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.
That’s why I used 2%, 4%, and 6% - in my experience, they tend to be benchmarks for the likelihood of how your investment funds need to perform for Life/TPD, Life/TPD with CI and Life/TPD with ECI respectively.
For the last one, even with a low multiplier of x2 (making the cost quite high), it’s not uncommon for a scenario to exist where your Term premiums are higher than your whole life premiums, and your ROI required for investing is likely to be really high as a result.
As for other considerations…
1) Realize the limitations of your analysis
Basic limitations: There are things like inflation, changing market conditions, changing conditions in your life, past performance doesn’t equate to future performance…
Slightly advanced limitations: Non-guaranteed insurance (if you’re using a Group Term policy), non-guaranteed premiums (if there’s Critical Illness insurance), credit ratings.
2) Head to Head
It must be head to head – as a FAR (Financial Advisory Representative), I get to offer lots of companies.
The idea of using two different companies is flawed and I’ve had the fortune and misfortune of seeing it happen already, under your slightly advanced limitations as listed above.
You can insist on such a comparison and I will be more than delighted to help you, but I would explain the risk to you and whether you would be willing to acknowledge it.
3) Match up the Capital to the best of your ability
In the above analysis, the person who opted for BTIR and succeeded would have had an additional $5272 in capital. EDIT: Hariz was kind enough to point out that after the 20th year, you would continue to pay for your Term premiums. That eats into the overall return of your IR, which brings it up close to a 6% annualized yield for you to win.
What do you do with the capital? Invest it? Spend it? Either way, you should use it for something. Be fair. At the end of your tenure, if you spent it, you could always say –
‘I’m so glad that I was disciplined enough to BTIR.'
'Not only did I make more money than what an insurance companies’ permanent policy would have given me, but I got to _______________’ (insert whatever here)
I would personally suggest ‘Trip to Europe or ‘Trip to New York’ here.
I have not done either before, and it would be kind of nice.
4) Realize the limitations of BTIR itself
I’ve mentioned some of the limitations already – for example, the lack of committing to investing the rest or even the term policy itself.
There are some general limitations mentioned here, although to be fair not all of them are applicable to the Singapore context.
You have to be exceptional and disciplined – and if you have no history of doing that for your credit cards, making your bed or paying your bills on time, I’d really suggest you start small before trying to see how that works out for a movement (BTIR) that clearly requires half a lifetime of discipline. 5) Other last considerations How long should your Term policy be for? How long should your Multiplier for your Whole Life policy be until, and how many times should it be? How many years should you set the premium for your whole life policy, and is there a difference? What about Group Term Insurance?
So that’s it.
Stay woke, salarymen.
1) Dalbar – Quantitative Analysis of Investor Behavior, Dalbar Inc (March 2011)*
-Funds are not held longer than an average of 3.27 years
2) Optimizing Retirement Income by Combining Actuarial Science and Investments (2015)** -Some other general weaknesses of the BTIR principle
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