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Rain comments on Open Thread: April 2010, Part 2 - Less Wrong
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You forgot to add:
-Everyone else is trying to do the same thing, so look at your actually expected real rate of return on all this saving you're planning (negative even before taxes on withdrawls or dividends, over the last 10 years, and with high volatility), and then hang your head and ask why you even bother.
I bring this up because I save a lot and use the tax-advantaged options, but when I look at the numbers, I have to ask, what's the point? After taxes (which will have to go up as the tidal wave of unfunded obligations comes due) and inflation, you barely get anything out of saving. (Yes, there's the no-tax Roth, but you get to invest very little in it.) Plus, if you save it for long enough not to be penalized on withdrawl, you have to put off consumption until waaaaay into the future, when it will do less for you.
It just seems like you'd be better off buying durable assets or investing in marketable job skills, which are more robust against the kinds of things that punish your savings.
I've been exploiring the "infinite banking" option: mutual universal whole life insurance that you can borrow against and which gets a steady, relatively high rate of return and is tax-shielded and has a long pedigree. Seems a lot better than following the herding into IRAs which will probably have their promises violated at some point.
I don't believe they are. The vast majority of people I see investing and saving do so in a proactive manner, choosing on a whim, and with a risk horizon of less than a year. They pull out when the market goes down and pile on when hot tips become common ("Real estate can't lose!"). Even the big firms are doing a significant amount of trading and reformulating on a daily basis (evidence: financial "crisis").
I put my trust in the people who seem to understand what's really going on, like Warren Buffet, who says that a passively managed Index Fund is the way 99 percent of people should invest.
And if you're ready to say that IRA promises will be broken (which I also consider a good probability), then your "infinite banking" scheme is even less likely to remain stable, as they're backed by private companies rather than the US government.
Nice stereotype, but I didn't do any of that, and still lost a lot from the time I started investing (mid '06), despite concentrating on low-cost index funds (to the extent permitted by the 401k). As did anyone else who started in the decade before that.
Keep in mind, there's a certain cognitive capture going on here: in the popular mind, long-term saving is equated with using the 401k/Roth options, which require you to invest in a very specific class of assets. Even with all the whimsy you refer to, that's building in an unjustifiably low risk premium that has to change eventually.
Wha? What "backing" are you referring to, and is your comparison apples-to-apples? The government doesn't "back" IRAs, it just has a promise they will have certain tax privileges. The assets in the IRAs, where it gets its value, are managed by private companies, just like for mutual whole life insurance (which are member-owned if that matters). Yes, the government could lift their tax privileges too, but this would require breaking an even stronger, longer tradition of not taxing life insurance benefits, which is the (ostensible) purpose of these plans.
ETA:
Buffet hasn't actually worked out the nuts and bolts of how to get the meaningful diversication you need, starting with much smaller sums than he has, and adhering to account minimums and contribution limits. That advice seems like more of a vague pleasantry than something you can benefit from. And, it's not what he does.
I don't like arguing with you, SilasBarta. It feels very combative, and sets off emotional responses in me, even when I think you have a valid point.
As such, I'm tapping out.
In case it may help you to know, I've felt the same on a couple occasions when I engaged Silas in argument.
I've chalked it down to poor skill at positive sum self-esteem transactions on Silas' part, at least when mediated by text. I don't think it's deliberate, as on some other occasions I concluded on a genuine desire to help on his part.
Could you please at least explain what you had in mind by your claim that infinite banking is backed by private companies rather than the US government (as you presumably meant to say IRAs are)? I promise not to reply to that comment.
I was incorrect in determining the impact on each type of investment from the government considering private companies manage both. At the time, I was thinking that the government created IRAs through law, and I didn't think that was the case with insurance, and thus the insurance plans seemed more likely to be subject to change by profit motive. However, I don't know enough about the particular form of life insurance you're suggesting to feel comfortable making further claims.