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Three Things: September 15, 2019

September 15, 2019
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Another week, another Three Things email...Topics include: longevity risk, a Word of the Day, and some thoughts on life insurance as an investment. 


 Thing #1: 

Article: The Investor's Survival Guide To A Long Life

Seeking Alpha

Great news: People are living longer than ever before!  

Not So Great News: People are outliving their money. 

So what should we do? This article addresses how investors may cope with longevity, and a few ways to improve the odds of a solid financial plan.  

Link to Article:

Key Takeaway: When it comes time to enter the withdrawal phase of a financial plan, there can be a tendency to want to pursue a portfolio-wide strategy to generate income that will serve as a replacement of employment income. Clearly the annuity salespersons LOVE this…. But it also can manifest itself in an adjustment to the underlying investment strategy towards a pursuit of more income. 

This can present a problem: rather than just yield, what investors should care about is total return, which is income generation (either from dividends or interest or rent) PLUS investment growth (price appreciation). By seeking only income and not growth, a portfolio may not be able to see their assets last. 

The article also addresses how it can be difficult to stomach portfolio volatility during retirement, but it’s a natural part of the experience. In last week’s Three Things I highlighted withdrawals rates on a hypothetical 60/40 portfolio and how sustainable they can be. The key is that adjustments aren’t made unnecessarily. 

Note: Within the article there are some investing ideas that are contrary to what I’d recommend. The narrative around longevity, risk, and volatility are the main focal points. 


Thing #2: 

Definition: Optionality

Oxford Dictionary

As an Econ nerd, I love the analysis of trade-offs existing within financial planning decisions: 

Spending today vs. investing for the long term…

Retiring at age 55 vs. working/saving until age 65…

Taking Social Security at 66 vs. waiting until 70…

Buying Stocks vs. Real Estate vs. Bonds...

There are countless tradeoffs in financial planning, but the one that most of us want, when it comes to our financial plans, is financial freedom tomorrow as a result of sacrifice today... The freedom to not have to work in a job we hate, to not have to downsize our homes in order to pay for something, etc….As part of this pursuit of freedom, the ability to maintain Optionality is key. 



Definition: The quality of being available to be chosen but not obligatory. 

Key Takeaway: Whether it’s called financial freedom, flexibility, or optionality, the truth in financial planning is this: when we can react to circumstances, our odds of our plans being successful are better because our options are open. 


Thing #3: 

YouTube Video: Life Insurance is NOT an Investment

Dave Ramsey

We all get marketed to A LOT —commercials during football games, invitations to free steak dinners in our mailboxes, sponsored Facebook posts in our newsfeed, etc…. Financial products and strategies are no different. 


In fact, on Facebook today I saw a sponsored ad for a “Wealth Maximization Account” and a “Perpetual Wealth Strategy”…Sounds amazing, right? Not so fast. As a seasoned advisor and full-time skeptic, I know these gimmicky terms are almost certainly some kind of cash value life insurance product. 

Further, on Friday I had a client reach out with questions about a “strategy that grows uninterrupted by market crashes” from a recent book she’d read. I’m glad she asked for my take on things because it was immediately clear that this book was pitching life insurance strategies in a convincing way. 

Given the barrage of information we’re receiving all the time, I figured this is a good time to refresh my stance on cash-value life policies. 

I’m not an advocate of cash value life insurance --also called whole life, universal life, portfolio-based life, etc.— for a lot of reasons:  they're famously expensive, not as tax-efficient as they advertise, and completely inflexible (limited optionality…word of the day!). 

To be clear, I do think these products are better than not investing at all. However, I just think there’s a better way to invest….After all, the insurance companies themselves must already acknowledge that there’s a better way to invest, because they gladly accept your dollars, invest them, pay you out, and keep the excess investment return. Companies don’t design products to lose money. 

Just as a product salesperson can craft a convincing argument for life insurance, you’d expect someone like me to be able to create a narrative against it…Although I try to be as unbiased as possible, there’s a potential for me to be conflicted on this argument. Thus, I think this is a good opportunity to defer to Dave Ramsey’s no-nonsense approach to financial wisdom. He doesn’t run a financial firm, so he doesn’t have any reason to dislike these insurance products other than merit alone.

In this 9 minute video, Dave discusses life insurance… I highly recommend you watch it:

Link to Video:

Key Takeaway: 
As an independent fee-only fiduciary advisor, I have full-flexibility to adopt any strategy available. My only criteria: do I think this is the best way for my clients to achieve their objectives?  

I have a life insurance license and could sell products like these which pay huge commissions…. I don’t. Always check with me about anything you’re considering (life insurance, annuities, varying investment strategies, etc.). 

Note: With all of the above said, there are some ways where Ultra High Net Worth Individuals can use insurance to address an estate tax risk or to leverage premium financing. The cases where this is appropriate are unique, but I’m familiar with them. If you have questions don’t hesitate to ask. 

That’s all this week. See you next Sunday!