RPF0475-Friday_QA
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00:00:30.000 | It's Friday. That means it's time for a live Q&A call.
00:00:35.000 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight,
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00:01:01.000 | My name is Joshua and I am your host.
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00:02:26.000 | We're going to begin with Sean in Missouri. Sean, welcome to the show.
00:02:30.000 | Thank you, Josh. I appreciate it.
00:02:33.000 | Go ahead and ask your question, please.
00:02:35.000 | Yes. So me and my wife, we're currently trying to figure out a plan right now.
00:02:41.000 | So we're carrying a lot of credit card debt.
00:02:44.000 | We bought a house about two years ago. It's proved to be a very fruitful investment for us.
00:02:49.000 | And right now, we've got a total of about $45,000 in credit card debt that's kind of just been built up over the past few years.
00:02:59.000 | So we're trying to come up with a plan to eliminate that debt as quickly as possible.
00:03:05.000 | And so we've talked it over and we've kind of narrowed it down to a couple of different options.
00:03:10.000 | So either pulling out maybe a home equity loan to reduce because the credit card interest rates are so high, because they're 18 or 19 percent.
00:03:21.000 | We could get a home equity loan of 6 percent to cover all of that and then aggressively pay that down.
00:03:28.000 | Or we were looking at the other options of possibly paying off one credit card, like, as quickly as possible.
00:03:38.000 | So we're just kind of lost just in the numbers of it right now.
00:03:43.000 | And so we're hoping maybe you could help us figure out a plan for that. So that way we can get on a better path.
00:03:50.000 | How much is your household annual income?
00:03:54.000 | Total right now is about $75,000. That's after tax.
00:04:03.000 | And before you bought the house, did you and your wife have credit card debt then?
00:04:08.000 | We did. We had a little bit, maybe $3,000 or $4,000 at the time. So it's been about two years now that we've kind of built that up.
00:04:18.000 | So the credit card debt then primarily, as I'm understanding, is from improvements, repairs to the house.
00:04:24.000 | You put things, construction materials at Home Depot, new paint, new curtains, new furniture, those types of expenses on the credit card.
00:04:33.000 | And that's what the debt is from. Is that right?
00:04:35.000 | No, not really. So it's more about 10 percent, me and my wife are both also entrepreneurs.
00:04:41.000 | And so I've just recently started my own real estate business as an agent.
00:04:48.000 | So part of it is that and then hers is I think about maybe 15 of that is hers. She's got a company.
00:04:55.000 | She's a makeup artist. She's working on building right now. I'd say maybe about 15 of that is towards her makeup artistry.
00:05:07.000 | Okay. So then the house was just simply you moved into the house. It's been a good decision. It's been a good house.
00:05:13.000 | But that's not what caused you to go into debt. What caused you to go into debt is that recently both you and she have begun new businesses.
00:05:20.000 | And the credit card debt is due to that. Is it due to business-related expenditures such as purchasing signs, outfitting a location to do makeup artists, buying tools?
00:05:32.000 | Or is it due to covering personal income during a time of low income as you start the business?
00:05:37.000 | Yeah. So I would say it's about 50/50 in that regard. 50 percent towards the buying purchasing and then 50 percent towards covering expenses due to low income.
00:05:47.000 | And at this point, do you feel like like are you continuing to add money to the credit card balances?
00:05:54.000 | No, I think we've hit like probably over the past two months we've hit a stopping point where we were just like, okay, this is we've gone too far.
00:06:04.000 | And so we're really trying to like relook at what we've spent and try and figure out the best way to eliminate this debt.
00:06:13.000 | Okay. All right. So this is – the reason all these questions are important is it will guide the advice.
00:06:22.000 | For example, if the debt were related to your house, then that would be one thing.
00:06:27.000 | And you said it was a fruitful investment. So we tried to figure out, well, was this – did you buy an old house and needed to fix it up?
00:06:32.000 | That's not the case. If the debt were related to overspending, let's say that you and she had stable incomes and just over the years you continually put extra expenses onto your credit card balances, then under those circumstances, that would lead in a different course of action.
00:06:51.000 | If it's related to low income and it's piled up a lot over the last couple of years and now it's just related to low income, the major question is are the businesses working now? I'm hearing a yes. Is that right?
00:07:05.000 | No, not yet.
00:07:06.000 | Okay. So tell me more. Tell me about the stage of the business, yours and hers both, what the experience has been thus far and what you see coming down the line in the next six months.
00:07:17.000 | So experience thus far, I'll speak for mine first as an agent. So I just recently over the past month or two became licensed as an agent. And so I'm just really getting my foot in the door to get off the ground.
00:07:32.000 | And then I have a second job that I'm working right now to provide additional income because it's stable income. And I work that one full-time and I'm doing full-time for my real estate business as well.
00:07:44.000 | That's not producing any profit right now. It's putting money out for licenses and fees and everything else to get off the ground.
00:07:52.000 | But over the next six months, ideally, I'm hoping to be making all of that back and even more. So projected income, I guess, would be not including our initial 75, would be probably an additional 75 over the next six months.
00:08:10.000 | And the 75 is coming from your wife then currently?
00:08:14.000 | No. So the 75 is coming from me. And my wife is currently looking for another job in addition to running her business right now just to provide additional income.
00:08:25.000 | Okay. So in your real estate business, this is brand new, you haven't yet sold any property. So you have no net income from that business yet. You're working a side job, which is paying you steady income. And how much is that paying you on a weekly or monthly basis?
00:08:41.000 | So on a monthly after-tax basis, it's about $4,000.
00:08:45.000 | And is this a regular job?
00:08:47.000 | Yes, it's a 9-to-5.
00:08:49.000 | Okay, good. All right, great. So that gives us a great place to start from. Now, your wife's business, is she earning any profit whatsoever in that business yet on a regular basis?
00:09:01.000 | Yes, but it's minimal. It's a couple hundred dollars right now. So she started hers a couple months ago. And so it's just turning over a couple hundred dollars a month right now.
00:09:13.000 | Okay. And you said she's now looking for another side job to get stable income coming in as well?
00:09:18.000 | Yes.
00:09:20.000 | All right. How much, not including extra payments, how much are your monthly living expenses, including just the minimum payments on everything?
00:09:29.000 | So right around $4,000.
00:09:34.000 | So with your income at about $4,000, you can essentially tread water with your expenses staying current on your debts at $4,000 a month. Is that right?
00:09:44.000 | Yeah, making no impact on the credit.
00:09:47.000 | Understood. And in the current scenario, are you current on all your payments?
00:09:52.000 | Yes.
00:09:53.000 | Okay. So this scenario here will kind of guide my advice. At the moment, what I hear is both of you are working to start businesses, you a real estate business, her a makeup artist business.
00:10:08.000 | And it's slow going as it is with most businesses. We're not sure if or when it's going to go faster. We're hoping it is. But right now, it's slow going.
00:10:21.000 | You may have been a little bit too optimistic about the rate of business growth and that's what led to the credit card debt kind of piling up, buying stuff for the business, trying to get things going and doing that on credit card debt and covering your own personal expenses.
00:10:36.000 | In my experience, I have never found it to be a blessing for a new business owner to start a business on credit cards.
00:10:44.000 | I've never seen that be a good thing, especially when compared with alternative uses.
00:10:50.000 | Most businesses like you're describing to me are business of a new real estate agent, a business of a makeup artist.
00:10:56.000 | Most of these businesses can and should be started without any borrowing.
00:11:00.000 | There are many businesses and business owners who have begun with borrowing money and with credit card debt.
00:11:08.000 | So you can't say that it doesn't work. Certainly, many people have done it.
00:11:11.000 | But my experience has been that if you borrow money, it causes you to be less focused on making the business produce cash flow and it causes you to spend unnecessary amounts of money.
00:11:23.000 | Because it's easier to spend borrowed money, we wind up just simply swiping the card or entering it online and buying things that we think we might need until we prove that we actually do need them.
00:11:35.000 | And we find it easier to keep our expenses high because we cover the difference with a credit card debt.
00:11:42.000 | Instead of saying no when there's an opportunity to do something that's fun, maybe a weekend away or a week away or whatever the situation is, just as an example.
00:11:50.000 | We should say no, but we say, "Well, we're starting a new business. We need a little break. Let's go ahead and do it and put the personal expenses on the business credit – on the credit card."
00:11:59.000 | So I've never seen that to be a blessing for a business like yours.
00:12:02.000 | There are businesses that are much higher scale that I don't know if they can ever be started without debt.
00:12:08.000 | Some people, experienced business owners, they're going to launch a new venture.
00:12:12.000 | If you need millions of dollars of capital, that's different.
00:12:16.000 | Or some people need to buy major amounts of equipment. That's different.
00:12:19.000 | But in the business structure that you're describing to me or if any other listeners were going to start such a business, I would encourage you to never start such a business with credit card debt.
00:12:28.000 | But rather to work your way through and do it on the side as you are now doing.
00:12:33.000 | The reality is you could have worked over the last two years a job and started your real estate business on the side.
00:12:40.000 | And your wife could have worked over the last two years a job and started a makeup artist business on the side.
00:12:47.000 | And so accruing this debt wasn't strictly necessary.
00:12:51.000 | So now that we're there, I'm not saying that to make you feel bad.
00:12:54.000 | Just you got to learn the lesson. I've learned this the hard way myself. I've done it myself and learned the lesson.
00:12:59.000 | I had to pay it all off. But learn the lesson from it and encourage others to avoid that.
00:13:05.000 | I've regretted it when I've done that in the past. I have regretted it.
00:13:08.000 | And I wished that I had just simply worked my way through instead of taking the easy way out with credit card debt.
00:13:15.000 | So let's bring it to today and ignore the past because we are where we are.
00:13:18.000 | Today, what I would encourage you to do is not worry too much about paying off the credit card debt as quickly as possible in the sense of what are we going to do this month.
00:13:28.000 | What I would do is I would just fight like crazy to freeze it and stop accruing more.
00:13:34.000 | So if you are earning $4,000 a month at your job, what I would immediately do is stop spending on the credit cards for any reason whatsoever.
00:13:44.000 | Probably best not to actually literally cut them up at this point because you're going to need to do some balance surfing over the next months and figure out what to do about possibly changing the whole – about what to do with it.
00:13:58.000 | But at least lock them up away from you so you can't use them.
00:14:02.000 | If you have a discipline and willpower problem, freeze them in the block of ice as some people do.
00:14:07.000 | But I would physically keep them present until you get them paid off.
00:14:12.000 | But don't – you got to figure out a way to not use them.
00:14:15.000 | If you do have a willpower problem, shred the things and then figure out how to surf the balances later.
00:14:20.000 | But the reason I would say is kind of philosophically at this point, you do have opportunity and you have an opportunity for two new businesses.
00:14:28.000 | Sounds like you're still committed to growing these businesses and that means that you have opportunity to build more revenue.
00:14:33.000 | So as long as we're not going deeper into the hole, let's make sure that we can keep these businesses going.
00:14:39.000 | And as you create more income from the businesses, it would be great to be able to expand and it would be great to take that money and pay it off.
00:14:49.000 | So what I would do is I would commit myself to not borrowing more money and staying current on my stable salary job but not expand personal expenses.
00:14:59.000 | Then look at your business and say, "How can I make this business work?"
00:15:03.000 | If you can start selling houses – well, in that case, you said you had $45,000 of credit card debt.
00:15:12.000 | If your average commission on your local area is – let's just say $4,500, ignoring taxes, that means you need to sell ten houses.
00:15:20.000 | So that should give you a great amount of motivation to say, "Let me get some houses sold."
00:15:25.000 | Or if your wife figures out what her average profit per client is or engagement, however she's structuring her business, then that can give you a major focus on building those businesses.
00:15:39.000 | And use the money from the business to pay extra on the debt to get the debt cleared as quickly as possible.
00:15:45.000 | You may need at some time to retain the earnings in the business to expand.
00:15:50.000 | For example, you will face a situation in your real estate business where you're going to be quickly tapped out and you'll find it difficult to keep your full-time job and to keep – to do your real estate business.
00:16:09.000 | So I don't know what the number of clients is where you'll get to the point where you're just exhausted.
00:16:13.000 | But you'll reach that point in time and you're going to have to face the challenge.
00:16:16.000 | Once you've sold some houses, am I going to keep my 9 to 5 or should I go ahead and transition over to the business?
00:16:23.000 | And so you need to keep yourself the room of being able to make a decision to leave the 9 to 5 and that means retaining earnings in the business, keeping money there in the business.
00:16:34.000 | I don't know how to tell you tactically what to do from week to week.
00:16:38.000 | But I would pursue both.
00:16:40.000 | I would try to work like crazy with the goal of having the debt paid off before I left my 9 to 5 if I get the business going.
00:16:47.000 | And I would do that as long as I could, work long hours to work it.
00:16:52.000 | But I would also keep the option.
00:16:53.000 | I'd try to keep some money liquid in case I came to the point where I said, "You know what? Real estate is working.
00:16:58.000 | This is for me.
00:16:59.000 | I am going to go ahead and leave my job."
00:17:02.000 | And in that situation, you're going to need to have 8, 10, 12 thousand dollars saved up to get you through two or three months while you ramp up the business with a full-time effort and a full-time endeavor.
00:17:13.000 | And knowing when and where the right place to make that transition is, is impossible for, of course, for me to do that.
00:17:21.000 | But I would talk to some people around you and make sure that you are accurately assessing your productivity.
00:17:27.000 | Make sure that if you're putting in the time, you're putting in the work, great.
00:17:31.000 | You should pursue that with a goal towards transitioning to it full-time.
00:17:34.000 | And you may not put as a requirement that you have to have the debt paid off before then or you may say, "No, I do want to get the debt paid off and then transition."
00:17:45.000 | So, we'll talk a couple of tactics in a moment, but let me pause.
00:17:48.000 | Do you understand where I'm going and saying you've got opportunity here for the businesses.
00:17:52.000 | Make sure you give them time to grow and transition?
00:17:55.000 | Yeah, definitely. That does make sense.
00:17:58.000 | Okay.
00:17:59.000 | Tactically, as far as answering the question about the HELOC versus not, are these credit cards at 18% to 19% interest rates currently?
00:18:06.000 | Yes.
00:18:08.000 | Why are the interest rates so high?
00:18:10.000 | Have you not tried to get 0% introductory offers and things like that?
00:18:14.000 | I have and I think it's just because the balances are so high on them that I've been rejected for those.
00:18:21.000 | So, I have tried that, but I have been rejected.
00:18:25.000 | Okay. So, the game – when you're in this situation, the game has a few different plays depending on how good your credit score is, etc.
00:18:32.000 | So, here are a few things that you need to do.
00:18:34.000 | Number one, don't ever, ever, ever miss a minimum payment, period.
00:18:40.000 | Because if you start missing payments, that has a dramatic effect on your credit score and it has a dramatic effect on your ability to get more – well, to get more credit.
00:18:53.000 | Yeah. And the biggest thing that's going to affect you at this point is the percentage of balance that you have as compared to the available credit.
00:19:01.000 | So, make sure that every one of your credit cards is set up with an automatic payment or make sure you have a very good accounting system where you don't miss payments.
00:19:09.000 | I recommend to everybody who's not in financial distress that all credit cards and all debt accounts are set to – especially at least debt accounts that are reported to a credit agency are set.
00:19:22.000 | So, at least the minimum payment is automatically paid from a checking account because you just – if you start getting behind because you just didn't pay attention, that was pointless and you shouldn't do that.
00:19:34.000 | You should systematically ask for additional amounts of credit from the credit card companies.
00:19:40.000 | And the way that you do that is as your income goes up, go ahead and ask for more credit. And as your income goes up, you tell them about that.
00:19:52.000 | And as you – you tell them about that and that's going to be the biggest factor and they'll increase your credit.
00:20:00.000 | The higher your available credit is, that will help you on your credit utilization score. That will raise your score and that will make you qualified for more offers.
00:20:10.000 | The best thing to do is to take advantage of the zero percent offers.
00:20:14.000 | And basically, if your credit score is decent and if your payment record is good, you can get from time to time zero percent offers from companies.
00:20:23.000 | A couple of things that you should do as far as tactics and tools. Make sure that you check. If you are enrolled – or if you've ever gone enrolled in the opt-out prescreen process in the past, which is something that lots of people do in order to limit credit card offers.
00:20:37.000 | When you're in this situation, you need to unenroll. Make sure that you're not in the opt-out space. You need to make sure that you're getting the offers, getting the special offers.
00:20:45.000 | And they'll send you the zero percent balance transfer fees – zero percent balance transfer offers to you.
00:20:52.000 | And those are very helpful because if you can cut your debt from 18 percent interest rate to zero percent with a small balance transfer fee, that can help you very much to keep things going forward.
00:21:04.000 | The second thing that you do is make sure that you are actively looking for opportunities for cards and things that will fit your personal credit scenario.
00:21:16.000 | So there are a couple of businesses. Sign up if you haven't done it on the Credit Karma website. C-R-E-D-I-T-K-A-R-M-A.
00:21:24.000 | And what they'll do is they'll give you the tools on what is your credit score and why is it.
00:21:29.000 | But what Credit Karma does is because they have access to your credit score, they'll select some offers for you based upon your profile.
00:21:37.000 | And that will give you a high percentage possibility of getting approved when you go to apply for a card.
00:21:44.000 | Different credit card companies have different types of cards that they want to market to different types of debtors.
00:21:50.000 | So it's not as simple as saying, "I want a Bank of America card. You need to know which Bank of America card is for me."
00:21:55.000 | In years past, we did a marketing – when I was in the marketing and brand management kind of consulting company, we did an interesting study for a major, major credit card provider.
00:22:07.000 | And it was so interesting to me to read all of the profiles that they had on different types of debtors.
00:22:14.000 | And you are segmented and you're profiled and all of the offers are tailored right to you for the type of debtor that you are.
00:22:21.000 | So to enhance your ability to get a score or to get a card, use a service like Credit Karma where they're going to tailor the offers that you should apply for based upon your personal profile.
00:22:34.000 | The standard thing, you should be able – as long as you're not late on all kinds of things, from time to time, you should be able to get a 0% balance offer, transfer offer.
00:22:43.000 | Usually, if your credit scores are not great or if your utilization rate is very high, then you'll have to pay either a 3% or 5% balance transfer fee.
00:22:54.000 | Calculate those costs. If you can get your available credit higher and get your score better, then sometimes from time to time, they'll give you a 0-0 where you have a 0% introductory offer and a $0 transfer fee.
00:23:10.000 | As you do this – and I'm talking about this over the course of months. As you do this, then make sure that you – as you do this, make sure that you don't close the old accounts.
00:23:22.000 | When you transfer the balance, just keep it there even if they won't give you any more credit because that will help your utilization ratio.
00:23:28.000 | As you're going through this process, make sure that you're reporting your higher income as it goes up.
00:23:33.000 | So let's say that you sell a couple of houses and you say, "Well, actually, my annual income has – I could sell a house a month. So now I'm adding $48,000 to my annual income."
00:23:42.000 | Take that and add that to your job and report that plus your wife's income as the household income.
00:23:49.000 | When you're self-employed, the best thing is keep your job and your self-employment income and report the total income number to the credit card companies and they'll increase your balance based upon what your income is.
00:24:00.000 | Along the way, look for other offers. So look for an offer at a local credit union to move some of it from 18 or 19 percent to maybe 6, 7, 8, 9 percent.
00:24:11.000 | Have you ever investigated getting a personal loan from a credit union or other source of funding?
00:24:15.000 | I did, but they were going to put me at 18 percent, so it didn't make any sense for me to –
00:24:22.000 | Yeah, it doesn't benefit anything. It doesn't benefit anything.
00:24:23.000 | Yeah.
00:24:24.000 | So look for other opportunities, but kind of the credit card game is your best – one of your best bets to get this.
00:24:31.000 | Now, should you move it to the home equity line of credit? That's the question. Maybe. So what's the total value of the house today?
00:24:38.000 | Total value of the house today is 535.
00:24:42.000 | And how much is your mortgage balance currently?
00:24:45.000 | 433.
00:24:47.000 | Why did you guys buy such an expensive house without making any money?
00:24:52.000 | Well, we were making money at the time, but it was through a VA loan.
00:25:00.000 | Do you have any interest in selling your house?
00:25:05.000 | I do, but my wife does not. She very much wants to hold on to it.
00:25:10.000 | All right. So that's important. Well, do you think that you could – have you investigated getting a HELOC on the house and moving it?
00:25:21.000 | I did. So I looked into that, and I was just kind of skeptical of whether or not we should do it because – so the total amount that I could get through HELOC would be $70,000 at a 6% interest rate.
00:25:37.000 | So I had looked into that. I was just unsure if I should do that, whether or not we should reserve that as like – you know, if we have any medical emergencies that come up.
00:25:47.000 | I talked it over with my wife, and we were just – we were kind of unsure about if we should utilize something like that for our credit card debt.
00:25:53.000 | Right. Do you have any other money? Do you have any investments, retirement accounts? Do you have any life insurance policies, savings, valuable assets?
00:26:02.000 | I've got about two grand in an IRA right now.
00:26:06.000 | All right. There's no point in touching that.
00:26:11.000 | I hate adding more debt to a house and especially credit card debt. I hate it for two reasons.
00:26:17.000 | Number one, I don't like taking unsecured debt and moving it over into a secured debt position.
00:26:24.000 | If you have a credit card debt, at the end of the day – you know, at the end of the day – excuse me. If you don't pay, yeah, there would be a lawsuit, but you don't lose your house.
00:26:36.000 | Now, I hate you're having such an expensive house, but if it's – you know, if – I wouldn't tell my wife, honey, we've got to move out just because we have credit card debt.
00:26:47.000 | Like you can figure it out, and it's time for you to get busy and sell some houses and pay it off.
00:26:51.000 | It sounds like a dream house. It sounds like something that is important, and that's not the type of thing to try to disrupt your marriage over a temporary short-term credit card scenario.
00:27:02.000 | I don't know how to tell you the answer clearly. Here are just the risks and the benefits of both.
00:27:06.000 | If you move it over onto a HELOC, then you put yourself in a situation where, yes, you save some interest, and that would be beneficial.
00:27:15.000 | But you also move the debt from an unsecured debt to a secured debt.
00:27:19.000 | So if you got behind on your payments or something happened, you are unable to – you're unable to – well, you run the risk of winding up in foreclosure because of it.
00:27:33.000 | I think what I might do is I might do half and half.
00:27:36.000 | And so I might move the money over – I might take out the HELOC, move some of the balances over in order to free up my credit utilization ratio and get that down under – ideally, it's under 30 percent.
00:27:50.000 | But if you do that – do you know what the total credit limit is across all your cards currently?
00:27:55.000 | So if we're talking utilization, we're at like 95 percent.
00:28:00.000 | Okay. So if you can cut it down, you're not going to get any great offers at 95 percent.
00:28:06.000 | I would consider moving something like half of it over to a HELOC, dropping my rate utilization ratio below 50 percent, maybe below 40 percent, and that will free up the zero percent offers.
00:28:16.000 | And then moving some more of it over to credit cards.
00:28:20.000 | There is a case to be made just to move it over into the HELOC and the – my concern is if you do that, you might lose the motivation to pay off the debt and you might just start spending more money and that's not going to help you.
00:28:35.000 | If you can figure out how to have that psychological – the psychological motivation still intense to get rid of the debt and you can do that in the context of a home equity line, that's great.
00:28:48.000 | And that might be worth doing.
00:28:50.000 | But I don't know. I don't like home equity line to credit.
00:28:58.000 | But it certainly – there's a – if you can go from 18 percent to 6 percent, that's a massive savings.
00:29:06.000 | I mean we're talking interest on $45,000, 12 percent interest is $5,400.
00:29:15.000 | I think you got it. Yeah. Go ahead.
00:29:20.000 | So my question – not my question, but I guess the primary discussion that me and my wife were having was whether or not it would be more beneficial.
00:29:30.000 | So for us right now, we're in the mindset of, hey, we need to work our butts off.
00:29:33.000 | Like we need to really turn this around, so that's why we're both going to be working full-time jobs while we're building our businesses.
00:29:39.000 | And there was just a question of is – that was kind of my question was is the risk of doing the HELOC worth like the extra – let's say over two or three years, it ends up being like an extra $10,000 in interest.
00:29:55.000 | Like is the risk worth it?
00:29:57.000 | And that's kind of like why I was calling in today was whether or not it would be worth it to do that or if we just suck it up and, hey, we just – we accept that this is a high interest rate and we just work our butts off to pay it down.
00:30:11.000 | So that's kind of where the discussion was for me.
00:30:15.000 | Well, I guess all I can – it's a hard question for me to answer because the benefits – all I can do is just lay out kind of the benefits and the advantages for you.
00:30:25.000 | The benefit of moving it over onto a home equity line of credit, the obvious benefit is you lower your interest rate dramatically.
00:30:32.000 | That is a dramatic savings.
00:30:34.000 | The second benefit to moving it to a home equity line of credit is you move what today would be a mixture of business debt, deductible debt and non-deductible debt over onto a home equity line.
00:30:45.000 | And you can deduct that along with your other mortgage interest.
00:30:48.000 | So that could help you slightly from a tax consideration.
00:30:51.000 | And you do have that debt secured by an asset that eventually could be sold and paid off.
00:31:00.000 | Those would be kind of the benefits of the home equity line of credit and the interest savings is substantial.
00:31:06.000 | It's definitely substantial.
00:31:08.000 | The fear that you have if you move it over onto the home equity line of credit and then face some sort of emergency, that fear is justified.
00:31:17.000 | But you have to recognize that you still have access to the credit cards.
00:31:21.000 | So if you did move it over to the home equity line of credit, in essence, on the net, you're in the same position as you are keeping the balance on the credit cards and just having an empty home equity line of credit.
00:31:32.000 | You're in basically the same place.
00:31:36.000 | Because if you had an emergency, you could still, of course, use the credit cards again.
00:31:40.000 | And if you move the money over onto the home equity line of credit, it would help you to improve your credit score.
00:31:44.000 | Interest in favor of keeping it on the credit cards is the motivation to keep paying off the debt.
00:31:51.000 | I have almost never seen a family who was motivated to pay off credit cards when they moved it over to the home equity line of credit was able to keep the same motivation.
00:32:00.000 | There's something about having credit card debt that helps you to stay motivated.
00:32:03.000 | And I don't like the idea of moving debt over onto something where it's secured by an asset.
00:32:09.000 | But in your case, you're kind of stuck.
00:32:13.000 | So I would say it's either, number one, how quickly can you get out of debt?
00:32:17.000 | If you and she are both working full-time jobs and working side jobs, you could have this thing gone and you could be completely debt-free in 12 months.
00:32:24.000 | If you work hard and build up the business while you have your main job, you could be there in 12 months.
00:32:32.000 | And in 12 months, is the interest on the credit cards going to be a huge deal?
00:32:35.000 | Probably not.
00:32:36.000 | And you'd be able to get it down as you pay off the balance of some.
00:32:40.000 | So I think there's a strong argument made in favor of the home equity line of credit.
00:32:45.000 | I think I would be annoyed.
00:32:47.000 | And I personally, this is my opinion, I personally don't want unsecured debt moving to secured debt.
00:32:54.000 | It's more important to me to maintain a lower risk profile at the cost of a higher temporary interest for a few months than it is for me to save the interest.
00:33:03.000 | But that was a 20-minute discussion to say I don't know what you should do.
00:33:08.000 | But you really brought up some great points and definitely gave me some stuff to think about that I had no clue about, especially with the credit utilization and just the idea of if the emergency does come up, we still have access to the credit cards, which if we did do the HELOC, I'm not going to touch the credit cards.
00:33:29.000 | Because my whole goal is to be debt-free and ideally financially independent by the time I'm 35.
00:33:37.000 | So –
00:33:38.000 | Okay.
00:33:39.000 | If you've got that major motivation, then in that situation, I think I would shred the credit cards.
00:33:43.000 | I'd get rid of them completely.
00:33:44.000 | I wouldn't close them.
00:33:45.000 | But if you're going to move to the HELOC and still have them, shred them.
00:33:49.000 | If you have an emergency, you can get access to them in a few days.
00:33:51.000 | You can call the company and say, "Hey, we're going to – we need the cards again."
00:33:56.000 | But make a pact with your wife that we're going to have this thing gone.
00:34:00.000 | Otherwise, you just run the risk of going behind.
00:34:02.000 | But remember this, and I wanted to lead what I said earlier is important.
00:34:06.000 | When you're in a business startup place, it's okay for you to wait.
00:34:11.000 | It's okay for you to say, "I need to wait, and I'll deal with this in 12 months or six months," and look at the business.
00:34:17.000 | Make the business grow.
00:34:19.000 | You have the focus where you can do all of the above.
00:34:21.000 | You don't have to.
00:34:22.000 | But it's perfectly reasonable to say this is financing cost for the startup of my new business, and I can work on this in six or 12 months.
00:34:29.000 | Many people delude themselves, and six or 12 months turns into six or 12 years.
00:34:34.000 | And they still have a failing business, and they didn't move quickly enough.
00:34:37.000 | But it's okay to wait.
00:34:40.000 | All right, good luck to you guys, and let me know how it goes.
00:34:43.000 | I hope it helps.
00:34:44.000 | I hate to go back and forth, and maybe I didn't even answer it.
00:34:47.000 | Next – oops, wrong button.
00:34:49.000 | Matthew, hold on.
00:34:50.000 | I'm coming to you.
00:34:51.000 | Matthew, welcome to the show.
00:34:52.000 | How can I serve you today, please?
00:34:54.000 | Hey, Joshua.
00:34:55.000 | Thanks for taking my call today.
00:34:58.000 | I guess this falls under the career and income planning.
00:35:03.000 | I was reading Cal Newport's book, "So Good They Can't Ignore You," and he states that people find fulfillment in a career sometimes by simply sticking with that career
00:35:18.000 | and over time becoming, I don't know, necessarily an expert, but much more comfortable with their career.
00:35:25.000 | That's an oversimplification of what's in the actual book, but that's kind of how it is broken down.
00:35:32.000 | Do you believe that that has merit?
00:35:35.000 | If so, why, and if not, why not?
00:35:37.000 | And the reason I ask that is because it kind of runs into the sunk cost fallacy.
00:35:42.000 | You have to walk that thin line between, "Okay, do I just believe everything is gone and I'm making a clear decision today," or does each day I get a little bit better and this becomes a little bit more of a fulfilling career for me?
00:36:00.000 | If a career is fundamentally a bad fit, it's very unlikely that somebody is going to be able or willing to stick it out until they're good.
00:36:09.000 | So I think you have to start with there's got to be some basic fundamental fit.
00:36:16.000 | As long as there's some basic fundamental fit, and obviously here – well, not obviously.
00:36:24.000 | I'm not here talking about somebody who's in survival mode, totally broke, just the bare minimum necessities of life.
00:36:32.000 | In that situation, you take whatever job is at hand and you get yourself out of the ditch.
00:36:37.000 | We're talking about somebody who has opportunity and who's done well.
00:36:40.000 | I think when you have a basic level of fit, then that does make a lot of sense and there are – there is value in getting better at something.
00:36:50.000 | So I'll just use the simplest example, myself, because listeners know who I am because I've shared so much of my life.
00:37:00.000 | I often when I was younger had this dream of having an internet business because I would sit at home and I would – I've been pursuing this goal of having an independent online income that was location independent.
00:37:12.000 | I've been pursuing it for 15 years, maybe more, 17 years perhaps.
00:37:17.000 | And so I'd often have this dream and this idea and this goal that life would just be perfect if I had a laptop and could sit in front of a laptop.
00:37:26.000 | When I got into the financial planning business, I quit after three years and I quit – now, the first three years were brutal.
00:37:35.000 | After three years, I got better.
00:37:37.000 | But then I had an opportunity with a startup, a friend of mine who had created a startup, and it was in the technology space, had huge potential, huge potential returns, et cetera, and needed some help with online marketing.
00:37:50.000 | And I felt I had some skills to offer in that situation.
00:37:53.000 | I quit my business, told my bosses and everybody that I was done.
00:37:59.000 | I didn't fully terminate my contract, but I was moving towards that.
00:38:02.000 | And for about a month or two, I quit and went to work with this other person doing this technology startup.
00:38:12.000 | I quickly discovered that my dream, my juvenile dream that life would just be great if I can sit in front of a laptop and make my income wasn't the reality, that it wasn't just perfect and beautiful and fun just because I could sit in front of a laptop.
00:38:26.000 | I found it was really hard and it was work just like everything else was.
00:38:30.000 | Now, that particular venture didn't work out.
00:38:32.000 | I didn't have a good fit with the founder, and I was able to, without even ever having ever told my clients, I was able to step back in and kind of pick up the reins of my financial planning business like I had before.
00:38:44.000 | The next three years, years three to six, were much more fun because of my mastery of certain fundamentals that had caused me problems in the first three years.
00:38:54.000 | But then ultimately, I did switch and come to Radical Personal Finance.
00:38:58.000 | Now, one thing I am guaranteed proven to myself again is this is work.
00:39:03.000 | Having a so-called internet business and a media – I jokingly call my media empire.
00:39:09.000 | It's work.
00:39:10.000 | It is hard work and it's not always fun.
00:39:14.000 | So, I wholeheartedly stand with you and would condemn the idea that work is going to just be fun.
00:39:23.000 | Just because work is not fun doesn't mean work is not worth doing.
00:39:28.000 | And I don't know anybody who is effective and successful at their job or their business, their career, who doesn't have parts of it that they don't particularly love doing that aren't particularly fun.
00:39:40.000 | But that doesn't mean it's not worth doing.
00:39:42.000 | So, I do agree as long as there's a basic fit with the career.
00:39:47.000 | There are some careers and some people working in them that just simply are not fundamentally a fit, and it's a waste of time to keep pursuing them for year after year after year when a small, simple transition to something else would open up the horizons of opportunity and success far more freely.
00:40:07.000 | Got it. That makes sense.
00:40:11.000 | Yeah, I was just curious of how those two fit because there's so many jobs and careers that would be quite fulfilling to people but may not check the whole passion box.
00:40:25.000 | And I was just curious of kind of and I've actually noticed that in my own careers that I've noticed that people who have been around for 15 years really enjoy what they do.
00:40:42.000 | Although if you ask them 10 years ago if they would find "passion" in that job or in that field, they would probably answer no.
00:40:51.000 | But after the time had passed, they had found fulfillment in what they were doing.
00:40:57.000 | I do think that word – I wholeheartedly agree with Cal Newport in this.
00:41:00.000 | I think the word "passion" is very much oversold and misunderstood by many people.
00:41:08.000 | People often conflate the word "passion" with "fun," and I think that's a major mistake.
00:41:15.000 | And passion I think is appropriate.
00:41:20.000 | I have a deep passion for what I do, but it's not expressed in the same way that, "Oh, this is fun. I'm doing what I like to do for fun."
00:41:27.000 | I've experienced that anytime I've ever taken what I like to do for fun and turned it into work, it's quickly lost its fun for me.
00:41:35.000 | That's just been my experience and my observation of other people as well.
00:41:38.000 | I've known professional athletes.
00:41:40.000 | I've known people who are engaged in sports work, things that are fun for people.
00:41:47.000 | Again, quickly loses its appeal when it's turned into work.
00:41:53.000 | To me, passion is much more a matter of impact.
00:41:57.000 | So I'm passionate about the work that I do because I want to see a difference made in the world, and I can do that in many different ways.
00:42:07.000 | It's no different – what I'm doing now is fully integrated with the change that I want to see in the world.
00:42:13.000 | And it's that passion for change, that passion for truth, that passion for the things that – for lobbying and advocating and teaching the ideas and fundamental principles and concepts that I believe are helpful that keeps me going through the more difficult times.
00:42:31.000 | It's not just a fun passion for talking on a microphone.
00:42:35.000 | I could do this in a dozen different ways, but it is a deep passion.
00:42:39.000 | It's just not a fun.
00:42:41.000 | So good question.
00:42:42.000 | All right.
00:42:43.000 | I have got two other callers here.
00:42:46.000 | Let's go first with 415 caller from California.
00:42:50.000 | Welcome to Radical Personal Finance.
00:42:52.000 | Go ahead and tell us who you are and ask your question, please.
00:42:58.000 | 415 Area Code from San Francisco, California.
00:43:01.000 | Welcome to the show.
00:43:06.000 | All right.
00:43:07.000 | Dead air just like on the radio.
00:43:08.000 | Next, we'll go to Washington, 202 number.
00:43:11.000 | Welcome to the show.
00:43:13.000 | Introduce yourself, please, and let me know your question.
00:43:15.000 | Yes, Joshua.
00:43:16.000 | My name is John.
00:43:17.000 | Thank you for taking the call.
00:43:19.000 | I am an active duty officer in the Navy, and I have been running some calculations for myself about the military survivor benefit plan.
00:43:30.000 | And I wanted to tell you what I have seen so far.
00:43:35.000 | And as my virtual financial advisor, I wanted to ask some feedback as to whether or not there is something that I'm missing.
00:43:44.000 | Okay.
00:43:45.000 | Go ahead.
00:43:46.000 | So the military survivor benefit plan, in short, is basically buying into an annuity for my spouse to continue to receive a benefit in the event that I were to pass away.
00:44:00.000 | So my spouse would be entitled to 55% of my retirement pay, and that would include inflation adjustments.
00:44:10.000 | But the cost to buy into that program is 6.5% each month for 30 years.
00:44:18.000 | So that 6.5% does have the benefit of being pre-taxed.
00:44:24.000 | The alternative sometimes discussed is the idea of a term life insurance.
00:44:30.000 | But as I've considered that, I know one of the disadvantages there is there's nothing at the end of the term.
00:44:36.000 | And although we could go through financial planning and talk about how other investments may grow,
00:44:42.000 | I feel like I would be missing an opportunity to fully care for my spouse or my wife in terms of having something guaranteed rather than relying on some other investment growth.
00:44:57.000 | So that has led me to look more closely at whole life insurance, which the disadvantage there is it would be relatively costly.
00:45:07.000 | But I'm considering the idea of a 10-year paid up policy, which means I could cover that within my current monthly budget,
00:45:16.000 | pay it off over the next 10 years with the added benefit of getting that expense ended and not carrying that expense into retirement.
00:45:26.000 | I see the other benefits of the whole life insurance being an opportunity if my wife were to die prematurely relative to me,
00:45:36.000 | there would still be something there in my estate compared to nothing buying into this survivor benefit as an effective annuity.
00:45:46.000 | So roughly speaking, just doing some ballpark estimates, the 10-year whole life insurance,
00:45:54.000 | and I'm notionally looking at something like a $600,000 policy, would be paying in about $120,000 from year 2017 to year 2027.
00:46:08.000 | Compared to the military survivor benefit with that 6.5%, being roughly, and just estimating a potential retirement in 2027,
00:46:19.000 | roughly being about $200, just making some rough assumptions about inflation from 2027 to 2057.
00:46:30.000 | So I think like any other insurance decision, this is really coming down to a risk decision.
00:46:38.000 | But I see some benefits to the military survivor benefit in particular if I were to be hit by a bus early or if inflation were to run rampant.
00:46:51.000 | But that's the summary I have, and I'm just wanting to, again, see if I'm missing something.
00:47:01.000 | –Have you reviewed the quotes that you've received and the policy illustrations on a whole life policy?
00:47:08.000 | Have those been reviewed in consultation with a professional agent or those things that you pulled just online on your own research?
00:47:17.000 | –I've done some quotes with a life insurance company that I'm familiar with because I have term life policies with them,
00:47:26.000 | so I do not have any whole life policy with them, but I haven't gone into detailed discussions with an agent.
00:47:32.000 | –Given your health, is there any reason to expect that you would not be granted a life insurance policy with the best health underwriting at the best health classification?
00:47:44.000 | –No. I think I would be. –How old are you currently?
00:47:48.000 | –I am 38. –And tell me your wife, her age, please.
00:47:54.000 | –She's just a year older than me. –And is her health also in good condition? Is she also in good health?
00:48:01.000 | –Her health is not as good as mine. She has some chronic concerns, though not specifically related to anything that should affect longevity.
00:48:19.000 | –Her family history and your family history, are your parents alive? If so, how old are they? Or if not, at what age did they die?
00:48:27.000 | –They are all alive in their 60s. –With your grandparents, were they long-lived?
00:48:34.000 | –Relatively speaking.
00:48:38.000 | –So just to kind of clarify, this is an important area of consideration because we're basically trying to make some guesses here.
00:48:50.000 | And if you guess right or wrong, you may come out substantially ahead or not, depending on what happens.
00:49:00.000 | If you live and are very long-lived, then – and if you can get the benefit of your military pension for a long period of time at a higher rate, that's going to be very much in your favor.
00:49:14.000 | If your wife dies before you or dies at a younger age, then it would be much better for you to choose the option that gives you more money.
00:49:23.000 | So that's a big deal. This entire plan is predicated upon the fact that you could even get insurance.
00:49:29.000 | And so that's why I ask the health questions. Many people who start to do these calculations and think this through quickly find out, "Well, I can't even get insurance."
00:49:40.000 | And if you can't get insurance, the best thing to do is go with these benefits like the military survivor benefit plan.
00:49:47.000 | And then also age makes a big difference. The problem with life insurance is it needs to be – really to work out well, it really needs to be purchased at a younger age for short-term needs like this.
00:50:00.000 | So 38 is an entirely reasonable age to do this.
00:50:05.000 | The first thing to do is to get as accurate numbers as possible.
00:50:12.000 | So the company that you did this with, was it USAA? Do you have term insurance with them? And you talked to them about a whole life policy. What company was it?
00:50:22.000 | It is actually Navy Mutual Aid Association.
00:50:25.000 | Okay. So it's good to talk with them whether it's Navy Mutual Aid, etc. I probably would be very slow to go with – for whole life insurance, I'd be very slow to talk too long with a company that doesn't specialize in whole life insurance.
00:50:45.000 | And the four big guns in the whole life insurance policy are the big mutual life insurance companies.
00:50:52.000 | Northwestern Mutual, New York Life, MassMutual and Guardian are the leaders in that space. That's what they do.
00:50:59.000 | And I would review this with an agent from one or a couple of those companies depending on which company we're talking about.
00:51:10.000 | They may or may not have access to the other company's policies, but they're all going to be very similar in terms of their quality.
00:51:17.000 | The reason that's important is if you work with one of those companies, you're more likely to get somebody who is experienced in whole life insurance and who can run some numbers.
00:51:27.000 | Because with this, a lot of it is going to depend on the performance of the actual policy.
00:51:32.000 | A $600,000 policy that stays $600,000 compared to the benefit of a military – pension of the military benefit is probably not going to be all that great.
00:51:43.000 | A $600,000 policy that makes up the difference for the 6.5% loss and that's run with a good quality mutual company where you're going to get ongoing dividends.
00:51:55.000 | Once the policy is mature, it's going to continue growing. The cash values will be there. The death benefit will be there.
00:52:02.000 | That approach will make a big difference. And so this has to be carefully calculated based upon somebody who knows and who can use a quality conservative policy that is going to be there.
00:52:13.000 | It's very important that you recognize that in terms of what you're considering giving up, the military survivor benefit pension plan, that is a gold-plated option.
00:52:28.000 | That is a powerful financial planning tool. It is – number one, it's guaranteed to you. There's no underwriting. You just have to sign up for it.
00:52:37.000 | Number two, it's backed directly by the full faith and credit of the US government.
00:52:43.000 | We're not talking about an insurance company that is – may or may not go under, may or may not pay out.
00:52:49.000 | We're talking about the full faith and credit of the US government, which is backed by all of their taxing authority.
00:52:55.000 | That's backed by military budget allocation, which nobody right now is lobbying to take money away from the military.
00:53:04.000 | And so especially for veterans and all of this stuff, you don't get a stronger positioning power than what you're talking about.
00:53:13.000 | Military benefit pension plans, that is gold in our current political space.
00:53:20.000 | And because of the cost of living adjustment, Ryder, that is one of the most valuable potential assets that you can have.
00:53:28.000 | When you start calculating that inflation benefit and when it's – that's so, so powerful and it makes a huge difference to the value of it.
00:53:37.000 | So you have to approach this very seriously and start with the fact of this thing is a diamond in my financial planning tool belt.
00:53:46.000 | I may be able to get a slightly better diamond, but I need to be very suspicious.
00:53:52.000 | You don't just trot out to the local financial person and say, "Hey, I'm interested in buying a 10-year paid up whole life insurance policy. What you got?"
00:54:01.000 | And buy with some B-rated company or a policy that may self-destruct because it was poorly designed and poorly funded, et cetera.
00:54:08.000 | You need to replace gold with gold if you're going to consider something like this for your family.
00:54:13.000 | And so I would – if I woke up in your shoes, I would exclusively start in one of those situations and I would try to work with a gold-plated agent or somebody that can work with you with those.
00:54:25.000 | They're not as good as the full faith and credit of the government.
00:54:29.000 | But there may be an opportunity to enhance it and you'll only know by calculating it.
00:54:34.000 | My standard advice on how to find an experienced life insurance agent in a situation like yours is this.
00:54:41.000 | If you don't have somebody or don't have a connection, find in phone book, local search directory, et cetera, one of the offices for those four companies.
00:54:50.000 | And you should start with a couple.
00:54:52.000 | Every one of them has a reason why they think they're better than another.
00:54:55.000 | But start with those offices.
00:54:56.000 | Call the local office.
00:54:57.000 | Speak to the secretary who answers the phone.
00:55:00.000 | Tell them you want to speak with the managing director or managing partner of the office.
00:55:05.000 | And just tell them, "I'm interested in getting some insurance quotes but I'd like to talk to the managing director or managing partner."
00:55:11.000 | They may or may not put you through.
00:55:13.000 | So tell the information to the secretary.
00:55:15.000 | You don't need to talk to the managing director or managing partner.
00:55:17.000 | But tell them, "I'm shopping for life insurance policy as a possible pension replacement option and I need to get some quotes and talk with somebody knowledgeable.
00:55:25.000 | Who in your office would you recommend I talk to?"
00:55:28.000 | And that way they'll steer you to somebody who's more experienced senior agent who should hopefully have the technical competence to actually run an accurate calculation for you or they may just do it themselves.
00:55:43.000 | You don't need to talk to the managing director.
00:55:45.000 | The secretary can tell you who that person is and put them in touch with you.
00:55:48.000 | But at least by going through the managing director, you don't run the risk of just facing whoever's new off the street.
00:55:56.000 | To the actual question of it, if you don't buy the spousal benefit option and you die early, is my understanding accurate that your wife would get nothing from your pension?
00:56:19.000 | That is correct.
00:56:25.000 | That has been the thing that I have come to loathe about some of the pension plans.
00:56:31.000 | And because of that, I have actually – the year before I came and started Radical Personal Finance, I went through this analysis with a client of mine who was a schoolteacher.
00:56:51.000 | And they had the gold-plated pension, the best that the government school system had to offer.
00:57:02.000 | But there was no survivor benefit.
00:57:06.000 | And we worked through the whole analysis.
00:57:09.000 | We ran the numbers on the policies and we did move into the situation of replacing that pension with a life insurance policy and a – it was a different planning scenario.
00:57:21.000 | But – and the major reason we did it was because they were willing to bet on long life and they wanted both.
00:57:27.000 | They wanted the insurance and it.
00:57:29.000 | I'm concerned about only $600,000 because your pension would have a present value I would assume far in excess of $600,000.
00:57:42.000 | So just my gut is if you're running your numbers based upon what you got from that one quote, my gut is that you're better off skipping the life insurance policy and keeping the military benefits.
00:57:54.000 | But you may be able to get a better policy.
00:57:57.000 | You may be able to get a better designed policy, a policy that's built for death benefit and can run at a lower premium but is still very, very safe.
00:58:05.000 | And you may be able to do it and come out ahead, especially if you're confident about your health.
00:58:13.000 | But I would cover it in the short term.
00:58:15.000 | I would definitely – if you're going to do that, you definitely need to make up much more than $600,000 of whole life in term.
00:58:21.000 | You're going to need a lot more term to protect yourself over the next decade as you move towards that, a couple of decades.
00:58:27.000 | And so you're going to need a delicate plan that's well-designed if you do want to do better.
00:58:35.000 | In general, my advice is take the government benefit because it's so strong and it does provide that rock solid protection for your wife, which is crucial.
00:58:46.000 | But the situation that you're describing piques my interest in that it's worth further calculation.
00:58:53.000 | But you need a better built policy to get you there and you need to do some more careful calculation on what you'd be giving up of the present value of the benefit for her.
00:59:02.000 | Helpful?
00:59:04.000 | Does that answer your question enough to get you started?
00:59:07.000 | Yes, it does.
00:59:09.000 | You do have – you are the right type of candidate for whom this plan can potentially work for.
00:59:16.000 | In general, these plans don't work for most people.
00:59:21.000 | People who want to buy a life insurance policy to replace something, it usually doesn't work.
00:59:26.000 | In my experience, it doesn't work because people are usually buying them too old and they're too sick and they can't get policies at good ratings.
00:59:33.000 | If you were issued a standard or a rated policy, then the whole plan goes out the window and you absolutely should not go with it.
00:59:40.000 | But if you could get a preferred policy with a well-run company, it is possible that this could come out better and you could get to enjoy the benefit of a pension for your entire lifetime and protect your wife financially and have the possibility of leaving a much larger estate.
01:00:01.000 | It is one of the reasons why I do love it when people get life insurance at a young age with good companies because this opens up opportunities to them that many of their peers won't have.
01:00:15.000 | Anything else I can answer for you before we go?
01:00:19.000 | Is that good enough?
01:00:20.000 | Yes, sir. Thank you, Joshua.
01:00:23.000 | I hope that's enough of a starting point to talk about the calculations that need to be done.
01:00:29.000 | The math is too complex to do on the show.
01:00:34.000 | What you need to do to do the analysis, any of you who are interested in the topic, is calculate the exact cost of that benefit and the exact potential benefit.
01:00:44.000 | You need to do a forward calculation on the inflation of what your likely salary is at the time of retirement, inflate that throughout the retirement years, and bring it back to the present value of today and the present value of retirement, and then bring it back and figure out what the cost is, what you'd be giving up in terms of a present value.
01:01:06.000 | Then you look at the life insurance policy and you consider the options.
01:01:11.000 | One thing I've neglected to do is I'm not sure the 10-year paid up is the right solution either.
01:01:17.000 | It's not necessary to have, in a situation like that, it's not necessarily necessary to have a quick pay policy, which is what the caller was talking about, a policy that you pay premiums into for 10 years.
01:01:31.000 | If you have enough term insurance in a situation like that to cover the, and for a 38-year-old, there's no reason why you can't cover the next 30 years with term insurance.
01:01:41.000 | Let's say that he's planning to retire in 10 years.
01:01:43.000 | You can buy a flat 30-year term policy that covers you for the first 20 years.
01:01:47.000 | Term insurance is the cheapest way to cover those first few decades.
01:01:51.000 | We're just talking about what if he dies at 78.
01:01:54.000 | You're not going to be buying and owning term insurance at 78, so there's got to be a permanent policy there.
01:01:59.000 | But if you have a higher pension payout, there's not necessarily any reason to give up the next 10 years of income to have a 10-year paid up policy.
01:02:12.000 | You could, as long as the premium is something that's reasonable on a retirement income, you could be in a situation where you can have a policy that you pay for longer.
01:02:23.000 | That is only going to make sense to you, life insurance and financial planning nerds.
01:02:29.000 | That was way outside of what I can do on a podcast.
01:02:32.000 | Thank you all so much for listening. Thank you for calling in.
01:02:34.000 | Two things as we go. If you'd like to join a future call-in show, make sure that you sign up and support the show at radicalpersonalfinance.com/patreon.
01:02:40.000 | Number two, remember that at the moment, I still have registration open for the beta version of the Radical Personal Finance Guide to Career and Income Planning.
01:02:50.000 | At the moment, I have – as I record this on Friday, August 11th, I have 27 seats left.
01:02:55.000 | When those 27 seats are sold, I will be closing registration or if we get all the way until next week – and I don't expect this to – I think we'll sell out before then.
01:03:03.000 | But if we get all the way to next week on August 20th, then I will close registration.
01:03:07.000 | Details of that can be found at radicalpersonalfinance.com/career.
01:03:15.000 | Special bonus of today's Q&A call. After I finished the music, I realized I hadn't answered John's question well enough.
01:03:22.000 | So, John, I want to explain a little bit more to you and make sure you get this right because it's too big.
01:03:29.000 | You don't want to get it wrong if you do it.
01:03:31.000 | So, number one, the major cost that you've got – the major thing if you're going to plan for this for your wife.
01:03:36.000 | If you retired – give me a number. How much – if you retired at 48, what do you guess would be your initial beginning pension benefit from the military at that point?
01:03:49.000 | Estimated to be $80,000 for me.
01:03:52.000 | But as I mentioned, the survivor benefit premium, if I were hit by a bus on that first day, it would only be $45,000 for my wife.
01:04:00.000 | Okay. So $80,000 of annual income in that scenario is a huge pension that you have got to protect for.
01:04:07.000 | That's $80,000 of gold-plated income.
01:04:11.000 | So we're talking $3 to $5 million of term life insurance that you need to have in place.
01:04:16.000 | And so I know you already have some term life insurance, but let's just pretend that you have none so I can get it clearly the point across.
01:04:24.000 | And then you – pretend you have none and then you go talk to an insurance agent and figure out how this fits with what you already have and quotes and all of that.
01:04:35.000 | But if I were working with you, what I would do, if I woke up in your shoes, I would start with term life insurance.
01:04:43.000 | And basically, perhaps in your situation, 38, I would do something akin to almost a stair-step level of plan.
01:04:53.000 | And so for the sake of clarity, you could do this with a 10-year term, a 20-year term, and a 30-year term policy.
01:05:01.000 | So let's say you bought a million dollars of 10-year term, 20-year term, and 30-year term.
01:05:07.000 | So what that covers is that if you die in the next 10 years, your wife gets 3 million from the term.
01:05:12.000 | If you die in the following decade, she gets 2 million.
01:05:15.000 | If she dies – if you die in the third decade, she gets a million.
01:05:17.000 | Probably should be a little bit more than that.
01:05:19.000 | Probably should be longer.
01:05:20.000 | You do the math because you've got to replace that for her.
01:05:23.000 | And the cheapest way to do that at this age and at this stage is going to be with term life insurance.
01:05:29.000 | Now, you should supplement that with a permanent life insurance policy.
01:05:33.000 | And I don't see any benefit to your having that permanent life insurance policy paid up in 10 years because if when you retire, you're going to have a stable income.
01:05:45.000 | So you can pay life insurance premiums on an ongoing basis.
01:05:49.000 | And you may get more bang for your buck if you go ahead and plan in the ability of just a low ordinary life payment where you just pay a steady premium going forward for the rest of your life.
01:06:06.000 | You may get more bang for the buck if you set that up now and you'll be able to buy more death benefit, more permanent death benefit that lasts forever.
01:06:13.000 | And that covers during the last, say, 20, 30, 40 years of your life depending on how the numbers wind up working.
01:06:18.000 | And so for any listener who got confused by all this, the major benefit is if John has life insurance in place and he takes the option of the military pension for only him, he gets the benefit of having a much higher pension payment from the day he retires until the day he dies.
01:06:38.000 | And if he lives for a long time, he could potentially get a ton of money from the pension. And if he dies at an old age, he dies having a life insurance policy that gets passed on to his heirs.
01:06:52.000 | Because he's covered with life insurance during the interim, he can protect his wife if he dies early and she is still financially squared away.
01:07:01.000 | But – and at least she's protected. So he's taking a – potentially taking a gamble to have a much higher benefit and to leave behind that estate in terms of life insurance policy for his children.
01:07:13.000 | So that's the reason to do it. It might – if he does it right, it can come out substantially ahead of just having the lower retirement income for both of them and a reduced income for his wife.
01:07:24.000 | So that's how I would structure it, John, conceptually. Make sense?
01:07:28.000 | Okay. Relative to what you mentioned about the 3 to 5 million, can you just educate me on the role of some you're using?
01:07:37.000 | So as I mentioned, if something were to happen to me, then my wife starting out would be estimated roughly 45K. How would you value that?
01:07:49.000 | Okay. So 45 –
01:07:51.000 | Life insurance?
01:07:52.000 | Yeah. So probably 3 to 5 million may be a little bit excessive if we're just going to try to replace $45,000.
01:08:00.000 | So if we just use – let's use the 4% rule. $45,000 per year of income times 25 is $1.1 million of total present value that would need to produce that.
01:08:16.000 | That's if the money were invested in stocks, very risky, very fluctuation, and if we're using as a standard that 4% rule that we just use as quick rule of thumb math on something like a financial podcast.
01:08:28.000 | So we're at $1 million. Now, the problem is this. You don't have a mutual fund portfolio that you may be able to pull from during the course of your wife's lifetime.
01:08:39.000 | You have a gold-plated annuity that would pay your wife $45,000 a year backed by the full faith and credit of the government and – full faith and credit of the US government with an inflation rider for life.
01:08:53.000 | And so if you retired at 48 and were dead at 49, that's potentially 50 to 70 years of life expectancy for your wife if she lived to 90, 100, 110, somewhere in that range.
01:09:06.000 | That's a huge, huge asset. So I automatically kind of just mentally doubled what a 4% rule is to give – and this is totally nonscientific, just to kind of get the sense of the fact that this thing is gold.
01:09:20.000 | A guaranteed pension by the government with inflation riders, this is gold. This is the best benefit you could possibly get.
01:09:26.000 | So in order to make up the difference of risk, you need to have more money. So probably if you went and you asked a New York Life, a Northwestern Mutual, a Mass Mutual, one of these companies, you said, "Tell me how much I need to buy to buy a guaranteed annuity with inflation adjustment for my wife."
01:09:44.000 | My gut would be right now for a 48-year-old – when you retire, 48-year-old male, my gut would – or for your wife, under her eight-life expectancy, my gut would be that they would charge you a lump sum amount of – I'll give you my number, $2,625,000.
01:10:02.000 | Now you email me later and tell me if I'm right. But we're talking a huge amount of money. So that's where I got – that's where I jumped right to $3 million.
01:10:10.000 | I understand. That's helpful.
01:10:14.000 | Okay. Yeah. You've got to replace like with like. And this is what I don't like, what angers me about not-so-great life insurance agents.
01:10:23.000 | You can't play around with great assets and replace them with bad assets just to scrape a commission.
01:10:33.000 | So you got to remember, John, your military pension is a diamond. It doesn't mean you can't get a better diamond or possibly get a better deal or double dip.
01:10:43.000 | You really can. I think you can. And if I were in your shoes, I probably would.
01:10:47.000 | But it does mean you need to be really conservative with everything that you do and make sure that you have a bulletproof plan. That's all. That's my major point.
01:10:57.000 | Okay.
01:10:58.000 | Let me know how it goes. I hope that was helpful. You ask the agent to run that quote and tell me if my – a 48-year-old female with good health, life expectancy, guaranteed lifetime single life income of $45,000 per year with an inflation option.
01:11:17.000 | I bet you it's north of – to buy it lump sum would be – I bet you $2.5 million. We'll see.
01:11:23.000 | Tell me what it is when you have them run that annuity numbers at today's interest rates.
01:11:27.000 | All right.
01:11:29.000 | Have a great day, John.
01:11:31.000 | This show is part of the Radical Life Media network of podcasts and resources. Find out more at RadicalLifeMedia.com.
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