The Financial Mistake most Millennials are Making

As reported by Buzznet, a recent study uncovered that 75% of millennials don’t have any life insurance, supposedly because they can’t afford it. But something millennials fail to realize is that the younger you are when you purchase life insurance, the cheaper your coverage will be for your entire life. Life insurance isn’t as trendy as it once was in America, but with proper education, that can and should change.

One reason millennials have avoided life insurance is that they don’t think it is exciting or sexy enough.  Target Date Mutual Funds and other trendy typical financial planning products are portrayed as the place to park your money. One study shows that over 70% of all 401ks are invested in these Target Date Mutual Funds.  But that isn’t because Target Date Mutual Funds are the best place to park your money.

For example:

• A 25 year old earning $4,000 could live on $3,200 and park $800 every month until they are 65 into a Target Date Mutual Fund. If they could earn 7% for those 480 months they would be a multimillionaire with $2,099,850.72.

Sounds pretty exciting but logically, would they really be a multimillionaire or not?

According to MarketWatch, a Target Date Mutual Fund is more expensive and less effective than a simple investment plan.

One of the reasons Target Date Mutual Funds are more expensive is due to what is called the expense ratio charged in target date funds. Typically, the expense ratio can be as high as .51%. This makes Target Date Mutual Funds less attractive to a savvy investor. But obviously, with sexy marketing, Target Date Mutual Funds still attract plenty of novice investors who don’t know any better.

Secondly, Taxes on Target-Date Mutual Funds can be assessed as capital gains or based on income depending on how the funds are held, either in qualified or non-qualified accounts.  But either way, taxes will reduce the overall growth of these funds.

• If the expense ratio is only .40% and taxes are a mere 2%, then that final $2,099,850 will be reduced to only $1,100,750.
• If the expense ratio is .5% and taxes are 3%, then that expected $2,099,850 will be reduced to a mere $835,734.

It is important to realize that over the past 20 years, December 1999 through December 2019, the S&P 500 Index has only experienced an annualized return of 4.164%.  With this kind of a return along with a 0.4% expense ratio and taxes of only 2% that $2,099.850 is reduced to only $557,286, or about a quarter of what was expected.  And once you consider you cost basis of $384,000 ($800 per month for 480 months, age 25 to 65), you’ll end up earning less than a 1% annual return on your money, instead of 7%.

Yet, if that $800 every month was spent paying the premium on a participating whole life insurance policy, from age 25 to 65, there would be $714,088 of guaranteed cash value and $1,636,206 of guaranteed death benefit. With dividends, the cash value would be closer to one million, at $984,534, and the death benefit would be closer too million at $2,194,907. This cash value build-up would be completely accessible and could be used without any taxation throughout one’s lifetime, and the death benefit, minus any cash values spent or borrowed, would be passed on tax-free to the beneficiaries of the policy.

These facts, if millennials were aware of them, would definitely make life insurance more popular.  But these facts about life insurance are not as sexy as telling people that they can become multimillionaires.

According to the Federal Reserve Bank of Chicago, back in 1989, 77% of all American households had life insurance coverage.[iii]  Today, that number has been greatly reduced, namely because of the serious misunderstandings and the grave misrepresentation that has been spread about life insurance.

Yet there is no other product that can provide the living and death benefits that participating whole life insurance can provide.   Life insurance by design, is not an investment but is rather a binding contractual agreement which keeps your money safe and liquid so that you can use other people’s money without losing the growth on your own money.  It is the financial tool that successful people have used for centuries to keep more of the money they make and stop losing money to taxes, interest, and volatility.  Millennials, as well as others, would do well to discover these truths before they lose the opportunity to purchase the life insurance that will provide them with the guarantee that they will have enough money when they retire, instead of risking money in investments that get destroyed by taxes, expense ratios, and volatility.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.