In February I was supposed to present an evening discussion to local Salt Lake City docs with Garrett Gunderson, author of Killing Sacred Cows. It was set up as a bit of a debate, focusing on the differences in our investing philosophies. However, the presentation fell through due to lack of interest. I read his book anyway and had mixed feeling about it. Some parts were very good, many parts were simply low-yield, and others were, well, less than good. At any rate, there was certainly plenty in the book worth talking about.
Gunderson is an entrepreneur who, by selling insurance, achieved an income of $450K within 2 years of college graduation. What does that tell me? That tells me he is a very talented salesman and entrepreneur because most insurance agents and entrepreneurs I know never have that kind of income. It also means he likely has something worth knowing. It doesn't mean his method is reproducible for the masses, but there are likely lessons learned. It also means he is probably trying to sell me something in his book. That's okay, most books are.
The book is subtitled “Overcoming the Financial Myths that are Destroying your Prosperity.” Anytime I see a book with a title like that, the first thing I like to do is see, well, what are these myths. Often, the myths are a bit of a straw man, but I certainly love to see challenges to “conventional wisdom.” Here are Gunderson's myths, along with my comments on them:
Myth # 1 The Economic Pie is Finite
This one is a bit of a straw man. This is the whole Abundance vs Scarcity philosophy. Entrepreneurial types love this one. Insurance agents seem to as well. Anyone who doesn't agree with it is labeled as having a scarcity mentality. For example, if you didn't want to pay a 1% ER for a mutual fund because you know you are far more likely to have higher returns if you buy the 0.1% ER fund instead, you would be accused of focusing on price instead of value. It's a bit of a half truth. You certainly should focus on value. However, it is also true that you get (to keep) what you don't pay for. There's a great deal of value in that as well. Insurance agents love this argument- “Don't focus on the fact that 50-110% of your first year's whole life premium goes in my pocket, focus instead on how much money you'll have in cash value in 40 years!” An abundance mentality is wonderful and certainly helpful, but don't fall for the sales techniques often attached to it.
The one part about this chapter that I really did like, however, is when he points out that there are two ways to have more disposable income. You can either spend less (what he describes as the scarcity mentality) or you can make more (what he describes as the abundance mentality.) Both of them work, and too many people forget that sometimes it is easier to do one than the other.
Myth # 2 You're In It For The Long Haul
This chapter is one long diatribe in favor of an income approach to investing rather than a total market approach. I've written about this before. It isn't that income is bad, it's simply that if you focus on it at the expense of total return, you may end up doing some dumb things with your money. “Income guys” also seem to play down the ability to convert a high net worth into income. For example, if I have $500K in index funds that is kicking out $10K in income every year (but gaining 6% in capital gains in addition) I could convert it to something with a higher income relatively easily. There nothing keeping me from taking that $500K and buying an investment property with it that may pay out 6-8% in income with little capital gains.
The straw man in this argument is that anyone investing in stocks or retirement accounts is “postponing their dreams.” That's silly. There's no reason you can't live your financial and non-financial dreams, invest in stocks inside a retirement account, and invest in real estate (or even cash value life insurance) on the side. It's not an either-or. Meanwhile, people who mistakenly follow this philosophy may be passing up tax breaks worth hundreds of thousands of dollars to themselves or their heirs and avoiding an asset class with exceptionally good historical returns.
Some of what he writes in support of this philosophy is downright wrong. For example, this quote:
To my knowledge no strategy exists to avoid taxation on unused qualified plans at the time of a person's death. The investor's heirs are unable to access it without severe tax penalties.
I think it is unfortunate that he does not know of a strategy like this. But the fact that he doesn't does explain why he went through all the trouble to write a book. The technique is called a stretch IRA. He is so fearful of this massive tax coming that he refers readers frequently in the book to his site called The 401(k) Hoax. This is a good example of “The Retirement Tax Trap” so frequently used to sell people life insurance they don't need. If you're really worried that you're going to pay so much money in taxes in retirement due to using tax-deferred accounts, then use Roth IRAs, Roth 401(k)s, and do Roth conversions at every opportunity. Along the same line, I see lots of complaints about the Age 59 1/2 rule. There are so many exceptions to this rule, I barely worry about it at all.
Myth # 3 It's All About The Numbers
This chapter has a lot of low-yield fluff in it. He's basically saying worry about the quality of life and your happiness rather than the size of your nest egg. I agree with that. He uses an example where someone is so obsessed with not losing their nest egg that they won't spend any of it. I agree that's unhealthy. I don't, however, see it as a result of investing in stocks or using retirement accounts. If someone is having trouble spending their stash, moving the portfolio toward income investments may help them. For example, he could use a SPIA with a portion of his nest egg that would then give him “permission to spend” every month because there will be another check next month. Insurance agents love to focus on the “permission to spend” thing. I'll tell you what, I don't need to buy an insurance policy to give myself permission to spend. But if you do, then go ahead and do it.
In this chapter is an odd section where he gets a bit more specific than usual when he tells you how to deal with inflation, a serious opponent for any investor. He recommends:
- Having contingencies- Okay, so far so good. Seems wise, if vague.
- Maximize cash flow so you have a continual source of income. While cash flow isn't bad, it seems unwise to someone worried about inflation to have an investment whose return consists entirely of cash flow.
- Avoid planning a future of passive retirement. Okay, what he's saying here is keep working in retirement at something that you love that actually pays you well. That's great if you can get it, and is certainly a great ideal to chase. But I'm apparently too pessimistic when I consider that many people never find something they would do for free that pays them very well.
- Don't think 70% of your preretirement income is enough. Instead, seek to maximize it. I'll go one better. I think 25-50% is enough. What the heck am I going to spend a half million bucks a year on in retirement when I never did that before retirement? Do I have a scarcity mentality? I guess. Like Jack Bogle, I simply call it “Enough.”
- In a tough spot, consider spending down principal of assets in retirement. I don't need to be in a tough spot to do that, that's the plan. It's like he has never even heard of the Trinity study. My goal isn't to leave millions behind at death. I fully plan to spend most of what I don't spend today. And that's okay.
- Use charitable trusts. Okay, that's fine if you need them. Most people won't, but if the numbers work for your situation, go for it. They're a fine tool, but they're just that.
This chapter also contains some strange straw man arguments. Such as this one:
401(k)s seem to have a guaranteed rate of return. This is a fallacy. But we cannot see it as such unless we begin to think like economists and consider the unseen factors.
Uh….does anyone believe a 401(k) has a guaranteed rate of return? I suppose there are some people out there that think this, but that is such a low level of financial sophistication I don't think it's really worth addressing as a common myth or fallacy.
Myth # 4 Financial Security
Any chapter that starts out quoting Kiyosaki about his rich dad (who didn't actually exist) and his poor dad loses a lot of credibility in my book. However, truth be told I really liked this chapter. It describes a philosophical shift that many people could really use. Basically, find something you love to do and that you feel adds value to your life and that of the people around you. That is how you will be most successful rather than working at a job you hate and focusing too much attention on your investments. You are far more likely to end up wealthier by having a job you love than by becoming an investment expert. The reason why is you will work hard, you will work for a long time, and you will be paid well because you add so much value to the lives of others doing it. This philosophy is the best part of the book.
Myth # 5 Money is Power
This is another great philosophical chapter. A bit fluffy, perhaps, but certainly displays a mindset worth cultivating.
Myth # 6 High Risk = High Returns
This is a chapter full of truths but with an underlying current of distrust for stock investing and the use of retirement accounts. He says you should take responsibility for your investments, learn more about and understand your investments, invest don't gamble, the best investment is in yourself, be aware of your opportunity costs, and mitigate your risks. That's all good advice, but I just couldn't help but think I was getting set up to be sold permanent life insurance.
Myth # 7 Self-insurance
Oh, here it is. The sales pitch for whole life insurance. I knew it had to be here somewhere in a book written by someone who became wealthy selling it. I loved that he started the chapter using a quote from The Bogleheads Guide to Investing (an excellent primer on investing BTW) in order to display the myth- “The Cheapest Insurance is Self-Insurance.” I'm sorry Garrett, on this one I side with the Bogleheads. This entire chapter is like sitting across the table from a whole life insurance salesman whose kids will not eat anything tonight if you don't buy a policy. If you can't imagine what that feels like, read the 800 comments after this post.
I love the questionnaire accompanying the chapter that helps you decide what to insure and how much to buy. It includes these questions, “If you knew the event you were insuring against were going to occur tomorrow, how much insurance would you buy?” and “If there were no cost to this insurance, how much would you acquire?” Uh….as much as someone would sell me. Duh. But that question has little to do with how much a wise insurance purchaser would actually buy. At any rate, I've spent entirely too much of my life pointing out the fallacies used to sell whole life insurance. I don't need to do it again while reviewing this book.
Myth # 8 Avoid Debt Like The Plague
This is a good chapter. On the continuum from debt haters to the ridiculously overextended, Garrett definitely falls to the right of me. But that's okay. I understand that many times the right mathematical answer is to carry debt at good terms. The chapter has an excellent box entitled “How Producers (as opposed to Consumers) Get Out of Debt.” I think it's great.
Myth # 9 A Penny Saved Is A Penny Earned
I thought I'd hate this chapter. But I didn't. It was good. He emphasizes spending consciously with an eye toward value rather than price. No criticism here and if you're not familiar with this concept, this chapter is well worth your time.
The Final Chapter of Killing Sacred Cows – A Sales Pitch
In the final chapter, he sells his books, CDs, DVDs etc and sums up the rest of the book. About what you would expect from a book written by an entrepreneur. Nothing particularly bad or good there. Feel free to skip it.
The 401(k) Hoax
He includes an appendix at the end about why a 401(k) is a hoax. I see this argument from two types of people. The first is insurance agents. The second is real estate investors. Both don't seem to understand how 401(k)s work very well, and both are focused on somebody who anticipates having far higher taxable income in retirement than they do in their peak earnings years, something that is possible, but quite rare. What's Gunderson's beef with a 401(k)?
1) It doesn't give you cash every month (like real estate I suppose.) A straw man, of course. A 401(k) can give you cash every month just fine.
2) It's not liquid. Uh…okay. You can sell your mutual funds any day the market is open and pull the money out of the 401(k). Do you have to follow a few simple rules in exchange for this massive tax break? Sure. No big deal for most. If it is a big deal and you can't figure out an exception to the age 59 1/ rule, there's an extra 10% penalty. At any rate, it's far more liquid than Gunderson's apparently favored alternatives- permanent life insurance and real estate.
3) Market dependency. Yup, if a market goes down and you're invested in it, your investment goes down. That applies to stocks, bonds, real estate and other markets, whether you're investing directly in them with or without a 401(k) or whether an insurance company is doing it for you and paying you dividends based on how their portfolio performs. If you wish to insure against market volatility, that is likely to cost you more than you are willing to pay for it when you really understand the concept.
4) An employer match isn't a 100% return. Yes it is. Obviously it doesn't mean you will have a 100% return every year going forward. I wouldn't think that would need to be said. Not getting a 401(k) match is the equivalent of leaving part of your salary on the table. It's a rookie mistake if ever there was one.
5) Lack of Knowledge. Yes, many 401(k) investors don't know how their 401(k) works or what they're invested in. That's not a 401(k) issue. That's an investor issue.
6) Adminstrative Fees. Yes, many 401(k)s have terrible fees. They have to be REALLY bad in order for it to be worth passing up the 401(k), but since most people change jobs frequently, you're usually never stuck with a bad 401(k) for long. You can also lobby to change it. Or you can invest up to the match only and invest the rest in a Roth IRA.
7) Underutilization because of tax deferral. I suppose it is possible that some people refuse to spend their nest egg because they don't want to pay taxes on it. That isn't the 401(k)'s fault. That's just people being dumb, letting the tax tail wag the investment dog.
8) Higher tax brackets upon withdrawal. No wonder he hates these things. He thinks most people will pay higher tax rates upon pulling their money out of their 401(k). If I hadn't put money into my 401(k)s this year, that money would have been taxed at 39.6% + 5%. The likelihood of me pulling that money out in retirement at a higher effective tax rate than that seems awfully low to me. First I get to fill up the 0% bracket, then the 10%, then the 15%, then the 25%, then the 28% etc etc etc. I honestly don't think Mr. Gunderson understands this. He really does believe that most people will pay taxes at higher rates at withdrawal than they are saving at contribution. In my experience, savings rates and investment returns are generally so low that this is really a non-issue. If it's not going to be an issue for me saving 20-30% of my gross income and earning the best returns the market has to offer, how much of an issue can it be for someone saving 5-10% of their gross and investing in high ER funds or with an advisor? At any rate, even if you really expect to be in a higher bracket later, THERE'S ALWAYS ROTH- Roth 401(k), Roth IRAs, and Roth conversions. Does he even mention that stuff?
9) Estate taxes. Most doctors won't have an estate tax problem, much less the rest of America. The federal estate tax exemption is currently $5.43M ($10.68M married) and indexed to inflation. Most states, including the one I share with Mr. Gunderson, don't have a state estate or inheritance tax.
10) No Exit Strategy. Straw man. I have an exit strategy. It's called withdrawals. What I don't spend will be either given to charity or become a stretch IRA for my heirs.
11) Subject to government change. Yup, 401(k)s are subject to government regulation and change. Just like IRAs, real estate tax law, insurance policy tax law, and the draft. Hardly a reason to avoid using a 401(k).
12) Golden handcuffs. I guess if your match is so good that you're willing to stay at a job that you hate because of it, then this could be a criticism of a 401(k). I don't happen to know anyone with a match that good (I've never actually had a match ever), but I suppose it could exist somewhere.
13) Disinvesting. He briefly discusses Sequence of Returns risk, as if that's unique to 401(k)s for some reason. Even if it was, you can always roll the 401(k) to an IRA and buy a SPIA with it. Voila- no sequence of returns risk.
14) No holistic plan. I agree, many investors don't have a plan. Not the 401(k)'s fault.
15) Neglect of stewardship. If the fact that your employer offers a 401(k) makes you abdicate your responsibility to learn about investing, then I suppose that is a bad thing. Seems like a weak argument to me though.
Gunderson asks, “Is that enough or shall I continue?” Well, my answer is that he should have continued because he hasn't provided a single decent reason I can see to avoid using a 401(k) as part of your financial plan. Are there issues? Sure. But to pretend it is a “hoax” is a scare tactic that is likely to cause the uninformed reader to leave thousands of dollars of salary on the table and throw away the benefits of decades of tax-protected growth. The book reminded me a lot of a book called Missed Fortune, written by another local insurance fan, Douglas Andrew, that I wrote up extensively some time ago. I wasn't surprised to see that the two authors work together with such investing “authorities” as Pamela Yellen (of Bank on Yourself fame) selling expensive (only $25K/year!) “Genius Network” seminars to teach you all about money. Andrew's philosophy, which Gunderson seems to agree with, is to pull all your money out of your 401(k), suck out as much equity of as many properties as you can get your hands on, and “invest” it in permanent life insurance. While I'm all for taking a careful look at conventional wisdom, there is a reason such conventions as “Max out your 401(k),” “Buy term and invest the difference,” and “pay off your mortgage” exist, and it isn't simply stupidity or tradition.
Review of Killing Sacred Cows
All in the book is a reasonable read. I absolutely think he makes excellent points about being an entrepreneur and spending your life doing that which will make you happiest. However, his insurance agent sales training shines through, especially when he embarks on a Quixotian crusade against the 401(k). That combined with the relatively low yield of large sections of the book will keep it off my recommended reading list. But if you' want look at alternative philosophies to Bogleheadism, it isn't a bad place to start. Just don't give up your 401(k) match in order to go buy some whole life insurance. And for heaven's sake don't pay $25K to join the Genius Network. You can buy Killing Sacred Cows on Amazon here. Mine was $3.99 plus shipping.
Have you read the book? What did you think? Comment below!