David H. Kinder, RFC®, ChFC, CLU
Why Traditional Planning Is Designed To Fail You: The 4 Rules of Financial Institutions
Updated: Jan 18
If you were to open a bank, financial institution, Wall Street-based institution, or even the Internal Revenue Service division... what would be your criteria to ensure that you were running a profitable business?
To build a profitable financial business, then you would live by four rules - the same four rules that EVERY financial institution (and Government) live by. Rule #1: They want ALL your money. (Somehow, the word 'duh' comes to mind.) Banks: When I worked for a large national bank, one of our initiatives was this, but they 'softened' this to talk about "wallet share". They wanted every customer to have at least 1 or 2 bank cards (credit and/or debit cards) in every customer's wallet. That's just a way to show that they are trying to "build financial relationships". Of course, it goes far further than just having a credit or debit card. They want you to invest in their bank CDs (Certificates of Depreciation), IRAs and Roth IRAs, and other accounts. Financial Institutions: Let's just talk about lending for now. If you own the debt, you capitalize on the cash flow and the labor of those who borrow from you. As we know, "the borrower is slave to the lender." Well, at least if you can't make the ongoing payments.
Wall Street: The more you invest, the more the demand for shares go up and Wall Street benefits. Also, if there are management fees for managing your money, then not only does Wall Street benefit, but so does the relationship advisor or broker through those management fees. The IRS: The Federal Government is a financial institution, just on behalf of our government. And this government has some major spending issues... and raises revenues through taxes. And if you decide to enter into a PARTNERSHIP with our government to build your retirement, they can control how much of your savings they can have by simply changing the rules.
Rule #2: They Want All Your Money Systematically
Banks: Why do banks promote "direct deposit" so much to have a free account? Someone is making money on your money, right? Plus, that makes you "sticky" to the bank because you're less likely to leave the bank. (Yes, it also is a convenience to avoid having to pick up your check and physically go to the bank and wait in line, etc.) Financial Institutions: Again, let's look at lending. Lenders set up monthly structured payment plans to keep your debt obligation in good standing and current. This is reported to credit bureaus to show how good of a credit risk you are. In a way, you're financially coerced into paying every month because if you don't... the consequences can be severe: higher penalty rates on your debt, negative reporting to the credit bureaus, etc. Wall Street: The more you buy securities on an ongoing basis (such as through an employer-sponsored 401(k) plan), the more money you're investing in the overall economy and these companies get to use your money for their purposes. Remember, this isn't savings. This is investing... and there are NO GUARANTEES on investing.
The IRS: The Government mandates that taxes come out of your paycheck every pay period. And every year when you file for your taxes, if you OVERPAID... you get to negotiate with the IRS to get your over-payment BACK! Yes, you'll get it back... but why over-pay them in the first place? Even Heathcliff Huxtable knew that "The Government comes for the regular people first."
Rule #3: They want to hold your money for a long time Banks: Most banking accounts are very liquid. Even CDs are easy to access if you need to - you just give up the interest you could've earned. But banks don't just do checking accounts. They are lenders as well. Financial Institutions: Again, looking at lending: they want you to hold your debt for a long time, BUT they will entice you with lower rates to either set up an automatic payment OR to set up shorter repayment plans! Aren't the rates on a 15-year mortgage LOWER than the rates for a 30-year mortgage? (Of course, the payment is about 40% higher, so they get more of their money back sooner.) If you lose your income, this might not be the best way to go.
The IRS: The IRS partners with you and your preferred financial institution. The institution gets to collect ongoing fees on your balance AND the IRS gets to watch your money grow every year waiting until they "partner" with you on the distributions. Remember that there are two major things that IRS Regulated Plans do:
1) They defer the tax 2) They defer the tax calculation
Rule #4: When the time comes, they want to give back as little as possible. First, you've been trained and conditioned to NOT touch this money. You want the money to grow and not lose. By the time you're in retirement, you'll end up spending as little as possible because you've been conditioned NOT to spend it. Banks, Financial Institutions, and Wall Street: Plus, there are other articles to encourage you to NOT spend much. Ever hear of the 4% rule? This was the rule that you could be 'okay' spending 4% of your wealth every year and not run out of money. That rule has been revised to the 2.8% rule. https://www.morningstar.com/articles/582877/video
By the way, insurance companies aren't exempt from this either. If you pay term life insurance premiums for 20 years... these plans are actuarily designed to NOT pay out! They only pay out 1-2% of these plans! So, statistically speaking, you probably won't die, so the insurance company gets to keep the money you were spending in premiums! Now, you could get your money back with a Return of Premium (ROP) plan... but you'll be paying more for that coverage with NO interest gains for you.
The IRS: However, the IRS still wants to be paid on your partnership with them. So, if you DON'T take out the Required Minimum Distribution (RMD's), they will not only force you to do so, but if you don't, your penalty is 50% of what you SHOULD have taken out! (See IRS Publication 590-b for those rules: https://www.irs.gov/pub/irs-pdf/p590b.pdf) Whose side is YOUR planner or advisor on?
Just look at their advice. Are they SAYING that they serve your needs but the reality is that they are furthering the agenda of banks, financial institutions, Wall Street, and the IRS?
You may remember Ronald Reagan said: "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'" I'm beginning to believe that the NEXT most terrifying words are: "Trust me, I'm a financial advisor." Which may be why 99% of Americans don't use a financial advisor.
What's the alternative? There IS an alternative. One that works PERFECTLY... if given enough time and properly structured. I call it the Liquidity, Use, and Control model for financial planning. It puts YOU in greater control and helps assure that you have money if and when you need it - without requiring bank approvals, costly structured loan arrangements, and you can do it OFF THE RADAR OF THE IRS!!!
You can read more about this model here: https://www.davidkinderfinancial.com/post/2018/11/07/is-your-financial-planning-pyramid-upside-down
Maybe I can call myself "The Unplanner"? (I wonder if I should trademark that?)
Here's a recent video interview I did on this topic: