In a roomful of financial advisors and life insurance agents in Scottsdale, Arizona, Emily Prendiville walks through how to have a truly compelling, interesting and potentially life-changing conversation with prospects and clients.

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Transcript of Video

How many of you in this room would like to make more money and how many of you, when you retire, want to retire at the standard of living you were enjoying before receiving your last paycheck? And do you believe, over your lifetime, that income tax rates are going to go up, come down or stay the same?

So I asked you that for two reasons and these are great questions to ask your clients. One is it seems like all of us in this room believe that taxes will go up and so we share that same belief. But secondly, if you want to make more, retire at that standard of living and you believe taxes are going up, you quite likely today are in the lowest tax bracket you’ll ever again be in. Very few people relate that belief to what they’re doing with their finances.

Oftentimes this conversation helps people align their beliefs with what they’re doing with their wealth. And I come back to the fact, oftentimes in a conversation about that exact answer, you want to make more, retire at that standard living or better and you believe taxes are going up over your lifetime.

If this circle I’m drawing represents a pie and you have the ability to put as many of your assets as you choose to into this pie and once held there, they would never be subject to income taxes again but you would have the use and control of that wealth. If I make the first slice in this pie. Could someone describe for me the size of a pie slice. I should draw to represent your wealth that will never be subject to taxes again? (audience: the whole thing)

Get them to think differently
Or sometimes people say “erase the line”. If this is where you want to be, what are you doing to get there? Starts a great conversation. Some people will start talking about their real estate. Some people will bring up their 401K and then they realize,  oh wait a minute, that’s not getting me there either. So you’re already getting them to think differently. And that’s really the point of the words that you use is to get them  to think differently because we get so “programmed” by our environment and what everybody around us is doing. So asking that kind of question and then backing it up in a couple of other interesting ways is how you can change up the conversation.

Another way to say this to your client is, if you have the ability to put as many of your assets as you choose to into this pie that, once held there, you’d have the use and control of that money but you would never be subject to income taxes again, then how big of a pie slice would you want? Or describe for me how big a slice I should draw to represent your wealth that never again will be subject to income taxes.

What conversation are you having?
So when I look back at all of the conversations that I had through the years with clients, it’s always been about how to build wealth, how to accumulate wealth and then, you know, they think, I’m fine now. Today, people are right on the brink of retiring and whatever dollar amount they have following traditional planning, they have no idea what it means when they go to spend it.

If you think about our industry and it’s not just our industry. You can look at CPAs and at HR people who put people in retirement qualified plans. They set them up all the time with 401Ks. Nobody is required by law to have a conversation with a client about how to most tax efficiently spend their money in retirement. It’s all about accumulating wealth and assets under management.

Which guide would you use?
So let’s use Mount Everest as an example. Let’s say your clients are at the base of Mount Everest getting ready to go on the journey to hike that mountain. Next to them are two guides. They’re told they can only bring one of these guides along with them on the journey and they have very different skill sets. The first guide  has had great success bringing people safely to the top of the mountain. The second guide has had great success bringing people safely down off the mountain and home. Which one guide would you take with you and why? Yeah, the second guide. Yeah, it’s fun when a husband and wife answer differently on this one. We have a fun conversation because it does happen.

But it’s true. 75 percent of the deaths occur coming off Mt. Everest. Now some of those people never made it to the top but they still had to get back down safely. And so I believe 75 percent of the mistakes will happen when people are following traditional planning as they’re coming down the mountain in retirement. So I want to share the rules of the game with people because they’re very different when people are coming down off that mountain than when they’re climbing up the mountain as you’re all aware of sequence of returns and so forth.

If we also look at that focus on gathering assets under management, let’s say we had two hikers and the first hiker gets to the top of Mt. Everest. He’s done a great job and has amassed five million dollars. Hiker 2 has also done an exceptional job. Maybe he didn’t enjoy the same rate of return or wasn’t able to put aside as much and has 3 million. If this were the whole story and I asked anybody in their right mind, would you want to be Hiker 1 or 2, everybody’s going to say Hiker 1. Seems logical. More is better.

But let me finish the story and then ask you. Hiker 1, because of where your money is, will received 200,000 a year, 100 percent taxable, where Hiker number 2 will receive 190,000 tax exempt. When you know the whole story which hiker would you rather be? The direct opposite of what we thought.

 [00:07:22] It’s about Money to Spend
We’re actually saying I want less money because in retirement it’s not about the retirement plan. It’s about money to spend.  Just kind of keep it simple. It’s just the money you’ve got to spend. And this is really easy in a conversation if someone starts going back to their old ways of thinking to point to Hiker 2, that’s where you want to be.  Hiker 2 has more to spend.

So you see how this takes them up the mountain and down the mountain as a story and puts it all together about what they’re really going to have to spend in retirement. Because would your clients want to know or do they know based on traditional planning and retirement that they’re going to be paid fifth or sixth every single year? They really have no idea what they’re going to get to spend. None. It’s a guessing game.

 [00:08:21] Clients today are paid 5th or 6th
So this is why clients actually, under the traditional planning model in retirement, are paid fifth or sixth. If we go back to that pie, right now what happen, so they want no line, but they’re probably somewhere like this maybe.

Because what happens in retirement? They’re going to pay federal tax, depending on what state they’re in, they may pay state tax. Their distribution will cause them to pay tax on Social Security most likely. They’re going to pay more for their Medicare and they’re paying fees on this account every year. One two three four, five. They are sixth and who made the money? Everybody else made their money. I mean how good does that feel in retirement?

The 3 Scenarios that will change your world
So people do want to get off the radar screen of the IRS. Cash flow kind of ties it together and this will help you share with people what happens when they’re coming down the mountain.

Let’s say that there were triplets born. When I’m talking to baby boomers, I call my triplets Peter, Paul and Mary. Now Peter, Paul and Mary, they made a pact when they were younger that when they retired, they will have accumulated a million dollars. Where they accumulated was up to them. And of course we know the tax code incentivizes us to accumulate wealth in certain places and based upon where we accumulate it, when we want to spend it, we’ll be taxed accordingly. So they each have a million dollars.

Peter chose to accumulate his money in the always-taxed bucket so that would be your 401K, IRA, SEPs, etc.  Peter decides to take an 80,000 dollar check from his always-taxed bucket. Today on the top end, he could have to stroke a check federally for as much as 30,000,  leaving him with 50,000 to spend.

But it’s not the end of the story, because the government’s going to say, you know, I’m really glad you took responsibility for your retirement and that you can show that income. But in our estimation, our determination, you fall into our category of being too wealthy of a retiree and therefore, you’re not entitled to all your social security. So we’re going to just take back taxes on up to 85 percent of your Social Security benefit.

 [00:11:39] Yes, Social Security is taxed
So few people are aware of that. I’ve had retirees who said I’m not paying taxes on my social security. I tell them go get your tax return because they don’t look at it. They just want to be told, do I owe money or am I getting money back. They have no idea. And this is not chump change. You know some people say, well Social Security is not a big part of my retirement, which is wonderful for them if that’s true.

 If you take a husband and wife who were both good income earners, let’s say they’re making 46 grand in Social Security benefits between the two of them. They live 25 years in retirement and they’re in a 25 percent tax bracket, then they are giving back 250,000 dollars unnecessarily because of where they accumulated their wealth. Do you think your clients would like you if you brought back 250,000 dollars to them? 250,000 dollars.

And, you know when Social Security was created, it was said it would never be taxed and it wasn’t taxed for 50 years. In the 1970s,with the explosion of mutual funds and the explosion of retirement accounts, Wham! in 1984 suddenly, there’s a tax. They shifted everybody in this direction and then added this tax.

Now Paul chose the sometimes-taxed bucket and the sometimes tax bucket, I call the Warren Buffett bucket because it’s a second tax but he never explained that to the American people when he said his secretary was in a higher tax bracket than he was.

So here, you pay your tax once on the income you earned as required by law and you take the after-tax dollars and make an investment. Paul kept track of the amount he contributed and he knows that exactly half of that million was what he contributed. The other half was gain.

So he receives his 80,000 dollar check and the first 40,000 applies to his cost basis.  It’s not taxed. The second 40,000, if held long enough, could be subject to long term capital gain and Paul could owe up to 8000 dollars, leaving him 72,000 to spend.  But as you all know, that’s not the end of the story either because he’s showing married filing jointly,  with 40,000 of income, up to 50 percent of his Social Security will be taxed.

Now Mary chose the never-taxed bucket and there are a couple of things that can sit in this never-taxed bucket such as the Roth and the reverse mortgage. EMILY? sounds funny -> I refer to as properly structured life insurance. But you know, honestly, it’s really around the life insurance tax code. It’s actually really around lending laws. And I’ll explain that in a second. But Mary, in the never-taxed bucket, receives her 80,000 dollars and how much tax does she owe. Absolutely nothing.

 [00:14:55] Cash flow six figures
So you can be cash flowing six figures in retirement and if you’re only sources come from the never-taxed bucket and Social Security, now you don’t have to pay tax on your Social Security. You won’t be stuck paying extra for your Medicare. You actually legally do not have to file a tax return. How does that sound? Yeah I mean, I can’t believe I was in this profession for 26 years before I actually knew that was possible.

 [00:15:37] Check out this report from the GAO
And let me just say that also if you’re not aware, there is a, you can Google this and get your own copy, report from the General Accounting Office from January of 1990 and on page 27, there is a great explanation of how we use the life insurance tax code to do just this, position what could have been considered income into cash flow.

I’ll share with you that it  goes something like this. A policyholder borrows against their cash value life insurance, the amount borrowed is considered a transfer of capital, not a realization of income and therefore not subject to taxation.

So it’s no different than if you take out a car loan; you do not have to put those loan proceeds on your tax return. It goes on to say that the interest income that should be building up to fund the death benefit can instead be a source of untaxed current cash flow. If the loans are not repaid, the death benefit will simply be reduced by the amount of the loan. The policyholder has the use of tax free cash flow for purposes other than insurance. This is like an endorsement!

Making it real
I was doing a web call with an attorney in Ohio and I just loved what he said.  First he paraphrased what I just told you, and then he said,

“So, Emily, let me get this straight. We’re building a retirement strategy on the premise of a law where loans are not reported as income.”

I said “Exactly.”

He said “but it’s a loan. I must have to pay it back.”

And I said, “not during your lifetime. No, the insurance company is on the hook for a much bigger amount. They don’t care if you pay it back. It’ll be paid against the death benefit.”

He said, “well what about loan interest? I must have to pay interest.”

I responded, ” Yes, the insurance company can and they will charge you interest but you don’t pay it during your lifetime. It will be paid from the death benefit.”

He looked straight at me and said, “This is absolutely brilliant. I get to live on my dead self!”

Want to learn more about how to have these types of conversations with your prospects and clients? I’m accepting a few select advisors for mentoring so let’s talk about whether we’re a good match for each other.