Personal discipline is a rare find in 2022. Financial discipline is even rarer. People who voluntarily underwent enormous investments of time for their degree, career, and position have too frequently made a habit of spending every dollar they earn. They don’t know that they are giving up interest on those dollars forever.
Or, if they do know, they dismiss it and follow the conventional advice: “Put this percent of your income into these mutual funds in this tax-qualified retirement plan, and you can retire as a multi-millionaire!”
This advice relies on many assumptions, whether the advice giver has considered them or not. I think you will agree that this well-intentioned suggestion, or something strikingly similar, is the leading financial advice.
How Are People Faring with The Conventional Advice?
Okay, so if this is the way to do it, how are people who followed that advice faring? Let’s look to the official numbers from the United States Census Bureau, since I never want to be accused of making things up. Consider the data from 2020 (the most current information available, as of writing):
- Retirement-age individuals (65 and older) have a “poverty threshold” of $12,413, or $15,644 if it’s a household with two members.
- 28.7% of individuals over age 65 have an annual income of less than 200% of the poverty threshold. Even using the higher threshold (for a married couple, let’s say) that means an annual income of less than $31,288.
- The median income of individuals aged 65 and older is only $46,360. That means half of that population (around 35.7 million people) makes less than that, and half makes more.
Why bring all this up? People who have followed the “common sense” financial advice are not rolling in money after they retire. For most people—and these numbers include people still working at age 65—that means living on significantly less money than they made pre-retirement. So, not taking extravagant international vacations every year like the commercials show.
Isn’t Saving in My 401(k)/403(b)/IRA/Roth IRA/Keogh Financial Discipline?
First, let me challenge the notion that putting money into the stock market is saving at all.
Setting aside inflation for a moment, which systematically punishes traditional savings, consider the simple piggy bank. You put money in, coin by coin, and then when you want to access the funds—all of it is there. No more, no less.
Prior to the creation of the Federal Reserve, there was nothing wrong with this method! Prices did change in the economy, but they were not on a permanent upward trajectory as they have been since 1913. (For a diversion that is both fun and depressing, play with this tool that tracks Consumer Price Inflation (CPI) since 1789. Note that CPI is not the same thing as monetary inflation!)
Investments in the stock market change in value, sometimes by enormous amounts. If you need to “crack open the piggy bank” on your 67th birthday, because you planned to stop working at that age, you are subject the conditions of the market at that time. If the “Great Recession” can offer us any lessons, surely this is one of them: Sometimes the stock market is down for multiple consecutive years. Not the best time to be retiring!
Yes, it’s great that through the magic of payroll deductions, a huge number of people are practicing some financial discipline by setting aside a portion of their earnings. But that isn’t really saving, in the traditional sense, because it is subject to a long list of conditions. (10% penalty for early withdrawals, management fees, required minimum distributions later in life, maximum yearly contributions, and so forth.)
Saving, in my mind, is storing wealth so that the value is stable (or growing!) and accessible whenever I need it. Like all government plans, “tax-qualified retirement accounts” are an attempt to make the wild, wonderful, unpredictable experience of being a human fit a dry statistical model. (They want to know when they get their cut, in other words.)
When They Say Saving, They Mean Investing
This is not to say that you can’t put money in the stock market. Lots of people have made excellent money in the market. Others have lost huge sums.
Hear me out.
One standard budget model for a household is to save (read: invest) 20% of income in the stock market. Mortgage payment, car payment, groceries, electric bill, cell phone bill, internet bill, eating out, school supplies, new clothes, and all of that eat up the other 80%. The so-called “50/30/20 Rule” was popularized by Senator Elizabeth Warren—not that I would ever recommend taking advice from her. (On any topic, ever.)
Actually saving 20% of your income would be a phenomenal achievement! There is always something new and cool to buy, and the allure of just loaning the money now can be almost insurmountable. But, putting it in the stock market does nothing to improve the material condition of your life now. If you can stand to shove that much money at Wall Street, though, you will likely amass quite the sum for use later in life.
But what if, instead, you were to set aside 20% of your income (or more, since it’s not “locked up” like in a retirement plan) in a properly designed dividend-paying whole life insurance policy from a mutual insurance company?
When I Say Saving, I Mean Saving
If your first thought was “whole life insurance is the worst place for your money,” or “life insurance only pays when you die,” there is plenty of other material on this site to address those common misunderstandings.
Whole life policies give their owners unparalleled flexibility, while also increasing in value every year. The first few years of your policy, however, there will be somewhat less money available than what was paid in. It’s wise to recall the words of R. Nelson Nash, in Becoming Your Own Banker:
“In [using a whole life policy as a bank] the policyowner is starting up a new business that never existed before. There is always a cost of starting up a conventional bank. The life insurance company is simply, in effect, an administrator of the plan (policy). Earnings (dividends) and interest both go to the policy-owner.)”
This is an unavoidable first step, a short-term sacrifice for a better future. Just like saving in a piggy bank! For saving in a piggy bank to have any meaning, after all, you must put in money over time so that you accumulate a larger total than you would ordinarily have in your wallet at any given moment.
In other words, putting $20 in a piggy bank and then taking it back out next week is somewhat silly. Why bother putting it in there at all, if your time horizon is that short? You want to think about your whole life policies as decisions you have made for the rest of your life. (That’s how the insurance company thinks about it, after all!)
Building a Better Piggy Bank
So, what’s the proper way to do this?
The answer varies widely from person to person, family to family, business to business. That’s one of the things I enjoy so much about what I do—I get to solve all kinds of problems for all kinds of people! When you are ready to get into specifics, contact me.
Just to lay out the framework: There is going to be an ongoing premium payment that is required to keep your whole life policy in force—after all, you are buying life insurance here. These payments never increase, but they should be an amount that can be paid for the rest of your life.
The amount that is paid beyond the required premium buys “paid up additions.” Paid Up Additions (PUAs) are the earliest driver of the “cash surrender value.” Cash surrender value is the amount that you can access via “policy loans” or “partial surrenders.”
What Makes it Better?
Your cash surrender value is contractually guaranteed to increase in value every year. On top of that, when the life insurance company is profitable, they will pay a dividend. Since your policy is with a mutual life insurance company, and a dividend participating product, you will also earn a dividend. (Note that dividends are not guaranteed!)
Every person I work with gets a detailed walkthrough of how these various components work together, so please don’t feel intimidated by the sudden burst of new vocabulary!
When dividends are earned, you can (among other things) use them to buy more PUAs. Since PUAs are more life insurance, they also trigger more dividends. This is how your policy’s value compounds over time.
For exercising the personal discipline to learn this process and the financial discipline to pay your premiums year in and year out, even when you see shiny new “get rich quick” schemes every day on social media, you will establish a financial platform like nothing else. This means you can deploy your assets to any investment opportunities that you find.
Remember that the cash value must increase every single year. A lot of people get stuck when they see that the cash surrender value will be less than the total amount paid in for a few years. That scares people off.
First of all, I stress that every dollar of cash surrender value is a dollar that has been permanently liberated from the fractional reserve banking system. It’s now under your total control, unlike dollars in a bank account or a retirement plan.
But, just as importantly, once the cash value has exceeded what has been paid—that will be true forever. Every single year, the policy will become more efficient, period.
The biggest issue is not “how long does it take to return a net profit?” The biggest issue is financial discipline.
Reasons Not To Try
- Your friends and coworkers think it’s weird.
- You could potentially earn a higher rate of return in the stock market.
- There was a really nice-looking sales page for a shiny new series of 13 webinars that “guarantees” you will make your money back in 30 days on your Facebook feed.
- The economy might collapse.
- This sounds too good to be true.
This list is as long as you let it become.
“Do the things others don’t want to do.”
– John Paul DeJoria, founder of The Patrón Spirits Company
This is what it comes down to. Control the impulse to bite your nails about “what ifs,” and focus on a concept that has been used in Europe since 1688 (and on this side of the ocean since 1759!) See beyond the short term and think like the wealthy—as far into the future as possible.
When surprises appear in the future, your financial discipline will see you through.
Discipline Equals Freedom
In conclusion, I want to share a wonderful passage from Discipline Equals Freedom: Field Manual, by Jocko Willink:
“But sometimes, in day-to-day life, you can lose track of the long-term goal. It fades from your vision. It slips from your mind. Wrong. I want that long-term goal to be so embedded in my mind, that I never lose sight of it. Ever. The little tasks and projects and short-term goals that you tackle need to lead toward strategic victory – winning the long war.
But we want results now. We want the shortcut to the winner’s podium. We need the instant gratification. And when we don’t get the short-term glory, sometimes we lose sight of those long-term goals. They fade. We lose focus. So we stop the daily tasks and disciplines that allow us to achieve those goals. And a day slips by. Then another day. And a day turns into a week and a week into a year. And you look up in six weeks or six months or six years … And you’ve made no progress. Maybe you even went backwards.
You lost sight of the long-term goal. And it faded. It faded from memory and the passion dried up and you began to rationalize: Maybe I can’t. Maybe I don’t really want to. Maybe this goal isn’t for me. And so you give up. You let it go. And you settle for a status quo. For the easy road. No. Don’t do that. Embed that long-term goal in your mind. Burn it into your soul. Think about it, write about it, talk about it. Hang it up on your wall. But most important: Do something about it. Every single day.”
Don’t Lose Sight of Your Goal
So, stop talking about being financially free “someday,” and seize today. Build your discipline, build the platform, and opportunities will follow.
To quote Jocko Willink one more time:
“The shortcut is a lie.”