Morgan Housel
ABOUT Morgan

Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and a two-time finalist for the Gerald Loeb Award for Distinguished Business and [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Joe Schweiger

Joe is a CERTIFIED FINANCIAL PLANNER™ professional who has been with Pure Financial Advisors since 2018. As a Financial Advisor for the firm, Joe works with clients to develop, implement, and monitor financial planning strategies that are tailored for their specific goals and objectives. Joe is passionate about educating clients in areas such as retirement [...]

Published On
August 14, 2018
YMYW Podcast 182

Morgan Housel (Collaborative Fund, former Wall Street Journal and Motley Fool) offers practical ways to determine your actual risk tolerance and perhaps help avoid the investing disease of fear and greed. And, listen to find out where you fall on Morgan’s spectrum of financial dependence to financial independence. Plus, should you invest in a hybrid fixed indexed annuity? Is an indexed universal life insurance policy right for you?

ANDI’S PODCAST SURVEY (has now ended!) On Friday, August 17th, 2018, we’re giving away a $100 Amazon gift card! To enter to win, take my 5-minute survey and let me know what you think about the Your Money, Your Wealth® podcast. What financial topics matter most to you? What are your favorite parts of the podcast? What would make the show even better? Fill out the survey by August 17th and help me make this your favorite podcast ever. 

Show Notes


“When a lot of investors think about how much risk they can take as an investor, they often try to forecast how they think they would feel in a hypothetical future situation. So sitting here today, they try to say, ‘How would I feel if the stock market fell 30%? Would I be okay with that? Would that scare me?’ And they try to set up their investment portfolio around that projection of how they think they would feel. There’s a lot of evidence that when people do that, they’re not actually accurately projecting how they would feel in that situation. They are more or less extrapolating how they feel today. – Morgan Housel

From Collaborative Fund, that’s one of the best finance writers in the country – former Wall Street Journal and Motley Fool columnist Morgan Housel. Today on Your Money, Your Wealth®, Morgan offers practical ways to determine your actual risk tolerance and perhaps help avoid the investing disease of fear and greed. And listen to find out where you fall on Morgan’s spectrum of financial dependence to financial independence. Plus, should you invest in a hybrid fixed indexed annuity? Is an indexed universal life insurance policy right for you? Well, now we got a guy. Joe Schweiger, CFP® joins us today to answer your questions. Now, here are two guys entirely dependent on those two guys for everything of value in today’s show, Joe Anderson, CFP® and Big Al Clopine, CPA.

01:17 – Morgan Housel Part 1: The Psychology of Money

JA: Alan, you know what time it is, right?

AC: It’s that time to talk to somebody WAY smarter than us.

JA: Way. I’m super excited this week.

AC: Yes, me too! (laughs)

JA: We’ve got Morgan Housel on the line. He’s a partner at the Collaborative Fund, former columnist of The Motley Fool and The Wall Street Journal. One of my favorite white papers – I’m a huge fan of behavioral finance, you know this Al. He wrote a white paper called The Psychology of Money, so I’m excited to talk to Morgan about that. Morgan, welcome to the program.

MH: Thanks for having me.

JA: Hey, in a little bit of background, can you tell our listeners a little bit more about yourself? Kind of where you came from, where you’re at and where you’re going?

MH: Yeah, well I started as a financial writer in 2007 writing for the Motley Fool, and of course, that was an interesting time to start writing about financial markets. I was covering banking and the macroeconomy in 2007 going into 2008, and that’s of course when the financial crisis really started heating up. Things started getting really, really dicey in the banking sector and the economy that I was covering. And that, I don’t know if I knew it at the time, but I think that started a journey for me, of realizing that what happened to banks, what happened in the economy in 2008-2009 couldn’t really be explained in a financial textbook. There wasn’t much was taught in universities and finance courses that would’ve taught you why the financial crisis happened. So that for me just began a journey of going down, thinking more about behavioral finance. And that if there weren’t formulas and big academic ideas I could explain about the financial crisis, it meant that it was more about behavior and what was going on inside people’s heads, and the biases and the relationship with greed and fear. So that just became kind of a passion of mine, thinking about researching and writing behavioral finance that I’ve done for past 10 or 12 years as columnist for The Wall Street Journal for a long time and for the Motley Fool, and now I’m at Collaborative Fund.

JA: You know you start this white paper out looking at two different investors. You have this nice little old lady in New York City. She was a secretary her whole life, ends up dying with $7 million. And you have another individual that was a former vice-chairman at Merrill Lynch. One of the biggest investment banking firms in the world retires in his 40s and then ends up filing for bankruptcy. And so you look at one person that doesn’t have any experience whatsoever when it comes to investing, that ends up leaving a small fortune to a charity, and you have another individual that probably has more education, information, networks in the world of finance than most, and ends up broke. That is the world of finance, my friend. You’re not going to have someone that doesn’t have any experience do open heart surgery for you, right?

MH: Right. There is virtually other fields in which those stories exist. You don’t see them in sports. It’s impossible to think that an amateur off the street could play one on one with LeBron and not only beat him but absolutely crush him. It just wouldn’t happen. Or to someone from off the street with no education to perform a successful root canal on their neighbor. It just would not ever happen. There’s no scenario in which can happen. But it happens in investing. And the point I made in the paper was, why does that happen? Some people would say “because there is luck in investing. Some people get lucky, some people get unlucky.” But I think it’s more than that. What matters most is that successful investing is not necessarily about what you know, it’s about how we behave. And behavior is not something that you can teach, even to really smart people who go to the best schools and work for the best companies and have the best networks. Behavior is something that is kind of ingrained in you, often from birth. It’s just part of your personality. It has to do with the culture that you were raised in, the family you were raised in, the generation and the country that you grew up in. All the things that are not only often out of our control, but absolutely vary from person to person. And so that is kind of the base of the pyramid. No matter how smart you are or how much education you have, If you don’t get the behavior part right in investing, then that intelligence and that education isn’t going to matter. So getting your behavior right is the base of the pyramid in investing and in finances. So that to me is where I’ve always wanted to spend all my mental bandwidth as an investor, is trying to nail that part of it, under the idea that if I don’t get that part right, nothing else is gonna matter.

JA: But let me ask you this. I think most investors are overconfident and they feel that maybe they’re someone different. “I am a better investor than the average person.” How do we get to the root of the problem, is I guess my point? You could follow an algorithm, you can look at certain charts, and this is how you invest, but when you know what hits the fan, most people won’t be able to stomach it. So how do we cure this disease (laughs) of the human nature of investing?

AC: (laughs) That may take a few more centuries.

MH: (laughs) The unfortunate, but I think honest answer is, it’s very difficult. I would love to tell you, “oh, all you have to do is follow A, B, and C and you figured it out and everything’s going to be OK, it’s just plug in the data and get your answer.” But it’s not like that. These are behavioral biases that have been ingrained in humans for hundreds of thousands of years and they’re not something you can get rid of overnight. To me, I there are a couple things that you can do, starting with just being aware of them. Even if you can’t overcome them, just being aware of how you think, and how other people think, and how other people including yourself are likely to react in certain situations, is really valuable. And I’ll just give you one point. When a lot of investors think about how much risk they can take as an investor, they often try to forecast how they think they would feel in a hypothetical future situation. So sitting here today, they try to say, “how would I feel if the stock market fell 30%? Would I be okay with that? Would that scare me?” And they try to set up their investment portfolio around that projection of how they think they would feel. There’s a lot of evidence that when people do that, they’re not actually accurately projecting how they would feel in that situation. They are more or less extrapolating how they feel today. So right now we’ve have a 9 or 10-year bull market, a lot of investors feel pretty good. When people are thinking about how they might feel during the next bear market, the next recession? They’re often just projecting their optimism that they have today. The reverse was true in 2009 when a lot of investors were trying to anticipate how they might feel in the future. They were just extrapolating their pessimism and their fear that they were holding in 2009.

And so, one solution for that, that’s maybe too strong a word, but one thing that I think is helpful for people to do, is rather than trying to project how you might feel in the future, is to study how you behaved and how you responded in the past. So if you panicked and sold your stocks in 2009 as a lot of investors did, that’s probably a pretty good indication how it’s going to feel the next time. No matter how much you think you’ve learned, or how much you say, “I won’t do that again, I’ve learned my lesson,” I think the odds are that for most people, not everyone, but for most people, the odds are that, no, it’s not that you haven’t learned your lesson, it’s that that fear is just an ingrained part of your personality, and therefore you’re likely to do it again next time. And that’s okay. Just set your portfolio up today to work around that. If you have a lower risk tolerance than most people and you can’t stomach losing 30% of your money, let’s just have a higher allocation to bonds and cash – and that’s okay to do.  So I think just being aware of how you reacted in the past, and assuming it’s going to mimic how you’re likely to respond in the future is one thing that we can do to better situate ourselves around our biases. So it’s not that we’re hopeless around these things – they’re very difficult to cure. I think a lot of them are basically impossible to cure. But there are things we can do to try to better understand them and just kind of tilt the odds a little bit better in our favor.

JA: We’ve been in a bull market almost for the last 10 years. And if you look at someone that had $100,000, if they lose 30% on $100,000, yeah, that’s going to hurt, but it’s $30,000. Or if I had $50,000. Now you fast forward to some of those individuals over the past 10 years, that $100,000, if they were a diligent saver, is now a million dollars or $1,500,000, and that 30% hit on a million five or a million bucks, is completely different. So when the market does correct, I think we’ll find a whole new paradox of individuals that are going to need your services, and reading your literature on behavioral finance.

MH: Yeah, I think that’s true. I think to summarize the point that you’re making is that it’s intuitive to think that you will contextualize a bear market or a recession in percentage terms. But people usually do it raw dollar terms. So 30% was $30,000 10 years ago, now it’s maybe $300,000 because you got portfolio growth, even though it’s the same magnitude of decline, it’s going to hurt so much more. And I think the reason why is because people contextualize those losses. Just something that they can really wrap their head around, like their salary or their mortgage payment. So if you lose 300 grand, you start saying, “how many years do I need to work to make that up?” And it’s very different at lower levels of money. But even though it’s the same percentage, it just becomes, when the numbers get larger, you start contextualizing them in ways that add to the amount of fear and greed, and that cycle that leads to bad decisions.

JA: I like your quote in your article with Harry Markowitz. Nobel Prize-winning economist. And he came up with the Efficient Frontier and for those of you that don’t know, it’s like a certain level of risk should maximize a certain return, it kind of gives you a pie chart of how much money you should have in stocks and bonds and so on. But Harry, he came up with it, and he’s like, “I visualize my grief if the stock market went down or went up.” He’s like, “well, how would I feel if it went down? So you know what? I’m just going to go 50/50.” (laughs)

MH: Right, this is the guy that won the Nobel Prize for creating one of the most really mathematically complex systems of how exactly you should allocate your money between bonds and cash, and for his own money he didn’t even use it. The person who made himself and won the Nobel Prize didn’t even use it himself! Which I think is an indication that there is a lot that is taught in finance that we pay a lot of attention to. And a lot of stuff is useful. But it was developed in an academic setting, mainly just to be intellectually stimulating for academics. For them to create something that was mathematically precise and mathematically very elegant, but in the real world, once you later over the behaviorism that really effects people in the real world that they actually invest in, it becomes much less relevant. Even the person that invented it doesn’t use it for his own money. And I think the takeaway from that is when people are thinking about their own money – this is probably especially true for professional investors and financial advisors – that really simple techniques and ideas and rules of thumb and back of the envelope, “How does it feel? Does this make you feel better? Do you sleep  better at night if we do this?” is a really effective way to think about it, rather than trying to go deep into a financial textbook of, “This is how we should  think about this topic, this is how we should allocate the portfolio based on these models and our forecast, what do you think the economy is going to be this year, what do you think interest rates are going to do this year?”

To me, it’s much better to say, I’ve always thought about it as, I’m not trying to maximize for returns in investing, which might sound weird – why would I not want to maximize returns? So really what I’m trying to do is maximizing for how well I sleep at night. And I think most investors if you really get them into a corner, that’s what they want to do as well. And because I’m just trying to maximize for how I sleep at night, I don’t think about, “how can I maximize my returns? Or what is the economy going to do this year? What’s the stock market going to do this year?” All I’m thinking about it is when I look at my portfolio, does it feel good to me? Do I look at it and say yeah, that feels about right. Some other advisor might look at it and say, “well, you should have more here, you should have more this,” I look at it and say, “no, this helps me. I feel good about this intuitively. I feel good about the cushion that I have and I feel good that even in all these bad scenarios that I can conjure up in my head, I’d still be OK. That’s all I want to do with investing. And it’s very simple and it kind of comes from the gut, comes from the heart of just, “this makes me feel good.” I think that’s actually a very effective way for people to think about their investments. And that’s not to poo-poo a lot of the academic breakthroughs that we’ve made in finance, and it’s not to poo-poo a data-driven investment approach as backed by evidence – that’s certainly not what it is. But I think there’s a lot to be said for people keeping their financial positions as simple as possible and doing it with the idea that you’re just doing this to reduce stress and worry and sleep better at night, rather than maximize returns.

So do you have the investing disease of fear and greed? How did you react in the last recession? What will you do when this bull becomes a bear? Pure Financial’s Director of Research, Brian Perry, CFP®, CFA® has a Comprehensive Guide to Bear Markets (video) – you’ll find it in the show notes for today’s episode. Learn the history of market declines, what causes them, their average recovery times, why bear market predictions are so hard to make, and some investing strategies to help you prepare for the bear. Check it out in the show notes at YourMoneyYourWealth.com Let’s hear some more from Morgan Housel. Big Al’s got a question:

15:20 – Morgan Housel Part 2: The Spectrum of Financial Dependence to Independence

AC: I do like your idea that maybe instead of a risk tolerance questionnaire, or how would you feel if the market goes down 30%, look how you acted last time. But I heard you recently talking about millennials and, of course, they don’t have any history, a lot of them maybe they saw their parents go through the Great Recession but they haven’t yet. And I think you have a pretty interesting perspective there that maybe they ought to go a little bit more conservative than most of us would recommend just because they haven’t had that experience yet.

MH: Yes because, true, if you’re younger than probably 32, 33 years old, you’ve never experienced a significant downturn in the U.S. market. If you take that a step further and you look at a country like Australia,  they haven’t had a recession in 27 years. So you have the majority of even professional investors in that country that have never really experienced a big economic downturn. And that will certainly have an effect when the next downturn comes, because it’s going to be a completely new paradigm for you, versus someone who invested through the dot com bubble and then through 9/11 and then through the financial crisis of ’08, has a completely different perspective. I think it’s important to point out that just because the person who has been through any declines has experienced something different, it doesn’t necessarily mean that they’re smarter or wiser. There’s a known thing that people who lived through the Great Depression were way overly conservative in their investments for the remainder of their lives. They, by and large, shunned the stock market when the stock market was booming. They really wound up in bonds and cash and safety. When you look at a country, like a lot of countries in Europe that were bombed to rubble and disintegrated during World War Two, a lot of those populations remained very conservative for the rest of their lives just because they had been through so much trauma that kind of left last scar tissue with them. And so, it is possible that people that lived through the dot com bubble and the financial crisis will be too conservative for the rest of their lives. Just because they’ve experienced that doesn’t make them necessarily wiser. I think it’s appropriate for every investor to realize that the experience that you have, what you’ve experienced in your life, is probably a fraction of what the economy and stock market is capable of producing for the rest of your life. And just being open to far more situations and scenarios than you’ve experienced in your past. And it’s important to realize that, because most people when they think about their future, they by and large extrapolate the past from their own life and assume that’s what their future is going to be like. So it’s just kind of a plea, I guess, for investors to talk to other investors who’ve experienced different scenarios, particularly investors who are much older or much younger than them, and have a much different view about where the economy is going and what the stock market is capable of doing. And one example of that are baby boomers who came of age in the 70s and 80s, experienced a lot of inflation during that period. My generation, the millennials, have really never experienced inflation above about 2%. So we just have a very different view of what inflation is capable of doing, where a lot of the baby boomers will remember gas lines and mortgages that were 14% interest rates. My generation doesn’t. And I think if we just talk to each other a little bit more and try to gain a more open mind about what we’ve experienced, that helps both of us understand possibilities of what the world is capable of doing next.

JA: Yeah without question. Looking at your last blog I thought was fairly interesting too. You’re looking for “dependent on cash to financial independent.” And there were several different stages that you went through. You could have complete dependence, and I guess, what, that’s someone like Big Al asking for change. (laughs) Asking me for a coupla bucks every day.

AC: (laughs) That’s stage 1. I’m completely dependent on you. Usually, that’s for children under 15, but make an exception for me.

JA: (laughs) This was very, very interesting. And how you came up with these levels. Tell our listeners a little bit of behind the genesis of the paper. I’ve never read anything like this – so tell me a little bit about what your thought process was.

MH: Yeah, good question. For me, why do people invest? We’re all investing so we can have more money. And that’s kind of a blunt way to say it and it kind of sounds too materialistic. But I think that’s the point – most people, when they think about money, it’s in a materialistic way. I want more money so I can have more stuff. And not necessarily more stuff, you’re saving so that you can take yourself during retirement, and you can send your kids to more school, so you can send your kids to college. But for me, more money, and the reason that I invest, has always been around gaining control over my time, and gaining a higher level of independence. That’s really all I wanted. All I want from investing is to be in a situation where I can wake up in the morning and say, “I wanna do what I want today.” And by and large, that doesn’t necessarily mean retirement. I know there’s a big movement about the early retirement movement. There’s a lot of excitement around that. But I think most people, including myself, wake up in the morning and say, “I want to work. That’s what I want to do today. But I’m going to choose the work that I do, I’m going to choose who I do it for, I’m going to choose how much of it I can do.” I might want to take a lower paying job that I like better because I have a certain level of independence with my savings. It’s just gaining control over your time. And I think a lot of that stems from some of the work in positive psychology, which is kind of the study of happiness. It shows that people can get very accustomed to their material situation on either end – so if you’re very poor or very wealthy, if you have a small house or a huge mansion, people get accustomed to that stuff pretty quickly. Particularly once you’re above a certain level of basic comforts. You get accustomed to whatever you have. But having control over your time, if you can dictate your schedule, and when you’re going to go to work, and who you’re going to work for, and what kind of work you’d do? If you can own your schedule, that is something that will pretty much always bring you happiness when you have it, and you will always feel miserable when you don’t have it. And they are a lot of very wealthy people, multi-millionaires, that have no control over their time, and many of them are miserable. And there are a lot of people who we would not consider particularly wealthy, but they own their day, they own their calendar, and those people on average tend to be pretty happy. So that’s always what I’ve wanted to do is thinking about money not in terms of how much stuff can I buy with this, but what level of independence does this buy for me. So that’s always how I’ve kind of framed wealth in my own head, and so this article was just kind of putting that down on paper. Like, what do some of those levels look like? And there’s a lot of different levels. Financial independence is often portrayed as black and white. You’re either working or you’re not. You’re either in a job or you’re retired. There’s a lot of different levels of someone who has just enough savings that they can take a lower paying job than they otherwise might have to, to cover their student loans or their mortgage – that’s a level of independence. Once you reach a certain amount of comfort with your social status to where you don’t feel the need to buy a flashy car or wear flashy clothes just to prove yourself, that’s a level of independence. That’s a burden lifted off of you. So there’s a lot of different levels to go down, and most people I think will never reach a level in which they feel completely independent. I think no matter where you are, you’re always going to rely on others – that’s kind of a part of human nature. But that’s always how I viewed money, in general, is just, “how can this free me up a little more so I can wake up in the morning and say, ‘I can do whatever I want today.'”

JA: That is such a good point, and I think a lot of people need to take a little bit of a step back and think about that. I think individuals have this quest for wealth, but they really don’t understand what wealth is. They might be thinking of a dollar figure, they might be thinking of a fancy house or a nice car, and they’re collecting stuff. They see a guy – and I forget what article this was that you wrote, but – they see an individual with a $200,000 car. “That person must be wealthy. I want to get to that point.” And the person driving the car is thinking, “Hey, they’re thinking I’m really cool.” But in actuality, they’re like, “no, I don’t really think they’re cool. I’m just kind of envious of a certain status.” If they take maybe a little bit of time and truly think about what wealth means to them, I think the whole paradigm shift of this retirement crisis, and all the other BS that you hear, the millennials don’t save anything, and the baby boomers are breaking the system, and the age wave, and all this negativity, all that is is trying to sell stuff. Al and I work with individuals that don’t have millions of dollars, and they’re the happiest people in the world. Al and I work with people that have millions of dollars and it’s like they’re miserable. It’s like what the hell are you doing? And then thee people with very little money, they’re like, “Man, I wish I had millions because then I could be happy!” Bullsh-!! You’re just gonna end up being more miserable!

MH: It’s a really tough situation, and one thing I think that’s important to point out is that it really is different for everyone. The lifestyle that I choose to live some people might say, “I would be miserable if I did that.” And that’s fine. I’ve found a way for my family that makes us happy and that’s what works with us, but if it’s different for you, well then great. There’s no formula for this and you can say “just do X and you’ll be happy.’ You really have to find out what works for you. But I think by and large for the vast majority of people, just to reiterate that focusing your goals and your pursuits on having more freedom of time, rather than more quantity of goods is something that I think is a big step in the right direction towards actually becoming happier with your money.

JA: Morgan, You’re awesome. I really appreciate your time. I kept you late, but we could talk about this for hours. So thank you so much for joining us today. It’s been a real treat.

MH: This has been fun, thanks.

JA: Hey, that’s Morgan Housel folks, you can check him out at MorganHousel.com or CollaborativeFund.com and we’ll put all of that stuff on our show notes and hopefully we can get you back on here soon.

If you’d like to read the transcript of this speakerphone interview with Morgan Housel, check out the show notes at YourMoneyYourWealth.com. And hey, don’t forget, we’re choosing the winner of our $100 Amazon gift card on Friday, August 17th – that’s 2018, in case you’re listening to this many months from now – all you have to do to enter to win is fill out my 5 minute podcast survey (now ended) also linked in the show notes for this episode. Let me know your thoughts on what we should talk about on Your Money, Your Wealth®, who we should talk to, and what you do and don’t like about the podcast. And thanks so much for the responses we’ve already gotten, you’re giving us some great feedback and we appreciate it!

26:18 – Should I Invest in a Hybrid Fixed Indexed Annuity? With Joe Schweiger, CFP®

JA: Most of you – or not most, I think we only have four listeners, so all four of you responded nicely to this – and so some of the things that you want to hear about is “I heard annuities, even though Joe doesn’t like them.” So guess what folks. We’re going to talk a little bit about annuities because we had a few e-mail questions come through in the past couple of weeks and I’ve been ignoring them, but we have Joe Schweiger, he’s Shweigin’ his way through the office lately. He’s a brand new employee at Pure Financial Advisors. He’s a CERTIFIED FINANCIAL PLANNER™ and he’s our insurance specialist. So I brought him into the studio today to answer some of these hot questions on annuities. Joe, welcome to the show.

JS: Thanks Joe, happy to be here.

JA: Are you happy? Are you a little nervous? Don’t worry about it.

JS: Eh, first time on the radio, so…

JA: First time, long time?

AL: It seems like he’ll bite, but I swear he won’t.

JA: Hey, tell our listeners a little bit about yourself. What’s your story, my friend?

JS: Yeah, so I’ve been here now going on a month, pretty much brand new. So, last six and a half years I worked for a general agency in the insurance industry. So basically an insurance brokerage. We specialized in mainly fixed products, so a lot of indexed universal life and Fixed Indexed Annuities. Making the transition over here, I completed my CFP certification end of last year and wanted to become more of a holistic planner.

JA: And not sell indexed annuities, or do you still want to do that on the side?

JS: (laughs) Uh, I know we’re fee only, so… I actually have never sold one, I was usually helping.

JA: You were just the guy behind the guy. So if they had questions and say, “hey, could you help me with this particular product how does it work?” and then you would break it down for them and you would say, “here, this is exactly how it works, here’s the caps, here’s the spreads, here’s how the indexing works, you’re not really invested in the S&P 500 index sir or ma’am, you’re actually invested in a long-term bond with an option on it, and then they’d be like, “really? I thought we were actually invested in the S&P 500 index?” Would that happen?

JS:  Exactly.

JA: And they would say “what’s the commission on it. Ok sounds good. Thank you very much.” (laughs)  I’m kidding. Kidding Not really. I’m going to have Joe stick around here for another segment because I’ve got some other e-mail questions in regards to universal life and annuities and all sorts of stuff. So I want our young Flanagan, Joe Schweiger, CERTIFIED FINANCIAL PLANNER™, barely out of the womb here in onto the main stage. You were a professional hockey player almost too, weren’t you?

JS: I had a brief stint in an exhibition camp, but…

JA: A brief stint in an exhibition camp?

JS: …about 10 days.

JA: 10 days! Hey man, you got the show! That’s pretty impressive. OK, here we go Joe, got some questions for you. I’ve got two for you. Let’s do this one here. “I am thinking about…” Or, “Dear Joe and Al, I am thinking about putting my life savings into an annuity that is supposed to pay me 8% signing bonus and 7% compound interest over a ten year period with no risk of losing my initial investment.” Are you getting that Joe?

JS: So far, yep.

JA: OK. “The product is casually referred to as a hybrid fixed indexed annuity,” and I don’t think we need to share the name of the insurance company, but if you want to know, it’s a secured benefit income annuity, through Secured Benefit Insurance. You heard of them?

JS: Uh, sounds familiar.

JA: Sure. All right so here’s her question. “Exactly how is this initial investment guaranteed? The salespeople call it a guaranteed contract. It looks like it’s covered by my state, and that really helps my peace of mind. But I’m wondering if there is a connection that goes beyond my state? I’m looking for more protection, that is, if more protection is appropriate. Anything you might add to my understanding of the risk of the initial investment would be greatly appreciated.” So here’s the crux of this: so she’s putting her life savings into an annuity contract, and that the salesperson is saying that she will get an 8% signing bonus. So here, put money into the contract. I will give you 8% just because I’m a good person, and I’ll also guarantee you 7% over the next 10 years. True false?

JS: Well, we’ll start with the fact that the insurance company is saying that they’ll let them put their life savings into the annuity. So right there, first and foremost, every insurance company does have compliance, so they will most likely not accept the full amount of everything you have.

JA: But they could also BS on the app.

JS: Technically yeah, they could definitely say they’re worth a little bit more. Second part, yeah, a lot of times fixed indexed annuities or indexed annuities will have different promotions or I like to think of them as “bells and whistles.” You know, an 8% premium bonus, the 7% compounding roll up. Really what they’re doing is they’re taking the money that they’re they’re giving the insurance company and they’re investing that in the appropriate bond portfolio that’s going to last for that client’s lifetime. So by saying that they’re going to give them 8% and then the 7% roll up, really what they’re going to do is take away on the potential for them to accumulate in that product. So if income is the important component that you’re looking for, an indexed annuity can potentially do that for you down the road.

JA: But this is all BS Joe, to be honest with you. So she’s thinking that she gets free money of 8% just by putting the money into it. It’s not free money. The insurance company is not going to say, “you know what, just because we’re a good company, I’m going to give you 8%.” How does that actually work? Break that down for us.

JS: So another part of the premium bonus, and a lot of times when people are looking at annuities, there’s really two accounts that you need to think of. The first one is the actual cash account which you’d be able to walk away with. The other account is basically a fathom account that’s only used to calculate what the income payment would be down the road. So if they’re giving you 8% you definitely want to look to see if that’s going to be in the cash account or if it’s going to be in the fathom account that’s going to basically calculate how your income will be produced down the road.

JA: So a fathom account, what you’re basically stating is that there are two different types of ledgers within this type of product. There’s a cash value and then there is an income benefit rider. And this is what she’s confused on is that they’re going to give her an 8% bonus upfront, so she has to be aware of where that 8% bonus is actually going to go into. What ledger that this is going to be applied to. And then this 7% compound interest over 10 years. She’s not getting a 7% compound interest rate over 10 years. She just isn’t.

JS: Yes. I would 100% agree with you. Most likely that 7% compounding interest is going to be in the income account, again, only used to calculate what the payout will be once you elect to…

JA: Annuitize it or start the income stream. So here’s a prime example of why people get taken advantage of on these products, is that OK, now I have $100,000, she thinks that she’s going to get a guaranteed 7% interest rate. No wonder why she’s looking at the state for help, because it’s like, “wow, this sounds probably too good to be true. How can someone guarantee me 7% interest and not necessarily have any other type of protections? What are they doing, how are they investing it? This is a really good rate of return.” So what they’re basically doing, it’s all smoke and mirrors. That 7% is not a true return. So if she holds this over 10 years at 7%, Joe, her money is going to double, right? Rule of 72? So let’s say if she puts her life savings of $100,000 into the account, the account balance will be $200,000, roughly, in ten years. If she gets a 7% compound return. But that $200,000, she cannot take a distribution from that. She can’t take money from the account, can she?

JS: That’s correct. There’s also a withdrawal rate. So say it grows to $200,000, depending on your age, you have the withdraw percentage. So then, say that’s 5% – she wouldn’t be able to take out $200,000.

JA: She’d be able to take out $10,000, let’s say if it’s 5%. (Joe S. and Andi laugh as Joe A. ramps up) So over the next 10 years, she pulls out 5%, that’s $10,000 a year. So now she’s held that product for 20 years, what did she get out of the product? Her principal back! Right? Because she took $10,000 out. She started with $100,000, she put it into the product, she got this guaranteed 7%, which is BS, ten years later, all of a sudden it “grows” to this magical $200,000, but she can’t pull the $200,000 out. She can only pull 5% out. So now that’s $10,000. Is my math correct? I don’t have a calculator.

JS: Your math is correct.

JA: All right. So now she’s got $100,000. So she takes that $100,000 out. Or she takes the $10,000 out, $10,000 times ten years is what? A hundred grand. So how long as she had her money with that insurance company?

JS: So after the 10 years – 20 years…

JA: 20 years!! What did she get back is her principal payments!! So then she goes another 10 years, she pulls out another $10,000 per year. So now she pulls out $200,000, so she doubled her money, but how long did she have her money with the insurance company?

JS: At that time 30..

JA: 30 YEARS!!!

JS: You gotta think of the time value of money calculations…

JA: Right?! I mean what’s the internal rate of return on this? It’s like maybe 2.1%! So they say, “we’ll give you this 8% bonus.” All they’re doing is taking some of that money in a different ledger and then it’s all smoke and mirrors.

Js: That’s correct.

AL: This listener is correct. Joe does not like annuities. (laughs)

JA: If she wants a guaranteed rate of return of 2%, then take that nice product.

JS: Exactly. What it comes down to is exactly that…

JA: Understand what the hell you’re buying, right?

JS: I would agree.

JA: Anything else you want to add on that Joe?

JS: Yeah, you kind of hit the nail on the head, so…

JA: So I guess Joe’s point earlier was saying if you wanted a guaranteed income stream, an annuity will definitely give you that. But here’s what bugs me, is that when someone is coming back and their interpretation of what this product does is to say that they get this grandiose bonus, and then all of a sudden a guarantee of 7% compounded per year, it’s like who wouldn’t want that? Every institution in the world would want to get a guaranteed 7%. It just doesn’t exist. But that’s how they’re positioning or selling it. And it’s, I don’t know. It’s kinda BS.

Hey, if you’ve got an annuity question, a life insurance question, whatever, Joe Schweiger, CFP® is here now and we can have Joe and Joe and Big Al answer it for you, anytime you like. Actually, if you have any money question, I’m sitting in a building full of qualified, knowledgeable people with answers! And I know any of them would love for me to pull them into the studio and put ‘em up to this microphone to answer you, just like the Joes are doing, so let us know! Call (888) 994-6257, that’s (888) 994-6257 with your money questions or email them to info@purefinancial.com. Go ahead, I’m waiting. All right, cool, we got another one!

37:52 – Should I Invest in an Indexed Universal Life Insurance Policy? With Joe Schweiger, CFP®

JA: “I have a guy.” Everyone’s got a guy, right? “I’ve got a guy trying to get me to invest $300,000 into an indexed universal life insurance policy. I told him that for this $300,000 I wanted to sock it away for retirement and preserve its capital while not worrying about the underlying investment mix. I also don’t want the task of having to pay attention to manage it. Although I told him I have no need for any life insurance, he’s still pushing for me to buy into this because it’s as good as an indexed annuity.” (laughs) That’s a really good benchmark comparison! All right, what say you, Joe Schweiger?

JS: So, first and foremost I’m going I have to say, if you’re not looking to buy life insurance, the point of life insurance is to purchase a death benefit. So if that’s not really the plan, then I wouldn’t necessarily go to put all your money into an IUL.

JA: So why would an IUL – for those of you who are keeping score is an indexed universal life insurance policy. Joe here is talking jargon because he’s just so much into the industry. Why would someone want a position in an indexed universal life insurance policy and have some gentlemen put $300,000 into that policy? Why would someone want to do that? You just said they shouldn’t. But why would they want to pitch this?

AL: Can I guess?

JA: Sure. What?

AL: Commission.

JA: Well there could be that involved. Could be a little bit of that.

JS: Definitely commission. The way that cash value life insurance works is there’s a minimum and a maximum you can put in. So really, depending on the agent and how he’s positioning the policy, will really impact how much cash it can actually grow in it. Of course like I just mentioned though, if a death benefit is not a main concern, a life insurance policy, in general, would not be the best solution for you.

JA: What’s the sales pitch? Gimme the sales pitch.

JS: The sales pitch for an IUL?

JA: You are the life insurance agent and I got $300,000 burning a hole in my pocket. I don’t need life insurance, Joe, but man, I don’t know. I don’t want to deal with my investments.

JS: So the pitch behind an indexed universal life and the way that it works is this. Again, there’s a minimum amount you can put in, which is basically what the insurance company is saying, “this is what’s going to pay for the death benefit that you’ll receive.”

JA: So I have a million dollar policy, there’s a minimum amount that I can put into that policy just to cover the cost of insurance.

JS: Exactly.

JA: And then there’s also a maximum amount before it becomes a MEC – a modified endowment contract. Look at me! (laughs) I should be the insurance expert!

JS: So yeah exactly. If you put any more money than that, then it becomes basically a MEC.

JA: OK. So you don’t want a MEC? Or do you want a MEC?

JS: I would say that you don’t want a MEC. There are times when a MEC would make sense.

JA: Because it hurts the taxation of the cash value?

JS: Yes exactly. So when you’re pulling money out it’s going to be taxable like a qualified account. The only times I see that really worth doing is if it’s some type of college planning pitch, where you want to get money away from your expected family contribution.

JA: Ah, I see. So that’s those little sneaky ways to kind of hide things, hide assets.

JS: Shelter. (laughs) Hide, shelter…

JA: (laughs) Oh, interesting, Joe!! Now the truth comes out. All right. So 300 grand. So the whole pitch of this is what, so they can get tax-deferred growth. And then at some point they grow the money, right, and then they can pull the money out tax-free? Is that the pitch?

JS: Exactly. That’s the way it works. If you structure it the right way, putting it up to that MEC line, basically the minimum amount of insurance comes out and then it sits into an account that basically shadows indices. So what that means is the insurance company is buying long-term bonds.

JA: They’re buying options?

JS: Exactly. So for instance, say that you give $1,000 premium. $950 of that goes back into the bonds to grow you back up to $1,000. Depending on the economic makeup of what’s happening in the industry…

JA: Yeah, depends on what the options are costing.

JS: Exactly options budget, so that’s going to be dependent on what type of caps or participation rates.

JA: So when they’re saying, “hey, you can invest in let’s say the S&P 500 within this index.” They’re not investing in the S&P 500.

JS: They’re not. Exactly. They’re buying options.

JA: They’re buying options on the S&P 500 index. And so are they getting dividends from the S&P 500?

JS: They are not.

JA: They’re just getting the appreciation of that index, minus the cost. And then if you overlay that within a life insurance contract, that adds a little bit more cost. Would you agree with that?

JS: I’m sorry, would you repeat that?

JA: So what they’re doing is buying a long-term bond and they’re buying a call option within the long-term bond. They’re calling this an S&P 500 index in some instances.

JS: Yeah. They’re taking the bond, they’re putting that money aside to grow, basically, your premium back up to where you put in. So if you put $1,000, $950 grows up to $1,000, they take that $50, they buy options with it…

JA: If they cost $50.

JS: Again, depending on the economic situation…

JA: Sure, if it’s a volatile market, the markets are going south, it’s going to cost you a little bit more than that. So the pitch is to say, “we can grow your money, you’re never going to lose money because they’re in bonds.”

JS: “Never lose money due to market volatility” is the correct way to say it.

JA: See, I like your honesty. Thank you for that. So never lose money due to market volatility.

JS: Of course. You know, insurance charges can go up. There are other things that can happen inside of a contract. It’s important to look through that whole contract and the whole illustration to see what the guarantees are, and how long that actually is going to last, what they’re illustrating. There’s a number of factors that go into how an illustration plays out and what is actually being sold to you. So it’s it’s important to definitely look at that and not just have an insurance agent say “upside potential, no loss.” You have to be careful with that.

JA: Right. And if it’s in a wrapper of… And why someone that doesn’t need life insurance, why they would get pitched this, or why they would get presented – maybe that’s too strong a word. Why they would get presented this solution in this particular person’s scenario, is to say, “hey, this is for long-term growth. You don’t necessarily need the money. So if it goes into this product, you can grow the money tax-deferred. You’ll never have to pay tax on it. You don’t necessarily have to worry about the volatility of that particular investment, because it’s going to be safe from downward volatility, so you could get some of the appreciation of the overall market, depending on how it does, with no downside risk. And then when you pull the money out of this life insurance contract, it will come out to you tax-free.”

JS: That’s the typical pitch.

JA: That’s that’s this would be a solution, right?

JS: Exactly – the tax-free portion, of course, you have to remember, is coming out via a policy loan. There are two ways to withdraw money out of insurance policy: policy loan or you can withdraw up to basis, and then everything after that would become taxable. So again, you need to understand how the money is coming out.

JA: So it’s not as cut and dry as maybe how it’s presented sometimes. Because it sounds pretty good right. If you got  $300,000, Joe, why don’t we put it into a policy or product and then it can grow, very much like the S&P 500 with downside risk. That money grows tax-deferred, and when you pull the money out it will be tax-free to you. I would sign up for that all day, right? But that’s just the tip of the iceberg. You have to take deeper looks here because you’ve got the cost of insurance. You’re not necessarily in the S&P 500 at all. You’re in long-term bonds and their buying call options on those. You’ve got premium charges, caps, you’ve got participation rates. And then, when you start trying to take distributions from this thing, then you have to take it FIFO, right? First in, first out, which is non-taxable – you’re just taking your premium dollars back out, and then you could take a loan from the overall cash value. And then if that loan is too much and all of a sudden that policy needs to be in force for life, just about. If it crashes…

JS: If it implodes then yes. Basically, everything that you took out via policy loans would then be taxable like it was in a qualified account.

JA: So if this is done absolutely perfectly, it could be a viable solution.

JS: I would agree with that, absolutely.

JA: Because I like everything upfront. Like if I have some excess capital, if I want tax-deferred growth and I want tax-free income, yes. But I think it’s sold way too much on this concept, and I’ve been doing this 20 years, and I’ve never seen it done appropriately. We get policies in here and it’s like, “oh my god, I want to start taking money out of this thing. But I still have cost of insurance. Now I’m a lot older. How do I go about doing this?” So you just absolutely have to be careful. You have to read the fine print. You have to figure out exactly what your goals are, and if you need the money prior to, let’s say – it’s a long-term play. You’re locking your money up because it needs time because the cost of insurance upfront is…

JS: A lot higher than any other type of investment. Absolutely.

JA: All right. That’s Joe Schweiger folks. That’s all I got with insurance today. If you want more information, you can email us at info@purefinancial.com, if you’ve got more insurance questions, if you got annuity questions…

AL: We got a guy now.

JA: We got a guy. I got a guy. He’s trying to sell me some stuff, but we got a guy to educate you on the guy that’s trying to sell you stuff. All right. That’s it for us today, thanks for listening. For Big Al Clopine, I’m Joe Anderson. The show’s called Your Money, Your Wealth, we’ll see you next time.


Thank you, Joe and Joe, and special thanks to Morgan Housel for joining us today. Check out Morgan’s excellent writing at CollaborativeFund.com

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.