The Financial Planning Bubble
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Everyone's Buying the Same Thing at the Same Time
When people think of financial bubbles or manias, they usually think of things like the dot-com bubble or the 17th century tulip mania. They think of these isolated sectors or long-gone esoteric assets.
But what if I told you that probably you and just about everyone you know has been participating in the biggest mania of all time for the last two generations?
A mania is essentially a period of time when everyone is clamoring to buy the same thing at the same time, regardless of price. And if you think about it, it's quite literally what we're all doing when it comes to standard financial planning.
The Index Fund Mania
What are we all constantly told and constantly bombarded with in terms of regular, typical financial planning advice? The main thing is all you need to do is invest for the long term in a low-cost index fund, usually tracking the S&P 500. That's the gold standard.
But if we analyze it:
Everyone's doing it
Everyone's doing it right now (and they have been for the last 20+ years)
Pretty much everything is at all-time highs
Indexes are overrepresented by five big tech companies, essentially further consolidating risk
We Don't Have Enough Data
Here's something that will blow your mind: If you really take a look at this from a statistics standpoint, we really have nowhere near enough data to believe any of the outcomes are going to be what we're told they're going to be.
Think about the trajectory of a typical person's life. If someone works from 25 to 65 for 40 years, then lives another 30 years, that's 70 years total. We can't just take a 70-year rolling average of the performance of the S&P 500 if we want to be statistically correct.
What this means is the entire history of the S&P 500, which is about 94 years, is really only one single data point for a 70-year lifespan. We would actually need thirty 70-year rolling averages to have some actual data for what takes place over an entire lifetime.
So how is it that people who invest for average rates of return can expect anything other than average results at best? Remember, if you look at the paperwork you get with your qualified plan, there's usually big letters that say "past performance doesn't indicate future results." That's because no one has any idea what's going to happen.
The Problem with Variables-Based Planning
Financial planning is really planning for the best case scenario. Everyone tells you you're going to get a 12% average rate of return in the market. That's like the best it's ever done. Everyone's making these plans based on the best performance we've seen in the market.
A real plan has parallel plans that cover the worst case scenario.
If you take an honest look at a typical financial plan, what do we really know about it?
We don't know how much money we're going to end up putting in it
We don't know the rate of return we're going to get during accumulation
We don't know when we'll need to access that money during our working years
We don't know when we're going to retire because;
We don't know how much money we'll end up with
We don't know what the rate of return will be in the future when taking retirement income
We don't know what taxes will be when we take it out
We don't know how long we're going to live
We don't know what our health will be, which affects how much money we'll need
So what, exactly, about the typical financial plan is actually a "plan" at all?
Planning with Principles Instead
Rather than planning around all these variables that we don't know, we can plan with principles. And not only is it way easier, but it's way less stressful.
Instead of hoping for all these variables to work out in our favor to create a big retirement account, we can plan using principles, ensuring that no matter what happens, we can create a big retirement income.
That's what matters most.
It doesn't matter what our account ends up being - we need to know we can get a good income out of it.
The good news is there are only two principles (and types of assets) we really need to worry about:
Accumulation - Assets that grow (stocks, real estate, etc.)
Distribution - Assets that help us get more income (insurance & annuities)
Most people only focus on buying accumulation assets, but they buy them in forms that carry a lot of volatility and risk. That volatility requires us to hold on for the long term. But here's the problem: the long term always eventually becomes the short term because we're going to need to start withdrawing income.
The Hidden Danger of Having Only Accumulation Assets
Here's an example everyone can relate to. During market dips, you'll predictably find people saying "Don't worry, now's the time to dollar cost average." I agree - that's good if you can do it. You buy more shares when prices are lower, and when the market recovers, you get acceleration.
However, the rules change when you start withdrawing money. If we withdraw during years when there are market losses, it's like the opposite of dollar cost averaging. We have to sell more shares to get the fixed income we need to live on. When the market comes back, we don't have enough shares left for the account value to recover.
The timing of market losses really matters when you're pulling money out for retirement income. This is why it's important to simultaneously build distribution assets all along the way.
Distribution Assets Come from Insurance
Distribution assets come from the insurance world. Whole life insurance and annuities are the best examples. The actuarial nature of these products allows them to have higher distribution rates on the same capital base. More importantly, they have guarantees.
Annuities are just the other side of the coin of life insurance. Life insurance protects your family if you die early; an annuity protects you if you live too long by giving you guaranteed income for life. Social Security is an annuity. Your pension is an annuity. We're actually already really familiar with them.
Two Powerful Retirement Strategies
If you show up on the day of your retirement with a one-to-one ratio of retirement account value and permanent life insurance death benefit, it opens up a whole world of options that just aren't available if all you have is your retirement account.
Strategy #1: Buy an Annuity Take some or all of your retirement account and buy an annuity with it. The actuarial strenth of the annuity can as much as double the distribution rate from the same capital base--guaranteed for life. The guaranteed death benefit replaces the value of the retirement account you just annuitized. You get more to use and enjoy during retirement, and your family gets more tax-free when you die.
Strategy #2: Use Life Insurance as a Volatility Buffer Keep your retirement account invested but use the guaranteed cash value of whole life insurance during negative market years. Switch to guaranteed life insurance cash value for income during down years, then switch back to retirement accounts when markets recover. Research shows even having just two years of income from life insurance can mean the difference between going broke and leaving millions to your family.
IBC Comes Along Automatically
The incredible thing about this principles-based strategy is that because you're buying whole life insurance, the Infinite Banking Concept comes right along with it automatically. Because you have use of the cash value all along the way, you could continue buying assets with that cash value so that by retirement, you'll have all the same assets you would have had anyway, plus this big death benefit.
Instead of showing up with a million dollars, you show up with that same million dollars and a million dollar death benefit. And if you've got this guaranteed million dollar death benefit that you know is going to your family, doesn't that give you a permission slip to use and enjoy the million dollars from your retirement account in a way that makes you happy?
Don't get caught up in this financial planning bubble. One way to steer clear is to maintain at least some part of your financial life that is in your control, has liquidity when you need it, and has guarantees.
Ready to learn more about how to apply these strategies in your own life? Schedule a free consulation with me today.
