A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™
Saving money isn’t the most exciting topic in finance. You can ask any advisor and those advisors will probably say the same thing about it. To save money for purchases, pay cash and then replenish your savings. As you already know, this show allows you to do something different while still adhering to get prevention principles. Our Paradigm Life wealth strategist and great friend of mine, Gary Pinkerton, is also going to be joined by one of our most experienced clients, David Shirkey. They are going to talk about how this systematic approach blends the security and certainty of savings habits with the freedom and flexibility to do more with your assets. We’re going to get into how that can work for you in the beginning as well as continuing to adopt this strategy over the long-term and share with you actual examples of this flexibility as well as certainty. Let’s go ahead and dive in. Welcome to the show.
Patrick, thanks for allowing me to co-host and to bring on my awesome client, David Shirkey. David hales from Jackson, Michigan. He and his family run a company up there. David is a client. I’m honored to say David, his parents, siblings, children, nieces and nephews are clients of Paradigm Life. I hope for many generations of future clients of Paradigm Life. David’s been on our team and our family for a couple of years. David runs an amazing investor group up in Michigan to try to help other business owners, entrepreneurs and investors learn all different things that he and his family have learned.
David is essentially running a family office. They created their own family office and he’s modeling what multigenerational wealthy families, which neither he nor his dad would say, “That’s not us,” a humble, wonderful family in the Midwest. However, they’ve learned that these families have some amazing ideas, financial education for their children, ways in which you can prudently look at investments and make low-risk investments that have substantial returns. That’s his role in the company, used to be in the day-to-day. David, share maybe a little bit more about when you took on this role, things you’ve learned or what you did before, anything that you think is relevant.
I never knew the term ‘family office’ until probably a few years ago. As I was able to spend more time seeking out investments for our family outside of our main business, I started coming across that concept and that mindset. We have a humble family office, you could say. I’m responsible for searching out strategies and proposing investment options and communicating amongst my parents and my siblings. Even trying to coach and teach a little bit of the next generation with the oldest who is eighteen and starting to help him try to set up his financial future.
I haven’t done this yet, but if you went to the library or Amazon and got books on successful family offices or what makes a good family office, have you done that? Have you studied that concept? I bet you there’s some great stuff in there. You can tell me if I’m wrong, but my guess is you reading and you’re like, “This is not about family offices. This is about a good way to run finance.”
I thought you were going towards it’s all about communication, defining what you want to achieve. It does take a lot of communication. Maybe you have one generation that controls and generated the wealth and then maybe they’re pursuing different interests. Me and my generation, I’m trying to be strategic and manage it and grow it. I still have to communicate a lot with my parents who still control it, but they’re leaning on me for defining strategy and proposing actions.
It's all about communication, defining what you want to achieve. Click To Tweet
Tell me what your challenge is having read a wonderful heartfelt letter that you sent out to the next generation, which I thought was amazing and I appreciate you sharing. Tell me your challenge with the next generation. What’s your role there?
I don’t consider it a challenge necessarily, but I do feel an obligation to make sure we take advantage of these blessings. My children are a little bit younger. My girls are 8, 6 and 2. We have their banking policy started but they don’t necessarily understand them. My eighteen-year-old nephew, Carter, I do think he understands this and I felt compelled to write him a two-page letter. I tried to say, “How would I share the high level utilizing high cash value, life insurance to create a personal banking system? How would I share that with an eighteen-year-old in two pages?” I tried to hit on a couple of things that he might be thinking about. It might be important to him at eighteen years old and that hopefully, we’ll plant a seed for the future.
There were things in that letter that I felt like it might have been challenging to try to talk a language in which the eighteen-year-olds would understand or would appreciate it. You’re talking things about you’re going to die one day. One day, you’re going to be unhealthy. Eighteen-year-olds don’t think that, especially male eighteen-year-olds. As I would roll up the challenge of earning generation, you’re in the middle, which is interesting as you said. You’re still navigating the desires and the goals of the patriarch if you will. The first generation that made money initially made money. One of the unique things about your city inspires me is that they’re producing things in Jackson.
There are manufacturers everywhere. You’re making things, which I make fun of that, but it’s wonderful. For me, 100-year leap back into what America was in the past. That’s super inspiring for me. Your generation has been able to grow what that put in place. It’s not this squandering. It’s a message that many people understand that it’s my opinion that some wealthy people have been busy making the money they have. They’ve made a mistake and have not spent the time to teach financial education to the next generation. Maybe the goals and the ideas are a little bit lost there. That’s the point of family offices to protect and propagate the wealth.
There’s a huge part of it about passing legacy, which is passing your own experience and knowledge and understanding about why you did what you did. That’s misunderstood, two generations down from the originator. Your job, your role is to navigate both, which is amazing. I love the role and the idea that you’re taking what is $400 million families down to a reasonable level that the rest of us can look at your model. Other people are doing this like you. Put in place perhaps trusts, but most importantly, education systems and ways to talk certainly to the younger generations, but even the older generation. In our talk, we’re going to cover this life insurance policy, this AND Asset as we call it.
Why do we call it an AND Asset? If you go back and think about it, we’re talking about it as a bank. If you go back to the normal way that most people would do banking, there are two ways to purchase things in life. One is you save prudently for it. Sadly, this is a lost start in America. You save prudently for it, spend the money on something, take it out of the account and spend it. You go through the process of saving for the next one, the saver role. There is the inability of whether your situation has put you in a place where you can’t wait to save it or maybe it’s unable to do the delayed gratification, whichever it is. You’re in this situation where you make the purchase before you have the money.
You’re not only making the payments to pay off that credit card or the purchase, but you’re also making the interest payments. Too many people realize too late that they’re servicing the debt. They’re not able to make the payments on the item, but there’s a third way. That’s what we’re going to talk about is how you can use life insurance as the third way. We call it the AND Asset specifically for that reason. David, what comes to mind for you or what’s your understanding of the AND Asset way of doing it?
To me, I see it as an efficient way of storing your savings and then helping you perform a couple of different tasks with the same money. To put it simply, at a minimum, you’re accomplishing two, which is saving more efficiently and having life insurance. It’s easy to get it done 3 or 4 things by paying for your living expenses via the system or eventually investing in things be in the system. Automatically it’s doing two things at once and they can do even more.
I don’t know if you’ve even yet used it for a consumption type item, but have you made investments with loans against policies?
We were surprised that I need a new roof. I took a policy loan to pay for our roof. That was one reason I’ve accessed our policies and then I did invest in the ATM. I made the ATM fund investment because I have confidence that investment is going to perform. I felt comfortable taking the 5% policy loan to fund my investment in the ATM fund.
It's better to start using policy loans for cashflow and investments. Click To Tweet
Was there any issue trying to link up cashflow coming back from the investment? What I always tell my clients early on is I like it if you first use your policy loans for cashflow and investments, especially if you’re going to make in the bank. The reason is that it helps you learn the loan process before you have to learn all of it at once. Coming up with extra cash to put in is harder than if you use it for an asset that the cashflow from which you can use to have a source of funds to repay your loan automatically. We all know that you don’t have to repay the loan, it’s certainly to your financial advantage to repay the loan. It’s an easy baby step to have your first loan be for something that’s cashflowing. Speaking of this with an ATM investment, the payments are maybe quarterly. Is that right?
That worked out easier. I was hoping for a quarterly or an annual. I was going to make the point that sometimes that adds stress for the client of, “Do I have to come up with my payments monthly?” If you remember, we had a whole talk on this one. One of the whole shows on loans and you get to structure it how it best fits your life and your cashflow. It’s well-placed for a cashflow AND Asset. It makes sense as well for a roof. Ironically, David, that was my first consumption thing or life expense thing that was not an asset or not an investment but I did as well. The roof of my house. I was talking to my advisor, this sounds familiar because I completely remember talking to you about whether you should borrow against it for the roof as well.
What I was talking with Patrick Donahoe about is this was 2013. I put it on my credit card because the roof is leaking and I said, “I was going to pay off the credit card with the cash in my checking account, but maybe I should put it into the policy first and borrow against it. Would that be better?” We went through the opportunity costs of not putting in the policy first. As an example of a cash line asset, maybe I’ll repeat the example that we did when I was talking with your investors there at MIG. First of all, I’ve said MIG a couple of times. What’s the purpose of your investment group? What things should they do there?
Our Michigan Investment Group is a casual, low-key bi-monthly gathering where I bring in a different investment provider to share what he or she does. We’ve had eight of these meetings over the past 14, 15 months. It’s an education. The first 5 or 6 of the presenters were investment operators that we’ve invested in already. We can vouch for them. We’re starting to venture out a little bit. Our next two presenters I have not invested with them yet, but I don’t know if that amount, I’ve got a good referral before we’d asked them to come presently.
I found it interesting that you adopted this when you were going to graduate school out in Colorado, you were in a similar group. You adopted the model. It has been successful. I know because I’ve been fortunate enough to have many of the attendees as my clients. They’re appreciative of you bringing that to this environment and doing much vetting if you will of the presenters. It’s opening up their perspectives. It’s not what they hear on CNBC every day. It opens up the aperture to see other things in life. I was fortunate to present to the group a couple of months ago. One of the things we were bringing up because I was trying to do this without slides. David was moderating and it was awesome. It was well-received.
The reason I’m doing the example here again is that it’s a decent example of opportunity, cost of cash, and it worked once without visual aids. If you were going to buy $100,000 rental property, typically, the way I do is I get a 30-year fixed-rate mortgage, conventional mortgage for 80% of the money. It’s $80,000 and keep things simple. I’m keeping closing costs and stuff out of it. There’s $20,000 that we would have to come up with as a down payment. I’ve given this talk a couple of times. I remember the numbers and I’m rounding them off a little bit, but you can go grab a financial calculator and check. I would pay my loan back over maybe 10 or 12 years is how mine is working based on the cashflow I get.
I pay it back at the rate that the asset will fund it. Maybe you want to live on some of the cashflow from this asset. That would be fine. You change the periodicity. An example of stretching that out, if we went 30 years on this one, it ended the same time as the big loan. It turns out, and most people are comfortable with this idea, that there’s about as much cost in interest as you pay on a loan as there is in the actual principle. About $17,000 for a 5% loan from the insurance company. A lot of times, people stop right there and they’ll say, “Why wouldn’t I use cash? I wouldn’t have to pay that $17,000.” What do you say to them, David, the other side of the coin, if you will?
The easiest one is if you pay cash, then you never got your snowball started in the first place. You never got the cash value injected into your policy. That can continue to grow and compound without you having to work for it. Second of all, you also never got life insurance in place. I don’t think that’s necessarily talked about a ton in the discussions about cash pay, life insurance, but you don’t take a step and pause and take some savings and get a policy started. You don’t have that protection.
David, I’m going to put you on the hook here. Remind me, I want to circle back to the life insurance side of it. It’s a great story about how that evening presentation at MIG went and some things that followed. I appreciate that. Talking about the $20,000, if I didn’t put it in, I call the dollars going into the property as house jail because my money that went into the property isn’t doing anything for me. If I could have the seller flip that for me or have my best friend put his dollars in whatever, the property still is going to be ready for the tenant. It’s still going to provide me the cashflow. My dollars are going in there. A lot of times people say, “Those dollars are doing something.” They’re earning whatever the properties aren’t. They enabled the thing, if I could enable it.
Paying with cash allows you to grow and compound your policy without having to work for it. Click To Tweet
Those dollars, if you look at them, they’re not earning anything. If I don’t use my dollars, then one half of the coin is I got to pay $17,000 in interest over 30 years if I choose to take that long. At the same time, my dollars were doing something. They were sitting in my life insurance policy. I’ll make an assumption here that they only earned 4.5%. Not as much as the loan to the insurance company at 5% of the calculator. If you go and grow, look at $20,000 growing at 4.5% for 30 years with no taxes or fees, you end up with $75,000. If you take out the original $20,000, that’s a growth of $55,000. This seems huge.
The fact that $20,000 sat there uninterrupted and grew and compounded and the interest compounded, etc. It grows by $55,000 interest as opposed to the $17,000 we paid. At $38,000 difference. It is huge and there’s a couple of reasons why it’s huge. One, is that it’s a 30-year period of time and we don’t always go that long. It’s moving in the right direction even if it’s a one-year period of time. The other is it’s operating in this unique environment where there’s no taxes and outside fees or anything on. It can purely grow and compound. That’s an example of how the $20,000 that went into that property. The cost of house jail or the opportunity cost to put the money in the property is expensive. I’m doing one and I’m doing 19 with my loans.
The other side of it is that good point you made, David. I couldn’t have asked you to make that a better time. You haven’t gotten started. You don’t have your little banking system going and as a result, you have some family emergency money. You have property reserves for this property in case something happens and maybe you have other properties. Maybe you have an upcoming vacation and you wish you could store that cash on the sideline for a while somewhere where it was going to grow nicely. The fact that you started the business to make these investments with. It’s not about the $20,000 which we showed is important for opportunity costs.
It’s about everything that’s grown in your financial foundation there. It’s a good point. We were at this event, David and I are doing our best to downplay the insurance side. Up play the cash value and the banking side. I lead people down that path all the time. I’m certainly guilty of that. The reason is that sometimes life insurance comes off as a little bit off-putting or shocking and people won’t go in. They won’t even open their minds to the concepts of things like opportunity costs. A better place to save and grow in the impact of taxes and legacy and things that are important topics. Sometimes I downplay the insurance side of it a lot. I did tell a funny story there. I won’t go into it here, but I’ve got some giggles out of people.
They’d been in that environment where on my anniversary dinner with my wife, on the second anniversary after starting my real estate business, investing in the business, I was going hard at it. I thought it was smart, as part of this celebration to tell my wife that I bought two new properties and I hadn’t told her that I already bought them. It made her look mad in the middle of the dinner. A lot of people giggle because they’re like, “You were a serious rookie.” I was. The thing that saves me in that story because she was upset and concerned that if I were to pass away, she hasn’t studied real estate. What would happen if she has to take on all of this? What was there $1.5 million of bank loan debt?
What am I going to do with that? I discounted that. A few minutes later when it was appropriate to say something, and when I’d thought about it, I said, “Honey, one of the interesting things is that I funded all this stuff with these life insurance policy loans that we got and there’s $2 million of tax reduction if that would come out. You could pay off the properties or you could let the bank have the properties and keep the $2 million.” It was a calming thing. That was my moment when I realized that this life insurance death benefit stuff is important in our lives. I’ve always heavily respected it since then. I tried to talk to my clients about it. David, not to get too far into the conversation of this, but you had a similar event that we talked about a couple of weeks after that event.
The 1.5 weeks after the event, I had a close cousin of mine pass away. He’s my age, 42. I wasn’t ready financially. That’s part of the deal that you don’t think about it a whole lot. I haven’t articulated this concept well, but I say if we sit here and think about the things that are probably going to happen in the future, we might lose a job. I might get sick. One of our kids might get in a car accident. Might have a flood. All those things are possible, but we know we’re going to die. What happens is even though it’s a low probability that maybe I’m going to pass away in the next week or month or year or five years. The impact of that happening is huge. Let me take that low probability, but super high impact. That’s something that if we thought of it like that, we would put more emphasis on preparing for it.
I beg your forgiveness if I went down a road we shouldn’t. I’m 50 and I went and visited with a bunch of football games with a bunch of my classmates in Annapolis. They were naming off these people that had passed away already. I’m still not ready to think at age 50, that’s even reasonable. You commented 42 on a healthy individual. I reflected that too. When we were having the conversation, I was on location with one of the insurance companies and I was talking to the head of the company and he says, “Gary, it’s unfortunate for your client and it’s sad. However, it happens all the time to people who are not ready.” It took us down a little path but I do appreciate you helping.
Remind me that there’s a vulnerability that we as life insurance people who are talking about this isn’t going to banking, don’t think about the death benefit side. I implore all of you out there reading, please think about the death benefit side for your families. Remember that’s an added benefit to this cash management strategy, this asset protection strategy where it’s growing in the background nicely and it’s the best place to save your cash at the beginning. One of the beautiful things about the insurance companies is they never lose sight of this.
Every time I tried to ask for policy and it’s maybe the wrong size cash value, they say, “Why would we do that much?” I can’t tell them it’s the amount of cash that the person wants to save. This insurance company, bless their hearts, are 100% focused on, is this an appropriate level of life insurance, the death benefit for this person? Rest assured that the people on the other side that are there looking out for us, they’re 100% looking at that side of it. David, anything more on AND Asset on cash management strategy stuff that you thought of that I didn’t bring up that I should have?
When I was getting my policy started, I used a major annual expense that I know my wife and I are going to have to be paid for every year to size the number of premiums that we pay. We used our private school tuition for our daughters. We know we’re going to be paying $12,000 or $14,000 every year until they graduate. We thought if we can take our savings and get the policy started and then every year instead of paying their tuition directly, we pay our premiums and then use policy loans to pay for their tuition. You have to have more savings than that expense. That’s how we got our minds around it to get started was take an annual expense that we plan on making anyways and size our policies around that is in some way.
That’s a great point because I am looking at it from a cashflow strategy perspective and I have those conversations frequently with clients. I remember you were thinking about how to size the policy, what contributions can we make? It’s a redirecting of cashflow or a cashflow strategy first going into life insurance. That’s a great point. Do you have another one? I thought you said maybe two or a couple of things?
That was the thing. Down the road, we are planning on using it to buy our next vehicles and that thing. Hopefully, our daughter’s policies on their sixteen, they’ll be using it to finance their vehicle. When they’re eighteen, they’ll be using it to start financing some of their college expenses. Those are down the road away still.
David, thank you for joining us on this show. I will be forever grateful for you and the family and all of the involvement you have with your policies and questions you’ve asked me and made me grow as an adviser. Thank you.
Gary, David, thank you. Thank you all for joining us on our episode. The savings component of The Perpetual Wealth Strategy and concept of AND Assets have provided much of that certainty and stability, flexibility and peace of mind for our clients. I’m glad you took a few minutes to revisit that with us. Be sure to visit The Perpetual Wealth Strategy Podcast page on ParadigmLife.net. We’ve created simple visuals to help illustrate these concepts and principles. You’re free to download and use them as you wish, whether it’s for you or for someone that you’d like to share that with. Be sure to check back for our future episodes in this welcome series. If this is one of the first blogs you read, you can go back and check out the previous ones.
Join us next time as we talk about what you should expect with your policy and your strategy in the first year. Nick Welch, a long time Perpetual Wealth Strategy Advocate and a Wealth Strategist at Paradigm Life, will be joining us as we dive into some important aspects that you will want to understand and keep at the top of your mind for the first twelve months as you’re adopting this financial strategy. We’ll see you next time. Thank you for reading The Perpetual Wealth Strategy blog. Be sure to visit the show’s official page at ParadigmLife.net for appropriate disclaimers and terms of service.
Guest opinions are their own. If you require specific investment, financial, legal, tax, or any other specialized advice, please consult an appropriate professional or a wealth strategist at Paradigm Life. We welcome and appreciate reviews of the show. Head on over to iTunes or Stitcher to leave your review. Don’t forget to subscribe to the show to get access to every new episode and its exclusive content. Thanks for joining us and we’ll see you next time.
A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™