17 Nov Creating Certainty in Today’s Uncertain World
Creating Certainty in Today’s Uncertain World
(The Road Less Traveled)
If you were able to corral twelve financial planners in a room and asked them to produce the best financial plan for you using identical data you would most likely wind up with twelve different solutions. How would you know which one is really the best, or even if any of them are the best considering your unique circumstances?
The problem with traditional planning is that the stated objectives of most plans and their implementation strategies violate core principles of economics. The main problems with traditional planning methods is that their stated objective is to meet the clients stated needs and goals. Is it possible that the advisor in implementing his traditional plan has actually inhibited the client’s ability to maximize his wealth potential by designing a plan to merely to meet a client’s stated needs and goals? Is it possible that the clients stated needs and goals will change as they encounters the many twists and turns on the path seeking financial security and independence? Obviously the answer is yes.
So, the best financial plan is one that gives the individual confidence and certainty that they will be successful across the widest range of possibilities, live too long, die too soon, and everything in between. One that will provide the control and resources to address any of the many challenges they will face over their lifetime. One that allows them to live the one life they have the best they can. There is only one planning strategy that can accomplish this. The foundation of this planning strategy is built on predictable results, financial control, lifetime access to your money without penalty, competitive rate of return, and minimization of wealth transfers that erode your ability to create wealth.
Imagine a plan where one dollar does the work of two or three dollars – providing a leveraged benefit for premature death, a leveraged benefit to provide significant cash for a chronic or terminal illness, and becomes self-completing in the event of a long-term disability. If any one of these three unthinkable events occurs your family could suffer a catastrophic loss of wealth, so this type of plan also acts like property insurance. In addition to benefits named above this type of financial plan can provide cash for college planning, and a tax-advantaged retirement income stream. The economic certainty and benefits of this kind of plan can only be achieved if permanent cash value life insurance is at the heart of the plan.
Let’s compare how the planning strategy described above might fare against plans using more traditional planning strategies.
Most people have the majority of their retirement savings in IRAs and 401(k)s. That’s the traditional approach to investment and retirement planning because that’s what their advisor and CPA told them to do. I consider these bad assets. IRAs and 401(k)s are tax deferred, creating an ever increasing debt on these accounts. What you really have is a TAX INCREASING LIABILITY PLAN. The ever increasing compounding fees also erode your wealth potential. If you access your money prior to age 59 ½ you pay taxes and a 10% penalty that reduces your withdrawal substantially, as much as 35 to 45 percent. You have given up the ability to use your money over most of your adult life. You have locked yourself out of happiness. You cannot pledge these account as collateral, because that would cause a taxable event as well, and the tax burden passes to your beneficiaries upon your death. Once the money is deposited into these tax-deferred or tax-qualified accounts there is no economical way to access the money.
At retirement, just when you need the money the most, you are taxed at an unknown, and most likely higher tax rate. This makes these traditional retirement savings accounts an uncertain and diminishing asset over time. Taxed as ordinary income, withdrawals from traditional retirement accounts create additional issues in retirement. The income from tax-deferred accounts could cause more of your social security benefit to be taxed, or you may have to pay a higher premium for Medicare. Additionally, withdrawals may cause a phase-out of deductions, tax credits, exemptions and other benefits as income increases. Then when you reach age 70 ½ you are forced to begin taking withdrawals from the tax deferred account whether you need the additional income or not. From this point on your taxable income will probably increase each year. Taxes represent the largest transfer of wealth you will ever experience. Terrible things happen when you experience wealth transfers to the government or other institutions. The transferred money and its ability to compound and create wealth for you are gone forever. This is known as OPPORTUNITY COST, a 200-year-old principle of economics. You have unintentionally created a huge economic dilemma.
The point is that traditional planning has set up the individual for massive wealth transfers that he or she has little control over. They have relinquished use and control of their money and are now subordinate to the tax policies and rules regulating tax-qualified plans. The rules and the tax rates change frequently and you have no control. All of the problems associated with traditional planning can be minimized or eliminated by transferring more of your saving and accumulated wealth to permanent life insurance. Instead of a Roth IRA conversion, think converting to permanent life insurance.
Maybe now you are beginning to understand how a plan that minimizes wealth transfers, grows tax-deferred, provides income tax-free access to the accumulated cash value, passes income tax-free to your beneficiaries, and just plain provides more spendable wealth is superior to a traditional financial plan.
Life is so uncertain that I believe the main focus of a financial plan is to create more confidence, certainty and happiness in the lives of people we advise. The certainty provided with a life plan built on a foundation of permanent cash value life insurance gives solace to an individual so that they may make choices that they would never have made if their future was based on a traditional financial plan. Many at-risk investments like stocks, bonds, mutual funds, IRAs, or 401(k)s may work out in hindsight, but people will not feel safe making significant, bold choices in other areas of their lives based on the expected performance of these assets because there is little certainty of the outcome. They will be in wait-and -see mode most of the lives. Their life will be filled with lost opportunities and the wealth that those opportunities may have created. For example, Walt Disney was unable to secure financing for Disney World. Everyone he approached for financing thought it was a crazy idea. So Walt Disney leveraged the cash value of his permanent life insurance policy to finance his Disney World project. You know the rest of the story. What do you think the rate of return on his life insurance policy was?
Dr. Solomon Huebner, the founder of the American College of Financial Services wrote extensively about this subject in his book “The Economics of Life Insurance”. In his book Dr. Huebner wrote, “Life Insurance in its economic mission is not limited to the indemnification of the loss of life. In fact its greatest value is in living benefits. It allows the insured himself to surely, quickly, and conveniently accomplish his economic purposes during life. The economic services of life insurance, despite its outstanding importance to the welfare of the individual and the community, have been greatly subordinated in publications on life insurance to the mathematical principles.”
By creating more certainty of success for an individual, a plan built on a solid foundation of permanent life insurance better addresses the lifetime of economic challenges than any other planning strategy available.
Bryan D Myers
241 East Main Street
Westminster, MD 21157