The Math in SSOYA is "Fuzzy"
(You Won't Believe It)
The Math in SSOYA is "Fuzzy" (you won't believe it) Throughout SSOYA the author alludes to a "S.A.F.E.T.Y. Fund™" where clients can grow their wealth in what appears to be a magical way not know to others. The flaws with the math in SSOYA are so glaring and problematic that the conclusions in the book are not "real world" and as such
cannot be relied upon when determining if using the strategies to grow wealth.
Again, the author is very clever when setting up the reader when discussing the "S.A.F.E.T.Y. Fund™." In the early pages of the book, readers have no idea that the "S.A.F.E.T.Y. Fund™" is really a cash value life insurance policy.
Why? It could be that if readers knew from page 1 that the entire book revolved around funding life insurance as a wealth accumulator, many would be turned off and would not want to buy or read the book. As you can learn by clicking here, using cash value life to grow wealth can be a very good idea, but the way it is postured SSOYA is very troubling and telling.
In summary, cash value life insurance is used as a cash accumulator because once funded properly (minimum death benefit to keep costs down), cash in the policy grows tax free and can be removed tax free in retirement. That is not possible with a brokerage account or 401(k) or IRA.
While a well designed cash value life policy can work well from a financial standpoint for clients, there ARE expenses in the policy. While the expenses can be minimized with proper design, they are there and are subtracted from the investment returns of the policy each year. To use a crude example, if you had $100,000 cash in a well designed indexed equity life insurance policy, the expenses annually may equate 1% of the cash value. Not bad to receive tax free (no capital gains or dividend taxes) growth and a tax free withdrawal.
Examples of Fuzzy Math
With the above brief background on the expenses in a
"S.A.F.E.T.Y. Fund™," let’s take a look at some of the examples from SSOYA. It will blow your mind at the flaws with the wealth building examples in the book.
The author starts indoctrinating the reader on page 99 where she discussed the "S.A.F.E.T.Y. Fund™" and has an example where she shows $100,000 growing "tax-free" for 30 years. She compares this to money growing in a tax hostile account for a client in the 30% tax bracket. The flaw with the math in SSOYA are too many to list, but the first one is that money that grows in brokerage account for such a client will not have the growth taxed annually at 30% unless all the gains come from taxable dividends or short term capital gains.
In the example on page 99, the author states that IF $100,000 grows at 8% (net) annually, the client will have $931,727 in an account vs. $485,572. (The $931,727 number is actually incorrect as that is the balance after 29 years. The author must have looked at the row for year 29 in her spreadsheet as the correct number is 1,006,266).
It really doesn’t matter if she pulled the wrong number or not as the example is useless and not grounded in reality. See the next heading which says it all.
The wealth building examples using the "S.A.F.E.T.Y. Fund™" in SSOYA use a vehicle that grows 1) MONEY MANAGEMENT EXPENSE FREE, 2) MUTUAL FUND EXPENSE FREE, 3) CAPITAL GAINS AND DIVIDEND TAX FREE, 4) INSURANCE EXPENSE FREE.
The average mutual fund expense is over 1.2%, the average money management fee on a small brokerage account is 1% and taxes on investments range from 15% for long term capital gains to 40%+ for short term capital gains and dividend taxes (depending on the state you live in.
If cash value life insurance is used as a wealth building tool, even the best and least expensive policies will have annual expenses of approximately 1% annually and upwards of 3% annually for other policies (these expenses include cost of insurance and per 1000 charge (which are other expenses such as commission, "dac" taxes, administration etc)).
Because the "S.A.F.E.T.Y. Fund™" in SSOYA (where the author would have you grow your wealth) is a cash value life insurance policy (although the reader doesn’t find that out until the later chapters of the book), NONE of the examples in the book are accurate as they do not take into account the proper expenses.
Another Faulty Example
On page 106 the author has an example of $10,000 growing in a compound manner where after 30 years the balance is $100,628 vs. $34,000 with simple interest. At least with this example, the author looked at the correct row of her spreadsheet, but again, there is no magic wealth building tool that returns 8% without any expenses.
Another Faulty Example
On page 142 of the book the author illustrates repositioning $90,000 of money a client has sitting as "idle equity" in a home and repositions that into the "S.A.F.E.T.Y. Fund™" where that money grows at 7% annually. She states that the account balance in the "S.A.F.E.T.Y. Fund™" at the end of 360 months would be $712,200. It’s not certain where this number came from considering that by using annual compounding growth on $90,000 for 30 years the account balance should be $685,103.
Again, it’s not really relevant that $712,200 is more then $685,103 because neither number comes from the real world.
Why?
1) Money does not magically grow expense free in the "S.A.F.E.T.Y. Fund™" life insurance policy. There are annual insurance costs and per 1000 charges; 2) because the author illustrated pouring $90,000 in year one into the life policy, she violated a cardinal rule of using life insurance to build wealth which is that you should NOT fund in year one all the premium dollars. Why? Because to do so would FORCE the client to buy significantly more death benefit otherwise the client will violate the Modified Endowment Contract (MEC) rules and would NOT be able to remove cash from the policy tax free in retirement.
To put it in English, there are laws that govern how cash value life insurance can be used to build wealth. Because money does grow tax free and can be removed tax free, in the "old days" many people lump sum funded them with very low death benefits. Because of this, the IRS/Congress passed laws to make sure cash value life insurance did not function so well from a financial standpoint and came out with the MEC rules (which require a certain death benefit depending on how much and when premium payments are made into a policy). The shorter funding period, the higher the required death benefit and in turn the higher the expenses.
This example along with the others in the book seem to indicate that the author does not understand how life insurance works to build wealth in the real world. If she did, she would not continue to allude to her "S.A.F.E.T.Y. Fund™" as a magic fund that grows without cost and would NEVER suggest of have an example where $90,000 or any amount of money is paid into a life insurance policy in year 1. Classic/ proper planning will have clients paying premiums into a life insurance policy over a 5-7 year so as to minimize costs in the policy (costs the author ignores throughout the book).
Continuing the Example
On page 145 she continues the example by allowing the idle $90,000 to grow except this time at 8% instead of 7% and the total in the "S.A.F.E.T.Y. Fund™" is instead $1,342,500. Again, using a simple excel program, the total using 8% annually on a $90,000 initial investment is really $905,639. While it can’t be determined how such simple math could be wrong, it really doesn’t matter as neither number is real world as money does not magically grow expense free at 8% in a "S.A.F.E.T.Y. Fund™."
Summary on the Fuzzy Math in SSOYA
It's really incredible that anyone who knows anything about how money grows in the "real world" or knows anything about expenses in a life insurance policy would take anything in SSOYA serious.
The numbers are so fundamentally flawed that they are useless to the non-advisor reader. Additionally, it's an outrage that insurance, financial and mortgage planners are using this book as a sales tool. It proves that they do not critically think about the sales tools they give out or if they have taken a critical look at SSOYA are devoid of the needed skills to determine what is so obvious (that the examples in the book are fundamentally flawed).
If you've read this book and thought it was your ticket to build wealth as discussed, that is not the case. If you want to read a book that is grounded in reality and shows you how the math in the book is derived to grow your wealth using the concept of Equity Harvesting, you should purchase The Home Equity Management Guidebook.
Reading it after reading SSOYA will be like a breath of fresh air. In addition, the conclusions from The Home Equity Management Guidebook are that Equity Harvesting can work well as a wealth building tool with setup the "right way." To read about this useful, accurate and full disclosure book, please click here.