SuperMoney Interviews: Pamela Yellen On Investing and Saving Strategies

Pamela Yellen is a financial security expert, founder of Bank On Yourself, and the author of two New York Times best-selling books. She spent some time with us recently to talk about investing and saving strategies, and to tell us why you should only entrust your money with one person: yourself.

Tell us about your business background. Why did you decide to create Bank On Yourself?

My husband and I started investing in the stock and real estate markets in 1987, but we never came close to getting the kind of returns we were told we should be able to get. I started coaching financial advisors on how to build their businesses in 1990, and they were always bringing financial products and concepts to my attention. Often, they would tell me they thought they had found the secret to financial success.

Since I wasn’t happy following the traditional retirement planning advice, I had an open mind and began researching various financial products and strategies, searching for ones that might pass my due diligence tests and that my husband and I could use to reach our goals. I ultimately investigated more than 450 different financial vehicles, but only a handful passed my tests. Many turned out to be quite dangerous to people’s wealth.

Finally, one of the financial advisors I was coaching asked if I’d heard about a strategy that relies on specially designed dividend-paying whole life insurance policies to grow wealth safely and predictably. The concept got even more interesting because it also lets you use the plan to become your own source of financing for your cars, vacations, a college education, business expenses, or any other major purchase.

Because this strategy lets you literally bypass banks and Wall Street, I called it “Bank On Yourself.” It’s a very exciting and empowering concept to anyone who wants to take back control of their financial future from financial institutions.

Even though it was common for our grandparents and great-grandparents to use this strategy, it fell out of favor once 401(k)s became the norm. Suddenly every American was given full responsibility for reaching their retirement savings goals, even though they were woefully unprepared for the job. I saw so much financial insecurity created by this shift that I also became passionate about educating people about ways to reach their retirement goals without taking any unnecessary risks.

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If someone were to say to you, “I don’t have the expertise to handle my finances. I’ll just hire some investment firm to deal with them,” how would you respond?

That’s the conclusion my husband and I came to some years back. We kept doing all the “right things” we’d been told to do and kept getting poor results. So we decided to let an expert manage our money for us. We researched and interviewed a dozen of the country’s top – and most expensive – financial planners and investment managers and ultimately hired three of them in succession. And all three ended up losing us money during what turned out to be the longest-running bull market in history!

I didn’t discover until later that 80% of all mutual funds, financial advisors, and investment advisory services underperform the overall market, according to the Hulbert Financial Digest – and not just because of the fees they charge. The experts are human, too, and buy and sell at the wrong times just like the rest of us.

Many financial experts have different opinions about the wisdom of whole life insurance as a financial instrument. What’s your take on this issue?

I demonstrate in my books and on my website that most experts who dislike whole life insurance are talking about a completely different type of whole life policy. Their main objections are that the cash value grows too slowly and the commissions are too high. But the policies used for the Bank On Yourself concept have riders or options incorporated into them that make your cash value grow significantly faster – and cut the agent’s commission by up to 70%.

Their argument that you should buy term and invest the difference is absurd in so many ways. I love asking people who think investing in the market is the best way to save for retirement if they can tell me what their retirement account will be worth on the day they plan to tap into it.

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Here’s a news flash: If you don’t know how much your retirement account will be worth when you want to use it, you don’t have a plan! That’s gambling!

And as far as the “invest the difference” part – I’ve never met anyone who actually bought a term policy, priced the cost of a permanent policy with an equivalent death benefit, and then put the difference into an investment account every month. It just doesn’t happen.

What suggestions do you have for people who want to save money for retirement?

Here are three…
1. Don’t wait to pay down all your debt before saving for your retirement. Do both now.
2. Don’t get discouraged. Even if you can only put aside 1% or 2% more each year, it will start to add up and you won’t feel the pinch.
3. Don’t confuse “saving” with “investing.” Investing is what you do with money you can afford to lose – or wait 20 years or more, if needed, until the market recovers. You can lose part or all of what you invest. Saving is what you do with money you can’t really afford to lose – your rainy day fund, college fund, and your retirement savings. Saving is safe and guaranteed.
Why do you think so many people are retiring later and/or with less money than in past generations?

Because people have followed the conventional wisdom of investing instead of saving for retirement, they have little to show for it other than a lot of sleepless nights and financial insecurity. Isn’t the definition of insanity to continue doing the same things while expecting a different result?

What’s worse is that most people I’ve surveyed live in constant fear that the next market crash will wipe out 50% or more of their life savings again, just like the last crashes did for so many. And what if it happens right before they plan to retire?

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Some individuals who aren’t market-savvy believe that entrusting their savings to banks and banking products is a safe way to invest. How accurate is this viewpoint?

I think you need to be much more wary of saving in banks ever since the Dodd-Frank Act of 2010 went into law. Most people don’t realize this, but it changed the banking game; and the next time banks fail, they will not be bailed out by taxpayers. They will be “bailed in” by stockholders and depositors.

I’m also not a big fan of banks for the same reason Mark Twain pointed out:

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the moment it begins to rain.”

The Bank On Yourself concept lets you provide for your own financing needs, freeing you from the control that banks and financial institutions have over most people’s lives.

Do you have any advice for people who are hesitant to invest due to the market crash less than a decade ago?

They should be hesitant! We’ve had two major market crashes of 49% or more just since the year 2000.

You shouldn’t consider investing at all until you have an emergency cash reserve equal to two years of your household income. Yes, I said two years. During the last recession, some people were unemployed for two years or more. Imagine the feeling of financial security you’d have knowing you could wait out a job loss or recession for two years, if necessary.

Remember, it wasn’t raining when Noah built the ark. So start today. After you build that two-year cushion in a financial vehicle that is safe and liquid, only invest money you can afford to lose or can wait at least 20 years for it to recover, as I mentioned earlier.

And look into alternatives to traditional saving and investing vehicles that are safe, predictable and guaranteed, like the super-charged dividend-paying whole life insurance policies I described. They have an unbeatable combination of advantages that include guaranteed, predictable growth; liquidity; control; and tax benefits, as well.