Case Study – Part 6: Couple Earning $45k Each a Year – Episode 175

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, I have our co-host and bestselling financial author, Kim Butler, with us today. And today we’re going to be picking up on John and Jane meeting 4.0. We call that meeting 4.0, realize that we believe that we should break financial decisions into a series of financial education sessions. This would technically be our fourth session. Sometimes we accelerate that, sometimes it takes more time.

[01:06] It is totally dependent upon the client. But in this particular case, we have John and Jane, and we found that our listeners find that it is very useful to have a real live case study to learn from. So welcome, Kim. Well, thank you, Todd. Yeah, this is a fun one. So this couple is actually almost 30 as they come into this meeting. And five years prior, without checking in with us, which happens often, they both got $5,000 raises, and they decided to put it all into their 401k plan at work, which is commendable. They did a good job of saving the money. That $5,000 per year was getting a match, M-A-T-C-H, of 50% up to 2% of their income. And the second part of that sentence is really important.

[02:10] A lot of people, when they hear, oh, I’m getting a 50% match, they think that’s an unlimited 50% match. And on occasion, on rare occasion, it is. But in this example, it’s 50% up to 2% of their income. So they had sent the statements in ahead of time, and we did a quick analysis. And I’m going to do the best I can describing the analysis that’s fairly heavily numerical here on the podcast when you don’t have any calculator to look at. But one of the first things that we did is help them understand why it looked so good in the short run. So we took a rate calculator, just a simple financial calculator that you could get on your iPhone or Android app as a financial calculator, and we put in, so we went

[03:00] backwards to the beginning, zero balance, payment of $5,000 a year times .75, because of course, the $5,000 is going in, but they’re getting a tax deduction for that contribution in a 25% tax bracket. And the future value, so today, was $29,125 over a five-year period. And that equaled 15.06%. And that’s a very common calculation that people will do, especially on the short run. They look at their qualified plan, they put their money in, and they put it through the calculator, and they think, oh, my gosh, I’m earning 15%. This is awesome. Well, we had the joy, joy in quotes, of telling them that they didn’t have the whole truth. So we used a truthconcepts.com financial calculator that is called the

[03:54] qualified plan, which is for 401Ks and 403Bs and profit sharing and pensions and KIOs and IRAs. And we took this same five-year period, $5,000 for five years, and we just, first of all, looked at it at 4%, because that’s what they thought they were earning in their mutual funds. And so that’s what they were not understanding. Like, you know, we think we’re earning four, but then we see this 15% on our calculator, what’s going on? We put in a 50% match up to $1,000, because that was the 2% of their income, and then we showed the tax deduction and the tax deferral. Now, in addition, because they were truly looking at the qualified plan here at age 30, we showed the penalty, and it was amazing what

[04:53] the ridiculously low rate was that that earned. And so it wasn’t the 15% that they thought, it wasn’t the 4% that they thought, it was actually less than 1%. And so just thinking about this conceptually, what this helped them see is that the qualified plan is not doing as well as is talked about. And they kind of knew that in their hearts, but we were able to use the truthconcepts.com qualified plan calculator to show that to them. So thanks for hanging in there with us on the verbal description of a very numerical fact. I would actually refer you, if you want to see that type of an example, I would refer you to our Busting Retirement Lies book, which uses that qualified plan calculator and goes through a case study.

[05:47] The numbers are different, but it’ll help you get your own sense of it. I also just want to share one of the additional things we did is they said, well, you know, maybe we’re earning more like 6% instead of four. Can you take a look at it? Well, when we took a look at the 6%, all it did was bring it up to a 3.69% return. So it still is very, very much lower than they thought. Now here’s the fun part. Actually, before I go on to that though, Todd, any questions, any, any things you think need some additional clarity? Well, I think that the thing that we need to think of is that, you know, employers who offer a 401k plan are not, I mean, altruistic. I mean, they’re doing that because any amount of money that they

[06:43] contribute to a 401k plan versus giving you an income, they also get a huge tax break on that money as well. So, I mean, it’s not that your employer is trying to, I mean, you can have the best employer in the world. And I mean, they want to try to plan for their retirement. They’re offering something to you for your retirement. The question is, is it the best thing for your retirement? That’s the question that Kim Butler is here to answer today. Well, it is interesting. Our question to them was, what if we could increase the rate that you’re getting on your qualified plan without changing any of the investments or anything else? Because these people are still at work there. It’s not like we can roll that qualified plan or 401k out into

[07:43] an IRA and do something else with it. So the way that we increased the rate was to actually drop their contribution down to the match level. So instead of putting in 5,000 a year, like they had been, we had them put in only 1,000 a year, like their match was doing, so they put in a thousand a year and the match was putting in a thousand a year. So we’re changing max, M-A-X, to match M-A-T-C-H. That’s right. And what that did was enable them to, first of all, get a higher rate. So it was now back up into the 5% range instead of just over one that it had been, but more importantly, it enabled them to take the $4,000 difference, pay taxes on it, and contribute that difference. So the 4,000 minus taxes is 3,000 to a small whole life insurance

[08:51] policy with a maximum pay to petition writer. So instead of M-A-X-ing the qualified plan, the 401k, we’re M-A-X-ing their brand new whole life insurance policy, and that gave them more money in the whole life insurance cash value than they lost from not funding the qualified plan as heavily. Now, of course, this makes some assumptions that the qualified plan interest rate didn’t change, which of course we know it’s going to. It also made the assumption that the insurance company’s dividend didn’t change, which of course we know it’s going to. But it is pretty interesting that they were able to get a higher rate of return on their qualified plan, shift assets to an environment that they were able to control and have more cash value than their qualified

[09:55] plan had in cash over a 30-year analysis period. So by shifting the money from above the match level, M-A-T-C-H, in the 401k to the life insurance, they actually got ahead, assuming all of the numbers stayed the same as they were today. Well, and the first question I would have to ask is how much of their money is potentially at risk in the 401k plan? 100%. Okay. How much of their money is at risk in the life insurance plan that you presented? Zero percent. So, I mean, technically you could walk away with nothing. I mean, even if it’s matched versus a guaranteed rate of return per year, that can never be taken away from you. Am I understanding that correctly? Absolutely. So whole life insurance has a guaranteed cash value, and that’s

[11:05] assuming that dividends are never paid. Now, dividends have been paid by most whole life insurance companies every year for over a hundred years. So we can be confident using the dividend rate, which is of course higher than the guaranteed rate, but we can also know that there is a guaranteed cash value and it is setting a new floor every single year. That cash value grows, it sets a new floor and it can never go down. So it’s a guaranteed dollar figure, not just a guaranteed interest rate. And that’s a very important distinction. And it’s the only product that I know of that has a guaranteed dollar figure. CDs, of course, have guaranteed interest rates. Annuities have guaranteed interest rates, but only whole life

[11:54] insurance has a guaranteed cash value, which is actually a dollar figure. So my question to you is, is, okay, let’s assume John and Jane are 45 years old, they need access to this money because they have an opportunity to buy a real estate property that is 50% less than what they had ever hoped to pay for it. Where would they go? Then they want to borrow against their cash value of life insurance and let us know that they’ve either found a property themselves, which many people do, or they need help finding one. And we can get them to one of our bridge loan providers and enable them to buy the property 50 cents on the dollar, get it rented out with providing the renter from the company that does this work, and then they get the cash

[12:50] flow, which can then help them pay back their life insurance loan. And what would it take for them to get their 401k money back? I don’t think that’s available at all. Well, that’s not true. They could pay a penalty and taxes. Well, I mean, not only the penalty and taxes, but would you not also have to separate from your employee or for most cases? If you didn’t, you could still get the money via hardship loan. I think I will admit, I don’t know those rules real well, but yes, if you really wanted access to all of it, you would have to separate from your employer. So, I mean, literally, which gives you more control? The whole life insurance every day of the week. So we’re getting a positive rate of return, no loss of principle

[13:46] and access to the money when you want it, not when the employer says you can have it. I mean, am I missing something? Not that I can think of. That’s a great summary. And isn’t it wonderful that this product’s been around for over a hundred years, almost really 200 years in a lot of cases. And it just works. Boring, but effective is my term for it. And not that we necessarily want to be comparing whole life insurance to our 401k, that’s not necessarily the goal. The whole life insurance is the place to store cash. And as you so wisely asked, you want to look at the control and you have a hundred percent control over your whole life insurance policy, zero percent control over your 401k plan. And this was a challenge that this couple had.

[14:37] They had no money that they controlled. All of their dollars were going into this 401k plan that the government controls a hundred percent of. Absolutely. And the minimum age that you can draw that money? 59 and a half. I mean, how many times do you have opportunities prior to 59 and a half versus after 59 and a half? Yeah, that’s a great question. And it’s unanswerable, but we all can guess that there’s a lot more on the early side than the latter. So, Kim, I know that you have some additional information that’s available to just our listeners. And I would like for you to make that available if you would please. Yeah, we have a fun ebook that is at partners number four prosperity.com slash ebook.

[15:31] You cannot get it on Amazon. The ebook is also available as an audio version. So those that like to listen can hear it that way. It’s called financial planning has failed and it actually covers some of the information about the types of real estate deals that we like to get our clients involved in. Of course, it also covers some hints around this whole life insurance and how you can benefit from it. And it has a few other fun facts along the way that really explain how and why financial planning has failed this country and what you can do about it. And I’d like to point out to our listeners that Kim has several books that are available for sale on amazon.com, but she has chosen this particular book, which I think is one of the better

[16:21] books. Sorry, but I think it’s one of the better books you’ve written and made it available at no cost only to our listeners. So I just want you to know how much I appreciate that. Absolutely. It’s a joy to do super. Well, this is no BS money guy, Todd Strobel. I hope to hear from you at what if you have questions, what’s the best way to get a hold of you? Hello at partners, the number four prosperity.com. We will answer questions. We will put your case studies on the podcast and we appreciate you listening again. Take care and we’ll see you real soon. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com.

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