CHISWICK, WEST LONDON – Greetings from my childhood home…
Over the past few days, we’ve been exploring England as tourists.
We’ve seen Hampton Court Palace, where Henry VIII lived… We’ve explored the British Museum, founded in 1753… And we got the grand tour of Oxford from Chris, a Postcards reader.
But now, it’s time for our Friday mailbag edition, where I answer the latest questions you’ve sent in.
Below, a reader disagrees with our commitment to homeschool the kids… Others weigh in on our decision to buy my mum’s row house in London… And we talk about one of the world’s most generous retirement secrets: our “Income for Life” whole-life insurance policies.
All this and more below, so let’s dive in…
Reader question: From my own experience in life, to get ahead, you need “know how” and “know who.” The first, you can acquire from your parents, internet, libraries, and the like. The second, you really need to enroll your kids in school for a few years to acquire the “know who.”
You can probably achieve this now that you have the opportunity to park in the U.K. for a few years and where your roots are. Your kids have reached the age when solid friendships are acquired. Think about that!
We think having friends and being part of a community is a very special part of growing up. They haven’t had the opportunity to have friends up until now because we’ve been traveling so much.
Our children are ready to make some friends. We’d like to give them that opportunity now. But do we need to enroll our kids in school for them to find friends? No way!
First of all, enrolling them in school goes against everything we’ve been working on. And second, there are many other places a child can make friends. Like at church. Or at after-school activities. Or through the adults Kate and I know who have children.
Reader question: When you say you are “terrified” that the London property market could drop like a rock at any time, that raises a question. So why would you then buy? Hmmmm… Tom… I think you like being terrified!
Because life isn’t all about maximizing investment returns. Even for me. And I’m obsessed with maximizing investment returns (and wealth management, in general.)
Spending time in my mother’s house is helping me process my grief and say goodbye to her and my childhood memories. And besides, it’s a great house in a great spot, and we love it here.
If it falls in value, it would have been a price worth paying. But who knows. Perhaps it’ll keep rising? Keeping the house for now is the right thing to do…
Reader comment: If I were your brother, I would let you live in the house free. He would still own half and it would be an asset for him.
I’ll let him know what you said, haha. But in seriousness, he needs the money and we don’t have much confidence that London property prices will continue to rise long-term.
Just today I saw an article that said U.K. house prices were the fourth most frothy property market in the world right now. And besides, he’s welcome to come and stay any time he wants…
Reader question: I wonder why you don’t take a conventional mortgage on half the value of the home and use the home as collateral for the loan, rather than the cash value (and your life) in the life insurance policy? You are only borrowing half the value of the home to repay your brother and the interest rate is now about the same as that provided by the insurance company.
I will consider this. Also, my brother could write the mortgage.
Reader comment: I don’t want you to naively think that your participating whole-life policy will grow and grow after you let the dividends pay for future premiums (if that is what you have planned upon).
If you do let dividends pay future premiums, growth in face value and cash value slows its impressive increasing. If you decide to use the cash value to help sustain your income needs, these values will decrease even further. It’s possible that you missed something in the sales process. I did this work for 48 years. Life member MDRT (Million Dollar Round Table). Missing something is easy for one whose mind has, at times, wandered.
Thanks for you writing in. I’m aware that using the dividends from our policies to pay the premiums will retard the growth in death benefit and cash value. Isn’t that obvious? It’s like receiving a dividend instead of reinvesting it.
Reader question: I also have a 770 policy (Whole Life), thanks to you. I need more information on how much I can put into it. What or where is the limit? How many policies can we have? Who decides ?
You can have as many policies as you like. But there’s a limit on how much you can put into each policy if you want the policy to stay tax-free.
If you stuff too much cash into it, you cross a threshold, and the life insurance policy becomes a Modified Endowment Contract and loses its tax benefits. The solution is to open a new policy and get more life insurance coverage.
Keep in mind, I can’t give personalized advice. My best advice for anyone would be to talk to your life insurance agent. They can help you make the right decisions.
And if you’re a paid-up Tom’s Portfolio subscriber and haven’t checked out my library of “Income for Life” resources yet, you can access that here.
Reader question: I am looking for an income-generation opportunity. I like the idea of the whole-life “income for life” concept. What are some companies that you might suggest? I am a skeptic about insurance companies and don’t know where to turn.
I am 69 and I know that can affect premiums and potentially a deal breaker. I don’t have the energy for the stock market and I don’t like bitcoin. My son-in-law is thinking about getting into the rental business. That could be an investment for me as well.
I think we are in a bubble again and not sure if buying real estate in the near future is a good idea. Your thoughts would be appreciated! (Willing to pay for one of your programs to help me.)
We are in a bubble, driven by artificially low interest rates, manufactured liquidity, and enormous government deficits. If you agree with me that interest rates must rise (long-term view), then income investing is surely a very dangerous endeavor.
I’m not saying it’s impossible to generate decent income, but it’s definitely not a time for indiscriminate buying.
I’d consider the rental business if I lived in the American heartland. My hunch is that the best real estate in the U.S. for generating high-cash-flow yields would be found in the heartland, not on the coasts.
As for insurance, I love our Income-for-Life whole-life insurance strategy.
Keep in mind, life insurance companies don’t sell life insurance directly to consumers. You have to go through an agent who understands cash-value, whole-life insurance.
To help my Tom’s Portfolio subscribers navigate whole-life insurance, I’ve made my entire “Income for Life” library available to them. You can learn more about how to get access right here.
Reader question: I just don’t understand how having most of your funds in precious metals gives you any cash-flow to live on. Are you spending down some of the principal? Selling some of the precious metal holdings? Are you taking loans from the insurance policies for daily living expenses? What am I missing?
Yes, we plan to spend down our principal by selling some of our precious metals holdings. We call this “eating the seedcorn” or “burning the family furniture.”
I probably wouldn’t have the confidence to do this, if not for our life insurance policies that guarantee a tax-free inheritance for our children.
In the meantime, if gold appreciates at 4% or 5% a year, we should be fine. And, of course, I earn a little income for writing these Postcards, which really helps keep the beast at bay…
Reader question: We have spent years saving in 401(k)s and similar vehicles but have, in the last five years, started to invest in rental real estate for the cash flow. Would love to get more details about how you generate funds for daily living expenses so that your nest egg remains intact, and whether you have a budget figure that you plan on each year. Please share more details on this topic.
I’m not interested in income investments at the moment. Interest rates are too low and I expect them to rise long-term. It’s not a good time to be an income investor, generally, in my opinion.
Instead, as I wrote above, our plan is to “eat our seedcorn” (spend our principal, in other words). We cap our lifestyle burn rate at $3,500 a month.
With the income I receive from writing these Postcards, a little growth in our nest egg from our Dow-to-Gold trading strategy, and the security of owning life insurance, I think we’ll be fine.
Reader question: There may be a problem with your analysis of the stock market and the value appreciation calculations. I am referring to the fact that your calculations do not include dividend distributions.
Back in the day of Louis Ruckeyser (on PBS), he showed an 80-year chart of the Dow Jones Industrial average and compared it with a chart of the same index with all dividends reinvested. The difference was in the thousands of percent in favor of the dividend-reinvested chart.
There have been studies showing that 80% of the appreciation of stocks has come from dividend payments. If you go back and somehow recalculate your rates of return, including reinvested dividends, do your conclusions still hold up?
It’s true what you say about reinvested dividends and that a chart of the Dow Jones Industrial Average doesn’t take into account the power of compounding of reinvested dividends.
This doesn’t change my analysis.
The Dow-to-Gold ratio reveals a simple trading system that allows its users to make excellent entry and exit trades from the stock market, beating the buy-and-hold investor. The impact of compounded dividends doesn’t change this.
The Dow-to-Gold ratio works because it shows when the stock market is undervalued and when it is overvalued (and allows one to be a contrarian).
Reader question: What are your thoughts about gold and silver IRAs that are self-directed and hold physical metal on one’s behalf? A provider of such accounts is GoldStar Trust Company, for example.
There are annual fees associated with these types of accounts of course, and they’re certainly not private, which is a concern. But they seem like an option for people who don’t want to assume responsibility for safeguarding their own precious metals and prefer to avoid paper products. What am I missing?
My only objection would be the fees, but they’re not too bad… less than 1% a year. The GoldStar Trust Company has an easy to read fee schedule. Otherwise, I don’t think you’re missing anything.
Reader question: Are you going to keep your mother’s dog? I hope you do. Staying in “her” house will be comforting and I know the children will benefit.
No. Tessa lives with our neighbor now, two doors down the street. We see her nearly every day and take her for walks often. This arrangement works well for all of us.
And that’s all we have time for today! As always, please keep writing us at [email protected].
I read every message you send in, and I’ll answer as many as I can in future Friday mailbag editions.
– Tom Dyson
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