What I Do, And Why I Do It...

What I do, and why I do it.

Conventional Planning is Done Backwards

I’ve written in the past about my views on “Financial Planning” and, more specifically, the conventional approach. It’s done backwards!

 The question every planner should be asking the client is “What is your biggest fear?”  The most common and standard answer is “I’m afraid of running out of money before I die!”

What do most planners do? They create a “plan” or “strategy” to amass a pile of money, typically with the age of intended retirement as a target/factor. Why is this backwards? Read on…

Personal Experience and Insight

On a personal level, my family and I have experienced, first-hand, the benefits of every product I deal with. There was the loss of the family breadwinner (Life Insurance), a permanent disability (Disability Income Insurance), care for a family elder (Long-Term Care Insurance) and more.

What that provides in me is empathy, and a bit of insight.  I believe in the value of insurance, and the law of large numbers*.

 *The law of large numbers allows insurance policy owners to transfer their risk of negative events and the monetary implications (e.g. death, accidents, etc.) to insurance companies.  These companies sell policies (coverage) to many people, and using statistics with probability, absorb that risk and spread the risk over many.

 I can, however, take it a step further…There is magic of a sort in one particular type of insurance, and it’s written into the U.S. tax code. More in a moment…

Now, here is where most insurance buyers and sellers fall away:

I also have experience on Wall Street. I had a variety of responsibilities such as Compliance (aka treatment of clients), Trading, Sales, Administration, Systems and Procedures, and more.  I understand the effects of “volatility” (aka ups and downs) on cash liquidity and growth of investments and savings. In my experience, not many “advisers” truly understand the effects. To be clear, volatility is bad for the investor. 

Here is a link to a further explanation of Volatility and its affects: 

https://www.himelfinancial.com/blog/arithmetic-averages-deceiving-and-matters-you

“What will you do when you’re 82?”

Picture yourself healthy and 82 years old, enjoying your life, and paying your bills through use of the cash you’ve accumulated in what is now your IRA, and perhaps also using funds from an investment account.

Now imagine that the stock market (and other securities) drops by 35% as we’ve just seen over the last few weeks. What do you do? You’d probably feel nervous, cross your fingers, maybe pull back on purchases. Do you wait for “recovery”? How long will that take?

Are you seeing the effect of “volatility”?  Important point: In your younger years that volatility thing is not innocent when you’re trying to amass those savings, but it is commonly ignored and poorly understood.

 In those younger years, you’re earning a living, paying your bills through those earnings, and don’t quite put the pieces together.  You’ll hear advisers’ standards: “stay the course” and “you know the markets always go up over time”, as well as “you have time…you’re young!”

Planning is backwards primarily because that age-82 question is too frequently neither asked nor addressed. How is any plan reasonable if it ignores potential trouble in those later years? 

 What is needed then? How about certainty, safety and simplicity, just to start?  And if those elements are important, when should they be introduced into the “plan”? Wouldn’t you agree from the beginning, not as an afterthought when it’s possibly too late in the game, at (or near) retirement time?

Herd Mentality…But, shaped by aggressive, relentless marketing

 There is a definite “herd mentality” surrounding the common 401(k). By the way, 401(k)’s only date back to 1980. The period 1980 – 2000 was a phenomenal period in the stock market’s history, and those accounts did fairly well. Since 2000, the volatility we have all experienced has certainly not been helpful. The strategy we use with insurance, however, has not caused any discomfort or losses.

So, what do I do? I use a strategy that goes back to before 1900. Yes, over a century ago…

 Yes, it involves Life Insurance, but not just any.  And before you scoff, let me ask you: have you read section 7702 of the tax code?  In this era of “Turbulence”, have you looked into what industry(s) is likely to survive into the next millennium? Have you looked into the difference between Wall Street “risk” and investing in a “business model”?

“The Barrier” or Lobster Trap – age 65. 

(a lobster trap allows lobsters to enter but prevents exiting)

Barrier to what, you ask.  Well, some might refer to it as a “portal” to retirement.

 Let’s imagine you’re back in the present, meeting with a new adviser and that adviser describes how the planning program would work. Let’s look at two different approaches: “A”, Wall Street/stock market, and “B”, Participating (Mutual Company) Whole Life Insurance:

A)    “We’ll invest your money in a portfolio, which we’ll create based on your risk profile. You understand, of course, that if you want to see returns (on your investment) of 8%, you have to be prepared to lose up to 23%. Now, we have a great team of analysts behind us, and we will also use hedging techniques. We’ll sell “call options” to lock in some profits or modify possible losses. We’ll carefully select funds and other investments based on past performance, and we’ll work with the “efficient frontier”.  We’ll re-balance the investments at least annually.  There will be ups and downs, as the market does not go up in a straight line. Once we create the portfolio, we can look at the average historic returns in sum, and project where you will be at retirement age…what, 65?

“Yes, there are fees involved but we’ll keep those to a minimum. Those fees will be paid for as long as you work with us and, if funds are involved, for as long as you own those funds. Most fees are exposed, but some are just built in. Again, the fees will be charged for life, but they’re small. Perhaps 1, 2ish percent per year. But you know, we’ll get paid more if your portfolio goes up in value, and that’s why we’re here, right?**  How does that sound?  No, we can’t guarantee any result. We’re not allowed to.  In fact, I can get fined, even tossed out of the business if I make any guaranteed promises. Just remember, to make money, you have to take risk.

“One more point: if your living expenses are covered by withdrawals from your IRA, that could make your Social Security income taxable as well.”

Now, the risk for success? All on your shoulders. You should consider that your adviser (and his firm) are taking no risk in their advisory status, and you are taking all of the risk for success in an uncontrollable arena, Wall Street. And the effects of “VOLATILITY”? Well, that’s encapsulated in your risk.

Result: “To whom do I write the check?”  Is this you?  By the way, what happens when you’re 82?

 B)    “We’ll design a Whole Life policy to take advantage of the tax code and provide a “basket” into which you will deposit money in the form of premium, and also extra cash. We’re going to assume a conservative risk profile; we’re trying to avoid risk.  Part of the premium, along with that extra cash, will grow in line with your participation in the continued success of a mutual insurance company, one of the strongest, best rated, and proven financial companies available. Oh, and the company (and industry) is regulated, with an eye toward successfully existing into the next millennium.  The company will have paid “dividends” consistently for a minimum of 100 years with proven profitability during the 1918 flu pandemic, the first world war, the great depression, the second world war, the Korean war, the Vietnam war, the tech-bubble collapse of 2000, the great recession of 2008. Oh, and volatility is absolutely minimized. And during those stressful times, no money in those policies was lost.

“You will have access to cash almost immediately, in line with the policy’s growth. There will be guarantees on growth, at minimum, in black and white. You will be working as an owner of the company as you participate in those dividend payouts; a regulated, conservative, proven, solid company and, in essence, benefitting from their “business model”, not the uncontrolled movements of the stock market.

“Yes, it is life insurance, and there is a cost to it, just as there would be in starting ownership of any business. The costs for you are primarily up front, and not growing. And yes, since it’s life insurance, if something happens to you (for example dying prematurely), your family/beneficiary will get even more than you might by simply cashing out.  We’ll be able to provide, within some level of certainty, how much you will have (cash and/or death benefit) at any point in the future. And in retirement, under current law, the cash you use to pay your bills will not be taxable, nor will it negatively affect the taxability of your Social Security income. How does that sound? Remember, the centerpiece of your portfolio should provide certainty, not risk.”

And that risk for success? On the shoulders of the insurance company, not the stock market.

 Result: “What?  Insurance??”     So, Is that you?

 **By the way, regarding fees: That 1, 2ish percent thing with the “A” portfolio? They look small but it’s a continuous cost and, over a lifetime, that approach will dramatically reduce results. 

Where does the “Barrier” come in?

 The age of 65 is a nominal figure for retirement, isn’t it?  Perhaps you’ll retire at that age, but we’ll use the example here. Pre-65, you’re likely employed and contributing to some sort of savings. Perhaps you have an adviser, or you occasionally consult with the salespeople associated with your 401(k), 403(b), etc. for advice.

As you age after retirement, perhaps you’ll maintain a professional relationship with an adviser, especially if your assets are sizable…but advisers also age and retire.

 Where does that leave the investor? That individual can become what I refer to as a “discarded client”, possibly on his/her own.

Remember portfolio “A” above? Those actions: selling options, efficient frontier, re-balancing, and more...still happening?  How about anticipating and dealing with market swings? Additionally, you’ll be selling some investments to cover living expenses.  Which investments will go?  What might have seemed simple years before now becomes a problem. Simplicity was not the goal, and simplicity is not evident now…unless the portfolio is ignored; well, that’s simple!

The barrier is actually this: a “portal” to the joys of retirement, and a “barrier” to continued adviser support for far too many people. The Lobster Trap…

Thinking about when you will be 82, today…

 This is where “what will you do when you’re 82?” comes in. If you followed the conventional route associated with portfolio A, you had to deal with risk, volatility, and unfortunately never left the uncertainty of the stock market. You did not simplify the approach and, at 82, have more of the same. And you will pay taxes on gains as well as on the entirety of your IRA. That, in turn, will affect the taxability of your Social Security. With a Roth IRA, while taxes are not a liability, exposure to market volatility is still likely a concern.

And if the markets go down 35%, what will you do? What are your options?

The alternative is to grasp the negatives surrounding risk, volatility, and complexity, and to work toward low/non-risk, consistency, and simplicity throughout your financial life.  And to get away from unnecessary taxation in retirement.

One last point regarding retirement: There are also “elder orphans”, which are surviving spouses. Two things commonly stand out in our later years: 1) a surviving spouse/partner has little understanding of family finances and 2) either spouse/partner is not quite on top of things, in comparison to 20 years earlier.

 Simplicity in one’s financial life should be a high priority. Once established, portfolio A is still not simple, while B is.

Give it some thought.