Cash Flow more important than net worth

“What would happen if you did the opposite?”

A simple question, but one packed with complexity just below the surface. It’s not hard to do the opposite – you just do it. But of course it’s not that easy.

Doing the opposite – going against the grain, bucking conventional wisdom – can be scary. It can result in failure. It welcomes skepticism.  It makes people uncomfortable.

It is also the indispensable action that is inextricably linked to virtually every breakthrough idea that has moved the needle of human progress.

Conventional wisdom is, by definition, a generally accepted theory or belief. Any action or idea that is contrary to conventional wisdom is, therefore, generally not accepted, and the person supporting it is considered crazy or just plain wrong – that is, until the radical is proven right, and the new idea replaces the old. As Albert Einstein said: “The only sure way to never make mistakes is to have no new ideas.”

But it is not a challenge that most accept willingly. That’s because there is a sense of comfort in convention, but it is false. As Mark Twain said: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” Sometimes you need to rock the boat.

Recently, I met with a couple in their late 40s.  The husband is a successful executive and the wife is a teacher.  Their combined income is very high, but most of their savings were tied up in retirement accounts that will not be accessible until they turn 59-1/2. Even more concerning to me, the couple was saving less than 10% of their combined income for the future. That’s because the cost of maintaining their comfortable lifestyle was taking up a huge chunk of their regular cash flow. This seemingly “well off” couple, with two big paychecks, was not as well off as they thought.

Over time, I got the couple to realize running their personal finances is very similar to running a business. As the old expression goes: “Cash is king” in the business world and I think the same applies to your personal finances. We’re taught to build up our net worth (what we own minus what we owe) so we’ll have a big nest egg for later in life.  However, it’s important to consider not just how you accumulate your wealth but how you’re going to use it during retirement and preserve it for the next generation.  In addition, if you’re tying up all your cash to build your nest egg during your working years, you might not have enough cash for disability, emergencies or great investment opportunities that come your way.

Based on the couple’s plan at the time, they were shooting to have $200,000 a year of income in retirement generated from their assets.  In order to make that happen, they were planning on needing a hefty $5 million in their accounts before they retired (i.e. the standard 4% drawdown x $5 million = $200,000 a year).  I explained that there are better ways to generate even more retirement income on a lower net worth without exposing themselves to so much market risk or sequence risk.  Not familiar with sequence risk? My recent video explains.

A smarter way to protect yourself from market volatility

For successful couples, one of the best ways to insulate yourself from sequence risk—i.e. a sudden drop in portfolio value right before or early in retirement– is to utilize cash value whole life insurance. When constructed properly (via a mutual insurance company), this type of policy helps you manage market volatility by providing access to cash that isn’t impacted by the market and can generate tax-free income.  Quite simply, the cash value of the policy can be used as a buffer when markets are down. For instance, you can take out substantially than the usual 4% drawdown (without penalty) if needed. And you can return the money back to the policy–whenever you feel your portfolio has recovered sufficiently—so it can continue to grow. The worst time to take money out of an account is after it takes a significant loss.  Having a productive alternative to use will give your investment account time to recoup.

Even if you use up all the cash value of the policy before your die, there is still some death benefit to pass on upon your death. The tax-free death benefit can also be used to facilitate a Roth conversion by using the death benefit to pay for the taxes on a big retirement account. This strategy frees up those dollars for a spouse and children from future taxation/RMDs by using discounted dollars from a life insurance policy.  This is a key feature of a properly constructed whole life policy; it uses pennies to secure dollars.  Who doesn’t like a discount?

If you think about it, cash value whole life is essentially “asset insurance” not “death insurance” as you get closer to retirement.  Those who say you don’t need life insurance in retirement may be right. But people who understand the value of life insurance to make their other assets work even better want it for their whole life.


As with any insurance policy, you do need to qualify for cash value whole life first. You’ll need to show proof of income, assets and good health. It’s not complicated and well worth a little effort to do so. If you or someone close to you has questions about maximizing the income potential of your assets in retirement while increasing your legacy, don’t hesitate to reach out.