RPF0133-QandA_on_HELOC_Strategy_and_Deferred

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00:00:24.520 | take advantage of our epic Black Friday sale. That's BlendJet.com. Q&A show

00:00:32.040 | today. We're gonna continue with the questions I wasn't able to cover on

00:00:35.320 | yesterday's show due to the time restrictions. We're gonna kick it off

00:00:39.720 | with Melissa's question on how to pay off a primary mortgage with a HELOC. Good

00:00:44.440 | morning, my name is Joshua Sheets. This is the Radical Personal Finance podcast for

00:00:48.520 | today, Tuesday, January 13, 2015. We're gonna get started and just see how far

00:00:56.000 | we can go with the time allotted. So let's kick it off with Melissa's

00:00:58.480 | question. Melissa, you're up. Hi Joshua, it's Melissa from Pennsylvania and I

00:01:05.400 | have a question for you. I keep a money journal where I just jot down ideas and

00:01:10.040 | books and different things as I come across them and I was reading through a

00:01:14.640 | page that I had jotted down a note from a year or two ago about paying your

00:01:20.640 | house off with a HELOC loan. Essentially it was, from what I understand, it was you

00:01:26.360 | deposit, you create a HELOC, you deposit your checks into it and pay all your

00:01:31.560 | bills out of the HELOC, almost using it as a savings account and in turn paying

00:01:35.440 | off more of your principal and decreasing the length of your loan.

00:01:40.680 | Basically I come to you for advice on if that is a legitimate idea and also if

00:01:47.320 | you have any knowledge of that. Also in the page I jotted down it must be

00:01:51.080 | associated with a book called Master Your Debt and a website TruthinEquity.com.

00:01:57.360 | Any advice you have would be great. Thanks a lot.

00:02:00.400 | Melissa, it's a great question and by the way I point out and commend to you

00:02:05.120 | Melissa's strategy of keeping a money notebook. That might be a useful strategy

00:02:09.640 | for some of some other listeners to adopt. It's a good way to keep organized

00:02:16.920 | and to have ideas and to organize your thoughts. I personally don't keep a

00:02:22.680 | separate money notebook but I do keep a comprehensive journal that basically has

00:02:26.760 | every idea or every thought that I want to remember in the future and I try to

00:02:30.280 | write down resources and things like that. It's a combination of a paper

00:02:34.560 | notebook and an Evernote journal. I do have some financial tags in Evernote as

00:02:38.000 | well so I commend that to you. It's a simple solution. So Melissa, it's an

00:02:42.360 | interesting question to me and this is the type of question that I love getting

00:02:45.040 | on the show. I had a guess as to what I thought this would be but I

00:02:49.960 | wasn't sure. I had never heard of Master Your Debt as a book. I wasn't aware of it

00:02:56.120 | so I went ahead and after you called the question on the voicemail line I went

00:03:00.320 | ahead and bought the book in order to read and see what it says and it

00:03:04.880 | sounded like an interesting book so I just got it off of Amazon. The used books

00:03:07.680 | paid a buck or two for it, I can't remember, and was able to get to this

00:03:11.120 | chapter and I do have a little bit of a history with this idea. Let me give that

00:03:14.880 | history of the idea first and then I'll get to the actual idea and we'll talk

00:03:19.320 | about it and see if this is a reasonable idea for us to consider implementing. I

00:03:24.120 | remember this years ago when it was probably five or six years ago, maybe more,

00:03:29.240 | when it was popularized with something that I think was called You First

00:03:33.360 | Financial and I think they go by United First Financial now and it was I would

00:03:40.560 | say semi popular at the time to promote this idea to take and take out a home

00:03:46.720 | equity line of credit on your house and then essentially you put all of your

00:03:49.840 | income into that home equity line of credit and you pay your bills out of it

00:03:52.960 | and hopefully by putting in more income than expenses out of it then you could

00:03:57.960 | actually get ahead and pay off your mortgage more quickly. I spent a long

00:04:03.840 | time actually sitting in the office of a representative of that company, at least

00:04:08.240 | about two to three hours, trying to understand how this product that he was

00:04:12.360 | selling worked and essentially primarily what it seemed to be was a software

00:04:16.640 | package to help you track your income and expenses and help you track all of

00:04:20.920 | these details and it seemed from what I could figure out that the primary

00:04:24.880 | motivation there was the fees for the software package. As I remember it was a

00:04:28.640 | few thousand bucks, something like $3,500, but I couldn't quite ever get my hands

00:04:33.400 | on how it worked so I was interested in researching this a little bit further. So

00:04:39.880 | I got the book and this is what I love doing the show that I can have a little

00:04:43.520 | bit more time to research these things that I've wanted to research but haven't

00:04:46.320 | been able to do and I'm gonna explain to you how the book presents it and some of

00:04:51.560 | the details on it and then talk about whether or not this is a useful strategy

00:04:56.000 | in my opinion. I've never done it, I've never known anybody that's done it, I

00:04:59.200 | have checked out the website, the website is TruthinEquity.com, I looked

00:05:02.560 | through everything I could find there without signing up for a consultation

00:05:05.800 | myself so I haven't gone through the process of actually trying to test it

00:05:09.800 | but I looked through all the information to do my best to present an important

00:05:16.280 | valuable insight into it. So in this book, Master Your Debt by Jordan

00:05:22.840 | Goodman, it's chapter 6 and it's entitled Mortgage Free in 5 to 7 Years and I'm

00:05:29.320 | gonna read just a few paragraphs from it and let's start with the beginning of

00:05:33.200 | the chapter. He says, "This whole chapter is a big secret but it's one you're going

00:05:36.640 | to be very happy I am sharing with you. It's a secret that will more than pay

00:05:40.440 | for this book. You could use my secret to become completely debt-free in less than

00:05:45.280 | a decade. I'm talking about a new way to manage your mortgage and your monthly

00:05:49.360 | cash flow so that you and not some banker get to squeeze the most out of

00:05:53.920 | every dollar that comes in and every dollar that goes out. Used correctly, this

00:05:58.360 | strategy will enable you to pay off your mortgage in as many years as some people

00:06:01.920 | take to pay off their cars. The strategy is called equity acceleration or

00:06:07.000 | mortgage acceleration. It's not such a big secret in Australia and the United

00:06:11.960 | Kingdom where as many as one in four homeowners are accelerating their

00:06:15.320 | mortgages. It's legal. It's not a scam. It's entirely above board. Anyone with a

00:06:21.320 | decent credit score and good bill management skills can accelerate the end

00:06:25.120 | of their mortgage and other debts by using the system I am going to lay out

00:06:29.160 | here. Here's a basic outline of how it works. You finance a new home or

00:06:34.040 | refinance an existing one by obtaining a home equity line of credit, HELOC,

00:06:38.400 | requiring an interest-only monthly payment for at least 10 years. You use

00:06:44.520 | the HELOC to pay off your existing mortgage, if you have one. The HELOC

00:06:49.000 | replaces a new or existing conventional mortgage. You send your whole paycheck

00:06:53.520 | into the HELOC every time you are paid. This covers your monthly minimum payment

00:06:58.320 | and then some. The HELOC becomes the new depository for your income. You pay your

00:07:04.140 | bills out of the HELOC as close to the due date as possible. That maximizes the

00:07:09.240 | amount of time your money sits in the HELOC, cutting your interest. Any extra

00:07:13.800 | money you have left in the HELOC account after you pay your bills and make the

00:07:18.120 | minimum interest payments on the HELOC goes toward further accelerating your

00:07:22.840 | debt reduction every month. The key to grasping the power of equity

00:07:28.120 | acceleration to eradicate your debt so quickly is understanding how interest is

00:07:32.680 | calculated in a traditional mortgage and in a HELOC. As you learned in the

00:07:37.560 | preceding chapter, a HELOC is a revolving loan that gives you the flexibility to

00:07:41.480 | make interest-only monthly payments every month or to make larger payments

00:07:44.960 | if you want to. In a traditional fixed-rate mortgage, the monthly

00:07:48.960 | principal and interest payment is predetermined and calculated according

00:07:52.400 | to a conventional amortization schedule and the principal is assessed every

00:07:56.320 | month on an ascending scale. And he goes on and gives some more details. In a HELOC,

00:08:01.520 | interest is recalculated every month on the basis of the average daily balance

00:08:05.840 | of the principal owed. The more money you run through your line of credit, even if

00:08:10.360 | the deposits do not stay there long, the more you are driving down the principal

00:08:14.360 | and setting the stage for those interest costs to be calculated on a lower

00:08:18.680 | average daily balance. As the monthly interest is pushed down, more and more of

00:08:23.480 | your cash goes toward paying off the principal owed and that results in lower

00:08:28.280 | and lower interest charges every month. That gets compounding working for you

00:08:32.680 | instead of against you. So that's his introduction to the strategy. He goes on

00:08:37.960 | and gives a couple of examples and he uses an example in the chapter for Mark

00:08:42.760 | and Susan. They own a home in Indiana, 12 years left on a 15-year mortgage with a

00:08:47.320 | fixed rate of 5.25%. They owe $192,000 left and then they goes

00:08:52.560 | through and says their monthly take-home income was about $7,500 and their

00:08:56.800 | monthly expenses came in at $5,250. Here's the key. The couple was a good

00:09:01.840 | candidate for an equity accelerator because they had a substantial positive

00:09:05.640 | cash flow. They also had equity in their home, good credit scores, and more

00:09:09.140 | important, a willingness to take an active role in managing and controlling

00:09:13.000 | their financial future. Goes on and creates some charts and shows that they

00:09:18.160 | would actually, by following the proposed plan of mortgage acceleration, they would

00:09:24.120 | be paying off their debt in under five years. So instead of 12 years remaining

00:09:28.240 | on their 15-year mortgage, they would be out of debt in less than five years. And

00:09:32.280 | then gives another example of Megan and Jared, and I'll skip some of those

00:09:37.520 | details. Now, at the end of the chapter, the author sets up some information and

00:09:43.280 | he talks about who it's a good fit for. Here are a couple of important things

00:09:48.080 | that you need to know. Do you understand the concept? What the accelerator system

00:09:52.360 | does is funnel more of your money into debt reduction and set the stage for you

00:09:56.440 | to begin to benefit from this immediately. By converting your lazy

00:10:00.520 | money, that's money sitting in accounts without connection to your home equity,

00:10:03.880 | such as a checking account, into money that works to pay off your mortgage, you

00:10:08.360 | reduce the amount you owe. That cuts your interest costs and hastens the day when

00:10:12.920 | your mortgage is but a distant memory. It's not for everyone. The mortgage

00:10:18.100 | acceleration concept won't work for everyone. Like the other strategies in

00:10:22.160 | this book, it requires discipline. You have to be a smart cash flow manager to

00:10:26.320 | make it work. You also have to have high enough credit scores to get a good

00:10:30.720 | HELOC and confidence that your income stream will continue. Implementing this

00:10:34.960 | strategy will improve your cash flow from day one, but it may not be enough to

00:10:39.000 | mitigate the effects of a variable rate loan. This is why I recommend a thorough

00:10:43.000 | analysis of your personal finances by a qualified expert before blindly

00:10:47.080 | implementing this strategy. If you decide to implement the equity accelerator

00:10:51.360 | concept with one of my recommended suppliers, you may be charged for the

00:10:54.920 | cost of the software, closing costs associated with the new loan, or a

00:10:59.120 | consultation fee. You won't be able to do this without any costs, but done right,

00:11:03.480 | the system will be profitable. The risks of mortgage acceleration are these. If

00:11:08.440 | you fall back into conventional practice, relying on your checking account for

00:11:12.880 | deposits and bill paying, you defeat the purpose of the strategy and could extend

00:11:16.640 | the life of your debt instead of paying it off quickly. If you aren't disciplined

00:11:20.600 | about paying your bills on time out of your HELOC, you could end up with late

00:11:24.200 | fees. If you lose your job and the extra cash flow that makes the mortgage

00:11:28.240 | acceleration system work, notice that, and the extra cash flow that makes the

00:11:33.320 | mortgage acceleration system work, that leaves you dependent on that open-ended

00:11:37.640 | variable rate environment. If interest rates then rise, you could end up going

00:11:41.560 | backwards. However, if there is a disruption in income, you can rely on the

00:11:45.920 | available equity in the HELOC to sustain your lifestyle until income is restored.

00:11:50.160 | In this scenario, the acceleration process will be interrupted, but you

00:11:55.040 | won't find yourself in a stressful situation wondering how to make ends

00:11:59.240 | meet. Goes on and talks about how to do it right. He says to do it right, you have

00:12:05.000 | to get the right kind of loan, you have to set up easy transfers, you have to

00:12:08.120 | make sure you're using the HELOC as the primary depository for your income, and

00:12:11.560 | that you can do it yourself if you're driven and disciplined, but you need-- it's

00:12:15.600 | probably better to connect one of the companies. And he gives four suggested

00:12:19.600 | companies for how to do it. Number one is TruthinEquity.com, which is mentioned a

00:12:24.880 | couple times in the chapter, and then I went back and checked the front cover.

00:12:28.920 | TruthinEquity.com was founded by a man named-- evidently named Bill

00:12:32.480 | Westrom, and I looked at the front cover of the book and it says "Jordan E. Goodman

00:12:37.040 | with Bill Westrom," so he's a contributing author on the book, and

00:12:39.840 | that's his favorite. Then number two is the MoneyMerge account with United

00:12:44.400 | First Financial. That was the one that was quite popular in years past. No More

00:12:48.720 | Mortgage, which is another opportunity, and then Harge Gill's Speed Equity, which

00:12:54.240 | evidently started in Australia and grew from there. And then at the end, notice

00:12:59.400 | here, he says at the end of the chapter, "Once you've gotten the mortgage

00:13:03.600 | acceleration plan down, there's a lot you can do with it. As long as your line of

00:13:06.920 | credit is sufficiently large, you can consolidate all of your other debts into

00:13:10.520 | it and get completely debt-free faster than you thought possible. You can pay

00:13:14.600 | off your home in five to seven years, and then with this new heightened level of

00:13:17.920 | financial expertise, you can use your HELOC to buy a second vacation or

00:13:21.960 | retirement home. Don't look now, but real estate prices are pretty attractive. You

00:13:26.360 | can also self-finance your next car, self-finance your next tuition bill, or

00:13:30.880 | start that side business without having to fill out a million forms and beg some

00:13:34.760 | banker. You can be your own banker now. I told you it would be a good secret." So I

00:13:39.800 | hope you're sold based upon reading the narrative in the book. It all sounds very

00:13:43.920 | compelling. After all, if we could just understand a slight difference of how a

00:13:48.240 | conventional mortgage amortization schedule works as compared to a home

00:13:52.680 | equity line of credit, interest payment, and amortization schedule, then just take

00:13:57.840 | advantage of the arbitrage opportunity, we can get rich, right? I'm not convinced.

00:14:03.160 | And I'll tell you why. And this is one of the reasons why I am in such

00:14:09.120 | favor of enhancing financial literacy. So much as I did several years ago when I

00:14:19.000 | was speaking with the Money Merge account, United First financial

00:14:22.440 | representative, I spent hours trying to understand the concept and went away

00:14:26.360 | thinking I was just dumb and that I didn't understand it, but it was the

00:14:28.960 | greatest thing ever. And in this one, I spent, you know, I read the whole chapter

00:14:34.400 | and I thought, "Wait a second. Is there something I don't know? Is there something

00:14:37.680 | I don't recognize?" Because yes, I understand how amortization schedules

00:14:40.400 | work, but the key is you got to go and look at the charts. And this to me is the

00:14:45.720 | big difference. For both of the case studies, there is a before and after

00:14:51.320 | chart illustrated which illustrates the amortization schedule. And I like to look

00:14:57.120 | at numbers because if I can understand what's going on with the numbers, I can

00:14:59.600 | be more compelled by the evidence. Before I jump into the details of the numbers, I

00:15:05.640 | hope you understand the strategy. Essentially, the strategy is you swap out

00:15:09.520 | the normal conventional mortgage for a home equity line of credit. And then

00:15:13.080 | every month, you're paying it down by the amount of your net paycheck. And then

00:15:16.240 | you're increasing the amount of the mortgage by the amount of your bills

00:15:20.520 | which you're simply paying out of the home equity line of credit, hopefully

00:15:24.160 | with an account that might have something like check writing privileges to pay

00:15:26.880 | your bills with. So assume for a moment that you owe $200,000 on your house and

00:15:32.000 | it's valued at $300,000. You apply for a home equity line of credit for $200,000

00:15:38.320 | to wipe out your existing mortgage. They go ahead and approve you for that.

00:15:45.080 | You pay off with the new bank. You pay off the existing mortgage with the

00:15:49.000 | $200,000. Then in that first month, let's assume that your monthly income is $10,000

00:15:56.120 | and your monthly expenses are $7,000. So you apply the $10,000 that you

00:16:00.840 | receive on the first of that month toward the home equity line of credit.

00:16:05.520 | That reduces your balance from $200,000 down to $190,000.

00:16:09.760 | Then throughout the course of the month, you pay your expenses little by little.

00:16:13.920 | And at the end of the month, because your expenses are $7,500, you have increased

00:16:18.760 | the balance of the home equity line of credit up to $197,500.

00:16:23.360 | Then you do it again in the second month. You apply the $10,000 of

00:16:27.800 | income. You drop it down. So your balance drops from $197,500 to $187,500.

00:16:35.280 | You increase that by $7,500 and you wind up with $195,000.

00:16:40.020 | So now at the end of the second month, you're at $195,000. That's effectively how it works.

00:16:47.360 | What I was interested in is, is there actually a way to get an arbitrage by getting a home

00:16:57.180 | equity line of credit where the interest calculation is primarily based upon what the current balance

00:17:04.160 | is as compared to the early years of a conventionally amortizing loan where you're paying a lot

00:17:10.280 | of interest up front and little interest down the road?

00:17:13.240 | And the answer is, I don't think so. So if you look at these scenarios, the first scenario

00:17:17.720 | that's given in the book, the debtor owes had an original loan balance of $225,000.

00:17:24.760 | And in their third year of their amortization schedule, they owe $192,934. Well, they propose

00:17:31.460 | changing that out with a new loan. But there are a couple of bits of details that you need

00:17:35.960 | to look hard at. First is what is the interest rate? And in this scenario, the interest rate

00:17:42.420 | on the 15-year fixed conventional mortgage is 5.25%. The proposed interest rate on the

00:17:50.500 | home equity line of credit is 4.00%. So 1.25% decrease in interest rates. That will make

00:18:02.740 | a substantial difference in the amount of interest that is paid over the course of a

00:18:06.380 | loan. Now, how frequently is it that you can get a home equity line of credit at a lower

00:18:13.040 | interest rate than a conventional mortgage? I simply don't know. I don't know what those

00:18:16.940 | current numbers are. I think they change over time. In general, with something like a 15-year

00:18:21.740 | mortgage, the interest rates on these, at least in the last few years, have been absurdly

00:18:25.820 | low. But what's that difference? I don't know. But I'm willing to give them the interest

00:18:30.460 | rate. What I'm not willing to give them is this. They illustrate on the first one what

00:18:35.580 | the deposited net income is, $7,500 per month. That's what the couple is earning. And then

00:18:40.820 | it illustrates what their expenses are. The monthly living expenses are $3,191, and the

00:18:46.700 | total monthly expenses are $5,249.72. In the first amortization schedule, it simply illustrated

00:18:58.340 | that that money is spent on cash flow. In the second amortization schedule, it's clear

00:19:07.500 | that that money is not spent, but rather that money remains in the debt. And so I ran the

00:19:14.580 | math on it. I said, "What would happen if I was able to actually do this by hand?" I

00:19:22.820 | said, "What if the person was willing to put all of that excess cash flow into their

00:19:28.860 | conventionally amortizing mortgage?" I calculated the normal monthly payment, which is about

00:19:35.140 | $1,800 a month. Then I calculated what the excess cash flow was, the difference between

00:19:39.820 | the expenses and their income, which the difference is $7,500 minus $5,250. So that was about

00:19:46.100 | $2,250. I added those together. It was about $4,050 per month.

00:19:52.580 | Well, if they would just pay a total of $4,050 per month, the normal monthly payment plus

00:19:58.620 | that additional amount toward their conventionally amortizing loan, right in five years, they

00:20:05.180 | would be out of debt, even without an interest rate savings going from 5.25 to 4. And then

00:20:11.340 | on the next page, how long does it take with the mortgage accelerator? Five years. There's

00:20:18.140 | the magic formula. So on that basis, all we're doing is saying we're willing to put all of

00:20:24.940 | our excess money. Instead of being in a checking account or in some other alternative investment,

00:20:33.940 | we're putting every excess dollar that we have against our mortgage. And you'll be debt

00:20:38.660 | free in five years. My problem with it is that the facts, the numbers, are not illustrated

00:20:46.280 | by the narrative. So in the narrative, you think this is something complex. And the way

00:20:49.480 | I just said it right there, hopefully it's clear. That's why you're out of debt in five

00:20:52.940 | years.

00:20:53.940 | Interestingly, listen to this narrative. And I'm going to actually read this to you because

00:20:59.140 | I want to use this as an example simply to show how you've got to look at the numbers.

00:21:05.860 | Let's read about Megan and Jared. Here's another quite different example of how the system

00:21:09.780 | can work for a Manhattan couple who don't have the extra cash flow that Mark and Susan

00:21:15.740 | enjoy. So we just said that Mark and Susan was the numbers I just used. Megan at 35 earns

00:21:22.740 | a salary of $75,000 as an editor at a New York publishing house. And her husband earns

00:21:27.860 | $90,000 as an art director. The balance of Megan's inheritance, $50,000, is in a mutual

00:21:34.180 | fund that has been returning an average of 8% a year. Megan and Jared bought a co-op

00:21:39.300 | in the Upper West Corner of Manhattan nearly five years ago in Hudson Heights, where real

00:21:44.020 | estate prices aren't nearly as high as further downtown. They put $75,000 down on a co-op

00:21:50.260 | costing $475,000. Are alarm bells going off in your head yet? One thing I have noticed

00:21:59.500 | with financial lies is that they're often embellished with beautiful pictures. It's

00:22:04.900 | like the example goes, if you have a fixer-upper that's a handyman special, if you talk about

00:22:10.500 | its quaint and its rustic and its antiquey, those should be code words for old and run

00:22:16.940 | down. Why do we need to know that it's a co-op in the Upper West Corner of Manhattan

00:22:21.780 | five years ago in Hudson Heights where real estate prices aren't nearly as high as further

00:22:25.140 | downtown? Why do we need to know that she's an editor at a New York publishing house and

00:22:29.060 | an art director? Let me continue. They have 25 years left on their mortgage, which has

00:22:34.740 | a fixed interest rate of 6.25%. Their combined take-home pay is $9,000 per month. Their monthly

00:22:41.560 | mortgage payment is $2,463. When you add in their commuting and parking costs and other

00:22:49.940 | expenses, there isn't much money left at the end of the month. Now how much money would

00:22:56.780 | you say is not much money left at the end of the month? If you have $9,000 in take-home

00:23:02.020 | pay, a mortgage payment of $2,463, and then commuting and parking costs and other expenses?

00:23:09.580 | There isn't much money left at the end of the month. Well, flip to the next page. It

00:23:15.940 | illustrates that their deposited net income is $9,000, and their total monthly expenses

00:23:21.100 | are $6,637. I don't know about you, but that's, in my world, that's a pretty healthy amount

00:23:28.600 | of money left at the end of the month. That's $2,363 left. That's almost a third of their

00:23:33.840 | income available. That's not insignificant. Let's continue. During the five years they've

00:23:41.000 | owned the apartment, Megan and Jared have sent their mortgage company over $147,000

00:23:46.340 | in principal and interest payments. Of that, $121,121 was interest, and $26,651 was applied

00:23:55.640 | toward principal. They still owe over $373,348, or 93% of their original mortgage. If they

00:24:06.040 | continue on this path for the next seven years, after 12 years of payments, they will still

00:24:10.900 | owe $318,903. They would have absorbed an additional $152,000 in interest costs and

00:24:19.880 | would still have 216 more payments before they would be mortgage-free. Are you lost

00:24:24.200 | in the details yet? This is another thing that you've got to watch out for, and people

00:24:27.400 | lose you in the details. All they've done is taken a very simple amortization schedule,

00:24:31.920 | which if you've ever looked at an amortization schedule, you should understand, and add an

00:24:36.000 | entire paragraph of confusing text, which simply means you drop down to, what was it,

00:24:41.440 | line year 15 or so, year 15 and 22. You drop down to the appropriate line on the amortization

00:24:49.440 | schedule and take a sentence to explain what every number means. Be careful when you're

00:24:54.720 | reading things like this. Megan and Jared have a couple of options if they are to take

00:24:57.880 | advantage of the equity accelerator concept. If they simply refinance their current mortgage

00:25:02.480 | into an equity accelerator, and Megan keeps her $50,000 inheritance in a mutual fund,

00:25:07.740 | they could be debt-free in eight and a half years. This would save them over $262,675

00:25:15.100 | in additional interest costs, and their mortgage would be paid off. In comparison with their

00:25:19.920 | current mortgage, Megan and Jared would still owe $303,811 of the original balance and $183,836

00:25:27.480 | in additional interest costs at that time. If Megan decides to close out her mutual fund

00:25:32.680 | and apply those funds toward an equity accelerator line of credit, Megan and Jared would own

00:25:37.600 | their home outright in only six years, nine months, and would save an additional $36,679

00:25:45.800 | in interest charges and be mortgage-free. He goes on, "Got the concept. What the accelerator

00:25:53.860 | system does is funnel more of your money, debt reduction, et cetera," which I already

00:25:56.660 | read for you. Here's why I'm belaboring this point. Was everything that the author wrote

00:26:04.340 | on those pages technically accurate? It's all technically true. What does it miss? You

00:26:12.480 | should immediately ask yourself, "Well, what's the interest rate that Megan and Jared are

00:26:15.860 | earning on the mutual fund versus what's the interest rate that they're paying on the debt?"

00:26:21.320 | In this scenario, the illustration was that they have a mutual fund earning 8%. That was

00:26:27.300 | what was stated in the facts. They have a current mortgage of 6.25%, and then under

00:26:33.920 | this proposed equity acceleration program, they're going to drop that interest rate to

00:26:38.040 | 4%. Then we're going to take a mutual fund, which is earning 8%, and use that to pay off

00:26:44.760 | the 4% debt. Then we're going to talk about how little interest we're paying. Yes, but

00:26:49.720 | how much money would we have had if we just stuck with the original? Here's the thing.

00:26:57.880 | This to me is a perfect example of how you can take a concept that might or might not

00:27:04.720 | be valid, which I'm going to cover again in just a moment, and you can completely twist

00:27:11.940 | it into making somebody think it's the greatest thing in the world simply because they're

00:27:17.400 | too ignorant to ask the right questions. In this example of A versus B, it looks very

00:27:22.480 | compelling. After all, in A, they put in there the full 30-year amortization schedule, which

00:27:28.320 | by the way is another interesting sleight of hand. They start with the opening balance

00:27:32.880 | of $400,000, which illustrates 30 years. Then they show, "Okay, well, we're in year five."

00:27:39.520 | But then in the comparison one, they start that at year one, which is actually year five

00:27:43.600 | on the original schedule. They do that in both of these. You've got a misrepresentation

00:27:48.080 | of data. This would be akin to whenever you look at a chart. If instead of illustrating

00:27:55.640 | the scale of the axis starting at zero and going from zero to 100, the chart maker may

00:28:03.020 | start at 80. Then by zooming in and not illustrating the full scale of the axis, then the chart

00:28:12.240 | maker looks like it's a major problem. But in reality, it's a very minor variation in

00:28:17.840 | data. It's the same thing here. It's a specious false comparison of data. Now, it might look

00:28:24.480 | prettier, fine, but it's making it look like a 30-year loan versus a nine-year, when in

00:28:28.920 | reality it's a 25-year versus a nine-year. Just a small thing.

00:28:33.160 | But then look at the numbers. Again, their existing loan is 6.25%. They're refinancing

00:28:37.560 | at 4%. That's a massive savings, a 25% cut in interest costs. Then B, in the first payment,

00:28:47.400 | they're only making a monthly payment of $2,462 on the loan. In the second payment, remember

00:28:56.240 | they have a net income of $9,000 and monthly living expense of 6,600. Let's do the math.

00:29:01.680 | What's the difference between those? 9,000 minus 6,637. We've got 2,363 plus the 2,462

00:29:10.080 | they're currently putting. They're putting $4,825 a month toward the balance of the loan

00:29:14.760 | now. So how long would it take, if I compare these two things, how long would it actually

00:29:20.880 | take to pay off the mortgage if we just made those two changes? Let's just ignore the interest

00:29:30.200 | rate for a moment. How long would it take if we just put that extra payment toward the

00:29:35.600 | original debt, which is what you're doing in essence?

00:29:38.840 | Well, the math is fairly simple, and this is why I want you to learn to run a financial

00:29:44.080 | calculator. Let's clear our register, put in $373,348.97, change the sign, put that

00:29:53.080 | in as our present value. That's the present value of the mortgage payment. That's the

00:29:58.240 | amount that we owe on the debt. Put in 6.25, hit that number, and let's convert that into

00:30:06.200 | a monthly amount. So we're going to hit the button to turn it into monthly amount. It's

00:30:10.480 | 50% of monthly interest. And let's put in now that $4,825 as our monthly payment. That's

00:30:18.400 | what we're going to actually be paying towards the loan. Zero for the future value, and let's

00:30:24.040 | calculate the end, the number of periods that would be required. It comes out to 99. Divide

00:30:28.840 | that by 12. That equals 8.25 years. So in scenario one, if they keep their existing

00:30:38.360 | traditionally amortizing payment, but they put the additional amount available in their

00:30:43.120 | cash flow toward that payment, their debt would be paid off in 8.25 years. In scenario

00:30:48.800 | B2, which is the proposed payment, how long does it take for things to get paid off? Somewhere

00:30:57.280 | between eight and nine years. So question, is it this magic gimmick of the mortgage acceleration

00:31:06.880 | program or is it the fact that there's an extra $2,363 on top of the minimum payment

00:31:13.880 | going toward the debt? That's the key variable. Why did I spend so much time on this? In my

00:31:22.680 | mind this is a very important example of what happens every day in the financial world.

00:31:28.580 | People create a good narrative and in essence divert your attention from one thing to the

00:31:39.680 | other. It's like a magician where if they're going to do something with the left hand,

00:31:43.920 | they want to make sure you're looking at the right hand. That's how most sleight-of-hand

00:31:48.100 | tricks work. This is a big deal, because the only way to actually understand if this is

00:31:54.520 | a good idea or not is to know to look for the interest rate and what the amount of money

00:31:59.280 | going to the payment is. Without those two details you can't make sense of this. With

00:32:04.560 | those two details you can immediately see that all we're doing is putting a bunch of

00:32:08.680 | excess money towards a mortgage payment. This was why, at least in my memory, United First

00:32:16.880 | Financial was charging $3,500 for this thing, for this software package. It's a bunch of

00:32:23.600 | baloney. It's a bunch of nonsense. Now if I'm wrong in my analysis, all I've

00:32:28.320 | done is just read this chapter of the book. But if I'm wrong, and any of you listening,

00:32:33.280 | if Jordan Goodman or Bill Westrom, if you think I'm wrong, tell me I'm wrong and show

00:32:37.200 | me where I'm wrong. I'm happy to be wrong. All I did was read one chapter of the book.

00:32:40.380 | But to me that's about as clear of an open and shut case as I can come up with, of a

00:32:45.040 | total waste of time and just technical truths that are represented in such a way that it's

00:32:51.120 | lying. I don't appreciate that. So my hope is to equip you to spy that and not fall prey

00:33:01.960 | to it. So what are some of the concepts that you

00:33:06.000 | could apply towards this? Well, number one, I think this is something that anybody could

00:33:09.880 | do. Now I don't know about the actual products. That's what happened is the mortgage market

00:33:14.040 | changed and the products weren't available and the home equity disappeared for people.

00:33:19.520 | That was why I think the market for that stuff dried up some years ago. So I don't know what's

00:33:23.160 | available, what's not. I would have no problem checking with a guy like him to see, "Can

00:33:28.160 | I do this? Are there products available?" I wouldn't pay big fees for it, but maybe

00:33:32.940 | there's a better mortgage product. But any of you can do this and in essence set up a

00:33:37.560 | home equity line of credit. That way if you're aggressively paying on your principal mortgage,

00:33:43.520 | you can have access to the cash if necessary through the home equity line of credit. Because

00:33:47.280 | that's the problem is once you pay down the debt on a mortgage like that, then you're

00:33:54.120 | stuck where all the money's locked up in your house and it's much harder to get it out than

00:33:58.880 | it was when it was sitting in your checking account. It would have some advantages to

00:34:03.120 | have a more flexible mortgage option where you're just paying interest only.

00:34:08.220 | I actually like the so-called pick-a-payment loans that used to be available. I don't even

00:34:15.560 | know if they're still available. But where you could essentially choose how much you

00:34:19.720 | paid every month. One would be an amortizing payment, one would be an interest only payment,

00:34:23.960 | and some of them would actually be a negatively amortizing payment where your balance would

00:34:26.880 | actually increase. It wasn't even a full interest payment. I think that'd be useful to have

00:34:30.920 | as an option on a mortgage simply because it keeps flexibility and would allow you to

00:34:36.760 | maintain your flexibility. I think flexibility is an underrated benefit in a financial plan.

00:34:43.620 | It's always nice if you can help save you. If you suffer a job loss or if you have an

00:34:48.700 | unexpected illness or disability, something like that, I like having flexibility. Now

00:34:53.780 | there's trade-offs with everything. That could be a benefit. But you could set that up yourself.

00:35:01.060 | If you want to have the money in the home equity, that could be great. You pay it off

00:35:04.580 | and then just tap the home equity if you need to with a home equity line of credit.

00:35:09.540 | Years ago, and we'll finish up the discussion on this topic with this, years ago when I

00:35:14.900 | had that meeting with the representative of United First Financial, what most impressed

00:35:18.980 | me about what he said was the software that they had created. I looked at the software.

00:35:26.300 | What was neat about the software is it illustrated how long it would take for somebody to be

00:35:34.500 | debt-free based upon certain decisions. In essence, there was a meter there and it illustrated,

00:35:41.660 | "Okay, if you spend this $50 on a haircut or you cut your hair yourself, then you'll

00:35:51.220 | save this amount of money and interest and you'll be out of debt this much sooner."

00:35:55.020 | It was almost like an immediate feedback loop in the software. I'm not sure it worked quite

00:35:59.500 | as well as he was showing me that it worked, but I thought it was a brilliant idea. What

00:36:04.020 | I compared it to is the idea of having a fork for a dieter. Let's say that you have a fork

00:36:10.780 | and this fork shows with every bite whether or not you are adding inches to your waistline

00:36:18.340 | and pounds to your scale or whether you are taking them away with every bite.

00:36:22.860 | If you're eating a bite of chocolate cake, with each bite it says, "0.13 pounds, 0.13

00:36:28.900 | pounds." By the time you finish the piece, you know that you've gained 1.2 pounds of

00:36:34.420 | additional weight. Let's say you're shortening your lifespan and it's calculating that by

00:36:40.180 | the end of this piece of chocolate cake, you've shortened your lifespan by 14 minutes based

00:36:44.420 | upon the extra weight that you're carrying from it.

00:36:47.540 | If you're plunging your fork into a green leafy salad, then you can see the numbers

00:36:54.740 | ticking up and you can see the weight dropping off and your lifespan increasing. I thought,

00:36:58.660 | "How cool would that be to have a magic fork that showed that? Wouldn't that be so helpful?"

00:37:03.140 | Before I'm about to tuck into a 2,000 calorie milkshake, I would have a bit of a moment

00:37:11.620 | of contemplation and ask myself, "Do I really want this?"

00:37:15.740 | I would love to see, and it's just an idea for some of you intelligent people out there,

00:37:19.260 | maybe you know of a software package that does this well. I've never seen a software

00:37:23.060 | package that does this well, but I would love to see somebody create a personal financial

00:37:27.920 | management system that would bring in this immediate feedback loop and that would illustrate

00:37:33.460 | in real time, "Here's how much longer you are toward your financial independence goal.

00:37:37.900 | Here's where you are with regard to your debt payoff. If you choose to avoid dining out

00:37:44.380 | instead of eating at home, you'll be out of debt this much sooner.

00:37:49.780 | Congratulations, by the way, these decisions that you've made this month where it seemed

00:37:54.140 | like it wasn't a big deal because you only saved $327, but the reality is you're going

00:37:59.380 | to be out of debt three months sooner. You're going to have your mortgage paid off three

00:38:02.340 | months sooner because that's the equivalent to three months of your principal payments

00:38:07.260 | on your mortgage balance, something like that. I don't know how to do that, but I would love

00:38:11.340 | to see that. I think it's a product that would help.

00:38:14.960 | You see this happening in the fitness world with all of the biomarkers, I guess it's biometrics,

00:38:21.740 | where you count, "Okay, here's how many steps I'm at," and you can see for the day, "I'm

00:38:25.900 | at this many steps. I've been starting wearing one of these Fitbit things, and so far today

00:38:30.500 | I'm at 3,749 steps." Well, I know that's not very much. I think we should build some of

00:38:38.300 | these tools with financial management. If you are capable of that, then I commend it

00:38:42.940 | to you as an idea. Hope that's helpful.

00:38:46.620 | Let's jump in and do another question today. I think we've got time. Let's answer Robert's

00:38:50.580 | question. We're going to shift gears pretty dramatically here about defined benefit plans,

00:38:55.900 | actually about non-qualified deferred comp plans. Kick it off, Robert.

00:39:00.140 | Hello, Josh. My name is Robert. I'm a frequent listener to your podcast, and I have a multi-part

00:39:05.300 | question. In keeping with the theme of the show, it'll be a little bit on the lengthy

00:39:09.740 | side. My wife is an executive at a publicly traded utility company. She has the opportunity

00:39:16.300 | to participate in a deferred compensation plan that pays her a "guaranteed" rate of

00:39:21.940 | return, currently in the 5% range, but fluctuates with the prevailing interest rates. This is

00:39:28.700 | a Fortune 500 company with a track record of solid financial performance, but I'm a

00:39:33.420 | little bit concerned about the safety of such a non-qualified plan, even though we could

00:39:38.420 | really use the ability to defer income currently. We have been participating for several years.

00:39:46.260 | I have three sort of related questions, or maybe there's one question and a two-part

00:39:51.580 | question. How safe are these plans, and do they ever really default? The second question

00:39:57.740 | is, if they are reasonably safe, how much of our overall net worth of investable assets

00:40:05.140 | can we contribute? We have also are required or strongly recommended to keep one year's

00:40:17.020 | salary in her company's stock, and between the two, currently, between the deferred comp

00:40:22.820 | plan and the company stock, we have a little bit under 10% of our investable net worth

00:40:28.860 | tied up in her company in one way or the other. We have no debt and are in the highest income

00:40:35.120 | tax bracket and expected to pay less in income tax in retirement. I'm 49 years old and she's

00:40:41.540 | 50 years old, and we both work full-time. Thank you for considering our question.

00:40:45.340 | It's a great question, Robert. This is going to be a fun one because we're going to go

00:40:49.060 | into an area that very few people really talk much about. The percentage of population that

00:40:56.180 | has access to a plan like you're describing is very small, and so this is not commonly

00:41:01.300 | discussed, especially in personal finance. It's a little bit difficult for me to answer

00:41:06.260 | without knowing the specifics of the plan, which is the way I like it because I can talk

00:41:10.060 | a little bit about the theory and then keep the onus and responsibility back on you to

00:41:15.860 | go and take the responsibility, as you already are, to make your own decision. I'll talk

00:41:22.640 | a little bit about the theory. Your primary question is about safety. How

00:41:26.860 | safe is the plan? Then your corollary is how do I fit this into my personal financial plan?

00:41:31.860 | Let's deal with safety. It's a tough question to answer because I don't have all the facts,

00:41:36.660 | but I'll give you, again, the thought process. This sounds, from the way that you described

00:41:42.020 | it, like non-qualified deferred comp. This is one of those magic areas that we love to

00:41:48.260 | talk about. We financial planners, it makes us feel really cool to talk about, "Oh, we'll

00:41:51.500 | set up a non-qualified deferred comp plan," just because, at least for me, it was always

00:41:56.940 | kind of like the sexy side of the business that I always wanted to, "Oh, I'd love to

00:42:00.220 | do it. Yeah, I specialize in setting up non-qualified deferred compensation plans for owners of

00:42:05.260 | highly-compensated." It just sounds cool, or at least it always did to me. Maybe that's

00:42:09.580 | a bit juvenile, but I always thought it sounded cool.

00:42:13.060 | In essence, what we're trying to do is we're trying to solve the problem of how do we set

00:42:18.740 | money aside without setting it aside for all of our employees. Let me define some terms

00:42:23.740 | here because in order to understand this, you need to understand a few terms. Let's

00:42:27.740 | start with non-qualified. When financial planners or tax wonks use that term, it has a very

00:42:34.400 | specific meaning. In this context, non-qualified means that this is a plan which is not governed

00:42:43.060 | by the rules of what we call ERISA. ERISA stands for the Employee Retirement Income

00:42:50.180 | Security Act. This is a law that was passed in 1974, and it established all kinds of standards

00:42:56.760 | and rules for employee benefit programs. We usually just refer to it as ERISA, E-R-I-S-A.

00:43:03.940 | This is actually an extremely complex area of planning. It's very specialized, and it's

00:43:10.620 | very important for companies to make sure that they are in compliance with ERISA. Depending

00:43:16.500 | on the type of plan that you have, the compliance may be simple and straightforward, or it might

00:43:21.900 | be more challenging and difficult. ERISA can cover essentially any kind of benefit

00:43:28.900 | plan. It can cover health plans. It can cover retirement schemes such as what we're most

00:43:37.580 | used to as 401(k)s, 403(b)s. Those are the ones we're used to. There's all these detailed

00:43:42.340 | rules that have to be followed. I'm not an ERISA expert. Technically, I guess I'm supposed

00:43:46.380 | to be. I did a designation that's called a registered employee benefits consultant.

00:43:52.260 | So technically, I'm supposed to be. All I know after reading two massive textbooks on

00:43:56.460 | it is that I don't know what I'm talking about. I'm going to leave it to the experts that

00:44:00.340 | practice in it day in and day out. I read the textbooks and passed the exams. It's

00:44:06.180 | such arcane, difficult information that I only have the basic concepts of it.

00:44:12.980 | The plans that people are used to participating in, again, 401(k)s, 403(b)s, we call these

00:44:17.260 | qualified plans. These qualified plans fall under the purview of ERISA rules. The ERISA

00:44:26.260 | rules ensure that all employees are treated equitably. That's the basic function of ERISA,

00:44:34.620 | is to make sure that you don't have some filthy business owner who is giving special treatment

00:44:43.540 | with one fancy-dancy benefit to two favorite employees and then just completely destroying

00:44:51.320 | the rank-and-file employees that are actually the backbone of his business. That's the whole

00:44:56.060 | point of ERISA.

00:44:57.980 | You've got all of these different classifications. You've got the top hat rules. You've got highly

00:45:03.220 | compensated employees who are highly compensated employees who are not. You've got all these

00:45:06.760 | ratios and things that indicate it. Basically, if your plan falls under ERISA, then it needs

00:45:12.740 | to treat all of your employees in a like manner. You can't discriminate in favor of your key

00:45:22.020 | employees. You can't discriminate in favor of your wife and your wife's brother who work

00:45:26.740 | at the company and give them a special package that you're not offering to everybody else.

00:45:31.100 | You have to treat everybody alike. Otherwise, your plan is disqualified. If you're out of

00:45:34.820 | ERISA compliance, it's just a world you don't want to be in.

00:45:39.580 | If you just simply choose to avoid ERISA, then you have a little bit more flexibility,

00:45:44.740 | but you also have some limitations. In order to actually avoid ERISA, then a plan must

00:45:52.780 | meet these two qualifications. It must be unfunded, and it must be maintained by an

00:45:59.700 | employer primarily for the purpose of providing deferred compensation for a select group of

00:46:05.780 | management or highly compensated employees. I'm going to define these terms in just a

00:46:12.460 | second, but it's important that you recognize that specifically in order to get out of ERISA

00:46:17.580 | compliance, which is where all of the government rules and regulations are to protect the so-called

00:46:23.100 | working man, the common worker, there's going to be some additional risk involved.

00:46:29.500 | These plans need to only be available for your highly compensated employees or for a

00:46:34.460 | select group of management. That's the key is where you mentioned that your wife is an

00:46:39.040 | executive at a publicly traded utility company. That's why she has access to this type of

00:46:43.620 | plan.

00:46:44.620 | Now, let me additionally now define the term I said. It must be unfunded. When we use the

00:46:51.800 | word "unfunded" in employee benefits, it has a very specialized meaning. For tax purposes,

00:46:59.660 | the distinction between a funded plan and an unfunded plan simply involves the question

00:47:05.900 | of whether the employee has received property from an employer or simply received the employer's

00:47:12.260 | promise to pay in the future. For income tax purposes, the treatment of a transfer of property

00:47:19.940 | is very different from the transfer of a simple promise. If the employer transfers property

00:47:26.720 | to the employee, then the amount of the tax and the timing of the taxation, that's determined

00:47:32.620 | under IRS Code Section 83. In essence, Section 83 simply says that if an employer transfers

00:47:40.740 | property to an employee as compensation for services, then the employee is taxed on the

00:47:46.820 | fair market value of that property in the first year in which there is no substantial

00:47:52.140 | risk of forfeiture. I've mentioned that little lingo on the show previously, the substantial

00:47:57.160 | risk of forfeiture. That's the doctrine that actually is applied to see when does this

00:48:02.460 | transfer occur.

00:48:06.260 | For income tax, again, when the employer transfers the property to an employee as compensation

00:48:13.500 | for services, then you're taxed on the fair market value of that property in the first

00:48:18.620 | year in which there is no substantial risk of forfeiture. What would be an example of

00:48:22.380 | this? Well, it would be your paycheck or your wife's paycheck in this example. As soon as

00:48:25.820 | she receives the paycheck, then she's taxed on that in that year because there's no substantial

00:48:32.540 | risk of her losing it. There's no substantial risk of forfeiture. She has the paycheck and

00:48:36.380 | now she's going to be taxed on it, which is the whole goal, what you're trying to do.

00:48:41.580 | You said, "I could really use the ability to defer the tax." Here's the key. To defer

00:48:48.380 | taxation on property that is transferred as compensation, then the employee must have

00:48:55.820 | a risk of forfeiture. That's when we're dealing with property.

00:49:07.340 | The flip side is to defer taxation on a simple promise, then we get into a different code

00:49:13.580 | section, not Section 83. We get into the requirements of Code Section 409A, which is one of the

00:49:20.620 | code sections that governs a lot of these plans. Then we've also got to deal with what

00:49:24.500 | are called the constructive receipt rules. When does the actual employee actually have

00:49:29.220 | constructive receipt of the property and dealing with the promise of the property?

00:49:35.660 | The definition of a funded plan, so we're trying to define unfunded and funded. The

00:49:41.340 | definition of a funded plan for tax purposes draws that line between what is a promise

00:49:46.660 | to pay versus what is actual property that's transferred. If we're dealing with a promise

00:49:51.420 | to pay, then we're dealing there under constructive receipt and when does the employee actually

00:49:56.620 | constructively receive the property. Anything different than that is covered by Section

00:50:01.500 | 83, which is what we're all used to dealing with.

00:50:05.500 | In a tax sense, a plan is unfunded if there's no fund of any kind set aside. But it's also

00:50:12.300 | considered unfunded even if the employer has set aside money or property to the employee's

00:50:17.380 | account as long as the assets are available to the employer's unsecured creditors. The

00:50:24.580 | assets can be protected against the employer itself, or they cannot be, but they must be

00:50:30.100 | available to the employer's unsecured creditors. In essence, the IRS doctrine says that in

00:50:37.060 | an unfunded plan, the employee's rights to any assets set aside must be no better than

00:50:43.100 | those of an unsecured creditor of the company. This makes sense. Again, remember what we're

00:50:49.660 | trying to do. We're trying to defer taxation. To defer taxation, we have to make sure that

00:50:54.660 | the employee doesn't receive that money. We've got to make sure it's set aside, the employee's

00:51:00.820 | not receiving it, and there has to be a substantial risk of forfeiture. Property has to be available

00:51:05.240 | to the company's creditors. Because this is a fairly flexible arrangement, we've got to

00:51:10.940 | make sure that, unlike the qualified plans where it's set aside, we've got to make sure

00:51:15.860 | that the company's not just going to go ahead and tuck money aside.

00:51:20.820 | Let me compare the two examples. If we're doing an ERISA qualified plan versus a non-qualified

00:51:26.700 | plan, an unfunded non-qualified plan. In an ERISA plan, let's assume that your wife is

00:51:31.400 | at this utility company, and she's participating in her 401(k). When she's tucking that money

00:51:36.340 | aside into the 401(k), and then all of a sudden her utility company goes bankrupt and the

00:51:41.540 | creditors come calling, and they say, "Hey, listen, you've got all this money here in

00:51:45.460 | the pension accounts, in these 401(k) funds. We want that money to pay our bills." Well,

00:51:51.260 | the answer in that case is no. That money is separated and is protected in a trust.

00:51:57.260 | There is actually a trust that's established that holds those 401(k) dollars. So the money

00:52:02.580 | is protected in the 401(k). But in exchange for that, the rules are very, very specific.

00:52:09.180 | All the employees have to be covered, and so you can't have key management all of a

00:52:12.980 | sudden tucking $400,000 into that 401(k). That's why there are the restrictions there,

00:52:18.020 | according to the tax doctrine.

00:52:19.620 | Now on the flip side, a non-qualified plan, a non-qualified deferred compensation plan

00:52:24.300 | is very flexible. It can be started, it can be stopped all the time. Unlike a 401(k),

00:52:28.740 | which you have to go through all these hoops to set up, they can start it, they can stop

00:52:32.220 | it, they can set one up for one employee, you can set up others for multiple employees.

00:52:35.980 | So in this case, in order to avoid the abuse, you can't have this plan protected from the

00:52:40.820 | claims of creditors, because if the key management knows that the company is going down, all

00:52:46.060 | they do is just take all the company assets, funnel them over here into the plan, look,

00:52:49.380 | hey, it's covered. And they walk away rich, fat, and happy, and the creditors get stiffed.

00:52:54.860 | So that's the – I know I've used all the technical lingo, but that's the doctrine

00:52:59.260 | essentially that's actually being followed, is they're trying to protect from the key

00:53:06.420 | management being able to tuck money aside into these non-qualified accounts and saying,

00:53:12.340 | well, these are protected from creditors.

00:53:13.860 | So let's get out of the weeds. The biggest danger with non-qualified deferred compensation

00:53:19.820 | plans is that they're simply not secure for the employee. The money is available as

00:53:25.740 | part of the company's general operating fund. Now, it may be accounted for in a separate

00:53:29.980 | manner. So I assume your wife has a separate account, which is being calculated based upon

00:53:35.900 | individual performance maybe of some kind of fund. And so it's technically separate.

00:53:42.260 | But the reality is that if you have a couple – $300,000, $400,000 in there, that money

00:53:47.540 | is not actually hers until she actually receives it. It's still the company's.

00:53:54.980 | And so from an accounting standpoint, they might actually be an accounting ledger that's

00:53:59.500 | illustrating a balance of $400,000. But company management could have chosen to employ that

00:54:04.500 | $400,000 into the purchase of a new power plant or whatever they've decided is a good

00:54:10.780 | use for the money. So that's the tradeoff. In exchange for not being taxed on the income

00:54:18.460 | currently, you give up control of the income. And you don't have the ability to get it

00:54:25.540 | until the future, and so there's some chance that you're going to lose it. And because

00:54:29.300 | you have that substantial risk of forfeiture, you're not currently being taxed on it.

00:54:34.180 | That's how it works. As soon as – your wife no longer has that substantial risk of

00:54:40.660 | forfeiture. As soon as she has the money and it's a sure thing, well, at that time, you'll

00:54:46.060 | be taxed on it. That's fundamentally how they work with the tax doctrine behind it.

00:54:55.260 | And so the answer to your question is how safe is it, that's a hard question to answer

00:55:00.840 | because the reality is you do have a substantial risk of forfeiture. It is possible that you

00:55:07.940 | could lose the money, and that's why you're getting the tax deferral. That's how it

00:55:15.180 | works. In order to get the tax deferral, you have the risk of loss. If you give up the

00:55:21.580 | risk of loss, you also give up the tax deferral because now you've received the property

00:55:25.740 | and now that property is going to be taxed. So what do you do? How do you look at it?

00:55:30.740 | Well, this is where it depends on – very much on the company. And the first thing you've

00:55:35.500 | got to look at is you've got to say how strong is this company? Is this company financially

00:55:44.500 | strong? Is it financially viable? Is it well run? There are some different ways of actually

00:55:51.560 | funding these accounts, and I'm going to go through them in just a second, but the

00:55:55.040 | key is they don't actually have to be funded. Technically, they are unfunded. There is no

00:56:00.380 | separate trust that is established and set aside where the money is just protected. These

00:56:06.500 | assets are part of the general assets of the employer. Now, the employer may choose to

00:56:10.540 | handle them in a separate way and account for them and set them aside in a separate

00:56:15.260 | account, and that's probably a good thing, but they don't have to. These are part of

00:56:21.300 | the general assets of the company. So you very much are dependent on the general – how

00:56:26.240 | strong is the company? And let me use a layperson's example to make this clear. If I work for

00:56:33.740 | the big utility here where I live is FPL – no, it's NextEra now, so let's just say it's

00:56:39.300 | NextEra. If I work for NextEra, which is a large utility company, and the president of

00:56:43.740 | NextEra comes to me and says, "Joshua, you're just a marvelous employee. Listen, we're

00:56:48.100 | going to offer you this special deal. If you fulfill the terms of this employment contract,

00:56:54.500 | we're going to offer you an additional $15,000 of employment – excuse me, $15,000 per year

00:57:00.880 | of retirement income every year of retirement." That promise has some weight because NextEra

00:57:07.340 | is a large – it's a financially viable company, and the employer is making a promise

00:57:11.900 | to pay in the future, and that payment might just be made out of the cash flow of the company.

00:57:17.520 | There might not be any funds set aside, no reserve account, anything like that. And that

00:57:21.380 | could be completely valid. That could be a completely valid example of a non-qualified

00:57:25.380 | deferred compensation plan. I am working now in exchange for compensation, which I've

00:57:30.600 | deferred for the future, and this is a special plan that's been set up exclusively for

00:57:35.820 | me. I don't have any actual transfer of property. I just have a promise to pay in

00:57:40.820 | the future, and so therefore I'm not taxed. I haven't constructively received any property,

00:57:45.680 | so I'm not taxed on the money now. I'll be taxed on the money at 65 when I receive

00:57:48.980 | that first $15,000 check. But in the meantime, the company could close up and blow away.

00:57:55.220 | Now, on the flip side, but that promise still has some strength because it's provided

00:57:59.140 | by NextEra Energy. Now, if Joe's coffee shop next door hires me and they say, "Joshua,

00:58:04.140 | you're just this genius, and we want to hire you, and we're going to pay you $15,000

00:58:08.820 | per year from 65 on," that also falls under all of those same arrangements. We set up

00:58:16.540 | a simple arrangement. This is a non-qualified deferred compensation program, and there are

00:58:19.540 | some rules we have to follow, but I'm trying to keep things simple.

00:58:25.340 | But the value of that promise, in my mind, it's not quite the safe. Joe's coffee shop

00:58:30.660 | that's just getting started next door is compared to NextEra Energy. Big difference there as

00:58:35.160 | far as their financial viability. And so the ultimate safety and security of the program

00:58:43.380 | is based upon the financial health of the employer.

00:58:46.900 | Now what about the deferral? What about the fact that you can defer income into it? Doesn't

00:58:51.020 | matter. That's just a feature of the plan. In the same way that a 401(k) is actually

00:58:58.060 | a subset, a type of profit-sharing plan. What most people don't understand about the technical

00:59:02.460 | way that the retirement accounts work is that a 401(k) is actually a profit-sharing plan

00:59:09.780 | with 401(k) provisions. And those 401(k) provisions actually permit the employee to defer some

00:59:16.560 | of their income and have it set aside. But the employer can just maintain a profit-sharing

00:59:20.420 | plan without 401(k) provisions. But by being able to add that 401(k) option there, it's

00:59:27.960 | reduced the cost for the employer, and that's why they're so common nowadays.

00:59:32.700 | So same thing with non-qualified deferred comp. The plan can actually be just a promise

00:59:36.140 | to pay like I outlined that will give you this $15,000 if you perform the requirements

00:59:41.660 | of this contract, or I can defer, you know, will allow you to defer 10% of your income

00:59:46.740 | into this separate account. So what about the funding? Well, there are a couple different

00:59:50.620 | ways that these can be funded. And these are the ones that are most commonly used. First,

00:59:56.180 | there can be just a simple reserve account that is maintained by the actual employer.

01:00:03.100 | And so here there is an actual account that the employer has, and this account can be

01:00:08.380 | invested in different types of securities. It could be invested in all types of financial

01:00:14.420 | securities. There's no trust, so there's no separation here. There's no trust. And the

01:00:20.780 | funds are actually fully accessible to the employer and to the employer's creditors.

01:00:26.180 | And so this satisfies the requirements of being unfunded for tax and ERISA purposes.

01:00:32.260 | And so this is quite common. There could also be an employer reserve account with employee

01:00:40.020 | investment discretion over the account. So under this idea, the employer, excuse me,

01:00:47.300 | the employee perceives that there's a greater security because they can select the investments

01:00:51.600 | that are in the account. They get to direct and say, "I want my money in a stock mutual

01:00:55.900 | fund," or "I want my money in a bond mutual fund," or "I want my money in a cash, you

01:01:01.020 | know, CD account." So that needs to be limited under the technical rules to some fairly broad

01:01:08.980 | investment classes, so equities, bond funds, some mutual funds, because you don't want

01:01:14.160 | to have the opportunity to select specific individual investments because that could

01:01:20.660 | cross the constructive receipt rules.

01:01:22.340 | So if I had the opportunity that I'm going to have an account with the level of discretion

01:01:27.540 | where I can short Home Depot stock, well, now that's going to cross over. And yeah,

01:01:35.100 | the IRS would say, "Well, hey, guess what? You've got this money set aside, but the reality

01:01:38.620 | is when you can short Home Depot stock, you've actually pretty much received it. You've constructively

01:01:43.340 | received the money, even though it's in a separate account. You control it just as effectively

01:01:47.460 | as if it were in your own IRA. So therefore, you have it, and that would violate those

01:01:53.200 | rules and we'd lose the tax deferral."

01:01:55.680 | So that's another way, though. So the first way, a reserve account that's just simply

01:01:59.000 | maintained by the employer, and the employer makes all the choices, or a reserve account

01:02:03.000 | maintained by the employer where the employee can direct the investments.

01:02:08.000 | The funds could be deferred into corporate-owned life insurance, and this is called COLE. This

01:02:14.160 | is kind of an interesting area of planning if you are a life insurance agent. We refer

01:02:19.760 | to two different types of life insurance planning. One is COLE, corporate-owned life insurance.

01:02:24.720 | The other is BOLI, bank-owned life insurance. This is an interesting type of planning. It's

01:02:29.200 | one of those sexy sides of the business. It's a very different type of life insurance planning

01:02:34.080 | than kind of kitchen table, here's how much life insurance mom and dad need to make sure

01:02:38.680 | the kids are taken care of if they die.

01:02:40.940 | But under a COLE plan, then we actually put the money into life insurance policies on

01:02:46.880 | the employee's life, but the policies are owned by and payable to the employer. These

01:02:53.840 | are cash value life insurance policies. They're not term insurance. These are cash value life

01:02:58.080 | insurance policies, and this can actually be a mechanism for providing financing for

01:03:04.560 | the employer's obligation under the terms of the plan. By using life insurance financing,

01:03:12.400 | then the plan can actually provide a death benefit, even in the early years of the plan,

01:03:16.680 | which can be really useful to younger employees. That can be a real benefit.

01:03:20.920 | So by participating in this plan, I know that, okay, I've secured a death benefit for my

01:03:23.920 | family. This can be a valuable part of my deferred compensation. If I set $10,000 aside

01:03:28.400 | just into an investment account, I don't have any death benefit. I got to go buy life insurance.

01:03:32.580 | But if I have a death benefit and I have an investment account, that can be useful. So

01:03:36.120 | these are often funded with corporate-owned life insurance.

01:03:39.660 | There can also be something set up which, if you are a CFP student, you need to understand

01:03:45.000 | the term what's known as a rabbi trust. Rabbi, like a Jewish rabbi, this was actually, it's

01:03:51.800 | so-called because the case that established this as an operating arrangement dealt with

01:03:57.720 | a synagogue with a rabbi who wanted to have the money set aside for his retirement. So

01:04:04.760 | in essence, a rabbi trust is a trust that's set up to hold property that's used for financing

01:04:11.240 | a deferred comp plan. And so the funds are still available to the employer's creditors,

01:04:17.080 | but they're not available to the management of the company.

01:04:20.440 | So under this scenario, maybe there's a rabbi trust established. There's a standardized

01:04:24.260 | document now. The IRS has provided standardized trust terms that will basically protect the

01:04:32.740 | account for greater safety to the employee. They'll protect the account from management

01:04:36.380 | being able to come in and say, "Look, there's this really great deal on this power plant

01:04:39.840 | that's going out of business." I don't even know if this happens in the power business,

01:04:42.460 | but follow my metaphor. "There's this great deal on this power plant that's going out

01:04:45.700 | of business. We got a steal of a deal. We're going to buy it at 30 cents on the dollar.

01:04:49.000 | So we're going to take all the money that's in these deferred comp plans, and we're going

01:04:54.120 | to use this to come up with a down payment on the power plant." They can do that if

01:04:58.160 | there's not a rabbi trust. If there's a rabbi trust, they can't do that. But if they go

01:05:02.680 | bankrupt, the creditors can still get the money.

01:05:05.100 | And then finally, there can be some sort of third-party guarantee that's established.

01:05:12.200 | And in this scenario, the employer goes out to a third party and obtains a guarantee to

01:05:18.320 | pay the employee if the employer defaults on the obligation. And so that could be a

01:05:24.840 | shareholder of the company, a related corporation, or it could just simply be a bank, or they

01:05:29.680 | obtain a letter of credit where the bank agrees if the employer breaches its obligation, they'll

01:05:34.120 | go ahead and pay the employee out the benefit.

01:05:38.320 | This does raise a little bit of concern that because of the guarantee, then the plan will

01:05:45.120 | switch from being unfunded to funded for tax purposes, not for ERISA, but for tax purposes.

01:05:50.800 | But if the employee goes out and gets the third-party guarantee independent of the employer,

01:05:58.160 | then it's not formally funded. So again, this is one of those specialized areas, just a

01:06:01.280 | little note that you need to be aware of. And obviously, I guess it's more for the general

01:06:05.040 | listening audience if anyone's setting one of these up.

01:06:08.400 | So you need to ask how this account is funded and see if there are reserves that are held

01:06:13.160 | by the employer. But back to your question on safety, this is what determines how safe

01:06:19.680 | it is. I would boil it down. If your company is financially strong, then the account is

01:06:25.340 | probably as safe as the finances of the company. So if you think the company is still going

01:06:29.800 | to be here, which obviously you do, but if you think the company is still going to be

01:06:33.240 | here when your wife retires, then it's probably pretty safe. If the company might not be here

01:06:38.040 | when your wife retires, well, it's not super safe.

01:06:41.400 | Now what is of interest to me is what the 5% rate is based on. So I would say pick up

01:06:47.520 | the phone and ask them. Call Human Resources. It might be connected to some sort of rate

01:06:54.780 | simply for the convenience of the employer to track the performance of the account. They

01:06:59.200 | might be using some external rate and saying, "We'll give whatever this rate is as a crediting

01:07:04.400 | mechanism to the account," when in reality the assets are not set aside, they're not

01:07:08.660 | invested in anything. Or that rate might be tied to a specific financial product. So if

01:07:14.440 | it's funded with a life insurance contract, that might be the rate that the life insurance

01:07:17.600 | company is paying to the people in the separate accounts. And so they're just passing that

01:07:24.520 | through. Theoretically, it could be an annuity contract. It could be a guaranteed investment

01:07:28.980 | contract, a GIC, a G-I-C, guaranteed investment contract. Those are offered by insurance companies.

01:07:35.560 | It could be mutual funds, maybe a stock fund, mutual bond fund. It's unlikely to be a stock

01:07:39.360 | fund with a 5% guarantee. But just ask. You've got to ask.

01:07:45.640 | And that's the key. When I was with Northwestern Mutual, I had one of these plans, and I could

01:07:49.520 | use the deferred comp plan. And any money that I put into the plan would be credited

01:07:55.720 | based upon the dividend interest rate that Northwestern Mutual earned off of its general

01:08:01.080 | portfolio. So an insurance company has a general account, which is their primary investment

01:08:07.800 | account, which is the reserve account for their insurance contracts. They need to fund

01:08:11.940 | all of the insurance contracts that remain outstanding. And whatever that portfolio earned,

01:08:18.160 | that was what my account was credited. And so it worked out really well. It was a guaranteed

01:08:22.880 | -- it would change, it would fluctuate a little bit year by year, but it was a pretty high

01:08:28.320 | rate. And so insurance companies often will offer

01:08:31.200 | special types of annuities for these types of plans. I won't get into all the names,

01:08:36.140 | but there's some unique products, and that may be what this is funded with. Just ask.

01:08:40.080 | You've got to ask. Hopefully, with a little bit of that background,

01:08:44.920 | that'll give you a bit of an idea to ask some questions and not feel bad about asking. But

01:08:49.960 | in essence, the safety of the promise is based upon the financial security of the company.

01:08:54.880 | If your company goes bankrupt, pools in Enron, WorldCom, whatever, all of the assets that

01:09:00.040 | are in that deferred comp plan, as long as it's a non-qualified deferred comp plan, and

01:09:03.480 | if I've diagnosed what it is accurately based upon your voicemail, all of those assets are

01:09:07.680 | available to the general creditors, the unsecured creditors of the company.

01:09:12.080 | So let's answer part two of your question. You said that you've got right now probably

01:09:18.160 | about 10% of your investable net worth is tied up in a company. So the question is,

01:09:23.840 | is 10% tied up in one company? Is it a lot, or is it a little? I don't know. I don't know.

01:09:34.800 | And this is one of those areas where it's very much a gut call. And I'm going to talk

01:09:41.160 | a little bit about this in the question, which now that I've stretched these shows into,

01:09:45.240 | instead of answering all these questions in one show, it'll probably be Wednesday or Thursday,

01:09:49.200 | I'll answer the question from the listener from Bonica in Sri Lanka. Actually, it'll

01:09:54.160 | be tomorrow. Probably I'll answer the question from Bonica in Sri Lanka. He's out talking

01:09:59.640 | about asset allocation in his context. How do you figure out if 10% is too much or is

01:10:04.440 | too little? It's going to depend. It's going to be a lot of it depends here. It depends

01:10:10.280 | on how much money you have. 10% of a million dollars is very different than 10% of $20

01:10:16.600 | million as regards your standard of living. You could look at this in two ways. And so

01:10:22.560 | I'll paint these two parallels for you. Let's say you have a million dollars of net worth

01:10:27.240 | and you lose 10% of it. Well, that's only $100,000. But the reality is, comparative

01:10:32.400 | to your lifestyle, the ability for you to have $900,000 versus a million dollars at

01:10:37.400 | that lower level of assets, that's going to make a dramatic difference in your lifestyle.

01:10:43.400 | But 10% of $20 million, if you've got $18 million or if you've got $20 million, is that

01:10:49.440 | going to dramatically affect your ability to make the BMW payment? Is that dramatically

01:10:55.160 | going to affect your ability to go out and buy the next BMW? It's not going to make much

01:10:59.000 | of a difference. 18 to 20, you're all in the same club. But 900 to a million, that's a

01:11:07.360 | lower real number. But I guess to my mind, it'd be a higher perceived number as far as

01:11:12.600 | lifestyle. You could argue that the other way and say, well, it's not really that much

01:11:17.040 | money, but $2 million, that's a lot of money. In my mind, the other thing you have to be

01:11:22.520 | aware of is that if it's 10% of your net worth, it's probably also 50%. You didn't say your

01:11:27.840 | position, but maybe your wife, if she's an executive, maybe she's a higher earner or

01:11:32.080 | substantially higher earner than you are. So if it's 10% of your net worth, but if the

01:11:36.560 | company goes bankrupt, it's also 50% of your income or 70% of your income. That's going

01:11:43.440 | to be a substantial number. But on the flip side, if you actually look at your financial

01:11:49.080 | planning, it sounds like you've got plenty of other assets. You've got no debt. You're

01:11:52.120 | asking questions. You're listening to shows like this. I'll bet the rest of your portfolio

01:11:56.160 | is abundantly diversified among different companies, different sectors that you've planned

01:12:02.280 | things out. So I simply don't know how to answer that question. It's one of those things

01:12:07.240 | where I don't have any mental models that would guide me. I would have to look at it

01:12:10.520 | personally. And if you knew of some information where you were nervous about this company,

01:12:16.120 | then I would start trying to diminish it. If you knew of something that you were bullish

01:12:21.040 | on this company, if you had other assets where you could suffer a wipeout, maybe it'd be

01:12:24.760 | okay for more. It's one of those things where I just don't have any mental models to apply

01:12:29.800 | to it. If any listeners do, come by and note those for me. This is episode 133, so radicalpersonalfinance.com/133.

01:12:38.640 | And I would love to know any ideas that you have on this subject for Robert. But I don't

01:12:47.240 | know. I probably wouldn't want more than 10% tied up there, considering that you have sizable

01:12:53.640 | incomes and that it's at least half of your income. If I could conveniently lower it,

01:13:01.080 | if you weren't especially bullish on the future of the company, then just keep the one-year

01:13:04.680 | salary in stock and don't go more heavily in. I'd pay attention to the company and to

01:13:09.160 | the industry. What happens to this company if oil prices are dropped? Is this company

01:13:15.920 | going to be affected? Affected positively, negatively? Frankly, I've reached the end

01:13:21.280 | of what I can do on a show like this, and I refer you from here to your financial advisor.

01:13:26.520 | Hopefully you feel a little bit more confident with some of the information just by having

01:13:30.280 | a little bit of the technical background to understand. And I hope that this was a fun

01:13:34.640 | introduction for others of you who aren't familiar with non-qualified deferred comp

01:13:39.440 | to kind of have a bit of an intro to it. It's an interesting world of planning. If I were

01:13:45.720 | going to go back and do planning, it's definitely one of the areas that I would consider working

01:13:51.080 | on. You've got to figure out a different business model because the sales cycle is

01:13:55.400 | extremely low, it's extremely complex, and this is one of those things where you need

01:13:59.540 | a national presence. You're going to be working with companies all over the country, and you've

01:14:05.080 | got to be extremely expert from a technical perspective. You need a marketing plan that's

01:14:09.520 | going to get you in front of the right people. It's one of those things I could never figure

01:14:12.560 | out with my resources how to set up the things I needed on the front end to kind of crack

01:14:18.160 | that nut. But it's one of those areas where you can do billion-dollar deals in the insurance

01:14:24.320 | business and the commission check on billion-dollar deals is a pretty sweet one. It's on my short

01:14:33.320 | list, but I can never figure out how to make it work. Maybe some of you can crack that

01:14:36.680 | nut. That's it for today's show. I will come back. I've got two questions left. I'll come

01:14:41.720 | back tomorrow, and I'm going to respond to a question from Mary on where to incorporate

01:14:47.680 | California versus Wyoming and also how to incorporate for a son. Then I'm going to answer

01:14:51.200 | that question from Bonica, who's living in Sri Lanka, a listener to the show, and ask

01:14:54.680 | some questions on asset allocation and diversification from his perspective, living in Sri Lanka

01:15:00.200 | and trying to apply some of what I talk about on the show to his scenario. I love scenarios

01:15:04.840 | like that because they help me to kind of think through and see the principles that

01:15:10.680 | exist in financial planning.

01:15:14.000 | Hope you enjoyed today's show. If you'd like to get in touch with me, you can email me,

01:15:16.680 | Joshua@radicalpersonalfinance.com, Twitter @radicalpf, Facebook.com/radicalpersonalfinance.

01:15:24.160 | If you've benefited from today's show, this show is supported by listeners, so I don't

01:15:30.280 | have any outside corporate involvement at this point. If you've benefited from that,

01:15:36.080 | I'd be thrilled if you would join the membership program. That's how I'm setting up to pay

01:15:39.960 | the bills. You can find the details of that at radicalpersonalfinance.com/membership.

01:15:52.720 | Thank you to all of you who are listening. I hope that you have a lovely day. I'll be

01:15:55.920 | back with you tomorrow.

01:15:56.680 | [music]

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01:16:24.680 | [music]

01:16:31.680 | [music]

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01:16:45.680 | [music]

01:16:48.680 | Thank you for listening to today's show. This show is intended to provide entertainment,

01:16:53.680 | education, and financial enlightenment. Your situation is unique and I cannot deliver any

01:17:02.520 | actionable advice without knowing anything about you. This show is not, and is not intended,

01:17:10.840 | to be any form of financial advice. Please, develop a team of professional advisors who

01:17:19.000 | you find to be caring, competent, and trustworthy, and consult them because they are the ones

01:17:26.680 | who can understand your specific needs, your specific goals, and provide specific answers

01:17:33.480 | to your questions. Hold them accountable for your results. I've done my absolute best to

01:17:39.640 | be clear and accurate in today's show, but I'm one person and I make mistakes. If you

01:17:45.120 | spot a mistake in something I've said, please come by the show page and comment so we can

01:17:49.840 | all learn together. Until tomorrow, thanks for being here.

01:17:54.840 | Unwrap the holiday savings at Citadel Outlets. Shop the early access Black Friday sales for

01:17:59.920 | the best deals of the season. The all-night shopping party starts Thanksgiving night at

01:18:04.080 | 8 p.m. Visit CitadelOutlets.com for more information.

01:18:08.160 | (upbeat music)

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