Caught Following the Masses

September 6, 2013

Man at DeskAre your financial plans the ones that “most people” have? Or are they the ones you should have? 

The following story could be what just about every wife wishes her husband knew about estate planning:

When U. S. Senator Robert Kerr of Oklahoma died, he left an estate that was valued at $20 million. The IRS immediately demanded $9 million from his astonished heirs. But market conditions at the time meant they would have to sell various stocks and real estate at a substantial loss – just to pay the sudden estate taxes.

They liquidated what they could, but could raise only $3 million. So they had to borrow the other $6 million. (You read that correctly – they had to borrow.) In the end, most of the estate went to interest payments and the IRS – not to the deserving and very frustrated heirs.

If this can happen to the $20 million fortune of a U.S. Senator (and long-standing member of the Senate Finance Committee), you and I are certainly fair game. For every high-profile case like this, thousands of “smaller fish” are getting fried.

This was the introduction to a do-it-yourself “Encyclopedia of Estate Planning”

What do most people do?

• They accumulate the majority of their financial assets in tax-deferred retirement plans i.e. 401ks.

• They buy term insurance, then get rid of it, because they “don’t need it anymore”, or because it’s too expensive to keep.

• They view tax planning as collecting W-2s and mortgage interest statements before April 15th. Then use their refund, since they overpaid all year for the big trip around the corner that they have been planning.

• They stay in debt their whole lives. They borrow to make up for the money they don’t have, to get the things they need because they don’t have the liquidity. Then they rationalize that inflation and tax breaks actually make it cheaper to pay 10-20% interest.

Maybe you think the above list oversimplifies things, but browse through a basic financial magazine or the personal finance section in your local paper. Most of the “how-to” articles are about mutual funds in your retirement plan, term insurance rates, how to re-finance your house, shopping for a credit card, and what to look for in a basic tax-preparer (as opposed to a tax planner). It’s assumed safe, part-of-the-herd mentality. Meanwhile any “outside the line” ideas are dismissed as being too risky, not appropriate for most people (there’s that phrase again), etc.

So, if you do what most people do, it follows that you will get what most people have.

What do most people get?

• A lifetime of hard work, with a retirement that doesn’t reflect their effort. (“I made a lot of money…where did it all go?”) They pay taxes at a higher rate than the deferral they received when they deposited it. Additionally, if they (and their spouse) die with a substantial amount left unspent, income and estate taxes may take a large percentage before it reaches their heirs.

• 15-20 years of life insurance premiums paid, with nothing to show for it. No life insurance in-force, no return on the premiums. Ultimately, a very profitable transaction for the insurance company.

• Ongoing monthly debt obligations that keep generating a profit for the lending institutions, while eating into their modest retirement nest egg. This isn’t an issue of being able to “afford” to borrow. It’s the long-term wealth transfer that takes place when you do. When money is accumulated in such a way that lump-sum distributions (such as those that might be used to pay cash for a residence) will trigger a prohibitive tax consequence, many choose to pay the bank instead of Uncle Sam.

Think we’re being a little harsh in our assessment? You can do a little or a lot of reading. Although the definition may vary from survey to survey, only about 5% of the population is really wealthy. And only about 5%-10% say they feel their retirement is truly free from financial stress. Admittedly, one could argue that these statistics reflect one’s perception, not some objective measure of wealth or satisfactory retirement, but the conclusions ring true.

Likewise, the accuracy of the numbers in other areas may vary from source to source, the consensus statements would be:

• Very few individuals (some say less than 20%) have an up-to-date will and trust in place.

• An equally small percentage have life insurance, other than what they receive as an employee benefit.

Please seek out financial planners you know and they will verify these comments from their own experience. In essence, most people don’t achieve financial success, don’t plan for the unexpected, and don’t do a good job of transferring what they leave behind to those they love or care about.

Now, it’s true that some people follow the “most people” plan, and save a million dollars. Even with all the taxes they pay, and the money they waste, it still seems like a pretty decent retirement. It might be inefficient, but it’s not poverty. If you are most people, maybe you can lose half of what you save, and still feel good about it, as long as the pile is big enough.

But do you really want to be most people?

Here’s the big question- if one person saves $1 million, and only gets to enjoy (i.e., spend or use) half of it, and another person also saves $1 million, but has the ability to enjoy all of it, which is the better choice? Or does it somehow not matter which alternative is selected, because the number is large enough? In the abstract, most people would not deliberately lose the ability to enjoy the maximum amount of benefit from their financial plan, but the reality is many do so every day – and they keep on losing out because for whatever reason, they can’t break away from the herd. Maybe it’s fear, or ignorance, or just inertia.

The caveats:

• If I do what most people do, I’ll get what most people have.
• Every dollar counts. Every dollar not wasted adds to my future.
• I can’t take it with me when I die, but I can choose whom I leave it with.
• Executing a good plan takes no more effort than reacting to the long-term consequences of a bad plan.

If it’s not apparent already, this isn’t financial planning for most people. These ideas and concepts aren’t part of the herd. This approach isn’t something you can find on the newsstand or in the business section of your local paper or USA Today. These prosperity-oriented strategies tend to be “outside the lines” of what most people might consider. But when you have looked at what most people get for their efforts, and also what a few successful people accomplish, we think you might agree with the observation that the financial road less traveled has a better destination.

These prosperity strategies are not just guesses. Over and over again, different individuals have demonstrated that the less-traveled path leads to success. And in the long run, these prosperity plans are no more expensive or time-consuming than the planning that “most people” do. I am sure Senator Robert Kerr and his wife would have liked to have realized these strategies before it was too late for them and their family.