- Warren Buffett's two rules of investing.
Number one, don't lose money.
Rule number two, don't forget rule number one.
In this educational episode,
I'm going to address,
what is my take on savings and investments
versus Dave Ramsey's approach?
Get ready.
I'm gonna share with you some insights
into my background and experience
and why I approach things differently than Dave Ramsey does.
One of us isn't wrong.
I think we're both right.
But you need to choose which one is the best approach
for you to take.
(light music)
So, I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for nearly five decades.
And for my understanding,
I've been helping people optimize assets
and minimize tax and empower their authentic wealth
for probably as long
as Dave Ramsey's been giving financial advice.
My understanding is that we both had negative experiences,
financial setbacks years ago, probably at the same era,
the 1970s, the 1980s.
And Dave decided to pound the key,
get outta debt as fast as possible,
invest your money in mutual funds,
in the market, and if the market is volatile,
just hang in there, the market always comes back.
And I've heard him say you should average 12%.
Now, let me just say, that's how I started out.
I started in 1974 and I was a huge proponent
of buy term insurance and invest the difference.
And pretty soon down the road,
in 30, 35 years, you'll have enough money
investing the difference that you don't need insurance
anymore later in life.
Well, I found that a lot of mega wealthy people
were buying more life insurance than ever
when they were in their 60s and 70s.
And it wasn't just for death benefit for estate tax.
It was to accumulate their money tax-free
and be able to access their money tax-free.
And they were earning rates of return,
you know, between six and 8% net cash on cash.
And so, that's when I got my big epiphany back in 1980.
So, from 1974 to 1980,
I ended up being responsible for over 3,000 clients
in 13 Western states and I actually licensed and trained
over 1,000 individuals who were also out there
telling people to buy term insurance
and invest the difference by diversifying
and dollar cost averaging in a mutual fund portfolio.
So, we were trying to earn an average of 12%,
like Dave says you should average.
Well, people weren't averaging that,
but let's assume you could.
I began to realize and so did EF Hutton,
which was not an insurance company,
they were a brokerage firm,
that in order to try to earn 12%,
you've got to try to time the market and what have you
and you can't panic.
Most people can't handle that,
because most people, when the market starts to head down,
especially 20, 25, 30%,
they say enough already and they sell low
and then they hang on and wait, wait, wait
'til it's up here and then they buy high.
And so, that's way DALBAR says the average person
with money in the market is only earning 3.49%.
Now, Dave Ramsey says,
"Yeah, well, you would earn 12% if you hung in there."
Actually, DALBAR, who studies the market,
says that in any 20-year period,
if you did not panic and you bought and held,
you would average more like 9.14%.
Now that's before tax.
So let's go back to this.
Let's just assume you could earn 12%, like Dave says.
Now, did you ever play red light, green light
when you were a kid?
Yeah.
So, you know that sometimes you take some steps forward
and some steps back.
So I realized that with money in mutual funds,
sometimes, we might make 20, 25% gains.
You may take 20 steps forward and then the next year,
the market comes down.
In a 10-year period,
there's usually seven up years compared to three down years.
So three of those years, 30% of them,
you're taking steps back.
In the decade from 2000 to 2010,
we had five down years.
You were taking steps backward five, half of the time,
and forward, and that's why it's called the lost decade.
'Cause people who started out with $1 million
in the year 2000, they saw that $1 million dwindle in value
down to 600,000 from 2001 to 2003.
It took 'til 2007 to come back to a million again,
to break even.
Then in 2008, they saw that million lose 40% again
down to 600,000.
And it actually took until 2012 to come back to a million.
Now, people using indexing,
which is one of my favorite strategies,
did not lose a dime after the 9/11 terrorist attacks,
nor in 2008.
They were cheering.
And at the end of that 12-year period,
their million had grown to 2 1/2 million,
some even three million,
versus those who had their money in the market.
Hang in there, the market always comes back.
So, I gave a lotta thought to Warren Buffett's statement,
"Don't lose money."
Easier said than done, maybe,
but I learned how to do that using indexing.
And I think Dave Ramsey and his team think
that I'm talking about indexed mutual funds.
No.
People who have their money in an indexed mutual fund,
like the S&P 500, would've lost 40%
in that indexed mutual fund from 2001 to 2003
and again lost 40% a second time in that decade in 2008.
That's an indexed fund.
Your money is diversified in the S&P 500,
but you would've lost 40% twice.
Indexing is a strategy.
An indexed fund is a commodity, okay?
So, what I realized is,
if you could earn 12%,
that's not what you're netting.
If you could really average 12%,
and this was really EF Hutton's idea,
if you take 12 steps forward.
So let's say you accumulate a $1 million nest egg.
And let's say you could earn 12%.
You theoretically oughta be able to withdraw 120,000 a year
without depleting your $1 million nest egg
if you're earning 12%.
You with me?
Well, EF Hutton said, "What are we thinking?
You pull out 120,000.
You're not netting 120,000
in a tax-deferred IRA or 401k.
You have to pay tax on that."
And most people who were savers are not
in a lower tax bracket when they retire.
So that's not been the proper advice for years, you know?
A step in the right direction is a Roth,
but I've never owned an IRA or 401k and never will.
I've never owned a Roth.
My favorite vehicle knocks the socks off of a Roth.
It has the two benefits of a Roth
and four additional benefits that Roths will never have.
But getting back to this analogy, this metaphor,
EF Hutton said, "If you pull out 120,000,
most Americans between federal tax and 41 outta 50 states
has a state income tax,"
I work with a lotta California people who are wealthy.
They are at least in a 33% effective tax bracket.
So they pull out 120,000.
They pay tax of 1/3, okay,
40,000 to net 80,000 to buy gas, groceries,
prescriptions, golf green fees and what have you.
But wait a minute.
The asset manager, the type that Dave Ramsey refers to,
they usually charge at least 1%
to manage that $1 million.
One percent is 10 grand.
If you subtract taxes and fees,
you're earning 12 and you're only netting seven.
You're taking 12 steps forward and five steps back
and you're netting 7% or 70,000 to buy gas and groceries.
EF Hutton back in 1980 said, "What are we thinking?
Let's go to the multi-trillion-dollar insurance industry,
the backbone of America,
and they've weathered the Great Depression
with flying colors.
And in 2008, not one single legal reserve insurance company
went under when 400 banks did.
And let's put the money in those
and let's do something different.
Let's buy term and invest the difference
under a tax-free umbrella.
But instead of trying to get this much insurance
for the least premium,
let's do the opposite.
Let's take the least amount of insurance
the IRS will let us get away with
and put in the most premium the IRS allows,
and this turns into a tax-free cash cow
for living benefits."
And so, back in 1980, when I saw that, I thought,
"Okay, this is buy term, invest the difference on steroids."
Because I had clients put in 500,000
and they were immediately earning 11, netting 10.
And frankly, they've been averaging that ever since
with indexed universal life and by rebalancing.
So, if they were earning 11 and netting 10,
only one percentage point, okay,
was allocated to pay for the cost of the insurance,
which the IRS said had to be there
in order for it to be tax-free under three sections
of the code, 72e, 7702, and 101a,
which say that money inside
of a permanent life insurance policy accumulates tax-free.
You can access that money tax-free,
and when you die, it blossoms and transfers income tax-free.
Okay?
Now, nothing else does that in the Internal Revenue code.
But what Hutton realized is,
you're trying to take the last amount of insurance
and put in the most money
to use it for living benefits.
So I had people putting in 500,000
and immediately started pulling out
50 grand a year tax-free.
Basically, they've been doing it ever since.
If you put in 500,000,
the IRS said the amount of insurance
is only about a million, only double that.
Well, people say, "Who pays $500,000 for $1 million
of life insurance?"
And Hutton said, "Our clients do."
Because you're not interested so much in the death benefit.
You're interested in the tax-free accumulation and access.
And if you structure it correctly and fund it properly,
you can earn 11 and net 10.
I have raised 11.17 and netted 10.07 cash on cash.
Every $1 million that I accumulate inside
of cash value inside of an indexed universal life policy,
at retirement, can generate 100,000 a year
of tax-free income.
You would have to be earning 15 or 16% in a mutual fund
to pull that out, and after tax and fees, to net 10.
I don't wanna go through the volatility and the risk
in the market to have to earn 16 to net 10
when I only need to earn 11 and net 10
in a properly structured indexed universal life.
Now, Dave and his team,
maybe they just don't understand this,
but they go,
"Well, I'd never seen an insurance policy do that."
I can show you hundreds of them who have performed,
that have performed like I've indicated.
The point is this.
When I put in 500,000,
the insurance company's only charging me
for the net amount at risk
if the original death benefit is a million.
If I don't need income right off the bat,
that 500,000 at an average return that I've averaged
since 1980, 9.6, let's say,
will double in 7 1/2 years.
When my 500,000 that I put into the insurance policy doubles
to a million, the insurance company is not charging me
for insurance anymore.
I am self-insured.
I have bought term and invested the difference tax-free,
and now I am self-insured, usually within 12 1/2 years,
in a properly structured indexed universal life
that's maximum funded.
So, using Dave's approach, buy term, invest the difference,
the mutual funds, after tax,
it takes 25 or 30 years before you could let go
of the insurance.
Here, I'm self-insured.
The cash value equals the death benefit
in 12 1/2 years, 15 years at the longest for most people
who set these up correctly.
So, I'm still a big proponent of buy term,
invest the difference, but I do it tax-free,
and I get self-insured sooner
in about half the time than a lot of the advisors
that Dave Ramsey instructs and teaches.
Does that make sense?
Now, again, I'm not here trying to attack Dave,
but I need to clarify,
'cause people are always asking me on this channel.
"Doug, who's telling the truth?"
Well, (bell ringing)
we're probably both telling some truths.
It's just which approach do you wanna take?
I would rather have tax-free accumulation
and only have to earn 11 to net 10
instead of have to earn 16 to net 10.
But the sad fact is,
DALBAR says the average person,
because they buy and sell at the wrong time, they panic,
they're only averaging 3.49%.
And this is what precipitated the 4% rule
in the financial services industry.
Because people are only averaging 3.5%
on their mutual funds,
they tell their broker-dealers
and the broker-dealers tell their reps,
"Do not illustrate any more than a 4% payout in retirement
without the client signing a hold harmless
that they won't sue us for them outliving their money."
Because they're only earning 3 1/2 is the reality,
because they're buying and selling at the wrong times.
So, if you had $1 million nest egg
and you could only pull out 4% or 40,000 a year
and you have to pay tax, even in a 25% bracket,
you're only netting 3% or 30,000.
You subtract 1% in fees, you're only netting 2%.
Do you want to net 2%
or do you wanna net 10?
It's a no-brainer.
And so, this is critical for you to understand,
and this is the difference between Dave Ramsey's take,
you know, put your money in the market and hang in there,
the market always comes back.
It's not averaging 12 according to DALBAR.
It's averaging nine.
If you could average nine, you're only netting 6% after tax,
5% after fees.
I can earn 11 and net 10.
I can earn twice as much by using indexing.
Indexing allows my money to participate
when the market goes up and not lose one dime
when the market goes down.
Now, if this is intriguing you,
I don't have time in this episode to explain indexing,
but I'll gift you this book and you can learn more.
This is called "The LASER Fund,"
and it's actually two books in one.
This side has all the charts and graphs and explanations,
14 chapters, about 200 pages.
If you learn more by stories,
you flip it over to this one,
and this has about 100 pages, 12 chapters,
with 62 chicken soup for the financial soul stories
on how to use maximum funded indexed universal life
structured correctly and funded properly.
Then it's deemed a LASER fund.
And you can use it for all kinds of financial goals,
not just retirement.
College funding for your kids,
working capital for business, real estate management.
This is where I keep my assets for liquidity,
safety, and predictable rates of return,
and I prefer tax-free.
That's why LASER means liquid assets safely earning returns.
Go to laserfund.com.
Contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost.
I'll fire out a hard copy to you.
There's options there to listen and learn, watch and learn.
But this is about you.
Check out the webinars we teach on a regular basis,
and you can even set up an appointment
to talk to a specialist to see how these strategies
may help you save and invest
like smart, savvy people do.
So, this is about your future.
You choose.
(light music)