Tom and John McFie talk about Retirement and Qualified Plans, and what is happening to American’s savings, Social Security, and Retirement.
So what should people do to avoid this? Asks John. Tom shares the Financial Solution that creates Wealth, Money and Freedom that he discovered when he was 45 years old.
Tom: Welcome to WealthTalks where we talk about solutions, money and other things that create wealth in your life. I’m Tom McFie, Founder and CEO of Life Benefits and I’ve got John here with me today in the studio.
Tom: John is our numbers guy here at Life Benefits and has created literally hundreds of blueprints for people to map out their wealth solutions for the future. John, speaking of the future…
Tom: Retirement is a really big issue today.
John: Yes. It is
Tom: What’s the number one concern that people are always expressing?
John: Well, the number one concern America have today is running out of money.
Tom: That means they’re afraid of outliving their money, isn’t it?
Tom: That’s a real concern because so many people out there have put money diligently aside into plans that now have failed. For example, Forbes now states that the qualified plan, the 401(k), the IRA, the 403(b) that experiments failed, let’s move on to something else. Jack Bogle, the Founder of Vanguard fund says you invest in mutual funds that most qualified plans invest in and you’re going to leave 80 percent of your money on the table for money managers. And CNN –
John: That’s to the fees, right?
Tom: That’s from the fees, and CNNMoney just recently reported that the average American only has $89,000 in their trusted 401 (k) plan or qualified plan. So those solutions are not – that place to save money is not working for people. Is it, John?
John: Right. That’s right, and if we take just the fees for example, that 80 percent that’s left on the table in fees at over the course of 40, 50 years, however long you have that money at a qualified plans. A lot of people don’t realize how just at one percent or two percent fees can add up to 80 percent of their money left on the table and it’s a lot like taxes too. So what happens is that they take out that two percent every year and not only do you lose that two percent every year, but you also lose the opportunity that that two percent could have compounded for you in growth.
Tom: And that’s not considered at an 80 percent that Jack Bogle is talking. He’s just talking about –
John: The compound, isn’t it?
Tom: He’s not talking about the compound use of money. He’s only talking about the compound two percent fees. And so you take two percent compound at over 50 years of contributing into a qualified plan and you’ve lost 80 percent of your wealth. Now, you’re talking about something that’s completely foreign to most people and that is that, how often could you have used that money? And in qualified plans, you cannot use your money without a penalty. Which is much higher than two percent. That’s 10 percent, if you access your money. And now we’re starting to talk about higher fees than what Jack Bogle is talking about.
John: And the use and velocity of their money?
Tom: So what people really don’t understand is that back in the 1970s when the ERISA laws were first passed and those were the laws that gave us the qualified plans. Is that Americans were saving over 14 percent of their income. And today, John, what are the charts telling us people are saving?
John: I think it’s about four percent right now.
Tom: And it fluctuates. And there was a time, just a couple years ago, where people were actually saving at a negative rate of minus 1.7. So, first of all, they’re not saving as much because they are now dependent on a government plan that’s going to take care of them. And that’s like putting on social security for retirement, which 90 percent of Americans do. Ninety percent of Americans today, according to research show that they depend on Social Security benefits for 40 percent of their income and retirement. And so basically people are saying, yes, we’re going to trust the government with our money. We’re going to trust our government with our retirement and we’re happy to live at a 50 or 60 percent decrease lifestyle when we retire. And yet, if you ask somebody on the street today, would you like to live at a – cut your lifestyle by 50 or 60 percent today? They would say, absolutely not. So, why would we want to do that in retirement?
John: Most people don’t, but they don’t realize that that’s what’s coming their way.
Tom: They don’t realize that that’s coming their way, because they’ve trusted Uncle Sam to step in and cover for them when they really should be taking that personal responsibility themselves. And it’s not really their fault, because they’ve been promised this and they think it’s guaranteed. But the sad part is, is these laws can be changed and there‘s much talk and debate about how they’re going to change those laws even the one we’re on right now. What are the plans of that Washington D.C. has been talking about, John?
John: The guaranteed retirement accounts?
Tom: Guaranteed retirement accounts. Now, let’s just talk about that word guaranteed for a second. Okay? When Social Security benefits came out, my parents were young and they said that Social Security was sold to the American public as an insurance program. Well, a few years later, someone filed suit against the Social Security administration because the insurance that they thought they were buying wasn’t working out the way they thought it was. And the supreme court of the United States ruled that Social Security is not an insurance plan. It is simply an entitlement program. And so the government has the right to tax you and they don’t have the contractual guarantee to have to pay you back. That’s what that meant. With an insurance policy, there are certain guarantees in it. It’s a completely different setup. Even though Social Security and insurance are runoff the same life expectancy table.
John: Life expectancy table. Sure.
Tom: It makes no difference, if the guarantee is not there.
Tom: And so what does that guaranteed retirement account ring to you, John? Do you think it’s – you think it’s going to be handled any better than Social Security funds that have been handled?
John: Not if history is any indicator.
Tom: That’s right. The fact is these plans that everyone’s talking about in Washington D.C., they’re saying that they want to take over your qualified plan money, if you diligently been parking money there, so that they can use that money to shore up their mismanagement at Social Security.
John: Yes, that’s not good. A lot of people don’t realize that the money that they’re coding into their qualified plans right now could be automatically rolled over into that, if anything.
Tom: That’s right. And that’s the talking – and that’s the talking has been in every administration since the Carter years when qualified plans first came on the scene.
John: Okay. So people had ample warning for this whole entire picture.
Tom: Well, the problem is it’s not screaming out on the media headlines and people sometimes aren’t aware of it. But here at WealthTalks, we’re wanting to talk about solutions, money, and other things that create wealth. And qualified plans do not create wealth in your life.
Tom: What they do is create lot of wealth for the many managers. And they create a lot of revenue for Uncle Sam.
John: Who gets to use the money all those years? It’s Wall Street.
Tom: Wall Street gets to use the money.
Tom: That’s right. Well, I will say this, John. The money managers are not done. Neither are the politicians. They’ve realized that money that is flowing is creating wealth and they have said, let us take charge on in. We’ll keep it flowing for you, but they keep most basically most of the profits. And the sad things is that when milk arises, after it’s been – the cream, the best part of the milk comes to the top. They dip in and take their stuff off the top. They always get their fees. It doesn’t matter whether the market went up or down on your 401(k). They get their two percent whereas you’re stuck with eating a 30 percent loss or a 40 percent loss like took place in 2008 and then you’ve got to take 10 years to go back up to where you were before and they dip in and skim the cream off again. So they set themselves up very well that way. And then the politicians in Washington realized that they are going to collect to more off you in retirement, tax-wise than you’ll ever deferred in your working career. And when people look at that math, they – the math drops off them, because they weren’t aware, they thought they were getting a tax advantage by not having to pay taxes until this point. And now they find out in retirement that not only there was going to be more taxes, but they’re going to end up probably paying taxes on their social security benefits as well, because of the combined income tax laws.
John: Yes, that’s an interesting one. Do you want to go to that a little bit more? The Social Security.
Tom: That is really a sad one. Poverty level in this country is anything lower than about $2,800. And yet if you make $2,667 a month, in Social Security benefits, your combined income puts you into a position that you now get to pay tax on 50 cents of every Social Security that the value you get. Now, raise your income by $1,000 to $3,667 a month and you’ve just now reached the point where you got to pay tax on 85 cents of every dollar Social Security benefit pays you, which this comes as a shocker to people. It’s like – and like we said earlier, people are depending on Social Security from that 90 percent of the mark, depending on for 40 percent of their income. And now they end up having to pay tax on that. And we find so many people in their golden years that aren’t so golden because they’re living not traveling, not spending the time that they wanted to with relatives and they’re at McDonald’s flipping burgers or they’re at Costco giving out samples.
John: So with the Social Security, since we’re talking about solutions here, the call we had last year with (Attorney George Kozol) touched on this a little bit and what were some of the things that you’ll say that people that are getting closer at retirement age to do in order to – so their combined income, they’ll owe so much in taxes on their Social Security?
Tom: Well, he was recommending – people that they need to really seriously think about doing what I did. I’ve started doing this when I was 45. I realized, whoa. We have been sold the bill goods and we’re going to end up paying for them. And so I took and liquidated my 401(k).
Tom: I liquidated my IRAs and I paid the 10 percent penalty and I paid the taxes when I was 45 and I’m so glad I did because taxes have gone up since then and I don’t never see taxes going down. Do you, John?
John: No. Those days are gone.
Tom: No. It can’t. Taxes have to go up. Social Security can’t fill, taxes going to have to go up, and we can get into that whole study of taxation and for harmonious going to federal budget that is Social Security benefits, the politicians in D.C. are going to have a revolt. So Social Security is one of those things that are too big to fail. And so they’re going to get the money some place and the only way to do that is through incur taxations or season 401(k) accounts or a combination of both. So when I realized this, I just liquidated my 401(ks) and I was over it a couple of years, so I wasn’t having to pay too much income tax.
Tom: But I gladly paid the 10 percent penalty, because I realized they were going to take a whole lot more out of me when I retired, than if I just pay it today.
John: And then you have to use that money over the next, how many years?
Tom: I’ve used that money over and over again just like banks and financial institutions and credit card use money and the money managers that I use in your money and your qualified plans. And we’re making that interest that they would normally get. And so in 18 months, I’ve recovered all of my penalties and taxes by using that money. And now we keep using that money and where we’ve parked it, I don’t have to pay taxes on it again. The fact is if I had used that money for a business, I actually get a tax deduction.
John: That’s interesting. We’ll have to tackle that one in another podcast.
Tom: We will, because that’s really powerful. And most people just walk away. I was just talking last night to a CPA that said I couldn’t teach in anything if I was born after 1940. And I thought, oh, my goodness. But these CPAs out there that think they know everything, sometimes steer people in a bad direction, because their goal primarily is to teach people to save taxes right now. And they save it not by saving it, but by deferring it. And those deferred taxes are going to eat them alive in retirement.
John: Yes. So a CPA is very good about saving you taxes today or deferring your taxes.
Tom: That’s right.
John: They’re very good at that. That’s they’re trained to do. But the question we have to ask is, is that the best thing for long-term?
Tom: Well, and the bottom-line is, do you want to live at a lower lifestyle in retirement than you do today? And if so, fine, go ahead, defer as many taxes as you can because that’s what you’re setting yourself up for. If you don’t, then stop deferring taxes and start doing something different. And that’s what we’re going to talk about on our next WealthTalks.
John: All right. Sounds good. See you back next time.
Tom: All right. Thanks so much everyone. We’ll see you next time.