What is an “RMD”?

“RMD” stands for Required-Minimum Distribution.

A “distribution” is money that you intentionally take out of your retirement account.¹

A “required minimum distribution,” then, a minimal amount you must withdraw.

For some people, this is no big deal, because they’re already living off their retirement money.

However, other people might prefer to leave their retirement account alone indefinitely.

And the RMD prevents them from doing so.

Why is there an RMD?

Why can’t you just leave your retirement money untouched?

Well… retirement accounts are often given various tax advantages – such as tax-deferred growth.

From the official point of view of the U.S. government, these benefits are intended for a single purpose: to help you accumulate money to live on in retirement.

So, the basic rationale of the RMD is this:

Once you’re in retirement, you must start settling up your tax bill.

Who Has to Take an RMD?

Since the tax advantages are supposed to assist people in retirement preparation, you can only postpone your tax bill until you’re in retirement.

The RMD is a guarantee that once you’re retired, you’ll be on the hook for at least some of those taxes you’ve been deferring.

“Retirement” can mean different things to different people.

For consistency, the IRS² has defined it in terms of a person’s attained age, rather than in terms of whether they’re “working” or not.

When Do You Have to Take the RMD?

For most purposes, the IRS considers a person to be “at retirement age” once he or she hits 59 ½.

But! This doesn’t mean that you have to start withdrawing money right away.

At 59 ½ you may begin taking penalty-free distributions from your retirement accounts – but you don’t have to.

But the IRS won’t wait on you forever.

At a certain point, the IRS will start force-feeding you your retirement money – whether you want to touch it or not.

This point, called the RMD age, is currently 72.

Congress changed this crucial number in the 2019 “SECURE” Act.³

Prior to this law, the RMD age was 70 ½.⁴

Where Would Your Money Be Susceptible to an RMD?

What accounts does this apply to?

First and foremost, we’re talking about retirement vehicles that are funded with pre-tax dollars.

Prominent examples of this are Traditional IRAs,⁵ as well as employer-sponsored, defined-contribution plans, such as the 401(k), the 403(b), and the 457(b).

But… Roth 401(k)s are funded with post-tax dollars, and they have RMDs, too.

The notable exception to the minimum-distribution requirement is the Roth IRA.

When in doubt, consult your employee-benefit administrator, human-resource department, or financial adviser for detail.

Because, you don’t want to make a mistake, here!

What Happens If You Don’t Take Your RMD?

The IRS imposes a hefty, 50% penalty on money that you were supposed to take but didn’t take.

And this penalty, sometimes referred to as a 50% “excise tax,” is in addition to the income tax that was owed on the RMD.

How Much Do You Withdraw?

Major caveat time!

You’re responsible for the numbers!

The government does have worksheets available at IRS.gov. And you should definitely use these, and consult with your tax preparer, if you have portfolio-specific questions.

That said… we can make a few points – for general informational or entertainment purposes, only.

Number one, your RMD amount is the answer to a division problem.

The dividend⁶ is the amount of money you have in relevant retirement accounts.

You get these numbers from your custodial or other financial institutions. In the case of an IRA, they’ll send you an “informational” Form 5498.⁷

This document contains several key pieces of information, including the Fair-Market Value, or FMV, of your IRA – as of December 31 the previous year.

The FMV is divided by something called your “life-expectancy factor.”

Also known as the “RMD divisor,” this is supplied by the IRS in widely published tables.

Warning! The IRS is reportedly in the process of revising its tables.

Suppose John is 72 and has a single IRA valued at $1,000,000.

For the time being, John’s divisor at 72 is “25.6.”

Therefore, John’s RMD is $1,000,000 / 25.6, or $39,062.50.

How Do You Take the RMD?

To take the RMD, you’ll fill out a distribution form from what whatever institution holds your retirement account.

At tax time, you’ll receive an IRS Form 1099-R, reporting the distribution amount.

You’ll bring this to your tax preparer.

In my example, the RMD amount reported on John’s 1099-R will be treated as income for the relevant year, and John will be taxed at whatever his income-tax rate is.

If John fails to take his RMD, he’ll forfeit half of the RMD value. That’s $19,531.25 in my example!

And, remember, he still owes income tax on the full $39,062.50.

Conclusion

An “RMD” is the minimum amount that the IRS requires you to withdraw from many retirement accounts, once you hit

72 – or, under previous rules, the age of 70 ½.

There are many complications that I haven’t gotten into, here.

For example, there are rules that govern circumstances such as:

• where you own more than one retirement account
• where you are still employed at RMD age
• where your retirement account has been funded with post-tax dollars, but still has to meet minimum-distribution requirements
• and so on

But if you found something of interest or of use in the brief overview, I ask that you like the video. I also invite you to subscribe to the channel if you’d like to see more content along these lines. If you click the notification bell, you’ll be alerted to new content as it becomes available.

Either way, I thank you so much for joining me today. And I look forward to seeing you again in another video.

Thank you so much!

(Featured-image credit: https://www.pexels.com/photo/question-mark-illustration-356079/https://images.pexels.com/photos/356079/pexels-photo-356079.jpeg.)

Notes:

In broad terms, you can think of retirement as broken up into three (3) periods: contribution, accumulation, and distribution.

3 Phases of Retirement Planning:

Contribution Period

This is where you invest or save money for use later. In the case of employer-sponsored plans such as 401(k)s, 403(b)s, 457(b)s, and the like of that, this is frequently accomplished via elective deferrals or salary reductions.

Contributions made this way are generally “pre-tax,” meaning that they are deducted (or excluded) from your gross income when your tax obligation is calculated.  employee contributions that are a generally a percentage of the employee’s compensation.

But you might also just write a check to your own Individual Retirement Account or Annuity (IRA). If it’s a Traditional IRA, then contributions are deductible. In the case of a Roth, they aren’t.

Of course, you could also save by using non-retirement-specific vehicles – such as certificates of deposit (CDs), money markets, non-qualified annuities, and savings accounts.

In these cases, deposits could be made the way you make any other deposits into bank accounts.

Getting into the pluses and minuses of any particular vehicle is beyond the scope of this article. Check back for additional posts, or visit my YouTube Channel, where I do tackle some of these questions.

Accumulation Period

Once invested or deposited into one vehicle or other, hopefully, your money is earning interest or increasing in value due to favorable market experience.

Of course, positive investment experience is seldom – if ever – guaranteed.

Rather, it depends on the performance of various equities or securities, stocks and bonds, and other things (commodities, futures, put options, or whatever) you bet on.

In some cases, you might put your money into a “fixed” vehicle – like a CD or certain annuities – where there is a guaranteed minimum rate of interest. Such vehicles are not entirely without risk, however. For one thing, there is possibility that the institution will fail. For another, the guaranteed rate is likely fairly low, and it may not adequately keep pace with inflation.

There’s lots to consider!

Distribution Period

Once you have grown your money and attained whatever age (for IRS-qualified vehicles, this is often 59 1/2) is required to access it without a penalty (if applicable), then you can begin to live off of it.

To do this, you’ll need to turn your retirement savings into an income stream.

Again, this would take us too far afield, presently. But, I speak about it in one of my YouTube videos.

How Do You Save?

But, from a practical point of view, converting assets into income requires that you have convertible assets! And earning something with your money presupposes that you had it deposited or invested into something.

So… what about that? How do you go about saving for retirement?

Here are five quick tips to jumpstart your thinking.

5 Tips

Start Early

Of course, this is easier said than done, sometimes. And if you’re already barreling down on retirement age, it’s not possible to travel back in time.

But, it’s better late than never.

The point of starting your savings are soon as feasible is multifold.

In the first place, it helps you to develop good and thrifty habits.

But, secondly, from a purely finance-101 perspective, it also enables you to more fully harness the power of compound interest.

Invest Wisely

Still, putting money away early does nothing for you if you lose it all.

I am certainly not a financial adviser and cannot give you investment advice.

But, unless you feel comfortable handling your allocations and transactions yourself, you’ll probably want to avail yourself of the recommendations of someone knowledgeable and licensed in the relevant products.

If you’re tempted to dabble in the stock market, then you will need to consult a broker or mutual-fund manager.

If you want to utilize CDs, money markets, and savings accounts, then your banker will perhaps suffice.

If you’re wanting to look into annuities and life-insurance products, then an insurance agent or broker should be in your network.

Pay Yourself First

Even good investments cannot make you money if you don’t fund them.

And this funding, to be most efficacious for your retirement, will have to be consistent and long-term.

One of the most recommended ways to do this is to get into the habit of automatically setting aside a portion of your paycheck, every time you receive one.

How much should you set aside?

Try to Save 10-20% of Your Income

This is going to depend.

But an oft-heard rule of thumb is to aim to save 10% to 20% of your pay. The median is obviously 15%.

But, don’t put off saving if you think you can’t manage these percentages.

1% will go further for you than 0%.

Having said that, and unless your income is very high in contrast to your expenses, it is unlikely that 1% will do much for your retirement nest egg.

So, try to make your contribution meaningful. Do enough so that you can feel good about your plan.

At the same time, you need to ensure that your contributions are sustainable. So, don’t do so much that you can’t pay your bills in the meantime.

But… if overly high expenses are the problem, look into creating a budget, cutting expenses, and so on.

Don’t Try to Time the Market

To repeat: I’m not an investment expert or financial adviser!

But, one of the standard aphorisms one hears when reading through the literature is that time in the market beats trying to time the market.

The point of this saying, I take it, is that you’re being encouraged to take a long view of things. Don’t think of the stock market like the blackjack table or a slot machine at the casino. Or… you run the risk of having the “house” take your hard-earned cash!

Instead, many people encourage us to put our money into dependable investments.

What are those? Well… I can’t say, specifically.

One of way categorizing them, though, would be things like the so-called “Blue Chip” companies, dependable dividend-paying companies, “large cap” corporations (i.e., ones with a lot of money), and well-diversified index and mutual funds.

What Kind of ‘Vehicle’ Do You Use?

Once you have gotten sufficiently motivated to start saving, one question is: where do you put your money?

Who do you make the check out to?

The main choices for retirement vehicles fall into these five categories.

5 Categories of Retirement Vehicle

Employer-Sponsored Plans

These are going to be ones that you have access to through your place of business.

We’re talking, here, about the 401(k) for most private-sector jobs. Many schools and non-profit organizations offer a 403(b). Some not-for-profits and numerous government jobs will give you access to a 457(b). Other government organizations have Thrift Savings Plan (TSP).

You need to consult your plan administrator or human-resource department for more information.

Individual Retirement Accounts

A second type of vehicle is the Individual Retirement Account or Individual Retirement Annuity. These come in two main flavors: the Traditional IRA and the Roth IRA. I describe the former, HERE, and the latter, HERE.

There is also something called a “non-qualified” annuity. But is generally less utilized for retirement savings, because it doesn’t have the tax advantages that are part and parcel of what it means for the IRA and Roth to be “qualified.” The non-qualified annuity can be handy to have once you’re in retirement, though, since you can continue to contribute to it even after you no longer have earned income.

Health Savings Accounts (HSA)

This one is often overlooked, because its primary purpose is to help you pay healthcare expenses. But a number of people suggest that you don’t neglect it as a retirement vehicle.

It must be coupled with a High-Deductible Health-Insurance Plan. There are other limitations and restriction as well. It’s beyond the present scope to get into it in detail. But, it might be worth your attention.

Brokerage Account

You might also want to have some stocks and bonds outside of your 401(k) or IRA. And one way to do this is to open an account with a brokerage.

‘Other’

Finally, as supplements to your primary vehicles, you may consider other things such as 529 Plans, private annuities, CDs, life insurance policies, money markets, savings accounts, and so on.

What’s the Order of Events?

There are numerous strategies. Here are three that I have encountered.

3 Strategies

Strategy #1

Some people suggest that you get your employer-sponsored plan – like a 401(k) – match, and then maximize contributions to an Individual Retirement Account. Whether this is a Traditional IRA or a Roth will depends on your current and projected-future tax situation, among other factors (like your income). From these, some people think that you should turn your attention back to the 401(k) and completely max out your contributions.

Strategy #2

Other people suggest something a bit different.

On a second view, people think you should start with your 401(k) match and then max an IRA (Traditional or Roth, as before). But, here, this strategy deviates in that adherents don’t recommend that you loop back and max your 401(k).

Instead, at this point, this next strategy has you turning your attention on ancillary vehicles like private annuities, brokerage accounts, and life insurance (to implement what is sometimes termed a Life-Insurance-Retirement Plan, “LIRP,” or a “7702 Plan”).

Strategy #3

On a third view, you just go down the list of available vehicles, maxing out contributions as you go along. So, this third strategy would suggest that you fund the 401(k) completely right off the bat. The you’d max out an IRA. Then you might max out an HSA, and so on.

Concluding Remarks

To be sure, there are any number of other strategies you might latch onto to or prefer. And, often, you will be steered into one or other by a financial adviser or money manager.

Which is picked will depend on your income, goals, tax situation, and other factors. For instance, if you don’t have access to an employer-sponsored plan, or if there isn’t a match, then you will have to craft a savings strategy that works with what you do have access to.

Still, it’s probably the case that doing something is better than doing nothing.

So… don’t delay starting your savings plan until you have the “perfect” strategy. After all, it’s probably impossible, practically, to fully optimize any financial plan. We don’t know for sure what the markets will do, when we’ll die, etc.

We do the best we can with what we have.

I wish you all the best in your retirement-savings planning!

Introduction

I went to Than Merrill’s real estate seminar.[1] This is a free, real-estate seminar that was advertised in my area. So, I thought I would do a quick review and share my thoughts.

Spoiler alert! It was a roughly two-hour sales pitch!

But here’s the thing. I am a complete real-estate novice. I want to point that out because it is highly relevant.

Given that I’m a novice, what I might get out of a two-hour sales pitch is likely to be different than what you might get out of it, if we both have different levels of background knowledge.

Ask yourself: “What is my current real-estate IQ?”

Because I had very little real-estate awareness going in, almost any factual information that was given in the seminar – granted that it was doled out as a sales presentation – was going to be new to me.

For me, then, I think I learned a bit. I’d say that it was worth my time.

But it might fully well be that some of my readers know a lot more about real estate than I do. Honestly, even knowing the basics of real estate – in terms of real-estate investing, flipping houses, and setting up rental properties – would put you ahead of where I was.

Maybe it wouldn’t be worth it to you to sit through a two-hour sales pitch, just to have a refresher course on things you know already.

Three-Part Outline

I’ll conduct my review in three separate pieces.

Firstly, I’ll survey the factual claims that were presented.

Secondly, I’ll describe the sales presentation.

Thirdly, I’ll give you a few concluding remarks.

Sketch of Factual Claims

Just a preliminary point, for clarification. By “factual information,” I don’t necessarily mean that I know that the presenter’s claims are correct. Rather, what I mean is that if you ignore the sales pitch and the inspirational comments, what remains were claims about what is true. They were factual claims.

Looking at that information, there were a number of things that were that were canvassed.

One idea was that of reverse wholesaling. If I understand it correctly, it’s basically the idea that you are going to sell rights that you to a real-estate contract. You sell contractual rights rather than real property. If enter into a contract with a seller, then you can sell your rights to that contract.

The presenter made an effort to distinguish this “reverse wholesaling” from something that he referred to as “bird dogging.” Essentially, “bird dogging” seemed to be another word for selling real-estate sales without a license.

Needless to say, this is illegal and is liable to get you into a lot of trouble.

The presenter wanted audience members to understand that Than Merrill’s course isn’t encouraging, teaching, or in any other way promoting illegality.

Now, I can’t comment on the accuracy of any of this. I’m not a lawyer. I’m not in real estate.

We also got into house “flipping,” rehabbing, and rentals. He also touched on the subject of tax deeds and tax liens. (Though, I’ll put an asterisk on that one because he said that tax liens aren’t part of the course that was covered by the main sales pitch. It’s a separate class.)

What basically is presented is information about evaluating properties. He talks a little bit about what you need to know to look at a property and to make a determination as to whether or not it’s worth your time to explore buying it.

So he also gets into finding properties: where can you find properties, evaluating databases, evaluating divorce and other probate and foreclosure listings.

The presenter talked about four different numbers you need to make an offer on a property.

These four numbers were: (1) Your cost to repair the property. (2) The estimated value of the property after you repair it (also called “After-Repair Value,” or ARV). (3) Your “holding cost” – that is, the amount you’ll have to spend (in insurance, property taxes, utilities, etc.) just to keep the property once you buy it, and before you resell it. (4) The expected closing costs – or, the fees you’ll have to pay to complete any of the contemplated real-estate transactions.

I don’t want to give away the entire presentation, here.

Hopefully, these scattered comments suffice to give you a pretty good idea about whether you want to attend the presentation yourself or not.

If you’re intrigued and you’d like to know more, then maybe it’s worth it for you to go. If you already are abreast of these (and other, related) issues, then maybe your time is better spent elsewhere than at Than Merrill’s sale presentation.

Again, most of the presentation seemed to be a very basic survey or elementary real-estate concepts and practices, like what information you need to make an offer on a property.

To me, this stuff was interesting because my background is completely different.[2]

Interlude 1: How Involved Is Than Merrill?

Than Merrill’s name is on this thing. But Than Merrill was not the presenter of the seminar that I attended.

In fact, he wasn’t anywhere to be found.

There was a professional presenter / speaker and then a couple of other people – maybe three or four people – in the back who were there to collect orders for the various things that were being sold.

And that brings me to the second part of my summary.

The Sales Part

The core of the evening was a sale presentation. Actually, it was a series of sales pitches.

There were at least three sales pitches that were made.

The first essentially has to do with evaluating deals. So Than Merrill has a software package called the “Deal Analyzer.”

Basically, what you would do is input certain numbers. There is some kind of algorithm built into the software such that it is supposed to give you a pretty good idea of whether or not a property is worth your investment – of money and time.

This is all provided that you can provide the four numbers that we just talked about, and it is provided that those numbers are accurate.

Given the sales price of the property, the ARV of the property, together with your estimates concerning closing, holding, and repair costs, you can use this deal analyzer to get a feel for a property’s lucrativeness for your purposes.

That was sales pitch one: The Deal Analyzer.

Now the second thing was a three-day course where they – that is, Than Merrill and his “Fortune Builders” company representatives – get into their procedures.

The presenter declared that there is a seven-step procedure for going through and finding properties, making offers, fixing them up and so on.

I’m not sure if it is referred to as “flipping” or “fixing and flipping” or what.[3] But it is essentially their process for making money on real estate.

The third and final thing is a separate course or separates on materials that has to do with the tax deeds and tax liens. I think there was some kind of an online course for this.[4]

Interlude 2: The ‘Franchise’ Metaphor

A lot of the sale pitch sort of revolved around the idea of buying into a franchise.

The idea the presenter said was basically this. Than Merrill has developed a system that is apparently successful at making money on real estate. So, basically, their idea is: if you them (that is, Than Merrill and Fortune Builders), then you can buy in to their business model.

It’s almost like opening a franchise for a restaurant. You buy in to a business plan that has been proven to be successful in different areas. You put down money, you buy into it, and they provide you with a brand and business materials.

At least… that was the analogy that was provided. You may want to ponder that analogy, as you as you think through whether or not this is something you want to get involved with.

Final Thoughts

You are probably used to YouTube videos where, at the beginning of the video, somebody – like a Tai-Lopez type – starts out life with only $47 in his pocket and then ends up driving away in a fancy car. Or, you watch as a camera tracks along with someone jogging on the beach and they say, “Hey, if you want to live this lifestyle, I’ll show you how to make millions working from home!”

A lot of this stuff is really masterful from a psychological point of view. It’s very persuasive.

The free seminar had that kind of feel to it.

It’s not just giving you information. It’s using information as a fisherman uses bait. They’re trying to get you to want to buy into their “franchise.”

The presenter was a great speaker, both in terms of delivery and in terms of sales prowess.[5] There’s no question that he was a skilled presenter – very relaxed, very fluid. He displayed an ability for fielding people’s questions. But, mostly, he tried to stay in control of the presentation.

He clearly knew the material.

Since the presentation was a sales presentation, you could recognize certain phrases that kept being thrown in – like “can we all agree with that?” – some of which were designed to elicit the so-called “yes set.”

You say “yes” to a series of preliminary questions and then you’re more likely to say “yes” to the sales pitch.

For example: You want to be successful, right? (Yes.) You want to have the flexibility to be your own boss? (Yes.) You realize that real estate has a lot of money-making potential? (Yes.) So, then, do you want to get started right now by signing up for Than’s course?

And after the first three questions have primed you by getting you into a pattern of saying “yes,” the idea is that you’re more likely to say “yes” again to the actual sales question.

The presenter also engaged in another sales tactic, which was set to try to get a audience member to “buy in” to what he was saying. To put it slightly differently, obtaining a “buy in” is an attempt to get little commitments from people along the way.

So, he would ask things such as: “If there was something you could do to increase your income, how soon would you want to begin?”

In addition to that, he kept having a lot of audience members raise their raise their hands. Ostensibly, this is done in order to facilitate audience participation. But, on a deeper level, it’s down for a couple of other reasons, too.

Number one, you get accustomed to doing as the presenter asks. Don’t look now, but you’re following instructions!

Number two, he’s also creating a group-mind or “mob” mentality. You begin to feel peer pressure to participate. But it’s not simply pressure to participate, it’s pressure to participate in the same way as everyone else.

For example: Anyone who’d love to get started with this right now, raise your hand.

So, a certain number of people raise their hands. And everyone feels some level of pressure to join in.

Be aware, then. It’s not just that it’s a sales presentation. But, it’s a sales presentation in a group setting.

You can have the peer pressure heaped on top of whatever buying pressure you already feel.

And, I think, these are real, palpable pressures.

Additionally, the presenter also tried to anticipate and inoculate the audience against objections.

For example, he would say things like: “Some people, when you tell them you’re interested in attending this course or engaging in real estate of this kind, are going to tell you that it’s a bad idea”

The presenter is trying to get you to chalk that kind of talk up to fear and ignorance.

So, he advises audiences members to surround themselves with people who are going to be positive. This is generally helpful advice. But, in this case, of course, it means that you should only surround yourself with other people were equally enthusiastic about attending Than Merrill’s three-day course!

Finally, there was a lot of inspirational stuff. (A lot by my standards, at least.)

I think there was a 10-minute video just trying to get you to “seize the day.”

This is all fairly standard stuff. You’ll be peppered with quotations.

“You have to do what other people won’t do to have what other people don’t have.”

“If you do what is easy, your life will be hard. But it you do what is hard, your life can get easier.”

Etc., etc.

In summation, I think number one: Obviously, this kind of thing is been around for some time. If the presenter was being genuine about having encountered a class like this 20+ years ago then Than Merrill wasn’t involved in at that time, but obviously this stuff is not new.

Moreover, it’s a sales pitch! Make absolutely no mistake about this.

But, having said that, I think there was some information that I did benefit from receiving. That is, I did gain some knowledge that I didn’t have before. Assuming that the information I received is correct, of course! It seemed plausible, but I haven’t checked it. Again, I’m not an expert real estate.

But if you are not a novice to real estate – as I am – then none of this information might be new to you. So, in this case, it probably just boils down to whether or not you want to subject yourself to a sales presentation in order to hear a few minute’s worth of real-estate information.[6] Do you want to this take risk of feeling pressured or persuaded to join Than Merrill’s network of real estate informants, buying into the Deal Analyzer, attending the three-day paid course, or whatever else.

One Last Thought: ‘What Do They Need Me For?’

A guy told me one time that there’s an interesting question you should always ask after presentations of this kind.

“If all this is as lucrative as you say it is, then what you need me for?”

And that question is extremely valuable. It can be used for all kinds of sales presentations.

In this instance, the question is really interesting because, in many cases, when you ask the question, “what do you need me for?” you think about guys with their YouTube videos. And the answer might be that they’re not as successful as they say they are. So, they literally need me because I am the one that makes them successful. They may be trying to sell me a course on how to make money. But, really, they get rich just by selling me the course.

If I believe they’re successful, I give them money. I buy their course or whatever. And that’s their revenue stream.

On the other hand, it might just be that they can be more successful with me than without me.

And in this case, I think that points to something that might be like.

I can’t really comment on it, maybe it would be clearer to those who actually go to the three-day course.

But it might be that Than Merrill is trying to create a network of real estate investors, speculators, or people on the streets who are going to be viewing properties. If you join that network, and if you feed information into the Deal Analyzer, then maybe this information ultimately gets back to Than’s investors. Maybe he becomes a kind of matchmaker between the money and the properties and then he take a cut of the profits.

If this is so – and I haven’t the foggiest notion whether it is or not – then it seems like he does stand to gain by increasing the size of his network. So, it might be something along the lines of that. Ultimately, you buy into this program and feed deals and then you might have an opportunity to avail yourself of some of the financing that Than Merrill has put together. In that case, he probably takes a percentage of it.

If that is what he’s doing, then at least it is understandable why he’d want to expand his network. And it’s at least plausible that this expansion might be beneficial both to him and to the people that join.

Furthermore, and presumably, Than Merrill’s going to want to take on good risks, and not loan money to people on endeavors that are doomed to failure  or that involve liability.

So, unless he can indemnify himself against those kinds of losses, it could point to the fact that he does have some confidence in this program – or in his Deal Analyzer – and that that would be a good sign.

But, again, I am incompetent to make any additional judgment along those lines.

I simply say if you have two hours to spend and and you’re interested enough to attend, then just be aware that it’s a sales pitch take it for what it is. Scrape what is of value to you, personally. But don’t feel pressured to spend any money.

Conclusion and Disclaimer

Anyway, this is been my appraisal.

This is for general informational entertainment purposes only!

Personally, I have no affiliation with the Than Merrill. I am not certainly getting any money at all from him or from anybody affiliated with that person or his Fortune Builders organizations.

These have just been my impressions after having attended the free seminar with a friend.

I’ll let you know my thoughts if I actually go to the three-day course.

Notes:

[1] This is a review of Than Merrill’s free real-estate seminar. I have no affiliation with Than Merrill or Than Merrill’s Fortune Builders company. This is not a paid review. It’s literally just my own thoughts after having attended.

[2] It’s also likely that you could find this information elsewhere. I’m certainly not saying that Than Merrill’s course is the only place to learn this information, even if you don’t already know it.

[3] So, “flipping” is often defined as buying something (and it can really be anything, boats, books, cars, houses, or whatever) and then reselling it for more than you bought it for. “Fixing and flipping” would be more or less the same thing, except that, in between buying and selling the thing, you spend a little money or time (or both) making improvements, repairs, upgrades and so on. Now, you should be aware that some people use the term “flipping” for both practices – buying and reselling on the one hand, as well as buying, fixing, and then reselling on the other.

[4] At various times, things got to be a little loud. People were moving around and going back and forth from their seats to the tables in back to place orders. Additionally, people were asking questions and talking to one another. It was a bit difficult for me to keep my attention on the main presenter during this interval. He did mention that the tax-related information was not a part of the three-day course. Presumably, you have to spring for the extra online course if you want to get into that.

[5] As a side note, the presenter said that 26 years ago he attended a course like the one he was presiding over. And then 23 years ago he put $1000 down to try to make something of real estate. He didn’t explain why he waited three years. But, I asked the guy after the fact, “Was Than Merrill supposed to have been involved 23-26 years ago?” According to his Wikipedia entry, Than Merrill is around 40 or 42 years old. So, 26 years ago he would’ve been 16. 23 years ago, he would’ve been 19. Of course, the guy said, “No.” The wealth course he previously attended – assuming that he really did attend one – had nothing to do with Than Merrill. My only point bringing that up is to say that, obviously, if that course that this presenter allegedly attended 20+ years ago, was relevantly similar to what is being presented today and had nothing to do with Than Merrill, then it’s not like Than Merrill has created some brand new, original system. In other words, this information is nothing new. To put it another way, don’t fall into thinking things like “Than Merrill created this or that.” Than Merrill’s got his name on some business model and they’re trying to get you interested in buying into it.

[6] Out of two hours, the factual claims might have taken up around 30-45 minutes.

Today, I’d like to say a few words about term insurance.

In order to understand term insurance, it can be helpful to frame the discussion in terms of what it’s contrasted against.

In the main, there are two different kinds of insurance for life insurance products: permanent[1] and temporary.

There are a couple of other options in between, but, here, I’m just focusing on the temporary kind of insurance. And, in a word, that’s term.

So, just briefly stated, temporary insurance is term insurance. This is opposed to permanent insurance – the gold standard for which is basically whole life.[2]

Term is sometimes referred to as “pure insurance” or “pure protection.” What’s referred to, here, is the idea that term insurance does not have a savings component. There is no “cash value” associated with term insurance.

Permanent insurance, on the other hand, has a savings component that is referred to as its “cash value.”

What is cash “value”?

I’ll try to answer that question, first, by offering an analogy.

Analogy: Renting Vs. Buying

Think about the difference between renting a home or an apartment and buying a house.

When you rent, you’re not building up any equity in the property. Instead, you are paying a landlord and what you are getting in return for your payment is a roof over your head. Or, to put it differently, you are purely paying for someplace to live.

Renting is purely providing you with a dwelling.

When you buy a property – or, at least, when you pay toward a mortgage in order to become the owner of the property, eventually — you are building “equity” in that property.

“Equity,” simply stated is the difference between what you owe on a property and what it’s worth.

The difference between term insurance and whole life insurance is not precisely the same, but it but it’s pretty close in this respect. Cash value is akin to equity.

When you are paying premiums into a term policy, you are not building up any cash value. It’s like renting.

When you pay premiums into a whole life policy, you are building cash value – and cash value is something like the equity you build in real property that you may buy.

Now, it’s a little different, in the sense that the equity in a property is going to be the money that you would basically get in the event that you liquidated the asset and after you discharge whatever debt you have on that asset.

For example, let’s say that you buy a $250,000 house. Pretend that you put 20% down on it. So, your putting $50,000 down and financing $200,000. We would say that you have built an immediate $50,000 worth of equity in the house.[3] (And this only increases with time, assuming that you make your mortgage payments.)

After you make your down payment (and after you close on the property!), your real estate has got $50,000 worth of equity built into it. And what that means is that if you go to sell that house, assuming the property’s value is at least the same as it was when you bought it, $50,000 to extract from the house.

To put it slightly differently, you sell the house for $250,000. Simplifying things, the buyer gives you $250,000. You took out a loan for $200,000. So, out of the $250,000, you take $200,000 of that money to pay off your loan.

And what are you left with?

$50,000.

You literally got back the $50,000 that you put “down.”

Now, understand: In real life you would have closing costs and taxes and lots of things. Ordinarily, you would never go through the rigmarole of buying a house, putting $50,000 down, and getting a mortgage loan only to go and sell the thing immediately.

This is just a mental exercise.

In theory, a piece of real property can function like a savings vehicle – or even, in some markets and areas, as an investment vehicle.

You might be saying: That’s a well and good. But…

What’s This Got to Do with Life Insurance?

Well, there is something called a “single-premium whole-life policy.” You literally plop one infusion of cash into the thing. It’s got one premium payment to make and then you’re finished paying for it.

Let’s say that, at the age of 65, you put $50,000 into a policy of this kind. At that age, and if you’re in pretty good health, your $50,000 might buy you $100,000 worth of coverage right off the bat. And you have no other premiums due.

But, besides the $100,000 worth of death benefit that you have, you also have your $50,000 in cash – just sitting in the policy.

If you went to cash that policy out, you could – in principle – get your $50,000 back. You’d get it back pretty much the same way you get your down payment back: by liquidating the asset you put the money into.

Now, in real estate, that means you sell your property. In life insurance, it means you surrender your policy.

Similar caveats apply to life insurance as to real estate. Just as you wouldn’t normally buy property only to immediately sell it for the same price you bought it for, you wouldn’t normally plop cash into a life policy only to surrender it immediately. In both cases, doing this is very likely to result in a loss of money for you.

But these are just thought experiments.

If whole life is like buying a property, and cash value is like equity, then term insurance is like renting.

There isn’t any sort of equity or cash value that you build up in the property.

Is the Lack of Cash Value Bad?

Not necessarily; it depends!

There are many conditions under which a person would be advised to rent instead of to buy. Maybe you only expect to live in a particular area for a few months, for instance.

Likewise, there are many conditions and circumstances in which a person might be advised to purchase term insurance.

Different Kinds of Term Insurance

There are different kinds of term insurance.

First of all, and most basically, there’s going to be a difference in term insurance with respect to the length of the term.

The “term” is the period of time that the policy is in force. So, some “terms” might be 10 years, 15 years, 20 years, and so on.

Secondly, there’s also a difference of whether or not the death benefit remains level.

Let’s say you buy a $1,000,000 term policy. If the term is “level,” that means that the death benefit remains at $1,000,000 for the duration of the term. If it’s a 20-year $1,000,000 level term policy, then at year 1 it would pay out $1,000,000 and at year 10 it would pay exactly the say amount (assuming premiums are paid and it’s in force).

In contrast to the above kind of “level term,” there are policies where the death benefit can decrease or increase over time.

If the policy gets smaller over time, this is called “decreasing term.” If it gets larger, it’s called “increasing term.”

Thirdly, some term policies are convertible.

We already noted the difference between term insurance and, say, whole-life insurance. Well, sometimes, people can switch between the two types.

Going from term to whole life can be done a number of ways.

Number one, a person could simply buy a new whole-life policy and effectively replace his or her term policy with it. (That is, just buy a new, permanent policy and let the term lapse.) You’ll have to reapply and re-underwrite.

Number two, a person could exercise his or her conversion option, if one exists.

Some term policies allow insured parties to basically take some or all of their term coverage and “turn it into” whole life. Usually, this is accomplished by readjusting the premium to correspond to the insured’s age at the time of conversion. But this option does not usually require additional underwriting.[4]

It’s sometimes said the only life insurance policy that matters, is the one that is in force on the day that you die. So, if you know there’s a low likelihood of the term policy paying, then you might think that converting some (or all) into something permanent will guarantee that you will have some protection in force at the time of your death..

Fourthly, there is a question of renewability.

As we stated, term policies are temporary policies. Let’s suppose that right now you purchase a 10-year level term policy. 11 years from now, the term will have concluded.

The question of renewability is basically this: At the end of year 10, do you have the option of buying additional time?

The question needs a bit of clarification.

At the end of year 10, there is of course nothing stopping you from trying to apply for and purchase another policy. This would require that you go back through the underwriting process so that the insurance company can reassess your health and insurability.

But what we’re thinking of with renewability is this: Can you basically extend your original 10-year policy for a longer period of time without getting underwritten again?

If the answer is “yes,” then your policy is renewable. If the answer is “no,” then it isn’t.

Some statistics suggest that fewer than 2% of term policies actually pay out. In part, this is because people outlive their term.

Think about it. Maybe you get a 10-year term, 15-, 20-, 30-year term, whatever. Your term policy covers you for 10 years, 15 years, 20 years, 30 years.

Let’s say that you are 30 years old when you take out a 30-year term. Well, in 30 years you’ll be 60.

Of course, anything can happen. But… Do you really think that you’ll die before you turn 60?

Suppose you make it to 60. Congratulations! You didn’t die!

But, since you’ve outlived your term, your policy won’t pay out. Ordinarily, that policy would just terminate.

If it’s renewable, however, you can “reup” the thing for another term. (Maybe not another 30 years. But maybe for another 10 or 15.)

Here’s another example.

Consider a person who is 20 years and old buys a 20-year term policy.

Well, that term policies going to expire by that person’s age 40. If his or her policy is renewable, that means that at his or her age 40 that individual will receive an offer to extend the term, let’s say, for another 20 years.

If he or she has renewable term, then that renewability is guaranteed on the basis of the original underwriting. This means that the individual at age 40 is guaranteed to be able to continue his or her policy.

However, it’s not to be continued at the same premium rate that was assessed when they were aged 20. The premium rate will be reassessed to their new insurance age 40.

But they don’t have to go back through underwriting to renew that term. All they do is start paying the new premium, and they’re good to go.

Can this be a great feature?

You bet. Particularly, if you are less healthy than you were at 20.

In some cases, maybe a person has gotten into health “kick” in their 30s. Maybe they’re healthier. Maybe it would be an opportune time to re-rate the person or have them apply for a different policy to try to get a better ort “preferred” rate.

But in the case of many people, as they age their health is declines. It can be somewhat comforting to have a policy with the renewability privileges baked into them so that there doesn’t have to be another health assessment, paramedical or anything like that when renewability comes up.

Depending on the table you consult, life expectancy for the average male is somewhere between the mid-70s and the mid-80s. The average female is predicted to live a bit longer: often this is predicted to be somewhere between low- and upper-80s.

Actuarially and statistically, term-life companies are betting that that 30-year-old will outlive his or her policy.[5]

Is not renewing – or, similarly, is non-renewability – necessarily a bad thing?

Again… it depends! What do you need the life-insurance policy to do?

Possible uses of Term-Life Policies

What would a person want these various policies for?

Term has many important uses.

Decreasing term, for example, might be used to keep pace mortgage balance. So (and I’m just making up the numbers), maybe you owe $200,000 on your mortgage. You have a 30-year loan. And you’re paying $1,000 per month. The amount you owe therefore will go down by about $12,000 each year.

Let’s say that you take out a $200,000 30-year, decreasing-term policy. As you pay down your mortgage (and build up your equity!), your coverage also goes down.

If you tragically died in the first year, your survivors would receive $200,000 – enough to pay off the mortgage. If you died halfway through, maybe you’d get $100,000.

This is okay in this application because the further along you get, the more you’ve paid down your mortgage. For this example, you won’t need $200,000 in 15 or 30 years because – theoretically – your mortgage will be paid down, or paid off.

Level term might be used for income replacement.

So, for example, a person who is let’s say 30 years old makes $100,000 a year over the next 30 or 40 years. That person would be expected to bring in about three or four million dollars – abstracting away from cost-of-living increases, inflation, raises, and a lot of other stuff.

The rough math is simple. You just multiply the yearly income – in this case, $100,000 – by the number of years you expect to work (assuming a retirement at age 70, to keep round numbers).

So… a hundred thousand times 30 years equals 3 million. A hundred thousand times 40 years yields four million.

It may be that level term policies are used to cover (some of) that.

Put a big asterisk on those numbers, because there are number of different calculations that can be used to try to ascertain insurance and income-replacement need. The only reason I am doing it in this clumsy way, presently, is to give you a fix on the numbers involved and to get you used to thinking along these lines.

In another place, I will go into the various methods – and completing schools of thought – surrounding these kinds of calculations. So, don’t get upset if I haven’t used your favored approach.

Let’s round things out.

Increasing term might also be used for income replacement, but perhaps with a twist.

Perhaps we know that this 30-year-old is on track in his or her job to receive substantial increases in pay over the next five or 10 years. It may be that increasing term policy is able to keep pace with these raises without the person having to re-underwrite for a certain additional coverage every time there is a bump in salary.

As always, there are complications.

Decreasing term could also be used for income replacement. This is because, on the face of it, the amount of term that’s necessary will go down as the years advance since the person in question will have fewer working years remaining. But, this is just an overview. I’ll go into more detail in later posts.

Miscellaneous Uses

Another term-insurance use worth mentioning is that of student-loan or other debt payoff.

Let’s say that a young person takes out a student loan. If that young person were, tragically, to die before the loan was paid off – and it’s an “unforgivable” loan – then perhaps the parental cosigners (if applicable) are going to be on the hook for that bill.

Some people like having some kind of policy that is keeping pace with the student loan payoff, so that in the unforeseen and unfortunate circumstance of the child’s death, the student loan can be discharged.

Similar things can be said for vehicle loans and other sorts of personal loan.

Term policy can also sometimes be used for something called “pension maximization.”

That will be a complex topic that lies well beyond the scope of what I can get into, here.

Annual-Renewable Term (ART)

There is another special kind of term that is called annual-renewable term.

Annual-renewable term is term that has to be renewed every single year.

Yearly, the insured has the option to re-up the policy. But, with annual renewable term, every year the policy gets a little bit more expensive.

With, say, level term, expenses are averaged over the life of the term. So, compared to ART, a level term policy may be more expensive year one, but less expensive by year 10.

To put it another way, the ART policy will start out less expensive, but get more expensive over time. Premiums for a level term will start out more expensive, but will often end up being comparatively less expensive.

ART might be used when the coverage need is very short-lived.

Or, it may be used in situations where the coverage amount is unavailable in other forms of term.

Or, again, it might be used when there isn’t sufficient budget available for a different sort of policy.

Return-of-Premium (ROP) Term

There is also return-of-premium term.

This is usually a term policy conjoined with some sort of “rider” (that is, a policy “extra”) that provides that if the insured dies after the term completes, then there will be a refund of some or all premiums that were paid into the policy.

This kind of a rider is usually fairly expensive to add on. What’s the benefit?

Well, recollect that fewer than 2% of term policies ever pay out. (According to some Google-able stats, anyway.)

So, for some people, it’s worth the extra money to guarantee themselves a “refund” at the conclusion of the term.

Other ‘Extras’

There are other riders that can be available on term policies.

Sometimes there are “disability waivers” that provide premiums to be paid or waived in the event that the insured is disabled and unable to work.

Sometimes “child,” “family,” or “spouse” riders provide additional, low-cost coverage for other family members.

There can be “non-family” riders for business partners.

Some companies off “accidental death,” “dismemberment,” or “double-indemnity” riders that increase payouts under certain scenarios.

There are “guaranteed-purchase” riders than can enable a person to obtain more coverage later on, without having to be re-underwritten.

And there are certain “accelerated-death-benefit” riders that give access to death proceeds ahead of death in order to pay for chronic illness, long-term care, or terminal illness.

What riders are available will depend on the insurance company in question.

You might think of riders like options packages on a car.

When you buy a car, you can customize it to your preferences by adding features and options – at additional cost – that don’t come standard on the “base models.”

Termination of Coverage

Of course, it is possible for a term policy to terminate prior to the conclusion of its contractual term. This might occur, for instance, in the event that premiums are not paid are scheduled.

But, generally speaking, if the premiums are paid, term policies will go from whatever date the contract is issued until such time as the term concludes.

Pros of Term

Term insurance of term gives you a lot of insurance bang for your buck. You get a high amount of death benefit for a comparatively low amount of premium.

Another positive is that term policies have a lot of versatility. There’s a number of things that can be done with them.

As we have just seen, they can be used for income replacement and for the discharging of various loans.

Finally, term policies have no cash value.

Now, I’m going to list this as both a pro and con. And that might seem somewhat contradictory.

But what I’m trying to underscore in virtue of doing that is to say that there are competing philosophies for how to calculate death benefits and for how to use insurance in your financial plan.

One perspective, popularized by such individuals as Suze Orman and Dave Ramsey, has it that you want to have term so that you have more money to invest in the market.

Think about it this way. You have particular whole-life policy, let’s say paying a death benefit of $500,000. A term policy with the same death benefit is going to have a comparatively lower premium.

The Orman-Ramsey idea is that you would purchase the term policy and then invest the difference between the whole-life premium and the term premium.

The reason for this advice is that Orman and Ramsey think you can get a lot higher return on your money by investing in the market.

So, on this point of view, you could consider the lack of cash value in a term policy to be a positive thing. That would be on the assumption that you share the perspective (or are persuaded by the advice) of people like Susie Orman and Dave Ramsey.

Cons

On the other hand, as has been stated, fewer than 2% of term policies are often said to pay out. This may be because the policies may lapse due to lack of premium payment or because the person outlives the term. Other figures suggest it might be as low as 1% of terms that pay out.

In any case, this is a negative from the standpoint of final expenses. Burial, crematory, and funeral expenses will occur at death. (Duh!)

If there is a 90+% chance your term won’t be in force when you die, then you should probably have another plan for how you will pay these.

You could prepay or use funds from a retirement account or whatever. But you have to realize that the money probably won’t be coming from your term insurance.

Additionally, some legacy planning and other types of estate planning (e.g., trust-funding) are going to depend upon a policy being in force when you die.

With its high likelihood of lapsing, term is not ideal for this application.

And, as I said, not everyone shares the Orman-Ramsey point of view about investing in the market.

This is too big of a topic to tackle, presently. But suffice it to say there are planners who advise the incorporation of life insurance into financial planning – whether estate planning, final-expense planning, legacy planning, retirement planning, what have you.

Conclusion

Whether term is right for you or not is going to depend on many things.

It will depend on your goals. Your needs. Your health and insurability. Your overall financial situation. And much else besides.

If you need a funeral policy, then you want one that has a high probability of being in place when you reach your life expectancy. And this probably won’t be term.

On the other hand, if you need to replace your income or pay down a mortgage or student-loan debt, then term might be just the right thing.

Every “pro” could be a con for certain applications. And various “cons” might be pros after all from another point of view. Whether a thing is a positive or negative depends in part on what the term is being used to do.

A knowledgeable advisor should be able to help you navigate through these waters.

I cannot give you direct advice, but I can simply say that my sketch of what term involves has been for general informational or entertainment purposes only. If you require more in-depth consultation, please consult with a professional in your area.

I hope that this has been somewhat helpful for you!

Notes:

[1] There is an immediate difficulty in the sense that “permanent” is usually defined as the “totality of one’s life.” However, this has to be sharpened up a bit, since if a person dies during his or her term, term insurance would also have – in that case – covered a person for the “totality of his or her life.” What is really in view is a person’s life expectancy, as calculated actuarially and represented on a mortality table.

[2] When I say “gold standard,” I mean with respect to its permanence. Another sort of life insurance product, universal life, is also capable of being “permanent.” But whole life is guaranteed to be permanent, if the premiums are paid as scheduled.

[3] But, in putting “$50,000 down,” it’s not so much that you are spending $50,000, as you are simply transferring $50,000 from some cash position – presumably taking cash from some vehicle, like a certificate of deposit (CD), checking account, savings account, money market, etc. – and you are moving that cash into your real estate.

No, really… you can think of it as if you’re property becomes a kind of savings account. How safe it is – or how much of a return you get – depends on the housing market, and, as it’s often said, the location, location, location (!) of the property that you buy. But I digress.

[4] Unless, that is, you want more whole-life coverage than you had in term. If you’re wanting a higher death benefit, then you’ll probably have to get re-underwritten.

[5] Policies can also lapse (e.g., for non-payment of premium) before their terms conclude.