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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

"We want your money here. We just happen to call it 'planning'."

Updated: Jan 18, 2023

A few years ago, I was with a large credit union as a junior financial advisor. At the time, we did financial seminars in our credit union branches. There was one particular seminar when the senior advisor was introducing our guest speaker and he said:

"We want your money here."

There's nothing inherently wrong with saying that, right? That's simply saying that we want to earn your business. That's a sign of ambition and that we want to welcome your business. However, the deeper I've gotten into the principles behind "traditional" planning... the more I have come to realize that many aspects of "traditional" planning don't necessarily serve client's best interests... but the best interests of: banks, financial institutions, Wall Street, and especially the Internal Revenue Service (IRS).

Behind every piece of advice you hear, ask yourself: "Who does this advice BEST serve? Is it best for me? Or is it best for the ultimate institution? Could it be both?"

Let's look at some traditional advice.

1. Maximize your 401(k) contributions, especially for the employer match.

Sounds harmless enough, right? Sounds like the advice wants you to get as much "free money" as possible.

Some considerations:

- Tax considerations: Have you done the math on that? What if there was a serious 'catch' behind that 'free money'. Is that current year 'deduction' really worth it for your retirement future?

- Wall Street considerations: What is your contributions going into? Do you understand the fee structure within the plan?

Is it possible that Wall Street and the IRS love your 401(k) plan more than you should?

2. Pay off your mortgage as soon as possible.

This wisdom comes primarily from the Great Depression back in the 1930's when many American's lost their homes.

Some considerations:

- Tax considerations: Since the tax code allows for the vast majority of people to deduct the interest payments... wouldn't accelerating the principal payoff continuously reduce your tax deduction?

- Wall Street considerations: Isn't this advice often coordinated with maximizing your 401(k) match? In essence, you are giving up a known and current year deduction in exchange for an unknown tax on your retirement savings?

- Bank considerations: Banks will entice us to get a 15-year mortgage by offering a lower interest rate on the loan. But the trade-off is that your required minimum mortgage payment ends up being about 40% HIGHER than it would have been with a traditional 30-year mortgage. Who benefits from that deal? The bank does, because they get more of your cash flow on a regular basis.

3. Contribute to an IRA in the years you can.

Many people either do this on their own or they do this with the assistance of a financial professional.

Here's what's interesting for this one: Does the advisor really CARE if you pick a Traditional IRA or a Roth IRA?

No. (And when I was doing this, I didn't care at the time either. The paperwork was all the same.) The advisor's job is to share with you enough information to make a decision... and then "they want your money here". The commissions or fees are exactly the same regardless of whether you choose to pay taxes today... or take a salary postponement and pay taxes tomorrow.

What does all of these pieces of traditional advice have in common?

They LOCK YOU AWAY from your money, if and/or when you need or want it.

Let's suppose you have some kind of emergency come up and you need access to capital to take care of it.

- 401(k): You can access your 401(k) balance, IF your plan allows it. You can access it via a loan, or, if you qualify under the IRS guidelines - a qualified IRS hardship withdrawal. So, who has control of your 401(k)? The plan and the IRS. (Do you think Wall Street happens to like that?) (Also, did you know that you are limited to either $50,000 loan OR 50% of your plan balance - whichever is LOWER? And you are limited to only one type of loan outstanding at a time - personal or residential?)

- IRA: Same deal with the 401(k). However, since you cannot get a LOAN against an IRA, you'd have to take a withdrawal. A fully taxable withdrawal... and if you're under age 59.5... a penalty as well. Unless you qualify for an IRS hardship withdrawal, you still don't have control or access. (And if the market tanks and you need access... well, you're just out of luck because you'll sell out those shares at a far lower value and may not EVER recover.)

- Home Equity: Home equity *may* be the most flexible of all these options. You can borrow against your home's value. So what's the problem? What if you don't QUALIFY for a BANK LOAN? Your credit has to be in good shape. And if you have irregular income OR you happen to be unemployed... you won't qualify for that home equity loan or line of credit.

There are 4 rules of financial institutions. You can read about them here.

So, who is the REAL beneficiary of your financial plan? Is it you? Or is it the banks, Wall Street, financial institutions & advisors, and the IRS?

There IS an alternative. One that I call the "liquidity, use, and control" model. It will not have the "highest returns", but you'll have the financial foundation and flexibility you need to meet life's unexpected turns and take advantage of opportunities. It will allow you to turn "bad events" into significant opportunities. And isn't that what we really want for our planning and our money?

EDIT: I was just reminded of THIS clip from Mary Poppins. Notice how all the "bank executives" just wanted 'tu'ppence'. Gotta agree with Michael here: "GIVE IT BACK!" I believe you CAN "feed the birds" AND grow your wealth at the same time. :)



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