Retiring Dilemma – The Great American Case Study – Episode 144

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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, best-selling 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. Once again, we’ve got best-selling financial author, Kim Butler, and our co-host with us today. And today we’re going to be talking about the Great American Test Case or the Great American Case Study, however you want to put it. This represents a real person that has come to us this week. And the reason that I want to bring them up is that to a lot of people, it would

[00:50] appear that they certainly are in a great financial position. And I want you to understand that when we look at today’s interest rates and today’s lifespans, it takes an incredible amount of money to last. So with that, welcome, Kim. Well, hello, Todd. Happy to be here and involved in the recommendations that we would provide for somebody in this situation because I’m guessing a lot of our listeners are very similar to this and or know somebody who is similar to it. They may even have parents that are similar to it or friends or what have you, depending on age brackets, of course. So we’re going to give this a shot and see if we can help some people out. Super. Well, I’m going to set up the parameters and then we’ll go from there.

[01:40] So we have a 51-year-old female. She has six children, five of which have moved away from home and gotten married. One is 16, still living at home. She has a house that is paid for. So she has no mortgage payments. She really has no debt to speak of. And she’s recently gone through a divorce and received a five hundred thousand dollar cash settlement. So a lot of people would say, wow, you’re 51 years old. You have no debt and five hundred thousand dollars cash, Dave Ramsey’s dream client, right? Yes. And a paid off home, which is unusual in, I think, a lot of people’s environment. But in her case, for whatever reason, not that we recommended that happen, but it did happen for her. And of course, that is something that Dave recommends.

[02:36] So there you go. Dream client Dave. So what we want to look at is, is that, you know, now she’s trying to figure out she has started her own home based business that right now is not generating any cash flow. So we really need to make this five hundred thousand dollars last. And considering that age 51, I don’t know what the actuarial tables would be, but I would certainly think she would have a good probability of reaching 85 or 90, wouldn’t you? Absolutely. I’ll look that up while we’re talking here just real quickly on the TruthConcept software. But it’s important to remember that actuarially, if somebody is going to use these tables to make any decisions, they have to remember that that is the general

[03:25] American public health structure. And so a 51 year old who’s healthy, of course, is going to probably live quite a bit longer than the tables would suggest. And that’s the first person, the first thing that this person needs to be really clear on is what kind of time frame we’re talking about, because a lot of people would say, oh, you know, maybe 30 years or something like that, which would be 50 to 80. I believe very, very strongly that somebody in that situation is looking at more like 40 or even possibly 45 or 50 years of longevity. I just looked it up. Life expectancy, according to the tables, and I’ll even choose the preferred rating, meaning she’s super healthy or we can go to super preferred, which is

[04:19] super, super healthy, and there’s only one year’s difference there, it’s 35 years. Super. That’s still an incredibly long time to try to make that money last. Now, you know, she’s also at an age where her risk tolerance is very low. So she has visited a traditional financial planner before approaching us as prosperity economics advisors. And they have told her that if she wants to keep her money safe, she needs to expect a three percent rate of return. So that would be on five hundred thousand dollars. I’ll let you do the math, Kim. OK, you want an interest only number there at three percent. So it’s 15 grand, right? Yep. So 15 grand. So that would mean that she has to live on a thousand, just a little

[05:19] over a thousand dollars a month. Now, someone who has a four hundred thousand dollar house and a five hundred thousand dollar bank account is probably not going to be real excited. Now, keep in mind, she’s also ten, 14 years away from Social Security as well. Correct. And this gal has no pension, right? Correct. Which is something, again, that’s happening to most of America. What we have is what we’ve saved, not anything our employer is going to provide. So anyway, so the so the big the big point that we wanted to say was is that our number one rule here is we must protect principle. Our number two rule is we must grow our investments at a rate higher than inflation, in many cases, much higher.

[06:12] And our number three rule is we must never violate rule number one. So on that. Well, it’s so much of a challenge for people to realize that they truly can find investments that don’t erode principle because the typical financial planner, all the news media, including Dave, talk about the roller coaster ride of the stock market and annuities, which are the non securities licensed advisors solution to creating income, some type of deferred or immediate annuity, which, of course, is going to erode principle on purpose. And so with somebody like this, it’s so important that she not erode that principle because that is truly her golden goose. Now, I would also encourage her to find work. Yes, she’s got a home based business started.

[07:07] That’s great. She needs to be spending 30, 40, 50 hours a week working that thing. And if she doesn’t want to do that, then she needs to go find what we would call just a regular day job where there’s some income coming in, if possible now, not, not always available, you know, if there’s children still at home or what have you, she can’t do that. That’s another issue, but it’s so important that people find work they love and plan on doing it for as long as they can so that they don’t fall into the category of, oh my gosh, every day is a Saturday. I have nothing to do. So I’m going to go shopping. And that’s not only going to be not earning income. That’s going to be spending more income because of the shopping habit.

[07:49] So with all those parameters set, are we ready to dig in and start giving some recommendations? I think so. Um, you know what, we don’t want to go into a whole lot of detail cause everybody’s situation is different, but we were able to come up with a plan that would come, that would, uh, basically commit part of her funds to a one year investment, that one year investment would be able to return us $291 a month in income. And then we were able to convert part of that money to a five year investment that would also provide us $3,333 a month in, uh, income. Now that is without touching principles. So we have hit our target of about $3,600 a month. Now this will be taxable income, um, at taxable interest income, um,

[08:49] with a guaranteed check in the mail each month while protecting the principal. And we’ve also taken $50,000 of that money and just set it aside so that it’s right there where she needs it. Um, any questions so far? I think that sounds like a great start. Uh, let’s talk a little bit about where we set aside her emergency opportunity fund because that’s an important part of people being willing to make the one or five year commitment that is necessary to get good cash flowing income. Now we’re just talking one or five years, but nevertheless, it is a committed timeframe that must be made in order to make sure a paycheck shows up every single month. And the only way that families are able to do that, that we have

[09:41] found is to have an emergency slash opportunity fund that is built up and readily available and liquid for them. I’m talking like less than seven days liquid so that they know that they have sufficient dollars. Should something go wrong to help their family, thereby allowing them to fully invest all of the other dollars, whereas the typical financial planner is going to want a lot of those dollars kind of sitting on the fence. They’re not really liquid and yet they’re not really invested either. What we’re saying is split that fence very specifically where a certain portion, in this case, 50,000 and that 50,000 was built up over time, is in savings account at a bank or a credit union or in cash value of whole life insurance stored in the insurance industry

[10:36] where it is better protected than it would be at a bank and totally liquid and available for that family. And then that’s one side of the fence, the complete and very strongly set other side of the fence are the investment dollars committed at one and five year timeframes. That’s a really critical point. And a lot of people are afraid to do the one and five year because they don’t have the liquidity. If we can help them find a good spot for the liquidity, then they’re more committed to the one and five year. Got it. So out of the 50,000, our plan is, is to take $5,000 of that money per year and to put that money each year into a whole life and policy with a maximum paid up additions rider, which that

[11:23] will continue to increase. Initially that will buy approximately a hundred thousand dollars worth of death benefit over a 20 year period. We estimate that will build up to a $200,000 death benefit because one of the things that’s important to her is that she would like to leave something to her children. So I want you to think about two things. One, the $500,000, if for any reason we needed to spend that principle, we have $200,000 worth of life insurance or two, perhaps she decides to take out a mortgage or even potentially when the time comes, a reverse mortgage, we now have insurance there to pay off that debt. So we’ve given her a lot of flexibility as well as a very short commitment time.

[12:15] We’ve got some funds committed for a year, some funds committed for five and some funds available in seven days. This to me looks like a great strategy. Well, and one of the nice things is that $100,000 growing. So the death benefit started at a hundred, but over the 20 year timeframe that we’re looking at, just assuming today’s numbers, it will double. And over a 30 year timeframe, it will triple if contributions are continuing to be made. Now she may not do that. So it may not double or triple. She may stop funding in which case it just kind of flattens out at maybe 170 or 80,000 of death benefit. But the presence of this death benefit can do a lot of things for her in terms of peace of mind.

[13:04] You can literally just visualize it as a guaranteed check upon death. And so if you have this person, let’s say she says, let’s say she stays single. We’re going to have this person that as she gets into her grandchild environment and she’s wanting to do more for grandchildren or maybe even great grandchildren, who knows how long she lives and how quickly the grandchildren have children, she knows that there’s a lump sum of money that is going to go to that family completely income tax free. And that can also provide a lot of peace of mind and enable her to tackle some strategies like a reverse mortgage that she might previously not have been willing to tackle without the presence of the death benefit.

[13:54] So we have a lot of people in this age bracket that say, you know, I don’t really care about the death benefit. And yet in actuality, what they do care about is leaving something often, not to their children, but to their grandchildren, or as we’ve said, maybe even great grandchildren. And the presence of the death benefit will do that for her automatically. While at the same time, those dollars that we’re providing and paying for the death benefit are hers to use. And what we did in this example is take the 5,000 a year, Todd mentioned. So 50,000 divide by 10, 5,000, and we split that up with about a $2,000 base premium and about a $3,000 paid a petition rider. And so that $3,000 is immediately available for her to use for emergency

[14:45] dollars and the $2,000 becomes a part of the same cash value starting around the third to fourth year, depending on the company. And there’s not a big difference between mutual life insurance companies, but there’s sometimes you’ll see small discrepancies in terms of what dollars are available when. But the bottom line is that that money over the course of that 10 years, that 5,000 in per year is going to equal about 50,000. So her entire liquid amount will slowly move from her savings account to her cash value of life insurance over the 10 year time frame during which she has the death benefit. If she should pass on early, she has tax protection because the life insurance, because it is insurance is not taxed as it grows along the way.

[15:41] And she has the protection of the insurance industry, which reserves its dollars in a dollar for dollar manner compared to the bank’s savings accounts and even credit union savings accounts, which only reserve their dollars in a fractional basis, typically seven to 10%. So her savings and her emergency slash opportunity money is going to be a lot more protected in the cash value of life insurance than it would in a savings account at a bank. Super. Well, Kim, what’s a, what’s a resource that you could offer our listeners where they could maybe read another story similar to this, but a little different. We’ve got a great line of stories in the book. Financial planning has failed. It is available specifically for our podcast listeners at partners

[16:32] number four prosperity.com slash ebook. You can print it out or you can grab the audio version, whichever you prefer. And again, that’s partners number four prosperity.com slash ebook. Super. Well, I know we went a little long today. Hopefully this has helped you. If you have any questions, please feel free to ask them at hello at partners. The number four prosperity.com. We glad to clarify any issues or maybe you’ve got a situation of your own. You’d like us to discuss, um, anonymously. Of course, we’re not going to put your name out there. Um, again, this is no BS money guy, Todd Strobel for the prosperity podcast, special thanks to Kim Butler and take care of everybody. Thank you for listening to the prosperity podcast to take control of your money

[17:17] 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.