I am writing this at 3.30am in the morning on a Wednesday.
For those of you who didn’t know, Money Maverick releases an article, ideally without fail, on Wednesday between 7 and 8pm (depends if he has an evening appointment).
So I have all of...15 hours+ to write a completely new article from start to finish, AND carry out my work day. I have no idea how I am going to pull this off.
But because this article has already begun, it means that my success is basically inevitable.
(I'm not sure if that is logical or if I'm just tired)
How did this happen? I was a little busy over the weekend trying to help my clients with the end of a sale, plus a trip with my company.
I can only blame myself, but one of the benefits of a company planning trip (and perks, like above) is that we talk a lot about our aspirations and what we hope to achieve for ourselves and our clients. We want to stay relevant to our clients so we can stay relevant.
Win-win. I’ve always loved that.
One of the prevalent win-win themes that I’ve been exploring a lot is how a Financial Advisor Representative sees something like the FIRE movement – in particular, Buy Term and Invest the Rest (BTIR).
Some of my clients have asked me about this: how I feel about it, whether they should do it (based on their needs), how to go about doing it...
And having done this for over 2 years for some of my clients, I'm fairly confident in my experience now compared to before.
I think many familiar are familiar with the term (punny) but not everyone applies it or fully understands what it is. For such a prevalent theme in the FIRE movement, it doesn’t feel like it’s been explored in the detail that is required to do it justice recently.
So I thought I’d try to explain it – and I wonder how it’ll sound like, coming from a Financial Consultant who has an equal appreciation for Whole Life products.
Here we go.
BTIR: Step by Step Guide
Let's look at this scenario.
30 Years Old, Male, Class 2
$300,000 Life/TPD/Critical Illness till Age 70
So BTIR, or sometimes known as BTID (Buy Term and Invest the Difference) - is basically using the premiums you would have used for a Whole Life policy and buying a Term policy instead, followed by investing the difference.
This is how it goes.
Step 1: Get the quotes for your Whole Life and Term policy.
Term: $1441.80 [40 years]
Whole Life: $3147.20 [20-year premium payment]
Do ensure that the parameters for your comparison are accurate (further details below).
Remember, there is no BTIR without the existence of a compared Whole Life Plan. The scenario leaves me with the following numbers above.
Step 2: Subtract the difference.
$3147.20 (Whole Life) - $1441.80 (Term) = $1705.40 (Investment Budget)
Done. This is the amount you need to religiously invest every year.
For a slightly fairer comparison, you should invest it according to the number of years that you would have paid for the whole life plan, which means that you only need to invest this amount for 20 years, not 40.
Step 3: Invest the difference…
This is the tricky part. Where do you invest, what do you invest in?
As an investment specialist I would obviously have a couple of suggestions with expensive funds that I offer – funds that can outperform market indices or offer dividends with more stability than REITs. I also show you how you can get higher returns.
But ultimately, whether you pick somethign like your Unit Trust platforms, Robos, the STI ETF, Dimensional Funds, REITs, SSBs, CPF, Bonds like Astrea or even your Multiplier account, your yield matters.
At the end of 20 years, your yields are as such from a capital of $34,108 [$1704.20 x 20]:
At 2%: $42,265 At 4%: $52,815 At 6%: $66,498
Step 4: …And let it roll till the end of your Term.
Since the duration of the Term selected here is 40 years and you’ve already invested for 20, you can now leave this large sum to roll on for another 20 years (40 – 20). So if you see that you’re on track to perform in the manner that you want, just leave it rolling.
Step 3 and Step 4 are the hardest parts of this whole thing.
Committing to something for 40 years is hard. Close to half the marriages in Singapore don’t last that long.
This is where you get to see if you are truly meant for this strategy, or if you’re going to flub it up.
(Although sometimes its just death, not divorce. Eh)
Step 5: Celebrate your awesomeness.
What is the final sum? The final sum is your self-insurance after 70.
If you regretted not buying a whole life policy for the children and grandchildren you’ve come to love, suddenly its not too late because you have a ton of money.
Seriously though – if you’ve pulled this off, you are an exception amongst rules.
The average Term Insurance policy lasts 6 years* and the average fund that people hold their money in lasts 3.27 years**.
In a world of spenders and compromises, you are disciplined beyond measure.
This is your reward.
BTIR at 2%: $62,804
Whole Life Policy with Poor Bonuses: $76,878
BTIR at 4%: $115,724
Whole Life Policy at Ideal Bonuses Paid Out: $132,082
BTIR at 6%: $213,269
You can see that it takes very little – no more than a 4.5% net yield – for you to ‘Beat’ one of, if not the best whole life policy outcomes in this scenario.
You also saved $5272 more than the person who opted for the whole life policy (total premiums paid).
You are self-insured, which means that you can ‘claim’ for anything, not limited to the definitions on your policy document.
You also likely have further future upside potential if you’ve made it this far. The differences will only widen over time.
All those are the upsides to being exceptional. I'm sure you can think of others, too.
And that’s a LOT of upside.
And Then Some
I thought I’d be the Devil’s Advocate for people who feel that advisors may push whole life a little too much – especially since I do BOTH whole life (ECI) and BTIR personally. As such, I intentionally didn’t use an example which would have favored whole life, which I could have.