This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com. With certified financial planner, Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well.
different reasons. And so I started thinking about, man, I bet you there are spiritual assets, and what are the classes for those as far as like, what would the rate of return be? And, you know, is that a good form of savings and that kind of thing? And I, as I did that, I couldn't help but think, man, one of the spiritual assets is prayer. And when you pray for somebody, you're literally, it keeps growing and growing for eternity, because God keeps those, you know, in bowls.
And, like, incense, they continue to come up to him. So the stuff, the prayers that your great-grandparents were praying for their future generations, you're still reaping the benefits of. And so we get a chance to kind of pass that on as our own understanding of the Bible, as we invest that in other people, as we get into community, you know, we're just growing these assets. And in God's economy, you know, the beauty of it is that, you know, there isn't a moth or a rust or nothing that's going to depreciate your assets.
These are as solid as the rock, so to speak. So, Hans, let's get with that on the financial side. What we've laid out in the video, and we don't have the visual when we're talking on the radio, but I can pretty much show it to you, is we got seven categories defined by their tax character, mainly, of assets that people have. And so when we have a new client coming into us for financial planning, retirement planning, we want to find out where their money is and where it's parked because we're going to use that money to create a lifestyle for them for the rest of their retirement, okay, and the rest of their life. And we're also going to, we're going to have to pay taxes out of some of this and some of it we can not pay taxes like money that's in a Roth or life insurance or certain kinds of annuities. So we want to learn about all this, and the point I made to you getting ready for the show is that people have a tendency before they get educated on this stuff to label these things as good and bad.
And I'm going to just tell you what the seven categories are. You know, it's cash, which would be money in the bank and a money market account, anything that can be converted to cash quickly, we're going to label as cash, and then we're going to talk about 401k and IRA, which is money you haven't paid taxes on yet, which most people that have accumulated assets, most of their money is typically in an IRA and 401k at retirement, so that's something we need to deal with. And then there's the Roth 401k, Roth IRA, which is money you've already paid taxes on and you're never going to pay taxes on it again. And then you have taxable investments, which is like a brokerage account where you would own stocks, investments that you've already paid taxes on, they're not in an IRA, and they're just accumulating. We have wealth accumulation life insurance, which is cash value life insurance, which a lot of people have this and they have money that they've paid in in premiums over the years, and then they just have a cash value that can be leveraged for things. And then we have immediate annuities and we have deferred annuities. Most people that come to us don't have these yet, but a lot of people, once they come under our management, we're going to tend to put part of their money into annuities so that we can create a lifetime income.
But that's a whole other category. And then we have real estate, which most people own some real estate, which is their primary home. And then some people that come into us own real estate beyond their primary home. Maybe they have a second home, they own some land, maybe have inherited some land, and then some people are really in the real estate business where they own some rental properties and that kind of thing. So real estate has its own pluses and minuses, but we're going to throw that in there as a category. And so what we did during the show is we then, first we want to get an assessment. And what we did during the show is evaluated each of these seven asset categories in terms of, it looks like 11 or 12 attributes of what's positive for them and what's negative for them. And you really don't want to have all your money in any one of these.
You really want to have your money spread out throughout really all of these or most of them. So talk to me a little bit, Robbie. Yeah. I mean, that's the idea of not labeling something good or bad. It would be pretty easy before I started talking about all this stuff to go annuities.
I don't need that. And again, it makes it easier from a standpoint of making decisions if you just label it good and bad. But I love the idea of why do people put their money in that or why do people use mutual funds versus other accounts? And those kind of things are all tools for different purposes and understanding those is a real opportunity to finish well, right?
Well, it is. And so the answer to that question is why do people put their money in that? Well, it probably means that whenever they put the money in there, they didn't need the money right now because if they needed the money right now, they would have put it in cash and they would have spent it. So they put it in something hoping to be able to planning to be able to take it later and expecting that they're going to have more money in there later than when they put it in.
Okay. I mean, it's just kind of that simple. And when you go through these attributes, it's generally because of some of these attributes that I'm going to go over is why they put it in there. I mean, is it people put it in an IRA just because they got the tax deduction? They didn't have to pay tax on the money going in. And their employer made it real easy for them putting it in the 401k, which is like an IRA. And so that's why it's there. And a lot of times that might be the only reason they haven't really thought about it. And so now when they're doing retirement planning with us, we're going to have the job of creating an income that's going to last a lifetime. So we're sitting there looking at somebody 65 or a couple of those 65.
And we're thinking that one or both of these people might live to 90 or beyond. And we want to make sure that they're still getting a check every month. And they're not broke when they're 86 because we took out too much money or invested it poorly in their younger years. So we've got somewhat of a difficult job of taking a finite amount of assets, all put in these different categories, and then rearranging them to put them in a good place to receive an income and to pay as little taxes as possible on that income over the rest of their life.
I mean, that's what the goal is. So, you know, when we start right at the top, I mean, why do people put money in cash? Well, they hold it because they might need it quickly. And we're going to recommend that most people have six months of income, maybe a year of income in cash, or in something like an interest-bearing money market account. Right now, those are paying about three and a half percent if you have it at the right place. And a lot of our clients that have some wealth and have some income, they're going to hold back 50 to $100,000 that they're going to have in cash at any point in time that they're earning and they're not earning much on.
Okay? And so the rate of return is poor on cash. There's very little risk, especially if you have it in the bank.
It's very liquid. You have flexibility as to when you take it out. You can take it out in a month, you can take it out in six months, you can take it out in two years. It does not have tax advantage accumulation. So that little bit of interest that you're getting, you're having to pay taxes on it. And it's not income tax free at death. It has no premature death benefit.
It has no benefit for long-term care. And it has no lawsuit protection. If you were ever sued, that's the first place they're going to go is to your cash and take it away from you. So that's kind of a quick rundown of cash. The next one on the list is IRA 401K. And this is the money that you have. And typically, this is where people have their most money. And generally, you're getting a good return. You put it in there for the long term. It's invested for the long term. And most people have done quite well and look forward to the future of doing quite well in their 401K and IRA. Now, there's a lot of risk with those. I mean, if you're invested in stocks, they can go down very quickly. It's not very liquid.
So I'm going through this kind of fast, but just jump in here if you got something to say, Ravi. The form of savings, it is a form of savings. You're flexible as to how much you put in there, although you have limits by the government.
It's not really flexible for distributing it. You don't have any short-term liquidity. You have tax advantage accumulation, but you do not have tax advantage withdrawal. So people that have a lot of money in their IRA 401K and now they're going to get retired and they're going to start living off of it. If we don't handle this properly, they're going to pay a lot of taxes as they're pulling money out of there. And consequently, they're going to run out of money later in life.
So we have to be real smart about how we pull the money out of the 401K IRA in our projections. Well, this would be a good place to jump in and say that this show is brought to you by CardinalGuide, cardinalguide.com, and at cardinalguide.com, that's where you're going to find the seven worries tabs. And today, its income is the tab that you would catch. And believe me, the show notes on this one are absolutely gorgeous. So there's this chart that Hans has been talking about where you can see how all these are rated and the different reasons that you would get these different kind of assets.
You know, where it's real visual and opportunity to see it. And again, it's all there at cardinalguide.com, as well as the Contact Hans and Tom page and Hans' book, The Complete Cardinal Guide to Planning Foreign Living and Retirement. And so we'll be back with a whole lot more of financial asset classes for retirement income in just a moment. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents.
Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil, and today's show, Financial Asset Classes for Retirement Income. And again, we're going through these different forms of investments and giving the idea that they're good for different reasons. They've got different, I guess, benefits, and they're not necessarily just good or bad, but kind of get an idea of, you know, why you might try certain things.
So Hans? Yeah, so, you know, what we're trying to do here in retirement planning, financial planning, when we're creating an income for people, I mean, our first and foremost, we don't want to run out of money in our 80s. I mean, whether we're doing it for a married couple or a single person, typically in their 60s, I mean, our first thought as a financial planner is we need to be comfortable if these people live into their 90s, or one of them does, or both of them, that there's going to be checks coming in and they're not going to run out of money. And that's the first thing that we're going to make as a priority. Then we're going to go, you know, next to their immediate needs and their lifestyle needs because, you know, the simplest way to have money when you're 80 and 90 is to not spend any when you're 60 and 70.
Yeah, that's not necessarily a good plan. When people come to us because now they're retired, they want to enjoy their money, and they just want to only enjoy it to the point where they're not putting their future at risk. And so taxes are a big factor in all this and in retirement. I mean, there's a way to round things out that you, you know, you pay less taxes in retirement than you did when you were working. And especially there's a way to try to have very low tax or no tax on your Social Security, which isn't really part of this chart today, but it's there as retirement income.
So all of this is the money that we're going to utilize to create that income for you, all the while keeping an eye on taxes. So, you know, one of the reasons we want to get money into a Roth IRA or a Roth 401k is we're then going to have the availability of drawing that out tax-free and especially later in retirement. I mean, one strategy is to leave the Roth IRA money just where it sits. Don't tap into it and let it grow tax-free so it'll be a tax-free income when you're very old.
Okay. Another way we can utilize that is we can put it into a deferred annuity where what we've done is it's already a Roth IRA, so any money coming out of it is going to be tax-free and we can get several years of growth before we start tapping it for an income. And then say we do that at 72 or 73, and then once that income starts, it's guaranteed that if we live to like 90 or 95 or 100 or some very old age, we're going to collect this tax-free check for the rest of our life. And that way we take a Roth IRA and turn it into a Roth annuity, a Roth deferred annuity that pays an income for life. Now, some people don't have any Roth IRA, Roth 401k, but they're early in retirement or they're pre-retirement, so we might want to build up the Roth. We're going to do some Roth conversion and we're going to use the taxable money, the money you've already paid taxes on that you've got in a savings account, investment account, because we can draw from that and not pay a lot of taxes.
We're going to use that to pay the taxes on the Roth conversion. I'm not recommending that for everybody, but what we're doing is we're moving money around in all these different categories to take tax advantage and to create a tax advantage retirement income strain. So in what's on this chart is talks about wealth accumulation life insurance and say, why is that on there? I didn't ever really looked upon life insurance as a potential asset, but you can do cash value life insurance where it's going to accumulate a substantial amount of money in there.
You're not going to pay taxes on the growth, so it's tax-free or tax-deferred growth, and then you can access it later in life tax-free through a policy loan. So I don't want to get into a whole discussion on that, but if people already have cash value life insurance, we might utilize it for that. Secondly, if they don't have it and they have an inherent need for life insurance and then it makes well to just buy it in cash value life insurance and then to put together what can become a tax-free savings account. Yeah, I'd say that one's a little complicated to understand, although I think I'm tracking with you that so obviously with my wife being younger than me, that would be a good investment for me to say that she might need that when we lose one sole securities check and lose my income and all that kind of stuff. Well, yeah, she's got some pretty substantial cash value built up in that life insurance, and we might sit down with you and I'd look at the policy, we might think about increasing the payment into the policy she already has. You say, well, that sounds nuts, paying more to your life insurance company than you actually have to pay? Sure, because all that extra is going to be going into the cash value fund and all the interest that's accumulating on that life insurance is tax deferred, but it's ultimately, if you access it properly, it's going to be tax-free.
Really? Can I explore that with you a second? So the policy I'm talking about is a universal life, and I think the one you're talking about, it's universal life, but it does have a pretty good cash value. Okay, and it's got a loan feature to it, and it may well have a wash loan feature to it where you can actually borrow it at 0% interest.
I mean, that's hard to comprehend. That's another meeting another day, but let's just say you do pass away before she does and she's now 75 years old. And she's got this hunk of money. She doesn't feel like she needs life insurance much anymore because you're deceased, and it's going to go to her kids if she dies too. So it still has a purpose, but she really wants to get it that $150,000 that you've accumulated in there. So she could just set up the thing to pay her $10,000 a year. They just send her a check of 850 bucks a month or whatever that is.
I mean, I'm just pulling that out of the air. And that thing would last about 15 years where she'd get $10,000 a year, and that would be tax-free if she did it through a policy. So are you saying I can actually make the payments on that more than what the payments are supposed to be? Yes. You can do that right now to make the future value larger.
See what I've learned. You and I will get out the proposal, and the next time we're together, we're going to call that insurance company, and I'm offering this to any of you that are calling. I mean, I have clients do this all the time. They send me their stuff, and we get on this phone that I'm sitting here right now.
We call the insurance company together. You give them your permission to talk to me, your financial planner, and then I ask them a bunch of questions. And you need to run a proposal, and there's limits, and you can't just send them $50,000 or something or $10,000. I mean, there's limits, but I'm guessing that you can pay substantially more every month into that thing, and it'll turn the thing into a wealth accumulation vehicle.
Okay. It's already a wealth accumulation, but it'll accelerate it greatly, and what I'm talking about to the listeners is we sell life insurance to people that are 65, and I could get into the reasons for that. They can also put some long-term care protection in there, and a lot of them pay the maximum premium that they can to accumulate a value, and then a lot of them are going to end up just leaving it there, and it's going to pay a large amount of money to their heirs. But the reason they're putting it in there is it's money for later years. It's a tax-free savings account that you can tap in your later years, okay? And it can be a sweet deal. It has its disadvantages too, so I want to give a balanced presentation, but it's useful for a place to put money, okay? Yeah, that's the beauty of the whole thing is that it's just another tool in your tool belt, right?
But you got to know when it's appropriate and for what situation, but you're right. I mean, this just opens up a whole new door to me that I hadn't really thought about. So we get over to real estate, and so if your only real estate is your primary home, well, then you're not going to get much income off of your real estate because you got to live there yourself unless you're going to go to an assisted living or something. If that happens to you, well, then we might think about renting your home, but primary residence is not an income producer, I guess is what I'm trying to say to you. But if you own a rental place or the home you used to live in or the home you inherited, that can be a nice income source for retirement. And there's also a way to make that tax advantage. I don't have too many clients going out and buying real estate at retirement to create the income. I don't know if I'm necessarily going to recommend somebody get into that in their 60s, although some people do, but pretty much that's a category, and real estate does not have a lot of liquidity to it. You can't turn around and turn it into cash real quickly.
It has some tax issues with it. So again, we want to remind you that the show is brought to you by Cardinal Guide, and cardinalguide.com is where you will find the seven worries tabs, and today's show is on income. As I mentioned earlier, there's a fabulous chart that shows all these things, a lot more information on these different classes of retirement income, and just beautiful information all there at cardinalguide.com. And of course, as well as the Contact Hans and Tom page, like if you're thinking with your life insurance policy or something that you heard today, easy, just contact Hans or Tom right there at the contact page at cardinalguide.com. Or again, Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement.
Great show, Hans. Thank you, and God bless you. Thank you. We hope you enjoyed Finishing Well brought to you by Cardinal Guide. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on The Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.
