I’ve recently been doing some work with a financial planner, and it’s astonishing how that field – which you’d think would be very numbers-based – is instead driven by a great deal of fear. It occurred to me how playing off of your emotions is such a powerful way to influence someone, and how poorly prepared most of us are. Politicians, employers, and yes, financial planners, do this to us all the time. Facts are your best defense against this fear-based approach, but apparently very few of us are interested in acquiring facts on our own. We instead rely on the “facts” presented by someone with clear ulterior motives, and we never question those facts.
In this case, the financial planner’s pitch started with a book called The Power of Zero: How to Get to the 0% Tax Bracket and Transform Your Retirement. The book includes a foreword by a CPA and a former Treasury Secretary, establishing its authority. The pitch copy notes how the government has over promised on programs like Social Security, which will doubtless go away just when you need it – playing on fear. And it employs a common financial planning approach – also rooted in fear – to point out how taxes have only ever gone up, up, up, and so you want to get to zero-tax as soon as possible, or you’ll see your retirement savings sucked down by taxes. People fear loss, and so this approach apparently works really well. The financial planner will then present retirement instruments, almost invariably containing the words “universal life” of some kind, which promise to offer you tax-free savings for retirement. Who wouldn’t want zero tax? The book also points out how all the rich and wealthy people are already doing these things, and us common folks like nothing more than to do what the rich people are doing. In fact, the rich people aren’t using these retirement instruments precisely because they are rich, and they can easily live off of their investments at exceedingly low tax rates.
Without getting into the dubious advantages of these products – many of which offer a poor rate of return, easily offsetting the supposed “tax savings” – let’s simply analyze the facts.
First is the fear that taxes only go up, up, up – a primary driver for these schemes. Historical US tax rates are readily available, and it stuns me that more people can’t be bothered to perform a simple Google search for them. I went here for them. First, they’re remarkably stable – they’ve been steady since 2002, surviving a massive economic recession. And in 2002 they were higher, with the top-end rate being 3.6% more. 2001 was higher yet. 1999? Higher, with the low-end rate at 5% more than today’s. Steady again until 1992, when they were, again, higher, with fewer brackets. You have to go back really, really far to find a time when the effective tax someone paid was lower as a percentage of their income.
Taxes don’t always go up. They usually go down over time, as a percentage of income. That’s because cutting taxes is politically popular, and because a growing GDP and population means each individual needs to pay a bit less into the system. We used to have a top-end rate of 70% – almost double today’s rate on the same dollar bracket! In 1963, the top bracket was 91%, and the bottom bracket was 20% – double today’s 10% entry-level tax. I’m back in 1946 as I write this, and I’m still not seeing how taxes have done anything but decline over time.
So in this fear-based push to hide all my retirement money from taxes, what was this planner offering in return? Am easily sub-5% return on my investment. The stock market historically returns 8% on most mid-aggressive investments, meaning I would be paying over 3% just to allay my fears. And this was still a stock- based investment, meaning there was no guarantee I’d make money – just that’s, whatever I did manage to eke out, I might not pay taxes on. Assuming Congress doesn’t change the laws and start taxing the kind of income this product offered, and there was of course no guarantee that wouldn’t happen.
The point here, again, is not the specifics of this idiot planner’s real plan, which was likely to net him as big a commission as possible. The point is how he used fear to push me in his direction.
Politicians do this to you constantly, relying on the 24-hour news cycle to get you all riled up. Remember that story on CNN yesterday, about how nothing was really wrong with the world, and we’d all be fine? No, you do not. My mother-in-law was appalled that we were considering going to Paris next year, because – based on her careful review of Fox News stories – everyone in Paris was clearly being shot, all the time. I pointed out that we couldn’t very well stay in the US, what with the mass invasions of Mexican criminals, the impending destruction of Christianity by Muslim hordes, and the jobless refugees that were clogging up our immigration centers. Mom-in-law isn’t good with sarcasm, unfortunately.
One more example: remember, during the 2008 econopocalypse, how CNN displayed the falling DOW number basically 24×7? Because the Dow Jones Industrial Average is a reliable marker of how our entire economy is doing? Also remember how, the minute that sucker started not only creeping back up but massively exceeding its prior records, CNN took it down? Yeah, the DJIA contains, like, 30 stocks. You shouldn’t need to have a degree in statistics to know that 30 stocks cannot possibly represent an entire complex economy like ours. It is literally the stupidest number ever. It’d be like asking one guy what color he liked, and ordering everyone to paint their houses that color. But almost nobody I talk to even knows what the DJIA is, because they never look. Most assume it’s some government economical index, because they simply can’t be bothered to verify this one “fact” that apparently has so much influence over their lives.
So just do me this favor: before you make any decisions based on “facts” other people have given you, verify. Whether it’s a grocery purchase (don’t even get me started on how this “non-GMO” trend has jacked up prices on products that never used GMOs in the first place), an election decision, or a retirement product – just verify the facts.