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THE VOLATILITY SHIELD – How to Vanquish the 4% Rule & Maximize Your Retirement Income
A Financial Novella by David McKnight
If you are a fan of David McKnight’s THE POWER OF ZERO or LOOK BEFORE YOU LIRP, you will probably love learning about retirement planning by reading the Financial Novella, The Volatility Shield. We know of very few authors who have used such believable story-telling in order to educate their readers on how to plan for retirement in a safe and productive manner.
David McKnight introduces the reader to Jack Wheeler, a recent graduate with a degree in Engineering who is on his way to his first post-college job in San Jose, California. Jack is excited to leave his life and stepfather behind in Lancaster, North Carolina.
At the same time, David introduces the reader to Ted Hardy, a former football star and Jack’s stepfather for the last ten years. Ted has called Jack to stop by his sporting goods store so that he can offer his apology for their troubled relationship over the last 10 years.
Jack soon finds out that his stepfather had called him in to review a retirement plan his stepfather had setup using the advice from his financial planner, Bruce Lassiter. Ted, for some reason, trusted Jack’s gift with numbers and wanted his blessing on the plan.
After a quick review of the document, Jack agreed that if the plan earned 9% annually and Ted and Jack’s mom could live on $165,00 per year, Ted should be able to live out his retirement comfortably.
Chapter 2 (Nineteen Years Later)
In this chapter, David describes an event that can happen to anybody, no matter their age. Jack gets a call from his stepsister who breaks the bad news that Ted Hardy, Jack’s stepfather, is in critical condition in a Lancaster hospital after having an aneurysm at Ted’s grandson’s football game.
Jack is reluctant to leave his wife and kids and rush to Lancaster but his stepsister reminded him that Jack has power of attorney and is the executor of Ted’s estate. It doesn’t matter that Jack doesn’t care for Ted now even after 19 years, he must go to Lancaster to make arrangements for his stepfather.
When Jack arrives at the hospital, he is greeted by Ted’s doctor and learns that although Ted will likely recover from the aneurysm, he’s going to need nursing care for the rest of his life which the doctor estimates will be maybe two years.
The doctor explained that there are two long-term care facilities in Lancaster that Jack can choose from: one is a top-notch facility that will likely cost Ted $10,000 a month and the other is a Medicaid type facility where the care would be questionable.
So, Jack will now have to drill-down into Ted’s finances but he’s confident Ted has plenty of money to afford the best long-term facility available.
In chapter three we find Jack trying to determine the condition of Ted’s estate even though he’s quite certain that there is plenty of cash available in Ted’s retirement account. Even if the average interest rate fell a little short of 9%, Jack feels certain that Ted is safe since his withdrawals were only $165,000 annually.
When Jack arrives at Ted’s condo, he is surprised to find a sparsely furnished condo with what appears to be second-hand furniture. While searching through the file drawer in Ted’s massive desk, Jack finds a file labeled “finances” and proceeds to review Ted’s account balances.
While reviewing the statements in Ted’s retirement account, Jack is shocked to at the account balance at the bottom of the most recent report: Total Portfolio Value $71,198.
Shocked at the amount in Ted’s portfolio, decides to confront Bruce Lassiter, Ted’s retirement planning guru, and get answers about Ted’s account. When he visits Bruce’s office the next morning, Jack is unable to speak with Bruce but his fears are confirmed by Bruce’s assistant.
Chapter four has Jack back at Ted’s condo doing another search of Jack’s file drawer and looking for answers and trying to determine if Bruce had swindled Jack’s stepfather or if Ted, for some unknown reason, simply blew up his retirement plan beginning ten years ago after the death of his wife, Jack’s mother. While digging through Ted’s files, Jack comes across a business card for Jane Fletcher, a life insurance agent who appeared to have sold Ted a term life insurance policy way back when.
Chapter 5 (Enter Jane Fletcher)
After reviewing Jane Fletcher’s website, Jack decides to pay her a visit in hopes of getting a second opinion before he actually confronts Bruce Lassiter. He feels that Ms. Fletcher might shed some light on what happened with Ted’s retirement plan since her website lists retirement planning as one of her services.
After reviewing the information Jack had provided, it didn’t take very long for Jane to see what went wrong with Ted’s retirement plan. Ted (and Jack as well) erroneously focused on the average interest rate rather than the actual interest each year. While explaining the problem with Bruce and Jack’s plan, Jane used a spreadsheet to illustrate what went wrong and why Ted’s account became dangerously low.
Referring to the spreadsheet, Jane pointed out that in the first three years of the retirement plan, the market actually had negative returns and yet Ted withdrew his $165,000 each year anyway. This resulted in significant losses that were never recovered because the withdrawals reduced the funds needed for the plan to recover. (David McKnight includes the table that illustrates what happens when you do not consider “actual” returns and focus only on average returns).
In this chapter, Jack finally confronts Bruce Lassiter about the disaster he set up for Ted’s retirement. Although this was a confrontation, both men were able to discuss what happened and both were confused how Ted quit coming to Bruce’s office and had ignored the warning signs that would have popped up years ago.
Jack also has the displeasure of informing Annie, Ted’s daughter, that her father would be living out his final years in the Medicaid long-term care facility because contrary to what all family members believed, Ted was actually going broke all this time.
Chapter 7 (Jack’s Retirement Plan)
After discussing the pitfalls of bad retirement planning with Jane Fletcher, Jack begins to consider his own retirement plan and becomes concerned that he will likely come up short just like his stepfather did.
He did a quick calculation on a spreadsheet that confirmed his new fears. Jack’s plan is to retire at 65 and would need to start a retirement income stream of $100,000 for him and his wife to enjoy a comfortable lifestyle. He realized that at the rate he was investing in his 401(k), he was going to come up well short of the $2.5 million he would need to save before age 65. Jack immediately decides to make an appointment with Jane Fletcher about his own retirement needs.
Jane does a short interview with Jack to help him determine what his position will likely be and while doing so, she confirms Jack’s worst fears. At the rate he is getting on his 401(k) (including the 3% company match), he would have $1.85 million which is well short of the $2.5 million that she also believed he would need. She gave Jack five options:
- Save more money to make up for the $650,000 shortfall
- Work longer. Put off retirement until age 69 rather than 69
- Die sooner
- Reduce spending during retirement to $74,000 per year (the 4% rule)
- Take more risk in the market
Jack was positive that none of the five options that Jane presented would be feasible for him and his wife. At this point he was, he was sure that there must be another option but Jane said there wasn’t.
In chapter eight, Jack is forced to deal with a reporter who is snooping around into Ted’s financial affairs. Sal, an unscrupulous reporter, believes that news about a broke former NFL quarterback would be something that could really sell newspapers.
In chapter nine, Jack confronts Jane having lunch at her desk and pleads his case for an option 6 (hint: Jane does have an option 6 but she didn’t want to discuss it with Jack because it involves permanent life insurance and Jack had already made it known to Jane that he didn’t believe in permanent life insurance).
Jane finally agrees to reveal option 6 to Jack but makes him promise that he must be willing to think outside-the-box when she offers it.
Chapter 10 (The Reveal)
In chapter 10, Jane reveals the VOLATILITY SHIELD to Jack and even shows him that if Ted would have had one in place during the first three years of retirement, he would have had $2,253,936 in his retirement account rather than $71,198 that is left for his long-term care.
Jane then begins explaining the Volatility Shield to Jack and how it would help him reach his retirement goals without the need for options 1 through 5. When asked what this volatility shield is, Jane instead provides a list of components that this account must consist of:
- the volatility shield must never lose money, even if the market is tanking
- the volatility shield must be productive (between 4 and 6% over time)
Since Jack did not have an actual appointment, Jane had to cut him off here but agreed to continue the conversation the next day.
By now, if the reader had also read the Power of Zero, bells should start going off with only the first two attributes that Jane has mentioned.
Chapter 11 (Option 6 Continued)
The beginning of chapter 11 has Jane quizzing Jack on what they discussed about the volatility shield during yesterday’s brief meeting and Jack, regardless of his excitement, recites everything they discussed. Jane continues with the volatility shield required attributes:
- the volatility shield must be in place BEFORE retirement (the sooner the better)
At this point, Jack is bursting at the seams to learn what investment product qualifies as a volatility shield (bucket #3 for you The Power of Zero fans). But Jane has once again ran out of time and invites Jack to come back in the morning,
Chapter 12 (Optioned 6 Continued Again)
In chapter 12, Jack admits he is anxious to learn about the 4th attribute required in the volatility shield. Jane begins the conversation by asking Jack if he’s ever heard of David Walker and Jack says he hasn’t.
Jane proceeds to tell him about David Walker, his background with the fed and his conclusions about how America must at least double income tax rates to survive the deficit (which is now more than $22 trillion. Once again, readers are reminded about The Power of Zero and how David McKnight agrees with his conclusion that by being in the lowest tax bracket as possible, is the only way possible that most retirees will be able to survive financially.
Jane explains that David Walker uses only one four letter word that will substantiate his conclusions: MATH. Here is when Jane Fletcher reveals the final attribute the volatility shield must have:
- The volatility shield must be tax-free
Here, Jane explains that unless the distributions from the volatility shield are tax-free, the account holder will likely lose almost 50% of its value to the IRS.
Once again, the time has run out and Jane Fletcher invites Jack to come again tomorrow for the big reveal.
In chapter 13, Jack meets with his stepsister and her husband to share his excitement with the volatility shield and how it can make up the difference in his retirement shortfall. He shares with Annie and her husband Brian what he has learned from Jane Fletcher about the volatility shield and is so excited to learn the actual product type tomorrow.
Unfortunately, while discussing what he learned with Brian, both of them begin to assume that the volatility shield must be permanent life insurance because Brian had been presented a similar concept a while back. Jack leaves his stepsister and her husband and begins to replay his meetings with Jane in his mind and becomes frustrated that Jane would try and sell him permanent life insurance.
Chapter 14 has Jack, who is unsettled about the thought of using permanent life insurance for retirement, blowing off his morning appointment with Jane. Instead, he decides to use the time to dig through Ted’s financial records in hopes of finding money that may have been hidden when he first searched that proverbial financial file drawer.
Instead of reading every financial statement in the file, Jack decides to check Ted’s online account and try to determine where his money went. While scanning the online account, Jack discovers that Ted had been transferring $5,000 each year for the last 10 years to another account that appeared to be American Federal Life.
While drilling down even further, Jack discovers that the $5,000 was a life insurance premium. Even more surprising was that the policy had a cash value of $650,000, a death benefit of $1.5 million and a long-term care rider that would advance $1 million of the death benefit.
While reviewing the statement from the life insurance company, Jack was astounded by the name of the agent of record: JANE FLETCHER.
Jack, with this financial revelation, took off to visit with Jane Fletcher even though he blew-off their appointment earlier. Jane wasn’t pleased to see him but allowed him to sit down for a few minutes.
Jack immediately showed Jane the statement from the life insurance company and she was astonished to find out that her client, Ted Hardy, was Jack’s stepfather.
Jane then recalled her meeting with Ted Hardy and explained to Jack that he wanted to move his account from Bruce Lassiter but was concerned that Bruce would blackmail him over a nasty letter he had written to Mel Kauffman, a local man who spent all of his time helping at-risk children and teenagers. Mel had been after Ted for a donation and Ted had finally lost his temper and wrote the nasty letter that Bruce got his hands on.
After the explanation about Jack’s stepfather, Jack was ready to accept Jane’s recommendation of the volatility shield and finally put his negative feelings about permanent life insurance. As they say, the rest of the story is history.
Jane and Jack get down to the business of making sure his retirement plan will yield the $100,000 annual distribution he will need for retirement. (don’t forget about the math)
Chapter 17 deals with the reporter who had been snooping around and finally published a negative article about the broke football hero Ted Hardy. Needless to say, when Jack found out he was furious and threatened to expose Sal (the reporter) as a liar and sue him for defaming his stepfather.
Although THE VOLATILITY SHIELD is a great story about using permanent life insurance to secure a comfortable retirement, the Epilogue is awesome. It brings everything together (like every story should) and leaves the reader satisfied. (SPOILER ALERT: It brought tears to my eyes).