Case Study of a 70 Year Old – Beating Inflation – Episode 157

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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, we have bestselling financial author and my co-host, Kim Butler with us today. We’ve kind of found that our listeners like to send in their particular information kind of anonymously so that we can maybe give them a little bit of advice, I guess, without the intimidation of face-to-face contact. I don’t know. We’re scary. Yeah. So we are more than happy to do that.

[00:56] In this particular case, we have a 70-year-old gentleman. His wife has passed away. He is what you would consider rather well off under some circumstances. He has about one point five million dollars that he currently has invested in the stock market. Now, he has three children. He has basically as a gift to them, he has financed each of their houses at a very reasonable interest rate, and that’s kind of his income. And his concern is, is that, you know, the 70 is the new 50. So 70 may not I mean, he may live another 25 years. And how do I make that one point five million dollars? He’s debt free. His house, I mean, his house is paid for. He has a few investments that he’s made with his kids.

[02:03] But basically everything is riding on the stock market. And his two fears are one, I’ll outlive my money and two, my investments will go backwards because the only thing that he’s guaranteed is he could lose everything. Correct? Absolutely. Our age old question of what’s the guarantee of a stock market? Zero. No, it’s negative a hundred. So if you, you know, I know that’s not a ton of information, but if, you know, what would you suggest to this person? Well, it is interesting. It’s enough information for me to start to give somebody like this direction. And I love this problem because it’s a very, very common problem for people as they look at their finances. And the essence of the problem in my mind is that they’re trying to get the

[03:00] stock market to be both their emergency opportunity liquid account and their growth account and their income account. And in the old days that could have worked. You know, you were able to buy dividend paying stocks. You could buy some value oriented stocks, maybe for growth. And then you could have some others that you wouldn’t mind selling, or maybe you could use T-bills or something like that for your liquidity. But I find in today’s world that that does not work anymore, that they’re trying to get the stock market to do three totally indistinct separate things. So what I would encourage somebody like this to do is, first of all, we need to be prepared for a lot more than 25 years, if he’s healthy, living to 95

[03:47] is going to be a piece of cake. Like he could hit a hundred, 110 easy. And so I think it’s going to be super, super important that he divide his money up and the first thing that I would ask him to consider is how much money he wants for an emergency opportunity fund. So let’s say he says a hundred thousand dollars, a hundred grand is going to help him sleep at night. It’ll be an emergency money. If he ever needs it, it’ll be an opportunity money. If something comes down the road that he wants to pursue. And so we need to carve out a hundred grand and put it somewhere that is cash oriented, totally liquid, where it will never go down again, but it will be there for him and be able to be used and yet still earn a

[04:32] decent rate of return, like decent enough to beat inflation or at least keep pace with inflation. So of course, our favorite solution for that type of situation is either life insurance on himself, or I’m guessing in his case, he would like even better the idea of buying life insurance on his children. So this is where he would own the policy. They would be the insured. So if he dies, nothing’s going to happen. It’s an account that literally will just transfer to them. But if they die, of course, there would be a death benefit. Hopefully that won’t happen while he’s still living. So in the meantime, what he gets is an opportunity to own insurance on, let’s say a 40 year old, where the internal rate of return is going to

[05:19] be probably around four or four and a half percent as of this recording in 2016 or 2017, depending on when it gets released. And that will be a higher internal rate of return than would be for somebody that’s 70 years old. So that’s my first suggestion is carve out a certain amount of money and have it be identified as his emergency slash opportunity money. And one of the things I just want to mention, it’s not, it’s kind of a cool thing about this is, is that if he were to take a 40 or even build that up to a hundred thousand dollars cash value in those policies and he were to sign those policies over to his children, they are completely exempt from the gift tax, aren’t they? Absolutely. Now, if they get too big, he may have to use up some of his individual

[06:17] credit, but that is still a fabulous way to get some money passed on to the next generation. Cool. Okay. So we’ve, we’ve, we’ve, we’ve invested some liquid money, um, that we’ve got for our emergency fund. Um, and I will mention that, you know, that four and a half percent really does kind of keep track of inflation because as inflation starts to come up, that interest rate comes up as well. Absolutely. So let’s turn to what he can do then with the $1.4 million that are left over. And by the way, I got to hand it to him. His financing of his children’s homes was fabulous and good for him that he did it at interest. I think it’s a really common thing for parents to want to just give their kids money to do something like finance a home, but good for him,

[07:10] even if it’s a reasonable interest, three, four or 5%, you know, that’s what would be in the marketplace anyway right now. And so that’s a little bit of income for him. That’s awesome and a great strategy. But I would like to really help him get more income. So just off the top of my head, I would say, let’s maybe find out about how much income he wants. You know, I’m sure he’s got some social security and who knows he may have a pension or something, probably not anymore these days, but let’s just say that he needs a little bit more income per month. Well, we could work that backwards and let’s just take a conservative interest rate. We know where we can get investments that absolutely without a shadow

[07:53] of a doubt will send him a 7% income stream and it’s paid monthly. So whatever number he needed, we could work that backwards. And let’s just say for discussion purposes that it’s $500,000. So I would have him put, we had a million five, now we’re down to a million four, I would have him put 500,000, so now we’re down to 900,000 left over, put 500,000 into our bridge loan environments. We have three or four different ones that will earn at least 7%. Some of them are a little higher than that and get him used to receiving a monthly check. Some of them are quarterly, but the point is that they pay a check consistently and then that will really give him confidence to do what he needs to do in two realms.

[08:42] The first realm is just live his life. Like go travel, go do what you want to do because you’ve got this income coming in. The second realm is take the remaining 900,000 and invest fully. Because one of the things that people are so afraid to do if they don’t have income is tie up their money in a decent investment. So he’s not needing to hit 30 years or anything, but if he can be confident in say seven to 10 years, even five to 10 years, then we can put that money to work for him at close to a double digit rate and absolutely assure him that he’s not going to lose principle on either case. In other words, he’s not going to lose principle on the bridge loan that would pay the 7% income and he’s not going to lose principle on

[09:30] the alternative investment of either life settlements or another type of bridge loan where he can absolutely make that money grow because this guy’s number one problem long-term is going to be beating inflation. And so if we can get the money to grow, then every five or so years, he can take some of the 900,000 that’s growing and move it into the $400,000 pot of money, thereby increasing his income. And if he does that every five years, over time, the $900,000 will shrink and the $400,000 will grow, thereby increasing his income, increasing, increasing, increasing, literally until he dies such that there’s a good chance he’d still have assets left for his family. And he would have had an increasing income from age 70, literally until the

[10:29] day he died, thereby enabling him to beat inflation, which again is going to be his number one problem to contend with. I can remember, you know, I don’t know, you may not be old enough to remember the gas rationing when you got your coupons and you had to stand in line on your coupon day and buy gas. And when we did that back in the 60s and 70s, it was 50 cents. Wow. And people complained about 50 cents. So, uh, I mean, it’s, the inflation part is something that people just don’t think about. I mean, a million dollars is not a million dollars anymore. Absolutely. It always cracks me up when somebody says they’re a millionaire. Okay. So the typical definition of a millionaire means that they have a million dollars.

[11:27] And to me, that’s, I mean, that’s just for some families, that’s awesome. And I’m not making a judgment call on this, but even using the words, I’m a millionaire, it just doesn’t have any meaning. Now, if you have a million dollar income per year, that’s a different discussion. But this concept of a million dollars, which has been around since the time began, that somehow that’s the end all and be all of financial work is just ludicrous. I mean, that’s like a 20,000 a year income with not even helping out in inflation. Well, and again, there’s two, two reasons for that. One is inflation and two is longevity. I mean, money didn’t have to last as long when we all died at 65. I mean, now, now we have to think in terms of a hundred years and, um,

[12:20] that just has changed the game for everybody. Very true. Um, Kim, I know you’ve, you, uh, have always done such a good job of, uh, giving our listeners a gift to kind of get them started. Um, can you kind of go over that? Absolutely. So we have a booklet called financial planning has failed and it addresses some of these issues and it also talks about the three solutions that we covered today, the life insurance as a place to store cash, the bridge loans as a place to create income and the life settlements as a place to grow your wealth without being worried that it’s going to shrink. And so I really encourage people to grab it. It’s available at partners. Number four, prosperity.com slash ebook.

[13:09] There’s an audio version. There’s the physical version is the only place you can get it. It is not at Amazon. And again, that’s partners. Number four, prosperity.com slash ebook. And again, if you’d like to have your personal question or you’d like to make a comment or maybe you even disagree with us, hello at partners. Number four, prosperity.com is the number that you would use. Kim, special appreciation to you. I know, um, your schedule is so tight, but you always make time for our listeners and I appreciate that. And, uh, we also appreciate those listeners out there. Keep sending in your questions and we will do our best to keep finding new answers again. This is no BS money guy, Todd Strobel.

[13:53] Take care and we’ll see you all 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. If you liked this episode, make sure you subscribe and leave a review. I think it was important to think about where we would be in the future. All the tools to analyze sales, such as inventory management, are right there on our dashboard. Start your free evaluation at shopify.com.