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The Big Lie of Retirement Planning

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What if everything people were being told about retirement planning was not true?
Well, maybe lie is too strong a word. Perhaps misleading is better… or outdated. There, that’s it; outdated. Everythig we’re being told about retirement planning is outdated.

We’re all told to max out our 401k, 403b or other employer-sponsored plan. And when we’re done with that, we should put more money into an IRA or a Roth IRA, unless of course you can’t because of the restrictions and phase-outs. Here’s the big problem though. Things have changed, and they’re really important things.

Pensions have been retired too…

Pensions are no longer available to most of us. In a 2013 study by the government, only 8% of private-sector companies offered a pension plan. 1
If you are in your mid-50's, Social Security may not be  in its current form when you retire. Back in 1940, the ratio of workers to beneficiaries was 159 to 1. In 2013, which is the last year the SSA calculated it, that ratio was down to around 3 to 1.2 That’s not a typo. 159 to 1 dropped all the way down to 3 to 1.

I’m 42 years old and I don’t know anyone my age who’s counting on Social Security to be there for them in a meaningful way. If it is, that’ll be great but hope doesn’t qualify as a viable savings plan.

I can never remember a time when interest rates weren’t low. I don’t even think of them as low because I have no point of comparison anymore. Bonds are like a ticking time bomb these days. Even modest increases in rates will remind many savers that bonds aren’t risk free.

CD’s? Savings account? Money markets? Some days it feels like stuffing the money in a mattress might pay more interest.

That leaves the stock market. There’s just one problem on people’s minds though. Volatility! Interestingly, one definition of volatility is “evaporating rapidly; passing off readily in the form of vapor”.3 Isn’t that what happens to people’s money when volatility moves against them? Their money turns to vapor.

There’s one more big unknown and that’s taxes. Now, it’s possible in the short term we’ll see some tax decreases but that’s still a big maybe. I travel around the country giving presentations to financial advisors and whenever I ask a room full of them who believes taxes will be higher in 10+ years than they are today, every single hand goes up.
Open question: If we all believe taxes will be higher in the future, why is everyone taking a tax deduction today with their 401k only to pay higher taxes when they take the money out?

Hold that thought.

Let’s recap. Pensions are all but gone. Social Security is under siege. Interest rates are low. The markets are incredibly volatile. Taxes will almost certainly be higher in the future than they are today but no one knows exactly how much higher.

Old Rules / New Rules

The dilemma retirement savers are faced with is a choice between the old rules of retirement savings and the new rules.4 I didn’t create that concept. It was created by a guy much smarter than me…an actuary in fact, named Martin Ruby. Mr. Ruby isn’t your normal actuary though. He runs his own retirement planning practice and he wrote a book for retirement savers on this very concept.

Mr. Ruby has written what I believe to be a comprehensive account on this subject: The New Rules of Retirement Saving: The Risks No One is Telling You About…And How to Fix Them. According to him, the old rules were built around the proverbial three legged stool of Social Security, personal savings and a pension. With two of those legs disappearing or under stress, all that’s left is personal savings. In other words, the old rules don’t work like they used to.

Many advisors talk about diversifying assets but how about diversifying taxes?

When you combine that with persistently low interest rates, increased market volatility and potential tax increases, you’re starting to get a clearer picture that something needs to change for retirement savers.

I’ve talked about how difficult things are but what should retirement savers do about it? It’s one thing to know the risks and the dangers but it’s another to put a plan in place to address them.

You should buy life insurance, of course. Wait, what? I’m sure I just lost some of you right there, but hear me out.
What do people who are saving for retirement need and want? They need their money to grow over time so when it’s their retirement day, they can take an income stream. They need to protect their money from stock market losses. In other words, they don’t want to go backwards like many folks did in 2008.

If you could choose to have tax-free income in retirement, would you? I bet you would. Many advisors talk about diversifying a client’s assets but how about diversifying their taxes? If everything they have is in a 401k, they have zero control over their taxes.

Is protection against dying important? I think we can all agree it is. But why not just buy term and invest the difference? Well, it turns out Wall Street’s old adage is one of the most flawed pieces of financial advice that’s ever been drilled into people.5 There’re a few major problems with it according to an article by Mary Beth Franklin.

The Incredible Utility of Life Insurance

First, nobody actually buys term and invests the difference. They just spend that money. Second, it doesn’t take into account the tax advantages of taking income from a life policy versus from other financial products. There are other reasons but you can read them all in her article referenced in the Footnotes.

So the answer is to buy life insurance, but not just any kind of life insurance. We want the kind that offers upside growth potential but protects us on the downside. We want index universal life. I’m not here to bash other kinds of life insurance but I will a little bit because neither whole life nor VUL nor traditional UL offers the same unique value proposition as index universal life.

Of course people will still have 401k’s and other retirement plans and will continue to contribute to them. The strategy with index universal life isn’t an all or nothing proposition, but then again, neither is the strategy with a 401k.
This is the end of the article but the beginning of a conversation. Are you still saving under the old rules which Mr. Ruby so aptly describes in his book? If you are, it might be time to learn the new set of rules which address the risks you face and put yourself in the best position to have the retirement you hoped for.

Damon LaTanzi is Vice President of Sales for DMI Marketing and is a consultant and advisor to Rubino and Liang LLC. He has 20 years of experience in the insurance & financial services industries.

4. “The New Rules of Retirement Saving: The Risks No One is Telling You About…And How to Fix Them.”, Martin H. Ruby, FSA. Stonewood Financial Solutions, 2016
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