Today, we are continuing our tale of the two twin Grandchildren: Michael & Matthew. We follow two similar grandchildren as they make different financial decisions and see how it turns out for them.
If you missed part one, click the link below to go straight there and get up to speed:
Click here to listen to part one of our tale about two Grandchildren
Right now, in 2020, they are both turning 34. So how did their financial strategies play out in their 40’s, 50’s, 60s and beyond? Well, let’s time travel and jump into today’s show to see what happens.
Here Are The Show Highlights:
– An old stock investing strategy for retiring rich and why it can be so hard to implement ([3:15])
– The future of college education and investing for your future generation grandchildren ([12:30])
– How to teach your kids financial responsibility ([13:10])
– The fate of the Wall Street stock and what guarantees really exist in Matthew’s plan ([16:00])
Remember to download Grandma’s Top Tips by dropping into grandmaswealthwisdom.com/toptips. Time-honored wealth strategies served with a helping of balance and trust.
If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting https://www.grandmaswealthwisdom.com/call…just like Grandma would want us to do.
A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts, Brandon and Amanda Neely. This is the only podcast for strategies to grow your wealth simply and sustainably like grandma used to. Without further ado here are your hosts.
Amanda: Hi, I'm Amanda, and welcome to Grandma's Wealth Wisdom where we work with you to build wealth Grandma would be proud of.
Brandon: And I'm Brandon. Today we're going to be continuing a tale of two grandchildren, but before we jump into that, we want to read another 5-star review. The review comes from CJ Johnson, and it says, "Brandon and his wife, Amanda, are refreshing in every way and light years ahead of most in understanding the fundamentals of good money management. [0:01:01.8] I love the title of their new brand, and we can all find a higher purpose, community, and impact of generations in all of their daily lives if we're intentional in doing it."
Amanda: So thanks, CJ Johnson for your review, and for the rest of you…
Brandon: I want to say something about this. He says that we're light years ahead of most in understanding the fundamentals; however, we're going backwards in looking at our grandparents so maybe we’re light years behind.
Amanda: But maybe that's a good thing…
Brandon: Maybe that's a good thing.
Amanda: Okay, well, what I was going to say is that as you may have heard, ratings, reviews, and subscribers are super important. They not only help us know that we're making an impact through the podcast, but also they help the podcast reach more people. We decided that we're not beyond bribing you. Here's the deal: If you write us an honest 5-star review, we'll share it on the podcast. [0:02:01.8] Plus, if you take a picture of your review and sent that screen shot to firstname.lastname@example.org, we'll send you a copy of the best-selling book by Pamela Yellen, The Bank on Yourself Revolution for free. As long as you're in the U.S., we will send you a copy in the mail or the Kindle version, your choice. So write an honest 5-star review and then send a screen shot of that review to email@example.com, and then you'll get the book for free.
Brandon: Okay, now, on to the story. This is why you joined the podcast is to listen to the story, not for the reviews and stuff, even though that's helpful, on to the story: A tale of two grandchildren, part II. We left at a cliffhanger last time. If you haven't listened to part I, go back and listen, and if it's been a while, here's a refresher.
Amanda: The grandchildren in the story are Michael and Matthew. Matthew is following the conventional wisdom followed by the majority of Americans since 1980, whereas Michael is following his Grandma Margaret's advice and doing things a lot differently. [0:03:09.4]
Brandon: We told the story up until 2019, and at the end of the story, Michael, and Matthew's financial situation is very different. Matthew is maxing out his 401K and saving for his kids' college in a 529 plan. When the stuff of life happens, he has to go into debt with those car loans and a credit card in order to cover the cost of his family's needs. He has to use those things. Their budget is maxed out, and things are stressful especially at the end of the month. Michael, on the other hand, is just putting 3% into his 401K so that he can get his employer match. His other savings for retirement, his kids' college and so forth, is going to the same place his grandma's savings went: high, cash-value dividend-paying whole life insurance. [0:04:06.4]
Amanda: And then the stuff of life happens to Michael, just as it does to Matthew, but Michael is able to use his life insurance policies to cover the cost using super low interest policy loans. He purchases two cars and he covers roof repairs. He is able to set his own repayment amounts on those loans as well so that those repayment amounts fit within his monthly budget. Michael's financial life is pretty boring. There is no stress. The biggest hiccup is when he looks at his 401K balance, and he sees it go up and down on a whim, but thankfully, Michael isn't counting on that money for his retirement.
Brandon: What happens to Matthew and Michael, from their 30s on? Right now, in 2019, they're both turning 34. How do their financial strategies play out in the 40s, 50s, 60s, 70s, and beyond? [0:05:03.5] Let's time travel and see what happens. Do we have any time travel music?
Amanda: Doodle-a-doo, doodle-a-doo, doodle-a-doo, doodle-a-doo…
Amanda: If that's… Is that good? Okay? So time traveling into the future, Matthew has been working hard to keep up with is plan. He continues to get mediocre pay increases throughout his 30s and 40s, even though he is producing a lot of money for his company, more of that productivity continues to go to the top senior executives rather to him and his peers. The salary increases are minimal. Yet, Matthew continues to put all he can into his 401K and 529 plans to cover the long-term costs of retirement and college.
Brandon: The total going into his 401K and 529 plans ends up being about 5% of his income.
Amanda: Right. And when Matthew is 48, his first kid starts college. It is 2033, and the cost of college has continued to soar. [0:06:03.7] His 529 plans though did not get their returns that he was promised when he set them up. He had to use the equity in his home to take out both a home equity line of credit, a HELOC, and Parent PLUS loans to help his kids go to college.
Brandon: And the kids still had to take out more loans on top of Matthew's HELOC and Parent PLUS loans in order to complete their degrees.
Amanda: When Matthew gets to his late-50s, all his kids are done with college, on their own. Now Matthew starts to take a serious look at what's left for retirement.
Brandon: His term life insurance is going to expire in his early 60s. Yet, he is still going to have that line of credit on the house, and the Parent PLUS loans that both went towards helping his kids go to college. He still has credit card debt because life just keeps happening. There always seems to be another repair, another kid needing braces, or larger holiday spending than anticipated, and by the time he pays off one car loan, they need another car, and he has to take out another loan to get it. [0:07:12.3] He has even had to take a loan from his 401K to cover a major medical expense not covered by his health insurance.
Amanda: Remember, Matthew's plan was to be completely out of debt by the time his term life insurance expired so that he could "self-insurance," and we'll have to do another episode on the whole idea of self-insuring and why that may or may not be a good idea, but that was Matthew's plan.
Brandon: Things would have been different if he was able to buy low and sell high, but he never seemed to be able to see a market crash coming in order to get out before or have cash to buy while it was low.
Amanda: Yeah, so, Matthew's average rate of return on his 401K is 3.98%, and that's the average everyone is saying. Matthew is not unique in this, and that 3.98% is before taking into account fees and taxes. [0:08:12.5] At this point, Matthew is just hoping to get out what he has put in and what his employer put in as well.
Brandon: I mean, he thought of draining his 401K and paying off his debts, but taxes are a lot higher than they were during the golden years of the 2016 tax law that expired in 2025. If he uses the 401K to pay off his debts, he would take a huge tax hit.
Amanda: Plus, he is still hoping for another roaring-20 like the years between 1980 and 2000 when the stock market saw huge growth, he is hoping for another 20 years just like that to give him the gains that he has been told would be there for him at some point.
Brandon: He's approaching 60 years old with a whopping 250K in his 401K and over $100,000 in debt, and he meets with his financial advisor to strategize when he'll be able to retire and how much he'll be able to use each year from his 401K, and right now, it looks like he'll be able to retire at 65 and have less than $1000 per month in retirement income from his 401K. [0:09:30.5]
Amanda: Less than $1000 per month? That's not as much as he thought he would have doing everything right like you've done.
Brandon: And he can work longer and potentially have more money.
Amanda: Right, but that's not what he thought he would have to do either. He thought he was following the secure way, what everyone else was doing, and that's the path he chose and the path he stuck to, and this is where he has ended up though following that path. He is in his 60s, still in debt, looking at living on very little or having to work the rest of his life in order to have enough money to live on. [0:10:07.3]
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Brandon: Michael's story is a lot different. Remember Michael is the other one, not Matthew. Michael now has six high-cash value dividend-paying whole life insurance policies specifically designed for him. Two on himself, two on his wife, and one on each now adult child. [0:11:04.3] He started them when they were just a couple months old; so six total. And because the cash value of his policies is available to him, he's been able to use the policies to cover various items throughout his 40s and 50s.
Amanda: And in the last episode, we already talked about taking policy loans to purchase cars and make roof repairs, and Michael has continued to do that, anytime they need a new car or need to make repairs.
Brandon: He has also taken policy loans for the kids' braces and some major medical expenses not covered by health insurance and even some fun activities like a family trip to Africa to show his kids a different culture and way of life. During a major market downturn, Michael even used a policy loan to purchase a rental property for well below market value. [0:12:01.0] When banks were being super strict on loans, Michael was able to get a huge deal on the property, then he used the rent paid by his tenant to pay back the policy loan, and now has a passive income each month to add to his wealth.
Amanda: One of my favorite things along the way is that when his first kid was starting college in 2033, there were more scholarships and grants available to help his kids pay for college because Michael's wealth was in these life insurance policies, and it just so happens that the college forms to apply for financial aid like the FAFSA don't ask about these kinds of items like life insurance, and so they were able to get these scholarships and grants, and then to make up whatever difference there was between the costs of college and what they were able to get, Michael used policy loans instead of his children having to take out student loans or Michael having to use Parent PLUS loans. [0:13:01.6] Then after college, Michael's children starting paying Michael back instead of being on the hook for traditional student loans.
Brandon: So wait a second – why would Michael insist on having his kids pay him back?
Amanda: Yeah, that's a great question. Michael helped them pay for college. Why should they pay him back for what he helped them pay? There are three big reasons: The first is that it teaches them financial responsibility to manage their money in such a way that they make these payments back to their dad, and then this money is also Michael and his wife's retirement money. Michael wants this money back so that he can potentially use it for retirement. And then finally, if Michael doesn’t use it for retirement, then his kids that have paid it back to him, they're actually going to get this money back to themselves in the form of the inheritance from the death benefit of those life insurance policies. I mean, as the loans are paid back, the death benefit increases. [0:13:59.6]
Brandon: Awesome. And a really cool thing happens in Michael's 50s, his kids get married, and as a wedding gift, Michael gives them the policies he started on them when they were in diapers. He sits down with each kid and their spouse and shares with them the philosophies his Grandma Margaret taught him. He tells her story and his story and gives them the resources to write their own story, to pass along to their children and grandchildren.
Amanda: Yeah, with those kids out of the nest, Michael's next 6-month review with his advisor is a celebration of the years leading up to retirement. He learns that he is right on track to have a six-figure income in retirement from those four policies him and his wife still have. There is a high-degree of certainty in these numbers. No market downturn is scaring him. No advisor fees are going to reduce his cash value. For every dollar he adds in premium between now and retirement, his cash value increases by more than that dollar and just increases what he has available to him. [0:15:08.1]
Brandon: Today, we have told the story of Matthew and Michael from their early 30s to their 60s, and what retirement looks like going into it.
Amanda: Yeah, just to give you an idea, a rough estimate of the interest payments that Matthew paid throughout the years, they were on average $12,000 per year. That's $120,000 over 10 years. If you take that over the 30 years between his early 30s and his 60s, that's $300,000, if you take that average over those 30 years.
Brandon: That's a lot of money - $300,000? That's more than Matthew has in his 401K. The balance there is only $250,000.
Amanda: Yup, as we're looking at this, you can see Matthew paid a guaranteed interest rate to the banks and finance companies for the majority of his life while also riding the roller coaster of Wall Street's rate of return that has no guarantees except that it will go up and it will go down… [laughter]… and he used that in his 401K and 529 plans. [0:16:14.0]
Brandon: Yeah, hence, rollercoaster.
Brandon: We even gave Matthew a positive 3.98% rate of return on his 401K. I mean, no one knows what the future holds with the stock market. One speculation is that as baby boomers are starting to pull their money out of the market in retirement and the millennials, like Matthew, are not putting as much in, so that's means the market is highly unlikely to see much positive growth.
Amanda: Yeah, so we gave Matthew the benefit of the doubt. We gave him that 3.98% return, but the one thing that's relatively certain is not that 3.98% return, but that the interest that Matthew pays on his mortgage, his HELOC, his Parent PLUS loans, his credit cards, I would bet you that that is going to be more than 3.98%. [0:17:06.6]
Brandon: In other words, the bottom of Matthew's bucket has bigger holes than the top of his bucket. There is more going out than coming in.
Amanda: Now Michael's life hasn't been perfect either. There have still been some major medical expenses, there has been kids' braces, roof repairs, new cars to buy… All those things. Yet, he took a very different path and created this stable foundation.
Brandon: In fact, his cash value in his four life insurance policies is in the millions. He is able to count on a six-figure income the minute he retires, and that income will be income tax-free.
Amanda: And he is able to still collect Social Security if that's still around by then. Whatever he gets in Social Security income is also pretty much tax-free because that Social Security income is his only reportable income. [0:18:01.2]
Brandon: Aside from the one rental property that continues to provide a monthly revenue stream.
Amanda: Right, I almost forgot about that. So, remember, that $12,000 on average per year that Matthew is paying in interest alone, well what did Michael pay?
Brandon: Michael saved almost all that interest by using his policy to finance purchases instead from cars to kids' college to vacations instead of taking a HELOC and a Parent PLUS loan or using a credit card, he used a loan feature on his policy and saved a bunch in interest.
Amanda: Yeah, but what did Michael still pay interest on?
Brandon: Well, his mortgage.
Amanda: And why did he do that?
Brandon: Because he could deduct that interest from his taxes and save the money there instead.
Brandon: Yeah, he did have some interest on his policy loans, but it was relatively low.
Amanda: A lot lower. We tried to keep this story as realistic as possible without boring you with all the statistical details that informed our story, but what is the moral of the story? [0:19:07.8] I guess the moral is this simple question: Do you want to be Matthew or Michael?
Brandon: Matthew is on the path the majority of people nowadays take. They tie up the money in plans like the 401K and then finance their major purchases and pay lots of interest to banks and finance companies. Michael is taking the path his grandmother took and half of Americans used in his grandma's day. He keeps the majority of his savings in a safe, easily accessible place so that he can use it throughout his lifetime.
Amanda: If, like us, you want to be like Michael, not "Be Like Mike," that's a different Mike! But if you want to be like Michael and his grandma, Margaret, you need a trustworthy guide to help you. Even Michael didn't do it alone. He had his grandma to share with him these philosophies. [0:20:01.5] He also had a financial professional to work with and help him through it, and that financial professional had special training and accountability to walk alongside Michael over the years and talk him through the various choices he made. This guide didn't make the decisions for Michael but was a sounding board to help him process and make the best decisions for himself.
If you would like to be like Michael and have a guide or sounding board, we'd love to see if we'd be a good fit for you to work in that capacity. To find out, all you've got to do is go to GrandmasWealthWisdom.com, and click Request a Meeting. Then, on that page, you can schedule a 15 or 20-minute call to begin the conversation and see if we would be a good fit. Go to your browser, type in GrandmasWealthWisdom.com or if you go to the Show Notes, you'll see that Request a Meeting in the Show Notes as well, and request that meeting, schedule 15-20 minutes with us, see if we might be a good guide to walk with you along your journey. [0:21:02.9]
Brandon: Yeah, let's try and be like Michael! This concludes our tale of two grandchildren. Next we'll be doing a series of episodes we're calling On the Verge Of. We'll be tackling potential threats like disability and burnout before we turn to the real possibilities of financial breakthrough and prosperity. So hit that Subscribe button so that you get our next episode where we'll be digging into the crisis of increasing housing costs while wages remain relatively stable. This episode is for anyone who feels their rent is too damn high, they'll never be able to buy a home, or they are house poor due to their mortgage. We've got some hope for you in the next episode.
Amanda: Until next time, keep building your wealth simply and sustainably for your own future and the future of our grandchildren's generation. [0:21:59.9]
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting, or investment advice. On such matters, please consult a professional who knows your specific situation.
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