E162: Are Tax-Deferred Programs Really Reliable? Here are 4 Main Risks and Rewards

E162: Are Tax-Deferred Programs Really Reliable? Here are 4 Main Risks and Rewards

In this episode, Nate and Holly discuss the four main risks of tax-deferred programs. They also discuss how understanding those risks can help decide whether those programs are suitable for your goals.

Topics discussed in this episode:

• Understanding the actual risk-reward situation that’s being offered by retirement programs
• Why Volatility risk can hit in a few different ways
• The tax risk and its risk-reward tug of war are going on once again
• Why is opportunity risk the least concrete risk and probably the most important?
• Why Political risk is the most farfetched one

Episode Resources:

• 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 Dollar Gill

Transcripts for Episode 162: Tax-Deferred Programs Risks and Rewards

Nate: In this episode, we discuss the four main risks of tax-deferred programs and how understanding those risks can be helpful in deciding whether those types of programs are right for you. She’s Holly and she helps people find financial freedom. 

Holly: He’s 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 everybody, welcome back to the show. It’s so great to have you. Holly, we’ve talked about this before in tax-deferred retirement programs. I think most of the audience would understand where we stand on this issue as far as what we’re doing personally. But we’re going to dive in, I think maybe in a little bit of a new light, because it’s still a very common question for people who come to us and talk to us on whether or not we would advise them to continue funding their 401(k) or IRAs, or whatever it is, a tax-deferred program. 

So, we get asked this question all the time still, even though we have episodes out there about this, but I think we’re bringing something new into it in some degree, or at least a new perspective I think in this episode, when we talk about the four main risks of tax-deferred programs. 

The reason I bring this up, Holly, and we were talking about this before the show, is that I think most people who listen to us would understand Nate doesn’t see very many things in black and white. I’m in the gray most of the time and I’m even in the gray area about me not seeing things in black and white. So, in other words, sometimes I wish I just saw the world in black and white. There are pros and cons to not seeing the world in black and white, because you’re not as confident in certain things. So, you’re seeing there’s some good, there’s some bad in everything, there’s some yin and yang, they’re tugging at each other. 

But I bring this up to say that I don’t think you and I believe that retirement programs are just evil and from the devil. It’s not a black and white approach. Whenever people come to me and ask that question, my answer is always, “It depends.” The idea of Infinite Banking is not better than retirement programs and the idea of retirement programs is not better than the idea of Infinite Banking. 

So, the one I like to bring in into the forefront is that situationally, retirement programs can be good or bad. Situationally. It depends on your situation. It also depends on what you believe about the future. Because we don’t have a crystal ball, we will not know for sure if tax-deferred retirement programs are ideal. 

The reason it gets so talked about, Holly, is because everyone’s got one in today’s world. So, situationally, it can depend on some things, which is why I believe that simply understanding the actual risk-reward situation that’s being offered by retirement programs is important in helping you understand if you want to do them or not, because it has to come down to you. It can’t be Nate’s decision for you. I try to help people come to a real decision, an educated decision on, “Am I willing to accept the risks in return for the possible rewards or am I not?” Which is, I think, how you should make any decision in life. 

Holly: Well, and I think Nate, that that’s what we always say. We want you to investigate. We want you to do research. In retirement programs, you hear about all the opportunity, what it does give you, but there’s never this other side of, is there any risk associated with it or what are those risks? 

Some of them are very factual like you, they’re tangible, you can see them and experience them. Other ones might be farfetched, but they are a reality of what could happen. And so, it is how you view the future. It is how you process information and take it in. But you need to know, this is a risk, there’s pros, we’re not saying they’re bad. What we’re saying is be aware of both sides of the coin before you make your decision and just jump in. 

Nate: Yeah, exactly. Yeah, and there are pros and cons, as there is with almost everything in life, especially financially speaking. So, if we go into the four risks and just understanding that on the flip side of the risk, there’s technically a reward, you could say, but you at least should understand the risk and then come to your own decision if you want to accept that risk or not in exchange for the reward. 

So, the four risks we’re going to dive into are volatility risk, tax risk, opportunity risk, and political risk. These four are what we’ve essentially identified as being the four main risks that go under the radar for a lot of people, they sit below the surface, but you have to understand that there’s a risk to it and there’s also a possible reward to each one, you could say. In other words, if everything goes well, retirement programs are probably going to be fine, but since we don’t know and it’s possible that things won’t go well in many different ways, you have to decide if you want to take the risk. 

So, the first one that we dive into is volatility risk. Holly, this is something we have brought up. I think this is the most obvious one for most people. I don’t know how much time we need necessarily to spend on it, but volatility risk can hit in a few different ways. First off, everyone knows that not every mutual fund is created equal. Rarely do mutual funds beat the market anyway. Oftentimes they lose to the market. And with the volatility risk is, you’re accepting the risk of having no idea how much money you’re actually going to have in the future. We have no idea. We hope it goes up. People would say it does tend to rise over time, and that’d be right, but we don’t know what your situation is going to look like, obviously, with your timing. 

And so, I thought we could dive into that a little bit. It’s becoming more and more common, Holly, for people to discuss, not even in our shoes, but just in every financial advising situation, that the real risk, the real volatility risk that we’re all dealing with, everyone with tax-deferred retirement programs that are mainly invested in mutual funds. The real volatility risk is what’s called the sequence of return risk. That’s what people are referring to as, this is the ultimate risk. It’s unlikely that unless we have a World War III or something else happens where the stock market just collapses and you lose almost everything. I mean, that’s always possible, but they’re saying that that risk is maybe more so unlikely than simply this idea called the sequence of return risk. 

And the sequence of return risk is essentially saying when it’s time for you to retire, the five years before your retirement date and the first five years after you decide to retire, and you’re switching in that timeframe to a world where you’re pulling income from your accounts, that is the red zone. Every decision that you make and every market movement that occurs in that 10 year window, is extremely important for the success of your entire retirement. 

And so, it really won’t matter what happened for the 30 years before that red zone window and it won’t really matter what happens in the 20 to 30 years of retirement after the red zone. Really what we’re talking about is what is going to happen in the red zone, of the five years before retirement and the five years after. And the reason they say this is because the sequence of returns may not work in your favor. 

That if the market is down in those early years of retirement and you’re having to pull out income from it, you can easily wind up in a situation where the account balance … In other words, if you were going to retire in 2005 and things are looking okay and ’06, ’07 comes along, things are okay, but then ’08 happens and your account loses 50% of its value. Suddenly you’re in the red zone. At this point you went from having a million dollars to $500,000 and you had to pull out 40, 50 grand to live on. So, now your balance is 450, and maybe after 2009 it’s 400, and suddenly the principal that’s left may not be enough, even if we have great returns after that point, it may not be enough to sustain your retirement. So, this is why they call it the red zone, and we don’t know what’s going to happen. 

And I remember one study, and it went from like 1978 to 2008, or something like that, and they said, “If you were to retire in 1978 and have a 30 year retirement with those 1978 return system, not only would you have been able to live off a really solid income but your account balance would be way bigger by 2007, 2008 than it was when you started with.” So, you would’ve been able to pull out income and you would’ve been able to keep compounding money and make money and everything would’ve been great. 

But then they said, “What if we flipped the sequence of returns and we took all those returns and instead we started with 2008 and worked backwards?” And maybe it was 2012 and worked backwards. It was one of the two. But essentially what it was said was, “Yeah, you’d run out of money within 30 years.” So, it’s the same returns, the same 30 year window. One of them, the guy retired with a million, pulled out income and ended up with $3 million when he died, and the other guy retired with a million, pulled out the same income, and ran out of money. And so, the idea is that this is the real risk is the sequence of return risk. 

Holly: And I think the key to that is that we can’t predict the future. Nate and I talk about that a lot. You don’t have that magic ball, but you can actually, literally have the same average rate of return, the same growth, whatever over a 30 year period, but it all does depend on what happens with those mutual funds in the market as to when you are retiring. 

So, you have to actually consider that. There are people I’m sure right now, Nate, that are like, “Oh, I wanted to retire but I’m not going to retire right now, because if I do that, what I have in my nest egg or in my retirement program could be greatly affected because of where we’re at with our economy today and what’s going on statistically in the world.” So, you might wait another five years or 10 years to go and do that versus other ones that, “Hey, it looked really good two years ago.” And they went and retired and now they’re like, “What am I going to do? I’m going to have to go back to work.” So, those are things you can’t predict. 

Nate: Yeah. All the people who retired in 2020 during the pandemic and just wanted to get out of the workforce because everything was going crazy, they might be regretting it now. They weren’t expecting for inflation to hit 10% and for the market to drop 25% and now they’re hanging by a thread, because if the market doesn’t turn back around in the next year or two and possibly inflation is more persistent and things end up getting worse, then that’s the real risk we’re living in. 

So, that goes unsaid. In other words, people understand that the market can be risky, that it can go up and down, that you can lose money. But most of us are pretty confident that over a long period of time it does go up. There might be a big recession, a 40% loss like there was in ’08 or in the dotcom bubble, or there’s these dips, but then it’s going to build itself back up. And while that may be true, what people are really trying to identify or are starting to identify is the idea that the sequence of returns is actually the real risk you’re adopting. That it is true over every 30 year period in history, the market has gone up over that 30 year period. But that doesn’t mean that if you’re actually in retirement and having to draw money that the money will last you 30 years, just because the market will average a positive return. 

So, we actually go over this in our course briefly, by the way the beginner’s course, Holly, there’s an episode on this where we dive into some real numbers based on that. That’s the volatility risk. You’re accepting that in retirement programs and what we’re saying though, inside of that risk, there is a possible reward as we mentioned, because there are certain sequence of returns, in which case you’ll be able to pull an income out and end up with a whole bunch of money after the end of retirement. 

So, in other words, there’s a risk-reward ratio going here, where there’s a risk that you would run out of money if the sequence doesn’t work in your favor and there’s a reward in exchange, you could go very well, but we don’t really know. So, this is one of the things I bring up or that you would want to understand about the actual risk-reward ratio you accept with retirement programs, because you would want to make sure, is it okay with you? 

Sometimes people are okay with the risk, if they have assets that are not correlated to the market to begin with. So, they’re okay leaving some in there, because they’ve got a lot of money and other assets doing other things. It’s not as big of a concern. They’re not counting on their retirement programs to have an awesome sequence of returns, because they’ve got other stuff. And maybe that’s fine, but this is one thing you would want to keep in mind if the majority of your capital, like most Americans, is pouring into your 401(k)s and IRAs, you would want to understand the volatility risk. Anything else on that front, Holly? 

Holly: Nope. There’s a risk and a reward. There typically is with almost any risk. 

Nate: That’s right. That’s right. 

Holly: You just don’t know what it is because we can’t predict the future. So, I think you have to ask yourself if you’re willing to take that risk, because you can get the reward or you can run out of money, like Nate said. So, you really have to know if that’s your only goal or that’s your only plan, I think you need a backup plan. 

Nate: Yeah, that’s a good point. So I mean, that is it getting more and more common. Honestly, there’s studies done that are not IBC, Infinite Banking style studies that are putting whole life insurance in a great light, just because of its ability to be a non-correlated asset that you can build up alongside of retirement programs to help buffer some of these risks that are taking place. That if everything’s in the stocks and bond world and the mutual fund world, then you are just simply accepting by default, you’re either going to get lucky or unlucky, depending on what happens in the future. So, that would be one thing to keep in mind. 

The next one is tax risk. I think a lot of people understand this one as well. These are very common risks to understand that in a tax-deferred program there’s a kind of myth out there that they save you money on taxes. That’s not exactly true though. We’ve beat this dead horse before on the show. Tax-deferred programs are not tax deductions in the purest sense, they are a tax-deferred program. So, all that means is all the money you’re putting into a 401(k), a traditional 401(k) or a traditional IRA, is essentially taking that bit of income and putting it into a program so you’re not paying taxes on it the year that your income was earned. But whenever you distribute money from a tax-deferred program, you will pay income tax on that distribution at whatever the tax bracket is that you would be in at that time. 

So, what we call the tax risk is there’s this risk-reward tug of war going on once again. The whole point or the whole idea is that it can make sense to do this type of thing if you’re going to end up paying less in taxes in the future when you pull the money out, then it makes sense, it’s going to work okay. So, if you’re in a lower tax bracket whenever you distribute the income during retirement, then it could make sense. But obviously, the risk is a couple of things. 

Number one, the risk is we don’t know what tax brackets are going to look like in the future, and secondly, we don’t know how successful you may end up becoming and how much income you’re going to show on paper at that time. And just with inflation you’re going to have to be pulling more income out than you’re currently … If you’re 30 and you’re looking at 65, age 65 or something retirement, you’re going to have to be pulling out high amounts of income at that time. 

Normally, the IRS does adjust tax brackets for inflation, but once again, that’s us trusting the government to always keep pace for us, on our behalf. So, we could dive into this for a moment, Holly, but essentially there’s a definite risk here that you will not be in a lower tax bracket and you ended up deferring taxes into the future, just to pay higher taxes on the money when it comes out. 

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Holly: We are in a historically low tax bracket currently, today, and we’ve been that way since Ronald Reagan was president. So, we are historically in a low tax bracket. So, the risks that you’re betting on is that in 30 years from now you are going to be in the same tax bracket or a lower one. And that’s not a guarantee, because our taxes can go up, we can have higher tax brackets. 

And what most people don’t realize is as you get older, a lot of those tax deductions that you got to take when you were younger don’t come into play when you’re older. And so, you actually might not be in a lower tax bracket, you actually might be in a higher tax bracket, or they might historically raise taxes across the board. And so, you’re in this 24% right now and you might be in a 35 or 38% tax bracket in the future. So, that’s a risk, but the reward is you could be in a lower tax bracket, you could pay less money, they adjusted it for inflation and you’re good to go. 

Nate: Exactly right. There’s a risk-reward here for sure. And I like how you brought me up too. This is why I like to tell people, I might be slightly biased towards certain financial philosophies, but I am not a black and white guy. I think it was last year, as Holly I brought up, I was phasing out certain deductions that I really liked to take and I was pretty close to it. And so in other words, if I had opened up a solo 401(k) for my S corporation and dumped 50 grand into it or something like that, it probably would’ve brought my income down just below the brink, where I could have taken some itemized deductions that I normally wanted to take based on income at that time. 

I was having deductions phased out. So, I was thinking to myself, “If I was to put that money in, of course I would be deferring the tax at whatever I was in, maybe the 32% or whatever it was at the time, the tax bracket that I was in, I’d have the 32% deferred, but then I’d also unlock some deductions.” So, my real tax savings on contributing 50 grand to a deferred retirement program would’ve been something like 45 to 50%. I think I ran the numbers. 

So, essentially it was like I could get a 50% tax deferral. And so then I had to decide, “Well, what are the chances that I’ll be in the 45 to 50% tax bracket in the future, when I come to retire?” Well, I’m only 30 years old, so that’s 30 years. And I was like, “Well, what were the taxes 30 years prior to this, in the ’80s and early ’90s, especially before Reagan came into office?” And you looked at some of those tax rates and you’re like, “Holy cow.” 

I did all the research last year as far as what income I would’ve had to have made to be in a 40% tax bracket in the 1970s, and it wasn’t very much in today’s dollars adjusted for inflation, it was like $130,000. So, essentially I was like, “Man, this is a big risk. Is it worth me locking the money up inside this tax-deferred program for 30 years, hoping that when I get there my tax bracket at that time would be a little bit lower than what I could actually get deferred today?” 

So, I decided not to do it, but it wasn’t because I am a black and white guy and I hate retirement programs. No, it was because I looked at history and I made a decision based on my own forecasting, my own desire. And just because I like the simple life of not having to worry about my whether or not I’m in a lower tax bracket or not. 

I don’t plan on stopping working. That’s another thing. So, in other words, I don’t plan on stopping to work with clients. I hope I’m making a ton of money at age 75, age 80. In other words, all of these things are pointing to me in my situation to say I wasn’t that interested in doing it. I don’t think I’m going to be making less money in the future. I don’t think that tax brackets are going down. 

That was the last point we wanted to make here too, Holly, was that just simply that not only does history say that we’re in a lower tax bracket, but I think all of us are a bit concerned with the debt ratio to GDP that our country has. 

Holly: Yeah. 

Nate: I think we’re all concerned with the spending problems, the fact that we’re running a deficit every year and at some point the government, whoever we elect, is going to have to make a decision on really, “Should we run deficits every year?” 

And so, the only options are either reduce spending or increase revenue. Revenue means increased taxes. When has the government ever really reduced spending by that much? I mean, it just doesn’t happen. Once a program is established, they don’t take it away, it’s political suicide. So, it feels like at some point, somebody’s going to have to get courage and make some tax changes and probably increase tax rates. So, I would rather take advantage of the low rates that we’re in today, avoid the risk of having to pay a lot more in tax in exchange for the possible reward that I would be paying less in the future. It is possible. I’m just saying it’s a risk that you would take with the tax-deferred program. 

Holly: Well, and I think, Nate, you also said something key there that leads to our third risk, the opportunity. It’s not like you really wanted to tie up like $50,000 for the next 30 years, really, realistically. You didn’t want to be like, “Okay.” And you can miss that opportunity. That’s the other risk is that opportunity risk of, you can’t really access or touch this money when you put it into a retirement program. And so, you can miss out on an opportunity or an investment that you could have used that money or accessed it for and done something with it. 

Nate: This one is probably the least concrete of these four risks, but I would also say I think it’s probably the most important. And what I mean by that is, when we say the third risk is the opportunity risk, you may be fine with the tax risk, the volatility risk, but the idea of retirement programs oftentimes creates a situation in which case that money is set aside and you don’t even seek out opportunities to put that money to work. This is very, very common. 

So, in other words, whenever all of your money is in tax-deferred retirement style programs, there’s a risk involved that you’ll miss out on opportunities that you could have taken advantage of had you had the money in your pocket, readily available to use. So, I would say that there are some people who maybe have a self-directed IRA and they’re trying to put money to work in various opportunities. 

And 401(k)s are a little bit different though, that a lot of companies don’t offer self-directed 401(k)s. You’re just stuck with the mutual fund style offerings that they have available. So, what I’m saying is especially in the world of the 401(k), but oftentimes in the world of the IRA, there is an opportunity risk you’re definitely taking on board, that you don’t have capital available to just take advantage of any opportunity that comes your way. And some people may say, “Well yeah, I do, Nate, I mean, if I had an IRA I could withdraw the money, pay the tax, pay the penalty and take advantage of opportunity. Or I could use the self-directed IRA.” 

And what I’m saying is, yeah that’s true to some degree, it’s not ideal. I’m just like, yeah, you may be able to, but the issue is that nobody I know who is in the paradigm of retirement programs and so their mind is saying, “This is what I’m building my future on.” They are not actively seeking places, opportunities to put this money to work, oftentimes, which is one of the reasons why we bring up all the time that Infinite Banking oftentimes serves as a gateway drug to other financial things. It’s like the entryway into it, because it’s almost an automatic paradigm shifting event will occur, where you will start to seek out other types of opportunities that you would never have thought to even pursue if you were stuck in the 401(k), IRA, mutual fund style paradigm. 

Essentially, this is what I tell people when they ask the question, “Nate, should I stop putting money into my 401(k)? Should I stop putting money in my IRA? So that I can fund maybe more into IBC?” This is actually, I think where the rubber hits the road. We can talk about the volatility, we can talk about the tax, but oftentimes it falls down to this, “Okay, well yeah, if you keep putting money into 401(k), you’ll get whatever the reward is from the 401(k).” 

The question you should ask yourself is whether or not you would rather have your hands on the money and be able to deploy it for the various opportunities that exist outside of the Wall Street mutual-fundy world. This is why I’m saying it’s not a bad thing. You may want to have some money in mutual funds, you may want to have some market correlation involved. I’m not going to objectively change your mind, nor would I want to. You should do what you want. 

But understand that I think this is really the most important one. If you’re trying to decide for yourself, “Should I stop contributing to these places?” The question I would then ask, “Well, if you were to stop and if you were to start funding policies, would you rather be a part of that world that is more focused on taking advantage of alternative assets and other types of opportunities?” This is very often true for the people who already have decent balances stuck in 401(k)s and they can’t get them out. They oftentimes will make that decision. They’ll say, “Yeah, I have enough already in the market. I don’t know if I want to keep putting money towards it. I would instead rather fund an IBC policy and then use that to take advantage of other types of opportunities that come along my way, as opposed to just continuing to feed the 401(k) that already has a large balance for years of doing it.” 

Holly: I think another risk of the opportunity is when we have been taught or all we’re doing is into retirement programs that are deferred, or 401(k)s is, we actually stop our mind from processing the opportunity of what we could do with that money. So, all we’ve done is done exactly what we’ve been told, we went and we’ve parked it somewhere else for somebody else to use and make money off of. And our mind isn’t actually ever processing. 

The risk is we don’t ever process or actually think, what opportunities did we miss or could we have been involved in, in life, because all we’ve done is pretend it doesn’t exist, it’s just gone away. Because technically, if it’s coming out of your paycheck and you’re not seeing it, it’s out of sight, out of mind. And so, you’re not even looking for that other opportunity of how you actually could diversify. You could actually look for other opportunities to build on your actual retirement. And I think that what we’ve done is become dependent. The other risk of that is, you’ve become dependent on somebody else to make the money for you, so later on in life you’ll have this nest egg, which isn’t guaranteed. 

Nate: That’s a good point. I like the idea of dependency thrown in there. I think it’s absolutely true. We get trained to become dependent and obviously financial institutions want that, whether it’s Wall Street institution, mutual funds, banks, even insurance companies, the people I work with, they all want you to be dependent on them. They want you to leave money sitting with them and to be dependent on them, and so they can offer value to you because of the dependency. 

And so, I do believe that being more independent financially oftentimes will outrun a dependency mentality on the 401(k). I think you’ll earn higher rates of return. I think you’ll be more successful. I think the opportunities you’ll be able to take advantage of will far exceed what you could have gotten inside of mutual funds. 

But that being said, there is a risk-reward ratio here because there is something to be said about being dependent. That’s certainly not for everybody and I don’t think everybody wants to take control and that’s fine. If you were to come to me and say, “I’m not really going to seek out any opportunities. I’m not really going to try to put the money to work anywhere else and I’m totally fine just letting it sit in mutual funds and doing that thing.” Then obviously you should keep putting money in. This is what we’re saying situationally is really the determining factor on whether you should do this. There is not an objective decision to be made here. 

So, I think people would want me to be objective. I think they would want me to say, in my world that, “An IBC policy is going to perform better than mutual funds inside of retirement programs.” How on earth could I know that? I can’t tell the future, I’m not a psychic. And if I was, I wouldn’t need to be talking to you. I’d be doing just fine. Of course, I don’t have a crystal ball, no one does. So, you have to make decisions based on your own situational desires. 

So, in other words, as we brought up, there is some opportunity risk. I think it’s likely that if you continue to fund money in there, you’re going to miss out on opportunities you otherwise could have taken advantage of. But you could also come back to me and say, “I’m not actually interested in looking for opportunities. I’m not much of a risk taker, I’m not much of a go-getter, and I’m kind of passive.” That’s perfectly fine. You have to understand yourself. 

So, there’s certainly a risk-reward ratio there that having someone manage the money, and our tagline, “If you follow the herd, you will be slaughtered.” The herd offers some feeling of comfort. “I’m just going to do what everyone else is doing. I’m going to be okay.” I also don’t like to paint a picture where it’s IBC or retirement programs and you got to choose which one and you can’t be doing the other. Of course, that’s not true. But if someone comes to me and says, “I am trying to decide if I should stop contributing money to retirement programs or even pull money out of retirement programs to capitalize IBC policies at a higher level.” I would ask you and I would want you be aware of and you would then come to a decision yourself, because I won’t be able to give you an objective conclusion. 

So, so far, Holly, volatility risk, which is mainly found in the sequence of returns. The tax risk, which is mainly coming from the tax bracket situation that you may be in at the time. We didn’t even bring up the idea of having your social security income taxed whenever you’re taking out distribution. I mean, there’s a lot of risks in there that may end up hurting you overall. There’s the opportunity risk, you may miss out on quite a few opportunities. 

The last one, and we don’t have to spend a ton of time on it, Holly, this one is the most farfetched. It’s real, but it is the most farfetched, so that’s why I don’t want to spend a ton of time on it, but it’s what I call the political risk. And this is the one that I think Nelson Nash was most concerned about in his book Becoming Your Own Banker. And a lot of people in the more libertarian, anti-big-government, freedom loving folks, they would be more concerned about this than maybe your average Joe. 

And the political risk is mainly, you look at the way the country’s heading, you look at the debt that we have, you look at how it seems like the pendulum is kind of moving more like the Democratic Party especially is becoming more socialistic than ever before. Where you got AOC and Bernie Sanders and Kamala Harris. You got all these people, these bright shining stars of the Democratic Party. I don’t even know if they like Bernie, but he’s out there for sure. 

These are the types of people that as it gets further and further left, you would certainly be concerned at some time in the future for public safety and for equity, and for whatever else that they’re going to dream of. Those retirement programs are going to look like real low-hanging fruit to confiscate in order to create a single payer retirement system, single payer healthcare system, and all these things that they already want. And expansion of government benefits. 

And this is one of the big things that Nelson Nash was very worried about, that at the very least that it’s like the writing is on the wall, that if some dominoes fall in the right order, suddenly the government could easily be confiscating at least portions of retirement programs by saying, “Hey, this tax deferral that you’ve been taking advantage of, well, we actually need the money now because we’re going to go start this new program, so we’re going to confiscate 50% of everyone’s program in exchange for a single payer retirement system.” 

So, this one I said is the most farfetched. I know, I mean you guys can just take that with a grain of salt if you want. I’m just saying that there’s certainly a huge community out there of individuals who would say that this is a real risk. And it is. You saw it happened in Venezuela. I don’t think this is what’s driving my decision, but I guess here’s what I would say, I am thankful that I don’t have to worry about that, based on how I’ve set myself up. 

So, it’s not that I’m not choosing to do retirement programs because this is a possible risk. I know some people it is, by the way, some people are choosing not to do it because they don’t want to marry themselves to the government in any way. I’m not exactly saying that’s me, but I will say I have felt in my own mind, “Man, it’s nice to not have to worry as much about elections and about who’s in office at the time, because I’m kind of insulated from those things by being so hyper focused on IBC.” 

Holly: Well, and Nate, I think the reality is, is that it could happen. To say it hasn’t happened, it’s happened in the world today, in other countries and things like that. So, you have to actually be willing to look at it. And that’s why Nelson was very big on, “Don’t be so dependent on the government handouts.” Right? “And nothing is free in this world.” You can say there’s free healthcare, it costs something, it costs someone, and more than someone, lots of someone’s something for healthcare. So, it’s not just free. And I think that that’s one of the risks you have to be willing to take. 

Nate: Yeah, I agree with that. And I would say that it’s almost like one of those principle risks. In other words, I think a lot of people like, “Man, just by principle, I don’t want to be involved with government programs. I don’t want to take the handout. I don’t want to do this because it creates some level of dependency on the government.” They created the problem of onerous taxation and then they are going to somehow provide the solution by offering some sort of tax break. And it was his opinion and a lot of people’s opinion that you’re being manipulated, and just by principle it would be unwise to take advantage of those programs. 

So, as I brought up, this risk itself, I don’t think it should be the deciding factor, but I would say it is a risk that you’re accepting. It’s enough for a lot of people to just avoid them all together, avoid government programs like the plague, avoid them all altogether and live their life in a more liberty, freedom focused mentality, which is what you can get in the world of paying whole life and other types of things. 

So, I think we’ve gone long enough, Holly. There’s four main risks. The volatility risk, the tax risk, opportunity risk, and the political risk. These are four things that if anyone wants to come to me and ask, “Should I stop?” I would say, “At least be aware of these. Understand the corresponding reward to the risk. It’s not a vacuum. These are not just bad things.” Because as we brought up, the volatility risk could work in your favor. The sequence of returns could be great. You could retire, pull income out and have more money left over, depending on how the sequence of returns works out. You could be in a lower tax bracket when you retire, and so the tax risk would work in your favor. 

You could be horrible at choosing opportunities to invest in and you could lose a whole bunch of money taking more control. And so, you need the Wall Street guys to manage your money, and you know that about yourself. And so obviously that wouldn’t be a risk to you. And politically speaking, yeah, we could easily not end up in a socialistic environment where that’s a danger and maybe you’re not worried about it at all, so you can sleep perfectly well at night without any concern on it. But at least, I would say, these are the four things you’d want to keep in mind when determining whether or not you want to take part in government sponsored retirement programs, especially tax-deferred programs that are so common today. Any last words, Holly? 

Holly: Nope. You summed it up good. 

Nate: All right, sounds great. Well, everyone, thank you so much for joining. We would really appreciate if you would subscribe, like it, review it, give us a rating wherever you consume the content, because that’s the best way to get the news out there and get the word out there. So, if you’ve been enjoying the podcast, we’d very much appreciate it. With that being said, this has been Dollars and Nonsense. If you follow the herd, you will be slaughtered. 

Holly: For free transcripts and resources, please visit livingwealth.com/e162.