Logic vs. Emotions

I know that I’m a smart guy. In fact, I’m so smart, that I know you don’t give a damn how smart I am. Make sense? Financial Advisors have long known that logic doesn’t sell, emotions do. Don’t believe me? Read the following:

Argument A: If you don’t follow my advice, you expose yourself to significant financial volatility, due to macroeconomic and global financial issues, specifically with regards to the fluctuations in relative valuations of the dollar versus foreign currencies. Given that assumed level of volatility, the portfolio value that represents minus two standard deviations from the mean would be an ending value approximately 44% lower than your current projected need at the estimated date of retirement.

Argument B: If you don’t follow my advice, there’s a good chance that you’ll go broke and have to move back into your kid’s basement. All your dreams will be flushed down the toilet and you’ll be a burden to your family until you finally, thankfully kick the bucket.

Both of these arguments are saying the exact same thing. But which of these arguments is more compelling? Well, unless you are an architect, computer programmer, or other hyper-analytical type, you answered “B.” In my experience, 90% of people are more motivated by emotional arguments than logical ones.

Fear vs. Hope

To be clear, there’s nothing wrong with using emotions to sell. I do it. But there is something distasteful about fear-mongering as the only sales tactic. First, a true professional uses both logic and emotions to sell. And secondly, emotional sales include not only fear, but hope.

Again, consider the following two arguments. Argument A should look familiar.

Argument A: If you don’t follow my advice, there’s a good chance that you’ll go broke and have to move back into your kid’s basement. All your dreams will be flushed down the toilet and you’ll be a burden to your family until you finally, thankfully kick the bucket.

Argument B: If you don’t follow my advice, there’s a possibility that you could face some difficult financial times down the road. My first goal is to maximize your financial security, ensuring that you don’t outlive your money and become a burden to your family. After that, we can focus on that second home, dream vacation, and other lifestyle enhancements.

If you didn’t notice it, both of these make emotional appeals. The difference is that Argument A focuses on fear only while argument B focuses on both fear and hope.

Again, there’s nothing wrong with using emotions to motivate people. However, far too often charlatan advisors use fear to push individuals into unnecessary and potentially destructive products. Recognizing this sales tactic should serve as a strong indicator that your interests are secondary to lining the salesperson’s pockets. Buyer beware.

“The money is tied up with penalties attached for early withdrawal. Although there are a few technicalities that allow penalty-free withdrawals, the restrictions are so numerous that very few know how to get around them.”

To this, I have three responses:
First, qualified plan money is tied up for good reason. Namely, individuals suck at saving and investing for retirement. It doesn’t take a genius to understand that if a penalty is attached for early withdrawal, people will tend to leave that money alone, saving it for its original intention – retirement income. If you take money out of a retirement plan to buy a fancy car or go on vacation, shame on you. That behavior invariably leads dependence on social welfare systems, which means that responsible taxpayers end up covering your stupidity. Certainly, a qualified plan isn’t the place to save your emergency fund, or your rainy day shopping spree fund either. Duh.
Second, If you do get jammed up and need access to your money, you absolutely can get it. Penalty-free. And easily, too. Here are some of the “completely esoteric, indecipherable, technical, and highly restricted” reason that Uncle Sam will let you take your money out of a qualified plan, including the “numerous restrictions” Mr. Gunderson alluded to.

• Unreimbursed Medical Expenses. If they’re more than 7.5% of your adjusted gross income, you can withdrawal money from your account penalty free. In some cases, this rule also applies to medical insurance premiums for unemployed persons.
• Disability. If a physician determines that your disability impedes your ability to engage in substantially gainful employment, you can make withdrawals penalty-free.
• Higher Education. Uncle Sam wants you to invest in yourself. As such, qualified higher education expenses may be paid by penalty-free early withdrawals.
• First-Time Homeowner. Uncle Sam believes in the power of home ownership – it’s part of the American Dream, right? So, you’re allowed to take out up to $10,000 within 120 days of your purchase – penalty free – to purchase, build, or fix your first home.

I don’t know about you, but it seems to me that medical expenses, disability, education and home ownership are pretty reasonable exceptions to the early withdrawal penalty. The bottom line is this: if your back is against the wall and you need the money, it’s there for you.
My third and final response is more philosophical. Making the argument that “because the exceptions are obscure, you shouldn’t put money in a qualified plan in the first place” is a ridiculous argument. Lack of knowledge should encourage you to learn, or talk with a professional. It shouldn’t be a prima facie reason to not use a vehicle. Embracing ignorance is the best way to guarantee a “bad” outcome.
The exceptions are not obscure at all, but there but if you have questions I always encourage you to talk to your Accountant or Financial Advisor is you have questions. There’s no shame in it.
If you want to talk to us, we’d love to.

David Gimpel, MBA, CWPP™, AAMS™ is the President of Rational Capital Management in Evanston, Illinois. The firm focuses on simplifying the complex financial lives of a select group of individuals and families. Visit RationalCapitalManagement.com or email David directly at david@rationalcapitalmanagement.com for more information.