Possible to Double Your Retirement Income?

How To Spend Your Principle, Save a Fortune on Taxes, Increase Your Cash Flow… and Never Run Out of Money!

stocks, bonds and mutual funds. They had scrimped and saved, planned and prepared, trying to avoid their greatest fear: having life left, but no money.

Now, they were at that point in their lives where they should be able to relax and start living off the fruits of their previous hard work, but some of that fear remained. What if it wasn’t enough? Would they have any options? What if they encountered unexpected health issues, or one of them required long-term care?

It was important to John and Carol to know that they would have enough for the high quality health care they desired. It was also important to them to have financial flexibility to support their alma mater and help with special expenses for their grand-children, but now Carol wondered if they could afford to help as they had in the past.

To be honest, they had been avoiding this conversation. But today, John seemed eager, even optimistic to discuss their finances. Two nights before, John had attended a seminar where he had learned about an intriguing new financial concepts and strategies for seniors. The ideas presented had reassured him in regards to the questions that had seemed so daunting just a week before.

As they sat across from each other at the dining room table, John asked Carol to listen to the ideas shared with an open mind. With retirement already begun, and so many unpredictable future expenses, Carol admitted that she knew their lifestyle was about to change drastically. And although she wasn’t entirely confident in the plan they had implemented, she didn’t know what else they could or should be doing.

Their plan had seemed solid when they implemented it 20 years ago, but inflation and changes in the tax laws had resulted in a lower bottom line. Just when they thought they would be able to live a carefree life, they were going to have to tighten their belts. Not only would they need to watch their spending, but there seemed to be no real safety net for the unknowns.

It disappointed Carol that all their saving couldn’t guarantee they would have “enough.” She was disappointed, but she also wasn’t ready to throw the baby out with the bathwater and go against all of their previous advice: “Spend interest only and maintain the principle bulk of the asset, and you’ll never run out of money.”

Protecting their principle seemed prudent and made sense to her, but it didn’t leave much room for error or emergencies. And once they started spending principle, then it could all go downhill very quickly, because they’d have less interest to live on.

Apparently, according to the seminar John had just attended, the “never spend your principle” advice had some pretty serious holes in it. One problem they had already discovered: with inflation and changing tax laws, living on interest alone might mean a much leaner existence than 20 years ago. The national debt, income taxes, the cost of living and the gaps in Medicare all seemed to be on rise, regardless of how they voted.

Also, they realized that by leaving the bulk of their assets unspent, they were allowing the brokerage firms full use of their hard-earned money, cost-free and risk-free! John wondered… could they make better use of their assets and increase their financial stability by keeping their money under their own control?

And finally, while that principle remained unspent, they paid income tax year after year on the interest-only income they scrimped to get by on. Like some kind of recurring bad dream, they kept paying the same taxes again and again, year after year.

Carol could certainly see the holes in their plan, but wondered, did they have any real alternatives? It scared her to think of changing course when they had relied on this plan for so long. Besides, so many of their friends seemed to be following the same script… could all of those people be wrong?

According to John, they might be very wrong! One of the first steps this new strategy recommended was to purchase a whole life insurance policy for both of them. This would increase the value of their estate in the short term, as well as create increased cash flow for them down the line, John explained.

Carol was really not sure about this, after all, they were 68 and 70! Their term policies had long expired, and she just couldn’t see the sense in life insurance at their age. Not only would they have to come up with the money to fund the policies (and she didn’t know where THAT would come from, since they were already tightening their budget), but she also didn’t see how life insurance policies would do anything for THEM while they were still alive!

Carol admitted that the life insurance would benefit their kids when they were gone; perhaps the two life insurance policies would even allow them to fund their great-grand-children’s college education, or benefit their favorite charities. But how could the policies help them resolve their own money worries now?

John had learned that purchasing two life insurance policies could actually help their current financial situation by doing three things. The new strategy would:

1. Reduce the taxes they were paying to the government,
2. Increase their income stream without compromising the value of their estate, and
3. Eliminate the principle the brokerage houses were allowed to use and shift the assets to their own control.

This sounded just a little too good to be true! Carol wanted to believe it, and felt herself getting excited at the thought of fewer taxes and more cash flow, but how would it work? Carol wanted to know exactly how two life insurance policies could accomplish all that!

John explained…they would be able to reduce the taxes they were paying to the government by by intentionally spending down the principle on their assets (stocks, bonds, savings accounts, CDs, etc.). By spending their principle, they would increase their income stream in three ways:

1. They would increase cash flow by allowing themselves to spend principle in addition to the interest each month.
2. By spending down their principle, their taxes would diminish each year, and many of those dollars would stay in their own pockets.
3. A new, more efficient income stream would be created by shifting assets from securities into permanent life insurance. Income taxes would be lowered while dollars would provide savings and cash flow, as well as a death benefit.

By shifting these assets into a cash value account where the growth would be safe from taxes or government intervention, they would keep the balance of power in their families’ corner. After all, it was their money, so why let the brokerage house control it? In this new account, the money could even be easily borrowed against in case of emergencies or major purchases, even while those dollars continued to grow and earn dividends.

John explained that the purchase of the two life insurance policies was like purchasing a “permission slip” to go against the typical financial advice they kept hearing. This strategy would allow them to able to finally spend their principle – as well as the interest they had earned over the years! After all, why should they work so hard and save so much, only to benefit the government, while they themselves remained afraid to touch their own dollars?

What if they could have their cake and eat it, too?

Yes, they would have to use some of their assets to purchase and maintain the premiums on these two life insurance policies. It wasn’t going to be cheap, but in the end, the cash value created and the death benefit would outweigh the costs of the policies.

This all sounded good, but the concept was so… different from the typical advice they had heard. Carol wanted to see some proof that the numbers really worked out. John had the proof ready. He showed her a chart that really brought home the point about how the government drained the asset through taxation when they withdrew only the interest:

Figure 1

Based on the example on the left, which represents what would happen when couples like themselves leave the bulk of their assets with the brokerage houses, Carol saw that over the course of 20 years, they would pay over 1 million dollars in taxes! They would pay a whopping $1,071,515 on their money – just for having saved so diligently!

However, in the example on the right, which represents what happens should they spend down their principle more quickly, they would pay only $239,428  over the course of 20 years – a difference of $760,000! The taxes would decrease partially because the principle would earn less interest as they spent it down, but some of those taxes – a whopping $276,441, would go right into their pocket!

Most importantly, this strategy would also give them $120,000 more per year in spendable income, all because they decided to claim the use of their own money rather than allowing the brokerage houses to keep it.

But then, as Carol’s initial excitement calmed, she scrolled down to the bottom of the right column, and saw all those numbers in red ($73,212). She also noticed that to the right of the dividing line between the two examples, the happy couple’s account value had dropped to zero.

Granted, it had taken 16 years to do so, with less tax money and more spendable income in the meanwhile, but still — Carol planned on living past 86, so what then? Not only were living expenses bound to be much higher in 18 years, but she imagined she and John might also be more prone to maladies at that point in their lives. How would they live if they were out of money?

This is when John pulled out the second chart, showing where the two proposed life insurance policies would kick in and create a new income stream: 

Figure 2a

(Part 2 of the chart – the next 20 years):

Figure 2b

Now Carol saw that the new plan didn’t leave her penniless at 86 at all. As a matter of fact, it increased their cash flow $10,000 per year, giving them up to $400,000 more in spendable income!

Not only that, but in the early years of the strategy, it increased the size of their estate considerably, as much as a million dollars. Carol felt re-assured that as assets were spent down, an additional layer of financial security was built into their personal economy.

Additionally, as John explained, they would use the bulk of the increased Gross Withdrawal on the purchase and maintenance of the two life insurance policies, which added extra value to their assets as well as enabled them to spend an extra $10k per year. And despite the increases to their estate value and cash flow, they still would spend almost $600,000 less on taxes than their original plan of living on interest only.

Carol also noted that by the end of the 20 years shown on the chart, their Estate Value would still have a balance of $2.5 million, which is what they started with in the previous plan. Yet they would have not only the additional $10,000 to spend each year, they would also now have the use of these two life insurance policies. These policies included not only a death benefit, but cash value that could be used or easily borrowed against.

Carol started to breathe a little easier…maybe their future wasn’t destined for financial uncertainty after all.

Carol saw why John said that purchasing the two policies gave them “permission to spend” down the principle of their assets. The permanent insurance was the buffer that picked up where the assets left off. Their Net Spendable would have increased by hundreds of thousands of dollars, even though their assets would have been reduced to zero. 

It seemed they really could have their cake and eat it too! This new strategy allowed them to maintain their net worth — and spend their principle. It would allow them to not only cover their living expenses, but also have a contingency plan for healthcare expenses, increased taxes, etc., AND leave something for their kids, their grandkids, and their favorite organizations. This could be their legacy.

There was one part of the chart that confused her, though… and that was the lack of mathematical accuracy that occurred at age 85. Carol noticed that their Gross Withdrawal dropped drastically to $31,000, yet somehow, the chart still showed their “Net Spendable” at $83,000 – just as it had been.

Pointing her finger at the spot on the chart that showed this, Carol asked John, “How does that work?”

John actually looked rather proud of himself as he pulled out yet another chart:

Figure 3

John pointed to the top of the column that was labeled “PLI Cash Flow” (Permanent Life Insurance cash flow) and explained that, if you were to overlay this chart onto the previous one, you would see that for the first 10 years after purchasing the life insurance policies, the couple would need to nurture the policies’ growth with $110,000 a year (which would be funded through the spending down of their original assets).

Then, at age 85, when the previous chart showed that dramatic decrease in Gross Withdrawal from $91,000 to $31,000, the policies’ cash value would be healthy enough to start adding $60,000 to their Net Spendable.

In other words, the policy that they had paid into in their 70’s would start paying THEM in their 80’s!

This got Carol excited, because she was really starting to understand just how much of a “permission slip” these two life insurance policies would be! But then, it dawned on her… would that $60,000 per year be taxed as income? To this, John replied with a smile, “No, that is net after taxes.”

Carol did notice that both the “Cash Value” and the “Death Benefit” were gradually  decreasing with every $60,000 withdrawal from their life insurance policies. Carol questioned John about this, wondering if she should be concerned.

John happily showed her the last chart, which carried out the same calculations as above for 15 more years. This assured Carol that even if they lived to be 109 years old, their life insurance policies, which would have supplemented their income for 25 years, would still have over $1.2 million in Cash Value and Death Benefit:

Figure 4

Carol was reassured. It had taken a lot longer than their usual breakfast chats, but by the time lunch was rolling around, she was starting to get her feet under the idea of paying down their assets and purchasing life insurance policies.

Then John pulled out yet another pamphlet from a company called “One Reverse Mortgage.” He explained that in case the worst should happen… higher taxes, runaway inflation, health setbacks, etc., they had still another option they could take advantage of in their mid-80’s for an additional monthly income: a Reverse Mortgage.

Carol had heard about Reverse Mortgages, but they had always intended to leave their home to their kids as part of their estate. She questioned, “John, isn’t that wrong somehow? I mean, it just doesn’t seem right to sell our house back to the bank, piece by piece, leaving us and the kids with nothing to show for all those years when we scrimped and saved just to pay the mortgage each month!”

John explained how the cushion of the life insurance policies made this a more viable contingency option. “Think about it this way, Carol,” he said. “By using the Reverse Mortgage concept, the kids will be absolved of the responsibility of trying to come to some kind of agreement about what to do with the house once we’ve passed. They can just leave it in the bank’s hands! No one has to fly back here to come up with agreements or debate who gets to live in it; they can allow to bank to take care of it.”

“It really is the kinder thing to do to the kids,” John continued. “They’ll have enough on their plates, both financially and emotionally when we pass. If they do decide to keep the house, then they can use the policies’ Death Benefit to do so. Otherwise, they let the bank keep the house, and use the life insurance monies for something else!”

Carol had never thought about this before, but she realized that they had never even talked with their kids about the house, or considered that there might be easier solutions than leaving the house for them to deal with. John also assured her that it was just one possibility – an option for increasing cash flow further if needed.

John also shared with Carol that, likewise, the two death benefits in the permanent policies would remain assets that can be sold if that was ever deemed necessary. As he explained, “A life insurance contract is sort of like a real estate deed – it represents an asset of concrete value that can actually be sold, if desired.”

Assuring Carol he wasn’t actually suggesting that they would sell their policy benefits, John got back to one of the big concepts he learned at the seminar that did apply to them.

“The core idea is this — if we completely exhaust one asset, before moving on to another, then we can reduce our taxes and increase our income. What most people do instead is this: they take a little bit here and there from the variety of assets they own, but meanwhile, they don’t really control their own assets. They try to “live off the interest,” and as a result, they remain subject to taxes from the government, not to mention continuing brokerage house fees, as well.”

Now Carol’s eyes got big as she had one of those “Aha” moments. “Wait a minute!” she exclaimed. “I’ve trying to think of how to financially ‘prepare for the worst,’ so to speak. But I’m realizing that with the benefits of these new strategies, we don’t have to wait for some big family emergency to liquidate an asset, get a reverse mortgage, or take a loan against our cash value.”

Carol continued excitedly, “Your 70th birthday party at your daughter’s house was a blast… but could you imagine doing your 80th birthday celebration in Maui and bringing the whole family — grandkids and all!? Or taking them on a European cruise to celebrate your 90th birthday? Maybe there’s something to be said for spending some of our assets while we are alive in a way that allows us to see them enjoy it!”

“That would be amazing!” said John. “But only on one condition… I refuse to wear one of those t-shirts that say, ‘I’m Spending my Grandchildren’s Inheritance’! Of course, I’d be spending it WITH my grandchildren, and I can’t think of anything better.”

Carol agreed to the no-cheesy-t-shirt stipulation, as long as they could discuss together how to let some of the extra cash flow from these strategies benefit the whole family.

“You know,” Carol added, “maybe we’ve been engaging in too much scarcity thinking with this ‘never spend the principle’ rule. After all, we’ve worked hard and saved well, and you’re right – if we use the right strategies with the right mindset, we have more than enough to enjoy, be ready for the unexpected, and still leave a legacy!”

John was pleased that Carol was on board with exploring these new concepts, and that she saw new possibilities in using permanent life insurance as a “permission slip” to change their financial strategy and actually be able to spend the money they had saved. By combining strategies that reduce taxes and give them additional income as well as multiple “safety nets,” they could enjoy additional financial strength as well as reassurance.

Carol confessed, “John, I’ve been so worried about money, but for the first time today, I feel better, like we really do have breathing room and lots of options, even when unexpected expenses come our way. But I’m also a bit over-whelmed, to be honest. It sounds like there are just so many variables, that there is no way a seminar or book could accurately advise any one of us on our specific situation.”

John agreed. “You’re so right, Carol, we need personal advice for our specific situation.” And he knew just who to call – the advisor who had originally told him about Macro Economics strategies.

“Macro -Economics?” asked Carol.

As John explained, Macro-Economics was a term he had heard at the seminar that described an alternative to “typical” financial planning.

“Before the rise of the financial planning industry, mutual funds, and 401(k)s, many wealthy people practiced Macro-Economics, although no one called it that yet!

“”I’m so on board with that!” said Carol.”Should we call that advisor now?”

“As soon as we have lunch,” John said. “I’m starving!”

_____________________________________________________________________________

And finally, please remember… all characters represented here are truly fictional. For information directly related to your financial situation, talk to your Macro Economics Advisor.

www.wealth-coach.net