1 Million Dollar Question – Episode 155

This transcript was auto-generated and may contain errors.

[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, we’ve got bestselling prolific financial author, Kim Butler. Those books just continue to keep pouring out on Amazon. All of them are great. I encourage you guys to go out there and check them out. And today we’re going to be talking about a $1 million question. And let’s just kind of set this up. We had one of our podcast listeners say, okay, let’s say if I won a million dollars

[00:53] today, what would I do with it? And I think this is kind of a fun thing to play with. And it’s really kind of educational because it shows you how it’s not so much significant the amount of money that you have. It’s the time that you have to invest it and how long it is before you need it. How are you, Kim? Very fine, Todd. And I’ll let you in on a secret. And that is that we have our sixth book starting as of today. So we just released the fifth one that’s Busting the Life Insurance Lies. And the sixth one will be Busting the Estate Planning Lies. And we hope that it’s out in July or so of 2017. Awesome. And for our listeners, we have just negotiated a deal with one of the top estate planning

[01:52] attorneys in the country who’s going to provide a separate educational system with multiple topics to help people understand what they should be doing today. And he’s also very politically active and kind of has his finger on the pulse of where he feels the estate planning arena is going. And I know you hate the word planning, but is there any way to say estate something else? You know, it’s funny, Kate, our marketing strategist and writer and I tossed that back and forth and we finally gave up when it comes to estate planning. It’s all that it is. It’s yes, you just have to use the word planning. And so I’m OK with that. I’ll get off my planning soapbox. OK, all right. Well, let’s kind of start this out.

[02:42] And unfortunately, the listener who sent this in really didn’t give us a scenario of the age or the income or anything that a person has. So I want to kind of start and say, OK, I’m 30 years old, you know, I probably have some student loan debt, probably been in my first house and have a mortgage, maybe got a couple of kids. I’m working my way kind of through the job ladder and I inherit a million dollars. And of course, the first thing that goes through people’s mind is you’re going to pay off all your debt, quit your job and live happily ever after. Does that work? It doesn’t. And, you know, I was just listening to a YouTube video yesterday that’s from one of these entrepreneurial people that have made their millions and they’re out

[03:34] there talking to others about how to do it. And he kept talking about when you’re a millionaire, when you’re a millionaire. And I wanted to stop the video and say, wait a minute, does that mean a million dollars of cash flow? Well, we know it doesn’t. I mean, most people, when they say when you’re a millionaire, they mean that you have a million dollars, and it’s so important for our listeners to understand that a million dollars is nothing like that’s the starting point, even for people early, early in their career, a million dollars should be a goal. It is not an end game. It is not what will solve all of their financial problems. And yet here’s this person that’s emailed in and has this inheritance.

[04:20] And how wonderful it is that we can provide them some guidance. And I’m totally looking forward to do it. So we’re going to set up the stage. We’re going to do two different case studies. One is your 30 years old, a little bit of debt, million dollar inheritance. And you have a job right now. Correct? That’s how you set it. Correct. So you’re working. And I mean, you know, probably at 30 years old, even if you’ve done things correctly, you know, you’re not probably going to pay cash for a house, which means, you know, you may be saving 10 or 15% if you’re doing well. And maybe you’ve got us beginning of a retirement account or something like that, but the main thing is, is that your cashflow is probably pretty tight.

[05:06] So if we took that million dollars and didn’t want to touch the principle, because at 30 years old, we have a 60 to 70 year life expectancy left, don’t we? Absolutely. It is totally common for people to be living well past a hundred. You know, the insurance companies these days are using age 121 for people. And that doesn’t mean everybody’s going to live to 121, but whereas a life insurance policy used to be analyzed out to age 100, now it’s out to age 121 and that just needs to tell us something. So, yeah, if you, if you’re 30 and you have your million bucks and you have your job, please, please keep your job. And yet from that million, you can do some fabulous things. So the first thing that often people take a look at is paying off debt.

[06:00] And I would agree that you could use a rule of thumb of 8% for the cost of debt. Anything over that should be paid off. Anything under that should be kept. So, you know, Kiyosaki, he has a good debt, bad debt thing. A lot of people talk about efficient debt versus inefficient debt. And we’ve for years used 8% as that dividing line. In other words, 8% or under is fine and 8% or over, which obviously eights in the middle could go either way, 8% or over is not as efficient debt. So credit card debt, fine, paid off. Student loan debt, if it’s more like six or seven, we can help find investments that earn more than that. And so you’re better investing those dollars and earning the investment income and then using that investment income to pay the debt rather than

[07:02] just paying it off. However, after the inefficient debt gets paid off, there’s something that’s more important to do before you start to invest. Do we need a drum roll? I’m going to guess on this one because this was the first thing I thought of is before we do anything else and you tell me if I’m wrong, shouldn’t we think of protecting that million dollars with insurance? Absolutely. Not only should we protect the million dollars, we should protect our ability to get up and go to work every day because that million dollars is a nice windfall, but it’s actually not our greatest asset. Our greatest asset is still our ability to get up and go to work every day. So you want to look at using just a little bit of the inheritance.

[07:55] I would say on average about 5%. You want to use about 5% of the inheritance to buy life insurance and disability insurance. And our listeners know we don’t talk about disability insurance very much, but it’s still a very viable tool that protects your number one asset, which again is the ability to get up and go to work. I have a question that I’ve always want to know the answer to, and maybe you can provide it. If I’m working and I buy my own private disability policy, and then for whatever reason I stop working, not for a disability reason, whether I’m unemployed or maybe I just decide that I can’t afford to stop working, and then I become disabled, am I still able to file a claim? Absolutely.

[08:44] If you have bought your own disability coverage, then that is typically what’s called own occupation definition. And so while the exact date at which you became disabled, you might not be employed, you still have an occupation that you are involved with. Now, if it was 10 or 20 years later, then maybe not so much. But if this is something, you know, you’re between jobs or you’re taking a sabbatical or something like that, I have to believe very strongly, and I could be wrong. You know, there’s a chance that a doctor or an insurance company would interpret it differently. But I have to believe that that coverage is going to stand the test of time and get paid based on the occupation that you are in, in a

[09:32] normal environment. So yes, a personally owned policy is going to pay. Of course, one that was through work would no longer exist. Awesome. Okay. So we want to get our million dollar, we want to get our life insurance, and we’re going to use that life insurance, not only for that death benefit, so that if we have to, you know, for whatever reason, good or bad, something happens to part of that million dollars, it will always exist. But there’s another component to that that gives us the ability to still use that policy while we’re alive, doesn’t it? Absolutely. And that’s actually the second most important thing that needs to happen again, before investing is saving. And I really want people to encourage the use of the word saving as a

[10:22] verb, like an act, a thing that you do every single month, you need to keep saving and, or you use a portion of the inheritance to do some lump sum savings, but life insurance actually doesn’t work very well with lump sums, it can, but you’re so much better creating some of your own cash flow, again, whether it’s work oriented income or investment oriented income, create extra cash flow more than what you need for your lifestyle and save it. And that act of saving, so saving as a verb, as a habit, and then of course, savings as a noun is what’s going to protect you on a go forward basis and not cause you to become one of the statistics that is out there that’s so prevalent where people either win a lottery or

[11:16] they get inheritance from grandparents or parents and they lose it within two or three years because they just do not know how to handle it. If you force yourself to save on an active monthly basis and you force yourself to have savings, then that emergency opportunity fund where your savings is stored again, yes, the best place for that is the cash flow of life insurance, whole life insurance to be specific, then you’re going to put yourself on a much firmer foundation for financial success. Then if you don’t have that emergency opportunity fund, again, stored inside the life insurance, but my insurance agent warned me and showed me the statistics about how I am going to be broke in three to five years.

[12:07] If I don’t do something immediately with that money. So I need to put it in an annuity to protect my income for life. Well, that would certainly be one perspective. This happens a lot. So, I mean, I’m not saying I agree with it, but. So I will share a different perspective. Annuities are interesting animals in that they are sponsored by insurance companies and we’re big believers in the life insurance industry’s strengths. However, we’re also big believers in control and the fifth principle of prosperity actually of the seven that we espouse is control and when you purchase an annuity, especially a deferred annuity, which is probably what they were talking about, would be naturally the case for a 30 year old.

[12:59] A deferred annuity absolutely causes you to give up control. So I would prefer that you keep control of your cash, do the cash value, whole life insurance product that again, you’re going to pay for monthly or annually with a portion of this inheritance. And then I would encourage you to consider investing the rest and something that’s truly going to have the opportunity to get what is should be close to double digit returns. That should be your goal is double digit returns on your investments. I mean, like 10% low double digit returns. Now you may not be able to get there. Maybe it’s seven, eight or 9%, but typically in today’s market, annuities are paying five or 6%, maybe seven, and I don’t feel that

[13:50] that’s a strong enough investment to warrant giving up the control. In fact, I wouldn’t personally call an annuity an investment at all. It’s a place to store cash, but then it’s not liquid. So to me, it’s not a good place to store cash either. Absolutely. So what we’re talking about here is putting money into, into some safe investment accounts that have the ability to generate cashflow. And once again, we’re talking about the same argument over and over again. And that’s the argument of net worth versus cashflow. And if you can get 10% on a hundred thousand or on a million dollars, you have a hundred thousand dollars in cashflow part of that cashflow can pay for that insurance. So you’re really not even dipping into the principal and the other part of

[14:39] the cashflow, if you needed it to buy an investment piece of real estate, you could compound that money. If you needed it to live on, you could still protect the million dollar principal, or preferably you could let that money continue to grow. Absolutely. All very well said. And so somebody with the million dollars is technically considered an accredited investor and certainly has access to the goal of that double digit, but even if somebody has a little bit less than that, we can help them find investments that cashflow where they don’t have to be an accredited investor and maybe the return, as I said, is only seven, eight or 9%, but creating an asset that sends a check or automatically deposits money every single month into your checking account is a fabulous

[15:34] structure and should be something that everybody is looking for. And then as you’ve stated, it’s so important that they use that cashflow to then help them continue to build wealth. It would be very easy for that cashflow to just kind of fall apart into the regular checking account and get freddered away on groceries and clothes and whatever. It’s important to use the income to continue to build wealth. And so let’s say somebody has a job and they provide some of this asset base to create income, but they really want to just set some of it aside to really grow for the long term. Then we could introduce the idea of life settlements, the senior life settlements arena, which you do have to be accredited to be

[16:22] involved in, again, a million dollar net worth or two or 300,000 of income, depending if you’re married, that life settlement arena would be a fabulous place to put wealth where it could really grow substantially and not be at risk of getting cut in half by the roller coaster ride or the stock market or any of the other Wall Street shenanigans, can’t even say that word, or who’s in the presidency or the price of oil or the myriads of things that can affect our money. Senior life settlements typically are not affected by those things. And so they can put the money in there and be confident that it’s going to grow. And while the life settlements don’t create cashflow, these other things do. And so if anybody’s curious about this kind of information, if they

[17:12] want more detail about how to use the cash value of life insurance as their emergency opportunity fund, or how to get involved in bridge loans, which create the cashflow that we were talking about, the 7 to 10% cash flowing deals, or the life settlements that have the opportunity for those low double digit returns, all they have to do is reach out to us at hello at partners, number four prosperity.com and just put the subject line million dollar podcast. So that’s hello at partners, number four prosperity.com million dollar podcast in the subject line. We will send you information on any of these three specific products that we’ve talked about today that would help somebody actually turn this

[17:57] million dollars into the foundation that every single person wants with their money. And that is three things, a place to store emergency opportunity money, a place to create monthly income, and a place to grow wealth. All right. So I think we’ve hit the 30 year old pretty good. What’s the next stage you think we should address? Well, let’s just tackle a 60 year old, you know, it could be 55, 65, somewhere in there. I think past 59 and a half, because now you’re in kind of a special arena, you get to do some special things then. Great idea. Okay. So with that environment, what’s interesting is that the same three things are typically desired. The people in that age want a place to store cash.

[18:48] They want a place to create income. Now, in this case, maybe more income than the 30 year old. So you could take that million dollars and rather than doing the typical asset allocation, which a typical advisor would do, you just look at the amount of income that you want to create. So hopefully a 60 year old is going to continue to work as we talked about earlier in the show. Most people are going to be living to well past a hundred. There’s no way that a million dollars is going to sustain you for 40 years. So a 60 year old should keep on working and yet they may want to create a little bit more income. So, okay, fine. You can work the numbers backwards. Let’s say you’ve got a seven or 8% opportunity or even 10, like you said.

[19:34] Well, how much principle needs to be invested to create the amount of cash flow that that person needs. So you can work those numbers backwards. And then I still feel strongly that they would want to have an asset that’s really going to grow because let’s say they invest the senior life settlements and 10 years later, that money is ready to put to use and maybe they even do it again for a second round of another eight to 10 years, that’s what’s going to help them beat inflation. And inflation is one of the biggest detriments of a retiree’s life in the financial side because inflation is a stealth tax and it erodes that cashflow stream and so they’re going to have X dollars creating income from the bridge loans, but they’re going to need to add to that in

[20:31] order to maintain the same lifestyle. And you can do that by using the life settlements and then converting that principle to the bridge loans down the road, which would then supplement the income stream, hence beating inflation. I think, you know, if we go back and look just quickly at that 30-year-old who bought that million dollars worth of insurance. And by the time they get to the age 60, inflation is off the charts and the cash value of that life insurance is continuing to be affected by that same inflation. So while inflation is going up, the accumulation of cash flow is increasing and you have the permission slip then to spend the cash flow, to spend the million and know that, I mean, on

[21:19] average, somebody bought a million dollars at age 30 probably has what, two and a half million at age 60? Right. Yep. And there’s your permission slip to spend that original million and it’ll be replaced when you’re gone. Absolutely. And that’s what sustains families and enables wealth to go from generation to generation is when people have an amount of life insurance that will enable the current generation to spend their assets fully and then pass the life insurance on. Life insurance goes income tax free to the heirs. It’s the most efficient thing to leave around. People should not be leaving 401k plans and IRAs and assets like that for the next generation. It’s inefficient. And just, I want credit.

[22:09] We got this request in about three weeks ago and I did buy a lottery ticket every single week hoping to make this a real show. It just didn’t work. Anyway, this is the No BS Money Guy, Todd Strobel for the Prosperity Podcast. Thanks to all of our listeners. Keep your questions coming. This is a technical subject, folks. If you have questions, do hello at partners4prosperity.com. Special thanks to Kim Butler and we’ll see y’all again 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 partners4prosperity.com. If you liked this episode, make sure you subscribe and leave a review.