Retirement plans aren’t just about 401ks and IRAs—it’s time to look beyond. In this episode, Wade Reed dives into the real story behind traditional retirement plans and the options most people overlook. From the origins of the 401k to understanding the limits of IRAs, Wade unpacks the often misunderstood world of qualified plans and explains why they may not be the best route for everyone. He also explores alternatives like whole life insurance and private brokerage accounts, helping you evaluate your financial decisions with control, liquidity, and emotional clarity in mind. Tune in to discover how to make more informed choices that align with your long-term financial goals.
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Best Retirement Plans?
What is up, money masters? In this episode, our topic is retirement plans. This is one of the most common topics that comes up, and there’s a lot of controversy around this for some reason, which is bizarre because everyone needs to retire but we get really hung up emotionally on what type of retirement plan. What I mean by retirement plan is typically a 401(k), an IRA, a Roth IRA, a Roth 401(k). Those are what are known as qualified plans or government-qualified plans, sometimes abbreviated simply as QP. A lot of people don’t really know what that means.
“What is qualified? What is the government’s involvement really in this thing? This is all I’ve known my whole life. Why would it be good or bad? Why would people say it’s not a good thing?” I want to talk through that. I want to talk about retirement. I want to talk about whole life insurance and how it fits into an overall retirement strategy and connect some dots for you guys about what the facts are about these things so you can be better informed and be more successful with whether or not you choose to use these.
Origins Of The 401k And IRA
You can still retire. You do not have to use a 401(k) or an IRA to be able to retire successfully. You just have to know that’s true. You don’t have to use those vehicles. In fact, they’re not vehicles. They’re tax codes. That’s one of the points I want to make here. A 401(k) is actually the brainchild of a tax code from 1978. This was written into the tax code when some retirement laws were revised, and it was something that was known as a way to defer income into a future date, the tax on income to a future date.
There’s this guy by the name of Ted Benna, and he was a consultant for a company known as the Johnson Companies, and he was a retirement planning consultant. What he was doing was trying to find some ways that he could enhance the higher income earners of the day their retirement opportunities because they were just getting creamed when it comes to taxes. In the late ‘70s and early ‘80s, the tax brackets for those who were higher income earners were significantly higher than they are now. Nowadays, they’re high, 37%. Back then, it was in the 40s%. In some cases, before Ronald Reagan, they was as high as 90% if you were the highest income earner in America. Can you believe that?
No wonder, at this point in time, people were looking for ways to defer income into the future when they might have better tax rates, earn less, and thereby have less tax on their money. Ted Benna comes, and he reads up on the IRS tax code, section 401(k), and he recognizes there’s some opportunity here. He came up with a way to incentivize lower-income employees at companies to contribute to the plan because their requirements were that all employees had to contribute something, at least a certain minimum amount.
The higher income earners would have a chance to contribute almost an unlimited amount, or at least a maximum amount, above what the other employees were contributing. He knew that the lower-paid employees were not likely to want to defer their savings in a vehicle that would lock it away for many years to come unless there was some incentive to do it. The incentive became an employer match. The only reason this was recommended was that the higher income earners would have a chance to defer their income at a higher dollar amount into the future, which was really good for them because they dealt with some significant costs, and none of us likes taxes. Seriously, who loves to pay tax?
All of us are going to be looking for ways we can reduce our taxes. This was one way that lower-paid employees would be incentivized to do it, so the plan could function for the higher income earners in particular. He was a consultant trying to find this. In recent interviews in the past few years, Ted Benna has basically declared that it became a monster.
It was never intended to become a ubiquitous thing. It was never intended to be something that every employer utilized as a way to incentivize their employees to have a retirement. It almost accidentally shifted companies away from serving their employees through pensions and guaranteed payments if they worked a certain number of years. It shifted away from that to a personal decision where we had to become really wise and really sophisticated financial people.
It used to be handled for us. It used to be much simpler, but today’s world, the use of a 401(k) and the qualified plan known as an IRA, Individual Retirement Agreement or Arrangement, not account. An IRA is not an account. It is an agreement or an arrangement with the IRS. Individual Retirement Arrangement. Again, it’s a partnership with the IRS that has certain tax benefits. If it’s a regular IRA, we’re deferring tax into the future. If it’s a Roth IRA, we’re paying tax now and the growth is tax-free from that point forward.
An IRA is not an account. It is an agreement or an arrangement with the IRS.
There are limitations that the government places on these things, and there are restrictions as to the liquidity and the ability to get access to these funds. In the absence of understanding the true partnership relationship we have with the IRS, we just go with the flow, don’t we? Everyone else is doing these things. I keep hearing it’s a good thing, but I’m not really sure. I’m inviting you, guys. In order to become money masters, we have to start asking ourselves, “What’s the historical context behind these things? Where did they come from? Why do they exist? Are they actually useful for me versus those that they were originally created for?”
I want you guys to get in the habit of asking better questions. Questions like, “Is this the right thing for me? How can I know if it’s the right thing for me? What are the rules wrapped around this particular financial vehicle, retirement vehicle, or particular plan or recommended strategy, whatever it is?” Do not just go with the whims or with somebody that you trust, but ask those questions to become really inquisitive, to become a student of money, as I often say.
Become a student of money.
The C.L.U.E. Framework
Let’s just think this through for a minute. If I have a desire to save for the future, where can I do that? What happens to my ability to access the funds? What will the earning rate be on it? What are the alternative uses and things that I might want to do with it or might need to do with it? There’s an acronym I want to share with you, and it’s not my awesome acronym. It’s a separate one specifically dealing with these types of things.
When we’re dealing with financial decisions, we want to have a C.L.U.E. We want to get a C.L.U.E. about our money. C.L.U.E. stands for Control, Liquidity, Use or uses or options, and our Emotional state. This is the framework I utilize when I consider what’s going to happen if I move my money from one place to another.
If I move it from a bank savings account, which is totally in my control, totally liquid, have 100% use opportunities, and my emotional state is kind of neutral just because it’s not doing much. It’s just there. If I move it to a 401(k) or an IRA where I defer tax, I shift the control over to the government. They determine what I can and can’t do with my money. The liquidity is virtually eliminated unless we are willing to pay an extra 10% tax penalty by taking it out before age 59 and a half. My uses are dramatically reduced. I can only invest it. Once it’s inside these plans that are governed by the tax codes that govern them, I can only do certain things with them.
Why would that be? Why can I only invest in my company stock or mutual funds or a specific set of restricted investments made available by my custodian of that money? Often, it’s held through someone like Fidelity or Charles Schwab, those are known as custodians. You become the beneficiary, but you’re not actually the owner. You get to make decisions about it, but during the time that it’s held in a qualified plan, you’re a beneficiary of it. It’s for your benefit. That’s weird, isn’t it? Would I really want to lose that level of control over my money and only be able to invest in the stock market, where there’s significant volatility, and where, even though there’s an average over a 100-plus year history of the stock market of 8% to 12%, my reality might be completely different than that?
Meaning, when I get in in my adult years and when I get out in my later adult years, what is the effect of timing on that? Maybe I get in during a down year, so I immediately lost money, then I have to deal with recovering, and hopefully, I have some big up years to recover, but then what if, in my later years, just as I’m retiring, like what happened in 2008, what if there’s a significant downturn in the market?
I have to delay my retirement because I’m a slave to the IRS’s tax laws and to the interest rate environment of the stock market. When I really think about these things, when I thought through these things, it was almost dumbfounding that I would just go with the flow and put money into a 401(k). Really, the only reason I did that is because the word retirement is attached to it. It’s like, “That’s my retirement plan.” It doesn’t have to be. The other reason I got in when I first had one of these, in 2005 to 2008, I was with an employer that had an employer match. There was an incentive. Free money, why wouldn’t I do that?
When I got a little wiser, when I had somebody propose these same types of questions that I’m suggesting to you and this logic, I went, “Wow, this might be a hoax. This might not really be the best thing.” Because let me give you a quick story. I had an old acquaintance call me up and this person had gone through a difficult financial circumstance. A divorce took place, and a financial division of assets had to take place and it was quite distressing.
The financial obligations were piling up, causing some credit card debt. He asked me just for some guidance, like, “Help me see what I’m not seeing, basically. What can I do?” He had got behind on a payment on a credit card that had been used to cover medical bills. I said, “Well, what’s holding you back from doing that?”
“I don’t have much money in the bank because of this divorce.” “Okay, well, do you have some?” “I do have some.” “Okay, well, let’s not destroy your credit. Let’s at least get that minimum payment taken care of. Since you’re so low on the bank, what are some ways you could gain access to some funds?” “The house that I used to have is my ex’s and in the next three years or so, we’re going to have to split it up. We’re going to have to sell the house or we’re going to have to refinance the house to get equity out and share it, but I’ve got a lot of equity in it.”
“Okay, so unfortunately, that’s locked up. You no longer have control over it and it’s no longer liquid. Your uses are greatly limited and your emotional state is upset. You feel restricted about it. It’s a negative feeling. All the acronym, control, liquidity, use, and emotional state, they’re all negative. What about 401(k)? Have you been contributing to your company’s 401(k)?”
“Yeah, I’ve got something like $10,000 to $50,000, something like that. I don’t even know what it is.” “What are the options? You’re in a hardship. You might qualify for a hardship withdrawal, which would eliminate the 10% tax penalty, but you’ll still have to pay tax that you haven’t yet paid on it.” “That sucks.” “You at least could unlock some of the money through a hardship withdrawal, maybe take care of that credit card.”
That’s good news. Another thing is known as an in-service loan. Many companies with 401(k)s offer an in-service loan up to a certain maximum. That maximum is typically $50,000. Let’s say you’ve accumulated $100,000, the max you can get is $50,000. If you’ve accumulated $1 million, the max you can get on a loan is $50,000. If you only have $40,000, the max you can get is a percentage of that. It’s not going to be the full $40,000.
It’s going to be a lower percentage, and that’s determined by the company. I said, “We need to look into if you can get a loan, and for what length of time, and what the terms would be on that loan from your 401(k).” There’s limited liquidity. At least there’s some possible liquidity there to help bridge the gap between this frustrating time of a life crisis.
On the other hand, I’ve got somebody I’m working with, a very high-income earner, talking $400,000+ a year, and contributing the max to their 401(k). I asked him, “What are you doing that for?” He said, “I don’t really know what else to do.” This person has a whole life insurance policy with me. This person has a brokerage account that they’re using that’s not qualified. It’s a private brokerage account, putting money into to try to get some gains in the stock market. He’s got some kids going to college, and he needs to fund that. I’m like, “You’ve got a lot of surplus cashflow between yourself and your wife’s income. Where’s all that going?”
“Typically to my 401(k) and my savings and my brokerage.” “Of course, some’s going to my whole life policies.” I said, “Well, did you recognize that what you’re doing with the 401(k) is locking up liquidity? You said you want to own your own home. You said you want to buy some real estate or make some other investments, where you’re really limited when it’s in the 401(k).”
“I know, Wade, but I want to get the match.” I said, “Are they matching 100% of every dollar you put in or is it only a portion?” He said, “I think it’s only a portion.” “Why don’t you find out what that portion is and only go to that match and keep the rest of it liquid, pay the tax on it so you have full control over it? You can make whatever decision makes the most sense as you build it up. One of those decisions might be helping more with kids’ education. One of those might be making the investment in their own property.”
Other Options
Control, liquidity, use, and emotional state. As we talked that through for him, it was like increasing the positive emotions about it because there were more options. There was a better understanding of these things. Again, summarizing things here, we have the qualified plans that are really familiar to us. Most of us do it mostly because others do it. We’re not really asking the question, “Is this right for me? Is the timing right for me to do this?”
Am I okay with the partnership that I’m getting into with the IRS? Am I okay with the limitations on the investments that I’m allowed to make? Am I okay being in the stock market as the primary thing I can invest in that’s highly speculative and highly volatile? Would I prefer to have more control? Would I prefer to have some money in the bank that I can deal with in a crisis? Would I prefer to have more control over the use and liquidity of my money? Thereby, we might consider private brokerage accounts. We might consider whole life insurance as an alternative.
It’s not to say you shouldn’t do one or the other. They actually are very coordinated. When we use protective assets like whole life insurance, whole life insurance is something you have to qualify for. You can’t just buy it off the street. That’s part of the reason why people don’t buy it as often because there is a qualification process and some don’t qualify. There’s a guarantee of protection. It’s like owning a house when you buy whole life insurance. It’s an asset, it builds equity, called cash value.
If you remember that cash value from a prior podcast, I talked about Patrick Donohoe’s hierarchy of wealth. He talks about that in this book above my right shoulder, Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream, in chapter seven. I really like that framework. There’s this four-tier architecture or framework for organizing the risk of our assets. Tier one, the base tier, is cash and cash equivalents, which are bank savings, CDs, and whole life insurance. The very top is speculation, like cryptocurrency and the stock market. Our 401(k)s and IRAs typically fall into that spot. It’s speculative, and because it’s high risk, remember, risk is not a function of gain. It’s a function of loss.
Risk is not a function of gain. It’s a function of loss.
If there’s high risk, that means there’s a high chance of loss with a low chance of a high return. They’re not equal to each other. High risk does not equal high return. High risk equals a low chance of a high return and a high chance of loss. If we’re putting money in the stock market, and that’s where we’re putting most of our money, not only have we deferred our taxes, we’ve locked it away until age 59 and a half, and we have virtually no liquidity. Versus whole life insurance, which is at the base tier, has 100% liquidity. You have any choice or use you want. You have full control over what you do with that money.
You could cancel it, you could add more to it, depending on the circumstance. I like it personally. I’ve had it since 2014, my first whole life insurance policy that I set up. I’ve been funding it ever since as much as I possibly can, because I prefer to store my money there versus in a typical bank, because if I have it in the bank, it’s taxable.
Of course, I keep some there. I keep enough for my emergency fund, like 2 to 3 months’ worth of living expenses, a minimum of one month, but typically 2 to 3. Anything above that that’s not needed for an emergency or planned maintenance for my house or my yard or taking a trip with my family, everything else goes to my whole life insurance policies. There, I’m earning the equivalent of 5% to 7%, if it were a taxable savings account. I’m netting out about four and a half to five and a half, depending on the company and the policy that I have.
That’s a pretty decent earning rate, but it’s not sexy, is it? That’s some of the discouragement people have about whole life. It’s not sexy. It doesn’t have that possible 20%, 50%, or 100% return like an investment does. Oftentimes, they’re pitted against each other as though you should only do one or the other.
The fact is, we need the economic principle of investment gains. We need to have some risk-based things that have the potential for higher returns, but we also need the stabilizing factor of whole life insurance and cash equivalents that give us confidence and certainty that if something goes bad. If we have a financial crisis like a divorce or a job loss, we have a backup plan. We have some cash to work through that difficult time.
I mentioned that in a prior episode where this client of mine had been heavily paying down a loan, a mortgage, and that you lose liquidity when you pay down a mortgage. You don’t have access to it anymore. I said, “Hold off a second. You’re a business owner. We probably ought to make sure you have more liquidity.” He did that, and this past two quarters of this year, it was rough. The collections were really rough, and so having that liquidity was a big deal.
Rethinking Retirement Plans
Retirement plans, do you have to use a 401(k) or an IRA? Absolutely not. You can just do it in a private brokerage account, for that matter. You can put it in a bank savings account and use CDs. The point is not that you’re using a quote-unquote retirement account. The point is that you’re specifically allocating a portion of your money that’s set aside for the purpose of long-term savings, which can support you in a successful retirement.
As you have liquidity, opportunities will come to you. As you have liquidity, you’ll be able to make a decision on, “Do I want to own real estate?” Maybe I want to have assets like rental real estate properties as an income source for retirement. Maybe I want to play in the cryptocurrency market, take a tiny portion, and see if I can have a big gain.
In fact, one of my clients put $200 in, and a few months later, it was worth $20,000. Those things exist, but they’re very rare, and so if you want to play a little bit, set a little bit aside for that purpose, and you might see some big gains. Sound investing, as I mentioned in a prior episode, is about doing things with wisdom and order, looking at things that are sound and that work consistently, and being mindful to avoid the risks of speculation with large sums but focus on things that have stability. Own businesses that consistently produce value that everyone always needs. Own real estate. Own your own home. Use whole life insurance cash value. Use bank savings accounts.
Be very careful with the investments you choose in brokerage accounts, like ETFs, mutual funds, or stocks. 401(k)s, maybe get the match to maximize your compensation, but minimize the risk associated with it by not putting too much in there. Recognize the rules that govern these different types of plans, and be willing to ask questions, guys. Don’t just go with the flow. Ask the historical question, where did this come from? Does it make sense for me? What will be my best vehicle to get the outcome that I desire?
You guys have maybe never asked that question very deeply. What is it that I actually want? What is the vision for my future, and then what are the ways I can accomplish that? That’s my invitation to you guys. Take a closer look at your retirement plans. Ask questions. If you want to have a consultation, reach out to me. I’d be happy to consult with you and see what shifts can be made to enhance what you’re doing and make it more cohesive and unified instead of being at odds with one another.
How do we make it most effective? How do we optimize for our future retirement? I wish you guys to have a wonderful day. I love you guys. Thanks for reading, and please let me know in the comments. Please leave me a review. If you’re liking this, shoot me a note through my email service and let me know what you’d like me talk about in a future episode. If there are any guests you’d like me to have on, I’m preparing to do some guests, by the way.
I’ve had to brain-dump the past few episodes and make sure I get some of the key things off my mind that needed to be there. I do plan to have some guests. I plan to do some case studies with existing clients and let you learn them directly how things work when you coach and get things done in the proper order, and some of the challenges that come up and how they’ve been overcome. I really want to hear from you. Please reach out. Let me know on Facebook, my Facebook page, my Instagram page, my LinkedIn page, or reach out to me directly and let me know what you think of this. I can’t wait to share some more insights and nuggets with you. Take care.
Episode Resources
- Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream
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