RPF0491-QA

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00:00:30.400 | Today on Radical Personal Finance it's live Q&A!

00:00:33.400 | Welcome to Radical Personal Finance, the show dedicated to providing you with knowledge,

00:00:52.800 | skills, insight and encouragement.

00:00:55.120 | You need to live a rich and meaningful life now while building a plan for financial freedom

00:00:59.080 | in 10 years or less.

00:01:00.160 | My name is Joshua and I am your host.

00:01:02.520 | Today live Q&A.

00:01:03.520 | I've been doing a special series of live Q&A shows this week and we round out with our

00:01:08.280 | third one.

00:01:09.280 | This will be the last one for a little while that's open to the entire audience of the

00:01:12.800 | show.

00:01:13.800 | I usually restrict these Q&A calls to patrons of the show, those of you who find enough

00:01:26.200 | value in the show to financially support it.

00:01:28.160 | You can do that if you're interested in doing that at radicalpersonalfinance.com/patron.

00:01:32.160 | Radicalpersonalfinance.com/patron.

00:01:34.160 | Thank you to the many of you who do support the show that way.

00:01:36.680 | But this week I've been doing a special series of live Q&A shows.

00:01:39.640 | Super fun.

00:01:40.640 | We can give interesting questions with people that we don't usually get to talk to.

00:01:45.200 | So our first caller today is Karen in California.

00:01:48.560 | Karen, welcome to Radical Personal Finance.

00:01:50.040 | How can I serve you today, please?

00:01:51.040 | Thank you, Joshua.

00:01:52.040 | I'm calling because I'm trying to figure out for me and my husband what we should do

00:01:59.400 | next with our finances.

00:02:01.400 | We're older, so I'm 46.

00:02:04.600 | He is 49.

00:02:06.600 | But we've only been married about five and a half years.

00:02:13.880 | But when I married him, we had a lot of student loans from his end.

00:02:21.240 | And I really had to organize the finances for us.

00:02:26.680 | And we were able to get on track.

00:02:28.720 | And we actually paid it all off a couple months ago.

00:02:32.600 | It was $140,000 worth of student loans.

00:02:39.680 | We both had a career change, and so that's how the student loans came about.

00:02:44.400 | But at this point, I'm trying to figure out with moving forward what we should do next.

00:02:51.040 | If we should just really focus on the retirement, or we should buy a home, or maybe we can do

00:03:01.040 | part of, like, you know, I know people have told me you can buy a home, and that could

00:03:04.440 | be part of your retirement, too.

00:03:06.200 | So I'm really not sure what to do because the finances are limited, but housing is very

00:03:12.920 | expensive here, and we also need to retire at some point.

00:03:18.040 | What's your household income?

00:03:21.000 | Right now, our household income is about $140,000.

00:03:24.360 | Do you expect that to continue at $140,000, or do you expect any dramatic increases or

00:03:29.280 | decreases?

00:03:30.280 | It will probably stay about the same.

00:03:34.760 | There might be some increases coming up over the years.

00:03:40.000 | The income actually increased significantly just last year because I changed jobs.

00:03:45.360 | So I think at this point, $140,000 is a good number, but then it might increase a little

00:03:50.520 | bit every year.

00:03:51.520 | Okay.

00:03:52.520 | And how much money do you guys have just in savings, non-retirement accounts, just money

00:03:58.000 | that's available to you in bank accounts, things like that?

00:04:01.280 | We have $100,000.

00:04:02.680 | And how much money in retirement accounts, IRAs, Roth IRAs, that type of thing?

00:04:08.800 | It's $200,000.

00:04:10.960 | And do you have any other major assets, a home somewhere else, any other major financial

00:04:16.600 | assets?

00:04:17.600 | No.

00:04:18.600 | I actually had a condo in Georgia, but I sold it, and that's where the cash came from.

00:04:24.640 | Great.

00:04:25.640 | And do you owe any money to anybody for any reason?

00:04:27.840 | No.

00:04:28.840 | We only have a car loan of about $60,000.

00:04:33.480 | You broke up just a little bit.

00:04:34.480 | How much?

00:04:35.480 | $16,000.

00:04:36.480 | And how much is the car worth?

00:04:39.280 | I don't know, actually.

00:04:44.640 | Probably about the same.

00:04:47.040 | Okay.

00:04:48.040 | Well, conceptually, you're living in California.

00:04:50.600 | Why would you choose to buy a house in California?

00:04:53.520 | Well, because we're considering living here long-term, and the job market is very good

00:05:01.960 | for us.

00:05:05.000 | Do you want to own a house?

00:05:08.080 | Not necessarily, but it seems like the right thing to do.

00:05:15.920 | Why?

00:05:17.160 | I don't know.

00:05:20.240 | It seems like if I don't own something, the rent continues to grow.

00:05:26.640 | And if we want to stay here, it only makes sense at some point to buy something.

00:05:31.880 | Have you gone shopping for places to rent and/or places to buy?

00:05:38.320 | I've looked at what houses might be available to us to buy.

00:05:42.840 | And, actually, with the amount that I – the mortgage I'm looking at, it's limited, but

00:05:51.680 | possible in terms of housing that's available to buy.

00:05:56.680 | So if you did buy a house, how much would it cost and how much would the house cost?

00:06:03.000 | Yeah.

00:06:04.000 | So I'm looking at all the houses.

00:06:06.480 | Most of the houses in the market is about a million dollars, but there are houses that

00:06:13.360 | are like $600,000 or $700,000.

00:06:18.360 | So I'm looking at possibly if I can own something that's $500,000 to $600,000, that would be

00:06:24.320 | wonderful.

00:06:27.920 | And how much – to rent the place that you're living now, how much are you paying each month

00:06:32.640 | in rent?

00:06:33.640 | So right now, rent is pretty fair.

00:06:36.480 | It's about $1,800, but that's only because we started – we rented it about six years

00:06:44.320 | ago.

00:06:45.320 | So they can't really increase it too much every year, but the landlord has been increasing

00:06:52.720 | it every month – I mean, every year by about $150 each year, a month.

00:06:59.960 | So I know at some point he might either try to kick us out or – because rental market

00:07:05.600 | is about, for my apartment, probably about $2,500.

00:07:11.440 | Based upon where you're living now and the lifestyle associated with how you're living,

00:07:16.180 | are you and your husband happy?

00:07:18.560 | Yes.

00:07:21.720 | Based on what you're describing, I don't see a whole lot of advantage to buying.

00:07:25.280 | Now, California real estate is very difficult.

00:07:27.840 | Let me just give you some things to think about because ultimately you're going to

00:07:30.840 | have to make these decisions obviously.

00:07:33.200 | But California real estate is a unique animal.

00:07:37.280 | Let's talk conceptually generally first.

00:07:44.440 | Reasons to buy, reasons to rent.

00:07:45.720 | It's my conviction.

00:07:47.200 | I'm convinced generally that rentals are often going to be about the same financial

00:07:54.280 | results as owning a house, especially by the time you factor in the care and the maintenance

00:08:02.600 | of a place to live and et cetera.

00:08:06.520 | Many landlords underprice their property.

00:08:08.800 | Now, the problem is that has to be expressed locally.

00:08:12.760 | It has to be looked at locally.

00:08:14.600 | Sometimes you'll find that rents are very high.

00:08:17.480 | Sometimes you'll find that rents are very low.

00:08:19.360 | What you're describing to me, without knowing the exact properties involved, if you can

00:08:24.120 | rent a place that you're happy with for $1,800 or the alternative cost is to go and

00:08:29.880 | to buy a house that may cost you somewhere between $600,000 and a million dollars, if

00:08:36.280 | both of those bring you equal satisfaction in terms of lifestyle, no question, given

00:08:41.760 | that scenario, I would rent because there's just such a dramatic difference in your flexibility.

00:08:47.720 | There's such a dramatic difference there and it sounds like you have an undermarket

00:08:51.160 | rent, which is helpful.

00:08:53.260 | If your landlord is increasing your rents once a year, that's great.

00:08:56.400 | That's exactly what they should be doing.

00:08:58.640 | That's exactly how they should be reacting.

00:09:01.000 | After all, the value of property all around has been increasing in recent years and that

00:09:05.760 | will – and it's only just and fair that the landlord should be able to increase your

00:09:10.080 | rents steadily.

00:09:11.560 | So you should keep an eye on the rental market locally for equivalent housing units and see

00:09:17.920 | am I getting a fair rent.

00:09:19.400 | But it sounds like you have an undermarket rent.

00:09:21.920 | If you're happy with that, there's no way in the world that you could own a house

00:09:25.880 | where the pure cost, ignoring any kind of investment options, there's no way in the

00:09:30.360 | world you could own a house with a $600,000 to a million-dollar price tag and have the

00:09:36.200 | pure cost of your taxes and your insurance and your just simple costs of acquisition,

00:09:41.920 | et cetera, that would be anything less than $1,800 a month.

00:09:45.780 | You would not be building equity just because you went on and took on a $2,500 or $3,000

00:09:50.480 | a month mortgage payment.

00:09:51.880 | Your pure cost will be more than your rental expense.

00:09:54.600 | Now there may be a lifestyle difference.

00:09:56.760 | For example, I don't know if those prices that you're quoting are related to the same

00:10:00.680 | kind of place that you're living now.

00:10:03.140 | What happens often is when people move and especially when people buy, they often tend

00:10:07.580 | to buy more house than they would otherwise rent.

00:10:10.320 | That's why I asked you the question about lifestyle satisfaction.

00:10:13.900 | Given what you've described to me, sounds like rental is just probably conceptually

00:10:19.040 | better.

00:10:20.040 | It gives you more freedom, gives you more flexibility and it's going to have a lower

00:10:22.320 | net cost for you at this point in time.

00:10:25.080 | Now with regard to California real estate, you could make an argument and say, "Well,

00:10:29.760 | we're going to be here for the very, very long term.

00:10:32.180 | The local job market is good to us in our careers.

00:10:34.800 | We're going to be here for the very long term."

00:10:36.820 | I don't know enough about your local area to be confident in giving any kind of real

00:10:41.820 | estate advice.

00:10:42.820 | California real estate seems and feels to me, living on the other side of the country,

00:10:48.200 | like it's a very heady market right now.

00:10:53.880 | Now it's hard because real estate prices are supported by jobs and there are pockets in

00:10:59.840 | the California marketplace where there are very high incomes and there are very high

00:11:04.240 | wages and those very high incomes and very high wages push up real estate prices.

00:11:10.060 | Those little pockets where high income earners live tend to have high real estate appreciation.

00:11:17.480 | Now will that continue?

00:11:18.680 | I don't know and it's impossible for me to know but you would have to very carefully

00:11:22.640 | assess that.

00:11:23.640 | In general, I'm personally from observationally the other side of the country, I would be

00:11:28.320 | pretty nervous about owning California real estate at this point in time based upon what

00:11:32.600 | I can see, not being a local.

00:11:35.060 | So you would have to assess that.

00:11:36.800 | Now let's talk conceptually because of the basic question you asked of retirement versus

00:11:41.520 | real estate.

00:11:43.200 | Whatever you choose to do, you should probably focus on retirement and saving and investing

00:11:49.300 | for retirement.

00:11:51.160 | Even if you do choose to buy a place to live, if I woke up in your shoes, I would probably

00:11:56.340 | put the minimal amount of money down on that property and I would focus on accumulating

00:12:02.380 | more investment assets at this point in time.

00:12:04.880 | I wouldn't use a lot of money and I wouldn't use a lot of income to buy real estate and

00:12:10.120 | I think that you should be very careful to not change the asset allocation of your portfolio

00:12:17.960 | to be very heavy in real estate.

00:12:20.600 | Realistically speaking, sounds like these career changes have been good for you.

00:12:25.240 | But at this point in time, you don't have a ton of money compared to the amount of money

00:12:30.520 | that you're earning.

00:12:31.780 | So these new earnings, you need to take some time and have them build up.

00:12:34.680 | You have $100,000 in cash.

00:12:37.120 | That's probably a very decent amount to keep in cash.

00:12:41.440 | I wouldn't be concerned about having $50,000 to $70,000 as my emergency fund if I were

00:12:47.440 | living in California in your situation and I wouldn't be upset about having – keeping

00:12:52.520 | that other money around in case I did want to buy something, adjust something, move somewhere,

00:12:58.640 | etc.

00:12:59.640 | So to me, having $100,000 of cash feels pretty good.

00:13:02.880 | Now having $200,000 in retirement accounts means that you have some exposure to investment

00:13:08.080 | assets.

00:13:09.080 | If you were to go and to purchase a $600,000 or a million-dollar property, let's say

00:13:14.960 | that you were to put 10% down on that property, you'll start to be heavily weighted towards

00:13:19.960 | real estate and I think this is a danger for you because the thing that would affect California

00:13:24.880 | real estate prices would be a change in employment.

00:13:28.200 | If there were a change in wages, change in the economy that affect change in wages, stock

00:13:32.320 | bonuses went down, that would have an impact in time on the local California real estate

00:13:36.520 | market, would cause it to decline and that change in wages could affect you and your

00:13:41.280 | husband and your income and also affect your real estate.

00:13:45.060 | This is one of the reasons why it's unwise for people to put so much money into their

00:13:50.480 | own personal real estate.

00:13:51.840 | People are often so heavily weighted in personal real estate.

00:13:54.660 | So for all these reasons, I like the idea of your building up a bigger investment portfolio.

00:13:58.880 | I like the idea of your having more diversity and if you can live happily and rent for $1,800

00:14:04.640 | a month in a market where you would need to pay $600,000 to a million dollars to buy a

00:14:09.120 | place to live, I think I would personally, I'd be renting very happily.

00:14:14.560 | Okay.

00:14:15.560 | So let's say the concern I have is that the rental market or the rent that I'm paying

00:14:25.400 | may change very quickly.

00:14:27.400 | If it goes up significantly, would your thinking be different?

00:14:34.480 | You're asking a question about the future that is unknowable.

00:14:37.800 | So here would be – that is a concern and that is one of the challenges of being a tenant.

00:14:44.980 | It is possible that your landlord will adjust your rents relatively quickly.

00:14:50.660 | Now what protection do you have from that?

00:14:53.720 | Well, number one, you have a lease I would guess of some kind that probably can reset

00:14:58.440 | on an annual basis.

00:15:00.340 | Number two, you have the local market and your landlord wants to be competitive in the

00:15:05.040 | local market.

00:15:06.280 | And so there's going to be some reason why the local rental market is changing.

00:15:09.800 | Your landlord can't all of a sudden say, "I'm going to double your rent from $1,800

00:15:13.800 | a month to $3,600 a month and everything around costs $2,000 a month."

00:15:19.060 | You would move out and you'd find a different place.

00:15:21.240 | So the only reason your landlord is adjusting the rent is going to be because in the local

00:15:26.120 | base and local area, the rents are changing.

00:15:32.600 | And what you described to me, if you've been somewhere for quite a while and if you

00:15:37.280 | are a good tenant, most landlords I think would be – are happier to have a good tenant

00:15:43.440 | who pays reliably, doesn't cause a lot of problems and they're happy to take a little

00:15:47.200 | bit of an undermarket rent.

00:15:49.120 | So I'm just not that concerned about your rent going from $1,800 a month to $2,000 a

00:15:54.680 | month next year.

00:15:56.240 | That's not going to make a big difference.

00:15:58.500 | Now you have the exact same risk if you flip it around and say, "Well, if we buy a house,"

00:16:03.000 | and here would be the example because now we have the risk of housing prices changing.

00:16:06.640 | If you buy a house that costs $800,000 and there's just a minor 10% correction in the

00:16:15.480 | cost of housing, that's $80,000 of value that you could lose if you purchased a house

00:16:22.120 | and there were a decrease.

00:16:23.880 | Of course it could go the other way.

00:16:25.120 | You could have a 10% increase in the value of housing.

00:16:29.000 | But it's not unusual to have a 10% swing in the price of houses.

00:16:33.560 | So there's risk either way and if you think about it and you compare the risk of having

00:16:37.040 | a house that's $800,000, having a 10% correction in the real estate market, which is going

00:16:43.000 | to cost you $80,000 of value, if you take $80,000 out, you would have to have a major

00:16:50.560 | – let's do it this way.

00:16:53.600 | At $1,800 a month, if you had an $80,000 decrease in the value of your home, 80,000 divided

00:17:01.000 | by 1,800, that would be the equivalent of 44 months or four years of rent, of your total

00:17:10.640 | rent.

00:17:11.640 | So your risk, your personal financial risk as a tenant in this case is much, much lower

00:17:17.520 | than your personal financial risk as a homeowner.

00:17:20.280 | Okay.

00:17:21.280 | That makes sense.

00:17:24.280 | I guess I was thinking how housing is so limited.

00:17:29.920 | So housing for sale, buying a home is a good investment because it may just increase significantly

00:17:39.960 | and rent is increasing so significantly maybe so that maybe it makes sense to buy.

00:17:44.600 | But now I have more to think about.

00:17:46.920 | So go back in the early archives of Radical Personal Finance and I did some shows on real

00:17:50.640 | estate, how to do a rent versus buy analysis.

00:17:53.840 | In your case, I would do one very simple analysis.

00:17:57.640 | You take a property that you would be interested in buying.

00:18:01.160 | Find an actual property that's listed.

00:18:04.240 | Calculate what you would need to do to get a mortgage for it, how much money you would

00:18:08.240 | need to put down, calculate what type of mortgage rate you would be eligible for, calculate

00:18:14.240 | the cost of taxes and the cost of insurance.

00:18:17.640 | And I'd wager with you that when you do that, I bet you will find the pure cost of that

00:18:25.680 | home.

00:18:26.680 | By cost, I mean the cost of your annual real estate taxes, the cost of your annual insurance

00:18:32.320 | coverage and any other pure costs – sorry, the cost of interest on your mortgage.

00:18:38.480 | Those three costs, I would bet that those three costs are in excess of what you're

00:18:44.560 | paying in rent by a substantial margin.

00:18:46.900 | Now you go run the math and if you find that it's very different than that, go ahead.

00:18:50.960 | You might find otherwise.

00:18:52.480 | But to me, I would say that those pure costs are going to be very, very substantial to

00:19:00.000 | you.

00:19:01.000 | So I'm going to run the math on your specific situation, but based upon what you're describing,

00:19:04.080 | if I woke up in your shoes, I think I would rent.

00:19:06.520 | Dean in Alabama, welcome to Radical Personal Finance, sir.

00:19:09.120 | Well, thank you, Joshua.

00:19:10.680 | It is great to be able to talk to you and I want to say thanks because you do take a

00:19:16.240 | different spin on personal finance than most of the other shows do.

00:19:20.320 | So I guess that's why it's called Radical.

00:19:22.520 | My pleasure.

00:19:23.520 | I hope that it's actually a useful spin.

00:19:24.520 | How can I serve you today, sir?

00:19:26.400 | Great, great, great.

00:19:27.560 | Well, my question is about the donor advised funds.

00:19:30.560 | I'm wanting to use one to front load my future charitable contributions.

00:19:38.040 | And the reason I'm thinking about doing that is I want to put a large sum in there.

00:19:41.800 | When I say large, it's large for me, you know, $75,000, $80,000.

00:19:46.520 | And my goal has always been to try to stay in the 15% tax bracket, which gives me plenty,

00:19:52.040 | plenty, plenty of money to spend, but I will never see any tax deductions because it's

00:19:58.000 | hard to make it past the standard deduction.

00:20:00.720 | So I thought if I front loaded, took the deduction this year, which would be large, then I would

00:20:07.880 | have a fund to pull from to make charitable contributions and keep my standard deduction

00:20:12.960 | kind of a way of making more cash flow.

00:20:15.580 | Do you have a high income year this year or do you have another?

00:20:19.560 | Is there a is there something that you can foresee that would push you into a high income

00:20:23.680 | when that would be particularly helpful to you to make this do this plan?

00:20:27.080 | Well, if the way my income sits this year and will be probably for the foreseeable near

00:20:33.200 | future is going to be about $73,000 for the year.

00:20:37.600 | And so that's where I was.

00:20:38.600 | I was thinking that if I front loaded, it was like $75,000 or $80,000.

00:20:42.720 | Keep me under the when I make the big deduction for the charitable contribution, it still

00:20:48.160 | keep me in a 15% tax bracket.

00:20:52.880 | And then like I say, and then between my pension and my wife's social security, I am retired.

00:20:59.680 | My wife's social security and some disability income she has coming in.

00:21:03.320 | We really have plenty to cover all the bills.

00:21:06.480 | I have no debt.

00:21:07.480 | I'm like I say, I'm retired.

00:21:10.720 | Most all of my money is in 401ks and IRAs.

00:21:13.800 | So everything that comes out has got to be taxed anyway.

00:21:16.920 | And so my goal is to try to pull out and stay in the 15% tax bracket.

00:21:20.920 | Yeah, I like it.

00:21:23.080 | Do you have a local community foundation or a sponsor of the funds that would be appropriate

00:21:27.920 | for your personal charitable goals?

00:21:29.760 | Well, it would mostly be just church donations.

00:21:34.400 | And it's mostly that's what I'm thinking of is my tax.

00:21:38.400 | Even paying 10% on $96,000 if you stay in the 15% tax bracket, I still never hit the

00:21:45.840 | standard deductions.

00:21:48.080 | It's almost like you're paying out the money, but you're not getting the deductions.

00:21:51.920 | So if I front load it, then I can pull it out of the donor advised fund, pay my tithe,

00:21:56.120 | and I still have the standard deduction to meet up to.

00:21:59.520 | I haven't been able to find anybody else to tell me whether it makes sense or not.

00:22:03.280 | It makes sense in my mind.

00:22:04.640 | Yeah, the biggest thing is just simply finding a local foundation, a local charitable foundation

00:22:09.680 | that will run the fund properly.

00:22:13.240 | And then making sure that the fund will get through to the charitable organization from

00:22:18.320 | that donor advised fund.

00:22:19.960 | So –

00:22:20.960 | Would you not be able to use Fidelity or Vanguard as the donor advised funds to do this through?

00:22:26.800 | I'm not sure.

00:22:27.800 | I don't see any reason why you couldn't.

00:22:29.960 | I don't know what – I don't know of any reason why it wouldn't work.

00:22:35.600 | I'm not aware of any reason why it wouldn't work.

00:22:39.560 | Administratively, that would be the next question I would ask because I would call whoever you're

00:22:44.880 | planning to use as your coordinator for the donor advised fund and make sure that a public

00:22:52.200 | – make sure that the charity that you are working with would be an approved charity.

00:22:59.600 | I don't know – it's a good idea.

00:23:02.040 | I've never done it and I've never done it with a client and I can't see any conceptual

00:23:05.840 | reason why it wouldn't work based upon my knowledge.

00:23:09.480 | But I would have to actually follow through and work through and see can I actually administratively

00:23:15.160 | do it.

00:23:16.160 | That's the best I can do for you.

00:23:17.160 | That's – and I haven't been able to find the answer from anyone else either because

00:23:22.000 | they say the same thing.

00:23:23.000 | No one's done it.

00:23:24.000 | They didn't know anyone that's done it.

00:23:26.000 | And my – I've always pushed back with, "Well, you can get a tax deduction anyway,

00:23:31.320 | but you can't get a tax deduction unless you go over $12,700 filing jointly."

00:23:36.200 | Right, right.

00:23:37.200 | I would sit down – the church that – so you want all the money to go to your local

00:23:42.360 | church, is that right?

00:23:43.360 | More than likely, yes.

00:23:45.140 | Is this local church –

00:23:46.140 | Do it in like a monthly or quarterly basis.

00:23:49.920 | Is this local church a large church or a small church?

00:23:52.800 | I'm going to say a medium church.

00:23:55.480 | When I question our financial people on using donor advised funds, they don't have the

00:24:00.800 | knowledge.

00:24:02.000 | They don't understand them.

00:24:03.000 | Right.

00:24:04.000 | Because they give you that questionable look like, "A what now?"

00:24:08.160 | Is there an insurance agent or a financial advisor or an estate attorney that you know

00:24:14.280 | of in the church?

00:24:17.140 | You know what?

00:24:18.140 | Not that I know of.

00:24:19.140 | Not that I know of.

00:24:20.140 | I have not heard of anyone that's down them lines.

00:24:22.800 | So just like you say, even if you used to leave – if I was to move and go to another

00:24:27.360 | church and I still have my funds that I could pull from to make my contributions then.

00:24:33.200 | Is it important –

00:24:34.200 | I'm just looking at it as a front load, just what I'm looking at it as.

00:24:36.720 | I'm going to pay a tithe regardless.

00:24:38.320 | I just want to get the best tax deduction possible.

00:24:42.280 | I would sit down –

00:24:43.280 | And you don't ever know what the tax code's going to change.

00:24:45.920 | We might not even be able to do that this year.

00:24:47.760 | You never know.

00:24:48.760 | I know you got to show them that one too.

00:24:49.760 | You never know from one year to the next what it's going to be.

00:24:54.880 | I think for any of us predicting the tax code is the definition of impossibility.

00:24:59.760 | I would have to be really certain of a direct divine revelation to make any comments of

00:25:06.280 | a tax code and I probably wouldn't even then declare it out of fear of being completely

00:25:10.560 | wrong.

00:25:11.560 | It's hard.

00:25:12.560 | It's just like I've worked many years.

00:25:17.280 | I'm just a factory worker and I've saved in the 401(k), saved in my RAs, deprived

00:25:24.480 | myself along the way so that I can hit this retirement years and be able to enjoy them.

00:25:30.160 | So I want to be able to get that money out and pay as few taxes on it as I can and still

00:25:35.880 | be able to travel and do things.

00:25:37.600 | Right.

00:25:38.600 | And it's really frustrating to have the government leeches come in and pull off 10

00:25:43.680 | or 15 percent of the money.

00:25:46.120 | So here practically is what I think you need to do.

00:25:48.800 | Number one, I think you need to go and speak to somebody in your local church who has a

00:25:56.440 | complete connection.

00:25:57.440 | If you're in a medium-sized church, there may be somebody there in the church that you

00:26:00.040 | don't know that would be a professional expert in this area.

00:26:05.440 | And so go and ask somebody on your pastoral team, go and ask somebody who's connected

00:26:09.760 | in the church and just say, "Do we have any insurance agents?

00:26:13.240 | Do we have any financial advisors?

00:26:16.260 | Or do we have any tax or estate attorneys or accountants in our church?"

00:26:21.620 | It's hard for me to imagine a medium-sized church body that doesn't have at least somebody

00:26:26.000 | from one of those areas.

00:26:27.960 | Now with that local professional, it would be good to start and ask, "Hey, here's what

00:26:35.360 | I'm thinking," and try to get a referral to a local estate planning attorney or local

00:26:42.480 | estate expert.

00:26:44.040 | Another way to approach it would be to go to your local community foundation.

00:26:47.840 | Find a community foundation near you and go to your local community foundation.

00:26:52.760 | Call them up and ask to sit down with one of their planners and describe to them what

00:26:56.480 | you're trying to accomplish and describe to them what your financial goals are, what your

00:27:01.880 | financial assets are, and what your financial intentions are.

00:27:08.120 | It's worth it to sit down with a competent estate planner in this context and make sure

00:27:12.720 | that this is the best plan.

00:27:14.640 | What I have found doing this type of work in the past is frequently people will neglect

00:27:22.240 | an asset or neglect something that is potentially very useful.

00:27:27.240 | For example, they might have an appreciated stock or an appreciated piece of real estate.

00:27:32.760 | Sometimes you can use that charitably to generate a very high tax deduction while it's not actually

00:27:40.320 | costing you all that much out of pocket.

00:27:43.480 | My biggest fear is that you're thinking on a cash basis when in reality you might have

00:27:48.520 | an asset that would be more useful for you and have a higher utility in this context.

00:27:55.520 | In the church world, you'll be able to find somebody locally.

00:28:00.000 | You'll be able to find somebody who works in this area.

00:28:02.100 | You can do this on the phone.

00:28:03.500 | You can talk with them.

00:28:04.500 | Tell them about your financial situation.

00:28:06.160 | You'll be able to find somebody who will work with you.

00:28:08.440 | There are teams of people who give specific advice in this area.

00:28:13.080 | The goal is to figure out how to get money into the church and into the local church

00:28:18.200 | community in the most efficient way.

00:28:20.400 | I think you can find somebody in your local area who can look this over with you and make

00:28:25.120 | sure that this is the best way for you to approach it.

00:28:27.560 | Then finally, administratively, I would reach out to the potential sponsor that you have

00:28:33.160 | and talk to one of their advisors.

00:28:34.900 | Every company who would offer this kind of service will have a team of advisors who will

00:28:39.600 | talk through this with you.

00:28:40.880 | If you want to go to Fidelity or you want to go to Vanguard and you want to talk to

00:28:43.640 | them, they'll put you on the phone with a charitable advisor and they'll put you on

00:28:50.360 | the phone with one of their teams and they'll talk this through with you.

00:28:53.800 | They have the expertise.

00:28:54.800 | Then finally, if none of those plans work, reach out.

00:28:58.640 | Do a little bit of research in your local community and find an insurance agent from

00:29:03.640 | one of the big old insurance companies.

00:29:06.880 | Here's the secret to that scenario.

00:29:10.680 | That particular insurance agent may not have specialized knowledge in estate planning.

00:29:16.800 | But because insurance agents like to sell great big insurance policies, they know that

00:29:22.160 | they need experts.

00:29:24.480 | Most of the insurance companies have is they have teams of what are called advanced planning

00:29:28.680 | attorneys.

00:29:30.000 | These attorneys are real experts in their industry, but they're paid by the insurance

00:29:34.520 | company.

00:29:35.520 | You can use this as a way of your getting good, competent, free advice through your

00:29:43.120 | relationship with the insurance agent.

00:29:45.880 | They'll look at the different options.

00:29:47.120 | They'll talk through the different options with you and they'll make sure that you're

00:29:49.360 | getting a good, useful scenario.

00:29:53.880 | I used to do this all the time.

00:29:55.120 | I had access to my advanced planning attorneys.

00:29:57.120 | I have friends that were with other companies.

00:29:59.480 | They would have access to their advanced planning attorneys.

00:30:02.120 | It's a good way to get a specialized estate planning attorney on the phone without your

00:30:07.680 | having to stroke the check for the hourly fee.

00:30:11.320 | They'll sit with you.

00:30:12.320 | They'll talk it through with you and they'll see if they can suggest any ideas that will

00:30:15.600 | help you better.

00:30:17.280 | Those are the action steps that I would take, Dean.

00:30:20.480 | Deacon Harris That sounds fantastic.

00:30:23.360 | In my research and doing all this, everything that you touched on right there, I have come

00:30:28.880 | across that in all the research.

00:30:31.080 | My hardest part is like appreciated assets.

00:30:34.240 | I don't have any appreciated.

00:30:35.800 | All my money is in this 401(k) and these IRAs.

00:30:40.560 | It limits you.

00:30:41.560 | It limits you on how you can use them funds.

00:30:43.880 | You can have a million dollars in there, but it sure does limit you on how you can get

00:30:47.240 | it out and use them funds.

00:30:49.480 | Just like you were saying before, I didn't put enough money in taxable accounts or buy

00:30:55.760 | something or stocks or whatever.

00:30:58.240 | Something that would appreciate up that you could use in a tax advantage like that.

00:31:02.000 | All I've got is an income and my 401(k)s and IRAs and that's it.

00:31:07.680 | Preston Pysh (00:06:00): Have you looked through in your situation

00:31:10.360 | the IRA, 401(k) charitable contribution directly out of the 401(k)?

00:31:16.200 | David Tepker (00:06:10): Out of a 401(k)?

00:31:18.880 | No, I have not.

00:31:19.880 | I did not know that you could do that straight out of a 401(k), not unless you were 70 and

00:31:24.840 | a half.

00:31:25.840 | So…

00:31:26.840 | Tavish Leff (00:06:22): You can make…

00:31:27.840 | I'm not current enough to walk you through this in a live format.

00:31:34.040 | I've gotten rusty on this topic in the last couple of years and I'm just not current

00:31:38.480 | enough to walk you through the details in a live format.

00:31:41.160 | Do a web search.

00:31:42.160 | Just pull up duck.go and do a web search for 401(k) charitable contributions and read through

00:31:49.520 | that.

00:31:51.080 | This was a big opportunity about three, four, five years ago, something like that.

00:31:58.320 | This was a big opportunity when the tax law changed about four or five opportunities to

00:32:03.240 | do direct contributions of retirement assets directly to the charity.

00:32:08.480 | And so you would need to just pull it up, look at it, read it, find the IRS website

00:32:15.920 | appropriate publication on this and look to see what the current rules are on making charitable

00:32:22.360 | contributions directly from your retirement funds.

00:32:26.240 | The benefit is it may be a way for you to get money out of the 401(k) and get it directly

00:32:35.520 | to the charity while doing it in a very efficient way with minimum fees.

00:32:42.000 | So again, just do some searching and do some additional research on charitable contributions

00:32:46.680 | directly out of a retirement account and hopefully that will help you.

00:32:50.440 | Eddie in Virginia, welcome to Radical Personal Finance.

00:32:52.960 | How can I serve you today, please?

00:32:54.960 | Eddie: Hey, Joshua.

00:32:57.440 | I'm calling.

00:32:58.440 | I just want to get some career advice on you.

00:33:01.840 | I'm contemplating a move out of my current industry.

00:33:06.160 | Currently I'm a commission-based employee, 100%, and in an industry that goes up and

00:33:11.960 | down pretty often.

00:33:13.920 | And I'm thinking of making a move, but I'd take a pretty significant pay cut.

00:33:18.200 | It wouldn't change my lifestyle drastically because my wife and I don't spend a lot of

00:33:22.160 | money, but it would definitely change some of our plans.

00:33:25.400 | And I just wanted to see what sort of advice you had.

00:33:27.880 | Well, if you're going to make less money, why would you make the move?

00:33:30.760 | What's in it for you?

00:33:31.760 | Joshua: Stability.

00:33:32.760 | It's a salary.

00:33:33.760 | Yes, stability, salary position, typically.

00:33:39.120 | Eddie: Has living on an unknown up and down income, has that been hard for you?

00:33:46.680 | Joshua: Yes.

00:33:48.400 | Yeah, because you've talked about this before.

00:33:51.360 | Some months you make $20,000 and some months you make zero.

00:33:55.920 | Not that budgeting's hard, but it's just very difficult to game plan where it is.

00:34:02.040 | And my organization has been not as great on delivering products in a timely manner

00:34:07.480 | outside of my control.

00:34:09.480 | So it's hard.

00:34:10.480 | Eddie: So in the last year, how much have you made in the last year in your commission-based

00:34:13.560 | job?

00:34:14.560 | Joshua: I will approximately make about $100,000.

00:34:18.280 | Eddie: And if you go to the salary-based job, how much do you think you'll make in the next

00:34:22.400 | year?

00:34:23.400 | Joshua: About $80,000 to $85,000.

00:34:26.520 | Eddie: In your commission-based job, have you exhausted all of your opportunities to

00:34:33.040 | dramatically increase your income under your current commission structure?

00:34:37.760 | Joshua: Yes.

00:34:39.080 | Eddie: In your salary-based job, will there be opportunities for substantial increases

00:34:44.520 | in your income?

00:34:46.080 | Joshua: I believe so if I move up into a higher level management position, yes.

00:34:51.160 | Well, that to me is the biggest concern because, yes, commissions can be stressful.

00:34:58.480 | And I think here you have to ask the question, "What's the cost for you?

00:35:04.200 | What's the cost for your wife?

00:35:05.440 | What's the cost on your family?"

00:35:07.840 | There are different levels of stress that you may or may not find helpful and find difficult.

00:35:12.760 | An example, in my situation, I've lived on a highly fluctuating, highly variable income

00:35:19.840 | since 2008 and it's been hard, very hard at times.

00:35:24.600 | But I've learned this increasing skills to deal with it.

00:35:28.040 | I still have a long way to learn, I'm sure.

00:35:30.480 | But I've learned increasing skills to deal with it and I've been able to make steps in

00:35:33.780 | order to put enough of a financial buffer that is not so painful as it once was.

00:35:39.040 | There were times where early – earlier in life, it was quite painful.

00:35:43.600 | But I've learned and it's not particularly painful to me at this point in time.

00:35:49.080 | And in integrating with my wife, there were times during our joint management of finances

00:35:54.660 | early in our marriage where it was painful.

00:35:56.840 | But my wife never – it was never an emotional problem for her.

00:36:01.220 | She was never emotionally connected to the challenge of having low-income months and

00:36:06.360 | high-income months.

00:36:07.360 | So it was never all that stressful for her.

00:36:09.600 | Thus, it was never all that stressful in our marriage.

00:36:12.320 | I've worked and counseled other couples who were in similar industries and experienced

00:36:17.040 | similar fluctuations of income.

00:36:19.680 | And in their situation, for differing reasons, their experience of the stress of fluctuating

00:36:25.680 | income was very, very different.

00:36:29.200 | And specifically, I know of one couple that I was engaged in in personal financial counseling

00:36:36.400 | where for them to go from a fluctuating income to a fixed income, even though there was a

00:36:43.320 | slight pay cut, was a tremendous blessing for them and their family and their overall

00:36:48.600 | emotional makeup, especially for the emotional stability of the wife.

00:36:54.600 | And so I think that you should analyze that separate from financial increase.

00:37:00.240 | And that's not a factor to be discounted.

00:37:04.000 | It's something that's important.

00:37:05.640 | Now, on the flip side, you should look and say, "Well, if I do make this switch, how

00:37:09.560 | much is it going to cost me and then how much am I giving up on the upside?"

00:37:13.800 | If you've maximized all your opportunities and you're maxed out at about $100,000, then

00:37:19.720 | that doesn't sound too exciting to me, no matter whether you're a commissioner or salary.

00:37:23.640 | If this other job is a better fit for you and you can move to a salary position at $80,000

00:37:28.360 | but maybe a year and a half from now, you can make a jump in the levels of the company

00:37:33.040 | and go from 80 to 120, that sounds probably more exciting than the fact that you're maxed

00:37:37.280 | out on commission at $100,000 with your current business structure.

00:37:40.580 | So the fact that there's not a big possible increase on the commission basis to me just

00:37:45.200 | doesn't sound that exciting.

00:37:46.680 | And for those reasons, I think I probably would.

00:37:49.520 | I'd probably take the temporary pay cut, move to the stable income.

00:37:52.920 | That will be helpful.

00:37:54.360 | And then focus on what do I need to do to bump up in the level of the compensation tier

00:37:59.960 | here or to move into the bonus program here even though it's not directly tied to commissions.

00:38:05.160 | Okay.

00:38:06.160 | Awesome.

00:38:07.160 | Thank you.

00:38:08.160 | You're welcome.

00:38:09.160 | Did we miss anything?

00:38:10.160 | Are there any other extenuating factors?

00:38:11.160 | Is that good enough?

00:38:12.160 | No.

00:38:13.160 | I mean, that's really what it came down to.

00:38:15.760 | My current position is odd hours as well, so that's putting some stress there.

00:38:21.160 | I'm going to add that.

00:38:22.800 | The other position is going to be more of a nine to five.

00:38:25.720 | So those were factors that I'd already kind of ruled what I'm willing to do, but I wanted

00:38:31.000 | to get your opinion on it.

00:38:32.280 | So I really appreciate your podcast.

00:38:34.620 | It's hard to say.

00:38:36.040 | The odd hours are actually a big benefit and so is just simple stability.

00:38:41.640 | I think most of us who work in these commission-based or fluctuating income scenarios, I think most

00:38:47.780 | of us regularly look at and say, "You know what?

00:38:50.920 | Maybe I should go get a job."

00:38:51.920 | It's funny.

00:38:52.920 | I was talking about this with a friend of mine who is also an entrepreneur and we were

00:38:57.080 | talking about the challenges of just simply trying to build a business starting with nothing

00:39:01.760 | with young children.

00:39:03.080 | And our comment together, both him and me, and we're motivated, goal-oriented people,

00:39:10.560 | was we underestimated how difficult it was to build a business that would work when also

00:39:17.400 | trying to do a good job with young children.

00:39:21.480 | And many times I think you look around and as much as I love entrepreneurship and business,

00:39:27.560 | et cetera, I think there is a lot of benefit in simply having a job that is steady, that

00:39:33.720 | provides a steady income, it helps with planning and provides a good structure.

00:39:38.720 | And I think that can work really good benefits.

00:39:41.360 | Travis in Kentucky, welcome to Radical Personal Finance.

00:39:44.040 | How can I help you, sir?

00:39:45.040 | Travis Buehler, CEO, Radical Personal Finance, Inc.

00:39:46.040 | Hello, Joshua.

00:39:47.040 | I appreciate you taking the call and appreciate all that you do on the podcast.

00:39:51.040 | I really enjoy it.

00:39:53.200 | My wife and I were recently blessed to welcome our new daughter into the family.

00:39:58.600 | So we now have a 4-year-old and a 2-week-old and we're looking to add some coverage to

00:40:05.880 | our life insurance.

00:40:07.400 | I currently have a million dollars worth of term life insurance coverage and my wife doesn't

00:40:13.120 | have anything currently.

00:40:15.600 | And I was exploring the options between just adding term life, some more coverage for both

00:40:20.960 | myself and for her, but also weighing that against the idea of maybe doing something

00:40:25.720 | like a joint universal life coverage.

00:40:30.040 | And I guess I've heard you talk about it extensively in recent podcasts and heard you talk about

00:40:35.560 | how it can be such a valuable tool, you know, in different circumstances and that you have

00:40:40.400 | policies in your family.

00:40:43.200 | And I guess as I run through some of the scenarios doing my math, it's hard for me to overcome

00:40:47.760 | the idea of buy term and invest the rest.

00:40:51.120 | Most of the calculations I do, that seems to be the most beneficial way to go.

00:40:58.120 | But I guess before I went ahead and made a decision, I was wanting to pick your brain

00:41:01.560 | about some other things I may not be considering.

00:41:04.520 | What's your household income?

00:41:06.800 | $150,000.

00:41:08.600 | Okay.

00:41:10.160 | So there's two levels of analysis.

00:41:15.280 | Just what makes me nervous is you talked about a joint policy.

00:41:19.200 | Why were you considering purchasing a joint life policy?

00:41:23.240 | Well, I guess the idea was, is the reason that we were wanting to buy the insurance

00:41:30.680 | was not so much for the end, you know, hopefully we live to be the ripe old age and, you know,

00:41:36.720 | dying at 85, 90, 95, whatever, and then having a death benefit come to us.

00:41:42.120 | That's not really the idea of why I want to buy the coverage.

00:41:45.160 | It's more of if one of us dies prematurely, you know, I want to be able to have some money

00:41:49.960 | to cover, you know, the, basically the services that she provides to the family.

00:41:54.480 | Of course.

00:41:55.480 | And of course, vice versa for me.

00:41:57.800 | So I guess the idea of maybe doing a joint policy was you kill two birds with one stone

00:42:02.240 | and you know, I'm covered if I die quicker or she's covered or, you know, vice versa.

00:42:07.120 | I'm covered if she dies quicker, she's covered if I die quicker.

00:42:11.400 | You know, it might not be that there's any benefit.

00:42:13.880 | You know, maybe a whole life on me and a whole life on her, you know, maybe that's something

00:42:18.920 | to explore as well.

00:42:20.920 | Um, and I guess that's, but still I always run into the idea that, you know, the term

00:42:26.080 | is cheaper.

00:42:27.080 | And if I take the difference between what I would be putting in a whole life policy

00:42:29.800 | and just I'm responsible and invest that, you know, reasonably well, um, the time horizon

00:42:36.080 | that you're talking about with, you know, holding a whole life policy, if you let your

00:42:40.600 | capital accumulate, you know, in a mutual fund or, you know, you know, well diversified

00:42:46.320 | investment account, uh, at the end of the day, I keep coming back to the idea, well,

00:42:50.400 | I'm better off just doing that.

00:42:52.240 | Um, and so I guess I'm wondering, is there an aspect that maybe I should be considering,

00:42:58.160 | um, before I just go ahead and say, yes, that's what I should do.

00:43:03.360 | Um, and the reason why I guess I'm a little bit nervous is I, I listened to you talk and

00:43:09.680 | I foresee and maybe project some of the things that you're probably doing with your personal

00:43:15.480 | finances and I'm wondering why you're arriving at the idea that, yeah, a whole life policy

00:43:20.240 | is better for me.

00:43:21.240 | Um, cause I'd imagine we're probably similar with the way that we approach, um, you know,

00:43:26.880 | these, these types of problems.

00:43:29.320 | So I want to, yeah, the error that you're making is the either or, uh, discussion.

00:43:36.200 | And that's usually the error when it comes to the buy term invest the difference discussion

00:43:39.720 | is we're not as, as York, you're saying I should either do this or I should do that.

00:43:45.400 | So hold on one second.

00:43:46.400 | We'll get the whole life insurance in just a moment.

00:43:48.520 | First the joint life discussion.

00:43:50.120 | Um, I assume that you were talking about a joint life first to die policy.

00:43:54.640 | Uh, is that right?

00:43:55.840 | Or were you, were you talking about a second to die policy?

00:43:57.960 | Okay.

00:43:58.960 | All right.

00:43:59.960 | I don't like this and I don't think there's any benefit to your buying a joint life first

00:44:02.560 | to die policy.

00:44:03.560 | Uh, for the sake of other listeners, you can purchase a life insurance policy that is,

00:44:09.320 | is, it is, uh, underwritten on the life of two people.

00:44:14.280 | Uh, and there are two ways that it can be done.

00:44:16.920 | The first way it can be done.

00:44:18.120 | So in this, in this particular situation, it would be underwritten on the life of Travis

00:44:22.680 | and on Travis's wife, Travis, how old are you?

00:44:25.320 | How old's your wife?

00:44:27.280 | I'm 33 and she is 32.

00:44:29.600 | Okay.

00:44:30.600 | So the idea here is, um, whenever one of them dies, then the policy would pay out a certain

00:44:37.400 | sum of money.

00:44:39.120 | And uh, uh, then, and hopefully the idea is because it's on two, two lives, it's a little

00:44:45.280 | bit cheaper than it would be on one or the other.

00:44:47.880 | Uh, I don't like it.

00:44:49.160 | I don't think that, um, and this, these are guesses.

00:44:52.600 | You could disprove this with your actual numbers from some insurance companies.

00:44:57.680 | I'm giving you a gut feeling based upon experience, not a, uh, a mathematically calculated provable

00:45:04.760 | thing where I just ran, um, policies on you.

00:45:08.080 | Joint life first to die policies are very rare.

00:45:10.920 | And so I don't think the market is competitive.

00:45:12.880 | I think if you buy a joint life first to die policy, you're going to wind up paying more

00:45:17.640 | per, um, uh, per thousand dollars of insurance than you will with a term life policy.

00:45:24.120 | Term life policies are so competitive.

00:45:26.440 | The prices are in the floor.

00:45:28.720 | And so I don't think you're going to get as much of a benefit.

00:45:31.960 | Number two, I don't think you're going to get, um, the coverage that you should get.

00:45:36.680 | If, if my wife dies, then, uh, my, then I need money in order for me to be able to care

00:45:44.060 | for our children in the way that we want our children to be cared for.

00:45:48.400 | I couldn't do that if she were dead, if she didn't have life insurance.

00:45:52.680 | But now I still face the risk of, well, what about me if I die?

00:45:56.760 | And the money that I would need to care for my children is not the same amount of money

00:46:01.880 | as my children would need if both of us were dead.

00:46:04.840 | And so I think a much happier with the plan to a much happier with the plan to put in

00:46:12.400 | place, uh, uh, policies on both of us so that if she dies, then I receive money.

00:46:19.080 | If I die, she receives money.

00:46:20.480 | And if we both die, then our children receive the sum total of all of the money.

00:46:25.760 | So I don't like the structure of the joint life.

00:46:28.320 | Also there are concerns with regard to ownership, who's going to own the policy, how is the

00:46:32.680 | policy going to be owned?

00:46:34.360 | And there are concerns for you, for your wife and for your children to protect you in case

00:46:39.360 | of divorce.

00:46:40.640 | What happens if you were to divorce?

00:46:42.600 | Um, what happens to the policy and how do we make sure that the insurance stays in force?

00:46:47.440 | So as a financial planner, I just, I don't like the joint life first to die.

00:46:51.400 | That's different.

00:46:52.400 | That's very different than joint life second to die when we're using that at a later stage.

00:46:57.520 | But for you as a young family, I don't see any compelling benefit to pursuing a joint

00:47:02.200 | life first to die policy.

00:47:03.840 | Make sense?

00:47:04.840 | Okay.

00:47:05.840 | Okay.

00:47:06.840 | Now, second, we're talking about term life insurance versus universal life insurance.

00:47:11.240 | This is a blanket statement, but this is kind of my opinion based upon experience.

00:47:17.160 | I don't like universal life insurance for unsophisticated people.

00:47:22.840 | Universal life insurance has its place and it's a useful tool, but I don't like universal

00:47:27.720 | life insurance for unsophisticated people.

00:47:31.800 | And unsophisticated is not an insult, but it's a level of understanding of how insurance

00:47:37.760 | works.

00:47:38.760 | Universal life insurance is the most complicated form of insurance and it can be a useful tool

00:47:43.560 | because of the flexibility.

00:47:45.400 | It can be a useful tool in the hands of a competent financial planner or in the case

00:47:49.660 | of a sophisticated insurance buyer.

00:47:51.960 | But many people buy it and they don't understand how it works.

00:47:54.720 | So universal life insurance is often underfunded and it often doesn't work long term.

00:48:01.160 | Now it can be a way of providing a family with the equivalent in some cases of an extended

00:48:07.520 | term life insurance policy with options.

00:48:10.120 | But it's so complicated that it's very hard for me in my experience to believe that the

00:48:13.840 | average person with a basic working knowledge of insurance would be able to successfully

00:48:19.360 | buy one and get all the benefits of it.

00:48:21.440 | I much prefer the simplicity of term life insurance.

00:48:24.880 | The second problem with universal life insurance is what is it invested in?

00:48:29.360 | And if the policy is a variable universal life contract, which it frequently is, then

00:48:35.000 | all of a sudden now we have to factor on the risk factors of stock and equities markets

00:48:40.400 | and the risk factors of an insurance product and it just becomes very complicated.

00:48:45.600 | It does have a place but I don't like it for young couples who just need simple insurance

00:48:50.920 | planning.

00:48:51.920 | So I'm very nervous about you pursuing a universal life insurance contract as the basis for – in

00:48:58.960 | any regard.

00:48:59.960 | I like the simplicity of term life insurance.

00:49:02.240 | With me so far?

00:49:03.240 | Okay.

00:49:04.240 | Okay.

00:49:05.240 | Now you need a lot of term life insurance and your wife needs a lot of term life insurance.

00:49:10.280 | Chances are I don't know anything about your assets but at your age, I don't see

00:49:14.880 | any reason for you not to have double or double and a half the amount of term life insurance

00:49:19.400 | coverage that you have.

00:49:20.400 | I don't see any reason for you not to – for your wife not to have a million dollars

00:49:24.040 | of insurance coverage for her.

00:49:26.040 | Term life insurance is so cheap that there's a compelling benefit for you to have quite

00:49:32.080 | a bit of it.

00:49:33.080 | With $150,000 annual household income, it will make – the cost of premiums will make

00:49:38.240 | effectively no difference in your household versus the potential benefit of your having

00:49:43.600 | two or three million dollars of coverage and your wife having a million dollars of coverage.

00:49:47.780 | You can go and you can do more careful calculations, et cetera.

00:49:50.400 | But we're talking about the cost of a pizza.

00:49:53.720 | For 32, 33-year-old healthy non-tobacco users, we're talking about the cost of a pizza

00:49:58.280 | a month, a couple of pizzas a month and you'll like having more and it will put more tools

00:50:04.020 | in your portfolio.

00:50:06.400 | The best thing for me about life insurance is that having millions of dollars of term

00:50:12.980 | life insurance allows me to guarantee my financial legacy for my children.

00:50:19.080 | It's one of the most powerful feelings you can get when you're young and you don't

00:50:24.680 | yet have all the money that you want to have.

00:50:27.280 | It is really rewarding to recognize the fact that if I'm dead, I can guarantee a significant

00:50:34.120 | estate for my children and term life insurance is one of the most powerful financial tools

00:50:40.800 | to do that.

00:50:41.800 | For you as a 33-year-old male healthy non-tobacco user, you can have two to two and a half,

00:50:47.600 | three million dollars of life insurance for something like probably 75, 80 bucks a month

00:50:50.880 | depending on the structure.

00:50:53.880 | Once you have that, you'll find that that is very, very powerful in terms of psychologically

00:51:00.120 | or at least I have found it to be that way.

00:51:02.320 | So don't look at anything, don't look at universal life insurance, don't look at

00:51:06.320 | whole life insurance, don't look at anything until you have properly established the total

00:51:13.480 | amount of death benefit that you need with regard to you and your wife using term life

00:51:19.720 | insurance.

00:51:20.720 | Make sense?

00:51:21.720 | Now, with whole life insurance, I would like you to have insurance policies on your children's

00:51:29.880 | lives, small whole life insurance policies on your children's lives before you buy

00:51:34.560 | it for you.

00:51:36.320 | So if you are willing to spend a little bit more money on insurance and you properly squared

00:51:40.360 | away term life insurance for you and your wife and you can buy some small whole life

00:51:44.840 | policies for your children, I think that's a good idea.

00:51:47.640 | I own whole life insurance policies on all of my children, small ones, well-designed

00:51:52.200 | from a good company that will be an efficient accumulation of money over time.

00:51:56.720 | I've done shows on life insurance for children in the past.

00:52:01.680 | Also make sure that your disability insurance is squared away fully, that you have as much

00:52:05.560 | as you can get and that you're covered and make sure that your health insurance is squared

00:52:10.700 | away as well.

00:52:11.940 | Now once health insurance, disability insurance, term life insurance are squared away, now

00:52:16.280 | we can have the whole life insurance conversation.

00:52:19.780 | But it's not either or because there's no comparison between the two.

00:52:24.360 | It's not either you buy a million dollars of term life insurance or you buy $33,000

00:52:28.400 | of whole life insurance.

00:52:29.740 | We always solve death benefit needs first and we always solve that with term life insurance.

00:52:34.720 | You don't solve death benefit needs with whole life insurance.

00:52:37.320 | Okay.

00:52:38.320 | Okay.

00:52:39.320 | Now, should you buy some whole life insurance?

00:52:41.600 | I don't know.

00:52:44.000 | If the question is buy term and invest the difference, so you have to recognize you can't

00:52:48.900 | buy term and invest the difference and get the equivalent of a whole life insurance policy.

00:52:53.360 | Whole life insurance is a unique product.

00:52:56.800 | If you're going to compare, should I buy a whole life insurance because I'm already telling

00:53:00.320 | you, you should buy term.

00:53:01.960 | You should buy term.

00:53:03.080 | So now separate the question from either or and say, "I'm considering buying a whole life

00:53:07.720 | insurance contract or I'm considering purchasing this other investment."

00:53:14.160 | Now compare them on the merits.

00:53:16.000 | And where the whole conversation breaks down is that if you're an aggressive investor and

00:53:19.920 | if equities markets continue to perform, in general, an equity market should outperform

00:53:25.480 | a traditional portfolio-based whole life insurance contract and it should.

00:53:30.120 | Now, it doesn't always and the returns come at varied times.

00:53:33.560 | It should outperform that.

00:53:35.100 | The basic functional benefit of whole life insurance that I appreciate is a few things.

00:53:40.240 | Number one, whole life insurance is a stable asset.

00:53:44.080 | Life insurance companies, well-run life insurance companies and a traditional non-equity, business-based

00:53:49.800 | based life insurance contract is – the value of the contract is guaranteed to go up.

00:53:55.560 | The amount at which it goes up changes but it's guaranteed to go up.

00:53:58.880 | That gives me a stable pile of money.

00:54:03.120 | Second thing I like about it is if a policy is well-constructed and it's well-purchased,

00:54:09.840 | it can be fairly efficient.

00:54:12.760 | It can function and be fairly efficient.

00:54:14.760 | It's going to have higher costs than some other things because you have to deal with

00:54:18.160 | the cost of insurance.

00:54:19.480 | But it can be fairly efficient.

00:54:21.080 | It's also very flexible.

00:54:23.600 | And so unlike some other things that I can choose to invest and put money into, a whole

00:54:31.360 | life insurance contract can be flexible.

00:54:33.640 | I can put money in or take money out anytime I want.

00:54:37.120 | So I have a stable pile of money that can increase, that was guaranteed to increase

00:54:41.400 | at a varying rate, that will be very, very safe and it will function as a non-correlating

00:54:47.180 | asset to some of my other investments and it's very, very flexible.

00:54:51.080 | I can get money in and out of it and it's protected and exempt from the claims of creditors.

00:54:55.960 | That's helpful.

00:54:57.280 | Just like the money in a 401(k) and IRA is.

00:54:59.320 | It's not the only asset.

00:55:00.920 | But it is protected and exempt from the claims of creditors and it pays out a death benefit

00:55:05.640 | which can be very, very useful and that death benefit is paid out income tax-free and it's

00:55:10.640 | an asset that I can pledge a security for a loan.

00:55:14.080 | It's an asset that I can move into a trust.

00:55:15.880 | It's a very, very flexible asset.

00:55:17.980 | Where people make the mistake is trying to make it do everything and I think that's

00:55:22.480 | a wrong approach.

00:55:23.640 | So I think it's worth – I don't have an insurance license.

00:55:26.680 | I don't sell whole life insurance anymore.

00:55:29.580 | But my generalized advice has often been to purchase – you always cover death benefit

00:55:35.280 | with term life insurance.

00:55:36.920 | And if you find benefits in the whole life insurance attributes and if you can develop

00:55:43.180 | a policy that's well-run, well-built, et cetera, then there is a place for you to put

00:55:48.400 | some money into it if it's useful to you.

00:55:51.640 | But that's as far as I would go.

00:55:52.980 | To me, that's a practical, actual, realistic way to approach it.

00:55:59.460 | Most of the argument on the subject where it's all – it's a matter of everything

00:56:02.360 | into whole life insurance or nothing into whole life insurance.

00:56:04.520 | It's up to the devil.

00:56:05.520 | It's just a waste of money.

00:56:07.180 | Those have not been true in my experience.

00:56:09.160 | So what I've just described to you is about the only way that I can get at what seems

00:56:14.300 | to be true based upon my experience and my knowledge.

00:56:16.940 | Ryan Neuhofeldt Okay.

00:56:18.740 | So if I'm hearing you correctly, in essence you're saying if the idea is to cover expenses

00:56:26.140 | or debt due to the event of your death and you're looking for the death benefit, then

00:56:31.460 | you focus on your term life insurance.

00:56:34.220 | If you're looking for other ways to invest capital, look at a whole life insurance policy

00:56:40.160 | more like a bond proxy, an alternative to a bond or an alternative to another investment.

00:56:45.440 | Is that in essence –

00:56:46.440 | Trevor Burrus Yeah, that is –

00:56:47.440 | Ryan Neuhofeldt – that might have the additional benefit of a death benefit should you die?

00:56:52.760 | Trevor Burrus Exactly.

00:56:54.080 | And I don't underestimate the value of that death benefit.

00:56:56.640 | One of the things that – when I first got into the insurance business, I thought that

00:57:01.480 | as you got older, your need and your value of insurance, of life insurance would go down.

00:57:07.000 | The basic concept is that over time, you should be able to self-insure.

00:57:11.720 | So you buy term life insurance when you're younger.

00:57:15.260 | Over time, you're able to self-insure because you have more assets and you have fewer liabilities.

00:57:20.320 | You pay down your debts.

00:57:21.760 | Your children grow and move out of the house and so you have fewer liabilities to – fewer

00:57:27.960 | responsibilities and fewer liabilities.

00:57:30.520 | So you get to the point where you need less insurance and hopefully at some point you

00:57:34.600 | need no insurance.

00:57:35.880 | Now, that's not wrong.

00:57:38.440 | It does happen.

00:57:39.440 | It's obvious that it happens that your responsibilities change over time as your children grow and

00:57:44.320 | move out of the house.

00:57:45.860 | But my experience in working with actual clients was that very few people actually got to the

00:57:51.400 | self-insurance model because what tends to happen in the arc of finance and the cycle

00:57:57.560 | of many families was that people didn't necessarily downsize from so much as they

00:58:04.920 | other days did.

00:58:05.920 | They might have moved to a smaller house but they often upgraded it to a luxury house or

00:58:09.760 | they often just found that they liked having the insurance.

00:58:12.680 | When I think about children and my wife, I feel a significant amount of responsibility

00:58:18.240 | to my wife to make sure that if I die, even if our children are grown and gone, that she

00:58:23.280 | is well-supported.

00:58:24.280 | Now, I want to do that with assets.

00:58:26.860 | But as an example, my wife is not an income earner in our household.

00:58:30.440 | She is at home full time and she's not an income earner.

00:58:33.240 | So as a husband, I owe her a duty of care that goes beyond the life of my children.

00:58:39.520 | I need to make sure that because she is not earning income, she doesn't have income where

00:58:44.800 | she's saving.

00:58:45.800 | I owe her a duty of care to make sure that if I die after our children are grown, that

00:58:50.520 | she is able to continue in our lifestyle without the need to go and to get a job, without the

00:58:56.440 | need to go and move into poverty.

00:59:00.920 | So what happens is there becomes value – there comes a lot of value with the life insurance

00:59:06.480 | policy.

00:59:07.480 | Then finally as an estate, with the whole life insurance policy, the policy always being

00:59:10.400 | in force.

00:59:11.580 | When you get them when you're young, the premiums disappear over time or they're

00:59:15.600 | so insignificant as to be – well, insignificant.

00:59:20.000 | So they become a very useful asset.

00:59:22.300 | Even as a financial planner, I look at it and I like the idea to be able to use life

00:59:26.660 | insurance as a way to equalize the estate.

00:59:29.260 | I'm too young and you're too young to have any clue about paying estate taxes.

00:59:34.820 | But that's often been a scenario where you have to cover and say, "Well, how do we

00:59:38.100 | pay these estate taxes?"

00:59:39.640 | Life insurance is a particularly useful and flexible tool.

00:59:42.300 | It's not the only tool but it's a particularly useful and flexible tool.

00:59:45.660 | So in the hands of a competent financial planner, a life insurance policy is a very flexible

00:59:50.060 | asset.

00:59:51.060 | It doesn't work for everything.

00:59:52.100 | It's just a flexible asset that has value.

00:59:54.660 | That's about as far as I would go.

00:59:56.300 | Make sense?

00:59:57.300 | Steve Horwitz: Okay.

00:59:58.300 | Yes, it does.

00:59:59.540 | One follow-up question I would have with in terms to the children, how do you determine

01:00:03.620 | the amount of a whole life insurance policy to place on a child?

01:00:07.420 | Trevor Burrus: Life insurance company will have a minimum amount that they'll cover.

01:00:12.160 | You may be able to cover a death benefit.

01:00:13.780 | I mean not be remiss and say that you have to buy whole life insurance.

01:00:17.660 | You sometimes can cover a death benefit as a term life insurance rider but this is usually

01:00:23.140 | only found in the context of employer-based life insurance.

01:00:26.260 | I haven't seen that frequently on individual-based life insurance.

01:00:29.960 | But if you have a job, you may be able to put life insurance contract on your children

01:00:35.700 | through your group life insurance contract.

01:00:38.620 | The only contracts that you can buy in the open market that I'm aware of for children

01:00:42.760 | are going to be whole life insurance contracts.

01:00:44.780 | The insurance company will have a minimum policy size that they'll sell.

01:00:49.740 | It's often $25,000.

01:00:51.620 | Sometimes it's $15,000.

01:00:52.620 | Sometimes it varies but often it's something like $25,000.

01:00:57.580 | What I often encourage clients to do is to put the minimum policy, a $25,000 policy on

01:01:04.100 | each of their children and to put it on there with what's called an additional purchase

01:01:10.380 | benefit.

01:01:11.380 | One of the benefits of a life insurance policy for children is yes to have some insurance

01:01:15.180 | coverage in case they die.

01:01:16.180 | But that's not my big thing.

01:01:17.540 | I've always appreciated having what's called an additional purchase benefit which guarantees

01:01:22.380 | their ability to buy additional insurance in the future.

01:01:25.700 | Now that's a cost and it means that from the perspective of an investment calculation,

01:01:32.780 | just pure cash accumulation, that a child's policy doesn't – it's not as efficient

01:01:39.200 | as others because there's a higher cost of insurance.

01:01:41.400 | When you add an additional purchase benefit or a waiver of premium benefit onto it, it

01:01:45.300 | changes the efficiency of the contract.

01:01:47.520 | Those are pure insurance benefits.

01:01:48.660 | Thus, they add additional cost.

01:01:50.460 | And so my children's policies are not spectacular when measured by a rate of return perspective.

01:01:58.700 | But they're very, very useful when measured by an insurance perspective and that's how

01:02:02.980 | I view them just simply as an insurance perspective.

01:02:05.380 | I have them for all of my children.

01:02:08.100 | I sold a lot of them when I was an insurance agent.

01:02:11.140 | It just made sense from – I've always just felt like it makes sense.

01:02:14.140 | If you've got the financial – now, it's not appropriate for somebody who has no money.

01:02:18.420 | If somebody is scraping to get by and it's not appropriate, people don't have their

01:02:22.440 | own coverage squared away.

01:02:23.940 | That's why I talked about disability insurance for you, life insurance for you and your wife,

01:02:28.500 | make sure your health insurance is on track, et cetera.

01:02:30.900 | But if you can cover those things out of your income and there's still additional flexible

01:02:35.400 | money that can cover it, I find it compelling.

01:02:38.540 | Trevor Burrus: OK.

01:02:41.580 | The idea is they can always purchase more life insurance even if they're sick or have

01:02:47.060 | some disability.

01:02:48.060 | Is that what that rider is?

01:02:50.140 | Tavish Lynch: Exactly.

01:02:51.140 | It's an additional purchase benefit.

01:02:52.140 | So for example, with the policies that I own for my children, at each – I think if memory

01:02:57.820 | is right, there are seven opportunities starting at the age of 20, between the ages of 20 and

01:03:03.940 | 40, every three years, wherein the insurance company will send them a letter and during

01:03:08.780 | a 90-day period, the child can exercise the additional purchase benefit option and they

01:03:15.280 | can just simply say, "Yes, I would like to purchase an additional $150,000 of insurance."

01:03:20.580 | The only downside is they're not – that doesn't apply to term life insurance.

01:03:24.420 | It's only whole life insurance that they can purchase.

01:03:27.300 | But at each of those times, they have the option guaranteed to be able to purchase an

01:03:30.980 | additional $150,000 of life insurance.

01:03:35.600 | So what it means is that you can have a child who has a $25,000 policy and with that $25,000

01:03:42.420 | policy, if they can buy an additional purchase option of 150,000 times seven, you wind up

01:03:48.120 | where they can purchase up to basically over a million dollars of life insurance without

01:03:52.680 | any medical exams, without any lifestyle questions.

01:03:56.100 | It means no hobby questions, no avocations, no occupation questions.

01:04:01.260 | So those things that are often very, very difficult for a client – sometimes it's

01:04:04.900 | health stuff.

01:04:05.900 | But that's – maybe it happens, maybe it doesn't.

01:04:08.180 | But a lot of times, maybe the child is a beginning pilot or they're learning to fly helicopters

01:04:14.140 | or they're engaged in a risky occupation or they're doing something like they're

01:04:18.340 | a race car driver.

01:04:19.540 | You can't get insurance in those contexts.

01:04:22.060 | But with the additional purchase benefit, there's the option there for them to be

01:04:24.860 | able to get new contracts.

01:04:27.420 | Now I'm probably – let me not hedge that.

01:04:31.420 | I'm biased because of my experience as an insurance agent.

01:04:35.300 | What happens is when I – I still don't like certain kinds of insurance.

01:04:39.020 | I'm still very kind of cheap when it comes to buying insurance.

01:04:43.100 | I still – I share that ethic of I don't like to buy insurance, that ethic that many

01:04:47.600 | of us have.

01:04:48.780 | But when you go into the insurance business, you start to see different situations and

01:04:53.140 | over the years, my appreciation of insurance has substantially increased and you're

01:04:58.260 | hearing that tone come through in my voice based upon experience, seeing how in so many

01:05:02.500 | situations having that insurance in force would be really, really valuable.

01:05:10.380 | It's hard to talk about because the chances are so remote.

01:05:16.580 | I've never told the story on radical personal finance.

01:05:19.420 | But just as a way of example of showing how valuable an insurance contract can be, I was

01:05:28.260 | – I had a client of mine in the past.

01:05:31.500 | This client was probably not a great fit.

01:05:33.640 | They weren't a great fit for insurance because they had a highly fluctuating income and they

01:05:40.860 | were entrepreneurs and they were in an industry which when I first met them was in a really

01:05:46.700 | tough space and in the construction industry.

01:05:51.820 | When I first met them, I was a very novice insurance agent and they were excited about

01:05:58.300 | buying insurance and as a novice insurance agent, I was impressed with the fact that

01:06:02.380 | they were excited and because they were excited about buying insurance, I was excited about

01:06:07.260 | selling them insurance.

01:06:08.540 | So I sold them life insurance policies on the whole family.

01:06:10.860 | Now, I did a good job, term life insurance mom and dad.

01:06:13.900 | But I sold them – in addition to that, I sold them child policies on their children

01:06:20.140 | and I felt really good about it.

01:06:21.580 | But I underestimated because of my greenness, because of my novice experience in the business,

01:06:28.460 | I underestimated their financial capacity to pay and I had gotten over exuberant in

01:06:34.180 | what I had sold them and I underestimated their financial capacity to pay.

01:06:37.940 | A year later, I forget if it was less than a year.

01:06:39.660 | I forget if the policies technically lapsed or not.

01:06:42.100 | But basically a year or something later, they couldn't keep up the payments and so the

01:06:47.300 | insurance went out of force.

01:06:48.780 | It lapsed and I felt very bad about that.

01:06:50.820 | As an insurance agent, one of the worst things that can happen for a client is if they buy

01:06:55.740 | anything other than term life insurance, if they buy whole life insurance of any kind

01:06:59.540 | and then the policy lapses, it winds up being very, very expensive in the short term because

01:07:04.500 | there are so many costs at the inception of a contract that if they don't keep the contract,

01:07:09.240 | it winds up going out of force and it's very, very expensive.

01:07:12.500 | So the policy lapsed and I was of course disappointed but what could I do?

01:07:17.060 | Well, a few years later, they reached out to me again.

01:07:20.500 | Things were better at this point and things were better and they were doing better.

01:07:25.840 | Their business was more stable and so they said, "We want to buy insurance again.

01:07:28.980 | We really liked having it but we want to buy it again."

01:07:31.580 | Well, they were excited about buying it.

01:07:33.340 | I was excited about selling it.

01:07:34.820 | So I went and I sold them a whole new suite of life insurance policies, proper good planning

01:07:40.260 | term for mom and dad and whole life for the kids.

01:07:44.060 | I was excited about it and it was great.

01:07:46.260 | Well, unfortunately yet again, they – and I had – by this point, I had a little bit

01:07:51.740 | more experience.

01:07:52.740 | I was a little more cautious but they were demonstrating significant capacity to pay.

01:07:56.660 | Their business was stable.

01:07:57.700 | They were in a good place.

01:08:02.900 | So I sold them policies.

01:08:03.900 | Well, I can't remember exactly what happened at this point but sometime later, they wound

01:08:07.940 | up lapsing those policies again.

01:08:10.380 | I think they made it through so it wasn't as expensive.

01:08:12.740 | They lapsed all the policies and I was disappointed but I didn't worry too much about it.

01:08:16.620 | They had moved out of the area and I just said, "Well, sometimes as an insurance agent

01:08:20.540 | is too, sometimes clients don't talk to you.

01:08:22.500 | They lapse their stuff and they go on.

01:08:23.700 | That's life.

01:08:24.700 | That's business."

01:08:25.700 | Well, unfortunately, I forget the exact timing but a couple of years later, their youngest

01:08:30.140 | son was murdered and it was just a heartbreaking story but their youngest son was murdered.

01:08:37.500 | I was pretty distraught about it.

01:08:40.300 | I don't want to – the word devastated comes to mind.

01:08:42.980 | It's probably a little bit of an overly charged word but I was really disappointed and really

01:08:48.220 | upset.

01:08:50.180 | I went through and I just thought, "Was there anything I could have done to keep that in

01:08:55.700 | force?

01:08:56.700 | Why do you think did I not do my job of keeping the insurance in force for them?"

01:09:00.340 | But it's pretty devastating because I watched then the horror of watching parents deal with

01:09:06.900 | the murder of their young son.

01:09:08.620 | He was six, seven years old.

01:09:12.300 | I wished so much that that insurance contract had been in force because if it had been in

01:09:17.620 | force, it would have been so helpful to mom and dad.

01:09:20.260 | Now thank God their marriage survived.

01:09:23.560 | Very frequently in the death of a child, when a couple experiences the death of a child,

01:09:27.820 | very frequently their marriage does not survive.

01:09:30.460 | Thank God their marriage survived.

01:09:31.740 | They worked through it and thank God they've had another child.

01:09:34.780 | So in the end, tragedy turns to triumph.

01:09:39.620 | But in that circumstance, I saw so clearly what a benefit that life insurance policy

01:09:46.180 | would be.

01:09:47.180 | Now that's an experience I've just shared with you, the emotion of it.

01:09:49.980 | I put that experience up against hundreds of other child life insurance policies that

01:09:54.700 | I sold that the child is fine and chances are it will just be kind of a decent long-term

01:10:00.020 | policy and that's the nature of insurance.

01:10:02.020 | So once you're exposed to that business as an insurance agent, then it starts to affect

01:10:06.380 | your emotions and you start to see how valuable that is and it changed me.

01:10:13.060 | That experience changed me.

01:10:14.060 | Travis, I'll give you the last word before I go on to my final caller.

01:10:16.820 | Travis Thurston: Sure.

01:10:17.820 | No, I appreciate it.

01:10:18.820 | That's all great advice.

01:10:19.820 | You answered what I needed to know.

01:10:21.540 | I really appreciate it.

01:10:22.540 | Marc Thiessen: Well, congratulations to you and your wife on the birth of your child.

01:10:27.580 | I think that's fantastic and I think you'll make good decisions.

01:10:31.820 | Hopefully this was helpful for you.

01:10:33.580 | All right, last caller of the day, Gidish from Tennessee.

01:10:38.500 | Welcome to the show.

01:10:39.500 | How can I serve you today, please?

01:10:40.500 | Gidish Gidish: Thank you, Joshua.

01:10:41.500 | You have been doing tremendous job and I appreciate you doing this for non-patrons of the show.

01:10:46.860 | I have two questions and I'm aware of your views on 529 plan, but I'll do a little bit

01:10:54.260 | of my background.

01:10:55.260 | I currently have, I contribute to maximum possible for both me and my wife, 401 account.

01:11:03.340 | This should be a year we should be able to maximize on Roth as well.

01:11:08.100 | Have a good term and disability insurance in place.

01:11:11.860 | We have two daughters.

01:11:13.540 | One is almost three year old.

01:11:15.380 | One is about nine month old.

01:11:17.160 | And so my goal for next year is start considering about 529.

01:11:21.960 | My education was not in this country.

01:11:24.460 | And so it was very customary for parents to fund college education and I would probably

01:11:29.760 | want to continue to an extent.

01:11:32.340 | I understand this is a different culture and I want them to take ownership of their education.

01:11:38.020 | So I haven't really figured out all the thoughts I would like to do, but I do know that if

01:11:42.580 | I want to fund some portion of it, this is the time to start thinking about it as far

01:11:48.060 | as 529 and time horizon of 15, 20 years or whatnot.

01:11:52.840 | So what would be a good goal to, you know, in terms of amount of money, let's say, you

01:11:59.580 | know, if I'm thinking at least half of their education, I want to help and then the rest

01:12:04.980 | of them, I can either, depending on how they do, they can take a loan out or I can help

01:12:08.980 | with my taxable.

01:12:09.980 | So I know a lot of prediction involved, but what would be a good amount you would consider?

01:12:15.300 | And I have one more question after that.

01:12:18.300 | You said you listened to my shows on 529s?

01:12:20.900 | Yes.

01:12:21.900 | I mean, I'm aware of your thoughts on it that, you know, your retirement should always come

01:12:28.060 | first and that's what I have been focusing on.

01:12:31.340 | And so I believe now that, you know, I'll be able to fully fund whatever the pre-tax

01:12:37.300 | opportunities are as far as my retirement income goes.

01:12:42.140 | So I would like to think about 529 versus taxable, and I know taxable would always have

01:12:48.740 | more flexibility.

01:12:50.940 | And so I kind of feel conflicted here.

01:12:52.300 | You know, I come from a background where parents traditionally fund their children's education

01:12:58.420 | with no obligation whatsoever.

01:12:59.900 | This is kind of a thing that you do, everybody does, but then now I'm in a different country

01:13:04.380 | where I also want them to have skin in the game, so to speak.

01:13:07.980 | You know, at least those are my views right now.

01:13:11.340 | Well you're conflicted and I'm conflicted.

01:13:14.500 | So let me give you my two answers.

01:13:18.220 | If I were a financial planner and you were my client and we were speaking strictly in

01:13:23.180 | a professional context, then the way that I would answer it is everything that you said,

01:13:29.540 | okay, are you on track for retirement?

01:13:31.620 | We would talk through, do you have debt?

01:13:33.420 | Do you have other uses of the money, et cetera?

01:13:35.180 | And you would say to me, no, Joshua, we're in good track.

01:13:37.580 | I'm well employed.

01:13:39.500 | My financials are on track.

01:13:41.540 | Then I would just say, well, what kind of school would you guess would be appropriate

01:13:45.580 | for your daughters?

01:13:47.200 | And you would say, well, the University of Tennessee.

01:13:50.820 | And so I would say, well, what's the current cost of Tennessee?

01:13:53.540 | And you would say, I want to fund it at 50 percent.

01:13:55.300 | We would basically just say, let's do some calculations and put some money in.

01:13:59.380 | That's the only answer in terms of a financial planning answer.

01:14:04.060 | So that's the technical answer.

01:14:05.700 | And basically you just stick some money in and you hope that it works out.

01:14:09.900 | I'm conflicted because I have an ideological block on this particular topic.

01:14:15.940 | And my ideological block is I see that college has changed and is changing.

01:14:24.900 | And I look at my young children and I cannot believe that I would send my children to any

01:14:32.180 | mainstream college with the exception of a hard science approach, something like engineering,

01:14:40.020 | mathematics, chemistry, that type of thing.

01:14:42.940 | That's about the only thing that I would ever send my children to.

01:14:47.460 | Everything else, as far as kind of just the mainstream approach to college, is just such

01:14:52.140 | a waste.

01:14:53.140 | I mean, it's an ideological swamp.

01:14:56.780 | And so the only exception for me is, OK, is there a hard science?

01:15:01.980 | And when I look at that and I look at about all the ways to get college for cheap, I can't

01:15:06.060 | imagine sending my children into kind of the traditional, hey, let's go off to – for

01:15:11.740 | you, maybe the University of Tennessee or let's go off to the University of Florida.

01:15:14.820 | I mean college these days is just such a cesspool that I look at it and I just can't even

01:15:20.460 | – I can't fathom myself ever wanting to encourage my children to wander into that

01:15:28.340 | filth.

01:15:29.340 | And so I have this massive ideological block around the idea of funding college.

01:15:35.620 | And that's what I tried to share in those shows, to say here's the technical answer

01:15:38.460 | to that.

01:15:40.140 | So then the other thing is I look at the pace of change around.

01:15:43.820 | I look at the deep dissatisfaction that my generation has with college.

01:15:48.300 | I look at the data that still indicates that educational attainment has a high correlation

01:15:53.620 | on earning ability, lower unemployment among people who have college degrees, et cetera.

01:15:57.700 | But I look at how fast the market is changing technologically and I look at the impact.

01:16:02.340 | And I'm convinced, especially since you have a three-year-old and a nine-month-old,

01:16:07.020 | I'm convinced that in the next 15 years, the world of education is going to be turned

01:16:11.780 | on its head.

01:16:12.780 | There have been movements happening under things, but these movements are picking up

01:16:21.660 | steam.

01:16:22.660 | And so I think the momentum is there that in 15 years, the college environment is going

01:16:26.980 | to be unrecognizable.

01:16:27.980 | So I have this major – there's your professional answer first and then frankly I have this

01:16:32.500 | ideological block that says I think the whole thing is a worthless waste of time.

01:16:37.540 | Okay.

01:16:38.540 | Okay.

01:16:39.540 | Well, that helps in a way that – I mean, I may – I mean, lately what I have been

01:16:45.260 | – I kind of go back and forth, but lately I have been leaning – yes, I may be missing

01:16:49.500 | out on some tax-free growth, but taxable is what would give me the best flexibility as

01:16:56.220 | far as use of money goes, whether it is unfold need of me, my wife, or my kids, you know,

01:17:03.340 | or whether it would require – if you would have asked me 10 years ago whether I would

01:17:06.500 | move to this country, I would have said no, and I'm here now and I plan to stay here.

01:17:10.980 | And who would know what would happen, you know, by the time they would be off college.

01:17:14.740 | So maybe that is what I would do.

01:17:17.020 | The second question I have, and I know this is probably something that you would point

01:17:22.900 | me in the right direction, but that is what I'm looking for here.

01:17:26.620 | I'm originally from India, and in India there is a big whole life insurance market with

01:17:34.220 | life insurance corporation, which is backed by government of India security, so it's

01:17:37.660 | very solid.

01:17:38.980 | I do have a substantial amount of different type of whole life insurance policy there,

01:17:44.700 | which I do contribute.

01:17:45.700 | I'm on a second year, and up to three years they have no cash values.

01:17:50.540 | My main concerns with those are I'm very – with financial regulation being tightened up, when

01:17:58.180 | I got it, nobody was ever tracking what happens and how it goes, and I was not aware of that.

01:18:05.180 | But with increasing financial scrutiny, and I know how whole life insurance taxable thing

01:18:11.700 | works over here, I need some direction to find out answers about how do I need to report

01:18:18.140 | this if I do need to report whole life insurance policy.

01:18:21.300 | I did look up IRS website and initially said, well, all your foreign account, if it has

01:18:26.260 | a collective of $10,000 or more, including surrender value of your whole life policy

01:18:31.140 | needs to be reported, but I'm not in that territory, but I would be there in a year

01:18:35.860 | or two, and I tried to ask around here in town to see if any particular CPA would have

01:18:42.380 | background dealing with something like this, and I ended up – everybody offers their

01:18:47.540 | service, but they don't necessarily have background or expertise that would make me

01:18:52.580 | feel comfortable with their answer.

01:18:54.900 | So any – I don't know if you are aware or if you have any direction where I can find

01:18:59.740 | the appropriate resource to think what to do with this.

01:19:03.940 | So let me make sure I understand the situation.

01:19:08.060 | You own a whole life insurance contract that is slowly accumulating cash value, and it's

01:19:14.520 | an Indian contract that you purchased while you were in India from an Indian-based life

01:19:19.300 | insurance company.

01:19:21.300 | You've now moved to the United States, and are you a citizen or are you on track to become

01:19:25.940 | a citizen of the US?

01:19:26.940 | Shailesh Kumar The latter part.

01:19:28.580 | Tavish Yehuda Okay.

01:19:29.580 | So you expect to become a citizen of the US, and as a US citizen in time – well, as a

01:19:34.820 | US citizen, you're now going to be subject to the full range of IRS regulation, and because

01:19:41.060 | the IRS requires for US citizens the reporting of foreign-held financial assets, you're

01:19:50.500 | trying to figure out if you need to report the value of your Indian whole life insurance

01:19:55.540 | contract to the IRS on the appropriate forms?

01:19:58.660 | Is that an accurate summary?

01:19:59.980 | Shailesh Kumar Yes.

01:20:01.740 | And also if it would make – the reason I got this whole life policy because there were

01:20:05.260 | a whole lot of taxable benefit if I would have stayed in India.

01:20:09.540 | The incentives were good, tax-free, et cetera, et cetera.

01:20:13.380 | But I don't know if me staying in US, whether my whole life policy would be treated from

01:20:18.980 | India would be treated in the same way as if those whole life policy would be one that

01:20:25.060 | I obtained in US.

01:20:26.340 | And so I also want to see that at some point would it make sense to just surrender it for

01:20:32.300 | simplification, and then maybe it would not be treated in a tax-advantaged fashion in

01:20:38.340 | US, and actually I would be better off investing that money.

01:20:43.060 | Anyway, I do make a sizable contribution every year on those, so.

01:20:46.500 | Trevor Burrus: Right.

01:20:48.060 | What an interesting question.

01:20:55.540 | So do you have other accounts in India or other aspects of your financial life that

01:21:01.160 | continues to be in India?

01:21:02.380 | Shailesh Kumar Yes.

01:21:03.380 | Well, I do have an RE account which I had to open essentially to fund this policy.

01:21:10.680 | But that's pretty much it.

01:21:12.300 | Trevor Burrus: And you intend to be in the United States, the best you can discern your

01:21:17.060 | intention now is to be a long-term resident of the United States?

01:21:20.620 | Shailesh Kumar Correct.

01:21:22.620 | Trevor Burrus: Okay.

01:21:24.620 | Well, do you continue to believe that this life insurance policy that you own is a good

01:21:31.020 | and valuable asset for you?

01:21:33.080 | Or at this point, do you look at it and say, "Well, not really"?

01:21:36.100 | Shailesh Kumar I think it's a good and valuable asset.

01:21:41.020 | But a huge unknown is how the earnings on it will be treated when it would start paying

01:21:48.300 | off.

01:21:49.500 | And that's a huge uncertainty.

01:21:50.940 | You know, if it would be treated in a way that whole life policy earning would be, then

01:21:55.740 | it absolutely does make sense to me.

01:21:58.220 | If it doesn't, and it would just put me up on the radar for IRS audit, then it probably

01:22:03.300 | does not.

01:22:05.940 | So that's the unknown for me, like how this policy would – earning from the policy would

01:22:12.180 | be treated here in the United States.

01:22:15.380 | Marc Thiessen So here's the best consideration that I can

01:22:19.980 | give you.

01:22:20.980 | It is an interesting and complicated question, but here's the best analysis that I could

01:22:24.120 | give you.

01:22:25.120 | I would start with the question of, is this a valuable asset?

01:22:30.740 | Because there's no point in your – if you have an asset that stinks and it's just

01:22:36.220 | a piece of junk, you made a bad investment, then under that context, you cut your losses

01:22:42.260 | and sell it and move on and find something better to do with the money.

01:22:46.420 | If it's a valuable asset though, then you want to – then there's no reason to rock

01:22:53.020 | the boat.

01:22:54.180 | So my first question, is this a valuable asset?

01:22:58.980 | And part of that kind of a corollary is, is this a valuable asset given my changing tax

01:23:05.820 | situation?

01:23:06.820 | And that's kind of probably the key thing because you purchased it planning to be governed

01:23:11.860 | by Indian tax law, but now you're governed by US-American tax law.

01:23:16.100 | And so the attributes of that may – have changed.

01:23:20.500 | You're subject to a different system, so the attributes of that have changed.

01:23:24.080 | So I would ask that question and that may be useful to you to analyze.

01:23:28.640 | Let's say that for sake of just numbers that are inaccurate but useful to the conversation.

01:23:34.120 | Let's say you were previously looking at it and saying, "I was going to get what

01:23:38.620 | would be the equivalent of a 10 percent annual rate of return on my asset."

01:23:41.840 | That would be great.

01:23:43.340 | But that was a 10 percent effective return net of taxes because of the tax value of the

01:23:49.760 | contract.

01:23:50.760 | But now I'm actually getting a zero percent rate of return.

01:23:52.960 | Well, in that context, dump the investment and move on to something else where you can

01:23:57.560 | at least get a better return.

01:23:59.480 | And so that tax consideration will be substantial.

01:24:02.780 | With regard to the IRS, I'm not scared of foreign reporting requirements.

01:24:08.240 | I think I hate them.

01:24:10.100 | In terms of ideologically, I hate them.

01:24:12.200 | I don't see what business the IRS has with you and your money.

01:24:16.080 | But I am in the minority and I'm just basically a clanging gong in the street.

01:24:21.220 | For some reason, the US voting base thinks that the IRS is God and deserves to know about

01:24:26.920 | every minute detail of your financial life.

01:24:29.360 | So I hate it but I'm not scared of it.

01:24:32.360 | The reality is that there are these requirements that if you hold foreign assets, you are required

01:24:37.720 | to report them.

01:24:38.960 | But I haven't heard any evidence or any even allegations.

01:24:43.000 | Maybe they're out there.

01:24:44.000 | I haven't looked.

01:24:45.000 | But I haven't heard any evidence or allegation that holding foreign assets would be a risk.

01:24:49.440 | And I recommend to people frequently that they internationally diversify their assets.

01:24:54.560 | I think it's a good idea.

01:24:56.160 | I get uncomfortable with the idea of having all of my assets in one country.

01:25:01.960 | And now we have to be practical about this.

01:25:05.480 | There's no reason for somebody who is just getting started and has no money to worry

01:25:09.580 | about opening a Swiss bank account.

01:25:11.960 | But as your wealth grows and as your assets grow, I think it's imprudent to keep all of

01:25:18.360 | your assets under one particular country, under one particular tax entity.

01:25:24.120 | Now I think there's an appropriate and prudent way to engage in international diversification.

01:25:29.240 | And unfortunately for US citizens, the price of entry is to file your FBAR forms, your

01:25:36.200 | report of foreign bank and financial accounts, your FBAR forms every year with what you have.

01:25:40.880 | So I'm not scared of filing it and I wouldn't dump the policy just because I now have to

01:25:44.960 | file the FBAR form.

01:25:46.960 | I would actually look at your having assets in India as a useful part of your overall

01:25:53.080 | financial life.

01:25:54.440 | The most natural way for you to diversify your holdings internationally is to invest

01:26:01.400 | and keep assets in a financial system that you know where you have contacts.

01:26:06.880 | I would guess you have family, friends, et cetera.

01:26:09.380 | And so for you, the most natural way for you to have that international diversification

01:26:13.240 | would still be to maintain a simple but not insubstantial financial life in India even

01:26:19.320 | though you're planning to be a long-term resident of the United States.

01:26:22.080 | >>Corey: Okay.

01:26:23.080 | Very good.

01:26:24.080 | And so for that second question, how change in the – or current change in the tax situation

01:26:31.240 | affects what effective rate of return would be, who can – I have tried to call IRS helpline.

01:26:40.080 | I reached out to the agent I have in India, but both of them have very limited knowledge

01:26:44.840 | about what is pertinent in their part of world without the other part of world.

01:26:49.560 | And so I want somebody who can take – who has an interest and can come up with solid

01:26:57.320 | advice on this is what your policy looks like, this is the current tax system looks like,

01:27:02.760 | and this is what it means when we connect two dots.

01:27:05.360 | Where do I start?

01:27:06.360 | Because local – one or two local CPAs I reached out to, of course, they are willing

01:27:12.520 | to provide services, but when I ask them, "Have you done," not necessarily for somebody

01:27:17.400 | living in India, but this type of work before, they were not able to give me any reference

01:27:22.360 | or so forth.

01:27:23.360 | So I don't know whom can I ask that question or what type of resources I can reach out

01:27:29.760 | so that I can answer that question for myself.

01:27:31.800 | >>Steve: I doubt the person exists.

01:27:34.400 | If they did exist, the only place I could imagine them existing would be somebody who

01:27:39.460 | is servicing the mega wealthy Indian American community, and I mean mega wealthy.

01:27:46.600 | There may be somebody who has established a boutique accounting and financial advice

01:27:53.320 | practice and they work with the mega wealthy.

01:27:57.440 | But in terms of just a rank and file person, I doubt they exist.

01:28:01.480 | And so frankly, you're going to be the best person to do it.

01:28:04.160 | Here's how I would approach it.

01:28:05.800 | Don't be scared of the government officials.

01:28:10.040 | Don't be scared of the IRS.

01:28:11.920 | The IRS – if you call the IRS, they're not going to have a clue about the answer

01:28:17.000 | and they're especially not going to have a clue about the answer of anybody that's

01:28:20.520 | going to be sitting on a phone bank.

01:28:22.420 | There may be some highly advanced person in the IRS organization, but nobody sitting on

01:28:30.560 | a phone bank is going to be able to help you and your local revenue agent is not going

01:28:33.800 | to be – they're going to be nice about it, but they just don't know.

01:28:37.160 | That's a very specialized question.

01:28:39.320 | What I would do if I were you, do your best to read around as you've done and then just

01:28:43.400 | ask yourself the question, "OK, based upon my reading of this, as a reasonable person

01:28:49.160 | who is desiring to comply with the law as I understand it to be, what do I think is

01:28:54.200 | the answer?"

01:28:55.620 | And whatever you need to do, go with that because here's practically the situation.

01:28:59.280 | The IRS is going to have no knowledge of your assets in India with the exception of what

01:29:05.400 | you actually file with them in the forms.

01:29:08.660 | There is no international tracking of every dollar and so they're going to have no knowledge

01:29:14.520 | of your assets except for what you file with them.

01:29:17.720 | The workings of a life insurance contract especially are opaque to the banking industry.

01:29:22.960 | It's unlike a retirement account.

01:29:25.920 | For example, the assets that you have in a retirement account are sent off to the IRS

01:29:29.600 | every year.

01:29:30.600 | But a life insurance contract doesn't have that connection and my guess is that the life

01:29:34.120 | insurance contract doesn't have that connection in India.

01:29:36.960 | So this is an asset that is opaque to the government authorities until or unless something

01:29:42.740 | is done.

01:29:43.740 | In the United States, whole life insurance contracts, growth and the value is not reported.

01:29:47.680 | It's not reportable in any way.

01:29:49.280 | That's one of the benefits of a whole life insurance contract.

01:29:52.060 | So I think the only burden or responsibility that's on you is to say as a prudent person,

01:29:59.340 | what's my best guess at this?

01:30:00.860 | What's my best approach?

01:30:01.860 | Chances are you'll never have any interaction with the IRS.

01:30:05.540 | The audit rate for people with the IRS is minute.

01:30:09.500 | I think if memory is right, it's under 1% of returns I think that are ever audited.

01:30:14.460 | Most of those audits, if my memory is right, are kind of automated letters back and forth.

01:30:20.360 | You'll never sit down with a revenue agent who has any knowledge of Indian tax law.

01:30:27.900 | And it's just – it's inconceivable.

01:30:30.540 | Now if you are some kind of magical criminal underlord – or sorry, overlord and you've

01:30:37.460 | earned $4 billion in rupees last year and now you're trying to figure out, "Well,

01:30:41.660 | how do I hide the money?"

01:30:42.660 | Well, now you might wind up in tax court and have to do it.

01:30:45.020 | But I think you're giving the IRS and the Indian version of the IRS far more credit.

01:30:52.360 | This is going to be irrelevant for you.

01:30:54.340 | Just do your best as a prudent, honest person so you can sit before the revenue agent and

01:30:58.180 | you can say, "Here's what I'm doing.

01:30:59.700 | I'm reporting it on these forms as you specified here.

01:31:02.980 | Here are the situation."

01:31:05.920 | And I think that's the best that they can expect.

01:31:08.140 | I mean you didn't set out to create these complicated laws.

01:31:11.820 | They did.

01:31:12.820 | But I think the best that anybody can expect is for you to do your best honestly, uprightly,

01:31:17.900 | to read the law and do your best to follow it.

01:31:21.020 | Everything beyond that is not worth worrying about.

01:31:24.220 | Okay.

01:31:25.220 | All right.

01:31:26.220 | Well, that helps.

01:31:27.220 | I will keep you posted on that.

01:31:29.860 | Thank you.

01:31:30.860 | It is an interesting question and I have found a number of those interesting kind of expatriate

01:31:36.580 | solutions.

01:31:38.300 | There is a business opportunity.

01:31:40.380 | I'm convinced, a business opportunity especially in the current world where it's much easier

01:31:45.860 | to target your listeners.

01:31:48.100 | But if you have an interest in accounting or an interest in financial advice and if

01:31:51.500 | you have an ethnic background or an experience, if you're an Indian-American or American-Indian,

01:31:59.900 | whichever way, if you have this connection and cross-border knowledge, you can become

01:32:07.380 | an expert in both and you can do a ton of business with people who cross that line.

01:32:12.740 | And remember, for most of these kinds of practices, you don't need that many customers.

01:32:17.420 | But many people who are expatriates from another country maintain a financial life in both.

01:32:22.580 | I remember a professor of mine in college was from one of the small countries in Africa,

01:32:28.660 | I forget which one, but he didn't invest in the United States.

01:32:31.700 | He worked in the United States but all of his investments were at home.

01:32:34.940 | He built out computer internet cafes and he had his friends and his family run them.

01:32:39.700 | But he made great returns on his money but it was all invested back home.

01:32:43.500 | And whether it's Canadian and US citizens who are living in the United States or in

01:32:48.860 | Canada and crossing the border and all of that, that's obviously a huge market.

01:32:53.020 | Or if it's Rwandan, people from Rwanda and the United States, you can target these tiny

01:32:59.840 | little kind of expatriate communities very effectively with the internet.

01:33:04.420 | And there are a lot of people like Girish who would have these kinds of questions that

01:33:08.940 | you could serve effectively.

01:33:09.940 | So, there's a business idea for you if you're into that.

01:33:12.380 | I think that's a pretty cool little option.

01:33:14.980 | And if you're into travel, especially if you're part of that community, if you are Indian

01:33:18.340 | American, then I think you have a really powerful way where you can set up an identity, a business

01:33:24.140 | identity in both countries and you have an entirely plausible business to run that involves

01:33:31.460 | you going back and forth, seeing your family in your home country and also in your country

01:33:36.820 | of residence.

01:33:37.820 | You have a really efficient way that you could set that up.

01:33:41.140 | So anyway, that's one idea, one thing I've thought of, one of my backup plans.

01:33:44.380 | I share it with you.

01:33:45.380 | I have a boring ethnic history so I'm just a boring old US American.

01:33:50.420 | But you never know.

01:33:51.420 | Maybe I'll move to India someday.

01:33:53.540 | I'll be back with you all soon.

01:33:58.180 | This show is part of the Radical Life Media network of podcasts and resources.

01:34:03.780 | Find out more at RadicalLifeMedia.com.

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