“I am ready to retire,” John was quick to state at the beginning of our annual meeting.
There were several things I wanted to talk to John and Jane Jones about this year since they would be soon turning 60. But when I heard John say this, my plans for the meeting took a back seat.
“Are you serious?” I asked John. “Do you think you are ready to retire?”
“I have no idea,” John answered. “I am making nearly $185,000 a year, which is a lot more than what I was making when I started, but it sure does not seem like we are getting anywhere.”
Jon was frustrated and I needed to learn more about the source of the frustration, so I started to ask him a few questions. “Do you have any idea how long of life expectancy you have? There is a great website out there called livingto100.com. Let’s go to that site and take the short test to get a projection of how long of a life you should be planning for.”
Once we went through the questionnaire the result that came back shocked John and Jane.
“Whoa, I could end up living to age 110?”
“That is a long time. Let’s put things in perspective. You started your career when you were 25, correct? Which means you have been working about 36 years,” I said. “Taking a wild guess, do you think you can afford a retirement of 50 years, assuming you do live to 110?”
“Of course not,” John answered. “We have been good savers and you have helped us navigate a bunch of difficult financial decisions. But we have been saving less than 100% of our income. There is no way I can live for 50 years on what we have saved. Especially since our standard of living is much higher than the $45,000 salary I had when I started.”
“Is your salary really that much higher?” I asked, knowing the answer. “Let’s put your numbers into a Future Value Calculator to see what your salary should be in 35 years to have the same purchasing power, as it does today,” I suggested as I input the numbers.
“That is nearly exactly what we are making now. No wonder we feel like we are spinning our wheels sometimes,” Jane said.
“I am going to call up another calculator called the Future Requirement Calculator. Do you think you could help me plug in the numbers?” I asked.
“My current salary is $185,000. My qualified plan, as of the last statement, had $158,640,” John told me, “We are in the 28% tax bracket and we live on about 60% of our income. I will get some Social Security, so I am thinking I will need about 75% of my current income for retirement”
Does this look right? I asked.
“Yes, I guess so,” John said, “I really do not know, but the numbers you have are correct.”
I chuckled at his honest response. “You are right, so far this is not telling us much is it? When I push the ‘projections’ button the calculator will show us how much you should have in savings to make it through a loooong retirement.”
“That is depressing,” John exclaimed. “I don’t have anything near 4.6 million dollars. How will I ever be done with this job?”
“Please, don’t despair,” I reassured John. “This calculator is simply useful as a reality check. But you said it so I have to ask: why is it you want to retire?”
“I am tired of my job. I don’t like it anymore,” John admitted.
“There is nothing wrong with that,” I said. “Tons of people get bored with what they have been doing for 20+ years and they think they should retire when they should just rethink what they are doing. When a client tells me what you just told me I send them to a website called lifereimagined.org. It has a lot of great information to help when thinking about retooling for a different career,” I explained.
“I told John this idea of retiring now was not a good idea,” Jane said. “John is in good health. It is just the job that is the problem. We have actually been looking around and are thinking about starting a business.”
“Not to be too blunt here, but now you are talking better sense,” I said with a chuckle. “What kind of company are you thinking of starting?”
“Well, we think this new field of Cryotherapy has a great future,” John said. “Medicaid will actually pay a good price for people to use the equipment we are thinking of buying. But, frankly, I am not sure we can do that either. We will need to purchase two office buildings that would total $250,000. Plus two cryotherapy and two vibrotherapy machines for $206,000. ”
“John, don’t be discouraged. We have known each other for a long time. I always say you need to know the whole truth about things so you can make informed decisions. This is a great opportunity to look at as much of the truth as we can about this new business so you can make a good decision.”
“First, let’s take a look at the real estate purchases. The purchase price was $250,000, right? And the closing costs were $5,000. How much are you planning to put down?” I asked.
“We want to avoid private mortgage insurance, so we will put $50,000 down,” John said.
“Ok great. What about the taxes, insurance and maintenance costs?” I asked
“All three are about $500 each,” John responded. “And we plan to have the business pay us $2500 a month in rental income.”
“We will look at this over a ten year period,” I said and pointed to the screen, “How does that look?”
“The rate of return isn’t all that great,” John said. “I was hoping for more.”
“This is only part of the equation,” I explained. “The real money maker will hopefully be the business. For that analysis, we are going to use a new copy of the same calculator.”
I entered the numbers and asked a few questions. “What do you see as your employee costs per month as well as your insurance for the company and maintenance costs?”
“We plan to be open 13 hours a day 6 days a week. We do not want to just hire minimum wage employees, we are hoping to provide a great service and we think we will need to pay employees a little higher than most. We calculated it would be about $10,000 per month in employee costs.”
Sounds good so far,” I said. “what will it cost per visit for a client?”
“About $75. At least that is in line with what Medicaid will pay,”
“You said you will be open 13 hours a day six days a week, which is essentially 4.5 weeks a month,” I commented. “How many clients per hour will you be able to handle?”
“I am not sure how many we will be able to handle, but we think a conservative number is 2 per hour,” Jane said.
I input all these numbers in the income line and showed them the calculator.
“Now that is a rate of return I like to see,” John said excitedly.
“As I have said before, it is not about net worth, it is about cash flow,” I said. “In this case, it’s not about rate of return it should also be about cash flow, and notice how much monthly cash flow you should have,” I pointed to the screen.
“That is more than I am making now,” John said. “Maybe I can retire after all.”
I smiled at him and said, “How about we say you can retool and still have a good income?”
“OK, I like that better. I need to stay healthy and active,” John agreed and started to get up.
“Are you finished John?” I said with a grin.
“I thought we were,” he said.
“I would like to talk to you about one more thing,” I said.
“OK, go ahead,” John said easing back into his chair. He was visibly more relaxed.
“$28,000 in income from the business each month is a lot more than what you are making now. What do you plan to do with that extra money?” I asked.
“We are going to enjoy life,” John said.
Jane was a little more serious and said, “We haven’t thought that far ahead.”
“I am not changing the subject, so stay with me. What do you think has been one of your best investments so far? I mean other than the policies you have purchased because we all know that everything else you have invested in or financed was made possible by those policies.”
“Without a doubt, the cabin has been the best. It has not been a huge moneymaker, but as far as making family memories and personal value to us, the cabin wins hands down,” John said.
“I agree with John,” Jane said smiling at him. “We got it for a great price and have enjoyed it more times than I can count.”
“Exactly what I thought,” I said. “What made it possible for you to purchase the cabin?”
“The policies,” John replied.
“Technically that is a correct answer, but I am asking you to think a little deeper here,” I said.
After a moment of silence, Jane finally said, “What made it possible was our willingness to save a significant portion of our income. What I mean is, we had policies that had cash and because we could move fast, we were able to buy the cabin.”
“Exactly,” I complimented Jane. “You are not too old to save. Who knows, maybe something else will come along. Even if nothing does though you need a place to store the extra cash you are going to have with this new business. If we plan on you paying about 30% in taxes, you will easily have another $100,000 a year coming in. Is there a better place to store cash than inside a policy?” I asked.
“When we first met I thought a whole life insurance contract was the worst place to have money,” John admitted. “But now, no, there is no better place. What do you recommend?”
“I think you should purchase a policy for $50,000 a year for each of you,” I said. “You can put the purchase of those policies into your operating agreement for the business and make it official.”
“You don’t have to ask me twice,” John said. “But I don’t want to pay premium forever.”
“I was going suggest you purchase a 10 pay policy. That is a policy guaranteed to be paid up in 10 years,” I explained.
“Sold! Where is the application?” John asked.
“Wow, if everyone was as easy to sell policies to as you are, I would have an easier time,” I said.
“You have our trust. You have always just shown us the whole truth of things and then we make our own decisions. Not once have you lead us astray,” John said.
“It is hard to go wrong with a whole life insurance contract,” I said. “I like the peace of mind it gives me personally knowing my clients are protected and will not lose money. That means I have never had to apologize for recommending or selling a whole life insurance policy.”
“Thank you,” Jane said. “Really, thank you.”
“Let’s get the applications filled out,” John said. “I want to celebrate our decision for me to retool!”
-Jason Henderson for Truth Concepts