• David H. Kinder, ChFC

Is Your Financial Plan a Wealth "Addition" Plan or a Wealth "Multiplication" Plan?


I had a little trouble trying to come up with a headline for this particular article because I really wanted to talk about synergy within one's financial strategy. The hard part came when trying to find a word to accurately reflect the lack of synergy - such as apathy or disjointed or disconnected or something. But that's not really what I want to talk about - as those words suggest that those plans aren't working. They do work... they just aren't the most efficient. Let's talk about a Wealth "Addition" plan: What the heck is a Wealth "addition" plan? It's a plan where every aspect of your financial plan only does one thing. That means that every dollar you allocate to your wealth plan is only doing that one thing. What could a Wealth "Addition" plan look like? It looks like an "envelope planning system" where every dollar does one thing. Savings & Banking:

  • Money into your bank savings account

  • Debt repayment (assuming you're not re-using that available credit again)

Insurance Coverage:

  • Health / Dental / Vision Insurance coverage

  • Group Life (burial) coverage, Group Disability coverage, etc.

  • Life Insurance (commonly term life as permanent is viewed as "too expensive")

  • Disability "paycheck" Insurance

  • Long Term Care Insurance

  • Critical Illness Insurance

Retirement Savings:

  • 401(k) or similar company retirement plan for current year tax postponement

  • IRA or Roth IRA (if eligible)

  • 529 College Savings Plans

  • Other after-tax brokerage accounts

  • Non-Qualified Annuities



Does this look and feel familiar? Does it look like your household budget, but for your financial security needs?


The image to the right looks like a standard budget: Mortgage, Utilities, Savings, Taxes, Education, Vacation, etc. So, what's the problem? The problem is... in THIS kind of planning... where one dollar can only do the work of one dollar in each category, you aren't building any synergy. In fact, compared to a synergy plan... you are GUARANTEED to be FAR MORE INEFFICIENT!


How is this inefficient? Let's look at it one at a time.

  • Bank Savings is typically done for those who hate debt and paying interest. Not a bad thing - but quite often, it is used to "save to spend". You save up the money... and you spend it - to avoid paying interest. The problem is... you give up the interest you COULD have earned if you had left the money there.

  • Debt Repayment is also a good thing - to eliminate the BAD interest being charged against you. The problem is... once you're done paying it off... will you have anything working FOR you? What if it takes you 10 years to pay it off... does it make sense to be "debt free and broke"? What if there was a more efficient way to save AND pay off your debt at the same time?

  • Health / Dental / Vision: Can't do much about that other than to make sure you're not over-paying for this critical coverage - in case the worst happens. Higher deductible plans can be helpful for that.

  • Group life and group disability coverage: This is good to have, but your dollars are still going to keep you covered for as long as you work for that employer. Once you leave, your coverage drops too. That's why it's so inexpensive.

  • Life Insurance: Typically, in wealth "addition" planning, life insurance is seen as a cost. So the goal is to keep the cost low while you fund your other priorities. The problem is this: Even if you have an inexpensive policy (let's say $1,000 a year) and you keep the policy for 20 years... you still lost $20,000 in premiums. Okay, there are other term policies that you can pay more and get your money back, but you don't EARN anything on top of that.

  • Disability "paycheck" insurance / Long Term Care Insurance and Critical Illness Coverage: Also seen as a COST. Again, you can lose those premiums if you didn't use it. (I do prefer plans that can refund your premiums minus any claims by retirement age so it isn't a completely "sunk" cost.)

  • 401(k) and Traditional IRA: There are a few problems here. 1) When you don't have liquidity (without paying taxes), it encourages credit card debt to avoid paying taxes. (I guess we would rather owe a bank than pay the IRS.) 2) In retirement, we have to WITHDRAW the money out - which limits the ongoing compounding growth we could have had... if we could just leave it alone. But the Government wants its money - which is why they impose RMDs or Required Minimum Distributions, so they can collect on the taxes on that withdrawal. 3) These accounts are frequently at the risk and mercy of the underlying investments. And who has to take that risk to afford the retirement you want? You do.

  • Roth IRA and Roth 401(k): Still has many of the same issues as above, but at least the withdrawals are tax-free. (Not tax-exempt - they still have to be REPORTED, but they don't affect your FEDERAL taxes; I just dropped a big hint of what *may* happen with Roth accounts in the future. They may be tax-free for federal taxes... but they *may* not be tax-free from STATE taxes? Only time will tell.)

  • 529 College Savings Plans: What happens if this money is NOT used for college? There is a 10% penalty on all the gains in the account. However, let's assume that it WAS all used for college? You still lose out on ALL the ongoing compounding you COULD have had if you could have left it in the plan! You have to deplete the plan! You HAVE to give up on all the gains in the plan.

  • After-Tax Brokerage Accounts: The big problem depends on how they are used. Short-term: If you are using it for short-term uses, then you have the same "save to spend" issues as bank savings does, except you may have more risk to your capital - depending on how it is invested and managed. Long-term:If you are doing "buy and hold", then your balance is subject to market losses and your money is essentially 'captive' to the market. Otherwise, if you lose 50%, you have to leave the money in there (FOR YEARS) in order to rebound, right?

  • Non-qualified annuities: Annuities are primarily meant for income purposes. They don't gain a lot as a capital investment, but they're not meant for that. They have surrender charges and IRS penalties if accessed prior to age 59 1/2 (see your contract for details). But they can be good for tax-advantaged income in retirement (outside of an IRS Regulated Retirement Plan) if annuitized. But like everything else above, every dollar is doing the purpose of a given dollar.


What if...

  • Instead of an "envelope wealth building plan"... you had a plan for synergy?

  • You had capital to invest when you wanted to - and you could "time the economy" rather than "buy and hold"?

  • You never had to stop the ongoing compounding of your wealth because of the terms of Government plans?

  • You always had access to capital in the event of emergency or opportunity and you wouldn't be subject to traditional creditors again?

  • You could build wealth and eliminate debt at the same time with the same dollars?

  • You could be up to 4x more efficient with your wealth and retire with 2-3 times the income you would've otherwise had?

  • In retirement, your income wouldn't be classified as 'income' per the Internal Revenue Code, but instead it would be classified as a 'transfer of capital' not subject to income taxation?

  • Instead of having your money subject to banks, financial institutions, Wall Street, and the IRS... you had your money set up to serve YOUR needs and you determine when and how you used your money when you wanted to?

  • Instead of saving in an account for college that can affect college financial aid, what if you had the money where it would be "off the radar" of the FAFSA forms and actually INCREASE your student's eligibility for aid and other financial programs?


All of the above IS possible... through a Wealth "Multiplication" plan or Synergy plan... where each dollar does the function of FOUR OR MORE! Which plan makes more sense to you?

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