Hi Mustachian friends, first time poster hoping for some advice to either stop worrying or quickly fix a (likely) mistake I made about 3 years ago. Here's the background info: (apologies in advance for the length)
I graduated college in December 2012 at age 22 with no student debt, an innate desire to live within my means, and a steady $40,000 entry-level job. I decided I'd like to start saving for retirement in addition to contributing 4% to my company 401(k), which was the level required for a 3.5% employer match.
So, in August 2013, being young, impressionable, inexperienced, and totally ignorant about investing, a friend/former college classmate convinced me to take out a Variable Universal (Cash Value) Life Insurance policy with the company he worked for.
He said that the policy was designed to supplement retirement savings, and that the "cash value" component would grow over time. I had some reservations given the general reputation of the insurance industry, but since he was a friend and genuinely nice guy (and good salesman), I signed up for $500/month.
Because of that, I currently receive:
-$600,000 worth of life insurance
-a lifetime guarantee that my coverage will be based on the physical I took as a healthy 23 year-old
-In my friend's words, a conservative projection that my $6,000/year contribution will grow to just under $500,000 by the time I'm 60, in the year 2050.
Here's are the caveats:
-The money doesn't start to grow exponentially until the policy has been in effect for many years
-The "guaranteed" growth by 2050 is only $277,000 (I've recently read that these policies often don't live up to their projections)
-I'm not projected to break even until I've contributed to the policy for 13 years ($78,000 contributed)
-I'm not guaranteed to break even until 22 years have passed and $132,000 contributed
-Only 92.5% of the "cash value" can be withdrawn at any one time, or the policy collapses and the government comes after you for trying to circumvent the $5,500 Roth/IRA annual contribution limit
After discovering MMM in February of this year, I've kicked my savings into overdrive, maxing out my 401(k) for this year, maxing out my Roth IRA for this and last year, and purchasing $3,000 of VTSMX with an additional $100 added each month. I've also learned a lot more about investing since February, reading all 500+ of MMM's posts, the jcollins stock series, "The 4 Pillars of Investing," and "The Intelligent Asset Allocator," both by Bill Bernstein.
My question is this: In the opinion of the Mustachian community, is CVLI a scam? Should I take a loss and ditch my policy, or keep it as part of my portfolio?
I could currently withdraw about $11,000 of the $18,000 I've contributed. If I do that, the other $7,000 is a loss. So, should I take the $7,000 hit and put the remaining ~$11,000 straight into Vanguard's Total Stock Market Admiral shares? I would then sell my existing VTSMX shares to purchase VTSAX shares due to the lower fees and start contributing $500/month to VTSAX instead of the CVLI.
I'm now in the mindset trying to achieve FI by 40 (or earlier), rather than trying retire at 65, which is where my head was at when I started the CVLI policy. Now, I feel that even if the money does grow to the $500,000 that is projected, I could get a lot better return elsewhere. Plus, needing to leave 7.5% of the money I contribute in the fund at all times seems to cancel out most of the return I'll get, and I have absolutely zero need for life insurance.
I was only doing this for the retirement savings, and a $7,000 loss now may be the smart choice in the long run. According to at least one compound interest calculator, a $10,000 principal with a $6,000 annual addition at a 7% rate would yield over $900,000 by 2050. Still way later than I want to retire, but at that rate, cancelling the policy seems like a no brainer to me.
What do you all think? Does anyone recommend keeping this policy?
Thanks for the help!
-Greg
For those interested, here are my vital stats:
-~$15,000 in checking/savings (I know that's too high, I'm going to figure out where I should put about $10k of that very soon)
-~$3,100 in VTSMX (opened in Aug 2016)
-~$11,500 in Roth IRA opened in Feb 2016 and maxed out for 2015 and 2016
-~$32,500 in 401(k) from an employer I left last week (Balance now needs to be rolled over to a Vanguard IRA)
-~$11,000 in "cash value" of life insurance that could be withdrawn
-$0 in mortgage, credit card, student loan, or auto debt
-$72,000 annual salary, sort of (Full salary severance package started this week, runs until January 30th, 2017, weighing options for new job)
-Annual expenses of ~$25,000 with some DEFINITE room for improvement since I'm not married and have no kids