Jamie Hopkins: Why Debt Is ‘Powerful,’ Annuities Are ‘Underutilized’ and the 4% Rule Is Just a ‘Finding’

Here’s a crisp and clear message to financial advisors from Jamie Hopkins, managing partner of wealth solutions at Carson Group: “If you don’t really care about what you’re doing, you’re in the wrong business,” he tells ThinkAdvisor in an interview. “Define your ‘Why.’ Your ‘Why’ should make you cry.”

In his newest book, “Find Your Freedom: Financial Planning for a Life on Purpose” (Harriman House – Nov. 22, 2022), co-written with Ron Carson, founder and CEO of Carson Group, readers have the freedom, of course, to hop among the 26 chapters. But chances are they’ll want to take in this comprehensive, conversational tome from cover to cover.

It provides a trove of financial planning insights as well as the likely repercussions of failing to have a good financial plan.

In the interview, however, Hopkins maintains that there’s typically little need for an all-inclusive plan if, for example, you’re only in your 20s. Estate planning can come later.

Finance professor of practice at Creighton University’s Heider College of Business, Hopkins co-created the Retirement Income Certified Professional designation and developed additional educational materials for the American College of Financial Services’ Certified Financial Planner and Chartered Financial Consultant programs, among others.

In 2017, seven years after Hopkins earned a Juris Doctor degree from Villanova School of Law, The American Bar Association named him one of the top 40 young lawyers in the U.S. In 2022, he served as a judge for ThinkAdvisor’s LUMINARIES industry recognition program. 

In our conversation, he explores a number of financial planning concepts, including the use of debt as a powerful tool. He also talks about why he thinks annuities are “oversold and underutilized” and why the 4% rule isn’t a rule but “a withdrawal finding.”

ThinkAdvisor recently held a phone interview with Hopkins, who was candid in a brief assessment of financial advisors.

He would hire only “5% of the financial advisors out there,” he declares, and then offers reasons.

Here are highlights of our interview: 

THINKADVISOR: How do you define “financial freedom”?

JAMIE HOPKINS: People need to define that for themselves. You have to start with understanding your relationship with money, where you want to go with it and who you want to be. Then work backwards toward what financial freedom means to you.

How can advisors take their own personal financial freedom to the next level?

Define your “Why.” I always say, “Your ‘Why’ should make you cry.” If you don’t really care about what you’re doing, you’re in the wrong business — whatever you’re doing in life.

I think most advisors should put their “Why” on their website. Do a video about your “Why.” 

Figure out what you actually want to do as an advisor. Make sure you’re only focusing on doing the things that you want to do, whether that means partnering, finding the right tech tools or leaving the firm you’re with and going out on your own or joining someone else’s firm.

You don’t have to feel like you’re stuck in life by default. 

What is the Carson “Find Your Freedom Planning Promise”?

It’s following a proven financial planning process that will get you to where you want to go. 

Advisors need to help people understand the basics first — saving, income [and so on] — and then get  more strategic about the decisions they ultimately have to make, like layering in legacy and more complex planning topics.

What keeps people from wanting to do a financial plan?

Everybody has parts of a financial plan. You might not put it all together [now] — and that’s OK. Not everything has to be wrapped up [at once].  

You can be in a part of life where only pieces of a plan are in place because that’s what you need at that [particular] phase.

If you’re 26 years old, for instance, you don’t need to know what your legacy, estate planning and charitable [strategies] are yet. 

But you have to align your planning with your objectives and goals. No one plan fits everybody.

To what extent are millennials and Gen Zs involved in financial planning?

It all depends on what phase of life you’re in and where you are at that stage, not how old you are.

The oldest millennials are in their 40s. They might even be thinking about retirement strategies. Some millennials in their 20s are millionaires.

However, most younger people are thinking about housing, managing debt and understanding their relationship with money. 

[The last point] is a core part of what [advisors] used to skip over: The behavioral aspect of understanding your relationship with money is incredibly recent. It’s only been two years since that’s been added into CFP education.

And one thing we have to get a better understanding of is whether you’re a debt-averse person or a more risk-tolerant person. 

How can “debt be a powerful planning tool that helps us open up possibilities in life that you wouldn’t have expected without it,” as you write?

Take a lesson from the best companies in the world: They almost all leverage debt to grow. Debt is a very powerful growth vehicle.

So you should always look at what [rates] you can borrow at and what you can leverage elsewhere. That should be an annual decision.

For Americans, the two biggest debt decisions are college education and buying a house. Also, you might have debt that comes in on your business side.

Any time you’re borrowing, you’re also making a decision as to how much to borrow vs. how much to invest.

Even if you’ve paid off your mortgage and you’re 62, you’re making an annual decision as to whether, for example, you should pay all taxes [with cash], refinance your mortgage or do a reverse mortgage.

Insurance is very important to a financial plan, you write: “Being without insurance is like having a steering wheel but no car.” But why do you need insurance if you’re investing in the market?

Insurance is often a risk-mitigation or transfer technique. Tax-free death benefits from life insurance can be a more efficient way to transfer wealth.

There are certain things that market returns can’t solve. For instance, no return can [provide] lifetime income.

Another example is health insurance. It doesn’t matter how much money you save and invest if you don’t have the right health care coverage, which can often be used to get preventive care. 

“The five years right before and right after retirement are when people need to be the most conservative with investing,” you write. Please elaborate.

Historical data supports the fact that the worst-case scenarios are when you take a lot of risk right around the time you retire and the markets pull [back] when you have to take a distribution.

The argument is that you should get a little bit more conservative right around retirement, and then you can increase your total percentage in equities over time throughout retirement.

That’s the [better-] performing strategy than decreasing your equity positions over time in retirement.   

It’s been shown that taking that risk off the table, from a volatility standpoint, ends up depleting retirement portfolios fast.

Where do you stand when it comes to the 4% rule?

It’s not a rule. It’s a 4% withdrawal finding. A rule implies that you have to follow it. 

The 4% finding was super-helpful as a guideline for withdrawal strategy. But when markets go up or down, we change our spending. We don’t adjust the 4% for inflation perfectly every year. That’s not how people behave.

But the finding does tell us that if we’re spending 8% a year, that’s probably not sustainable. And if we’re spending 2% a year, we probably have more wiggle room to spend more.

The single most important lesson of the 4% withdrawal finding research was that it brought out the fact that you could average, say, 8% over the course of your retirement but only be able to spend 4% because of sequence of returns risk. 

You write that annuities are often “oversold and underutilized.” Please explain?

Because the industry, the insurance companies, try to position them as the solution for everything, as opposed to being solutions that fit into a person’s plan.  

Academic research shows that annuities play a very important role: lifetime income in retirement income plans. 

But we don’t use annuities enough. Individuals’ perception is: “Every time I talk to somebody about annuities, they tell me it will solve everything in retirement for me.” 

This, in part, causes less of an uptick in the mass adoption of annuities.

“The shift from the accumulation phase to the decumulation phase requires very strategic decisions for most retirees,” you say. Please explain.

Part of that is a shifting of behavior and mindset. I think advisors didn’t start to realize this early enough. 

Throughout our whole life, we’re told over and over again to save more money: Put it aside, you’ll be fine.

But the reality is that once we get to retirement, it’s all about how we take distributions. However, we have no experience doing that to make [the money] last through a lifetime.

So this is a fundamental flipping of what we’ve been told forever. It’s all about: How do I spend and still be OK?

Where do financial advisors come into the picture?

The advisor’s role is to help craft a plan that’s sustainable but also makes people feel OK and have permission to spend.  

Advisors can add value, such as layering in income sources like deferring Social Security or buying an annuity, which give people permission to spend and not have their money run out.

“Interaction between required minimum distributions [from retirement accounts] and other taxes is so strong that, if we fail to plan [properly], we could be costing ourselves tens of thousands of dollars in additional taxes,” you say. Please elaborate.

RMDs are one of the few times in life where we have forced taxation. If we’re not paying attention to RMDs, it can have [a host of] ripple effects.

For example, RMDs can increase our Medicare premium cost or change the deductions that we’re getting for a small business. They can increase state and local taxes.

Because we’re subject to RMDs [from age 72], we lose a lot of the flexibility in planning. So planning should be done in the decade-and-a-half before we get to RMDs.

Do you recommend that people who dollar-cost-average continue to invest this way in the current down market?

It depends where you are in life. People nearing retirement probably have needed to take risk off the table because they must start spending soon. 

[In contrast], I [personally] still have 30 years to invest and just put $15,000 into the market this morning. 

If you know that your money and investments aren’t for tomorrow, you’re more OK with taking some risk and you’re more okay with volatility.

But if that money is for your mortgage tomorrow or a house you’re going to buy in a year or your kid’s college, you need to have the certainty that you can afford it and might take some risk off the table instead of continuing to invest.

You write that you would hire only about “5% of the financial advisors out there.” How come?

The main reason is that I don’t think most advisors are engaged in planning; nor do they have the level of education they need. 

A lot of advisors work in very narrowly defined systems where they’re still pushing a lot of product or individual strategies. They don’t engage in financial planning. 

And I think the profession still hasn’t focused enough on transparency. That’s been a huge issue for a long time.

Clients can find information about what [they’re] paying for [their advisor’s] advice and what the underlying fees are that are wrapped into the portfolios. But with a bunch of advisors, it’s often not upfront and very transparent. 

So becoming a more fiduciary client-interest-first advisor and having a better education, like a CFP, is core.

I wouldn’t hire a surgeon or a lawyer who didn’t go to med school or law school. But 90% of the advisors out there didn’t have any formal education or training.

Yet people hire them [to invest their money].