Permission to Spend – Episode 038

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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 to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel with bestselling financial author and our resident co-host Kim Butler. Hi Kim. Hello Todd. Happy to be here today. We’ve got a good old subject to talk about to help everybody, even if the actual strategy is in their 70s and 80s, this can impact people in their 40s, 50s, and 60s as well. Super. Well, we’re going to call this one permission to spend, and it’s how to spend your principal,

[00:49] save a fortune on taxes, increase your cash flow, and never run out of money. Or it’s the have your cake and eat it too strategy, as we will call it. Yeah. Well, it’s funny, you know, whenever my husband hears something that quote, sounds too good to be true, Todd Langford always says, well, then you need to check it out further because the old adage of if it sounds too good to be true, it probably is. If that were actually accurate, we wouldn’t have electricity, we wouldn’t have cars, we wouldn’t have cell phones. I mean, there’s all kinds of things that sounded to be good, too good to be true. So this sounds like a pretty big promise to me. Run that by me again. You said reduce taxes, how to spend your principal, save on taxes, increase cash

[01:38] flow and never run out of money. And to me, this is so important because number one, people are living longer than they anticipated. A lot of people took principal losses back in that 2008 area that still haven’t fully recovered or even if they have recovered from that, they’re not on track to where they thought they would be before. And three, the interest rate environment that’s out there right now does not allow them to continue to build the wealth that they need. So you see people trying to live on reduced cash flows that is making what’s supposed to be the most enjoyable period of their life, almost trying to get through it. And isn’t that sad to work all those years to get to a point where you’re

[02:27] trying to get through each day financially? It really is sad. And I’ll tell you, it’s one of the reasons that we don’t recommend retirement, because from a financial standpoint, when inflation keeps happening, if you’re trying to live on a fixed income, it makes it very, very difficult. And fixed incomes, not only are Social Security payments, but what people typically do is they take their interest only off of accounts. And so if you use this permission to spend strategy, you get to take both interest and principal, thereby reducing your taxes, because of course you’re not taxed on principal, and increasing your income. And then of course you get the added benefit of not being as affected by stock market fluctuations.

[03:16] Because if you’re relying on principal reduction for your income, as opposed to growth in the stock market, you have not only a higher income, but potentially an increasing income, and that increasing income can help offset inflation. So even if we jabber on about don’t retire, the fact is at some point you will stop working. And so we want to help you while you’re not working, get the best income that you have, use your money in the most effective way possible. And that necessitates reducing taxes, being able to spend principal and not worry about running out of money. All those things that we promised. All right. So if we look at the type of money that we’re talking about, is this our retirement account or savings account or mutual funds?

[04:08] What specifically are we addressing? Well, in actuality, it will in time be all of the above, but the first strategy that I want to talk about is called a pay down or a spend down. And this is very specifically on after-tax investment accounts. Could be a CD, could be mutual funds, but this is not IRA money, not retirement money. This is after-tax money that you have saved up by paying taxes and investing in something. And again, it’s your CD account, your stock account, your mutual fund that is non IRA. And the strategy, the pay down or the spend down is to take a period of time, 10, 15 or 20 years are the most common. And again, this is something that you’re not going to do until you’re in your seventies or so, even eighties.

[04:57] Now, is this based upon how long you think you’re going to live or just how long, I mean, what determines the timeframe that you use? Yeah, that’s a good question. It really depends more on how much money is in there. So if you have a, say a million dollar account and you’re 70, you could use maybe 10 or 15 years, if you only have a $200,000 account and you’re 70, then you’re going to use maybe five or seven years because the amount of money is not enough to warrant a big enough difference if you spread it out over a long period of time. So we’re talking very generically here on our podcasts always. And this is definitely something that takes some very specific recommendations. However, it’s good for everybody to learn about it, even if you’re

[05:41] in your thirties and forties, it’s good for you to know, because this ability, this permission to spend that we’re talking about is there because of the presence of permanent life insurance or whole life insurance. And I know a lot of people that have bought life insurance in their thirties and forties and fifties for this very reason, not that it necessarily helps them then of though, of course it does, but this ability or this permission to spend is something that they’ll not actually use until they’re in their seventies and eighties. However, if you were 60 and you knew when you were 70, that you could have more income because of your permission to spend strategy, you’d actually spend your money between your 60th and 70th birthday differently than if you did

[06:28] not know that you had this strategy to employ at age 70. So it’s a beneficial strategy, no matter the age. And we started off this program talking about people who are maybe struggling to have enough money to last for their lifetime, but for those people who still have even more than enough money, a lot of people will use this with a giving strategy to benefit causes that they’re behind. So I think this is a good strategy. If you have that money and you want to see this world improved while you’re around rather than waiting till after you pass away and part of your estate, it’s a good, good for them as well. Absolutely. So what you do is you take a fixed account, like a CD or maybe a mutual fund account, again, this is after tax money, and you purposely spend

[07:20] the interest and the principal and by reducing the principal on an annual basis, you have more money to live on or more money to give away as you referenced, and you have lower taxes because you’re spending principal, which has already been taxed. And you have less impact from the stock market and its fluctuations because you’re relying on the reduction of principal to create your income, not the growth in the stock market. So there’s a lot of value there in this permission to spend idea or this pay down or spend it down idea. So let’s say you take your million dollar account, you choose a 15 year timeframe, again, that that’s a personal thing that needs to be decided with you and your prosperity economics advisor, and you purposely make that

[08:06] account go to zero over that, say, 15 year period, thereby reducing the principal, lowering the tax and lowering the impact of the stock market fluctuations and sending more money to you, which you can either spend or give away. And that also then can help you beat inflation, which is a very critical thing for people in their seventies and eighties to have a rising income so that they can beat inflation. All right. But it seems to me that I’ve still lost a million dollars over those 15 years, so we need to see the other half of this. That is correct. And this is why this strategy, though used by people without life insurance, is so much more effective if you have life insurance. So if you own permanent life insurance on yourself, this is an example of

[08:56] where in your thirties, forties, fifties, you want to buy life insurance on yourself so that you can use this strategy, you get to use that life insurance as a replacement for this asset and the pay down and spend down idea are affected by the life insurance because you can do the pay down and spend down and know that the life insurance is going to replace that asset. Furthermore, you could do the pay down, spend down and know that the life insurance cash file you could come back in and you could use dividends or possibly even loans in your later years in order to replace that asset. So the other strategies that we use in this idea are also both benefited by the presence of life insurance. You can think about it like a permission slip.

[09:48] There’s even an age old article out there on the web that was written by a CPA. And what’s the title of that? Something about a permission slip. It’s called the it’s from the CPA wealth provider and it’s called the permission slip. Um, and we do have a question that came in when you’re discussing life insurance, is there a particular type of life insurance? The whole life products are the best because they’re guaranteed to have a death benefit and they have the guaranteed cash value and we know that they’re going to exist for somebody’s whole life. That’s why they’re called that. You can use universal life term insurance, other types of life insurance for this strategy, but it is more risky because those are not

[10:31] guaranteed to exist as long as you do. So we really prefer to see whole life used in this environment because we know that that death benefit is going to pay and it’s the presence of that death benefit that is generating this permission to spend this capability to spend interest and principle and completely reduce an account. Like we talked about to completely reduce the equity in a home. So the second strategy that is going to go along with this is a reverse mortgage and a lot of people do not want to do a reverse mortgage because they’re afraid of leaving their children with debt on a home, but if you have life insurance, then the children get to make the decision. They can either take the life insurance, pay off the bank and keep

[11:21] the house, or they can give the house to the bank and keep the life insurance, which will be of course tax-free and liquid, which might be a better scenario for them. You know, we have so many people across the country that want to save their homes for their children or grandchildren or, you know, possibly even great grandchildren, but frankly, those kids don’t want the house. They already live somewhere. They live in another part of the country, et cetera. So you’d be better to take the reverse mortgage, which by the way is tax-free income. So there’s another example of how we’ve reduced taxes, take the reverse mortgage, get your own income. Now, again, give that away, spend it, whatever you want to do with it.

[12:00] And then let the kids have the choice of either using the life insurance themselves or giving the life insurance to the bank to pay off that reverse mortgage, very, very effective strategy that not everybody likes until they hear it all the way through, but they, they, the reverse mortgages can be again, tax-free income and very beneficial when combined with a life insurance policy. And speaking on the reverse mortgages, a lot of those have the ability to be lines of credit. They can be consistent monthly income, or they can be blocks of cash. So a lot of options there as well. Um, what about other assets? I mean, are there, is there a particular type of asset that this wouldn’t work with? I’m thinking that as long as you’ve got the whole life insurance in place,

[12:49] again, term insurance looks a little risky because the premiums are going to get so big that it may take too much of the cashflow to make the premiums if you live too long, but is there a particular type of asset that you think this would not be good for? Well, the pay down idea doesn’t work as well with IRA money, because of course that’s going to be taxed regardless, but you can still employ the spending of principal idea within the IRA, but I’d actually like to talk about another product that it can work with, and that’s anytime you have something with a large capital gain. So this could be real estate investment, real estate. It could be some type of individual stock that you owned or maybe a

[13:31] business where you have a large capital gain and you do something called a charitable remainder trust. Charitable remainder trusts, when combined with whole life insurance, do a great job of giving you a tax deduction because you actually are donating to a charity and creating some cashflow and income for you to spend, as well as getting you out of paying capital gains taxes on a particular sale of an asset. Again, something that typically has a large capital gain. So it could be life settlements, could be a business, could be real estate. And again, the combination of a charitable remainder trust will give you some very tax efficient income because of the deduction that you get for the donation to charity, but you need it backed up.

[14:15] And again, the whole life insurance does the best job of backing that up. Okay. So we have piece number one is the charitable remainder trust in place. We have the asset that is going to be sold, and then we have the life insurance. What are the steps that we’ve got to go through? So this is a fairly complicated environment needs attorney help and CPA help to get it done, but you effectively are ready to sell the asset and you involve the charity in such a way that that sale is consummated by the giving of that asset to the charity, which then sells it to your buyer because the charity doesn’t really want the asset in most cases. So now the buyer has the asset, the charity gets the money and you got the

[15:07] deduction. And then the actual dollars are provided by the charity. Sometimes again, the term charitable remainder trust can also be charitable lead trust. So it depends on how it’s structured. Sometimes the actual dollars are provided by you and the charity’s getting their remainder. And then that creates the income stream. Again, offset by the donation to the charity and a reduced tax because of it. So there’s a lot of moving parts in there, but we do cover this in our live your life insurance book. We go through the steps fairly thoroughly there and there again is a need for attorney help and CPA help. I would say you would want to have an asset worth at least a million before you considered this because there’s some pretty hefty legal fees

[15:56] that have to go along with it, but a very effective strategy to reduce taxes and increase your income as well as make a donation to a charity. And we get to see the benefit of our money actually going to that charity now while we’re living, I guess, unless we take the, unless we designate the remainder to the charity. Correct. And even then, because the charity does know that they’re going to get it, depending on what’s important to you, sometimes the charity will still do some neat things for you as a donor. If that’s one of the reasons that you’re doing it for a lot of people, they’d rather remain anonymous. And that’s not important, but, and charities understand these very, very well, if you’re ever interested in reading about them, a local

[16:41] charity or a nationwide charity that you’re affiliated with will have good information for you on it. And, uh, if you happen to be in, say your sixties or seventies, maybe you have the assets, but you don’t really have the life insurance in place, is it just too late? No, that’s a great question. We, with a healthy person can absolutely make a case that the purchase of the life insurance will be a benefit to them because of these additional income strategies. And again, it’s not that they’re using the life insurance to create income, they’re using the life insurance to create the permission to spend the other assets, which then create the income often on a very tax-efficient environment. So we’ve got clients well into their seventies that purchase life

[17:31] insurance for this purpose without any detriment to them at all. So would Partners for Prosperity be your first stop as far as would you be willing to help somebody find an attorney and an accountant and the people that they would need to put a team together for this? Oh, absolutely. We can help in that environment nationwide. We have contacts that can do these. And again, your charitable sources also have good contacts that can help get this done. It’s definitely part of the estate planning work that is necessary. If you have an asset that has a massive capital gain that’s been deferred typically, then this is a worthwhile strategy to take a look at. So, and again, that maybe is a little complicated, but just to simplify it

[18:19] for our listeners, you know, taking it down to its lowest denominator, it’s saying, hey, if you have permanent life insurance with a guaranteed death benefit to take care of those things that are important to you at the end of your life, then you can do pretty much anything you want to with those assets you have during your life, correct? Absolutely. And there’s a lot of freedom and flexibility and peace of mind that comes with that capability. Anything else you’d like to add to our listeners? Well, I’m really glad that we’ve had a chance to cover this today. And I want to offer our ebook. If you haven’t had a chance to download it, it doesn’t cover this specifically, but if you want to reach out to us individually, we can provide

[19:07] you a white paper that we’ve written on the subject. And again, there’s the CPA article called the permission slip that’s out there on the web as well. So again, the ebook is at partners. Number four, prosperity.com slash ebook. It’s available as an audio book as well, a couple hours, 60 pages, lots of good information in there about the use of life insurance and a couple of our alternative investment strategies, which if you were going to do a reverse mortgage and, or a charitable remainder trust, and even potentially the pay down, depending on what asset that was sitting in at the time, you might need to access some alternative investments to make sure that when you did sell or when you did get a lump sum reverse mortgage, if you

[19:51] chose to take it that way, you knew a good solid place where you could invest those dollars and rely on the cashflow stream that you were going to get from them and not worry about losing your principal. Super. I recommend all of our listeners to download the book, download the audio contact partners for prosperity. I guarantee you, it’ll be a meeting unlike anyone that you’ve had with a traditional financial advisor. Again, we’re talking about giving you permission to spend that principle to be able to see the things that you want to see done, whether it’s to support your own lifestyle, give it to the next generation or any causes that you have, you know, the attitude in the market right now is

[20:33] to preserve that principle because quite frankly, most advisors are compensated based upon assets under management. So again, this may sound very foreign to conversations that you’ve had before that doesn’t necessarily make it bad. It just makes it different, may or may not fit your particular situation, but the folks over at partners for prosperity will have a talk and give you a good analysis and let you know exactly how this would work for you. Anything you want to say before we wrap up, Kim? Just always a note of gratitude. We appreciate you listening and we appreciate your questions. We’re more than happy to field them. Super. Well, this is no BS money guy, Todd Strobel for the prosperity podcast.

[21:13] Once again, special thanks to Kim Butler. Take care of everybody. 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.