Tag Archives: retirement

The Secret IRA

Self-Directed IRA’s are, unfortunately, a well kept secret… Well, this is one secret I won’t keep!

Do you know what at Self-Directed IRA is?  What it can own?  How it is different from a Traditional IRA?  I share with you some information on the Self-Directed IRA in this short video.

 

Video

Why lose a dime in the stock market again?

Did you know it’s not preordained that you must lose money in the stock market?  If you use the strategies of indexing and resetting you can grow your money without the risk of stock market losses. Enjoy this quick video explaining these two powerful yet little used strategies and let us know if we can help further.

Video – How to Avoid the Next Stock Market Crash

Are you in the Retirement Danger Zone?

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A bad investment can be a serious wealth stealer, but as much as it matters how much you lose, it can matter equally when the loss occurs. As you approach or enter your retirement years, declines in the value of your portfolio can be especially devastating.

“Dollar-cost averaging” describes how you can benefit even when the market goes backwards — if you don’t need to withdraw your money anytime soon, and continue to regularly invest when prices are low. Let’s say you invest $500 a month in a mutual fund. When the fund is $15 a share, you’re buying more share than when it’s $20. Then when the market comes back and your fund hopefully goes up, you own more shares, so your gains will be bigger.

However, dollar-cost averaging assumes that you are in the accumulation phase of life and will keep putting in fresh money toward retirement for awhile. It also assumes you have enough time before you’ll need the money to allow your portfolio to rebound from any significant downturns.

If you’re in the distribution phase of life and are taking funds out of that mutual fund, what you run up against is the phenomenon of “reverse dollar cost averaging.” If you are taking out $3,000 a month to help cover your retirement expenses, and you have to sell shares at the lower $15 apiece price, you’ll need to sell more of them, which means you won’t be holding them when they recover. And sales like that can cause you to run out of money quicker.

Enter the Retirement Danger Zone

The retirement danger zone begins when you get within 10 years of your scheduled retirement date, and lasts for the remainder of your life. Any losses you take during this phase can dramatically affect the quality of your later years. Many older people who experienced such pains to their portfolios in 2007 and 2008 found that they couldn’t afford to retire on schedule, or had to go back to work to supplement their income. According to the Federal Reserve, the median net worth for Americans ages 55 to 64 went down approximately 33 percent from 2007 to 2010.

Stock indexes are hitting records again now, and enthusiasm may be causing some people to forget just how fast the market can turn. It is critical for those in the retirement danger zone to begin to reallocate more of their retirement funds toward rock-solid products that remove any risk of market loss. Below are some places you could reallocate money from stock and bond mutual funds to places with much less volatility. The old rule of thumb is that you will sacrifice decent growth to preserve your principal. In many cases, that is true.

  • Savings accounts have a pitiful rate of growth and should be used strictly for a liquid emergency fund. The principal is protected and FDIC-insured.
  • Money market accounts are usually very safe and offer a higher — but still low — growth rate than savings accounts. They are very liquid.
  • Fixed annuities offer better rates than above but are not liquid. Annuities come built in with an early withdrawal penalty that can wipe out modest gains if funds are needed sooner than expected. Don’t confuse a fixed annuity with a variable annuity that tracks the markets and hence are subject to large losses. Variable annuities are not a place for retirement danger zone money.
  • Certificates of deposit offer more interest than savings accounts but take away liquidity. CDs are for defined periods from 30 days to a number of years. The longer you agree to not touch the money, the more interest the bank will pay.
  • Fixed indexed annuities are a hybrid of fixed and variable annuities that will protect your principal in down markets but allow you to participate in a portion of the gains in up markets. You can also buy a lifetime income rider that will assure a certain income for you and your spouse’s lifetime. They are illiquid for the first seven to 10 years, depending on the product. They could be a great place for IRA funds to grow safely.
  • Cash accounts allow people to deposit funds with some life insurance companies on a fixed rate of return that is usually more attractive than what banks offers. When banks are paying 0.5 percent, some of these accounts pay 3 percent. These accounts are generally liquid — but if you withdraw from the account, you must withdraw the entire balance.

Myths of Whole Life Insurance

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There are many myths about life insurance that most people unfortunately consider as facts. Most of these myths are perpetrated by Wall Street and people who want every nickel of your money in the market under their management. The first huge myth is “buy term and invest the difference” and this one is so big it required its own article to debunk.

Myth #2

Life insurance is a lousy place to put money

What I described in previous articles about designing policies is very true but there are also some other facts that blow this myth away. Simply ask yourself this question, if putting money into life insurance contracts is such a lousy place to put money, why do the biggest and most wealthy institutions put loads of their own money into life insurance products? Major Banks, large corporations, and family dynasties have been putting boat loads of money inside these kinds of policies for generations. Are they that stupid about money? Not hardly. They are very savvy with money which is why they use life insurance contracts and other products to grow and protect their wealth.

Major Banks High Cash Value Life Insurance
As of 12/31/2014, Federal Financial Institutions Examinations Council Call Reports

JPMorgan Chase 10.6 Billion Dollars
Wells Fargo Bank 17.995 Billion Dollars
Bank of America 20.794 Billion Dollars
PNC Bank 7.699 Billion Dollars

Whole life insurance is too expensive

When someone tells me that I will simply say “in relationship to what?” If you are just comparing it to premiums for a term policy on the same coverage amount you are correct. However, because of the tax free guaranteed compounding of a proper life policy many of my clients will overcome the actual cost of the insurance in the first few years of the policy. These policies will get to the point where they self complete which means the insurance company owes you more than you owe them in minimum premiums. So if you decided to, you could have the basic premium paid out of cash value and your cash value will still grow and move forward. So when 20 years from now you still want coverage and go to extend your old term insurance policy or buy another one, get ready for the shock of the new premium based on your attained age. If you had strongly funded a life policy 20 years before, that policy’s death benefit would have been growing these last 20 years (all part of proper design of the policy with a proper carrier) and no more funds would be required to maintain the policy due to the huge cash values you have accrued. You would have also have had access to large cash values to use for other wealth strategies.

Myth #4

Universal life or Indexed Universal life does the same thing as Whole Life

This is such a myth that I will need more than the space allotted to let you know how these policies really work over time and why the cost of insurance will skyrocket over the life of the policy. Please download my free report at my website and find the indexed universal life report under the video. Don’t you dare buy one of these policies until you read this free report. If you already have one of these policies get the report and be thankful there is probably something we can do for you to help. Ask us about a 1035 exchange of that kind of a policy to one that is better suited for long term and being your own bank.

Myth #5

I am too old or in too bad of health to obtain a life insurance policy

I have clients all over the country who once believed this to be true but now own life insurance policies. If you like the concepts of self banking and insurance policies don’t assume you can’t qualify for one of these policies. You may be able to qualify and the numbers will still make sense. If you indeed can’t qualify yourself there are other options.

Many of my clients take out policies on their children or grandchildren which mean the younger, healthier person qualifies for the insurance but my client owns the policy with all the benefits. I have clients in their 70’s who took out new policies but put the policy on their adult children. They then went on to use the funds in the policy as their own bank. Contact us to see if this might be an option for your situation as well.

When I am speaking to a crowd on this topic I often call a properly designed whole life policy as the “one account” because it is so truly unique and powerful. It is the only account that I am aware of that can function with many different uses that all work together. This is the only account that can be:

Savings Account– When you are not using your money it is sitting inside of the life insurance contract collecting much more in interest than it would if it was sitting in a bank. As of this writing most savings accounts are paying 0.5% or less and some life carriers dividend scale is almost 6.5% on life policies. Even after you take out the cost of insurance in the early years of the policy your money still does far better than dying a slow death in a traditional bank. You have easy access to your funds just like a savings account so why keep most of your money in the bank doing nothing for you or your family?

Your Personal Bank– Just as described in the last chapter you can put these funds to use to plug up your 4 massive wealth drains and help you grow wealth as the bank. Because you are doing this inside of your life insurance contract your earnings are tax deferred inside the policy and when properly done can be accessed tax free. Also with some policies and carriers the money you borrow out will still be credited with growth and dividends. This is not common but there are carriers that allow this and we can help you determining which carrier is best for your needs

Retirement Account- There will come a time when you desire to pull an income stream out of your policy. You will be able to either withdraw the money as you see fit (not optimal most of the time) or take policy loans that you will not pay back. In most cases policy loans are optimal because you don’t have to pay taxes on policy loans. If you choose, you don’t have to pay the policy loans back during your lifetime. The loans can be paid back out of the death benefit after you pass away. For instance you have a $1,000,000 death benefit but have borrowed out $250,000 in policy loans and deferred interest and you pass away, your family will receive the $1,000,000 death benefit less any outstanding policy loans which in this case are $250,000. This will produce $750,000 tax free to your estate after you pass away.

Rainy Day Fund- You should never borrow all the cash value out of your policy but rather keep a chunk of money in the policy in case of emergency. This is a rainy day fund that produces solid interest rates and return.

Estate Creator- Let’s not forget you are creating all this wealth inside of a life insurance contract which will automatically leave behind money for your family and/or anyone else you choose after you pass away. My mom, as she aged, started to worry more about leaving money behind for her family instead of living as abundant of a life as she should have lead. This is the only kind of program where you can spend every nickel during your lifetime and still leave behind extra for your family. Wherever you have your money saved or invested currently, ask yourself if the account you have it in has all of the benefits listed below. These are all benefits of a properly designed life insurance contract. Please feel free to contact us if you need more information.

Indexed Universal Life – A Ticking Time Bomb!

How would you like to put money into a financial product that lets you benefit from market gains, but never feel the pain of its losses? The money and growth inside the policy will be 100 percent tax-free for life. That’s the seductive pitch often used to tout an investment called indexed universal life insurance.

Based on that sales pitch, it would be no wonder if your response were, “Sign me up for that right away!” Unfortunately, all that glitters is not gold. The sales materials for your IUL policy will almost always be illustrated with unrealistic compounded rates of return. But as we all know, stock market growth does not simply compound over time. Sure, you can measure an “average rate of return,” but in the real world, prices oscillate, and performance can be a creature of timing much more than investing.
Bomb
In fact, an indexed universal life insurance policy will almost always leave you holding the bag.

Let me clarify first that these are entirely different investments than the “properly designed whole life policies” that I wrote about in February. When you invest money inside an IUL policy, you’re setting up a life insurance policy with an annual renewable term cost of insurance. The extra money placed in the policy goes into sub accounts, and those funds will generally follow an index (or indices) in some form when that index increases in value. This structure will cause the cost of insurance to rise every year, which is why most people let these policies lapse in later years.

One Man’s $50,000 Premium

A retired neurosurgeon at one of my seminars told me about his IUL nightmare. He invested substantial money in an indexed universal life insurance policy when he was 49. He funded this policy for 20 years, and the projected profits never seem to materialize. Among the reasons why:

  • The projections that were illustrated for him were not realistic.
  • The expenses of the insurance and many other hidden fees come out daily.
  • The guaranteed growth of 3 percent was only payable at policy cancellation.

Much worse was the bill when he turned 70. This policy was structured with a 20-year guaranteed term policy for the death benefit, and his premium hit almost $50,000 — and not one nickel was going into any cash value.

Surely, something must be wrong, you say? He assumed it was clerical error until he called the carrier and was told that is how those types of policies are built. In the 21st year of the policy, the premium was supposed to be almost 100 times the first year’s premium, and it was only going to rise further, since term insurance gets more expensive as people age. This man closed the policy down, which meant he no longer would receive the death benefit, and even the pitiful gains his investment had realized were now taxable because he’d lost the umbrella of the insurance policy tax structure.

Lousy Ideas, Without Clear Numbers

Welcome to the wonderful world of indexed universal life insurance. I can’t wait to see in this articles comments that somehow, one of you knows about a “special product” that has a “no lapse” guarantee or some other new (and yet old) wrinkle that allegedly makes these lousy policies better. These dogs with fleas are generally sold to those with high incomes, such as doctors, as a way to put loads of money away in a tax-free environment instead of the limitations of an individual retirement account or 401(k). The illustrations are not realistic and fail to speak plain English as to what is going to happen with these policies.

If you have been sold one of these policies, examine the illustration you were shown and notice the cost of insurance cannibalizing the cash value in the later years of the policy. Study the cost of insurance, which will never be plainly spelled out in dollars and cents (your first clue something is amiss) but rather in decimal points. Watch how that number grows in the later years.

If you have the misfortune of having one of these policies, you might still have an option to roll into a 1035 tax-free exchange. It would allow you (assuming you qualify health-wise) to exchange your cash value in your IUL policy into a properly designed whole policy with solid guarantees and fixed costs all disclosed up front.

For more free training and information on this topic, watch our video of the week and get free downloads.

Guaranteed Income (Part 3)

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Last week, we talked about investing, the second circle of wealth in my series of “Six Absolute Necessities for Acquiring Long-Term Wealth.” The third is guaranteed income. When I study people with successful retirements, filled with abundance and options, almost all have things in common:

  • They carry very little, if any, personal debt.
  • They have stable, secure income from multiple sources that they can set their watch by every month
  • Starting about 10 years before they retire, they begin shifting their assets from riskier investments to low- or no-risk income assets.

A mortgage is generally the biggest debt most of us have. Many argue that you should never pay off your house because the equity you put into it is tied up and not making you money. They might recommend borrowing as much as you can now because interest rates are low.

I say you can have the best of both worlds. First, pay off your mortgage before you retire. By adding small amounts directed to your principle every month, you will take months, even years off your payoff date. When your house is paid off, get the biggest equity line of credit you can. This way, if you see an attractive investment opportunity, you can put your equity to use, and if you don’t, you have removed the pressure of a big mortgage payment in retirement.

If you can pay off your mortgage while you are working, why not now shift that payment over to a solid savings or income product? This could work out to tens of thousands of extra dollars producing monthly income for when you retire.

An abundant retirement is about strong positive cash flow that you can count on for years to come. Do you have any idea how much money you need to retire every month? Do you know where you can get that income from? Do you have enough money for home health care or long-term care? Are you protected from big market downturns during your retirement years? How much will inflation eat into that monthly income needed?

Can You Answer These Questions?question mark

All these questions must be part of an income plan. We calculate these for clients all over the country. First, know how much income you and your spouse will receive from Social Security when you retire. You can get an estimate from the Social Security Administration. If you believe that number is at risk because of issues with Social Security, you better start putting more away and growing it safely.

If you need $5,000 per month to retire and the Social Security for you and your spouse is only $3,500, then you have a $1,500 shortfall. Do you have a pension? How much will that be when you begin to draw it? Do you have a 401(k) or Individual Retirement Account? How long could that account last if you need to draw $1,500 a month — $18,000 in a year? Will you have to pay taxes on what you take out? If you have a 401(k) or traditional IRA, the answer is yes. If you lose 50 percent of your capital to a bear market, how long will you be able to get $18,000 per year?

As you get to be in what we call the “retirement danger zone,” which is 10 years before your projected retirement, you need to start shifting assets away from market risk and over to guaranteed products. A solid fixed indexed annuity with a long-term income rider might be a very good call. I wrote an article about the different types of annuities and how to purchase one that fits your needs.

A lifetime income rider (state and product variations exist) will guarantee that you have a certain amount of income (depending on how much you have in your annuity and at what age you start withdrawing) for you and your spouse’s life. If you live to be very old, your normal retirement funds might run out, but a lifetime income rider guarantees that income stream regardless of what happens to the underlying cash in the account. Also if you have five to 10 years, you have time for that income rider to grow. Many income riders offer 6 percent and more guaranteed growth every year.

When you purchase a $200,000 annuity, many companies might offer a 10 percent bonus on your initial purchase price so your starting amount would be $220,000. When you add compound growth at 6 percent over 10 years, your income rider would top $400,000. Then you would start to draw your lifetime income at 6 percent of the $400,000, giving you $24,000 a year income for you and your spouse’s life. Presto! You have filled your income gap. If you have the resources to purchase another annuity, you might get one with a cost of living clause to hedge against inflation.

John Jamieson is the best-selling author of “The Perpetual Wealth System.” Check out this week’s featured video.

The Myth of “Average Rate of Return”

We are told that stocks are the way to wealth and that the market has averaged (pick a figure) over the last (pick a time frame) and so it will continue to do the same. It is important for you to understand that “average rates of return” can be easily manipulated and that whatever figure you get from Wall Street does not mean that your money will average that growth rate. (Dow Jones Industrial Average Stock Market Historical Graph)

Remember this example well: over 4 years, how is it possible to invest $100,000 on year one and average a 25% rate of return for four years and have less than $100,000 after year four and have never taken a dime out of the account during that time? The answer is so easy once you understand how this works. Invest $100,000 into the account and it grows at 100% (doubles) in year one so now it is worth $200,000. Year two, the account falls by 50% (half) putting the value back down at $100,000. Year three, the account grows by another 100% and the money is back up to $200,000. Year four, the account dips back down another 50% and our money is now back to $100,000. Now you take out taxes you made on the good years (the way mutual fund taxes work is you can owe tax even though you have not sold the asset) and fees, and time value of money and your account is worth quite a bit less than the $100,000 you started your investment plan out with four years before.

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Now take a look at your “average rate of return” and you will notice that if you add up 100% return years twice and subtract out your 50% years twice, that leaves you with 100%. You must divide that by the 4-year cycle and what do you get? Of course, I am a high school failure and college dropout but it looks like a 25% “average rate of return.” Did your money grow by 25% a year? Not hardly! If your money would have grown at 25% a year compounded annually your $100,000 would now be over $269,000. This is a far cry from the $80,000 your probably have left in your account when you “averaged” 25% per year for four years. Most of your 401k’s are earning an average rate of return.

Be very careful to focus on growth, not rates of return. If I am selling some kind of financial product and don’t like the last 4 year average I might try to show you the 8 year average. If that still stinks maybe the 15 year average will work? I have seen people in this day and age pull out 100 year averages to attempt to prove their point. The only problem is the economy of today doesn’t even vaguely resemble the economy of last century. This means that a 100 year average is probably a lousy way to try and predict the growth for the next 10 or 20 years of any particular product.

Instead of average rate of return focus on cash flow in and cash flow out of your accounts. Don’t get sucked into the age-old trap of just thinking about rates of return. Many times they are put in place so you will take your eye off the ball of what’s really happening. What’s really happening is that while we are all focusing on rates of return and the rise and fall of the stock market, we are happily pouring our wealth out month after month to the banks and other places with no real plan to stop the insanity. Wealth without Stocks will give you that plan.

Visit us at Perpetual Wealth Systems to learn more.

You’re Getting Ready to Retire… is Your Money Ready?

The baby boomers are retiring and preparing to retire by the millions: According to the AARP, 8,000 people turn 65 every day in America. But even if boomers are ready to retire physically, psychologically and chronologically, many are not ready financially.

I’m not talking about the usual question of whether or not you have enough money to retire. This discussion is about the proper use of that money. I work with clients from all over the country to map out their own financial strategies, and the first step is educating them about four phases of wealth.

Accumulation

The accumulation phase usually begins about age 25 or when you begin your full-time profession. This is when you start putting money away in retirement vehicles, such as 401(k) plans, Individual Retirement Accounts and other alternatives.

During this phase, you can take losses more easily since you have time to recover. Dollar cost averaging is your friend. You can take reasonable risks and might consider more aggressive funds, stocks and bonds. You should also consider solid real estate investments. You can use a self-directed IRA to own real estate and other non-traditional assets inside your retirement accounts. This phase will last until 10 years before your desired retirement age.

Pre-Retirement (aka Retirement Danger Zone)

Pre-retirement is when you begin to reassess your risk tolerance and start to realize that any losses you take now might dramatically affect your ability to retire at your scheduled age. It is when you begin to shift the bulk of your retirement money to very safe, stable, low-risk assets. No more than 30 percent of your portfolio should be left in the market, and that should be in low-risk, blue chip stocks. You also might consider selling off your real estate holdings or paying off mortgages and loans, giving you great cash flow and removing most of your downside risk. If real estate values drop dramatically, it hurts much more if you are leveraged with big mortgages. When you own properties free and clear, they are still great cash-flow machines even if the values drop. You should also consider using a portion of your cash to purchase a solid, low-fee, fixed-indexed annuity.

Retirement

Once you leave your profession — and your paycheck — risk and loss are your most dangerous enemy. At this point, most of your funds should be in guaranteed products. There is a myth that guarantees and low risk mean lousy rates of return. Seek out low- or no-risk alternatives to mutual funds. If you keep most of your money in mutual funds now, you are subject to the ravages of reverse dollar cost averaging, which that can gobble up retirement money in a hurry.

Retirement is all about hands-off income that you should be able to draw from several sources. These can include Social Security, pensions, 401(k)s, IRAs, cash value life insurance, free and clear real estate, fixed indexed annuities with lifetime income riders attached, certificates of deposit and standard savings. You could also be receiving payments from businesses or assets you sold when you retired. Creating income from these assets will make sure you can live in style for the next 30 years and beyond. During this time, you should also plan a long-term care or home health care strategy.

Legacy

The legacy phase represents what you would like to leave behind for family, charities, foundations and other causes near and dear to your heart. Ask yourself this question: What do I want to accomplish after I am gone? Then set up a legacy plan with an estate attorney to make sure your wishes are carried out with your money

People have widely varied opinions on this phase. Most want to leave a nice nest egg to their children and grandchildren to help with education and other expenses. But other people say they started with nothing and want to leave little to nothing behind after they are gone. One way to leave behind a fantastic legacy is to set up a properly designed life insurance policy while you’re still relatively young. It will be a tax-free retirement asset during your lifetime and leave behind tax-free cash for your heirs.

If you master these four wealth stages, you will be assured a life of financial abundance.