Do the Financial Rules Still Apply?

- Hi everybody, this is John Montoya.

- And this is John Perrings.

- We're authorized Infinite Banking practitioners and host of "The Fifth Edition." Episode 54: "Do the financial rules still apply?" So we had a question come in from LinkedIn, and this comes from Nicholas in the Washington DC area, he asked a very good question, "Will the traditional rules of finance hold strong or will the rules change in the next 40 years?" It seems to me," Nicholas says, "that the financial decisions made by someone who is age 25 in the 1980s is different than someone who is age 25 today. Do you agree or disagree?" Well, we thought this was a great question so we wanted to devote an entire episode to it. So thank you Nicholas. My quick answer, I don't even think the traditional rules of finance work right now. So the biggest reason why is because we have politically controlled money, called fiat, designed to devalue every single year. Now a few people understand this, but because we do have money that loses value the longer we hold it, we are forced further and further on the risk spectrum to stay ahead of the monetary basement. So this forces all of us really into higher time preferences than we otherwise would be making decisions in, and results in poor decision making, taking loans because they have little to no savings for a lot of people, for others, maybe choosing to get into get rich quick schemes by playing the chasing rate of return game in the market. All of this is to say that the foundational decision making that the majority of people make is fundamentally broken before people in their 20s are even entering the workforce. So let's just leave the base layer money issue aside, let's consider the so-called rules right now, for example, maxing out 401ks and IRAs and building wealth through Wall Street, it hasn't worked out well for baby boomers who are now going into retirement and retiring on less than they thought they would have. Essentially the rules of the 4% drawdown really don't even apply anymore because yields are so historically low. So question comes back to, why should someone in their 20s follow this path of financial uncertainty? The short answer is, we think they shouldn't. So this entire episode, we're gonna dedicate our answers to tackling this question, and Nicholas, thank you so much. So we're gonna cover this in two parts, part one, first, what are the traditional rules of finance? What are the assumptions that people think are working, and do they actually mean anything if the rules and definitions are constantly being changed? That'll be part one. Part two, we're going to talk about the principles of personal finance that don't change and bring that back to IBC. So let's get started.

- I love this topic, and if I could just change one word of what you said there in part one, and rather than like what we're traditionally taught, I would say what we're talking about is what we're typically taught, because if you go back to part two, which is bringing time back IBC and doing what we're doing with those types of strategies, that's probably more the traditional route that precedes all of the kind of qualified plans and all the things that you're seeing here over the last 30 or 40 years. And so if we jump into this part one and what we're typically taught, I'd say the biggest one is you gotta take high risk to get a high return, and that's kind of what we're taught out there, and to John Montoya's point earlier, a lot of it has to do, there's this big conception out there that you've gotta keep ahead of inflation. And of course, all things equal, of course you'd wanna keep ahead of inflation, otherwise everything you save doesn't continue to keep up. But if the only way you know how to do that is to take risk, then we're really missing a big part of the picture here where just taking high risk does not automatically equal a high return, right? And tying into that, we're taught to, if you go to whatever motley fool out there, or just any website really that talks about finance, they just talk about putting your money in ETF funds or ETFs, and you you'll get a high average rate of return, usually what they mean by that is like a eight, 10, 12% return, depending on who's writing the article. And that's all you have to do, and by doing that, your money will keep ahead of inflation, whether or not that's actually true, if you believe the official numbers maybe, but if you add in some of the go to like zerohedge.com or shadowstats.com and you'll learn the official inflation numbers, two things that they take out are food and energy. So right off the bat, we know that those numbers aren't the whole story. So those are two big ones right there, John, average rates of return, high average rates of return. What do you think about that?

- Well, the first thing I would say is that money doesn't grow based on averages. And I think people understand that at a very simple level, but we're bombarded with how well this target fund would've performed hypothetically or how a mutual fund has grown on average over the last 20 years, and these are all hypotheticals, and if there's one thing that we've always seen is that everybody's situation is different. People are horrible at timing the market, it's just human nature. And I think what's probably the biggest issue is that savings is really so synonymous now with investing that people.

- Yes.

- Don't even save properly anymore. And.

- Yes.

- More to our point with IBC and where we help people is they're missing the foundational piece to build wealth because everything immediately goes directly into investments and more so to Wall Street and that's the way they want it. And not that I'm totally against that, you need to have money invested and working for you. But the problem that I see is that there isn't truly a foundational piece with that savings component because everybody's so consumed with chasing rate of return, that they leave themselves such little liquidity to take advantage of maybe other opportunities outside of the market, or even just be adequately prepared for the curve balls in life that can and will happen. So the traditional rules of finance, it's changing, it's constantly evolving, but the bigger issue for me is that it just, people aren't set, the foundational piece first and foremost, and they're getting out way ahead of themselves. And because of the way the current market is and everything going on in the economy, now it's like everyone's feeling the pinch where, you know, if they are able to save any money, all of that has to go directly into investments really right away, and it's sink or swim. And the problem that we're discovering for all the baby boomers who have relied on the so called of retiring with your 401k and IRAs is that they have no predictability with what they're gonna end up with and compounding the problem. They have no idea how they're gonna turn that into income in retirement. So it's a big issue.

- That's right. Which by the way, was the topic of our last episode, episode 53, which you can take a listen to that as well. You know, getting to the baby boomers, excuse me, getting to the baby boomers that you just mentioned, one of the assumptions that goes into this, getting a high average rate of return is that they look at data out there where they take these rolling averages, like these rolling 30, 40 year averages that the market produces where they take 1990 to 2020, right? And so they take that 30 year average, and then they take 1991 to 2021 and they take that 30 year average. But it's actually statistically incorrect to look at it like that and if you go out there and look up, do a search for David Babbel, he's got a great talk about this, where he would say that an actual statistician would disagree with this method of evaluating different rates of return over different periods of time, and he likened it to having, imagine having 40 people in the room, and what you're gonna do is you're gonna take an average of how much all those people weigh, right? And you've got different types of people, short and fat, tall and fat, tall and skinny, all the different kind of weights that you can have, and then imagine taking one of those people out and replacing it with one other person. And you could see when you think of it that way, that would not change the average weight in the room very significantly at all. And so this is exactly how a lot of these rates of return calculations are done. And so if you look at it from that way, we actually have to replace all the people in the room with another 40 people to get another data point of average weights. And so when we look at it through that lens, we actually only have one data point. We only have one 40 year period of data that we're working with, one 40 year period. And so we're basing all of our financial decisions on this single 40 year period of time, which is indicative of sort of a working life, so to speak. And so we're making all these decisions based on a single data point. And so I think that was a, David Babbel, look him up, he actually passed away, I think, a year or two ago, but it's B-a-b-b-e-l. And you could probably find the talk that he did on that and pretty eye opening.

- Yeah, and it sounds overly complicated. So imagine being the average person in the labor force trying to prepare for retirement, and if you can make heads or tails out of what you are trying to say, I mean, it's overly complicated and is it any wonder that people are struggling to prepare adequately and not ultimately reach the majority of their financial goals when they want to go into retirement. So it's just unfortunate that this is the financial system that we're in and we're pretty much conditioned to be on that hamster wheel. So traditional rules of finance, we're talking about average returns, and in the last episode, I think we talked about the 4% drawdown and how that's not really working out for people once they enter into retirement with whatever assets they have accumulated to generate income, maybe delving a little bit deeper into custodial accounts, these 401ks and IRAs, just talk about some of the rules and restrictions and limitations that people have there. I'll say this just to be even, it's certainly, I guess, better than not having a retirement account, but good, better, best if there are better options out there, you certainly want to be aware of 'em, but 401ks and IRAs, I mean, let's talk about what the shortcomings are because for so many people, you're being thrust into these retirement accounts where who's the custodian? It's the government, you're basically partnering with uncle Sam and for a lot of people, that's a tough pill to swallow because who makes the rules? Uncle Sam, right? So they're gonna determine at some future date what your tax bracket's gonna be, and they're gonna take a portion of it. And that either is gonna happen at the tail end when you start to take money out, or maybe it's upfront with the Roth IRAs and 401ks that are now available, but either way, uncle Sam is gonna be your partner in these accounts all the way through, not to mention all the risk that you get in that rollercoaster ride. So it's better than nothing, but at the same time, this is like one of the legs of the three-legged stool that people are supposed to be relying on come retirement age, and in order to even get to retirement, they have to entail 20, 30, maybe 40 years of uncertainty. And it's entirely unnecessary too, because you shouldn't be putting all your eggs in just one basket, but this is what we're taught, max out your 401k, max out your IRAs and hope for the best and dollar cost average, and it'll all work out in the very end. And that's just not so. What are your thoughts there, John?

- Well, you know, we talked a little bit about this on the last one, I mean, you know, dollar cost averaging, it's a real thing, you can get some benefit out of that, but the problem is those same principles that work for you during your working life when you're funding these accounts, once you get to the retirement stage and you start pulling money out of the accounts, those same principles work against you, and you can completely run outta money in retirement if you start pulling money out and withdrawing funds, and in years where the return on your accounts is negative. And the other thing is like, how about the tax? We're looking at these tax deferred qualified plans, and I've asked 100s of people this over the last several years, what direction do you think taxes are gonna go by the time you get into retirement? And not a single person said they're gonna go down. And yet, everyone is contributing to these tax-deferred plans where they're deferring tax now during a time when they admit taxes are gonna be lower than they're gonna be when they wanna pull the money out. And so all these rationales get created to justify this behavior with things like, well, I'll be living on less income, and so I'll be in a lower tax bracket. And so to me, it's like, why on earth would you want to have a plan where you're gonna be living on lower income? Did you really work 40 years to just go live on as little as possible so you can pay a little less tax? And by the way, if you actually tally up the amount of tax that gets paid, the government gets a lot more tax dollars out of you when you defer it compared to when, if you just paid the tax up front. And so it comes down to really a lack of control. You give up all the control and you take all the risk when you use these products. You take all the risk, you give up all the control. There's like a 11 year window of time where you can actually make the decisions on how you use the money in these qualified plans. Because once you reach the age of 72, you are forced to withdraw money, required minimum distributions kick in. And so it's a strange thing that everybody prioritizes the use of these products where they're giving up control for the vast majority of time that they're even in use. It's really kind of a strange phenomenon to me.

- Yeah, absolutely. And let's go to the other end of the spectrum because we're talking about 401ks and IRAs and you have to go at the farthest end of the risk spectrum in order to achieve rates returns, but there's such a large portion of the population now that is so afraid of being out at that end of the spectrum, that they go to the other end of the spectrum where they want their money to be as safe and as liquid as possible. And according to the traditional, or what people think are the traditional rules of finance where do they park that money in order to have that sense of security and liquidity, they park it in a traditional bank. And the sad reality is that we're living in these times where interest rates are so historically low that people are earning, it's a horrible joke. I mean, it's 0.01% and maybe that's if you can get it. So you are losing money due to inflation, and the banks are turning around, lending that money out at potentially double digit interest rates and raking in the profits, hand over fist. And we're taught and conditioned to think, well, that's safe, right. But we can no longer even generate even a respectable rate of return. But the traditional rules say, well, that's where we should go in order to be safe, in order to be liquid. And it just isn't so, at least not by any measurements that for those of us who've been around for the past 20, 30 plus years would come to expect. So thinking forward the next 40 years, the people that are entering the workforce, you should be asking questions like this, "Will it work?" And also too, I would add, there're better answers available, which we'll get into here shortly. But yeah, banks paying near zero or at zero, there are better solutions out there than what we've been told and what people have conditioned to believe.

- Yeah, it didn't used to be that way. I mean, the traditional, so the traditional ways of saving money rather than typical were, you used to be able to put your money in a bank and get 8% on it. Like it's unfortunate that the way that the current financial system is set up, I mean, it really penalizes savers, people who want to be safe with their money. And the other, before we get into the more traditional side of things, which we'll tie in IBC, the other big thing to understand is that, with all this stuff that's happening, the goal posts are constantly being moved, right? The rules are always changing. So the person who emailed you on LinkedIn, Nicholas, he asks about, have the rules changed? And it's like, well, the rules are always changing. Like, we can't really rely on the rules to stay the same, unless we're in control. Because once we give up control of our capital and hand it over to these financial institutions and the government, it's up to them what the rules are gonna be. You don't get to make the rules anymore. So some of the things that are constantly changing, people are living longer, right. So we mentioned the 4% rule, we dug into that again in episode 53 quite a bit. But again, what that 4% rule means is, let's say you have a million dollars in your retirement account, that means you can, the 4% rule says you can safely withdraw 4% of that starting amount, and safely make it through your retirement year, so that's $40,000 on a million bucks. So being a millionaire, it's pretty tough to live on being a millionaire when you're living on the 4% rule. But since people are living longer and interest rates have been at these historical all time lows, the 4% rule isn't really working out anymore, it's more like the 2%, maybe 3% rule. And so people have to have these massive starting account balances in order to use these kind of typical strategies to make it through. They just tried to change the definition of a recession, right? And they're constantly changing the definition of what the money supply is. Most people think of inflation, they think of the consumer price index and prices going up, but the prices going up are really just the result of what inflation traditionally meant, which was the actual money supply itself. Inflation meant increasing the supply of money in circulation. And of course, when you do that, it devalues all of the money in circulation because you increase the supply. So the price goes down, and so relative to other goods, it takes you more of that money to buy the same goods, that's where the increased prices actually come from. So they're constantly changing all of these definitions, and so we, no one actually even knows what's going on with money anymore, very few people. And so it's very, what do the rules actually mean if the very fabric of the economy, which is the dollar is constantly being debased through money printing? We obviously don't really print it anymore, we just add ones and zeros to a computer screen, but if we're constantly devaluing the dollar, how can these rules mean anything to us, right? And that's really where inflation comes in.

- And there's one more traditional or so called traditional rule of thumb I want to hit on, we're told that when it comes to life insurance and living in that space, if you have an income that you need to protect, one of the things that we are told we should do is protect that income typically with a term policy. And that absolutely does make sense, but it's not a one size fits all, but the majority of advice that exists out there would tell you, well, if you've got a loved one and family to protect, you should buy term and invest the difference. And can't tell you how often we've come up against that being in the industry. And as a general rule of thumb, it's great to have that protection, but it's not one size fits all. But unfortunately, the mainstream noise that you hear out there is that, well, that's the only direction to take. And so we'll talk a little bit more about that in part two, but that's definitely something that, if that's all you hear, you're probably gonna believe it, just like with everything else.

- Yeah. It's tough, you listen to this podcast and you get such great education and then the next thing you know, you flip on the regular news and you hear the typical money advice, and that's everything that's out there. So it's hard to keep your mindset correct when the only thing you hear, imagine we were talking about young people, imagine being a 20 something year old, and you go into all your benefits paperwork, your new job, and your HR manager comes in there with her little 401k pamphlet with like a dozen options that sounds like a Godzilla movie with crazy names. Like Japan cap, whatever, like all these like super esoteric names. I actually have a LinkedIn post on this, I wish I could have remembered a couple of those names, but it sounds like a bad movie. And so you're sitting there 22, 24 years old, and you're like, okay, I guess I'll pick the medium risk one or the high risk. I mean, I'm young, so I can afford to take high risk right now. Meanwhile, we're not taught that how much lost opportunity cost you'll actually have as a young person if you lose money, right? And so the whole thing is kind of stacked against the regular person right now, where they don't really know where to look to get information on how to not partake in this craziness.

- And one more thing too, if we have a need for capital, and I think this really hits home for all the listeners and why people are attracted to IBC, if we have a need for capital, where are we taught that we should go to gain access to money that otherwise isn't under our control because it's tied up in 401ks and IRAs and potentially other investments? We're taught, we should go to a bank. And the financial system is really set up to take advantage of our need for capital, because we do not park a sufficient amount of our wealth in the right place. So we're taught to constantly rely on banks and banks are safe, and if we need capital for any reason to finance a car, our homes, second homes, vacation homes for curve balls that happen in life, well, there's always a bank and unbeknownst to people is that we can actually be our own bank and all the benefits that come with it. And so, John, unless you have anything you'd like to add.

- Great segue into part two.

- Yeah, that's right. This takes us into part two.

- Yeah, so in part two, we're talking about more and again, we're kind of mixing and matching our terms a little bit, so sorry about that, but we're comparing traditional versus typical and typical is kind of like what we're taught by the news outlets and financial entertainers out there. Traditional is more what we had prior to the advent of some of these qualified plans and things like that. Like, what did people do 50 or more years ago, how did they actually save and plan for these things? And one of the big things they used to save were savings accounts, pensions, and life insurance. Those were like the big three things that they used to save for their retirement. The safety used to be built in to a typical retirement plan. Again, mixing and matching a traditional retirement plan. Safety was built in, in the form of pensions, they had guaranteed income for life. I'm not saying everybody had it, but a lot more than now, guaranteed income for life. And they could actually earn a rate of return, a respectable rate of return in their savings account. So we're trying to get back to that more traditional way of thinking, which by the way, when you implement it, we now have the ability to actually take some risk in other areas of our life, because we're not betting the entire farm on these risky types of strategies that we're taught now, like everything everybody does now is risk based, market investments, IRAs, 401Ks, ETFs. By the way, ETFs, so we're going back to part one just for a second, ETFs, what do you call it when everybody does the same thing at the same time? That's called a bubble or a mania. So everyone and their mom is currently putting their money in ETFs and told they're gonna get an eight, 10% rate of return on it. Well, maybe, but if everyone is doing that, is that really like the principles of investing to just do what everybody else is doing? No, the principles of investing are buy low, sell high. So people are investing and they're not even doing it right. You know? So anyway, going back to part two, traditional, when you have a more traditional approach where safety is created, you can afford to go out and actually take a little bit of risk, which is what life is all about, but you don't have to bet the whole farm on it. And so we're not saying to just only be safe and only do the safe thing, we're saying, if you set yourself up financially with the correct structure, you can take risk and go out there and live life without risking your entire future.

- Yeah. And really the best type of financial plan is going to have a mix of investments that are on the risk spectrum, but you're also going to marry that with contractual guarantees. And where is the one place where you can always go to know that you have the confidence and the stability of contractual guarantees in order to lay out a financial plan that is going to keep going in a positive direction, not only throughout your lifetime, but generate income that you can live off of when you get to that retirement age and then ultimately transfer to your loved ones later on? It takes a well balanced approach, but you have to really adequately prepare by understanding what all the options are out there. And one of the best solutions perhaps hiding in plain sight to bring it back to life insurance is this very specific type of whole life policy that is designed for how we do it with Infinite Banking, where you have these contractual guarantees, you have the liquidity where if you need access to your money, for any reason, you have access to it, but it doesn't interrupt the growth of that money. So we get to take advantage of our savings actually continuing to grow, unlike what happens in a bank account, but we get the uninterrupted compounding growth of that money, even if we might use that for some other purpose. And it's what I've referred to as a financial unicorn or the ninth wonder of the world, which is uninterrupted compounding interest, because on the surface of things, if you think about compounding interests and what Einstein said, it's the eighth wonder of the world, that's phenomenal, but where can you actually go to get uninterrupted compounding interest? 'Cause that's actually what we want. And here we have IBC designed whole life insurance hiding in plain sight, it's been around for almost 200 years, and how many people have actually heard of it until maybe this moment?

- Absolutely. And it's like earlier when I was saying, if you set up the right structure, you can take risk. Well, if you wanna take some risk, you're going to need a source of financing. And so where do you want to go for that source of financing? Do you want to go to somebody else and ask them and try to get approved by them to get that source of financing? Or what if you could set that up yourself where you didn't have to ask anyone's permission to access financing to go out and do those things that create that excitement in life because you've set up the correct structure with guarantees and liquidity and leverage so that you can go out and make that growth happen on your terms.

- Absolutely. And also because we actually do what we talk about and we have the availability to have access to our cash values for any reason, it opens us up to opportunities that exist outside of Wall Street, where you have opportunities that, if all you have available in front of you through your 401ks and IRAs, it's completely Wall Street based. And there are other investment opportunities out there, including investing in businesses where the rates of return and the opportunities that exist can be pretty staggering. But unless you are well capitalized, have your capital in the best place you can possibly put it. These opportunities are completely off the table for you.

- That's right. And speaking of rate of return, in life, not all returns are a percentage number or a number on a piece of paper. What about the rate of return of having the liquidity to make a career change, right? Or start your own business or take a year off to go travel? Like having the control over your own life to be able to do the things that you want to do, that creates a rate of return that you can't put on a piece of paper. And so the, all of these things that used to happen no longer really happen anymore with typical planning. And so what we're trying to do is educate people on the power. You get on like TikTok or whatever, and you see everybody bashing being liquid and having cash. And all of their liquidity is tied up in things like lines of credit through their real estate or whatever the strategy might be. And those things are fine, and they work really well until they don't, because it's happened two times since I've been working, lines of credit dry up in these situations in a total market correction. And so if you're relying on a bank to provide you a line of credit on an asset that's not guaranteed, which by the way, that's your real estate, you might have some tough times ahead of you. But we're actually doing the same thing that these real estate folks are doing, except the underlying collateral of the whole life insurance policy, the death benefit, it's guaranteed. So there's never a time that you can't access the liquidity of your whole life insurance policy, but it's really the same thing as lines of credit on a property. It's just a different asset that we're doing it with.

- A 100%, and to add to that and bring it back to the retirement scenarios that people are discovering that they're not adequately prepared for. Well, here's a situation where if you combine the marriage of these guaranteed contracts, like through the whole life policies that we recommend with your 401Ks and your IRAs if you have 'em, now you suddenly have more options when it comes to retirement. Again, check out our previous episode on that, but that's ultimately what you want in life, more options, and to restrict yourself to fewer options, because, well, the so-called traditional rules of finance say that you should be doing this, well, there's a bigger world out there and hiding in plain sight is this financial unicorn, so grateful to have all the listeners here listening to what we have to say and hopefully open to discovering more.

- Yeah, and options is a huge thing. Most people are going to react to the coming changes. And having this, as you said, at Financial Unicorn, with all the guarantees, the liquidity and the leverage allows you to take advantage of the coming changes rather than just react to them. Most people are on a single trajectory that there's no getting off of it, you're gonna be on that trajectory no matter what happens following the typical advice, when you truly diversify, and what I mean by that is not just diversifying into other assets that have similar risk profiles, when you truly diversify and create a portion of your life that's truly guaranteed, you create a lot of options for yourself.

- Yeah, and going back to inflation and the deplacement of the dollar, that means potentially having access to funds that are extremely liquid. So if you want to get into alternative investments that you think would withstand the worst inflationary periods, you have the ability to do that, whether that's jumping into gold, silver, real estate, Bitcoin, whatever the case may be, you have the liquidity and the flexibility to take advantage of that with IBC that you wouldn't have anywhere else. And one more thing on that note too, if you're concerned about the dollar and the dollar not being the world's reserve currency 10, 20, 50 years from now, well, let's think about this over a longer time perspective, and this is what gives me so much confidence about IBC is that this is not something that's new, whole life insurance, these products and these insurance companies that offer it. We're talking about a strategy that's based off something that's been around for over 200 years. And if you study monetary history, you know what is money and who has control of the world's reserve currency, that changes, that changes somewhere between every 30 to 50 years. And the rules that applied 40 years ago or what we thought applied and what's applying today will apply in 40 years, those are gonna be changing too, right. They're gonna be evolving, but here you have a strategy based off of a track record of nearly 200 years of working, regardless of what's happening within the financial system. And which monetary asset is the dominant one. And I think that speaks so loudly to why you should be looking into this further and connecting with us on what this can do for you and your family, short and long term.

- Absolutely, focus on long term. All right, this was as always a great talk. John Montoya, thank you. You know, if you have any questions on this, take a look at thefifthedition.com. It's our new website, you can also access our online course that really addresses in great detail a lot of these questions in terms of how whole life insurance can fit into your life and make all the other things you're doing in your financial world work even better. And so head over to the Fifth Edition, and leave us a five star review, and we'll look forward to seeing you next time, take care.