Wade Reed continues his conversation with financial strategist and former Navy officer Gary Pinkerton about using the Family Banking Strategy to achieve financial stability. In this episode, he shares practical tips and real-life stories centered on the benefits of whole life insurance, the importance of maintaining a high level of liquidity, and the right way to navigate losses in the stock market. Gary also talks about minimizing risks when getting into alternative investments and how you should never lose control over your own money.
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The Family Bank: How A Submarine Captain Navigated Financial Uncertainty To Build Lasting Wealth Part 2
Welcome to part two of this Family Strategy. The last time, we left you with me sharing about my experience having this great epiphany about the stock market versus using whole life insurance, risk versus no risk, similar returns, and now we’re going to allow my colleague Gary Pinkerton to share some of his story and the practical uses of how he implemented the strategy after having the losses he had in the stock market and starting to apply a proactive approach to his financial life and applying the Family Bank Strategy. Enjoy the second part of this episode.
Alternative Strategies For The Stock Market
Let’s get into more of that. You started to see these questions about what’s going on with the stock market, what are the alternatives. How did you find Pat Donohoe, who’s the founder of Paradigm Life? What did you do from that point forward that’s been so different? What’s been effective for you using this strategy?
I found him as many of my original clients did and we were real estate investors. We had gotten the bug and understood the financial power, the magnification that can occur with providing workforce housing. I’m still a massive believer, a massive purchaser of residential real estate. It’s my biggest core holding. As another very quick aside, in that hierarchy of wealth, so between those directly owned things that you have, real estate businesses, your own career, and then the complete speculation, meaning there are dozens of people between you and your money, and it’s operating in industries you don’t understand up there, but typically a basket of mutual funds or something.
In between, there is something called passive investments or syndication, where you might understand more about it. You might understand a lot about it, and you know the people who have money. There’s a limited number of people between you and your money. It might just be one person, or it might be 3 or 4. You can go visit the property, you know enough details about it, or visit the business that you invested in. You’re passive, meaning you don’t make the decisions. There are still people between you and your money.
This sounds a little bit negative, but anytime you take money that is in your hands and you hand it to somebody else, you have taken on risk. I don’t care if it’s your priest, your pastor, or your parents. You have taken on risk because now somebody else is in control of some of your resources. I’m not saying don’t ever do it, I’m just saying understand that’s where the risk comes from. It walks around on two legs, and it has your money.
I pulled it down viscerally feeling in my gut that I needed to get it into my own control. Patrick Donohoe enabled me to understand that that was about control versus risk. I didn’t understand why I wanted to do it. I just knew I did need to do it. I’ve had tremendous success. Certainly, tenants and toilets bring drama. Tenants who don’t pay you or whatever the problem is, brings drama.
It is far overcome by the fact that you can use prudent, long-term, fixed-rate loans, which we couldn’t get on my farm back in the day, and it caused us to go bankrupt with 20% interest rate loans for a period of time. You can now get these smaller rates, lock them in, and offset inflation. When you’re in a world of inflation, and the entire globe is a world of inflation, everyone has fiat currency. You need to protect yourself from inflation, even low inflation.
You can buy gold. That works. You can buy land or cars. That’s not a good idea unless they’re collectors, but you can buy art. You can buy something to hold value. If you buy real estate, crazy things happen. You only have to put 20% of the money in. Somebody will rent it from you, so you get cashflow and tax deductions, and it has universal needs. I’m a big believer in that. I did an entire series at Paradigm Life on real estate and the pluses and minuses. I go down that path.
Patrick was advertising on a real estate show at the time that I subscribed to. He was talking about how you could use other people’s money to purchase all the real estate, including the down payment. I said that just can’t be true. I talked to him and John Stewart at the time, another colleague of ours, and it just made fundamental sense.
I was a scientist and an engineer. I did the math. John Stewart, our friend, many years later, when we were colleagues, said to me, “You scared me to death when we would have meetings because I knew you were going to ask questions I didn’t know the answers to.” I just did the due diligence. It all made sense to me. I put it in place in 2011.
I primarily used it for 2 or 3 years to fund all of that real estate movement that I was doing. Again, like your banking friend, and the guy who had done it for 25 years, I was getting the same experience. There was one thing that I could count on to always be there. Over the years, I’ve developed a bigger and bigger appreciation for having a lot of liquidity, certainty, and stability. I’d been an advisor in 2014. I started in 2014. In 2020, and COVID comes around, I’ve got 35 doors for my personal properties and six years advising other people to maintain liquidity.
I had got myself in a little corner where I was maybe like 10% liquid, but we recommend 30% to 40% at Paradigm Life. If you had 35 doors, you ought to be on the 40% side of that 30 to 40 but I wasn’t because I had just made a big investment in one of these syndications and these indirect investment things. I was all in on those at the time.
What happens is the mayor of every town I own real estate in says, “We know you folks are hurting, so you don’t need to pay your rent.” We just kept waiting. My wife and I were like bated breath. I know they’re going to say, “You don’t have to pay your mortgage either.” No one said that. We checked with the banks, and they were like, “You still need to pay your mortgage.” My wife looks at me and says, “How long is this going to last?” I go look at all my liquidity, and surprised it’s all in the life insurance.
If you buy real estate, crazy things happen. You only have to put 20% of the money in, somebody will rent it from you, and you will get cash flow and tax deductions.
I had maybe 6 to 8 months, which was okay. It was better than most people I knew, but it wasn’t comfortable then a great thing happens. The syndicator who took my $500,000 at the time said, “Sorry, we got to send all this back to you because the banks are not giving loans in the middle of COVID, and we can’t close on this property. We lost the property. We’re giving your money back.”
All of a sudden, my liquidity jumps up. It was like God looking at me, saying, “Did you get the message, or do I need to teach you a different way?” It was interesting. Since then, I’ve also gone up into that tier-three passive investing, halfway between where I was for twenty years and where I pulled back to be super conservative with my own assets. What happened over the last 3 or 4 years, the economy, with what it was under the last administration, it was rough again.
A lot of those things went bad. A lot of the people’s character who had my money went bad. I had another bad experience, and I’m back now to building my own portfolio. The great thing, though, Wade, and maybe this is a conversation for another get-together. Through all of this, I also learned about being a business owner. You and I have the pleasure of working with a great group of business owners, and they’re just fired up about maintaining control over their own life, adding value with widgets, and not just real estate. To me, it’s super inspiring.
It’s a way to get more bang out of your personal effort to put into something. You can only get so much. Your property can only be so much nicer than the neighbors’, the other alternatives to rent that they have available, but your business can be orders of magnitude better because of what you’ve put into it. To me, it’s a more efficient thing. It’s a little scarier, maybe. I’m excited about that.
Understanding The Complexities Of Whole Life Insurance
To summarize the story up to this point, you spent twenty years in the Navy and then exited at 26 years of that career. Found Paradigm Life and Patrick Donohoe in 2011. You hadn’t quite retired at that point. Is that right?
About five years. In fact, I was an agent, moonlighting on the weekends and at night for a couple of years while I was still finishing up the pretty low-effort end of my career.
You found such an interest in the product you had purchased, this whole life policy that was designed specifically to hold a bunch of cash. There’s life insurance that’s just plain vanilla whole life that doesn’t accrue cash value very quickly. There’s this way of designing it where most of the money you put in is cash value.
That’s what Paradigm Life specializes in. You had started to apply that. For a few years, you started to go, “This could be my next career.” Is that what you’re saying? You moonlighted as an agent and representing life insurance companies before you formally transitioned. You hit the ground running as an agent.
I did. This is just another chapter in life. I don’t know that anybody ever joins a life insurance agency or becomes a life insurance agent as a lifetime career path. I’m not saying I’m going anywhere. I’m just saying that the thing that I needed to learn the most, and when I looked around to people I wanted to influence and help not go through the experience that I was passionate about, that I did not personally want to go through again either.
I wanted to help people avoid it. I wanted them to learn my lessons. I was passionate about teaching what I had learned. It’s just some basic personal finance lessons and how to gain control in your own life to live the life that you want. I call that agency on my show. I wanted to be able to teach people that, but I needed to learn it first. The best way to learn is to become the teacher. I was holding meetings with people primarily because I wanted to become an expert at it.
I want to become an expert about starting businesses for family members. I’m just continuing to grow and step to the next level and bring teammates on who can help do the initial meetings now. It was the thing that I was most passionate about that I was doing in all my free time. I said, why not make it official and do it?
Making The Most Out Of Alternative Investments
Sounds like we have a little bit of similarity when it comes to the research side of our lives. I’m a very deep lawyer. I like to get into the details of things. That’s probably why it took me from 2009 to 2014 to fully grasp the value of a properly designed whole life insurance policy as an alternative to 401(k) and IRA-type plans, providing more liquidity and more opportunity for investment outside of it. It’s not just purely a place to store cash, but something you can collateralize. This is why the term family bank comes in.
What do banks do? They take our deposits. In essence, that’s their collateral. They lend it out to other people. They collateralize those loans through the cars that they take liens against. The real estate, and the business property they take liens against. Banks are very careful, very scrupulous about how they approach their investing. Again, for them, investing is lending money out to us and to the population of the communities that they do business in.
The best way to learn is to become the teacher.
If we want to take a lesson out of the book of a bank, we need to look at that and go, these alternative investments, whether it’s a personally owned piece of real estate like a rental property, or somebody else’s business venture, or their multifamily real estate deal. We need to get clear on who those people are, do some background checks, and make sure there’s a good track record before we borrow against our life insurance.
If you don’t have that yet, we can certainly schedule some time to discuss if that’s a good fit for you. If you have it in place already, and many of you probably do, you borrow against things when you have a solid opportunity that’s highly likely to be successful that adds additional value to your life. A 5% return on a life insurance policy doesn’t sound very sexy, but that’s the net return. That’s the net of the cost of insurance. That’s the net of taxes.
If you’re looking at a 10% to 12% return on a piece of real estate, you’ve also got some risk in there that’s not accounted for. In reality, if you’re a higher earner, that 5%, when you add back in the tax cost that hasn’t been accounted for. It’s more like a 7% to 9% return. You’ve got to find something that’s very realistically going to be above 7% to 9% before you’d get serious about investing in it. Otherwise, you keep it in the policy. At least, that’s the conclusion I’ve come to. Have you seen similar?
I completely agree. I have a quick story on that. I had a friend who asked me to invest in his real estate business, and I lent him money a couple of times. He said, “We’re going to go buy some Texas land, subdivide the land, and sell it for people putting houses on it.” It was supposed to be about a twelve-month hold, projecting an 18% to 20% a year return. I felt like that was worth taking my horses out of the barn because if you can get a 9% to 10% return then that’s a 5% net. You have some money left over to buy the insurance or whatever. I was like, “That’s worth it.”
I was pretty excited about it because I wanted to learn land development. What happens is, fast forward to the end of this story a couple of months ago. As everything else, it went slower than anticipated. Interest rates went up. People weren’t going to go buy houses, or buy land to build houses. It was slower, and sold for lower amounts than we anticipated. In the end, he emailed and said, “Our internal rate of return was 20%.” I’m like, internal rate of return is like an annualized return that you would get at a savings account.
What I got was 20% more than I gave you over two years. That’s a 10% annual return. It was more like nine and a half. That’s what the internal rate of return is. He’s like, “You’re right, I meant total return but 20% total return is pretty good.” I’m like, “It’s not bad over a year. It’s okay over two years. It would be horrible over your lifetime.” A 20% return on your money, because time matters. That’s one of the things that Todd Langford teaches us with Truth Concepts.
Here I am at a 9% annual return, and that was pre-tax. We pay the capital gains tax on it, and we’re down to about 7%. I had to borrow against my policy at the time, two years ago, at roughly 6%. If you had said, “Gary, will you borrow against your policy to get a net 7% return? Your cost of money is 6%.” I would have said no. The risk is not worth 1% to me.
If you give me an opportunity and a likelihood of getting 10% above my cost, I’ll go put my money at risk to go do that. Assuming it’s not my emergency fund and all these other things. If I have money and I’m looking for investment, I would do it. This one looked like that initially, but in the end, it basically just covered the cost of the money.
I think that’s fairly common in these alternative investments, where there’s a hoped-for return that’s significant, as much as doubling your money over 18 months to 5 years, let’s say. When you analyze the return and you consider the risk associated with that investment and some of the emotional turmoil that can take place. I’ve personally got one that’s at an 80% loss of the money that I put in. It was supposed to be a slam-dunk fifteen-month flip deal on a large apartment complex. It’s just not gone the way we anticipated.
The market just shifted. You can’t anticipate that stuff. These are risks that I had no idea to even think about. It’s just going to be a frustrating loss. I’ve borrowed against my policy, and I’m going to have to replenish that, hopefully, from other gains on other investments. My own earnings as well, you can replenish, but that slows things down. Too often, folks, we get sucked into investments that are not good investments. You don’t know enough about them. I have another client that just lost $75,000 on a syndicate. It was like, “I didn’t even know that was possible that you can lose all your money.”
That’s the easy button, though. If we’re looking in the mirror and being honest about it, why would you not know that was possible? It’s because there was an easy button, and they said, “If you push that easy button, you get a 17% return. I’ve been getting it for 2 or 3 years. You should jump in too.” That was the level of due diligence. I’ve done it. I’m not making fun of your client. I’ve done it lots of times. I’ve even done it now. Shame on me.
We’re so trusting of other people and trusting of circumstances that have been good in the past but aren’t necessarily going to be good in the future. No matter what the opportunity, we have to be scrupulous about it. Always underwrite the deal effectively before you say yes to it. In fact, I would suggest, in a prior episode, this guy named Eddie Wilson. He talked about five key factors to underwrite deals. I refer back to that episode about how to go about the underwriting process. It’s significant. We don’t want to cut corners on that stuff because if we do, we almost always lose money. If not, we just got lucky. Do you have a thought there?
Betting On Yourself And Maintaining Liquidity
A final takeaway from this, it sounds like that’s where you’re headed. If possible, your least risk, and therefore your highest chance for the greatest certainty to get to the financial future you want, is to maintain as much control as you can stomach over your resources. I find so many business owners and all they know is their business. They’ve had their head down in the business. Four or five years into the business, it starts spitting off cash flow finally.
They figured out how to do the business. They figured out how to market. They’ve got the startup costs under control. The thing now is spitting off money. They’re like, “I’m so busy. I need to go put this to work somewhere.” If they don’t meet with us, what they typically do is they go put it into somebody’s syndication, or they go put it into the markets. What I ask them is, let’s say that you find out that you have this horse. You thought the horse was pretty cool. You take him out, and you start racing.
You realize this horse has won the Kentucky Derby. You have a few thousand dollars, and you’re racing the horse now. You realize, “I’ve got a few things I need to do. Which should I do? Should we buy the better food, or should we buy the cheaper food?” Instead put the money in a nicer vehicle to haul the horse around. If you have a racehorse that could win the Kentucky Derby, put all the chips on that horse.
Maintain as much control as you can stomach over your resources to secure the highest chance to get the financial future you want.
Move the thing around in an Uber if you have to, but put all the money into making that horse do well. That’s your own business. It’s your own real estate. It could be your own education to improve your ability to earn more money personally. Put the money there and don’t put the money in somebody else’s business. I promise you, I have not seen Elon Musk’s financial statements, but I’m betting that if I saw his statements, they would have a bunch of liquidity.
On top of that, they would have directly owned low-risk things that he’s personally doing. Spending money to go to Mars, that’s not low risk to most people, but Elon Musk is personally involved in doing it and making the decisions. To him, rightfully so, it’s low risk. I just urge everybody, take the lessons I’ve learned in my 55 years and bet on yourself. Bet on things that you have some level of direct control in. Maintain a lot of liquidity, and you’ve got a bright future.
Closing Words And Episode Wrap-up
Thanks so much, Gary. We’ll wrap there. The family bank strategy is about you having a lot of liquidity, and enhancing that liquidity through a whole life insurance policy designed specifically for holding cash that then can provide asset protection. It can provide income protection in the event of early death. It provides legacy planning. The guarantee of the death benefit passes to you as income tax-free.
It grows income tax-free. It’s accessible income tax-free at any time, for any purpose. In fact, we collateralize the policy, so we don’t remove money from it. It keeps growing at the same time we borrow against it. That’s the hallmark of a good asset. An asset that can grow at the same time you have access to borrow against it. Real estate fits that bill. Businesses fit that bill. Whole life insurance fits that bill. It’s simpler, though. It’s lower risk than those other things.
We use it as the foundation of our financial life. We maintain some money in the bank locally for emergency money. I keep at least a couple of months’ worth of my expenses in just a local bank. The rest of my emergency fund is in my life insurance policies. Personally, I have nine between myself, my wife, and my six kids. Gary, you’ve got a whole suite of policies. About how many do you have?
I have twelve, a family of four.
It’s not uncommon to have a series of policies that get accumulated over time because at one point, you could only get a policy of one size. It might be $10,000, $20,000, or $30,000 a year. My first one was $5,000 a year. The next one, you have more resources, so you can get a larger one. You do that on family members. Over time, you just have a suite of policies that are your “family bank.”
You have this resource now that can be drawn against for key decisions in your life. No government control over it. You have 100% control over how you choose to use those policies. There’s no limitation on how much you can put in other than your own ability to do it. There are no early withdrawal penalties like there are on government-qualified plans.
There’s no risk in the stock market at all. It’s completely guaranteed in terms of the contract itself. We use it as the foundation of the strategy and then apply it to the bigger picture of growing our wealth through other assets as well. Gary, again, thanks for your time and for joining me. I hope we get to do it again.
I love it. Lots of fun. That time flew by.
It sure did. If you’re enjoying this content, please take a moment to go review the show and share it with your friends and family. If you’re watching this on YouTube, hit that like button, subscribe to this show, and we will see you in the next episode.
Episode Resources
- Free Budgeting Tool “Monthly Spending Planner & Tracker”
- Gary Pinkerton
- Gary Pinkerton on LinkedIn
- Paradigm Life
About Gary Pinkerton
Today, Gary lives on the Florida gulf coast with his wife, Sue, and their two sons. He is passionate about improving people’s lives through The Perpetual Wealth Strategy, a comprehensive approach to financial planning that he first learned about as a client of Paradigm Life in 2011. Gary’s mission is to empower his clients with the financial strategies they need to achieve their goals and secure their futures. Whether you’re interested in real estate, small business, or simply want to learn from the best, schedule a free consultation with Gary today and take the first step towards financial independence.