E174: How to Overcome the Risks and Danger of Every Underfunded Liability

In this episode, Nate and Holly discuss how stressful and dangerous it can be to live life with underfunded future liabilities.

Topics Discussed:

  • The five areas of life where people often find themselves underfunded financially and what you can do about it
  • Why mutual funds and stock accounts are actually not good at producing retirement income
  • How big the causes are due to unfunded liabilities
  • How to create a situation in which you are very financially secure and be over-capitalized in the future
  • What can the Infinite Banking system do to overcome the dangers of underfunded liabilities

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Podcast transcript for episode 174: Overcome Every Underfunded Liability

Nate: In this episode, we discuss how stressful and dangerous it can be to live life with underfunded future liabilities. 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, everyone, welcome back to the show. We’re so grateful to have you here. Holly, we’re going to sit down and talk about something today. I thought as we just get it going that I would share the idea behind this or what stirred me to talk about this. People who’ve listened to the show for very long know that Nate is like a philosopher. I’m always thinking about, I don’t know, reasons why things work in the world, reasons why we are the way we are financially, reasons why all of this stuff happens, and try to relate it in some way to infinite banking, which is our specialty. And so, in that same thing, we are reading in the news all the time about governments and pension programs, large corporations that have pensions. And we’re constantly reading about how these plans are all underfunded. There’s very rarely a pension program or a government future expense that is properly funded.

We like to use the term capitalized in IBC. Are you properly capitalized? And that’s really what they’re saying. They’re saying that these pension programs, these pensions with these different companies, whenever they say they’re underfunded, that just simply means the promises they’ve made to the future retirees in their company, they have not been setting enough capital aside to be invested to be able to actually pay them what they’ve promised. It’s called an underfunded liability. And sometimes there are things in the government, especially that are just simply unfunded future liabilities. It’s a cost. We know it’s coming down the pike and we’re not setting any money aside to pay for it at all. So, you see this happening in the big scale and these bigger companies and governments and so forth, they at least acknowledge that there is a future liability. They’re on the hook for it.

They’ve made contracts, they’re obligated to do it, and they realize we have not been setting enough money aside to do this. And things start to get really weird whenever they’re underfunded. Things become chaotic and stressful, which we’re going to talk about. So, Holly, that leads us to this episode where I essentially took all of that and I said, you know what, in the world of personal economics, people are the same way. All of us are living life and we know there are going to be future expenses that we are going to need money for, but oftentimes it goes completely unstated or we don’t think about the idea of being properly capitalized to meet those events. We just kind of hope that when we get there we’ll figure it out, which is obviously going to create financial stress and chaos, possible damage, which we’re going to talk a little bit about, Holly.

Holly: Yeah. And I would agree, Nate, that you have to start looking at this now. I think most of us with that capitalization or underfunding, some of us think we just want to bury our head in the sand and act like it doesn’t exist and if we don’t do anything now, it’s going to get better in the future. But you have to start being proactive now. You can’t just wait for the future for something to change or happen. You really have to start taking it into account wherever you’re at, whatever stage in life you’re at, because the longer you wait, the less time you have to build that capitalization.

Nate: Great point. And I think what’s interesting too is that almost everything financially in a personal financial realm can really be boiled down to us trying to be properly capitalized for future events. That’s what we’re doing right now. Your barometer of your success financially is actually the same as the barometer for a pension program’s success, which is, are we properly funded? Are we properly capitalized to meet our future obligations, which we know are going to happen? I think there are five areas of life where people often find themselves underfunded for something that is either guaranteed to happen in the future or is likely to happen in the future. And those five areas, some of them people probably already thinking in their head, but the first one will be retirement. The idea of a future where your body will slowly break down and at some point you can’t work. Whether you want to or not, it’s just likely at some point your income will go down just based on your ability to operate depending on what happens.

But all that said, number one is retirement. The second thing is emergencies, large emergencies that come out of nowhere. The third one is large purchases that we already know we’re going to have to make. Those would they be things like cars or house remodels or things that, in other words, if you live in a home right now, things will wear out into the future. At some point you’re going to have to buy new appliances. You’re probably going to have to replace windows. You’re going to have to paint the inside. You’re going to have to paint the outside. You’re going to have to update the kitchen. You’re going to have to do a lot of things, large purchases, things that these are planned. We know they’re going to happen whether we’re accounting for them or not. So, we have retirement, emergency situations, large purchases, college education and other types of child funding, whether it’s from a small thing like braces to a large thing like college, to if you have girls, God bless you with weddings.

And there are just large future liabilities that are likely going to happen with that. And then the last one’s going to be a little bit more complicated, I might spend some time in, and that’s the idea of being properly funded in the case of investment volatility. And so, that one’s going to take a little bit of explanation as far as what I referred to when I talk about that. But those are the five areas that all of us are going to… Some of them are guaranteed to happen and others are likely to happen at least once throughout time. And the impact that these future liabilities or obligations, expenses, the likelihood of them causing you damage, true financial situations that are going to be very difficult or at least financial concern, anxiety, stress, just financial woes, is all going to be dependent on whether you have been properly capitalized. Have you properly funded these future liabilities?

So, that’s what’s going to happen to these pension programs if we just tie it into what we talked about at the very beginning. There is going to be a breaking point in the future due to their unfunded liabilities, which is going to cause a lot of financial damage, stress, possible bankruptcy situations for the corporation itself. The government can just print money, so we don’t really know what that’s going to do, but there’s going to be a whole mess of consequences because they chose not to be properly funded. They made promises. They knew what they were making at the time. They did not set enough money aside. They knew it was happening, it’s going to hit, and then suddenly the pension’s going to wear out. I have actually plenty of clients who are in the airline industry and the airline industry was notorious for being underfunded in the pension program.

So much so that a lot of these pilots ended up getting pennies on the dollar for what they had expected their pension to be like. I don’t know even know, I don’t even want to get into it. All I’m merely saying is, man, we all have these underfunded liabilities. The question is, are you going to be properly capitalized? And of course, Holly, as we wind our way through these, the point is it is actually a really well oiled, solid system machine if you are doing IBC the right way, the Infinite Banking Concept, you’re practicing the right way to allow for you to be properly funded for most everything that comes your way. In fact, I would say right now, Holly, because of my unbelievable dedication to IBC, I really do feel I am properly funded.

Any of those five situations, retirement, emergencies, future purchases, college education or other types of your children’s major expenses and any sort of investment volatility and the damage that can cause, I feel very insulated from all of that due to my belief that I’m very well capitalized. And I just hope that everyone else can get there too, because it can take the edge off financially.

Holly: And I think it takes the stress off too. Nate, and you talked about airline situations. It’s happening and it’s been happening for years. It’s not just like it’s right now happening. But I think because of what’s going on with our economy, we’re seeing more and more talk about it. But even teachers programs that were state funded that guarantees them set amount of money for the rest of their life and then the state is actually bankrupt and owes money, and then we have the government coming and bailing it out even though they don’t have the money to really bail them out. So, I think you have this effect that you just feel like it’s spiraling out of control. And the one thing IBC does, if you utilize it, follow the rules and capitalize on that, it removes that, I call it the tornado effect of that spiraling that when is this going to end and how much am I really going to get.

And I think the five areas are really important because we never know when those situations are going to happen, whether it be the car broke down and we need a new car. And we were so used to not making a payment on a car and we’re barely getting by in what we’re putting in our policy that we’re like, oh, how am I going to afford this now, to I’ve got a wedding to plan or an emergency came up and I need this much money right now, where am I going to get it? And most of us, if you have the system in place and you’re following the rules, you actually can really utilize it and it relieves that financial stress in your life of what am I going to do and how am I going to do this. You mentioned girls, I’ve got three daughters, I got three weddings, and I got three going into education, and they’re right after each other. So, it’s kind of like, is that overwhelming? It’s really not overwhelming at all.

Nate: And it could be, yeah. So, many people come to us and they’re like, their kids are 15, 16, 17, 18 years old. They’re like on the cusp of wanting to go to school and the parents want to pay for it. But in that moment, that’s when they realized, oh, man, we have an underfunded liability. We have not properly prepared for this event, though we knew it was coming. Now, I’m not even fully a believer that parents have to pay for their kids to go to school, but I’m saying especially it’s the people who were wanting to pay for a lot of it or certain things that may happen. In other words, it’s not like I don’t think parents should feel guilty. That’s essentially what I’m saying, don’t feel guilty about not being properly prepared for this. But I find it interesting that someone would have a desire in their heart to be able to send their kids to school.

They know it’s coming down the pike, and yet they have just prepared so poorly for it. And it’s like having an unfunded pension liability. It’s like we knew it was coming, we knew it was going to be expensive and we just didn’t prepare for it. And now they’re here and we have to adjust everything about our life really just to be able to do what we were always wanting to do in the first place. It’s called being underfunded. And it causes stress that it doesn’t have to cause. If you live your life just simply conscious of the fact that in the future there are things that will come and you will need capital to take care of those things and solve for it in advance if you can.

Holly: And I think the reality, Nate, is that would the IBC system in place and with it working, then you really have the ability to plan for those, whether it be emergencies or those future events. Even if they’re two years out or a year out or hey, maybe they’re coming, if you actually have established the system, there’s things you can do. Like you said, I want to pay for my kids’ college is a big thing. And the kids are told all the time, go on trips and explore schools. I have a junior in high school, so I’m experiencing this. And my sophomore and freshman are, where do you want to go? What do you want to do? You need to start planning now. So, they’re telling the students that, and yet I laugh that there’s no communication to the parents.

Well, how much does that school that you want to go to cost? What does it look like? How much should you have been saving? What do they want to do? And my daughter actually said, they tell us to do all this, but they don’t tell us at all about the cost of it. They don’t tell us how we should have saved. What am I going to do, mom? And I’m like, well, we have a pretty good system in place, right?

Nate: Well, they call college tuition the new arms race. It’s like every school is paying, raising tuition prices, investing tons of money to try to track students, and it’s just a vicious cycle of ever excessive cost.

Holly: Or the amount of spam mail, not just emails now, but regular mail that we get because we have three daughters. I’m like trash, trash, trash. But they’re spending a lot of money doing it and they’re trying to get your kids into figuring out what they want to do. So, at some point as a parent, you have to start saying, even if you want to pay for it or whether you feel like they should pay for some of it, you still have to equip them with the ability to be able to do that.

Nate: That’s right.

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Nate: We mentioned there’s five main areas. Some of them we’ve already brought up some situations, but the first one being retirement. And I think people are aware of this one more than all the others by the way. We know we’re supposed to be at the very least, planning for retirement. You and I both don’t like the word. I don’t really like the connotations with it. I don’t really believe that everyone’s ultimate financial goal should be to stop working. The reality behind it is that at some point, especially for certain careers, you just simply can’t continue until you’re 85. You’re going to have to stop at some point. Your body won’t even allow you to do it. So, we know this is happening out there. And the reality is, what is the true liability that you’re trying to solve for?

This is one of the things that we described that it’s not a nest egg mentality, what you’re actually solving for is income. In other words, you need income to live in retirement, you need to be able to produce retirement income. So, a lot of people have a nest egg mentality where they’re just trying to store up money. They don’t actually know how much income is able to be spit out of that nest egg of money. They really don’t know. And that’s one thing we’ve talked about on this show many, many times. Some assets do better at producing income than others. And we’ve talked about this many times. So, like the stock market, let’s say mutual funds, are surprisingly for most people… The reason why it’s surprising is because it’s the most promoted form of retirement planning. But then when most people get to there, they realize, oh, mutual funds and stock accounts are actually not very good at producing retirement income.

They’re fine to just let sit on the sideline, but the reality is you have to start selling your holdings to get money to live on. So, the only way to produce income is to sell your stuff. Anytime you’re in a situation where the only way to get income is to sell stuff, and actually you’ll find out by the way, go ahead and try it out, go listen to our other podcasts, but you’ll find out that it can be a very precarious position, especially because if the things you’re selling, if the price of those things goes up and down wildly for no reason out under your control, then you may find yourself into a tough spot. So, that’s why other things do a better job. Policies do a very, very good job because of their steady, consistent growth without ever going down. It can produce steady income.

We can get a pretty accurate picture for what that’s going to look like with very, very little variability. The same thing goes for passive income producing things. That’s why by the way, even most conventional planners tell you to switch to bonds whenever you’re getting closer and closer to retirement, for the income generating ability of the bond, as compared to having to sell stocks at whatever the prices are, it can cause a lot of issues. So, the question that you really should be asking to determine if you’re properly capitalized is, at my current pace of saving and investing and so forth, am I on track to be able to produce enough passive income to retire when I think it’s likely I’ll need to?

There’s so many variables there, Holly. There’s so many assumptions there, but this is something that people should be conscious of as they move forward in life. Am I on track? If you never really give that much of a thought until you’re 60 years old, which is very common by the way, you’re wanting to wind down the business, but you actually have no clue, you can find out that you have been underfunded for this, like pension programs are finding out, and that your vision of retirement is going to be dramatically different than you thought.

And the only way to be able to do it is you’re going to have to start doing some weird things with money. In other words, you’re going to take a lot of risk. You have to gamble. And if things work out in your gambles, then you might end up being okay, but if they fail, then you’re going to be totally broke and life’s going to look way different, all because during your life there was not a proper understanding and appreciation of the future retirement liability.

Holly: I get asked this a lot, well, how much do I need? And the reality is that number varies for every single person. And I think in my viewpoint, you still have this nest egg mentality of I need this much cash in order to survive retirement income. And I think the better question you posed is, how much passive income do I need? What is that passive income? It’s not a nest egg that’s just sitting there waiting for you to use it, it’s also how is that money flowing and continuing to produce income for you now, today and in the future? So, there isn’t that magic ball to wave around and this much money will allow you to survive retirement. It really is.

We don’t know what the economy’s going to be. We don’t know how much inflation’s going to change and we don’t even know what our tax structure’s going to be in the future. So, I think all of that is to say there isn’t a magic number that this person needs this much money, but you have to start thinking of how do I create passive income now and in the future. Because we all at some point, like you said, Nate, are going to get to a point where we might not be able to work anymore.

Nate: And because of that, that you brought up, Holly, about the chaos of the assumptions, in other words, because we are not in control of the stock market, we’re not in control of the economy, tax brackets, inflation rates, all sorts of things. Because of that, the whole goal should be to be overfunded for future liabilities because of the potential for chaos to occur. And I find it interesting, this is why we think it can be a disservice and why people in the IBC community kind of mock some conventional financial planning situations, because it’s like they make all these nice steady, well, here’s your inflation rate, it’s going to stay this 2% for the whole time. And here’s your steady growth of your stock market, we’re going to just going to throw in 8% and we’ll throw it down there on that paper and here’s your contributions. It’s going to be steady and stagnant.

So, yeah, we think you’re on pace. And the reality is though, everything in the financial world, it’s all based on assumptions. And people don’t like this reality. They want some sort of objectivity, black and white scenario to be painted for them. But unfortunately, in the financial world, there’s not one. So, this is why if you want to create a situation in which you are very secure in many different assumptions, the goal is to be over capitalized. That really is the goal, to have capital. And so, that’s really the way it works for all of these, Holly. We talked about retirement, emergencies will happen. The whole idea is that your life will not be a piece of cake. This is why everybody recommends an emergency fund of sorts. So, I don’t know if we really need to hit this too hard, Holly.

The other one was large purchases, which we’ve kind of mentioned too as well. And just for a framework for this, Holly, I think you mentioned it, I have clients who will have a car that they’ve got a car payment on, they got a car loan to get and the car loan’s about to be paid off. And so, the payment is about to go away and they’re so happy when the car payment goes away. And I don’t blame them for that. Everyone likes to not have a car payment. But instead of being conscious of the fact that this car will not live forever and I’m going to need to buy another one, somehow that money that used to be going to a car payment, it doesn’t get stored up to take care of the future liability, that is a car that’s going to need to be bought. They don’t set money aside. They’re not capitalizing for it. They essentially just adopt what used to be a car payment into their lifestyle.

And so, it becomes an issue whenever the car breaks down and they have to go buy a new car and they realize, well, we didn’t save money up for this purpose and so we’re going to have to go back to the car loan people and get a car loan. But on top of that, we’re not even budgeting for a car payment anymore. Being underfunded suddenly causes some financial stress to be involved or they’re very concerned about having to make this new payment and it’s going to strap them. And that’s what I’m trying to bring up is that we should live life conscious of this. That’s one of the blessings by the way, of IBC. We can talk numbers all day on the screen, but I think what Nelson Nash was trying to say is wouldn’t it be a pretty simple life if you just created a situation where you are properly capitalized, where you have, you live on less than you make, you store up capital in a place that you can access all the time.

And then whenever things like cars are needed, you take money out of this pool and you put the money back in just like you would if got it from a different bank. But in other words, you can’t be weird with your capital and expect good results. You have to follow the rules of money and it’s so important. So, we have large purchases, college education, which we talked about quite a bit. If you wouldn’t mind, I’ll kind of wrap up with the investment volatility for just one second.

Holly: No. And I think when you talked about the chaos and all of it is in the financial world is assumptions, this leads to that volatility of investments and how you actually can protect yourself now and in the future. But really in my viewpoint, I’m just going to say this one point, Nate, the only way to protect yourself from investment volatility is to actually have an established IBC system that you’re utilizing or else I don’t think you are. I don’t know of another way you can be protected outside of actually having used and implemented the infinite banking system.

Nate: That’s right. Within this idea, if I want to try to describe what I mean when I say an investment being a liability that you can be underfunded for. So, to use an example just to make sure we’re all on the same page. If we go back to the last financial crisis in ’08 and especially the housing downturn of ’06, ’07, the housing bubble bursting before the total financial meltdown of everything. Inside of that world, many of our clients were making a lot of money in real estate at that time. It was the heyday in those early 2000s leading up to that point. And when everything goes well, you do not need to be properly capitalized. That’s kind of this idea, by the way, if everything is going to go well, then you can borrow as much money as you want, buy as many properties as you want, take as much risk as you want, because in a world where everything’s going well, the risk doesn’t matter anymore, because everything’s just going to keep going up.

Essentially what happened though is you had developers and you had people who were flipping. You had people in the commercial real estate world who had borrowed a lot of money to buy these assets, but once the values of those properties started to drop and tenants were getting behind on rents and so forth, suddenly they were getting behind on their bank loans. They were underwater on the bank loans. The income generated wasn’t high enough. They were planning to sell them a little bit later, but they had to hold onto them because the value’s so far down. And what I’m trying to bring up here is that they created a situation where they had very little capital to back up this huge investment portfolio. In which case, on top of that, there was a lot of borrowing going on in that world. And there still is, by the way. If you’re listening to this and you’re in real estate, a lot of borrowing is occurring for you to buy your properties. I’m sure of it.

This is a normal way to get into real estate. And so, the question that you have to ask yourself is that it’s really not even an if, it’s more like when. When you have another true downturn, you might get lucky and not have one. But over the next 30 years, what do you think the chances are? In the next 40 years, what do you think the chances are? I would say it’s pretty high to have some sort of shock to the system. And if you’re going to have a shock to the system, the question is, do you have enough capital to make it through the shock or do you not? And so, this is why I encourage, especially most of our listeners are what we call active investors, which means they’re doing these types of things. They’re very entrepreneurial. They’re not just set and forget it style folks.

They’re taking advantage of a lot of different opportunities and so forth. In all of your opportunities you’re taking advantage of, make sure that there is some capital in the warehouse, that there is something to back up the situations where you’re losing money on the outside. It’s kind of like, Holly, I don’t know if everyone’s been listening to it, but I’ve been talking about the book Antifragile, which I think is a really cool book. And I brought the concept of Antifragile before. But in that book, he describes the same thing, just like the people in ’06, ’07, ’08 who were in the real estate world, there was a lot. I’m sure everyone listening to this probably knows somebody who pretty much lost everything and had to restart, not just because the stock market collapsed, it was because they were not capitalized for the amount of loans they had outstanding.

And it would’ve been perfectly fine if everything was rosy. And so, there is this idea of anytime you’re going to invest in volatile areas where there’s possible shocks to the system, you should back that up with capital that can help overcome those issues. And we’ve talked about this before, Holly, in the world of retiring with stock market assets, even. We did this in the beginner’s course. I have a video on this. Because of the volatility of the market, whenever you are going to retire, they really only recommend pulling three to 4% of your assets out for income. So, that means if you have a million dollars and you can pull out 3% of it, your million dollar nest egg can produce for you 30 grand. And if you want to be a little bit of aggressive, it can produce 40 grand.

And the reason they’re saying that is because of the potential for shocks to the system to occur. And that is actually what the data is. The data is saying, if the market doesn’t have a shock to the system that’s major, especially early on in your retirement years, it’s likely you could take out higher percentages and be fine without running out of money into the future. But we don’t know. Nobody knows when the next shock to the system. The Dot Com bubble, the ’08 housing crisis, a COVID situation, the 1980s with rampant inflation and so forth, and interest rate rises in the ’70s, there were stagflation. They’re just saying, we don’t know what the next 10 years are going to look like. So, you can’t take out very much of your money because of the potential for a shock to the system.

So, what data and science points to is the reality that if you’re going to have a lot of assets in places that can be affected by shocks to the system, you should also back that up with capital that is not going to be affected when there’s a shock to the system, which that means you are actually allowed to pull between the two of them higher amounts of income without the fear of running out of money. This is just simply the idea of making sure all of the people who are listening to this are properly capitalized for all sorts of things. But one of them being just the idea that if I’m going to take risks by investing in certain things, especially when I’m going to use other people’s money, which is for most of you real estate folks, you are using that, and if there’s a shock to the system, you don’t want to lose everything.

The only way to not lose everything is to be properly capitalized on the backend. And so, there are future liabilities that can either be funded properly or underfunded. And your peacefulness in life and your anxiety levels are going to be very dependent on whether or not you are properly capitalized or underfunded. Well, everyone, thank you so much for joining us. Once again, if you are benefiting from the podcast, we would appreciate greatly a like or a review wherever you consume the content. That is the best way for us to get the podcast out there and well known. But 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/e174.

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