What Money is Really Safe?

April 20, 2023

Episode Transcript

Welcome to EWA’s Finlyt podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. In today’s podcast episode, Jamison and I are going to talk about what money is safe and what exactly does safety mean?

I think there’s a lot of misconceptions out there with the bank failure and potentially other banks, balance sheets and management styles coming under question under the microscope. So today we’re talking about specifically to our clients and all listeners on what is safe and what is safe of your balance sheet is technically safe.

And even for safe money has certain risks to it. So we’re gonna really go into a deep dive here of what are all risks on the table and what is safety really mean? So Jamison, first let’s just talk really briefly on the banks, the failure and what that means to our clients moving forward.

Yeah, I think just the timing of this is really important based on the headlines with the bank and fairs and everything. And I think every, especially high net worth individuals, but most people want some sort of liquidity at all times, meaning no matter what situation, then they want something that they could access, no matter what’s going on in the market.

So having something there is really important, but recent headlines, high level review, there’s been a couple of bank runs which totally normal has happened a bunch of times in history, but basically with rising interest rates, high level banks have to have a portion of their assets backed by cash or cash equivalents or something that is safe because just conceptually banks, if you put money into a check and count, they then turn around.

and lend that out in a mortgage, for example. So if everything’s lent out and everybody comes to the bank and wants their money back, that’s what causes a bank run if they don’t have liquidity. So with rising interest rates, some of these, the banking failures, they had treasuries, which we’ll hit on in great detail, which are safe, that were a low interest rate.

And as interest rates rose, people came to get their money out of the bank and they would have had to sell all the treasuries at a discount because new treasuries were being purchased at a much higher interest rate.

Let’s simplify this really quickly for listeners. So if I, Matt bought, let’s say, $100 ,000 of treasuries last year, and I did that, it was a five year treasury for 2%. And then let’s say Jameson this year has $100 ,000 of cash.

And he’s going to buy treasuries. Right now he could buy a treasury close to paying, you know, four and a half to 5%. So the question is, well, if I need my money today and I’m one year into a five year treasury, four years left to go, if I have the bandwidth, the flexibility to stay in my treasury for all five years, I’m not losing any money, but I’m only getting paid 2%.

Jameson, if he has the opportunity to buy a four and a half percent treasury and I try to sell him my 2%, there’s no way he’s gonna buy it. So what would need to happen? He would offer me a discount to make up for the difference in the yield.

And that’s exactly what happened to the banks. The bank’s got, Silicon Valley, for example, they purchased a ton billions of dollars of treasures paying under 2%. And that’s a very safe investment, but if the bank doesn’t have the flexibility to see that duration, that maturity come to fruition, and people come and try to get their money now, the bank would have to go out when they did.

They sold those at a big loss, which of what is the safest investment, one of the safest investments that exists as treasury? If held for the duration. If held for the duration, ended up being what caused the failure ultimately?

And then so, yeah, high level total mismanagement, but then at the same time, just to put in the perspective, their assets are like 200 billion and 80 billion, almost half was in these low interest treasuries.

They also work with primarily tech startups. So we think about what happened at last is going on right now in tech. It’s really hard to get funding. Obviously like tech industry has suffered. So companies are tech companies that can’t get funding from VCs or private equity.

They have to use bank cash as in the bank. And so when all of these companies are now drawn on the cash and they have half of their assets locked up in low interest treasuries, it’s impossible to come up with everything with high level, basically what happened.

Okay, perfect. So let’s talk about what is safe and then what risks. So let’s just talk about cash first. So let’s talk about banks. So James, what are the limits? Explain what is FDIC, what is the limits?

And if a client… had a million dollars in a bank account, is that safe or how would they make that safe? So FDIC insurance basically backs, it is insurance that backs depositors in banks, but it’s only up to $250 ,000.

So you could have 10 different accounts at 10 different banks and you get $250 each time. If you have $1 million in one bank account, only $250 ,000 is covered. What that means is just like Silicon Valley Bank, what happened if that bank totally went under, they got bailed out, not by the government, but by FDIC back the depositors, but if that bank totally went bankrupt, only $250 ,000 of that $1 million is safe hypothetically.

So right off of that, cash in the bank is technically safe from a principal as long as you have $250 per registration. So that could be $250 ,000 I could have in a checking account, $250 ,000 in a savings account.

I could have a, you know, if you’re married, you can have a joint name and 250 and 250 in each spouse’s name. So it’s per type of account as well. And so one work around this, you know, cause we have some clients that have, they’re sitting on millions of dollars of cash.

What we recommend it is open up a brokerage account. And if you want that FDIC insurance, just purchase CDs with different banks inside the brokerage accounts. That way, you know, you’re not physically going to a different bank.

You can open up one brokerage account, let’s say a Fidelity, and then purchase 10 CDs, 250 each, two and a half million bucks, boom. Immediately that money is safe from a principal and a FDIC. If each, any one of those banks fails, the technically the money is safe.

So when we talk about cash though, a lot of people think, okay, it’s safe. Like I’m not going to lose my principal. We also have to think about liquidity risk, which cash does not have, but then also inflation.

So on a high level of inflation, you know, let’s just say over the next 50 years, averages to be 3% and banks pay you 1%. I’m just making this up. You’re technically losing 2% a year. And if a money, historically money loses its value every 20 years by half.

So meaning something that a cheeseburger that cost $1 now, you’re going to need $2, 20 years from now to purchase the same cheeseburger. So technically if you keep money in a bank at 250 and spread it all across, the money is safe.

You’re not going to see it go down, but you’re actually losing a substantial, you’re almost losing half of your money every 20 years, if that’s what you do. So we do recommend that clients keep some safety net, but we generally recommend from a cash, pure cash perspective, no more than, you know, depending on the client, the cash flow and what they have going on, no more than three to six months of actual expenses in cash.

Most of our clients have years of money that is liquid, but we’ll talk about other ways to make that happen. I just first want to talk about cash. It’s safe from one perspective, but it’s not safe from a loss.

of a purchase in the power of long term. Yeah, no, that’s totally agreed. Can you elaborate a little bit more on, so let’s just fundamentally talk about the difference between holding money in a bank and then like a custodian, a brokerage account and the SIPC insurance?

Absolutely, yeah, so the, so what are the limits on SPIC? So FDIC covers banks and then if you like, so for example, we use Fidelity WA, I personally, EWA manages my money, it’s all a Fidelity, right, so, and we have Charles Schwab as well, a new custodian that we’ve introduced.

So both of these are huge custodians, you know, Fidelity is $8 trillion of assets and so if I have my money there, let’s talk about what’s safe, SPIC, what does that cover from a cash perspective, from an investment perspective, and let’s just go catastrophic, like what if Fidelity goes under, what kind of protection do they have for our clients?

So, SIPC covers the same 250 of cash and then an additional 500 ,000 of securities. So most, brokerage firms custodians will ensure 750 ,000 fidelity. However, they are insured through woods of London on top of that.

And so they will ensure up to a billion dollars per client. So 1 .9 million of cash that 250 pumps up to 1 .9 and then total security is up to a billion. So if they go under, they have an insurance policy that kicks in and pays up to 1 billion dollars to each client to make them whole.

Yeah. And so a couple of things on that. Fidelity is now over 10 trillion dollars of assets. And so if fidelity goes down, personal opinion, there’s gonna be bigger circumstances to worry about. Yeah, that’s like absolute doomsday worst case scenario.

So let’s talk for a second about, so we’ve talked, we’ve covered cash in the bank and we’ve covered cash, you know, at a brokerage house that that’s SBIC insured. So higher level of protection, if you’re with a brokerage house that’s purchased that additional insurance, you mentioned 1 .9 million.

Fidelity, I believe Charles Schwab is the same thing as 1 .9. What are they? You know that, I fanned? We’ll put that in the show notes. I know they have excess insurance. I’m not sure how much. Okay, so, you know, cash, there’s no difference between cash in a bank or cash fidelity, assuming you’re under those limits.

So then let’s talk about, we’ve covered the inflation risk. So let’s talk about, you know, what do banks, I’ve heard that when you give a dollar and a checking account to a bank, the bank is doing up to seven different things with that money.

So for example, they’re, they’re lending that money out to your neighbor for their mortgage, they’re using that money to purchase treasuries, they’re doing all other sorts of creative ways to get the, you know, the money working for them, they’re paying you maybe 1% and they’re probably making six or 7% on that, on that money, hypothetically.

So in light of what just happened, and with interest rates growing up, If you want your money to be safe from an institutional level, we’ve talked about the FDIC, we’ve talked about the SPIC, we’ve talked about brokerage accounts that ensure higher levels.

But why not just remove the middleman and just go purchase the treasuries yourself? I mean, you can get a three month, two year treasury paying above 4% right now. If you have $1 .9 million, you want to have cash, just go purchase the treasuries.

Because one, it’s guaranteed from the custodian from the brokerage level. And then it’s also, I mean, there’s nothing safer than the United States government, the US Treasury bills themselves. So if you want to know what’s safe that you can cover as many risks as possible from an inflation and the actual, like the ships falling down, the Treasury bills would be the answer.

Yeah, I would say that’s like any liquidity needs. So if you know you’re not going to need the money, long time, put it in the generally invest it. get it in the stock market. We know we’re buying stocks at a discount.

We know it’s going to go up over time. Treasuries are great. We’ve helped a lot of clients with any short term liquidity needs in the next five years, we’ll say, because you have to pick that duration of three, five year treasury.

And so that time period makes a ton of sense. Put it in treasuries, getting a very high rate of return rate now, given interest rates. And it’s going to outperform cash all day. Absolutely. So OK, now let’s move into then some other, you know, generally speaking, I would say our clients, we actually looked this up before the podcast, but clients that we invest their money on at.

Now we work with young physicians. We work with retired physicians, retirees, executives, all across the map. But if you just look at the average portfolio that we manage, it’s about 80% equity, 20% fixed income.

So a lot of our clients are committed to being long term equity investors. This is our belief is how you can save time and true wealth is created, because equities are very volatile in short term. But we would never recommend a client put short term needs and equities.

You should never have money in the stock market if your time frame is under five years. So if the assumptions are you’re building long term wealth, you have short term equity needs taken care of. We don’t need to be talking about cash.

We don’t need to talk about treasure. You should be diversified and inequities with every dollar above those safety net figures. And so with that, again, the custodian comes into play. The SPIC comes into play technically up to $1 billion that fidelity will be covered as an individual client.

So then there is the risk of the volatility in the short term, there’s a risk of loss. But that loss is only a loss if you realize that loss. And if you have a good financial plan in place, and you’re never in the position where you have to sell something at a loss, and your time horizon is on your, there’s a strong probability that equities long term equity needs to be term will be your safest bet from an inflation reduction strategy, equities of consistently outpace inflation.

And then also from a liquidity standpoint, the majority of our clients have line of credits attached to the non qualified investment. So if you have a million dollars in a taxable brokerage account backed up by the SPIC, a lot of banks or we use Goldman Saxes, one example will give you half of that money back in liquidity right away.

And so that means if you’re a client with a million dollars invested in the markets going down like it did in 2022, you don’t have to worry about paying taxes if liquidity concerned, you don’t have to worry about market timing, you can borrow the money from Goldman Sachs.

Goldman Sachs knows if you go bankrupt personally, they have collateral on that account. But that strategy allows you to keep your investments long term, never touch them, never worry about taxes, never worry about market timing.

And then on a bad year, or if you have a liquidity need, you still have access to the money without actually disrupting the portfolio. So we do recommend address cash needs, any purchases in the next five years having cash, address your emergency fund needs, address your peace of mind philosophically.

What do you need that’s safe just so you can sleep at night and then anything above that, let’s get it working long -term now, pace inflation, but let’s also keep it available. Let’s keep it liquid by having that security line of credit.

That does not cost anyone anything unless they actually use the money. Then they’re paying interest until the loans paid off, but they can just do interest only. But that’s avoiding taxes, avoiding market timing, and usually it’s a short -term need.

They’re popping money out and then putting it right back in. Yeah, no, I couldn’t agree more. I think that’s very well explained. And then just tie a bell on it like we always tell clients, bonds, cash, anything short -term is for financial planning purposes, meaning if you want to, kids going to college in the next five years have your bonds, and intentionally that it’s there, have your cash, whatever we decide on.

The other thing with the line of credit, I think what’s really important about that too, is it makes a ton of sense when you have high -income earners that there’s never any question that money’s coming in that could pay that off.

It just immediate liquidity solves a problem without having to sell any equities at a loss or realizing any capital gains. Absolutely. Let’s delve into more in a financial planning standpoint. Interest rate risk is a huge thing if you’re in the distribution phase.

Traditionally, if you’re a retiree in a 60 -40 portfolio, 60% equities, 40% fixed income. What happened in 2022 is equities went down 20%, and bonds also went down 10% to 15% as well. Because what happened, again, your bonds, you weren’t losing money if you could see the duration, but you saw the portfolio decline because if you had to look into those bonds that year, the purchaser of that bond would be accepting a lower rate from you than they could get on the marketplace.

said there would be a loss of a principle at that point. So typically we recommend a retiree, just an example. If you need 100 a year of income and 50 ,000 is coming from Social Security between you and your spouse, the other 50 needs to be taken out of a portfolio.

We’d recommend a seven year backup. So seven times 50 ,000 is safe. So if you’re a million dollar portfolio and you’re retired and you need 50 a year coming out, we’d recommend 350 of that be safe. And then 650 of it could be inequities because there’s no time historically and history doesn’t prove anything for the future, but it’s a good way to plan financially.

There’s no time where the market’s equities from a diversified perspective would have gone down taking that long to come back up. So you could have distributed the safe money and let the equities recover in the worst case scenario.

But what 2022 shows us is that safe money can’t just be in bonds because bonds have interest rate risk. So typically our retirees, we recommend have… you know, a 12 month liquidity plan. Um, but then cash value inside of insurance contracts has actually become extremely useful because this type of safe money does not have interest rate risk.

So for a retiree right now in 2022, if all they had was, uh, bonds, that would be a mistake because they would have had to sell those bonds at a loss in 2022. But if they had some cash or very short -term bonds or cash value in the insurance, that would have really saved the day and then those intermediate bond durations could have been held to maturity.

So then again, the goal of any money in this award and profit code is never lose money, but you need to have a financial plan that puts yourself in the position to never lose money. And so we need to have, think about where’s our safe money?

What is the liquidity? What are all these ramifications that come into play? So I mean, ideally if I were to pick and choose a retired client, what are the, what makes up the seven years? You know, we’d want one to three years and a cash asset that’s has no interest rate risk and no principal risk.

And that would either be cash, cash with no duration attached or cash value inside of life insurance because you can, the insurance company lets you borrow that money and there’s no, there’s no ramifications of what interest rates are doing in there.

So typically out of seven years, one to three years and some, an instrument like that and the other four or five years in, in actual bonds, because that allows you to have two or three years of some of the bonds are maturing to not ever risk the interest rate coming into play, if that makes sense.

Okay, a couple of questions for you. That was all you were going to say. So 2022, one of the most unique years in equity and bond history, they both performed very poorly. And so generally if, if equities drop, bonds will work inversely and you can investors flee to the bonds that have held their value didn’t happen in 2022.

So that makes the importance of having these other weather, whether it’s treasuries, line of credit, cash value, all of these other avenues that just like really I don’t reiterate why those are so important.

And then the second thing, can you go into, I think it’s really important to understand, investing in a bond, what’s the difference between a government bond and a corporate bond? And then let’s just say, yeah, talk about the safety of a corporate bond, or the safety of a government bond versus if a corporation goes bankrupt, how safe is that corporate bond?

Yeah, no, absolutely. So let’s just say hypothetically, Apple or Verizon, you know, come to Walmart, they issue bonds, you have 100 ,000, you let them borrow your money. That’s what a bond is, you’re letting them borrow your money.

In return, they’re gonna say after, let’s say, two, five years, they put a duration to that, we’re gonna return your 100 grand. But while we have that money outstanding, we’re gonna pay you interest.

If that company goes bankrupt, bondholders have some top rights. They get paid out first before stockholders. So there’s a probability you’ll get your money back. There’s also a probability where things are really bad.

You don’t, everyone loses, but. a bond issued by the government that doesn’t have that risk. Right, it’s by the government. The government goes on to them, we have much bigger issues. America will still exist if no offense, if Verizon goes on there, for example.

It’ll be in trouble, because that means the economy is probably heading south, but yeah, the government obviously isn’t going anywhere. And just a quick to address, then a lot of people say, the government’s in so much debt, the American assets, so if we add up the amount of assets Americans have, it is over three times the amount of debt that the US owes to China.

So if you look at, I believe the debt’s crazy. It’s like over 30 trillion, I believe. Yeah, 30 something. The amount of assets individuals in America hold are over three, almost four times that amount.

So when you look at, is that an issue? Yeah, that’s not good, but in reality, there is a strong backing of individuals behind that, of the actual assets. So, okay, so philosophically, that brings us to what bonds are the best.

Typically, we’re looking at getting, we want our bonds to act as safe money, to allow our equities to be invested long -term and get us our returns. But depending on account, the municipal bonds are also by municipalities around the country, very attractive from a tax perspective, because they’re federally tax free.

So if you’re in a high income tax bracket, or in 5%, that 5% doesn’t get hit with federal tax. Depending on the state year in, if you’re investing in a different state, you could still pay state taxes.

If it’s a state year in, then generally they’re exempt of state taxes. But consult with your CPA, and we gotta look at each one individually in your situation, where you’re a resident of, to figure that out.

Federal, treasuries are taxable from a federal level. And corporate bonds are taxable at a federal and state level. So corporate bonds generally have to be, to pay the highest interest, to make up for the fact that they’re the most tax inefficient.

Treasuries are second because they’re just federal and then municipals are the best tax wise because federal is usually your highest tax bill and municipals avoid that federal tax. So there’s a tax ramification to figure out the returns.

So a corporate bond paying 5% may actually be worse than a municipal bond paying 4% because of the taxes. But then you also have to look at the safety of each one as well and generally speaking treasures are by far the safest and then corporates and munis following that as well.

So basically just to sum everything you said corporate bonds, little bit more risky but in return you get a higher rate of return taxed inefficiently and then municipal bonds, the difference is safer, lower rate of return tax free essentially.

Exactly. Okay, no that’s great. So then talk a little bit about… We read a pretty detailed research report on the standard deviation between stocks and bonds long -term. This is phenomenal. I’m going to take this back to you because you actually did a video on this two years ago.

So think about what’s safer. Stocks are bonds. As the general public, the general public is going to say bonds, which is true. But you need to put the context. You say, okay, which is safer this year?

It would be bonds. Which is safer in a five -year? It would be bonds. But when you say which is safer, stocks or bonds, if you have a 30 -year period, what do you think people would say? Probably say bonds, but actually it’s dramatically different.

Explain this to us. Yeah. Basically, if you think about it from a macro level, the stock market, if you’re diversified appropriately, is pretty predictable long -term. If you’re properly diversified, it’s going to go up over the longer the time horizon, the more you can say with a high probability that it’s going to increase in value.

S &P 500, if you reinvest the dividends over the last 100 years, has been north of 9%. Compounded rate of return. So rule of 72, your money would double every eight years. Again, if you are properly diversified, if you’re in the S &P 500 index fund, yes, a company that’s in the S &P 500 today may not be in the S &P 500 20 years from now, but if you’re properly diversified, whatever company slots in, you’re invested in.

So that risk is covered. Bonds, however, there’s so much interest rate risk and interest rates fluctuate so often that the long -term safety or standard deviation is higher in bonds versus equities, because it’s much less predictable over a long period of time, because nobody has any idea what interest rates are going to be 20 years from now.

Absolutely. So if you actually compare the return over, and we’ll put this video, the links in the show notes, If you look at the returns over trailing one, five, 10 years, and then look at the standard deviation.

So basically, the return is the return. The standard deviation is the risk. Stocks were riskier, higher returns, but also higher risk than bonds. But if you look at those longer time periods, stocks were highest returns by far, but also lower risk than bond.

Because if you have a 30 -year bond, the chance of interest rates fluctuating over those 30 years is crazy. If you need to go sell that bond within that 30 years, there’s a high risk of losing a lot of principal, or the high risk of there’s also upside of you selling it at a gain.

It just depends on where our interest rates are higher or lower when you purchase the bond. Whereas the stocks, and it’s pretty consistently, there’s going to be very scary. 2030, maybe 50% dips along the way.

But long term, the stock market rewards patient investors. And I love the quote. It’s a place where impatient investors transfer wealth to patient investors. So we’ll put that definitely in the show notes.

So let’s dive in the cash value of insurance companies. So first of all, there’s a type of, you know, there’s so much misinformation about life insurance out there. I think it’s very misunderstood. There’s a lot of just like, a lot of people don’t truly understand how this works.

Yeah, so we’re talking about, we’re not talking about like index universal, there’s a lot of like, and we’ll probably have episodes just on this, a lot of like extremely, I don’t know what, just use direct words, garbage products out there.

They’re designed to maximize profits of the company or the agent selling them. They’re not going to do the clients any good. So what we’re talking about right now is, you know, most listeners, especially if you’re just generally speaking, like under Roth IRA, when that’s married, fine, enjoying like under 200 ,000, let’s say, life insurance, you should just be buying term insurance and invest in the difference.

Very, very simple. But for if you’re a high net worth, you’re making over half a million, a million a year, or have a net worth of, you know, let’s say, north of $5 million, the life insurance can be a big, a state planning tool, a big safety tool, but it can also be a place where ultra high net worth people store cash because in a whole life insurance contract, specifically, the contracts have a guaranteed cash home.

And how this works is the company has to keep reserves in place to honor those reserves. So if you look at, you know, some of the biggest mutual companies out there, companies like Mass Mutual, Northwestern Mutual, New York Life, Guardian, these are monster companies, you know, billions and billions of dollars portfolio that existed for 100 years and they pay dividends every year.

They’re mutually held, not publicly held. And the cash value inside these contracts are literally guaranteed. So if they go bankrupt, like that cash has to go to you, but most likely a company like this wouldn’t go bankrupt, they would get bought out and the company buying them as part of the transaction, have to make the policy holders hold.

And so the nice thing about these contracts, again, not recommending them, just talking about the safety of them, is that every year when a dividend is paid, the dividends aren’t guaranteed, but when the dividends are paid, you have a guaranteed cash column and then a non -guaranteed, but the non -guaranteed column transfers to the guaranteed column every single year and invest.

And it’s one of the only asset classes that exist where it has the upside, but every year at vest, meaning if the market goes down 2022, by 20%, the cash in there doesn’t, it goes up. It can never go down.

And the other nice aspect of this from a financial planning perspective is that this is cash that historically net of expenses in the companies we just named has averaged net of expenses four or five percent, actual cash returns.

And so being able to get that and accumulate safe money, but also having it available to you, it will charge you interest if you take it. But it’s available without interest rate risk. Like you can go grab it.

If you have $100 ,000 in bonds in 2022 and you need $100 ,000, you’d only have $85 ,000 hypothetically if it’s a corporate bond. If I have $100 ,000 in insurance contract, I can go borrow that $100 ,000, wait for the market to recover, and then go pay it back, and then nothing’s changed.

Or you would have actually had to take a loss, in that example, I wouldn’t. That’s why this can be an important part of it. And it is a very safe asset just with how these insurance companies are regulated and also how they manage their balance sheets.

And one thing to look at is, there’s a reason why Warren Buffett, some of his most profitable holding companies, Berkshire Hathaway, are insurance companies. And if you think about a life insurance company, you want to look at a company that has a 100 -year track record of paying dividends.

You want to look at a company that has no debt on their balance sheet, just an amazing balance sheet, a safe balance sheet. You also want to look at the future block of business. If you think about an insurance company, what’s their risk?

Well, if all of their policyholders die the next day, that really is tough for them, because they have to pay all these death claims. But then if you think about an insurance company, if they’re also offering annuity contracts, which is the opposite, annuities pay until you die.

So if you’re an insurance company, and you’re offering annuities, ideally, you don’t want your clients to live that long. But if you’re offering life insurance, you want your clients to live forever, because then you’re delaying that big death benefit claim.

So if you have both of these books of business, you’re really diversifying your risk as an insurance company. And so most clients of an insurance company, they have multiple products. And so if you think about, well, if they die too soon, the insurance company is losing money by paying the death benefit.

They’re also gaining, because they can stop those annuity payments. So insurance companies are really set up. If you’re part of a mutual company and you’re investing your money there at 4% or 5% rate of returns, getting that on a tax deferred basis, and also with being able to access the money in the whole life insurance contract without insurance.

I can’t tell you from financial planning standpoint how key that is. If you’re comparing or looking at like Dave Ramsey or Susan Ormond, buy term and invest a difference, yeah, all day for most of the general population, I’m going to say like 90% of the population should never mess with this stuff.

They should be buying term insurance, investing the difference in Roth IRAs and letting the money grow. But if you’re a high net worth person that maxed out all the avenues, maxed out Roth IRAs, maxed out 401ks and just want safe money, this may be one option to put it in.

And most states is also asset protected. So if you’re a doctor getting sued, money in your bank can be looked at. This could be covered through umbrella policy planning and other stuff. But most states, the cash value in life insurance isn’t touchable if a creditor comes along.

That’s another important aspect as well. So Jameson, let’s wrap this up. A popular option is through this company called TIA. And they have this traditional thing that… is a guaranteed thing that they advertise, which it is guaranteed.

I want to talk about, and a lot of some clients have liked this, and whenever we call, and you know, clients are retiring, getting their money out, TIA always puts up a pretty substantial fight on the phone with clients.

I want to talk about what, let’s just talk about the pros and cons of this TIA traditional sense. First of all, tell us about TIA. I know you do a lot of research. What is TIA? What do they stand for?

And then let’s go specifically into this guaranteed product. So, yeah, I was on a call yesterday with a client. I’ve done this a hundred times. And so, it’s, yeah, for a high level TIA craft, it stands for, and I’m not saying this is good, bad, right or wrong, but just fundamentally, I truly did not know this when I started doing this.

It stands for teachers, insurance, and annuity association. So they are an insurance company. Their business model is insurance and annuities, meaning like they’re compensated based on their products of insurance and annuities.

So that’s awesome if you want to purchase an annuity. That’s their holy grail. That’s like their bread and butter. That’s great if you want to purchase an insurance or annuity product, but I think a lot of this gets disguised as like an investment and part of your investment strategy.

And as much as it very well could be, if you needed that, I found a lot of people have these products that absolutely do not need an annuity. They have a pension, so security, and let’s just fundamentally think about teachers, teachers, insurance, and annuity association, they have, most teachers have state pensions that are going to state of Pennsylvania.

They have state pensions, like why would they ever need an annuity on time? Maybe they do, but generally speaking, they probably don’t. So these contracts are, there’s a number, I was looking at this yesterday, I think there’s like six different options they have.

And we’re gonna look at one example, but. The pitch is it’s a lot of times these are within 403Bs. So let’s say you have a million bucks inside of a 403B that you’ve accumulated if you work for a hospital.

Yeah, let’s just say a hospital for example, because this is where I’ve seen a lot. So nothing, if you work at a hospital, you’re not a teacher. So you still have this Inhooty contract, but you have a million bucks in a 403B.

In 200 ,000 of it, you could not even know, but just based on the investments that are within that million dollars. I’d say 200 ,000 of it’s in one of these TIA traditional guaranteed funds is what’s called.

So if you don’t do your research, you’re gonna have no idea what that is, which is most people do. And so TIA will pitch it like, hey, this is a safe guaranteed asset, meaning you put this in, we’re guaranteeing, I have the fact sheet right here on one of these, like 10 year rate of return is 3 .37%.

So they’re saying, like, hey, this is safe, this is guaranteed, it is an Inhooty contract. And then you look into the five. Look down into the fine print the returns based on the five -year constant mature five -year Treasury rate less 125 basis points That’s how they’re coming up with you know, however they calculate annulator return Can I stop you right there?

Why not go purchase a five -year Treasury minus zero basis points? Yeah, Treasuries are free for anyone to purchase exactly and then the caveat of these things what what why we Why we don’t generally recommend is can I ask you this for before?

What is the main purpose of having safe money? There’s liquidity liquidity so you can use it when whenever you need it whenever you need it Can you use TIA money whenever you need it? It is beat it is depending on the contract.

I would just say majority of them they’re paid out over 10 years So I have a million dollars in a TI guaranteed thing and I need it There I’m gonna call them up and they’re gonna say we can give it to you over 10 years We’ll give you a hundred this year a hundred year two hundred year three So we’ve just literally it feels good.

It’s safe We’ve just defeated the purpose of having safe money at all It’s there when the market’s down like 2022 you need to be able to access it So what is the point? Yeah in my opinion? There is no point and again just being based upon five -year Treasury less 1 .25% you basically have a Treasury portfolio that your advisory is charging 1 .25% Which is Robert criminal in itself And I was on a call doing a roll over yesterday basically unwinding this the client even he had and They’re pitching they’re like hey, do you know do you have a spouse like this is gonna be if you pull this out You could lose the income for life like this guy’s like trying to pitch this on the phone It’s like well, he doesn’t need an annuity.

He has safe money elsewhere. Like we just we just fundamentally don’t need this Crazy. Yeah, but But so anyway, a lot of the safe products, do your research, make sure they’re safe. And then annuity contracts, we’ll probably do a whole other episode on that.

The annuity contracts, I mean annuities fundamentally in our opinion should absolutely not be used in the accumulation phase. They’re too expensive, you’re not participating in stock market upside. And if you’re in an annuity in the accumulation phase, not going to make a general recommendation, but most likely I would say, most cases we’ve seen you shouldn’t be in that.

And then potentially you could be in an annuity contract in the distribution phase. Haven’t seen a ton of situations where that even makes a ton of sense. Yeah, and I’ve seen very passionate about the annuities.

Yeah, and so annuities, like if it’s an actual, an annuity is meant to be a tool for a retiree to distribute income. And so we do have many clients that have income annuities, that have 20 year guarantees.

Thank you. They die their spouse gets it their spouse dies in 20 years But that is part of a financial plan to bridge the gap because these clients don’t have pensions They have social security. So this is just a bridge the gap So all their necessary expenses are covered The portfolio can cover the gaps of the rest and that allows them to be more aggressive equity investor as well So I think the whole context of this entire podcast episode is you know What’s safe factually and logically out there?

But more importantly is how do you use this information to formulate a financial plan that works for you and your family? Because we’ve seen so many balance sheets that clients are living their lives based upon what their balance sheet does And I think this is a catastrophe Every financial plan our humble opinion your money your balance sheet should be set up To support your life by design now next year three years from now when your kids are in college when you retire It’s just a simple tool.

It’s a support mechanism that’s supposed to take stress off your plate not add additional stress on to it and with the misinformation out there and what the purpose of this podcast is financial literacy Education power Information is power will allow you to make the best decisions for your financial plan to support your family and make sure that all of your goals are being met one thing to add just The I think I read the statistic that a over 60% of American households Say that finances are their number one stressor in their life.

And so I mean that’s very like people live their life based on What their balance sheets are not doing and we our goal is to? Reverse that you know give financial literacy back so people can live their life Make the decisions they want do the things they want and not worry about what their balance sheets do and there’s I would say there’s no easy button like even our clients we we focus so much on education because like We’re we’re we’re the CFO.

They’re the CEO. They obviously but if there’s not education They’re not, we can’t navigate them through a down market. They’re like, no, no, I want out. I want out. The big mistake could happen. So they’re, as a client, we do recommend you have to have some general knowledge based and financial literacy for the relationship with an advisor to be maximized because then you can orchestrate and truly delegate stress fee.

Cause if you have no idea what’s going on, you may have all the trust in the world with someone, but if you don’t understand it, you may even be more stressed and then not trust that person when you disagree and don’t understand something.

So our goal here is, you know, financial literacy is so key, but it’s just one part of the equation and starting relationship with an advisor that they can truly save time and help you live your best life.

Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial.

Thank you very much.

Show Full Transcript

Recommended Videos

5 Tips for Retirees- Tip 1- Tax Bracket Management
Surprising Lessons on Financial Returns, Risk, and Long-Term Planning
5 Tips for Retirees- Tip 5- Set After Retirement Goals
10 Tips for Maximizing Your Financial Plan in 2023: Tip 10-Standard Deduction
Differences Between Revocable and Irrevocable Trusts
EWA's Time Management Philosophies