E142: Beware of Three Major Flaws in Retirement Programs to Absolutely Avoid
In this episode, we discuss three major flaws associated with retirement programs and why we believe you can get much better results by avoiding retirement programs altogether.
Retirement Program Flaws Topics Discussed:
- Where to begin when contemplating a retirement program
- Defining your financial goals
- Are most people really happy with the 401K or IRA they’re in?
- Is financial autopilot a sound strategy for your future?
- The psychological impact that a retirement program brings to people
- How health considerations impact your planning
- How conventional programs destroy entrepreneurial spirit in most people
- When some solutions build a false sense of hope for the future
- Accounting for the unconsidered volatility of the markets
- Measuring opportunity costs and weighing your options
- Understanding tax savings vs tax deferment that will sneak up to steal your retirement
- Gain access to our Beginner’s Course now FREE to listeners of the podcast here now
- What is Infinite Banking
- Who was Nelson Nash?
- CREDIT: Episode art background photo by Darius Bashar
Podcast transcript for episode 142: Three Major Flaws Retirement Programs
Nate: In this episode, we discuss three major flaws associated with retirement programs, and why we believe you can get much better results by avoiding retirement programs altogether. She’s Holly, and she helps people find financial freedom.
Holly: He is Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
Nate: All right, well, it’s great to be back, Holly. And I guess we’re here about to beat the dead horse again. We’ve talked about retirement programs many, many times before in the past. But they’re so prevalent in society. They’re so forced down our throats that it’s a topic that is always coming up with people. I mean, it’s a very common question. Should I be putting money in retirement programs? And then I always feel that we need to continually convey that there’s … First off, by the way, I’ll just caveat everything we’re about to say by saying retirement programs actually might be useful to some people. I’m not someone who puts a blanket statement on anything. But I do believe strongly that there’s some major flaws associated with retirement programs, and that most individuals can actually succeed better financially if they just avoid retirement programs altogether. And so we wanted to come together and kind of have a nice concise podcast describing some of the three major flaws that are associated with all retirement programs, and maybe offer some different solutions, essentially.
Holly: And I think the other thing is we want you guys to actually start thinking about why you’re doing retirement programs. Or what is the benefit for you? Versus the reality of, we’re just doing it because everybody else is doing it.
Nate: That’s a good point. And that’s what we say over … If you guys have followed the podcast for any period of time, you know that is essentially our mantra. I don’t care what you do financially, but you ought to know why you’re doing it, and why you’re doing it instead of these other options. You should know that. And that’s one thing that we find most of us in the United States just take retirement programs for granted. We get plugged in early on in our career with a 401(k) or an IRA. And we just continue to use them without ever truly realizing whether it’s something we want or not.
And in fact, I talk to a ton of people, they’re actually not that happy with their retirement program to begin with. I think probably a lot of you listening kind of in that boat, you were at one time, or still are, stuck in a 401(k) or an IRA, and you kind of wish you weren’t, kind of wish you hadn’t gone down that track. You kind of wish you had that money invested elsewhere, where you have more control of it. But you are where you are, that’s fine. Sometimes it’s difficult to get it out, and we don’t want to deal with penalties and taxes and so forth, so we’re kind of stuck with it.
But all that to say, we wanted to focus on the three major flaws that we find associated with most retirement programs, and why you can get better results by avoiding them altogether. So let’s go ahead and jump in, Holly, with the first one that we discussed. And I believe strongly that the primary issue with retirement programs has to do with what happens to your mentality. So this one is more of a psychological impact that a retirement program brings to people. I believe from being in this business for 10 years and talking to many, many people that retirement programs themselves do something to our entrepreneurial spirit, where we can get put on autopilot and complacency mode, and we can think we’re doing the right thing just by placing money in there. And unfortunately what happens is you no longer strive to seek opportunities that are actually helpful, that help you grow wealth in the way you want to.
And so I call this the mentality problem, and we can dive into it a little bit more detailed here, Holly. But I think primarily speaking, retirement programs are based on faulty premises to begin with, with faulty goals and agendas, that whenever we participate in, we can get kind of lost in that. And suddenly, we end up 30 or 40 years down the road, and we’re not actually where we had hoped we would be.
Holly: And I agree, Nate. I think the reality is most of us have never actually considered what a retirement program does to our thinking, our process of thinking, our ability to actually pursue other endeavors to build wealth, to create opportunities in the future for passive income. I mean, I just had, no joke, today I just had a client email me about, well, we’re retired, and we have no income stream coming in. So what do we do?
Nate: Yeah, kind of an interesting time to retire if that’s your situation.
Holly: Yeah. So we retired, we didn’t build anything really. We have no passive income, but I don’t know what to do.
Nate: Yeah, exactly. I mean, that kind of comes back to a couple of things. If we want to dive into what we mean by mentality, first off, and something we’ve talked about many, many times, the idea of retirement itself is a dangerous idea that I don’t believe should be your goal. I find a lot of people by default, their main agenda when building wealth is focused on this idea of being able to retirement one day. So essentially, retirement has been marketed by Wall Street and these major financial firms as the goal for you, using these retirement programs especially, because it really does line the pockets of the Wall Street mutual fund conglomerate.
But besides that, essentially whenever you live your life with your primary financial goal being retirement, I believe you’re handicapping your ability to become successful financially. So I would like to present another alternative. Once again, if the primary issue with retirement programs is mentality, then obviously I’m going to suggest a different mentality. And the mentality I recommend is to have a mentality that says, “I want to build wealth. I want to become a wealthy person.” So every financial transaction, every action that you do is focused on achieving this singular focus of becoming wealthy, of building wealth. Retirement itself is kind of a nasty overlord, it’s kind of a nasty master. It’s very self seeking at times. We may dive into that a little bit here too, but it messes with people’s mentality.
I believe that if your main goal is to build wealth, then obviously once you have built wealth, whether that’s five years from now or 30 years from now, the wealthy are given the option to choose whether or not they want to retire or not because they are wealthy. So if your goal is to become wealthy, to build wealth, then once you have achieved a certain level of success, the opportunity to retire will be available to you, but it should not be your ultimate goal financially.
Holly: Well, and with that mentality of retirement, Nate, in a way you’re stopping production or what you bring to society, whether it be the work that you’re doing, or the people you’re helping or assisting. It’s almost like you’re telling yourself you’re not a value, or you’re not contributing in some way to society. That word, retirement, I’m going to stop working, and I think that’s a big key. It’s kind of, and I’m just going to relate it to this, it’s like where they say people that win the lottery, and they take the cash and they quit their jobs, 90% of them or more end up in a worse financial state after that than they did prior to winning it. They lose all the money. It’s gone.
I think the same is true with retirement, that when you stop seeing yourself as productive or providing something to society, you almost stop the growth of being able to build wealth, to see wealth, to want to have more in life. It’s just a goal that, okay, I achieved it. Now what do I do?
Nate: It’s very common for health to take a major decline upon retirement, much quicker than while people are still producing value. But that’s a good point, Holly. Essentially, people think, I work at a job to be able to save enough money to one day retire. I think that if your entire life is built on becoming wealthy, job or no job, even … So in other words, leaving job, changing job, becoming an investor, it doesn’t really matter if I’m 75 or 35, if my goal is to build wealth, that’s going to continue being a goal even at age 75. So I think the biggest issue with retirement is that there’s an end date, like your age, maybe, 65, 67. I’m building everything up and then as soon as that, I hit this age, I’m done building wealth. I’m done. I’m done work, I’m not producing value.
You can actually produce value, by the way, by being good at investing money essentially is where I’m going with this. You don’t have to work a 9:00 to 5:00 job to continue to become wealthier and wealthier. You can just be very good at investing money and managing money and doing things with the wealth that you have to produce more than what you need in retirement. But all that to say, this is the big issue, is that once you hit age 65, 67, you’ve finished the line, you’re done working. And now you’re just going to live off and liquidate the assets that you’ve built up and hope that your money lasts longer than you do. We’re going to talk a little bit more about that too. But I’m just saying the mentality that pervades the retirement planning space is that your entire life should only be about making sure you have enough money for retirement. It has nothing to do with legacy or building wealth to begin with. So I think it can be dangerous.
As I said, some of the major flaws that I believe, it destroys entrepreneurial spirit in most people, which I’m so surprised when entrepreneurs stuff money in retirement programs. What are you thinking? You’re such good at running business and thinking creatively, as it’s already seen in your business success. And you just want to set money outside that you can’t touch for anything you may want to accomplish in life and just let it sit there and hope for the best. It doesn’t really make sense. But even for people who don’t own their own businesses, destroys entrepreneurial spirit. It reduces opportunities that come your way because you don’t actually have any money available to you. It’s all socked away in this account that you can’t really touch, you don’t really have any control of. And you’re penalized or taxed to pull money out.
So any opportunities that come your way, you can’t really take advantage of. It breeds complacency. We just get a set it and forget it mentality, which is never a good mentality for anything you want to be successful at, so breeds complacency. And it really, all of that needs to be replaced with a build wealth mentality. Let’s take action to become wealthier every year than we were the year before. At some point in time, that wealth will be able to support your lifestyle easily. But even when you’re doing that, you goal should still be, I would like to continue building wealth.
Holly: Well, Nate, I think there’s one other piece that also I think builds a sense often of false hope, that you’re not going to run out of money because you put this money in a 401(k) or an IRA, that you actually do have enough money to retire and live on. And I think it creates a sense of false hope or false security for individuals. And that’s one reason why they become complacent, because the belief is, well, because I’m putting this in a retirement program, then I’m going to have enough when I retire.
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Nate: Yeah, Holly, that does bring us to the second major issue we have, which is essentially what you brought up, which is volatility. The volatility that is associated with retirement program assets, which is mainly stocks and mutual funds, maybe some bonds thrown in, but essentially the volatility that exists inside of these programs breeds this feeling, this issue that you never, at any given day, you never really know how much money you’re going to have. And that is very disconcerting for most people. You never know in that type of environment whether or not you’re going to have enough to retire on because you really don’t know how much you should be putting away because the rate of return is … And what you’re going to end up having 30 years down the road is so completely cloudy and arbitrary, you just never know if you’re setting aside enough.
So this is what I find, due to the volatility in the market, we find a lot of people live their whole working career worried about their ability to retire one day, whether or not they’ll have enough money or not. And then even whenever they do retire, they’re worried that the market will not actually go well in the next 20, 30 years, and that they’re going to run out of money. So essentially, this volatility factor breeds anxiety and fear in people’s lives just by the nature of the assets invested in, for the most part. You never know how much money you have when you actually retire, and you never know how long it’s going to last when you do.
Holly: Well, and I think one of the things, if you want to really be true and ask some questions, ask people that have lost their retirement programs. Right? And I just say you can ask people in their 60s, 70s, even late 50s. Hey, they lost their retirement once already. And now they’ve spent maybe the last 20 years, or 10 years, building up that retirement again. And there’s never this feeling of safety that they’re going to have enough or be able to accumulate enough, or just look at your local places of business and the number of older individuals that are working, not because they want to, but because they have to, because they believed they had enough money.
Nate: You never know what type of economic environment will exist five years, one year, 10 years, 20 years, 30 years out. So that’s why I believe strongly, maybe this goes back to point number one, the mentality that is built whenever you try to support your retirement through the typical retirement program is just a faulty idea. It really should be about building wealth. And if everybody would focus their financial life on: What can I do today to help me become wealthier in the future? Maybe retirement programs fit in there for you somewhere. I’m just believing that very rarely whenever you take that step, the mentality change, do you think, “Wow, retirement programs are really what’s going to get me there.” I don’t know very many truly wealthy people who became multimillionaires from their retirement programs, very rarely. Very often, it’s the people who are actively pursuing opportunities that start to become very, very successful financially. I believe everyone should try to do that.
All that being said, Holly, with the volatility factor that we’re kind of on right now, it’s a very dangerous and major flaw existing in retirement programs, mainly because even if we were to agree with the idea of retirement programs, which is mainly, by the way, retirement requires an income stream. So for you to be able to retire, you have to be able to produce an income stream. And so if the whole goal of a retirement program is to give you a stream of income in which you can live on, it’s surprising to me that we choose assets inside of retirement programs that do not do a good job producing retirement income.
It doesn’t seem to make sense to begin with. This is that volatility issue that the assets inside of a retirement program do not actually produce income of themselves. The only way to get them to produce income is to start selling assets. So you have to start selling your mutual funds, your stocks. You have to sell them bit by bit over time, so you have to sell assets in order to get cash to live on, to get income. But we have to compare that to other assets that actually produce legitimate cashflow, produce real income that never goes away. So in other words, whenever you’re selling assets, sooner or later, it’s very possible that you’ll have sold everything, and you will have nothing left.
Now given, you’re hoping that the assets continue to grow in value and outpace your ability to sell them off, but there’s no guarantee of that due to the volatility that exists. This is why whenever you’re selling assets, you’re going to dwindle down the price unless the market conditions help you in that regard. But then you compare that to, let’s say an infinite banking policy, or a real estate portfolio, or these other types of investment opportunities that exist, that legitimately produce real cashflow that will never go away. And whenever you compare those two, you start to realize, man, this retirement program, whose main goal in life is to help me to retire, is not even that good at doing what it claims to do, which is produce an income stream that will last your entire life. It’s actually one of the worst assets to be able to do that, or at least due to the volatility of the assets, it’s one of the most dangerous ways to try to accomplish that goal. At least I could put it that way.
Holly: And you really, honestly, because of the volatility, like we’ve said, you really, honestly don’t know what you’re going to have.
Nate: And this is very common too with the volatility issue, that it really does depend on the early years of retirement. Most, if you run studies and different tests, essentially the market conditions that occur within the first five years of your quote, unquote retirement, will essentially be able … You’ll be able to know with a lot of certainty whether or not you’re actually going to be able to make it, depending on the market conditions that exist for the first five years of retirement because if you lose a lot of money early on, whatever is left will not be able to support your income for your life. That’s the problem.
With that being said, Holly, the volatility means, hey, it’s not the best source of income, due to the volatile nature of the assets in between and due to the nature of the assets as far as they’re not actually cashflow producing assets. They’re just simply appreciation based assets. That’s what stocks are. They appreciate in value, market value. And you have to sell the asset to get money to live on. Any time you’re trying to sell assets to live on then, it’s a dangerous place because those assets may not be worth very much, due to some means beyond your control. And since they don’t actually produce income themselves, likely means you can end up running out of money at some point in the future.
So two major flaws, one is the mentality that comes beside retirement program, and using them as your main investing source. The other one is the volatility that occurs inside of it means they’re not even very good at doing what you’re trying to get from them. And so lastly, Holly, the third one that we’ll talk about is taxation. The third major flaw is how they’re taxed can cause a lot of problems for individuals.
Holly: And the reality is that what you believe the taxes are going to be in the future today isn’t true because the tax laws change, taxes increase. And the reality is with the taxes, 100% of your income is fully taxable. It can create a taxable event. You and I and individuals invest in these retirement programs because they believe that they’re getting this, and we talked about it, a tax deduction per se. Well, that’s not truly the honest truth, and we’ve talked about that before. But in retirement, there are no deductions.
Nate: Yeah. You’re right. Yeah, exactly right. So as far as tax deductions are concerned, many times people think, “Nate, why would you say there’s not tax benefits associated with retirement programs?” Especially with deferred tax, like your typical 4019(k), your typical, traditional IRA. They’re like, “Don’t I get a deduction when I put money in?” Well, not exactly. You are deferring your income to a future date, so the only way it really becomes a benefit to you is if you’re paying lower tax brackets on the income that you produce from the retirement programs when it comes to that future date.
Once again though, you rarely ever come up to individuals who think that tax brackets are going to be going down in the future. Very rarely do you find people who think we’ll have a lower tax burden in the future than we do today. It’s almost impossible, fiscally impossible with the amount of debt the United States has, the government has right now. It’s getting harder and harder for them to pay interest, especially when interest rates are going to be going up here soon. That means the cost of the government’s debt is going to increase. And so it’s going to take a bigger and bigger piece of their revenue just to facilitate the national debt. So it’s almost a guarantee that they’re going to have to raise revenue through increase in taxes, which means that most likely tax brackets will increase in the future.
So you could easily be earning the same amount of money or similar amount of money and be paying more in taxes upon retirement. Then when you incorporate inflation into this, how much money you’re actually going to be needing in retirement may be excessive, much, much more than you need today, just because the dollar figures have gone up. And the tax brackets themselves don’t always readjust themselves perfectly for inflation. That’s the problem. But right now, the official inflation is 7% or 8%. It’s a joke. Give me a break. It’s not 7% or 8%. The actual inflation is probably 15% to 18%. [crosstalk 00:23:24].
Holly: But they want you to think it’s that, Nate.
Nate: I know. Yeah. They’re trying to tell us it’s seven or eight, so taxes, maybe the tax brackets will readjust at seven or eight, but our actual cost of living may have gone up by 10%, 11%, 12%. And when you compound that over a long period of time, it may take more and more income to live on in the future than the readjustment of the tax brackets due to inflation would suggest. So all this being said, with the tax brackets likely going up in the future, with the need to make sure there’s adequate income that may not be fully recognized in adjustments for the tax brackets themselves, and then when you incorporate the fact that you will not have any kids, so there’s no kids deductions, there’s no itemized deductions. Most likely in the future, you’re just going to get the standard deduction.
All of that put together, and suddenly there’s a perfect tax storm to where you were hoping to get a tax benefit from your 401(k), but actually, it’s just increasing your overall tax burden in your life. On top of that, Holly, whenever you start actually having taxable income showing up on your tax return in retirement, suddenly your social security income, which is supposed to be tax free income, starts to become taxable.
Nate: In fact, 85% of it is taxable when I think … And it’s a very low threshold, $40,000 a year of income. It’s $40,000 of income produced means that pretty much all of your social security income will be tacked on as all taxable income, so now you’ve got to pay taxes on the social security income, whereas if you can work it out through let’s say the Infinite Banking Concept, which produces unrecognized, completely tax free income, with absolutely no volatility, or even other types of investments like in the world of real estate, where depreciation hides a lot of income, you can start to actually have legitimate tax free retirement, or very low tax burden retirement. You don’t have to sit there worry about what the future tax situation’s going to be.
In other words, we have to compare everything to what else we could be doing. That’s the problem. And whenever you realize what else you could be doing when your eyes are open to that world, you start to see the retirement programs as essentially a tool for the masses, a set it and forget it tool for the masses. And it’s actually most likely not in your best interest unless you just want a set it and forget it tool that you don’t have to think about much, which is fine. I’m just saying it’s most likely you’re going to cut yourself short. You’re going to ruin your entrepreneurial spirit. You’re going to have some issues mentality wise. And you probably won’t succeed the way that you could’ve succeeded if you got more focused on what you wanted to accomplish.
Holly: And I think it’s a key here, Nate, is that it’s for the masses. A lot of the retirement programs are for the masses. The masses are middle class, lower class, not the wealthy. So you have to start thinking about: Why is the wealthy not doing something? And I’m doing something because it’s supposed to be good for me. I mean, the whole premise of retirement programs is it’s supposed to help you in your taxes, now and in the future. It’s supposed to benefit you. And yet, the reality is, if you have too much money, then in your retirement program or you’re accessing too much money, even what the government is going to give you in social security becomes taxable. So all these benefits that you thought you were promised or were guaranteed, none of them, number one, are guaranteed because our tax law changes all the time, tax code changes all the time. And just look at the history of taxes and how much they continue to go up.
And that alone should make you go, “Am I really going to be in a lower tax bracket 20, 30 years down the road?” Plus, the other thing that we haven’t really even said very much is you’ve put all this money into your retirement program to use 20, 30, 40 years later, yet it’s not worth nearly as much as it was when you first put it in. So you get money that with inflation and the cost of living, it’s going to cost you more and more to live on.
Nate: There’s so much uncertainty surrounding the idea of retirement. If you’ve listened to us for any period of time, you know that we’re very strongly opinionated on changing your mentality from a retirement mentality. And retirement programs, they automatically put you into retirement mentality. And wealth building mentality is just so much better in every way. There’s just so many different opportunities available. But yeah, you’re right, Holly. You can bring up the inflation issue and realize that even though you may project a big number of money in an account in the future due to stock market potential, hypothetical returns. When you actually get there, the question is: How much would that actually buy you? We don’t really know. So we don’t really know how much it’s going to be worth. And you’re locking it up. You can’t use it. So you can’t use good dollars today to achieve certain things today. You’re just hoping that the returns of the market will overcome any inflationary headwinds, any tax increase headwinds, any management fees that are involved inside of a 401(k) mutual funds, which can be very hidden and costly.
You add all these together and you think, “Well, there might be a better way to do it.” But the one thing that they’re good at is taking money out of the paycheck, Holly, so you don’t have to think about it. So here we go, once again, it’s for the masses is the benefit. It’s a set it, forget it. I don’t have to think about it. I set it up with the HR department. They take money out. I’ll deal with it whenever I’m 65. That’s the mentality around it.
Holly: And Nate, the reality is it’s not even like they take money out of the paycheck. In reality, most of us, it goes back to that mentality, guys, all these are kind of all tied together. The mentality is you never really realized that was your money that was gone because you never see it.
Nate: You never get to touch it. You just learn to live on the rest, and so be it. So the three major flaws, three major flaws, number one, mentality issues, psychological issues that occur when your main focus and drive is in retirement programs, what they can offer. Oftentimes, that will limit dramatically the wealth building opportunities that would come your way had you not used that. The second on is volatility, that due to the volatility of the market, you always have this concern, whether you’re before retirement or after, is what I have is enough. You never really know because it’s based on valuations that can change day by day. On top of that, due to the volatility, it’s actually not very good at producing income because it doesn’t produce real income. You have to sell stuff to get income, which is always a more dangerous way to produce income.
And lastly, the tax benefits that you thought you were going to get very likely are not occurring. It’s an unlikely result that the tax savings that are available with deferred programs are actually going to be able to be there in the future, due to the headwinds we see there as well with inflation and with rising interest rates and huge, mounting government debt. Seems likely taxes will go up, so you should want to try to decrease future tax burdens, not decrease today’s tax burden, which is what you do when you defer income to the future. Anything else, Holly, before we close it down?
Holly: I think our tagline will say it best, Nate. You guys have to get out of the herd, and you’ve got to get outside of the box that they’re trying to put you in, and start thinking for yourself.
Nate: Absolutely. Well, this has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.
Holly: For free transcripts and resources, please visit livingwealth.com/e142.
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