117: The Financial Planning Bubble

117 The Financial Planning Bubble

[00:00:00] Hello, everyone. I'm John Montoya and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life podcast.

John Perrings: Episode 117, the financial planning bubble. Hello, everyone. Welcome to the Strategic Whole Life podcast. And when people think of financial bubbles or manias, they usually think of things like the com bubble of, more recent history or the 17th century tulip mania, right?

They think of these kind of isolated sectors or, long gone esoteric assets. But. What if I told you that probably you and probably 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 [00:01:00] all doing when it comes to standard financial planning. What are we all constantly told and constantly bombarded with in terms of just 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, right? That's the gold standard. What do we really know about this?

If we analyze it, number one, everyone's doing it. Number two, everyone's doing it right now. And they have been for the last 20 plus years. pretty much everything right now is at all time highs, minus a little bit of a market correction a couple of weeks ago. Indexes are overrepresented by five big tech companies, essentially, further consolidating risk.

And if you really take a look at it and you want to look at this from a statistics standpoint, we really have nowhere near enough [00:02:00] data to really believe any of the outcomes are going to be what we're told they're going to be. Look up Dr. David Babbel, B A B B E L. He unfortunately passed away in 2021, but he's done some great work in this area.

If you think about the kind of 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, right? We can't just take a 70 year rolling average of the performance of the S& P 500, we can't just look at that rolling 70 year period, if we want to be statistically correct in analyzing, previous performance and averages in the market, we would actually need several 70 year periods, to get any kind of [00:03:00] statistical relevance.

What this means is the entire history of the S& P 500, which is like 94 years or something like that. If you think about it, that's really only one single data point for a 70 year lifespan. We would actually need, instead of, A 70 year rolling average we actually, what we really need are , 30, 70 year rolling averages so that we have some actual data for what takes place over an entire lifetime of what someone actually needs out of the market while they're in it.

So this idea that we can just go back 30 years and take a look at the average rate of return of the S& P 500, we're literally looking at one data point to calculate that. So how is it that people who invest for average rates of return, how is it that they can expect anything other than average results at best?

Remember all of [00:04:00] this analysis, if you look at the paperwork that you get with your qualified plan or your, statement from your broker, there's usually big letters down there that say, past performance doesn't indicate future results. And that's all because no one has any idea what's going to happen.

So there are people out there with these elaborate financial plans with buckets and target dates, et cetera, et cetera. Meanwhile, it's all based on probabilities and statistics. I think this is a huge problem. I just watched a YouTube video and Charlie Munger, who was on a panel with Warren Buffett, of course, he said, no, one's really doing any real stress testing, because if they were, they would add and they'd buy some assets with some guarantees on them.

So financial planning. Is really planning for the best case scenario. if you look at it, everyone tells you're going to get whatever, a 12%, average rate of return in the market. That's like the best it's ever done. there are some [00:05:00] certain periods where maybe it gets 14 percent or whatever, but it's like, everyone's making these plans based on the best performance you can, that we've seen in the market.

So it's all best case scenario planning and a real plan. Has parallel plans that cover the worst case scenario. And so what does this actually look like? if you look at again, typical financial planning, I call it planning with variables, right? If you take an honest look at our 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 know how much we're putting in right now, but we have no idea what we'll be able to put in, the future, We don't know the rate of return we're going to get during the accumulation phase while it's growing while during our working years.

We don't, know when we'll need to access that money during our working years. We don't know if we'll need to get to it for an emergency. And we don't know. We don't know when we're going to need to get to it when we retire, because [00:06:00] we also don't know exactly when we're going to retire because when we retire, it depends on how much money we end up with.

So there's a little bit of a catch 22 there. We don't know the rate of return we're going to get when we're accessing the money to take it out for retirement income. We don't know what the taxes are going to be when we take it out for retirement income, . We don't know how long we're going to live. So we don't know how long that money needs to last us. We have no idea, and we don't have any idea what our health will be either in the near future or. Definitely don't know in the, longterm. And so we have no idea if some of that money needs to be earmarked for healthcare expenses, which just keep going up and up So what about the typical financial plan is actually a plan? I don't see any plan there at all. We don't know anything about what's going to happen. So is there another way to plan? and yes, there is. So rather than planning around all these [00:07:00] variables that we don't know what they're going to be, we can plan with principles.

And not only is it way easier, but it's way less stressful. And so rather than hoping for, all these variables to work out in our favor and create a big retirement account, that's kind of the plan everybody's on, they're just hoping they build a big enough retirement account to live on.

But again, they don't know anything about what those numbers need to be. we can instead plan using principles, ensuring that no matter what happens, we can create a big retirement income. That's the thing that matters the most. It doesn't matter what our account ends up being. We need to know we can get a good income out of it.

And the good news is that there are only two principles that we really need to worry about. We need to worry about buying accumulation assets. So these are your assets that grow and you get growth out of them. so these are like your stocks or real estate or whatever you, [00:08:00] like. But then we also, the second principle is we also need to focus on buying distribution assets, and these are the things that are going to help us get more income out of the assets that we do have.

So most people only focus on buying accumulation assets, but the way that they buy them is that. In the form that carries with it a lot of volatility and risk. So all your stocks and mutual funds and all that volatility requires us to hold on to these assets for the longterm - "invest for the longterm."

That's where that comes from. The reason that is a mantra is because you have to, you can't count on, investing for the short term with these things because there's just too much volatility and you never know what you're going to end up with. And really the biggest problem is that the longterm.

Always eventually becomes the short term because we're always going to get to that point where we're going to need to start withdrawing income for that. as we start to, withdraw [00:09:00] from retirement accounts to get the income we need to live on, we lose all the benefits that investing for the longterm gave us, and it actually starts to work against us.

Okay. Here's an example, dollar cost averaging, last week or two weeks ago, when we had that dip in the markets, you could get on LinkedIn and, or Twitter and pretty predictably, you'd find the guys, saying, Hey, don't worry about this dip. You're now's the time to dollar cost average dollar cost averaging.

That's just when you hold on to your investments, you don't sell, you don't panic sell, which I agree. That's good. If you can do it, and then you keep buying. you buy more shares during that dip when the share price is lower. And so then when the market recovers and the share price presumably goes up, you get a little acceleration behind there and it increases your rate of return.

I agree with all of it. That's, a good thing. However, the rules change when you start [00:10:00] withdrawing money from your accounts to get the income that you need to live on. If we withdraw during the years when there are market losses, when market losses happen and we pull money out of there, it's actually like the opposite of dollar cost averaging. It works against us, right? We have to sell more shares to get the fixed income that we need to live on. Like we have to eat. So we need that amount of income.

We have to sell more shares to get that same income. So when the market comes back, we don't have enough shares left in there anymore for the account value to come back to where it was. The only way to recover is to get massive returns, which just don't happen in real life. And The other thing is the earlier that these losses happen during our retirement phase, we have a much, much greater risk of actually just running out of money altogether.

The earlier we see losses and pull money out of our account during those losses, it just cannibalizes so many of the shares that it can never recover. [00:11:00] Potentially just losing everything. The timing of the market losses really, matters when you're pulling money out to get income in retirement. So this is why it is important as you're buying your growth assets, your accumulation assets to simultaneously also build the distribution assets.

All along the way. Distribution assets come from the insurance world. So whole life insurance and annuities are the best examples, right? The actuarial nature of these products. So these are just, assets. They're financial products, but the actuarial nature of them allows them to have higher distribution rates on the same capital base.

In addition to this, And probably more importantly, they have guarantees. And this is why it's so important to while you're buying your accumulation assets during the accumulation phase, during [00:12:00] your working years, you really have to also simultaneously start building the distribution assets. That's the second principle. You got to build that all along the way. Distribution assets come from the insurance world.

So whole life insurance and annuities are probably the two best examples. Annuities are just the other side of the coin of life insurance. Life insurance protects you. If you die early, protects your family. If you die early, an annuity protects you. If you live too long by giving you a guaranteed income for the rest of your life.

Social Security is an annuity, your pension is just an annuity, these are all just annuities, so we're actually really familiar with them. there are some investment, people out there that have been bashing them lately. I don't know why, because at the end of the day, there's nothing quite as, freeing than to have a guaranteed income for the rest of your life.

There's really, I really don't know. See what could possibly be construed as bad about that. So what happens is the actuarial [00:13:00] nature of these products, it allows them to get higher distribution rates out of the same capital base compared to your growth assets because of the volatility of your growth assets, the distribution rate has to be pretty low so that you don't run out of money.

With actuarial products, you can increase those distribution rates from the same amount of money because you have all the guarantees built into it. And it uses the law of large numbers. That's just the actuarial science piece of it. So 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 for you.

These options just aren't available if all you have is your retirement account. You just can't do it. You're really stuck with the trajectory you're on, relying on, Monte Carlo simulations and the 4 percent rule, having very low [00:14:00] distribution rates and zero guarantees. So if you have this one to one ratio of growth assets and whole life insurance as a guaranteed distribution asset. there are two kind of core strategies and it gets more, refined from there and more sophisticated from there, like there are even, you can do more things than what I'm about to tell you, where you can start taking advantages of, some tax strategies, just not even getting into that for right now.

Here are two core strategies that will drastically improve, the outcome of your retirement. If you have this one to one ratio by the time you get to retirement. So number one, you can buy an annuity with the value of your retirement account. So if you've got a million dollars in your retirement account and a million dollar permanent whole life insurance death benefit, you could Take the retirement account, some or all of it, and just buy an annuity with it, [00:15:00] and the actuarial power of the annuity will roughly double the distribution that comes from the same capital base, from that same million dollars.

And it will provide that income to you for the rest of your life, guaranteed. Okay? The also guaranteed death benefit. Would then replace the value of the retirement account that you just annuitized, right? So you got to, you're giving up that retirement account in exchange for guaranteed income.

And then when you die, the death benefit replaces the value of that retirement account. So your family still receives the value of that retirement account tax free. So you get more to use and enjoy. During your retirement years and your family gets more to use and enjoy after you die from the tax free death benefit. Kind of a win-win. And it's all guaranteed.

Pretty solid strategy. Option number two, we lose a little bit of the guarantees, but we get to keep [00:16:00] our retirement account invested in the market. So sometimes not everybody wants to, buy an annuity. I personally like the annuity option because of the guarantees, but even if you didn't, this other option is really great.

And what we do here is we use the guaranteed cash value of the whole life insurance policy as a volatility buffer for your retirement account. So anytime the markets are negative, instead of again, like pulling money out During down market years and, liquidating some of those shares. All we do is we just switch over to the guaranteed cash value of the life insurance policy and get your income for that year from there.

The life insurance policy is guaranteed to always go up. And so you, the money's guaranteed to be there. You can get your income from that. And then when the markets go back up and your account value, your retirement account value, corrects and comes back to normal, you switch back over to the retirement account and just keep pulling your money [00:17:00] from there, the research shows, even if you only have two years of, Income from your life insurance cash value to fall back on during negative market years, it can mean the difference between going completely broke and leaving millions to your family. It's that powerful. So the incredible thing about this principles based.

Strategy is that because you're buying whole life insurance, you probably listen to this podcast because you're interested in the Infinite Banking Concept. guess what? IBC comes right along with it automatically. And because you have the use of the cash value all along the way, it's completely reasonable that you could continue buying assets with that cash value, so that by the time you get to retirement, you'll have all the same assets you would have had anyway, even if you hadn't bought the life insurance.

And, You have this big death benefit and you didn't have to come out of pocket any more money to get there. So instead of showing up [00:18:00] with a million dollars, you can show up with that same million dollars and a million dollar death benefit. And imagine the value that you've created for yourself and your family by doing that.

And again, if you've got this guaranteed million dollar death benefit that you know is going to go to your family when you die, doesn't that kind of. Free up the rest of that million dollars from your retirement account for you to use and enjoy. Sometimes they call that the permission slip idea. if you've got this million dollar death benefit over here that you know your family's going to get anyway, it gives you a permission slip to use and enjoy the million dollars from your retirement account in a way that makes you happy.

So it's very powerful, folks. don't get caught up in this financial planning bubble. One way to steer clear of it is. Just to not be affected by it. And one way to not be affected by it 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.

[00:19:00] So if any of this is sounding good for you and you want to learn more about how it could apply in your life specifically, head over to StrategicWholeLife. com. You can book a free 30 minute consultation with us right there. Or if you're the type of person that really just likes to. learn all they can before having to talk to someone.

We have an online course just for you. It's called IBC Mastery. It's right at the top of StrategicWholeLife. com. We actually cover some of these concepts in more detail in that course as well. So check it out. All right. Thanks everybody. We'll see you on the next one.