In February I was supposed to present an evening discussion to local Salt Lake City docs with Garrett Gunderson, author of Killing Sacred Cows. It was set up as a bit of a debate, focusing on the differences in our investing philosophies. However, the presentation fell through due to lack of interest. I read his book anyway and had mixed feeling about it. Some parts were very good, many parts were simply low-yield, and others were, well, less than good. At any rate, there was certainly plenty in the book worth talking about.
Gunderson is an entrepreneur who, by selling insurance, achieved an income of $450K within 2 years of college graduation. What does that tell me? That tells me he is a very talented salesman and entrepreneur because most insurance agents and entrepreneurs I know never have that kind of income. It also means he likely has something worth knowing. It doesn't mean his method is reproducible for the masses, but there are likely lessons learned. It also means he is probably trying to sell me something in his book. That's okay, most books are.
Killing Sacred Cows Summary
The book is subtitled “Overcoming the Financial Myths that are Destroying your Prosperity.” Anytime I see a book with a title like that, the first thing I like to do is see, well, what are these myths. Often, the myths are a bit of a straw man, but I certainly love to see challenges to “conventional wisdom.” Here are Gunderson's myths, along with my comments on them:
Myth # 1 The Economic Pie is Finite
This one is a bit of a straw man. This is the whole Abundance vs Scarcity philosophy. Entrepreneurial types love this one. Insurance agents seem to as well. Anyone who doesn't agree with it is labeled as having a scarcity mentality. For example, if you didn't want to pay a 1% ER for a mutual fund because you know you are far more likely to have higher returns if you buy the 0.1% ER fund instead, you would be accused of focusing on price instead of value. It's a bit of a half truth. You certainly should focus on value. However, it is also true that you get (to keep) what you don't pay for. There's a great deal of value in that as well. Insurance agents love this argument- “Don't focus on the fact that 50-110% of your first year's whole life premium goes in my pocket, focus instead on how much money you'll have in cash value in 40 years!” An abundance mentality is wonderful and certainly helpful, but don't fall for the sales techniques often attached to it.
The one part about this chapter that I really did like, however, is when he points out that there are two ways to have more disposable income. You can either spend less (what he describes as the scarcity mentality) or you can make more (what he describes as the abundance mentality.) Both of them work, and too many people forget that sometimes it is easier to do one than the other.
Myth # 2 You're In It For The Long Haul
This chapter is one long diatribe in favor of an income approach to investing rather than a total market approach. I've written about this before. It isn't that income is bad, it's simply that if you focus on it at the expense of total return, you may end up doing some dumb things with your money. “Income guys” also seem to play down the ability to convert a high net worth into income. For example, if I have $500K in index funds that is kicking out $10K in income every year (but gaining 6% in capital gains in addition) I could convert it to something with a higher income relatively easily. There nothing keeping me from taking that $500K and buying an investment property with it that may pay out 6-8% in income with little capital gains.
The straw man in this argument is that anyone investing in stocks or retirement accounts is “postponing their dreams.” That's silly. There's no reason you can't live your financial and non-financial dreams, invest in stocks inside a retirement account, and invest in real estate (or even cash value life insurance) on the side. It's not an either-or. Meanwhile, people who mistakenly follow this philosophy may be passing up tax breaks worth hundreds of thousands of dollars to themselves or their heirs and avoiding an asset class with exceptionally good historical returns.
Some of what he writes in support of this philosophy is downright wrong. For example, this quote:
To my knowledge no strategy exists to avoid taxation on unused qualified plans at the time of a person's death. The investor's heirs are unable to access it without severe tax penalties.
I think it is unfortunate that he does not know of a strategy like this. But the fact that he doesn't does explain why he went through all the trouble to write a book. The technique is called a stretch IRA. He is so fearful of this massive tax coming that he refers readers frequently in the book to his site called The 401(k) Hoax. This is a good example of “The Retirement Tax Trap” so frequently used to sell people life insurance they don't need. If you're really worried that you're going to pay so much money in taxes in retirement due to using tax-deferred accounts, then use Roth IRAs, Roth 401(k)s, and do Roth conversions at every opportunity. Along the same line, I see lots of complaints about the Age 59 1/2 rule. There are so many exceptions to this rule, I barely worry about it at all.
Myth # 3 It's All About The Numbers
This chapter has a lot of low-yield fluff in it. He's basically saying worry about the quality of life and your happiness rather than the size of your nest egg. I agree with that. He uses an example where someone is so obsessed with not losing their nest egg that they won't spend any of it. I agree that's unhealthy. I don't, however, see it as a result of investing in stocks or using retirement accounts. If someone is having trouble spending their stash, moving the portfolio toward income investments may help them. For example, he could use a SPIA with a portion of his nest egg that would then give him “permission to spend” every month because there will be another check next month. Insurance agents love to focus on the “permission to spend” thing. I'll tell you what, I don't need to buy an insurance policy to give myself permission to spend. But if you do, then go ahead and do it.
In this chapter is an odd section where he gets a bit more specific than usual when he tells you how to deal with inflation, a serious opponent for any investor. He recommends:
- Having contingencies- Okay, so far so good. Seems wise, if vague.
- Maximize cash flow so you have a continual source of income. While cash flow isn't bad, it seems unwise to someone worried about inflation to have an investment whose return consists entirely of cash flow.
- Avoid planning a future of passive retirement. Okay, what he's saying here is keep working in retirement at something that you love that actually pays you well. That's great if you can get it, and is certainly a great ideal to chase. But I'm apparently too pessimistic when I consider that many people never find something they would do for free that pays them very well.
- Don't think 70% of your preretirement income is enough. Instead, seek to maximize it. I'll go one better. I think 25-50% is enough. What the heck am I going to spend a half million bucks a year on in retirement when I never did that before retirement? Do I have a scarcity mentality? I guess. Like Jack Bogle, I simply call it “Enough.”
- In a tough spot, consider spending down principal of assets in retirement. I don't need to be in a tough spot to do that, that's the plan. It's like he has never even heard of the Trinity study. My goal isn't to leave millions behind at death. I fully plan to spend most of what I don't spend today. And that's okay.
- Use charitable trusts. Okay, that's fine if you need them. Most people won't, but if the numbers work for your situation, go for it. They're a fine tool, but they're just that.
This chapter also contains some strange straw man arguments. Such as this one:
401(k)s seem to have a guaranteed rate of return. This is a fallacy. But we cannot see it as such unless we begin to think like economists and consider the unseen factors.
Uh….does anyone believe a 401(k) has a guaranteed rate of return? I suppose there are some people out there that think this, but that is such a low level of financial sophistication I don't think it's really worth addressing as a common myth or fallacy.
Myth # 4 Financial Security
Any chapter that starts out quoting Kiyosaki about his rich dad (who didn't actually exist) and his poor dad loses a lot of credibility in my book. However, truth be told I really liked this chapter. It describes a philosophical shift that many people could really use. Basically, find something you love to do and that you feel adds value to your life and that of the people around you. That is how you will be most successful rather than working at a job you hate and focusing too much attention on your investments. You are far more likely to end up wealthier by having a job you love than by becoming an investment expert. The reason why is you will work hard, you will work for a long time, and you will be paid well because you add so much value to the lives of others doing it. This philosophy is the best part of the book.
Myth # 5 Money is Power
This is another great philosophical chapter. A bit fluffy, perhaps, but certainly displays a mindset worth cultivating.
Myth # 6 High Risk = High Returns
This is a chapter full of truths but with an underlying current of distrust for stock investing and the use of retirement accounts. He says you should take responsibility for your investments, learn more about and understand your investments, invest don't gamble, the best investment is in yourself, be aware of your opportunity costs, and mitigate your risks. That's all good advice, but I just couldn't help but think I was getting set up to be sold permanent life insurance.
Myth # 7 Self-insurance
Oh, here it is. The sales pitch for whole life insurance. I knew it had to be here somewhere in a book written by someone who became wealthy selling it. I loved that he started the chapter using a quote from The Bogleheads Guide to Investing (an excellent primer on investing BTW) in order to display the myth- “The Cheapest Insurance is Self-Insurance.” I'm sorry Garrett, on this one I side with the Bogleheads. This entire chapter is like sitting across the table from a whole life insurance salesman whose kids will not eat anything tonight if you don't buy a policy. If you can't imagine what that feels like, read the 800 comments after this post.
I love the questionnaire accompanying the chapter that helps you decide what to insure and how much to buy. It includes these questions, “If you knew the event you were insuring against were going to occur tomorrow, how much insurance would you buy?” and “If there were no cost to this insurance, how much would you acquire?” Uh….as much as someone would sell me. Duh. But that question has little to do with how much a wise insurance purchaser would actually buy. At any rate, I've spent entirely too much of my life pointing out the fallacies used to sell whole life insurance. I don't need to do it again while reviewing this book.
Myth # 8 Avoid Debt Like The Plague
This is a good chapter. On the continuum from debt haters to the ridiculously overextended, Garrett definitely falls to the right of me. But that's okay. I understand that many times the right mathematical answer is to carry debt at good terms. The chapter has an excellent box entitled “How Producers (as opposed to Consumers) Get Out of Debt.” I think it's great.
Myth # 9 A Penny Saved Is A Penny Earned
I thought I'd hate this chapter. But I didn't. It was good. He emphasizes spending consciously with an eye toward value rather than price. No criticism here and if you're not familiar with this concept, this chapter is well worth your time.
The Final Chapter of Killing Sacred Cows – A Sales Pitch
In the final chapter, he sells his books, CDs, DVDs etc and sums up the rest of the book. About what you would expect from a book written by an entrepreneur. Nothing particularly bad or good there. Feel free to skip it.
The 401(k) Hoax
He includes an appendix at the end about why a 401(k) is a hoax. I see this argument from two types of people. The first is insurance agents. The second is real estate investors. Both don't seem to understand how 401(k)s work very well, and both are focused on somebody who anticipates having far higher taxable income in retirement than they do in their peak earnings years, something that is possible, but quite rare. What's Gunderson's beef with a 401(k)?
1) It doesn't give you cash every month (like real estate I suppose.) A straw man, of course. A 401(k) can give you cash every month just fine.
2) It's not liquid. Uh…okay. You can sell your mutual funds any day the market is open and pull the money out of the 401(k). Do you have to follow a few simple rules in exchange for this massive tax break? Sure. No big deal for most. If it is a big deal and you can't figure out an exception to the age 59 1/ rule, there's an extra 10% penalty. At any rate, it's far more liquid than Gunderson's apparently favored alternatives- permanent life insurance and real estate.
3) Market dependency. Yup, if a market goes down and you're invested in it, your investment goes down. That applies to stocks, bonds, real estate and other markets, whether you're investing directly in them with or without a 401(k) or whether an insurance company is doing it for you and paying you dividends based on how their portfolio performs. If you wish to insure against market volatility, that is likely to cost you more than you are willing to pay for it when you really understand the concept.
4) An employer match isn't a 100% return. Yes it is. Obviously it doesn't mean you will have a 100% return every year going forward. I wouldn't think that would need to be said. Not getting a 401(k) match is the equivalent of leaving part of your salary on the table. It's a rookie mistake if ever there was one.
5) Lack of Knowledge. Yes, many 401(k) investors don't know how their 401(k) works or what they're invested in. That's not a 401(k) issue. That's an investor issue.
6) Adminstrative Fees. Yes, many 401(k)s have terrible fees. They have to be REALLY bad in order for it to be worth passing up the 401(k), but since most people change jobs frequently, you're usually never stuck with a bad 401(k) for long. You can also lobby to change it. Or you can invest up to the match only and invest the rest in a Roth IRA.
7) Underutilization because of tax deferral. I suppose it is possible that some people refuse to spend their nest egg because they don't want to pay taxes on it. That isn't the 401(k)'s fault. That's just people being dumb, letting the tax tail wag the investment dog.
8) Higher tax brackets upon withdrawal. No wonder he hates these things. He thinks most people will pay higher tax rates upon pulling their money out of their 401(k). If I hadn't put money into my 401(k)s this year, that money would have been taxed at 39.6% + 5%. The likelihood of me pulling that money out in retirement at a higher effective tax rate than that seems awfully low to me. First I get to fill up the 0% bracket, then the 10%, then the 15%, then the 25%, then the 28% etc etc etc. I honestly don't think Mr. Gunderson understands this. He really does believe that most people will pay taxes at higher rates at withdrawal than they are saving at contribution. In my experience, savings rates and investment returns are generally so low that this is really a non-issue. If it's not going to be an issue for me saving 20-30% of my gross income and earning the best returns the market has to offer, how much of an issue can it be for someone saving 5-10% of their gross and investing in high ER funds or with an advisor? At any rate, even if you really expect to be in a higher bracket later, THERE'S ALWAYS ROTH- Roth 401(k), Roth IRAs, and Roth conversions. Does he even mention that stuff?
9) Estate taxes. Most doctors won't have an estate tax problem, much less the rest of America. The federal estate tax exemption is currently $5.43M ($10.68M married) and indexed to inflation. Most states, including the one I share with Mr. Gunderson, don't have a state estate or inheritance tax.
10) No Exit Strategy. Straw man. I have an exit strategy. It's called withdrawals. What I don't spend will be either given to charity or become a stretch IRA for my heirs.
11) Subject to government change. Yup, 401(k)s are subject to government regulation and change. Just like IRAs, real estate tax law, insurance policy tax law, and the draft. Hardly a reason to avoid using a 401(k).
12) Golden handcuffs. I guess if your match is so good that you're willing to stay at a job that you hate because of it, then this could be a criticism of a 401(k). I don't happen to know anyone with a match that good (I've never actually had a match ever), but I suppose it could exist somewhere.
13) Disinvesting. He briefly discusses Sequence of Returns risk, as if that's unique to 401(k)s for some reason. Even if it was, you can always roll the 401(k) to an IRA and buy a SPIA with it. Voila- no sequence of returns risk.
14) No holistic plan. I agree, many investors don't have a plan. Not the 401(k)'s fault.
15) Neglect of stewardship. If the fact that your employer offers a 401(k) makes you abdicate your responsibility to learn about investing, then I suppose that is a bad thing. Seems like a weak argument to me though.
Gunderson asks, “Is that enough or shall I continue?” Well, my answer is that he should have continued because he hasn't provided a single decent reason I can see to avoid using a 401(k) as part of your financial plan. Are there issues? Sure. But to pretend it is a “hoax” is a scare tactic that is likely to cause the uninformed reader to leave thousands of dollars of salary on the table and throw away the benefits of decades of tax-protected growth. The book reminded me a lot of a book called Missed Fortune, written by another local insurance fan, Douglas Andrew, that I wrote up extensively some time ago. I wasn't surprised to see that the two authors work together with such investing “authorities” as Pamela Yellen (of Bank on Yourself fame) selling expensive (only $25K/year!) “Genius Network” seminars to teach you all about money. Andrew's philosophy, which Gunderson seems to agree with, is to pull all your money out of your 401(k), suck out as much equity of as many properties as you can get your hands on, and “invest” it in permanent life insurance. While I'm all for taking a careful look at conventional wisdom, there is a reason such conventions as “Max out your 401(k),” “Buy term and invest the difference,” and “pay off your mortgage” exist, and it isn't simply stupidity or tradition.
Review of Killing Sacred Cows Book
All in the book is a reasonable read. I absolutely think he makes excellent points about being an entrepreneur and spending your life doing that which will make you happiest. However, his insurance agent sales training shines through, especially when he embarks on a Quixotian crusade against the 401(k). That combined with the relatively low yield of large sections of the book will keep it off my recommended reading list. But if you' want look at alternative philosophies to Bogleheadism, it isn't a bad place to start. Just don't give up your 401(k) match in order to go buy some whole life insurance. And for heaven's sake don't pay $25K to join the Genius Network. You can buy Killing Sacred Cows on Amazon here. Mine was $3.99 plus shipping.
Have you read the book? What did you think? Comment below!
Wow ! I thought the 800 comment was meant as hyperbole.
Hahahaha! I tried to skim through a bit, and yeah it really is the internet comment version of an insurance salesman hard-sell.
The last 100 came after I asked people to quit commenting on that post!
Wow there are really 818 comments on that article 😀
Thanks for the review!
I’m actually sitting at a continuing education meeting right now listening to someone talk about finance. It’s always interesting seeing some of the things that they talk about, including some of the things that are on this list.
I would have loved to see the debate between you both if it had happened. Shoot, I would love to have you lecture at some of the meetings we have to attend from time to time. It’s scary to look around at all the people in a room and realize that most have no plan for the future,or their plan includes the things from this book…
There is less commenting here than I thought there would be. WCI, not sure if this is ubiquitous or if it is just my email, but the end of your posts are missing the “comment” link. Again, this could be just me.
I know Garrett personally, and have talked about him before. Our relationship is amicable and if he reads this post, he will know exactly who I am. We go back to college at Southern Utah University. At the end of the day, Garrett is a good guy and I do respect him and like him although my financial philosophies have diverged from his. He loves his wife and family and takes care of them and his friends which to me defines a good person. Not that you are saying he is a bad person but I can see some people making that leap.
Garrett got pretty swept up in the real estate bubble in the early and mid 2000’s…and I got swept up with him. A lot of his business partners left Garrett holding the bag when the bubble burst and literally moved out of town in the middle of the night. My investment with him was horrible but he held up his end of the bargain while I was finishing residency. I am admittedly a somewhat naive and gullible person so I took him at his word when he told me of his financial straits he was in in mid 2011. I do want to believe him.
So with that defense of Garrett’s character I can now say that I dabbled in his philosophy and am much farther behind because of it. I stayed out of a Roth IRA in residency at his advice and spent a lot of money on a whole life insurance policy. I made a little monthly income on a capital lease deal with him which I still question the ethics of. I eventually got rid of the whole life policy after the monthly payment became untenable. The property ended up going underwater by 90 K after the real estate bubble burst. I ended up short selling the property to get rid of it. Not awesome. I would probably have close to $50 -100 K in a tax free retirement account now if I hadn’t made those choices.
I think his investing philosophy is dangerous. I think the notion that there are “new” rules to prosperity is not true. Those rules are timeless. Ironically, at a conference of Garrett’s that I attended in 2005, one of his catch phrases was “times change, principles govern.” I completely agree with this statement and thus disagree with the notion of new rules of prosperity. Ironically, I love this statement and still use it although it may mean something different than the way he was using it in his conference to sell insurance to people.
I agree with the notion of your best investment is in yourself. However, this doesn’t mean that you should leverage your nest egg. Passive investments are safest with a market approach. If you want higher returns, create value for others but don’t do it at the expense of your retirement money.
I would love to write more but I am kid watching duty so maybe I can post more later.
They are all good guys – active in the community, family-oriented, friends-of-friends, etc. You have to ask yourself where all that left you? They all talk a good story, but at the end of the day you were left holding the bag. That’s the way whole life is peddled.
Thanks for sharing your personal experience. The post is meant to be a critique of the book/philosphy/ideas, and not personal in any way.
And it’s your email. Gmail often truncates long emails.
WCI, I do not see the value of discussing investing philosophies with a salesman. He would never change his point of view or accept your arguments simply because his income depends on it. On the other hand you have no conflicts of interest so you will be more willing to give some concessions (not that I think you will). Just by reading Lee’s comment you can tell where that philosophy will leave people.
Anyways… everybody knows trading options is the safest way to achieve your investment goals.
This blog post was recently brought to my attention. Although it was from last year, I thought it would be useful to respond. I respect Jim Dahle and what he has been able to accomplish in his life. Looking through this blog there are many areas we definitely agree. I wrote Killing Sacred Cows to dispel 9 myths about finance–and not just put these myths out to pasture, but put them out of their misery for good- so on that same note…..
Jim Dahle and I were going to debate at an event, that didn’t happen as he stated, but he read Killing Sacred Cows, and gave a chapter by chapter review. To be fair, I haven’t read his book. But I think it’s safe to categorize him in the camp that sees 401(k)s, IRAs and other qualified retirement plans as no-brainers, a position my book takes major exception with.
So today comes my rebuttal to his review. I’ll start by saying that I concede points to Jim where I think he is correct or has a good strategy, as he has done the same thing for me.
Jim’s objective seems to be making money that is spent during his lifetime. My objective is to create generational wealth and leave a financial legacy. And this shows both in his review and this rebuttal.
So let’s get to it.
Myth #1 The Economic Pie is Finite
Here’s what Jim has to say about the finite pie myth:
“This one is a bit of a straw man. This is the whole Abundance vs Scarcity philosophy. Entrepreneurial types love this one. Insurance agents seem to as well. Anyone who doesn’t agree with it is labeled as having a scarcity mentality. […]
“An abundance mentality is wonderful and certainly helpful, but don’t fall for the sales techniques often attached to it.”
Jim alludes to me being a life insurance salesmen throughout his critique, but I haven’t personally sat down and sold a single insurance policy since this book was written. And yet this book was a New York Times bestseller, so I should have sold thousands of policies if that was my goal, right?
I do recommend overfunded permanent life insurance, for the reasons I lay out in the book, and I do benefit financially sometimes when Wealth Factory members purchase life insurance policies–but at Wealth Factory we get paid from tuition and people purchasing our content. It is true I started my career selling securities and life insurance, but that changed in 2005.
Abundance or scarcity is a foundational paradigm. It is a way of life and determines one’s actions. Philosophically this has absolutely nothing to do with life insurance, but everything to do with success in business and life.
At Wealth Factory, we’ve turned typical commission-based financial services on its head. We charge money upfront for our financial services specifically so that we can help our members get low-commission, and thus low-cost, permanent life insurance policies–which are the only policies we recommend.
Plus, I own more than a dozen policies myself, so clearly I put my money where my mouth is.
Once Jim is done pointing out his bias, he actually agrees with a small point, which in many ways is the entire point:
“The one part about this chapter that I really did like, however, is when he points out that there are two ways to have more disposable income. You can either spend less (what he describes as the scarcity mentality) or you can make more (what he describes as the abundance mentality.) Both of them work, and too many people forget that sometimes it is easier to do one than the other.”
Yes, the abundance mindset is about being a producer and creating more value based on your abilities, passions, and business. If I’m getting ready to sell anything here, it’s the idea of investing in yourself and your business before investing in others via the stock market.
Myth #2 You’re in It for the Long Haul
Says Jim:
“This chapter is one long diatribe in favor of an income approach to investing rather than a total market approach. […]
“The straw man in this argument is that anyone investing in stocks or retirement accounts is ‘postponing their dreams.’ That’s silly. There’s no reason you can’t live your financial and non-financial dreams, invest in stocks inside a retirement account, and invest in real estate (or even cash value life insurance) on the side. It’s not an either-or.”
The dream is not to invest in real estate, the dream is to live wealthy today because you know have immediate cash flow through expanding your means and producing more rather than cutting back in order to put money in a retirement account. The approach has less to do with the choice of investment and more to do with the mindset associated with how to fund the investments.
When you focus on cash flow rather than accumulation, you know right away whether something is broken because the cash flow stops. But when you’re “in it for the long haul,” how do you know if the approach is working? If your investments are losing value, your financial advisor will just tell you to wait it out. You won’t know until 20-30 years down the road whether you have “enough” money to retire like you planned, so in the meantime you need to keep saving. The retirement target is fuzzy. Covering existing expenses through the creation of investment or entrepreneurial income is much more clear. And fuzzy targets don’t get hit.
And this is also where you missed the lesson from the last chapter. An abundance mindset reminds you to focus on being resourceful, creating value and expanding your cash flow. So rather than worrying about saving as much as possible in order to “have enough” to retire (and not knowing how much is enough), you focus on increasing cash flow NOW to live wealthy NOW.
Here’s a quote from this chapter in Killing Sacred Cows that makes the point:
“A more productive way of thinking begins by asking the questions, ‘What can I do today, right now to increase my productivity?’ ‘How can I immediately be the most productive with my current resources?’ ‘Where is there discontentment in the world that I have the ability to alleviate in this moment?’ ‘How can I be the steward of my money instead of turning it over to someone else and abdicating my stewardship?’ ‘How can I use my assets to live my Soul Purpose and increase my human life value?’” Pg. 45
Myth #3 It’s All About the Numbers
Says Jim:
“He’s basically saying worry about the quality of life and your happiness rather than the size of your nest egg. I agree with that. He uses an example where someone is so obsessed with not losing their nest egg that they won’t spend any of it. I agree that’s unhealthy. I don’t, however, see it as a result of investing in stocks or using retirement accounts. If someone is having trouble spending their stash, moving the portfolio toward income investments may help them. For example, he could use a SPIA with a portion of his nest egg that would then give him ‘permission to spend’ every month because there will be another check next month.”
Again, a lesson of the last chapter is that people are afraid to spend their “nest egg” because they’ve yet to accumulate enough. This chapter starts off with this quote:
“Whatever your income, how much should you be worth right now? Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.” —Thomas Stanley, “How to Determine if You’re Wealthy” in The Millionaire Next Door
That, right there, is why people who focus on numbers end up postponing their dreams and delaying happiness. And it’s why I wrote this chapter on thinking about wealth differently.
There is one point of agreement, however. While I do not think people should focus on building net worth, I do like his strategy for turning net worth into cash flow with a SPIA.
A SPIA (Single Premium Immediate Annuity) is a contract between you and an insurance company where you give the insurance company a lump sum of money (the Single Premium) and in return they give you a guaranteed annual payment (the Immediate Annuity) for a specified time period. The SPIA addresses market volatility and generates cash flow.
Myth #4 Financial Security; and Myth #5 Money Is Power
Says Jim of Myth #4:
“However, truth be told I really liked this chapter. It describes a philosophical shift that many people could really use. Basically, find something you love to do and that you feel adds value to your life and that of the people around you. That is how you will be most successful rather than working at a job you hate and focusing too much attention on your investments. You are far more likely to end up wealthier by having a job you love than by becoming an investment expert. The reason why is you will work hard, you will work for a long time, and you will be paid well because you add so much value to the lives of others doing it. This philosophy is the best part of the book.”
And about Myth #5:
“This is another great philosophical chapter. A bit fluffy, perhaps, but certainly displays a mindset worth cultivating.”
I know how to take a compliment: thank you.
Myth #6 High Risk = High Returns
“This is a chapter full of truths but with an underlying current of distrust for stock investing and the use of retirement accounts. He says you should take responsibility for your investments, learn more about and understand your investments, invest don’t gamble, the best investment is in yourself, be aware of your opportunity costs, and mitigate your risks. That’s all good advice, but I just couldn’t help but think I was getting set up to be sold permanent life insurance.”
While Jim talks about my underlying current of distrust for stock investing, I sense an underlying current of distrust for permanent life insurance. We can discuss that in the next section, and I’ll just point out that for this chapter, Jim says “That’s all good advice…”
Can’t argue with that. On to the next chapter.
Myth #7 Self-Insurance
“Oh, here it is. The sales pitch for whole life insurance. I knew it had to be here somewhere in a book written by someone who became wealthy selling it.”
This chapter is about more than just whole life insurance, it’s about the myth of self-insurance.
People think that if they have enough money set aside, then they are self-insured and buying insurance is a waste. That’s just not true, and it requires vast amounts of money to sit stagnant.
Here’s an excerpt from Killing Sacred Cows to demonstrate:
“Let’s suppose a person has a house with a market value of $1 million, and also has $1 million in a bank account. She thinks that she is ‘self-insured,’ at least for the value of her house. But what’s more expensive—two thousand dollars per year for a homeowner’s insurance policy, or not being able to use that $1 million in cash, because it must be available to indemnify the possible loss of her home? Insurance companies work by pooling risk, and therefore reducing the cost of indemnifying risk for individual policy holders.” Pg. 169
Jim didn’t point out his reasoning for disliking permanent life insurance in his review, so I can’t address that specifically. But I will say that it’s a typical position of most brokers as well, and their criticisms are correct for low cash value, maximum commission policies, but for Cash Flow Banking (a strategy that goes beyond just buying life insurance) they just don’t hold water.
Their first complaint is that permanent life insurance policies are too expensive; that the commissions are too high.
And that’s the truth if you are dealing with an insurance agent with commission-breath who is trying to oversell you a permanent life insurance policy with straight commission and no overfunding.
But just because there are expensive permanent life insurance policies sold by hungry insurance agents doesn’t mean there aren’t cost-efficient policies: a properly trained agent can reduce the commission up to four-times.
With certain companies there’s also a Paid-Up Additions Rider that allows you to deposit large sums of money commission-free so that 100% of the cash goes straight to the cash value of the policy.
That money then grows tax-free by 4-5% (admittedly not up front, but over time), once paid it becomes guaranteed. And if you utilize the policy correctly, you’ll never pay taxes on that growth, effectively increasing the return even higher.
Sure, that’s not as high of a return as the 7-10% return that people claim the stock market should get you. But those returns are fiction in this century. The day that I write this, January 22, 2016, the Dow Jones closed at 16,093. That’s lower than the year 2000-high of 11,722 when you adjust for inflation: 11,692.
So in 16 years, the market hasn’t even kept up with inflation much less kept up with “historical returns.”
There’s also incredible value in a guaranteed return for a business owner who utilizes their abundance mindset to increase profitability. If the stock market is falling, and your wealth is tied up in the market, it can take an enormous toll on your ability to have abundant, productive thoughts and ideas. But it’s just the opposite when your money is safe and getting dividends or a guaranteed minimum interest.
Another major benefit for entrepreneurs and intrapreneurs is how quick and easy it is to borrow against the cash value of your policy. You can get a check in 72 hours to fund any business venture or take advantage of an opportunity. Yes, the loan comes with interest, but since the cash value of the policy is still earning guaranteed interest it’s basically a wash.
And anecdotally, I recently spoke with someone that used to work in the Rockefeller’s family office, where the family fortune is managed, and they told me that the Rockefellers all use whole life insurance. This does not surprise me.
So yes, there are poorly-designed permanent life insurance policies. But there are also well-designed permanent life insurance policies with many more benefits that are covered in the book.
Myth #8 and #9, Plus the 401(K) Hoax
Jim approved of the chapters “Myth # 8 Avoid Debt Like The Plague” and “Myth # 9 A Penny Saved Is A Penny Earned,” so I’ll skip over those.
He then gave quick responses to each of my criticism of 401(k)s. I’ll just briefly go over his main arguments instead of going point by point.
I say that 401(k)s are not liquid, but he says they are if you qualify for an exemption or are willing to pay a 10% penalty. Well, those exemptions are for things like medical insurance, disability and formal education or buying a new house. Those exemptions do not include taking advantage of an opportunity to invest in your business or Soul Purpose. Like I said before, with permanent life insurance, you can borrow against the cash value of the policy for any reason and have a check within 72 hours–and there’s no 10% penalty. You can borrow against your 401(k), too, but with restrictions and risks that don’t apply to borrowing against your life insurance policy.
Jim agrees that 401(k)s are market dependent and your investments can drop, but doesn’t see a problem with that. He agrees that 401(k)s can have terrible fees, but suggests getting a new job at a company with a better 401(k).
Jim admits that 401(k)s may lead to an investor lacking knowledge of their investments, not having a holistic plan, not being a good steward of their money and underutilizing their money in retirement, but he sees this as a problem with the investor, not the investment.
OK, that may be fair. But it’s also like saying that a strict-low calorie diet that no one can stick with is a problem with the dieters, not the diet. Sure, but a plan that they can stick with is a much better proposition.
Jim also takes issue with my suggestion that the investor may be in a higher tax bracket upon withdrawal. First of all, taxes are at low rates right now if you compare it to the marginal tax history, and anytime I ask people at an event if taxes are going up or down, they laugh and always think taxes will likely going up in the future anyway. But this is also a place where our approach to wealth is different.
If an entrepreneur or intrapreneur has any amount of success, their income will keep them in a higher tax bracket when it’s time to withdrawal. Living on less income in the future is failure planning and would lead to being poorer in retirement.
My Final Word
If your objective is to retire hoping that you saved enough money, hoping that you won’t run out of money before you die, and that the market doesn’t get a mind of its own when you want to retire, then Jim’s approach may be for you.
Says Jim:
“My goal isn’t to leave millions behind at death. I fully plan to spend most of what I don’t spend today.”
He wants to spend down his money, as most financial advisors suggest, and that does nothing to relieve the biggest fear of most investors: outliving their money.
For me, I don’t see that as a rosy proposition. And it also doesn’t fit my wealth philosophy. I’m not going to live my life worried that I don’t have enough money saved, or that I might run out of money before I die, or that the market isn’t going to cooperate. I’m not going to go “all-in” on a 30-year bet on the markets, that very well could backfire.
I want to build wealth, to leave a financial legacy for the next generation of my family and empower them to do anything they’d like–so they’re not starting from zero. To build a family bank and earn interest and capture that interest with my family and future generations rather than giving it to a bank.
Finally, I fully admit that Jim, who says on his blog that outside of being a doctor his interests are in finance, may very well be investing in his values, drivers, abilities, and focus when he invests in the stock market. That’s his interest and admittedly, he does have a lot of knowledge in this area. But where is his awareness that not everyone has the same interests? And that others will be more successful taking an active interest in investments in their area of interest and expertise?
For me, there was a time that I did invest in real estate, but I am not passionate about this arena and learned a hard lesson that it wasn’t aligned with my investor DNA. Determine what type of investor you are. If you are not clear, invest in your education, your financial team, financial intelligence; until you know, it is ok staying more towards something guaranteed and focus on your business.
I am a proponent of investing in your strengths, and because finance and the markets are Jim’s strengths, I think his wealth strategy is good for him. I would not try to convince him that he should stop what he’s doing and try my philosophy although utilizing the Rockefeller Method and Cash Flow Banking could add substantially more certainty and future cash flow.
People have different investor DNA, and that leads some people to do well in the stock market, if they apply themselves. It’s a disaster for other people, especially for business owners if it means pulling money out of their own business to invest in other people’s businesses they don’t know, understand or control.
One last word from Jim:
“All in the book is a reasonable read. I absolutely think he makes excellent points about being an entrepreneur and spending your life doing that which will make you happiest.”
No rebuttal here, although the choice of the word “reasonable” could be more generous- LOL.
Build the life you love,
Garrett Gunderson
Thanks for the response. Would have been a fun event.
Good to hear from you Garrett. Hope all is well.
Lee
My neighbor was given a copy of Garrett’s book, asked me to evaluate it, and I skimmed the first part, and then discovered this page. I thought Jim’s review of it was excellent. I am a low-income investor in Vanguard funds primarily, a person who is financially independent because of low cost index funds, not some special knowledge of markets. I’ve lately taken on the burden of managing my Mom’s trust, with investments in Edward Jones and 3 rental properties. I have come to realize just what a terrible investment real estate is, how risky (repairs especially!) how un-diversified, and what terrible rates of return. I think Garrett has a mental block about stocks and bonds. That money is not “static” at all, it is very usefully invested in corporations which are good at using it to hire people and provide all kinds of goods and services, benefiting the broader economy. Investment in oneself only makes sense if you’re in the gig economy, one way or another, or young, and have lots of extra time that you could devote to a new career. It doesn’t mitigate financial risk at all, not being diversified. Garrett’s response helps me to understand his perspective as breadwinner for his family. He imagines that everyone has a wife and children, and is trying to found a new dynasty. I urge him to read about what relative wealth does your capacity for empathy. There is excellent research on that topic. He may not be helping his kids as much as he thinks he is.