Transcript
Paul Winkler: Yeah, welcome to The Investor Coaching Show. Paul and Claire, along with Evan, Barnard hanging out here with me today. Certified financial planner and enrolled agent and just all around…
Saving for Retirement
So what I’d like to, you know, we talked a little bit about best practices, you know, when you’re saving for retirement and you go, okay, so, you know, when I’m putting money away for retirement, what is it that I want to try to do? Well, try to accumulate as much as I can try not to make too many missteps, because the reality of it is you look at the statistics on people saving for retirement.
It is scary how many people are not prepared when they get down to, you know, where they’re, I forgot that I gave a statistics a couple of weeks ago and it just, I don’t, I don’t want to butcher them, but it was frightening how few people are going to be able to live at the same level that they were living at when they were just, you know, family going to work, doing their thing in retirement. Sure. I mean, it’s significant. They have to really find ways to cut back and, and, you know, you end up with, you know, as I talked about in the first hour, I talked a little bit about how, what we have a tendency to do is not think about retirement until it’s too late. And then we have to try to make up for lost time.
And, you know, we’ve all seen the numbers, sure. Say, well, what if you save $10,000 a year and you did it for a 40-year timeframe. And you know, and I talk about that and I said, well, what if I had a 10% rate of return? You know, what that 10,000 grows to is about $5 million. I mean, it’s insane. It’s there. It’s really good. Well, what if I only have 30 years, not 5 million. It’s $1.8, right? Well less. And it’s only a 10-year miss. I mean, that’s just a, a tiny, tiny period of time. What if and I only have 20 years to do it well, well now instead of, you know, $5 million, it’s $630,700, it’s, it’s unbelievably low, the difference between them.
Yep. So, and when it gets down to it, you don’t have forever to keep messing up with how you invest. You got to get it right from the, from the start. Because not only that, if we take that 40 years, let’s go back to that 40-year timeframe again. And let’s just say, well, let’s go back to that period of time. Remember it grows to be just shy of $5 million at that rate of return. Well, what if I, my rate of return is, you know, like let’s, let’s say it’s 3% less just cause, you know, I just didn’t. I made a couple mistakes and, and I didn’t quite get that rate of return. Two, two. Oh, you got all the two. Okay. Okay. Which is, you know, 40%, 40% the amount of money, right? I mean, so you go, Whoa, that’s a 40% and you’re going to live.
You guess what? Now I’m going to cut your pay 60%. Now let’s look at it that way. Or you have to die at 80 to one of those two, one of those two. Yeah. You either. Yeah. So you look at that and say, well, a 60% cut in pay. Could you take that right now? And the answer is probably, no, I wouldn’t want to do that. So as efficient as we possibly can be is what we ought to do with our retirement savings. And one of the things I’m seeing people do is they say, well, you don’t want, I’m going to diversify in what I do, which is a prudent way of doing things. And they go and say, well, diversification to them isn’t, I’m going to diversify across all the asset categories, you know, how we talk about it, and global diversification between big companies, small companies and value and growth and emerging markets and international established markets and US established markets and so on and so forth, no diversification, I’m going to have a 401(k).
And I’m also going to do an index universal life policy, and then I’m going to do, and you know, I’m going to do, you know, cause you know, I want to have money in all these different areas. Let’s talk a little bit about that. Let’s talk about when I buy life insurance policies and just advice, you know, index universal life. Cause we’re talking about India and the, you guys can parlay that into indexed annuities if you want, because the problems are the same. They’re even greater with indexed universal life. But what are the issues that you see with going and, you know, setting up insurance in that particular way?
Evan Barnard: You mean like just using that as a retirement vehicle? That’s the question.
Paul Winkler: Yeah. Or as part of my retirement vehicle.
Diversification and Multiple Strategies
Evan Barnard: Yeah. Okay. The diversification, I think the biggest thing is I think if you have these multiple strategies, there is absolutely going to be this pull to fund the wrong strategy at the wrong time. That’s a good point because okay. The market’s down, but my index universal policy didn’t drop. Yeah. You know, I did have my cost of insurance, so my value didn’t go up much, but I think that’s a safer place. And so I’ll put money there. Sure. And then the market goes up, right. And you’re like, Oh, I need to put that in my portfolio faster. And so I think you, you, number one, get yourself into a performance chasing spiral.
It’s a really good point. And you won’t get the returns you expect from any of, you know, in total. I think the other challenge is, you know, how do you take an income from those various strategies and those costs, right? When you’re needing the money for retirement, your costs of insurance are gonna really be high. Nice. You’re exactly right. Then if that thing lapses and you get a 1099 and you have no money left and you’ve still got a tax bill…
Paul Winkler: Exactly right. So what Evan’s basically saying there is when you buy these products, you’re paying a set amount of money. You know, you’re saying paying a set amount of money every month or every year when you pay that premium part of the money goes toward term insurance. The rest of it goes to this index. And we probably spend a little time talking about that in just a second and the problems with that. But let’s just for now just say, we’re looking at an investment vehicle that historically doesn’t have much of a fighting chance to get a higher rate of return than let’s say just some bonds to put that in perspective. You know, one of the examples I like to give is a dollar in treasury bills from 1926, till today it grows to $22.
Whereas if we look at large US stocks, it grows to over $9,000 and it’s like $30,000 or something like that for small companies. Yeah. Yeah. So is this like 30,000 to three times as much? And then if we go look at international small value, you know, or US small value, excuse me, it’s, you know, in the $80,000 range, it’s, it’s ridiculous versus 22 bucks. So you look at that and you say, well, historically let’s put that number so that you can kind of follow let’s take it after inflation. Well, the after inflation rate of return of fixed income investments, treasuries, namely back to the 1920s is 0.5%, 0.5%, 0.4%. Yeah. So you take the rule of 72, 72 divided by your rate of return tells you how long it’s going to take for your money to double.
And you’re looking at about 140 years and you’re just not going to be gracing the plan at that long, right? For your money to even double once, let alone, you know, double as many times you need to, to outpace inflation help you have a decent retirement
No, well, even, even if there was a little would have been challenged because the real issue that you’re dealing with as well has your life insurance costs. Because as you age, as Evan was saying, your life insurance costs go up and you’re paying that set premium for the policy. And at some point in time, your premium that you’re paying the money that you’re paying into the policy will be eclipsed by the cost of insurance. Now, when you’re starting to take your income out of your policy, that you’ve been sold, that this is an idea that we can use for your retirement in the future.
Your cost of insurance still has to be paid. So you’re taking an income. And so money’s going to you and money still has to be siphoned out to go for the life insurance costs. And if that, if, and when quite possibly that policy lapses, your money that you took out was just an advance on the death benefit. The death benefit is tax-free. So it is sold as you’re going to get an income that is tax-free from this product. The problem is that when that money is siphoned out and is taken out and it goes to zero, all of a sudden the IRS goes, “Oh, did you have any gain over all the years?Did you make anything off of this product?”
And if you made anything, if you had any, like, let’s say you were lucky enough to get some rate of return, a positive rate of return after all the expenses in the product, then you owe taxes on it because it is no longer alone. It is no longer in advance than the death benefit. There is no death benefit because the policy lapsed and you are in trouble with that product, that’s the problem that you run into now. Guys, what I want you to talk about is what are the issues on the investing side?
Ira Work: Well, the show on the investment side, which I was going to bring up is the fact that you cannot rebalance with the products you can change, you know, with an equity index life or equity index annuity. You can’t, you don’t have the true diversification to be able to say, I want X amount of money in this area, that area. I mean, you’re limited to about three or four different areas. That’s how, or I see one of the big differences I used to sell universal life as a retirement vehicle. I used to take the commissions and I used to invest it. That was my retirement vehicle.
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Get an Advisor Who Doesn’t Work for Commissions
Paul Winkler: Oh my God. You know, you’re a reformed Bumble from Rudolph the Red-Nosed Reindeer. No, that was, that wasn’t Rudolph. It was, it was Yukon Jack or whatever his name was I used to be.
Ira Work: I know, I know in all seriousness, I used to sell it as a retirement vehicle. You know, I should have shared on previous shows, you know, there was a fund, that’s not even around anymore the AME constellation fund. And that was not, that was an individual fund that you can buy for your IRA or for just a non-retirement account. Sure. You could buy inside an annuity. Yes. And you could have bought it inside a variable life insurance product. And I would basically say, so, Paul, do you look at the returns of this fund? Do you want to buy it taxable, tax-deferred, or tax-free? There you go. So we’ll just have to add a little bit of life insurance to that and just increase my commissions by a lot of money.
Paul Winkler: And that, if it is, I mean, you’re not the only one I had back in the early days now. Luckily I was, I was a terrible sit in, lucky for people. I was a terrible salesperson, but I used to try to sell, there was a company called Fortis. Okay. So in 1991, they had a knockout rate of return with our growth fund. It was funny, it was like 63% or something like that. Wow. And they actually set up an illustration software program that we could illustrate using actual rates of return of the underlying funds. And we were able to cherry pick, which funds we use to illustrate the rate of return on the product.
Wow. Now I, you know, I was ignorant. I have to tell you, I knew nothing. I didn’t really start to, I didn’t study academics and investing until the late nineties. So, you know, cut me a break on this one, but it was terrible what we were allowed to do, and it was completely legal. You could show a 12% rate of returns on these products.
Evan Barnard: Yeah. So that’s what I mean, I was going to say, we were capped at showing a 12%—capped listen to that language. We were capped. Yes. Okay. Showing a 12% return.
Paul Winkler: The way to get around the cap was to use this illustration software that actually used the actual fund returns because the SEC said, okay, well, as long as it’s actual fund returns and you know, you think about it, you know, the, the regulator said it was okay, right. Why would this be wrong? It must be, you know, because surely the regulators wouldn’t let us do this. If this wasn’t a prudent thing to show, so this is often why an investment advisor may show you something. And then they’re absolutely adamant and they don’t think they’re doing anything wrong.
Evan Barnard: They don’t, that’s the real harm that is to home advisor him or herself. They don’t think they’re doing the wrong thing or misrepresenting or whatever.
Paul Winkler: No. So, you know, and, and that’s exactly right. You know, you had a guy that was on the board for the securities and exchange commission, you know, the regulators themselves going out and running a Ponzi scheme and you know, so it is not what I would recommend to the public at large to think that just because I think that just because something is legal, that is necessarily good for you, you know? So this is really, really where, where the rubber meets the road is making sure that you understand that the regulators aren’t there to, and, and, you know, I’ve had conversations. You’ve heard me talk about this. I’ve had conversations with regulators and they say, you know, there’s a freedom to do business. There’s a freedom to do business.
There is a desire that we have to make sure that we protect clients. But the reality of it is that, because we live in the United States of America and thank God we do, we have the ability when we have freedoms now with those freedoms comes responsibility. And unfortunately the responsibility is often with the people that least know anything about investing, which is the client themselves. You signed pieces of paper. When you sign that piece of paper, you have basically taken the investment advisor off the hook because you signed it. I’ve had situations where I’ve tried to protect people from things, and I’ve had situations where I basically said, Hey, you know, I brought it to a regulator, or I brought it to a securities attorney and said, here, this is what my client has gotten into. Can you help them? And they basically look at it and go, no, I can’t help them. Right. They signed the piece of paper.
Pay Attention to Your Investment Practices
Ira Work: Well, I had lunch with a friend of mine who had Mississippian and advisor, and he was telling me that he’s been going back to all of his clients to have old annuities. And to me, old annuity means there’s no more surrender charge. Right. And he’s replacing these variable annuities because a lot of the insurance companies are getting out of the variable annuity business. Right. Because they’re recognizing that they cannot meet the liabilities they have with old and guarantees. And they’re being charged. You know, the policy holders being charged, in many cases like 3% and 4% and the insurance company, that’s where they make their money. And they realize they cannot meet these obligations.
If the policy holders start actually exercising those riders. So he’s now moving all of these clients into equity index annuities. Wow. And he says to me, and some of these pay obscene commission charges, Oh my gosh. I said, but you need to find better friends. I said, but you’re tying them up for years. And he said, Oh yeah. But the way that I get around that is I have these summit managers that I liked. So I put them into some fee-based plans and some commission products there, and that becomes your liquid money that they’re going to use right away. And then those surrender charges should eventually disappear.
So my comments about that, some of these people don’t realize that they’re doing wrong is not universal. No. Some people do realize that they’re doing wrong and do it anyway.
And then he was talking about converting a lot of things like long-term life insurance policies into these new hybrid policies with life insurance and the long-term care rider. And in some cases, switching it over and the built up cash value will make it a one-time payment that they don’t have any more premiums to pay. I’m like, but what about the cost of insurance? This is well under the current assumptions. Yeah. Yeah.
Paul Winkler: Some have gone out the window over the years and you know, basically they’ll say, “Oh, this is what we think is going to happen, but they have this little guaranteed column that really you don’t need to pay attention to.”
Ira Work: Because they’ve never gone down now.
Paul Winkler: Oh yeah. You have to worry about that comp and you know, and the reality of it is, and here’s one thing I want to take away from this segment folks is that there are, you’ve heard us talk negatively about annuity products and you know, the reality of it is there are some old contracts kind of what Ira is alluding to. There are some old contracts that you really should not get rid of some of the old ones, because they do have some significant positive guarantees. And this is why it’s so critical. Really. I can’t overemphasize. This is why it’s so critical when you’re getting advice about investing in financial planning, get it from people that aren’t selling stuff to you. You know, because when we look at these things, I’ve had people when they come into those contracts, Ira, and they have some really good guarantees.
I’m like, you know, you’ve got one of the good ones. I have been accused many times, Oh, that guy just hates annuities. He hates all this stuff because of the reason he hates it, because he can’t sell any of it. No, I hate it because most of it should be hated. I have some things that are actually older products that are, I’ve told people that keep, you know,
Ira Work: I have a client down in Tullahoma, a doctor, client who has an annuity. And I reviewed the note and I told him to keep the annuity. And he said, he looked at me and said, I was sure you were going to tell me to get rid of it. Exactly. Like it wouldn’t have been the right thing to do.
Paul Winkler: Yeah. And that’s the reality of it is that there are some old things, but I’m telling you this stuff out there right now, that is being purchased. And we’ll give you 2 cents because the insurance companies learned their lesson. They learned their lesson because they used to give away too much as a store. And then they got burnt because they realize, Oh my goodness, we were guaranteeing things we couldn’t possibly abide by. And then when the rubber met the road and the stuff hit the fan, then all of a sudden it fell apart. And that’s really when they started to change the contracts to where they weren’t nearly as client-centric, as they used to be.
Paul Winkler, The Investor Coaching Show, along with Ira Work and Evan Barnard. We’ll see you next time.
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