(3000*30) so it really makes no difference, yet he repeatedly says "You'll pay 30 times more in taxes if you use a 401k!"

He also fudges the math to sound more appealing in several places. It's possible that this was an honest oversight. I thought it looked funny, but I had look closely before I realized what the problem was. Either way, the math was important to a significant portion of his overall strategy, and the error was inexcusable. When he is talking about the benefits of borrowing money from your house to generate tax deductions while also arbitraging the interest rates. For example, he would suggest borrowing 100k of equity at 7.5%, which is effectively 5% since he's assuming a total (federal, state, and local) marginal tax rate of 1/3). He then says that by investing the 100k at 7.5% ($7500 per year), and taking advantage of the 7500 in tax deductions to avoid paying taxes on the gains, we can make a profit. After all, $7500 in gains on the investments minus $5000 net cost of the loan gives us $2500 more than we started out with. I'm pretty sure his example had a couple more twists and turns, but thats the basics of his flawed arbitrage strategy. He is taking credit for the tax breaks of the mortgage twice. First, he considers only the "net cost" of the loan (which includes the tax benefit), then he tries to take credit for the tax deductions again to offset otherwise taxable income.

There may have been other parts I disagreed with at the time I read it, but as I said before, it's been a little while (ok...so a few weeks) and my memory isn't that great. I do, however, remember being reasonably impressed with the early parts of the book and pretty disappointed by the time I got to the end. Even though I didn't agree with the math in several places, I would be interested in learning more about his insurance strategies. I didn't know enough about that stuff to really critique it. It's possible that there may be some merit to his ideas, but it's also possible that someone with more knowledge of the subject could find all sorts of holes in his strategies.