84: Beyond Rate of Return: A Strategic Approach to Wealth Building

084 Rate of Return Race to the Bottom

John Perrings: [00:00:00] Hello, everyone. Welcome to the newly named Strategic Whole Life podcast. If you're here looking for The Fifth Edition, you're still in the right place. We recently renamed it to Strategic Whole Life to help people find us a little more easily. W ith that quick reminder out of the way let's get on with the episode.

Episode 84, going beyond rate of return.. And today we're going to talk about the kind of prevailing hyper focus on the rate of return that you get in today's typical financial planning advice. And. Three main points in this episode. I'm going to talk a little bit about what I learned during my time in the data center industry working on $50m - $100M data center asset deals.

What the rate of return focus is doing to regular investors and savers. And then number three, if money were a race, you want to be the tortoise, not the hare. The tortoise being banking and investing being the hare. So [00:01:00] tune in and let's get started.

All right. Let's start with a little bit on my background. I come from the tech industry. A lot of my clients have Learned about this. And so I have a lot of tech industry clients. I'm here in the Silicon Valley San Francisco area, and spent a lot of time in the data center business.

First in data center, real estate, and then the data center construction cycle. And one of the things I learned advising on data center real estate. So you get these institutional investors that want to come in and, buy a $50M, $100M data center asset. And if you're not familiar with data centers, they're just big, specialized buildings with a ton of power, a bunch of internet connectivity and specialized cooling systems to extract all the heat from all the computers that run Google, Facebook, Amazon, etc., etc.

It's a specialized industrial class of real estate. And so the, you know,

and [00:02:00] so what would happen is you'd get these institutional investors that would come in with a bunch of money, they'd want to buy a data center asset as part of their portfolio. And one of the things that led me to first implementing what I do Now as work in my personal life and then eventually getting into this as a business is I noticed that um, and I was taught by my mentor in that business that the investors buying these assets, rate of return wasn't even in their top two, it's tied in there, but their top two main concerns were control and risk.

And I think I've said it on this podcast before the reason that rate of return. Is not their top two is because they know that if they have control of a high quality asset, they can create multiple rates of return off of that high quality asset, and they can do it in a much safer manner.

That was. An eye opening experience for me because, at that time I was still doing, the typical, what we're all [00:03:00] taught to do, putting money in my 401k, health savings account, all this other stuff. And I was like why do they have different priorities than what we're taught to have as individuals?

And so that was one of the things that started getting me. Down the rabbit hole, so to speak of really learning about more personal finance and how can I connect that to what I'm learning out here in the business world and what the, big money is actually doing. I share that to, hopefully, maybe connect those dots for you where if you look at what big money is doing, they are not doing anything even close to what we're being told to do and taught to do by the financial industry, the government and the banks. So what does that mean for regular investors and savers, right?

So if you ever schedule some time with me and want to talk about stuff. One of the things that I'll walk you through is a kind of graphical financial model that just goes through a regular a regular person's life, [00:04:00] where if you look at, I don't know, let's just look at a typical 35 year old, right?

They're going to work. Until they're 70, let's just look at a 35 year period, from 35 to 70. And let's say this person is making $100,000 well over 35 years, this is the easy part of the math. You just take $100,000 times 35, that's three and a half million dollars that this person is going to have coming through their hands over 35 years, three and a half million bucks.

That's more than probably 99 percent of the people will ever see in their 401k. Just from their income alone. Now, of course, we wouldn't expect this person to only earn $100,000 the whole time. We would expect their income to increase over time as they get more experience and better at what they're doing.

So if we just tack on a 4 percent average annual increase to that, that total amount of money over 35 [00:05:00] years doubles to a little over 7 million dollars. And then if, if we're playing this doing this experiment and we get to keep all of our money, let's put an earnings rate of a conservative 4 percent on top of all that money that we get to see coming into our life.

And that doubles again. We're looking at almost 14 million that's passing through this person's hands over the course of their working life. 14 million dollars. So just going back to this hyper focus on rate of return, clearly our most valuable asset is our ability to work and earn an income, right?

It's going to be way more than our house. Way more than our investments probably, we can, of course, ignore the outliers of the, early Bitcoin folks and all that stuff. But for most people by far that your ability to earn an income is your greatest asset. Now in the real world, we don't get to keep all this money, right?

If we, let's look at taxes, right? That's the first thing that comes [00:06:00] out from, for a lot of us, it comes out before it even hits our bank account in the form of withholding taxes. But if we actually add up all the tax in our life, of course, some are better off than others, depending on what state you're in.

But if you add up federal, state, local What about our gas tax? What about cell phone tax? What about hotel taxes? Sales tax? If you add all that stuff up, we can easily come to a conservative 35 percent of our money goes out to paying taxes. And what that does is that creates a loss.

Unfortunately we don't get to pay the taxes at the end. They come out all along the way. There's a lost opportunity cost or it creates a lost future growth of all that money that's coming through our hands. So the taxes are only two and a half million, but it actually causes a loss of almost 5 million because we don't get the growth on that money.

So now we're down to, now we're down from 14 million to 9 million. Let's look at debt. What about debt service? So if we just use 30%, since that's what a bank will give you [00:07:00] typically on a home loan, right? So if we're servicing debt at 30, 30%, that's another 4 million that leaves our life. And then that leaves, for a lot of people, especially.

What I see in the Bay Area, people making good money, but it's so expensive here, then there's another 30 percent in lifestyle. That leaves us with a savings rate of a 5 percent in this example. But even if you have, even if you're better and you have a higher savings rate, everything I'm about to talk about still applies.

So what happens is we went from 14 million down to $700,000. And it's really the outflows in our life that are causing the biggest pain for all of us. And so what we're taught is, hey, you need to get some exposure out there. You need to take some, take on some risk, right? Meanwhile...

This, I hate this term exposure and people talk about it. Like it's a good thing. Meanwhile you die of exposure, right? That's how, that's one of the first things you need to take care of is shelter. So this whole [00:08:00] idea of getting some exposure in your portfolio just drives me crazy. It's like, why is that a good thing?

So anyway, what are we taught? We're taught, we need to go out there and try to get a high rate of return with our money to overcome this problem. We went from 14 million. Down to $700,000. What if we tack on a decent rate of return? A lot of people are telling us 10%. That gets us up to 2 million, um, but the problem is a luxury once enjoyed becomes a necessity. And this is very true in real life. As our income goes up, our expenses tend to go up as well. And so unless we're willing to make some very major adjustments to our lifestyle, this two, this 2 million is really only gonna get us through about 12 years of retirement.

So we're going from 75 to 85 and like maybe maybe it'll last that long. So this doesn't really solve the problem. You know what I mean? And it's not about necessarily rate of return. It's about how [00:09:00] can we control, and it sounds boring, but it's actually more about how we, how much we can control money leaving our life.

It's not about how much we're earning on our money. It's about how much money we get to keep to earn. And so the rate of return starts to matter less. And so what if we were able to, what if we took this earnings rate back down to this 4 percent and you guys are all listening to this because of Infinite Banking.

What if we were using the infinite banking concept to more efficiently handle our debt. And let's say we were able to reduce that, down to, 25%. aNd actually let's keep it at, let's keep it at 30%. And instead of those costs increasing along with our income, let's just cut that down, that increase from 4% down to 3%, and our lifestyle instead of affecting our lifestyle today.

Let's just figure out a way to consciously choose in the future to not let [00:10:00] that not let our lifestyle expenses track our increasing income. So let's maybe we just cut that in half. And now all of a sudden we're doing better with a 4 percent rate of return. We're actually at two and a half million dollars.

We're doing a little bit better than we were with the 10 percent rate of return and we actually have now. 20 years of income and that's not really, that's not changing anything other than how we're consciously choosing to allow our expenses to grow. So you know, talking about income and expenses is really boring and that's why all the gurus out there are, getting so much traction.

They're wooing people into this idea that you can just get a high rate of return. All you got to do is start real estate investing. Meanwhile Nothing is discussed about the risks associated with that. Real estate has risks, stock market has risks, all these things. So it's not about the, it's not about the risks and the high rate of return.

It's about how can we control and better use all of the [00:11:00] money that's already coming into our life. Anyway, last point that I wanted to talk. So that's a little bit about, just a typical investor saver. Let's talk about the money race. You want to be the tortoise, not the hare. And the tortoise is is banking and the hare is investing.

It feels good to be the hair getting that quick launch. And this is something we deal with IBC all the time, where especially, you know, real estate investors, especially have a really hard time. They get so much FOMO about the first few years of the capitalization of your whole life insurance policy that they.

They decide to be the hair. They're like, Nope, I want to just take my money and go right into real estate with it. I do not want to strategically capitalize using dividend paying whole life insurance. I just don't see the value in it. Meanwhile, they're only looking at maybe a three year period where it is a little bit better because you have more liquidity.

But after three or five years. The math is there. You can call me and we'll go over it. The [00:12:00] math is there. You will do way better if you can capitalize first and then invest, right? That's what IBC is all about. So the tortoise versus the hare, banking is basically treating our money as inventory, and this is in Becoming Your Own Banker.

He talks about the grocery store and the cans of peas on the shelf. What's a grocery store owner? They're really just a person who moves inventory from the back of the store to the front of the store on the shelves, and then people buy those, and that's where money is created. Money is inventory in itself.

That's why he uses that analogy, because it's really the same thing. We both. Spend money and we consume money and same with the can of peas. We can sell that can of peas or we can eat a can of peas. So what are we doing with inventory? We're turning it over. So most people, when they're going out and investing, they're... Put in their money into something and they hope that the value gets higher, right?

And then they [00:13:00] hope then they can sell. Hopefully it's the right time to sell and hopefully they don't lose. With banking, we can take things that we don't have to get a high rate of return on it. And if we can just turn it over, over and over again, we can create much better outcomes than we can by.

Just putting our money into something and hoping that it get, accumulates in value or grows in value. And the thing is, it just takes some time. You have to capitalize first in order to do it and you, and it starts small, but then it gets bigger and bigger. And and it doesn't take a long time, but it just, it does take some time, so the other thing that happens is I get, people in their fifties will call up and they'll be like, is it too late for me to do this? Absolutely not. It's a great time for you to do it. And if you're in your sixties, it's also a great time for you to do it. A lot of us are taught to think in these 35, 40 year timeframes of our working life, and then you're going to retire and then [00:14:00] live off the money that you were able to accumulate.

I call that the save up, spend down economy where. You save up and then you spend it all and all of your, all your people after you end up just starting off in the same place you were like, what are you doing to help your people start off in a better place than you had to start off. Nelson Nash talked about having a 70 year outlook rather than a 30 year outlook.

 So this is the difference between investing and banking. And so what we're trying to do with The Infinite Banking Concept is provide a platform for you to constantly recycle the money without having to lose the growth on that money.

 I hope this was helpful. I wanted to just do a nice short episode today and just talk about this kind of rate of return focus. I really hope people can get out of that mindset where it's all about risk. It's all about hope. Hope is not a strategy where the process of banking is something where we have [00:15:00] control.

We take very minimal risk. I think where we have control, we Grow our value by multiplication rather than addition. All right, the race to the bottom with rates of return. Hope this was helpful. If any of this is resonating with you, you can head over to thefifthedition. com and you can schedule a free, no obligation, 30 minute consultation with us. We'll just talk about you, see if any of these strategies might be beneficial in your life.

Or, if you're the type of person that likes to just read as much as they can and do all their research before having to talk to anyone, totally understand I was the same way. We have an online course just for you at TheFifthEdition.com. It's right there at the top. You can click it and get access to our IBC Mastery course. All right, thanks very much and look forward to seeing you guys on the next episode.