Episode 142 – Retirement [7/7 Series Pt. 1] with Andy Tanner

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to the WealthAbility Show where we're always discovering how to make way more money and pay way less tax. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility. So the day's going to come when we're going to want to retire. We're going to want to not be working all the time. And the question is, how do we get there? Do we get there through that standard retirement plan, 401(k) pension plan or do we do something else? So today I have a very special guest, my very close friend, Andy Tanner, who is really an expert on both sides of this which is why I wanted Andy to come on because he's written a book, 401(k)aos, on the negative side of the qualified plan, and of course, if you read my book, the Win-Win Wealth Strategy, you see that from a tax standpoint there is some actual benefit to a qualified plan, although there are severe limitations which we're going to talk about today. So Andy, welcome to the show.

Andy Tanner:

Tom, it is just wonderful to spend time with you. I think people should know I have a huge bias towards my friend Tom Wheelwright. We've known each other for many, many years. Our families are very close friends and my sons idolize you. So we not only-

Tom Wheelwright:

That's because they're looking for A student that they can actually-

Andy Tanner:

Yeah, I'll tell you, they need someone better than their dad to lead the way, an example. But seriously, Tom, people should know also, I don't know if I should display it Tom, Tom also does my taxes so we know each other intimately well and we've traveled the world together. It's just great to be with you Tom. So thanks for the invitation.

Tom Wheelwright:

No, thank you. So just a little bit of your background, how'd you get into, because your book is Stock Market Cash Flow and 401(k)aos, and how'd you get into, because my recollection is you're a professional speaker, so that's how I think, you're an educator. How'd you get into the stock market and that whole-

Andy Tanner:

Yeah. Well, I will tell you, I didn't start out to be a teacher because I was beating Warren Buffet in an investing contest when I started. I'll tell you that right now. I think usually the place I start is college. I went to college because I'm tall, can't jump, can't shoot, but I could foul, so they put me on the team in basketball and as I academically, you have A, accounting, B, biology, all the way to zoology, never found anything that I was passionate about, just wasn't interested in those academic prospects. So when that was all over, I fell into sales. I'm pretty good with people, I guess. In the 90s, the internet online trading, I was selling software that would help people trade and that was first introduction stock so this is pretty cool. And then as luck would have it, got to know our mutual friend Robert and I spent 14 years traveling with him as a [inaudible 00:03:23] advisor.

Then my wife fell ill and my kids are in high school so now I stay home and I teach from here, my home office all around the world. That's the beautiful thing about the internet, and really I just have an attitude of gratitude every single morning, and we love trading stocks and you're right, I did write a book that was extremely critical of 401(k), so I'll say that I'm a little biased. I do agree with you though. By the way, the section on your latest book on 401(k)s is wonderful, especially from, I loved your book from a data standpoint. You really brought the numbers in this one and just said, “Look, here's the math. Hard to argue with the numbers.” So while I'm critical of 401(k)s, I acknowledge that there are circumstances if a person's got a highly paid employee and they don't want to learn to invest, but there's also some, I think people, even those guys could do better though. So we'll talk about maybe the qualified plans, non-qualified plans and I'll give my advice.

Tom Wheelwright:

All right. So let's get into it. Let's start early. Okay. So you're 30 years old, 20 years old, 40 years old, doesn't matter where you are, you might be 60 years old and you're going, “Okay, I would like to actually not have to work till I die.” Okay? I mean, I might want to work till I die. My dad worked till he was 88, but he didn't have to. He did it because he enjoyed it. And we don't want to have to work till we're 88. We'd like to be able to do other things and have the money to do that. So when we talk about the very first thing that we start with, seems to me like we ought to start with a target as to really what are we shooting for? Because as you talk about in 401(k)aos, there are different ways to retire, right? There are different levels of retirement.

Can you just talk a little bit about that? Because one of the questions I ask frequently on stage, and I think you probably do too, is how many of you want to retire rich and how many of you want to retire poor? And I've yet to have anybody that actually raised their hand, they wanted to retire poor, and yet their retirement strategy seems to be focused on retiring poor. So give us some of your, just the big picture of what you've got to look at when you're looking at that target.

Andy Tanner:

Yeah, you and I think, I hate to be in an echo chamber, but you and I think exactly, I mean precisely the same way. And I know that Stephen Covey in his book Seven Habits said one of the habits is to begin with the end in mind. And one of the things that I think has to be established before we make a blueprint or retirement in our pathway is exactly what you said. Where do you want to be and what level do you want to be at? One of the questions that drives me crazy that I get all the time is people will say, “Well, is this a good investment or is that a good investment?” That's like asking me what I think about a lawnmower or a dishwasher. We need to know the task at hand. So for example, if you were to look at investments as a vehicle, as a place to take you to that promised land and you say, “Andy, is a car a good vehicle?” I say, “Well, if you're going to the grocery store, probably, but if you want to go from Los Angeles to Hawaii, it's a non-starter.”

So when people say, “Is this a good investment vehicle?” I really need to know two things first. What rates of return are you requiring to be able to get to the promised land? And then do you have an education that allows you, do you have an education that matches the sophistication of the investments and the risks that you're managing? So in my opinion, if you want to go to Hawaii, that's like trying to go from… A 401(k), to me, if you want to go to the city park on your bicycle, that's wonderful. It's just wonderful. Get on your little 401(k) bicycle and go to the park. If you want to go from Los Angeles to Hawaii, a 401(k)'s like trying to ride a bicycle to Hawaii.

Tom Wheelwright:

I like it.

Andy Tanner:

So I think you hit it on the head, Tom. You and I both, when we work with people, say, “Well, what's your dream? What do you want? How big?” And then we can have a financial statement that we can look at today. This is what my wife and I do every Sunday. We say, “Where's our financial statement today?” And then we have a financial statement that represent our future. How do we build that bridge?

Tom Wheelwright:

Yeah. So I'm actually going to show this on my screen, Andy, realizing that some people are not going to be able to see this, but you can always go to our YouTube channel to see it. But I look at this, I like to make it pretty simple and so I draw simple drawings mostly because I can't draw. And to me, if here's where you are today, okay, so you just say, all right, whatever today is, doesn't matter what today is, here's today. And then on the other end of the spectrum, there's my dream. All right? So this is my dream. This is where I'd like to be. Well, I have to do a couple of things first of all. This is why your accountant, frankly, is so important because the first thing I have to do, I'm going, I have to know what that means in terms of dollars today.

So what do I have available to myself today to be investing in order to get to my dream, which also has to be in dollars. This is why you talk about the two financial statements, right? What's my today financial statement and what's my tomorrow financial statement? And that's really what we're talking about. Then I need two more pieces of data, and the first thing I need is time.

Andy Tanner:

There you go.

Tom Wheelwright:

What's the timeframe for this? And here's the great thing. So I have a degree in accounting, not finance, but I did take that finance class, Andy, and this is simply a very simple formula called a present value formula. If you know the numbers today and you know where you want to get to tomorrow and you know the amount of time, you can solve for what Andy's talking about, return on investment.

Andy Tanner:

There you go.

Tom Wheelwright:

What return on investment do I need in order to accomplish where I want to go? So it's really actually pretty simple when you put it into those terms. You're going to need some team members as we talk about all the time, Andy, one of them being your bookkeeper, one of them being your accountant, some other people. But really if you just put it in that simple framework, because your ROI, now you can determine, all right, what's the vehicle, right, Andy?

Andy Tanner:

Yeah.

Tom Wheelwright:

Because if your ROI is 4%, you can get 4% right now in a treasury note. You can get 4%. So you can do 4% pretty easily risk-free. If your number, I have a client we're working with on this Andy, and their number is 29%. I'm going, “You can't do that.” A, I don't know how you can ever get to 29% in a 401(k). I think that would be really challenging. I don't think you can get there, you certainly can't get there in general stocks, bonds and mutual funds. If you do it, the buy, hold and pray strategy that Kiyosaki is always talking about, that's the way we invest, right, buy, hold and pray that it goes up. That's great when it's going up like it did the last 10 years but it's not so good when you're in 2023 and it's going sideways, right? It's not going up, it's not dropping drastically, but it's certainly at best, sideways.

So now you have to look at, all right, if my return on investment is, if what I want means my return on investment has to be higher, then I have to take a different approach. So that's what you're saying, right? I've got to jump on the plane. I can't be, our friend Ken McElroy's jet, which I was on the other day by the way, Andy, that thing's like a sports car, that is so much fun, but you've got to have a different vehicle to do it. Does that make sense?

Andy Tanner:

100%. There's so many factors and when you look at a 401(k) plan, there's an extremely limited choice of investment vehicle. You are in a cut and paste template designed by someone else, and it's almost like being plopped in a little factory and you're in and out. Here's some interesting numbers on how 401(k)s worked. There's $11 trillion in the United States alone in what we call defined contribution plans. These are 401(k) type things where employee contributes, and Vanguard has just shy of 2 trillion of it. So I look at their numbers all the time, Vanguard and Fidelity, and they have an interesting report every year called How America Saves. They have 2022 out, obviously we're still in 2023, and the statistics are bothersome. For example, right now, if you are age 55 to 64, in that 10 years before traditional retirement, the average balance in a Vanguard 401(k) account is $89,760.

Tom Wheelwright:

Oh, my goodness.

Andy Tanner:

If you take the 4% rule, that's $299 a month to live on. So that means half the people at Vanguard have less than $90,000. And here's some other interesting statistics that might be interesting for people to hear. If you go to the Department of Labor and you find out what the average person in the USA spends to live, it's $67,000 and you might get $21,000 if you believe social security's there. So that means that I've got to come up with about $44,000 to just live an average life, not even a dream life. Tom, if you have 12 years left to go the ROI you would need to get that $880,000 at a 5% return to get the 44 to make it, it's 21%, and that doesn't usually happen.

Now, ironically, as you know, I do a really strange thing at my house. We have a gap year we've decided to take, so between the eighth and ninth grade, my kids come home, they learn taxes from Tom, they learn stocks from me, they learn business. And my son started out with dividends. You sent me a wonderful book that actually teaches us very well, and he bought a company called Footlocker, and through dividends and covered calls, he's gotten 21% in nine months. And so those types of returns are not available in 401(k). So that's kind of the downside of it. I think the tax side, if you have a tax conversation, it can make a lot of sense but it goes back to exactly what you said, beginning, end, time. What do I need to get to get my dream? I might find that I'm going to have to do some things in addition to that 401(k) or maybe I just go a different direction entirely.

Tom Wheelwright:

Yeah, I think that's a good point. And I want to back up just a little bit so people understand. Defined contribution plans means that the amount that you get out is defined by how much money you put in. Okay, so we're defining the contribution, not how much you get out. A defined benefit is the opposite.

Andy Tanner:

Opposite.

Tom Wheelwright:

That's what typically you think of as a pension plan. I want you to know, Andy, I do celebrate, every month I get a pension check from an old employer. It's $473.

Andy Tanner:

Hey.

Tom Wheelwright:

So very exciting, and I will get that for the rest of my life. So there you go. I've got my supplement to social security.

Andy Tanner:

If I had something like that, Tom, that'd changed my life because every time I'm in the drive through at McDonald's, I'd say supersize me. And you go for the big one when you're bringing in that kind of money.

Tom Wheelwright:

There you go. Exactly. But that's a defined benefit plan. That means that what's defined is what you're going to get out, not what's put in. These are the pension plans, and these are the pension plans that Ted Seidel in Who Stole My Pension is talking about. They're in trouble. They're the ones in trouble.

Andy Tanner:

Huge.

Tom Wheelwright:

There are the CalPERS, the California Retirement System.

Andy Tanner:

Illinois, Kentucky.

Tom Wheelwright:

There's the state retirement system, Illinois, et cetera. Some of them are clearly bankrupt and they'll get bailed out, that's likely what's going to happen. The problem is that the corporate ones won't get bailed out. So while the public service ones are likely to get bailed out, probably the corporate pension plans, they get haircuts. So like airlines, the unions, they got a haircut a while back. Because they have to deal with reality, they can't just rely on government printing money like a retirement system can at a state university. But then you have different types of defined contribution plans. So if you're an employer, you can actually put money in called a, it's just called a profit sharing plan where you actually share the profits with your employees. And that's one thing you can do. If you're self-employed, you can put it in what's called a SEPP, self-employed pension plan, and it's basically an IRA but it's a supersized IRA, you can put a lot more in. And then you've got, of course, the traditional 401(k), which is what's the max into a traditional 401(k) right now, Andy?

Andy Tanner:

I don't have one, so I don't know what the max is, but I can tell you this. There is a limit to what you can put in for sure, which is another limitation of what you might be able to put away for your vehicle. But I would tell you, I made some mistakes when I wrote my first book and I think it would be interesting for people to know about it. I've got a couple things I think your listeners would be really interested in. One of the mistakes I made when I wrote 401(k)aos is I didn't include the history. You can learn a lot from the history of 401(k). So in my second edition, I corrected that, and this is what I would recommend people think about. When you learn financial statements, you'll always learn there's an opposing financial statement on the other side of the deal. My mortgage might be the bank's asset if I have a mortgage. My car payment, if I have one, would be the bank's asset. So there's always two sides.

And in a 401(k), you really have a few parties. You have the worker, you have the employer, you have the government, you have Wall Street. And if a person takes the time to learn how these came to be, and I think I can do it in a couple minutes, but I think it'd be fascinating some things that listeners don't know about the most predominant pervasive program in the United States.

Tom Wheelwright:

Go for it.

Andy Tanner:

In 1875, a couple hundred years ago, there was a company called American Express. They were a courier like Federal Express.

Tom Wheelwright:

In 1875?

Andy Tanner:

Yeah, 1875.

Tom Wheelwright:

Got it.

Andy Tanner:

And they didn't have credit cards then. They were a courier like UPS or Federal Express. They had the first pension in the United States, and it was awful. You had to be vested for 20 years and there was a committee that could take you out. If you went on strike you were over, and the pension was simpler. It was designed by corporations to attract human capital. Humans were a resource and it was to chain you to your desk without chaining you to your desk. That's it. And as these grew, the pendulum swung towards unions and there was a company in the 1950s and 60s called the Studabaker Company and they were going bankrupt. Cars weren't selling and they had these huge pensions, millstone around their neck, and the unions wouldn't budge and they went out of business. So they went to Congress and the unions were brilliant. They said, “Hey, we don't really care if the companies go dead or not, but if we could transfer the liability to the taxpayer from a corporation, we could negotiate better and higher pensions.”

And they lobbied for many years and finally present Ford in 1972 signed something called ERISA, the Employee Retirement Income Security Act, and that gave some insurance to pensions. Well, this was bad news for employers. I mean, these regulations, the liabilities, the legalities. Now they had to pay insurance in case they went out and it was tough. And there was a congressman, and this is the story I think people are most interested in. There was a congressman in upstate New York named Barber Conable, and he had two constituents, Xerox and Kodak. And at the time, ERISA had frozen some rules on benefits. So if you worked for a bank in that time and you got a Christmas bonus of 100 grand, 75,000 of it went to taxes, 25 grand went to you. So it was rough. And so they wanted to create a loophole where they could say, “We're going to take these bonuses and defer them,” and they allowed banks to do that.

Well, Conable Barber had Xerox and Kraus get in his ear and say, “Hey, we want something written in where we could do something like that.” And so Conable hired a young lawyer who was 24 years old named Richard Stanger right out of college. And he said, “Write a little section of the tax code called 401(k) who will allow these guys to defer big bonuses.” And it was less than 1,000 words, Tom. Less than 1,000 words. And this is what I think people don't know. Whenever you start fooling around with the tax code, they do numbers to see what will affect the US bottom line in terms of taxes.

So they took it through, Congress had these guys, RS had these guys, a bunch of think tanks. And I interviewed Richard Stanger actually, and I about fell out of my chair. He said, “Andy, what was interesting is I wrote this thing as a young lawyer, less than 1,000 words, and when we ran it through the numbers, they came back and they said, ‘This will cost the US government in tax loss less than $1 million a year'.” And he said either there isn't a reason to do it or something's screwy, but they did it and obviously this was never designed to become the predominant plan in the United States. Well, the last part is-

Tom Wheelwright:

This was at a time when most people had a pension plan, right?

Andy Tanner:

Yes, yes. Well, this was in 1978, and in the year 1980, there was an interesting man. He was a retirement consultant named Ted Bennett and he was working with a bank that had had their rules frozen. They were trying to attract employees from other banks that couldn't get him because they couldn't get this loophole. And he said, “I wonder if I could give 401(k) to work with this,” but there was one problem. Richard Stanger had written in some equality laws that said, “If you don't have everyone benefiting, a certain amount of the rich people and the poor people benefiting, high employees, low employees, how do you get a bank teller excited about deferring their tax bonus if it's $100?” And he said, “What if we gave them some bait and matched it and the bank tellers bought in?” Well, the bank said, “We don't want to be pioneering this. This is scary.” So Ted said, “Let's do it in our own firm,” and in January 1st, 1980, the first 401(k) was born and it unlocked, it took the handcuffs of pensions off companies.

If you look at it from a financial standpoint, Tom, people should know this. A pension is a function of the income statement and a 401(k) is a function of the balance sheet. That is not a small change. No financial education, everyone said 401(k), pension, it's just retirement. But when you take a pension that's a function of income and cash flow and you turn that over and make it a function of your balance sheet, now you're managing the risk, now you have a nest egg, you have an hourglass that might not last you, and these are some of the things I have.

Well, to finish the story, 40 years goes by and Conable Barber is no longer on the House, Ways and Means committee, he's kind of retired, and he's at a social luncheon and everyone comes up [inaudible 00:24:45], says, “Congratulations, Conable.” “Congratulations what?” And he goes, “Well, there's a pension magazine that nominated you as one of the most influential, top 100 influential people on the planet because of your work on the 401(k).” He said, “My work on the what?” 40 years. “My work on the what?” And they said, “Well, the 401(k).” He goes, “Don't know what you're talking about.” “No, you did this.” He calls up his old staffers at the Ways and Means Committee and he said, “Did I have anything to do with the 401(k)?” He says, “Yeah, you sponsored the bill, you passed it. You're the guy.” The most significant legislation he passed in his entire career, he was totally unaware of because this was born to be a small loophole for a couple executives. The law of unattended consequences here, I think it's an interesting story. I don't know if listeners think it's interesting.

Tom Wheelwright:

Here's-

Andy Tanner:

Never designed to do this, Tom. Never designed to do this.

Tom Wheelwright:

Here's what's interesting, Andy. So if you look at chapter eight in my book, the Win-Win Wealth Strategy, I run those numbers and sure enough, it's a breakeven for the government. It's right out of breakeven for the government. Government doesn't make money on it, doesn't lose money on it. Interestingly, I look at seven investments in that book and the other six, the government actually makes money. So this is the only one that's a break even for the government, which is interesting. But what plays out, really what Stanger said is that it was only going to cost $1,000,000, probably is still the case. It does not cost them much money.

Andy Tanner:

The ones that won, if you look at all the financial statements, the losers, the biggest losers are the workers for sure. If you line up all of them, government break even, corporations win huge. They get to sever those ties. No more liability.

Tom Wheelwright:

Biggest winner though.

Andy Tanner:

Wall Street is zero risk, zero capital put up, zero responsibility. Whether it goes up or down, they collect their fees. I have some interesting spreadsheets I should share with people someday, even if they take a half percent out, up to 2% out in fees, the lion share of that money goes to Wall Street.

Tom Wheelwright:

Yeah, okay. So that's interesting. But here's the thing. The question still is, do I invest in the stock market or something else?

Andy Tanner:

Yes.

Tom Wheelwright:

Because the 401(k), now most people don't get a pension plan so that's the fact of the matter. So now what we have to look at is okay, that ship sailed. Unless you're a school teacher or a police officer or fireman, you probably don't have a pension or you have a $473 pension like I do. And so what do we do instead is the question, and here's my question for you. So I think that the first thing we have to do is look at, okay, what's that rate of return? But then we have to look at, okay, so now we have to choose the vehicle, right? And so let's say that you decide the vehicle that you want is the stock market. Okay? So that is one of the, remember, for our listeners, the stocks, bonds, mutual funds, that's something you can invest in in 401(k). That's why Wall Street's the big winner because Wall Street is, tell me if I'm wrong, but Wall Street's effectively a Ponzi scheme.

Andy Tanner:

For sure.

Tom Wheelwright:

Because it depends on new money in order to pay old money. And that's the definition of a Ponzi scheme. It depends on the new money coming in. The reason that the stock market goes up primarily is new money coming in. I mean, it can go up because of production efficiencies by the underlying companies.

Andy Tanner:

Oh, you bring up a great point.

Tom Wheelwright:

But it really goes up probably even more, it's really supply and demand because it's how, there's only so many stocks. I mean, the Dow has 30, the S&P has 500, Russell has 2000, right? I mean, that's not a lot still. I mean, you're talking about a few companies and now the more money that goes in that just by definition, more money chasing fewer goods is the definition of inflation. And so there we get price inflation which is what we've had since 2008. We've had huge price inflation in the stock market. So given that that's available and if you were going to invest through, if you were going to invest in the stock market, why wouldn't you do a 401(k)? Because to me, it makes sense actually, unless you want to control it, unless you want to actually determine where that money is invested because remember, you don't get to do that.

Qualified means government controlled, just so everybody understands. A qualified plan means government controlled plan. It means that they get to control how much money you put in, how much you take it out, when you take it out, how much tax benefit going in, how much tax benefit going out. The government actually controls pretty much everything about that plan. All you control is how much money you put in and at what point after you retire, you take it out, right?

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine, he's a former board certified surgeon, and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he is geared towards. So if you're a high paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes,” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Andy Tanner:

Yeah, let me answer that question in two ways. It's a great question. Why wouldn't you put the money in, right? Why wouldn't you do that? Well, a couple of things. First of all, there's a wonderful book by Robert Kiyosaki that I really love called The Cashflow Quadrant. And what it does is it gives you, it draws two lines in the sand, one this way and one this way, and it says, “How do you want to make your money? You want to make your money as an employee, self-employed investor, business owner.” I think that's the first choice to make. Because if you choose the 401(k) plan, you are squarely putting yourself in that E-quadrant. So if a person says, “I don't want to be an employee, I want to be in one of these other three quadrants, and I see better benefits there, then that's one reason right there. Why not invest in 401(k)? Because I don't want to be in E, my dreams are different.” So that's one reason.

Tom Wheelwright:

So that's actually a good argument for a 401(k) for employees because-

Andy Tanner:

Yes, it is.

Tom Wheelwright:

… what you're saying is, “Look, if you're an employee,” and as a tax professional, I can tell you that if you're an employee, there are very few options-

Andy Tanner:

Pick the match.

Tom Wheelwright:

There are very few options for tax benefits as an employee. The two that I talk about in my book are life insurance and qualified plans, and those are the two logical ones. Even as self-employed, there's some, but again, I see a lot of self-employed people do some type of a qualified plan. It may not be a 401(k) but they probably have a 401(k) for their employees, like you say. It's a way to attract human capital. And in fact, a lot of companies, they do it for that sole reason. Because if you don't have a 401(k), you can't attract the people. My CPA firm, I will admit, we have a 401(k). Why do we have a 401(k)?

Andy Tanner:

To attract people.

Tom Wheelwright:

Not because I'm a fan of 401(k)s, but when we go to recruit somebody, one of the first questions they ask us, “Tell me about your 401(k).”

Andy Tanner:

It's an education issue. If you have educated yourself to be a solid employee and that's where you want to be, for sure. The second reason we've kind of already covered is we want to say, “Well, great, but can that 401(k) get me from A to B?” You have to understand that. But more to your point, I thought you made a great point here. There's a little bit of jargon here. When you buy a business, if I were to come and want to buy your business, we'd look at your financial statement and we call this, there's some fundamental things I'd want to see, some growth, some income, we'd look at statements of cash flows. Are you using, are your cash flow coming from debt, investment or operations? Those are fundamental reasons to buy, and that's how I buy stocks.

What you talked about is what we call technicals is price movement of the company. And so what's interesting is when I buy stocks, I buy them because I see something that's fundamentally sound. But when 401(k) people buy stocks, they buy them because they're on schedule to do so. And so there becomes a detachment between the fundamental value of this company and it's priced because everyone's buying in a frenzy. The problem with that is is there's questions as to how sustainable that can be. If everyone's putting them on their 401(k), you think price is going up, but here's another difference. Are you going to invest for capital gains, hoping stock prices go up, which you can't control, or are you going to invest more for dividends or real estate distributions?

And I'll just use my son if I may for an example. So he bought 100 shares at Footlockers, 15, he's going to buy 1,000,000 shares, and he received so far in the nine months, he's had three dividends, $120, and it was a $40 stock so he spent $4,000 and he received about $500 from the options market. That has nothing to do with the price of his stock. That has to do with selling shoes and getting a part of that cash and dealing with the options markets, which is always there. So he's independent. If you actually add in the capital gain he's gotten, which I don't count on, he's actually at 30% per annum. He's at 21 without it. Now here's key. If the rule of 72, he'll have that stock paid off in about 3.4 years. Pretty clear.

Tom Wheelwright:

You mean with the options and the dividends?

Andy Tanner:

Correct. With dividends, with income from cash flow rather than capital gain. At that moment, the price of that stock is irrelevant for the rest of eternity. He can put that in a trust, his grandkids can have it, his great grandkids, he can have that part of the family trust and he no longer needs to worry about the direction of the price or the stock market. He only needs to worry is if, are they still selling shoes? Are they still paying a dividend? And with inflation, they've survived, most realtors got wiped out from Amazon so if you're still around, you're probably pretty good. If they still sell shoes, inflation will cause that dividend to grow so there's some inflation protection built in and he doesn't have to worry.

Now, that's a totally opposite approach than the 401(k), which is based on the price of stocks going up to increase your balance sheet and hope your hourglass doesn't run out. So these are things for people to think about that those opportunities that Dave is learning about do not exist in a 401(k). They do not participate in the stock market in the same way that my students learn to participate in the stock market.

Tom Wheelwright:

So if I can kind of simplify that down just a little bit, seems to me it's just a function of how much control do you want?

Andy Tanner:

Risk is about control, isn't it?

Tom Wheelwright:

That's really what it is. I mean, certainly the more control you have, the less risk you have, and you can control that risk. If you just put the money in every month into 401(k), you're just at the risk of wherever the market is, and if the market's really high and then it drops, you've lost money. If the market's really low, you make money, which is why the average investor makes a lot less than the stock market because of when they're putting the money in and out. And I think this is an important point to understand. So one of the things Andy mentioned earlier was that if you're an employee and you're really not interested in the education side of things, so you really would like this to be on autopilot, then a 401(k) may be exactly what you want. Because the whole point of the mutual fund or exchange traded fund, the ETF is really to-

Andy Tanner:

Hands off.

Tom Wheelwright:

… it's just to be hands off, managed risk, which we call diversification, which the point of diversification is to not lose money. It's not to make money, but it's to not lose money. So what you're trying to do is, Warren Buffett said one of the keys to success in investing is don't lose money. It seems obvious, but actually losing money has such a huge impact on your portfolio that losing money's really a bad thing. You really need to just have that constant flow. But that's a very slow way to do it. So then again, we're getting back to what kind of vehicle do you want? Do you want a 6% vehicle? And if you do, I mean, for example, you read that old book the Millionaire Next Door, we know people like that.

Andy Tanner:

School teachers.

Tom Wheelwright:

Not just school teachers. They could be financial analysts, they can be, they're corporate.

Andy Tanner:

For sure.

Tom Wheelwright:

They're in the corporate world or the government world, one of those two. And they just love to sock away money. They're living on the minimum amount of money, they're getting by, but they're socking away money and they're socking away as much as possible. So they're maxing out their 401(k) every year. They're going to max out their IRA every year on top of the 401(k) to the extent they can do that, even if it's non-deductible, they're just going to keep putting money away to the best they can. And if that's what you're doing and you're not going to actually get educated and want to take the time like David has to learn how to do things like options, people get scared with options, so here's what I learned. So little known fact is that years ago, about 20 years ago, I actually got my Series 7 license, Andy.

Andy Tanner:

Oh my word.

Tom Wheelwright:

I went through, it takes about six weeks to become a financial advisor, that's what it took me, and what you have to do is you have to study, it's a self-study course, and then you take a test, okay?

Andy Tanner:

It's a big test.

Tom Wheelwright:

It's a big test. It's all day, and I actually had to take it twice because the computer broke down in the middle of the first time.

Andy Tanner:

Oh, God.

Tom Wheelwright:

I literally had to go back, and of course it's a different test every time, but here's what I learned. I learned that on that test, about 50% of the questions were about options and using covered calls and things like that. So my point is is that I learned that in six weeks. So this is not, don't be afraid of it. Just because you think, “Oh, options, that's so complicated.” It's not that complicated. So Andy, in another time, you can go to Andy and we'll get your website out there.

Andy Tanner:

Maybe another day, maybe another day.

Tom Wheelwright:

But Andy can teach you how to do covered calls and how to do options trading. But if you're going, “Well, wait a minute, I would really like this to be an autopilot,” then honestly, and I was surprised by this, frankly. When I ran the numbers when I was writing Win-Win Wealth Strategy, I was surprised that from a tax standpoint, it really does work for you. And the reason is because you get the deduction when you put money into the 401(k), it's coming off your highest rate of tax. So we have progressive income tax. So if your highest rate is, say, 33%, your average rate's probably 17%, but your highest rate is 33%. Well, that deduction comes, you get a benefit at 33%. When you pull it out, you get all of the brackets, and so now you're really looking at the average rate.

So if you were making $200,000 while you were working and you put in money into your 401(k), and then you make $200,000 holding out of your 401(k), let's say you've done really well in your 401(k), you've really managed it well, then that $200,000 will be at a lower tax rate, average tax rate than what the tax benefit was when you put it in, so you really do have more money. And it really doesn't, there is this, it's because we have a progressive income tax system. If we had a flat tax system, it wouldn't work, but we have a progressive income tax system, and because we have a progressive income tax system, it does work. So we've kind of gone down that 401(k) et cetera path, but let's say we look at our simple little chart here, we go that vehicle, that return on investment, I'm not comfortable. If you ask any financial advisor, they will say, “Do not plan on more than a 10% return in the stock market.” They are not allowed to say that. That's actually illegal for them to suggest more than that.

Andy Tanner:

For sure.

Tom Wheelwright:

And so you go, “Okay, but based on mine, I need 17%. So I can't do it in a 401(k). I just can't do that.” So the alternative to a qualified plan, we call a non-qualified plan, and a non-qualified plan simply means, again, think about the control, it's not controlled by the government. They don't control how much money you put in. They don't control where you put it. You don't have to put it into Wall Street. They don't control when you take it out. They don't control what you do with it. So that is a non-qualified, so change qualified to controlled, and you have a controlled plan, government controlled plan, or a government not controlled plan. So the government doesn't control the other plan. So basically a non-qualified plan is anything else. It's really any plan that you have that does not include a pension profit-sharing 401(k) IRA. So talk about why, I mean, because we do know there are tax benefits to be, you get that tax deferral, you get it deferred to a low rate. What then is the benefit of going to a non-qualified plan, Andy?

Andy Tanner:

Well, I think you mentioned a lot of them because when you go to a non-qualified plan, your ability to be creative, your ability to really expand to all the asset classes is just a lot more control and a lot more options. Now, if you compare the two, if you decide you want to be in the E-quadrant, then be a gray E, you'd be a highly paid employee. If you're a thoracic surgeon and you make better than average, you're putting this money away, taxes are rough for [inaudible 00:44:36], great. But if you're not going to be in that upper crust of the E-quadrant, boy, you're going to have a hard time in the qualified plan. A non-qualified plan though, and the first thing I would say is you have either the burden or the benefit of a team, depending on how you look at it.

I look at it as a benefit. Some people say, “Well, if I decide to do a non-qualified plan,” they look at the downside this way. They might say, “Well, I'm going to have to learn a lot and now I'm going to have to get an accountant, or I'm going to get an attorney.” Or you can say, “Hey, now I get to learn a lot and I get the help from an accountant and an attorney and a bookkeeper.” And that's the way I feel about. It's funny how attitude is on this, Tom. I remember in the third grade, I took on a basketball team with my sons. I had the meeting with the parents and I said, “I'm going to practice every day after school for your son. We're going to video every game he does and I'm going to do a breakdown of it.” And I had a parent say, “Really? In the third grade, you're going to practice every day? You're going to do a film of every game in the third grade? Really?” I had other parents say, “Really? You'll provide a practice every day?”

So it's very much the same attitude of, wow. People are saying, “Oh, that's so much to learn. There's so much I can learn.” And I think the first thing I would do if I decide I'd like to investigate my options for non-qualified plans is I'd start with a team. I'd say, “I'm going to drive the ship, but I'll tell you, I need my…” Number one on that team is your accountant by far, and I had a person, friend of mine talking about, yesterday he came over to my house. He said, “Your accountant and your attorney have to talk together. They have to, because your attorney's going to talk tax, your accountant's going to talk protection, and they'll go to the extremes. They got to talk to each other and find the right mix of protection and tax, and it's fun. You learn so much and you have these incredible people that are way more interested in what you're doing than the guy running a 401(k) that you've never met.” So I would say the first thing, if you want to go non-qualified is a team, the second thing is education, and the third thing, there's a certain temperament, and we could talk about those things if you wanted.

Tom Wheelwright:

So I want to go back to the team because, good or bad, I spend a lot of time with rich people. I like it. I think rich people are interesting. It's not my goal in life to make rich people richer. Frankly, it's my goal in life to make an average person rich, that is, the average entrepreneur, I want them to become rich so that they're financially free. That is our declaration of financial independence at WealthAbility, my company, is that we believe everybody has the right to become independent of employers, the government and Wall Street. So that's fundamentally in my core.

But when I look at this team, I'm going, and I look at rich people, I go, “Okay, so what do all rich people have?” Let's think about somebody, a family like the Rockefellers or the Waltons or any of these Vanderbilts. They have something in common. They have what's called a family office and that family office is pretty magical. It includes an accountant and attorney. It also includes probably several different types of attorney, not just the estate plan attorney, an asset protection attorney, a contract attorney. It includes financial advisors, it includes life insurance people. It's all these people that are surrounded. And I'm going, okay, so by the way, no billionaire ever became a billionaire in a 401(k). Okay? It's not possible. In fact, every billionaire's become a billionaire being in control of what-

Andy Tanner:

Even more so, Tom, I've never, ever, in my whole, all the speeches I've given, I've never even found a poor person that became semi-rich with a 401(k). Again, the 401(k) is-

Tom Wheelwright:

It's just not possible. The problem is the numbers don't work.

Andy Tanner:

No ROI. Yeah.

Tom Wheelwright:

The numbers don't work. I mean, you can't make the numbers work. So that doesn't mean that, again, 401(k)s, doesn't mean they're bad. It means that they're right for certain people that want a certain type of vehicle. I mean, for example, I don't know if I told you this Andy, but I recently bought a BMW M8 Competition. Well, this is the fastest BMW made, and this was not, it's not a Chevy and it's not even a Chevy Corvette. Now, I'm happy to race that Chevy Corvette because the Chevy Corvette does not have a chance against my M8. Well, so why? Why am I willing to spend money on a BMW when I could get a Chevy? It's way cheaper to get a Chevy. Well, because that's not the vehicle I want. I want a different vehicle to do different things, right? When I'm in that M8, it can be pouring rain and I'm in complete control of that car. It does not swerve, it does not, it doesn't do anything. It's amazing. Well, that's what I want. I want that solid German manufacturer. I want that solid feeling.

And so you can choose to drive a Chevy, and there are a lot of people drive a Prius or they drive a Volkswagen. That's fine. And if that's what you want, great, and that's what you should do. So I think Andy and I, we'd agree that neither of us think that this is not a one size fit all.

Andy Tanner:

Never.

Tom Wheelwright:

The problem is is that Wall Street wants you to believe it's a one size fit. Wall Street wants you to believe that they're smarter about your money than you are. And they go, they want to make it opaque. They don't want to make it transparent, they don't want to make it opaque. And so what Andy and I have pretty much devoted our lives to is let's make it transparent. This is why we travel with Kiyosaki. He wants to make it transparent. He wants to say, “Look, we get that you've been taught the E and the S side, the employee and the self-employed side of the [inaudible 00:51:10] National Quadrant.

Andy Tanner:

Then you can choose.

Tom Wheelwright:

That's what the schools teach. They teach those two sides. They didn't teach how to become a big business. They didn't teach about systems and how to become a big business. They didn't teach about how to become a professional investor, an insider. They don't teach that in school. So all we're talking about is, okay, let's just be transparent with this. So when you're looking at these returns and you look at, okay, this is long, long, long story, longer, you look at, all right, who's on my team? There's the old rule that the six people you spend the most time with, that's going to be, their average income is going to be your income, likely. And so the same is true with your team. Constantly upgrading your team, this is what I find. So Andy, you and I have had this conversation because you were with a different tax advisor before me and we had to upgrade things a little bit.

Andy Tanner:

Tom, I was telling you. I had a friend, an old basketball buddy over at my house yesterday, said, “Andy, I'd like to talk,” and I said, “Well, who's your accountant right now?” The same firm that I was with, exactly the same. I says, “Well, I'm certainly not with them anymore.” And so you do upgrade your game. I love what you said about choice. Even a person in E-quadrant should learn a little bit. You mentioned diversification. Great, but that doesn't do anything against systemic risk. Nothing. In fact, the more you diversify, the more exposure to systemic risk you have. So if you're a 401(k)-

Tom Wheelwright:

Meaning risk in the market, right?

Andy Tanner:

Well, there's a company called BP, people think it's British Petroleum. No, they're actually known for broken pipe now. And when they broke that pipe in the Gulf of Mexico, their stock went from 60 to 30. Well, if you only had 1% of your wealth in that, you lose a half percent of your wealth. But two years later, the S&P 500 in the subprime meltdown, it lost 50%. The whole system lost 50%. That's timing risk. If you're like my father and you retire in 1999 before the dotcom bubble, you had a decade of nothing in the Nasdaq. He can't go from 60 to 70 with no ability to dollar cost average. So even if you're in E-quadrant, you should have a team, you should have an accountant, and maybe you say, “Mm, I have a good job. I'm in this higher paid thing. Do you know what? There's nothing that prevents me from doing my qualified plan, that's great, but I'd like to do some non-qualified stuff as well, and I can ride both of these.” There's nothing wrong with that and so get your team.

It's important with temperament as well, Tom. You have helped my temperament so much. I think that Warren Buffett's brilliance often overshadows his temperament and his passion. He has a wonderful temperament and he gets up every day, can do whatever he wants to do and he chooses to go to the office. That's the person who's passionate about non-qualified investments. So it's a wonderful thing.

Tom Wheelwright:

So if you could give our listeners just two or three actions that they can take in the next week or two to get started on this, what would you tell them?

Andy Tanner:

First thing is I would start a habit. I'll give you two or three. Number one would be a habit of a weekly meeting, whether you're single, married, whatever your partner is. Ours isn't perfect. You know this, Tom, you do my taxes. But Marcy and I every Sunday at 11:00 AM, we get out our financial statement and we check basically six numbers, income, expenses, net income or cash flow, assets, liabilities, net worth. We say, “Where are we right now?” Then we compare that to a financial statement of our dreams and we get that ROI we talked about. Are we making it? Are we headed there? So that would be the first thing that I would do is start to have a weekly meeting. What you focus on expands.

Number two, I'd evaluate my team. I'd say who is my accountant? Who is my attorney? Do I have one? And people are so worried about spending money, they think this is a falsehood. They think, well, accountants are expensive, attorneys are expensive. If you are not sophisticated, your accountant can bill you an hour because you're going to be done in an hour. As you grow and you have more money, you'll be more sophisticated. But I will tell you, I have never found a time in my life, regardless of who I was with, where I spent more on the attorney than they saved me in taxes. It has been an ROI every time-

Tom Wheelwright:

You meant the accountant, of course, not the attorney.

Andy Tanner:

Yeah. Every time it has saved, yeah, accountant, I can't say about the attorney, but the accountant has brought me an immediate ROI as an investor. You got to think about that because I agree, the fastest way to permanently increase your cash flow is to reduce the expense of taxes. That would be the second thing. And then the third thing is, I would dream big and I would be optimistic. I would think about what my talents are. I'd think about what my dreams are, how I can serve. Capitalism is about inequality. What it's about is you have to give more than you receive. You've paid a thousand dollars for an iPhone because you thought the iPhone was worth more, and so you always figure out how can I give more than I take?

Now people say, how are you going to get rich if you're always on the short end of the stick? If you're always giving more than what the people pay, how do you get rich? You serve more people. So think about how you can serve more people, and perhaps you say, “You know what? I make five, $600,000 a year and a 401(k) for me is great. Maybe I just want to learn a little bit about systemic risk,” but maybe you have this sense, “There's something more for me. There's more. Maybe I'll spend some time thinking and there's more I could do for the world.” So those three things. Have your weekly meeting, start getting focused, evaluate your team, and then start thinking about what you might be passionate, how you might serve more people and enjoy the benefits of giving more than you take.

Tom Wheelwright:

I love the dream big because I think that the worst thing that a financial advisor or financial planner can say to you is, “How much do you need to retire?”

Andy Tanner:

Oh, scarcity, right? Limits.

Tom Wheelwright:

That is like, “What do you mean? You mean, so I don't live under a bridge? So I don't live on a park bench. What do you mean by need?” And so I love the dream big. How much do you want. And so why not? Because once you get a little education, the reason the financial planner says how much do you need is because they can't deliver more than 10%. And so that means that you are limited on how big your dreams can be based on what they're telling you. Okay, I'm going to set aside this much money. It's going to go into these mutual funds, ETFs, whatever, and I'm going to get, let's say I get 8%. Okay, great, great. That means every nine years my pot doubles, right? That's the rule of 72. So eight times nine is 72, right? So that's what the rule of 72 says basically.

So 8% may be fine if you want to live modestly and you want to set aside that money modestly and you don't want to pay attention. But the thing is, with a little education, and if you dream big, then all of a sudden you go, “Well, wait a minute, are you kidding me? Andy's 15-year-old's getting 21% in the stock market. This is not-“

Andy Tanner:

For sure. [inaudible 00:59:38].

Tom Wheelwright:

I mean, Andy's talking about summer. I mean, for me, I look at business, real estate, energy, agriculture. I'm more of a non-traditional asset type guy. And because I love, again, Andy talks about serving more people and I actually pay a lot less tax, the more money I put back into productive use, the less tax I pay. But you have to dream big, and once you do and you get that education, you don't have to worry about, okay, is 29% too much? No, we can get there. We just have to kind of reassess. We just can't do it through a 401(k), an IRA, or pension plan. So with that, Andy, tell us where they can get more information about your educational materials and reach you.

Andy Tanner:

Well, thank you. I'll do a shameless plug. We have a website called thecashflowacademy.com, thecashflowacademy.com. I have a wonderful team of teachers. We have people with tremendous options experience and stock experience. We have Series 4 option principal. I mean, we have big time teachers in risk management, and so you can drop by. But more importantly, whether you learn from me or whether you learn from someone else, learn about what your plan is. The majority of Americans don't understand their 401(k) or their 401(a) or the 403(b) or whatever they're in. Get educated, take time and always be learning.

And then the final thing I just have to say, I'm going to embarrass Tom, but he is such a good man and I am so grateful for our friendship, Tom, and the chance to teach with you and share ideas with people you is special to me and the influence you've had on my children as not only my tax advisor but my friend is completely just indescribably priceless. And so I love you, I love your family and my kids love you, and I am just so grateful for our friendship and all the things you've taught me over decades now. So thank you for having me, and, man, I love you with cell in my body, so there you go.

Tom Wheelwright:

Well, thank you. If you haven't noticed, we are presidents of each other's fan clubs, and Andy's the best teacher when it comes to stock market, particularly cash flowing stock market, that I've ever seen. And so I highly recommend the The Cash Flow Academy without reservation, just because I know Andy's got your interests in heart, he's got his student's interests in heart. It's not for him about making money. It's about how do you get that education? And I'm learning from Andy all the time. So I learn at least as much from Andy as Andy's ever learned from me, both about making things simple and interesting. I always say my goal in life is to make taxes fun, easy and understandable, and so it's fun to be able to work with Andy and his kids because, and as Albert Einstein said, any six-year-old can explain something to a genius, but it takes a genius to explain something to a six-year-old.

So what I hope you've gotten out of today is that remember those three things that you do need to meet. You need to establish where you are and where you're going, establish that plan of action, that wealth strategy. And then you need to build that team around you, and don't forget to think big, and when you do that, you're going to make way more money and pay way less tax. We'll see you all next time.

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