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You Only Get One Shot at This
When it comes to our financial lives, we’re constantly being bombarded with all kinds of information: noise, hacks, hot takes, opinions, and (too many) options. Everything from 401Ks to real estate investing to debt snowballing, mortgage paydown strategies, Social Security, HSAs, and, yes, life insurance. Lots of things to choose from! How do we know what’s right?
The toughest part is that, for most people, no matter what they do, it takes decades to know whether any particular financial strategy really works. And if that strategy is flawed, by the time they find out, it might be too late. And if we’re shooting for a standard retirement age, we really only get one shot at getting it right. The closer we get, the harder it becomes to adjust if things aren’t working the way we hoped.
Most people are doing one or both of these two things with their money:
Sending it away and closing their eyes for 30 years, hoping for an “average” return.
Subjecting it to significant risk, chasing high returns. “High risk = high return” is one of the most damaging mantras in personal finance.
The good news is that both of these approaches work way better if we set up a solid foundation in parallel. If we have at least one place in our financial lives that has guarantees, liquidity, and control, this gives us a “permission slip” to take risk in other areas
So let’s walk through the three main paths we can take with our money and why one of them stands above the others for creating a rich, stress-free financial life.
Path 1: The Status Quo
The first path is to just do what everyone tells us to do. We fill out our paperwork at our jobs, handed to us by the HR/Benefits person (who is essentially acting as an unlicensed “financial professional”), and we’re now walking down the default path we’ve all been taught for decades. Maxing out our 401Ks and IRAs, sending our money to Wall Street, and locking it away in “401K jail.”
529 college savings plans and HSA accounts are essentially the same thing. A place to send money that reduces our control over how that money is used in the future.
We get tax benefits today that come along with strings attached in the form of tax obligations in the future and/or rules about how we can use our own money.
Brokerage accounts give us more control, but with added tax friction today.
And all of the above are subject to volatility (HSAs excepted), which can lead to losses.
I call this variables-based planning, because there are so many variables affecting the outcomes that we have no idea what’s going to happen. We give up control of our capital, take all the risk, all for some vague hope of an “average return.” By the way, how did we come to accept the actual numbers of 10% and 12% as a “good” average return? This just happens to be the average return. Leaving aside the fact that average return ≠ real return, how low would this number have to be before people decided this wasn’t a worthy objective?
And just look at everything we don’t know about a conventional “financial plan”: how much we’ll put in, what it’ll grow to, when we’ll need it, how much we’ll need, how much we’ll be able to get, and how long we’ll need it. It all makes me wonder what it is about financial “planning” that people think is a “plan” at all.
Almost all typical financial planning is built this way. It’s based on probabilities and statistics from past performance. This means all the fancy financial models are spitting out the same results based on data that will never happen again. Everyone plans around what is essentially a best-case scenario, ignoring all the volatility and risk.
The financial needle we have to thread for these plans to work out the way we hope is insane. If we don’t save enough, we risk financial difficulty in the future. If we save too much, required minimum distributions (RMDs) will push us right into the highest tax bracket anyway.
People far too often let the tax tail wag the finance dog. They are literally planning to live on less in a vain attempt to benefit from tax deferral.
The powers-that-be managed to gamify personal finance in the worst *Black Mirror* kind of way. Rather than live a rich life, people have been convinced to have less just to “win” the 401K game.
401Ks have only been around since the ‘80s. So we’re only just now seeing the actual results regarding quality of life in retirement. There’s barely any track record to judge them by. Meanwhile, this unproven program has become so ingrained in our employment system that we now have to opt out of a 401K. We get one by default. I, myself, have one! Didn’t have a choice.
Everyone sends their money away where they can’t touch it, then, when they need money for something, they don’t have any. So they have to go to the people who do. Banks and other financial institutions. How is anyone expecting to get ahead chasing a 10-12% average return while paying 22% credit card debt?
Even if a 401K is a good place to accumulate, it’s a terrible place to distribute from. The tax deferral we loved in our 30s comes back to haunt us in our 60s. I can tell you one thing for certain: if we didn’t like paying taxes in our 30s, we really won’t like paying taxes in our 60s, when we want or need that money to live on in retirement.
This system has been misused for decades. Even the creator of the 401K said it was never meant to be the primary thing, only a supplement for people who already had pensions. But for most people, it’s the only thing they have. And then pensions went away. They shifted the risk from companies that used to offer “defined benefit” plans (pensions) to employees, who can now only participate in “defined contribution” plans (401Ks, deferred comp, etc.) with an undefined benefit.
And this shift has not been good. According to Federal Reserve data, 90% of people who retired for the first time in 2023 had less than a million dollars saved. And if we then follow the conventional “4% Rule,” which says we can “safely” withdraw 4% of our starting account value per year, this means 90% of people will be living on less than $40,000/yr. And in 20 years, at 3% inflation, this $40,000 will spend like $20,000.
We traded our control and liquidity for what’s basically been a decades-long experiment, and it doesn’t look like it’s working out for most people.
Path 2: Financial “Hack” Culture
When people wake up to the problems with the status quo, a lot of them flip to the other side of the coin: the financial hack culture. I understand it, and it’s good in some ways. People feel behind and want to catch up, and at least they are considering options other than the hope-and-pray method of conventional financial planning. But now we have this sensationalized approach to getting ahead. Just open Instagram, YouTube, or Facebook, and we’ll find some guru, standing in front of a rented Lamborghini, telling us how to get rich.
All of it reinforces a strange version of a negative behavioral trait called high time preference. High time preference is a strong preference to consume today rather than later. A low time preference is the opposite: foregoing consumption today to save and invest. Hack culture makes us feel like we’re implementing low time preference, but because hacks tend to be shortcuts, it ends up boiling down to a type of Frankenstein’d high time preference in the form of putting our money into something, anything, to feel like we’re getting ahead. Said another way: FOMO.
Hacks show up everywhere. Stock options, real estate ventures, mortgage paydown strategies, and even life insurance, with the whole high early cash value nonsense. Obsessing over high early cash value is essentially an attempt to get “free insurance” and treats the Infinite Banking Concept as a hack rather than a tried-and-true process. But there’s a nuance here: all of these things can have positive expressions. There are principled ways into all of them. That’s why we talk about process over product. If we have a good process, we don’t need a product-based hack to make things grow faster.
To add a little color to this, people love to quote Warren Buffett when they talk about money, but almost nobody actually follows his advice. During an interview, someone once asked him why more people don’t do what he does. Buffett explained it’s because his approach is a “get-rich-slow scheme,” and it turns out that not many people want to do that (lol). Berkshire Hathaway, a company most consider one of the best in the world, sits on hundreds of billions in cash, yet the Dave Ramseys and Grant Cardones of the world are constantly telling us that holding cash is dumb. Btw, I’m not knocking these guys or implying that what they do is a “hack.” They are quite successful too. But it’s the mindset of always putting our money into the next thing that happens to be in front of us. Buffett said the best time to buy is when there is “blood in the streets.” Yet we are bombarded with “buy, buy, buy” even though everything is pretty much at all-time highs right now.
If we want to buy when there is blood in the streets, guess what we have to have? Cash.
Path 3: A Principles-Based Strategy
The third path is what I’d just call a principles-based strategy. Instead of planning our one and only lives around unknowable variables, we rely on timeless financial principles: thinking long-range, maintaining control and liquidity, building a foundation first, not getting overleveraged, and not taking on risk we don’t understand.
This is the more traditional approach. What is commonly referred to as “traditional” financial planning today has really only been around for a few decades. Regular people didn’t use to invest in the stock market; that was something rich people did. More traditional options include guaranteed income, such as annuities and pensions (which are just a type of annuity). (Also, guess what: Social Security is just a type of annuity too.) People love to bash annuities (usually asset managers who want to keep your assets under their management), but what could possibly be wrong with having guaranteed income for the rest of our lives? And then there’s rock-solid savings. Not everything has to be an investment. And if we do invest, focus on assets with very little risk, a lot of control, cash flow, and the ability to compound over time, based on principles rather than hacks. FYI - when you have money in the stock market, that’s not compounding growth. The value either goes up or down. You get whatever you get. So the next time someone talks about compounding growth in an index fund, just remind them of 2008 when most of them “compounded” down by 40%.
A Permission Slip to Take Risk
Here’s the thing: There’s nothing wrong with taking some risk. We all need a reason to get out of bed in the morning, and nobody wants to watch paint dry with their money. Going out and taking a risk to make things happen is also called innovation. The problem isn’t taking risk; it’s that most people are risking everything.
But if we have at least one place in our financial lives that we know will work, a place that grows no matter what, that we can get to when we need it, and that we can replenish so it keeps compounding (like, actually compounding) to what it was supposed to, we’ve given ourselves a “permission slip,” of sorts. It lets us take the risks we want to take without risking everything else if things don’t pan out.
Why Whole Life Insurance Is the Foundation
This newsletter and my podcast are all about the Infinite Banking Concept and whole life insurance, and I can’t think of another thing that gives us that place of safety, that one spot we know will work out. Whole life insurance is a bedrock asset that’s been used for centuries. It used to be one of the actual traditional places people saved, alongside their savings and a pension.
Today, we know we can do other things with whole life insurance, like implementing the Infinite Banking Concept. The cash value gives us access to capital, no questions asked, and we can use safe leverage on that capital to create growth outside the policy. But the main thing is removing the guesswork. We don’t have to do anything other than pay a premium to know the policy will work out for us.
The thing that makes whole life such an incredible asset class is that it’s an actuarial product, which is just a fancy term for insurance math. Actuarial math calculates risk using the law of large numbers. By pooling thousands of people in a similar risk class, the insurance company can, to some extent, know the future. I know it’s morbid, but they know how many insureds will die in any given year. They don’t know which ones, but they know how many, with remarkable accuracy. That gives whole life insurance some superpowers:
We get guarantees and liquidity like cash, growth similar to a corporate bond, tax treatment like a Roth IRA (but for totally different reasons, since it’s not a qualified plan), and the ability to borrow against it like a HELOC. In a lot of ways it’s almost like real estate: every premium builds equity, called cash surrender value, and we can take a policy loan against that cash value like we can get a HELOC against the equity in our houses. Except it’s even better, because we don’t have to qualify for a policy loan. It’s no-questions-asked access to financing. And other than the interest rate, there are no payback terms! On top of that, we’ve got a built-in estate plan with an income-tax-free death benefit building up the entire time. It does all of these things, which nobody can argue are bad things, and it all comes from one asset.
Because no one can argue the above are bad things, objections to whole life insurance almost always boil down to the rate of return. “Whole life insurance is a terrible investment.” A very tired objection once you understand that whole life insurance is not an investment at all and especially tired if you know how to do a capital equivalent analysis.
Like I always say, whole life insurance isn’t meant to compete as an investment, but it ain’t no slouch, either.
At the end of the day, we don’t want to bet our one and only financial lives on strategies that take 30 or 40 years to verify. Using principles-based strategies like Infinite Banking to build a strategic base of capital that’s there when we need it- that’s what we focus on in the Infinite Banking community.
If these principles are resonating with us and we’d like to learn how they might apply in our lives, schedule a free consultation at StackedLife.com. I’ll take us through a short assessment to see if and how IBC might benefit us, and if so, the next best step we can take.