The Accumulation Phase is the Missing Link

With respect to income and retirement planning, there are 3 phases of life.  The introduction phase, the accumulation phase, and the preservation phase.  The second phase, the accumulation phase, is the phase of life where you accumulate funds to retire (working years of life), pay off as much debt as possible, and try to achieve the best quality of life you can.  This is the phase that is destroying the American dream of retirement.

Most of us grew up with the illusion that if you get an education, you’ll work for a great company and enjoy a comfortable retirement.  Those days are over.  Education (the introduction phase) still is a vital step in preparing for your career path; however, working your entire life in exchange for a pension plan is an envied dream to most Americans today, and nothing more.  Unless you are a government employee, the odds of having a guaranteed income stream throughout retirement is out the window.  This is why the planning process must be revamped when discussing the accumulation phase.  You simply are not able to work for 30 years, get a gold watch, and have a check coming in month in month out.   Today, the accumulation phase of life requires a calculated approach depending on your financial goals. 

The odds of an individual under the age of 45 receiving social security starting (earliest) at the age of 62 is highly unlikely.  With the amount of baby boomers set to retire in the next 15 years, the social security well will run dry.  When you take into consideration that most retirement strategies today are deferred compensation plans which are market linked, the scenario can become quite concerning.  Most deferred compensation plans have either broke even over the last decade, or have lost value.  So in order for one to get back on track, they are likely to have to double the historic return in a global recession; a highly unlikely probability.  So what is the solution to this dilemma?  Financial guarantees.

There are products today specifically designed to provide an income stream for life with all of the flexibility above and beyond the traditional pension plan.  Many IRAs, 401ks, and other pre tax dollar investments have been converted into specialized products that can guarantee an income stream for life.  Informed Americans are converting their deferred compensation plan into these vehicles simply because their need for an income stream during retirement greatly outweighs the burden of hedging against risk in a global recession.   The truth is most IRAs in retirement are used as an additional income stream or are passed on to loved ones as a legacy.

Let’s take a closer look at how lifetime guarantees are helping protect against the absence of both the traditional pension plan and social security.   Assume John is 50 years old and has been in the workforce (accumulation phase) for 25 years.   Since the age of 25, he has been maxing out his 401k contribution each and every year.  Three years ago John was laid off and started a new job with a lower salary soon after.  Since his current employer is not matching his 401k he sees no incentive to roll it over to that product, not to mention he cannot afford to with the reduction of income.    John has not done well on his return over the last 10 years, and was lucky to break even.  Today the balance on his old 401k is $150,000.  John does not have a pension and wants to retire at the age of 65.  His sole objective is to provide an income stream for his retirement years, as he knows he is behind in his planning and does not have a pension plan.  Furthermore, he realizes that counting on social security to be available 12 years from now (at the soonest) is pretty much hit or miss.  For these reasons, John explores a lifetime income approach.  If John were to roll over his 401k into a traditional IRA and utilize financial guarantees, he would be eligible for an income stream of over $1,650 per month starting at the age of 65 without adding one more penny to his account.  This income stream would be guaranteed for life, regardless of any future market conditions.  As an added benefit, if John were to ever become sick or have to go into assisted living, he would have instant access to all of his cash value without penalty.

There are many Americans that have very similar circumstances to John.  The number one fear in retirement today is the fear of running out of money.  Just 10 years ago the number one fear in retirement was the fear of death, as it was for several decades before.   As financial times change, so do retirement trends.  The financial crisis has caused many people to exit market strategies in exchange for an income stream guaranteed for life; especially without having a pension or being able to receive social security.

Americans for the most part do not have a contingency plan in place.  Unfortunately, there has not been enough of an emphasis on the importance of income planning.  In a global recession, priorities are placed in short term solutions aimed at the current state of the economy, failing to address long term goals.  The financial goals are concentrated to the economy as a whole, and rarely dedicated to financial guarantees in retirement.  With the Federal stimulus and the struggling economy, the individual has an inherent responsibility to plan for their future income outside the recommendations of a financial planner.  Knowledge is the key.  The more avenues you explore with respect to retirement planning the more likely you are to achieve your financial goals.      

How "Depressed Data" Hurts the economy

It is no secret that market indexes like the Dow Jones Industrial Average have made a roller coaster seem like a little speed bump.   These drastic “shifts” in the market are unfavorably becoming the norm.  Unfortunately, this trend is going to continue. 

“Depressed Data” (lowering economic and financial expectations way down) is causing the market to rally under false pretenses, which in turn is giving way to excessive downturns in the market.  By lowering expectations, or depressing data, the market is being artificially inflated to move upward on subpar news.  When the market is being propped up on insufficient data, its foundation becomes weak; which paves the way to excessive volatility.   This strategy of being “overly optimistic” is causing an unnatural rise in the market.  For example, the market has rallied several times in the past couple of years when the unemployment filings went up.  Since unemployment filings came in below expectations (unemployment was lower than the data anticipated) the market rallied as a positive, or optimistic, sign.  Only because the depressed data showed unemployment filings were not as bad as initially thought, the market rallied accordingly.  This approach to sustaining growth in the market is not without consequence. 

Consumer confidence in May 2012 dropped to a 5 month low as investors are becoming more cynical about the economy.  Who can blame them?  Volatility has been present on a seemingly day to day basis, and despite what the talking heads say there seems to be no long term solution in sight.  This is a trend that needs to change to reverse this effect.  The problem is that Wall Street is not concerned about how the market gets propped up, only that it happens.  Simply put, this is a short term solution to a long term problem that is not going away.   

Because of the depressed data and the expected volatility, investors are using methods known as annual reset to lock in their gains on an annual basis without the threat of volatility.  Annual reset is able to do this because returns investors receive with this strategy are not stocks or securities, and therefore are exempt from volatility associated with securities.   These capped earnings guarantee that your money will never go backwards, or lose value, to any external events.  In fact, investors that implemented this approach prior to 2001 never lost a penny during 09/11/01, nor the financial collapse of 2008.  If you compare the average return of a $100,000 in the market (S & P 500) to this strategy from 1998 to 2011, annual reset outperformed the S & P 500 by at least $50,000 in most cases.  30 years ago these returns would not be typical; however they are today due to the volatility and Federal stimulus.

This is why investors are exploring fresh tactics in order to offset their losses, and instead are taking advantage of moderate returns.  They are embracing financial guarantees which are absent on Wall Street.  Investors are taking comfort with strategies of lifetime income and tax deferred growth just to name a couple.         

A Realtor's Deferrred Compensation Plan

A realtor’s deferred compensation plan (DCP) cannot follow a traditional suit.  The traditional 401k, or pretax dollar, DCP is not usually an avenue pursued by realtors.  Why?  Because they don’t operate on a salary or hourly schedule, therefore funding into these types of DCPs can prove to be difficult. 

A realtor is usually a self employed professional that requires liquidity at a moment’s notice and the flexibility to fund the plan at their discretion.  This poses a problem for the traditional DCP.  For example, if a realtor participates in a DCP (like a 401k or IRA) and is under the age of 59 ½, they will incur a 10% penalty from the Federal Government for earl withdrawal, and will end up paying ordinary income taxes on all of the funds withdrawn.  Not to mention they are capped on how much they can contribute each and every year.  What a realtor needs instead is a post tax DCP that is exempt from these restrictions with all the desired flexibility. 

DCPs that we offer are funded with post tax dollars, and if properly structured can come with all kinds of bells and whistles.  First off, all of the DCP plans we offer for self employed individuals will avoid all future market volatility and will allow for moderate returns that grow tax deferred with the capability of earning interest as high as 12% year in and year out.  Some of our DCPs come with a guarantee of 2% credited in years of volatility or market downturns (regardless of how far the market falls).  Secondly, our DCPs do not have any penalties for early withdrawal, nor is there any restriction on how much can be contributed to the plan each year (payments to the plan are flexible to coincide with commission checks).  Finally, the funds can be structured to avoid any Federal income tax upon withdrawal through the form of a loan against your own funds. 

Both small business owners and professionals are actively using these types of strategies in order to protect themselves against rising federal income taxes and expected volatility.  They are applauding the fact that these vehicles do not require structured payments to fund the DCP while maintaining liquidity in order to maintain day to day operating expenses, while maintaining the capability to withdrawal the funds exempt from federal income tax.  In fact, many businesses are using this strategy similar to a checking account in order to handle monthly expenses.

To learn more about how these unique benefits can work for you, please fill out our customer contact submission form.    

Fear and Greed on Wall Street

A recent article on www.Money.Cnn.com titled “Fear and GreedIndex” illustrates an accurate description of what is happening on Wall Street.  Because of the recent volatility stemming around Greece and the Euro, and unemployment domestically, the fear gage for investors is all the way in the red.  This means that investors as a whole do not put much faith in the outcome of their investments.  Bottom line, volatility is becoming a normal event investors are unwilling to tolerate moving forward.  Why now?  It’s simple, most investors’ retirement and financial goals have been severely disrupted over the last 10 – 12 years. They have to make up the losses and know that a volatile marketplace will not get them where they need for a secure retirement.   Unfortunately, this trend is likely to continue and many portfolios will continue to suffer losses like we have seen over the last few years.   

The fear and index gage pinpoints extreme fear for investors in every category.  Every aspect of investing is being marked as red, from junk bond investing to safe money havens.  However, Wall Street’s safe money havens are quite different from other Safe Money Vehicles (non-Wall Street affiliated products).  On Wall Street, a safe money haven usually refers to either commodities such as gold and silver, which can be volatile, or FDIC insured accounts (i.e. money market accounts) that will usually earn 1/10^th of 1% interest.  Because Wall Street designs their business model around non-guaranteed leveraged assets, their safe money havens are either susceptible to loss of value (exposed to market volatility) or are accounts that basically break even (usually FDIC insured), exposing your money to inflation risk.

Make no mistake about it, the reason the fear gage is so high is because in the market, investors have no guarantees in place in order to achieve their long term goals.  With non-leveraged assets (assets with a minimum leverage ratio of 1:1) you can provide a moderate return without subjecting your money to volatility through a unique concept known as annual reset.  Annual reset is a regulated concept (financial products protected by law) that will ensure you will never take a step backwards due to excessive volatility.

There are millions of investors who have taken advantage of annual reset in order to protect their money from volatility.  Those who implemented this philosophy prior to 2008 never lost a penny in the financial crisis when Lehman Brothers fell (at that time Lehman Brothers was leveraging their assets on a ratio of 33:1), and have experienced moderate returns since that point in time.   These investors understand that regardless of how the market performs they have underlying guarantees that offer lifetime income or tax advantaged withdrawals (for those who qualify) that will avoid volatility and allow for moderate returns. 

 Never heard of these financial products?  There is likely a good reason why.  Financial planners often fail to make recommendations to products that use annual reset (offering financial guarantees) because they deem it a conflict of interest.  Financial planners are in the business of hedging against risk, not proving total protection from risk.  These philosophies differ by the way the planning phase (usually based on how institutions leverage their assets) is approached in both long term and short term goals.  Annual reset is tied to products that do not offer securities, which is often interpreted as a lack of control by financial planners.  Furthermore, there are many planners that do not buy into eliminating the downside of the market in exchange for financial guarantees that come with capped earnings.  They feel their market driven products can yield a favorable return over a period of 30 plus years, as the market has done historically.  I disagree with this philosophy.   The “traditional diversified portfolio” flew out the window when the Fed pumped trillions of dollars into the market in order to offset the financial crisis of 2008, an event that has never happened in US history.  Not to mention many investors do not have 30 plus years to wait the market out, especially with zero guarantees.      

Until investors explore alternatives to Wall Street based products, the fear gage will continue to fall into the red and their financial woes will not be behind them.  The question to ask yourself is how much time and money are you willing to lose before the market corrects itself?  In other words, what is your contingency plan?  Exploring financial alternatives that are designed to protect your money from volatility is key to protecting and preserving your future financial goals.      

Market Set to Open in the Red This AM

The Dow Jones Industrial Average is set to open over 75 points in the red this morning amongst mounting concerns on Greece leaving the Euro. 

To add fuel to the fire, Dell missed second quarter projected growth and Morgan Stanley was subpoenaed by regulators on the mishandling of the Facebook IPO.   

Of course, even with all this news, Greece is still receiving most of the attention with fears of default from the Euro.  “Uncertainty surrounding Greece’s membership in the euro and possible contagion into other countries plagued by high deficits just isn’t going away, at least not until Greek elections have taken place on June 17th,” said Markus Huber, head of German sales trading at ETX Capital in London.

EU leaders are to meet in Brussels today to discuss growth strategies in order to try and offset a sovereign debt crisis that has knocked out $4 trillion in equity markets worldwide this month. 

Domestically, the Congressional Budget Office (CBO) predicts a recession if the right budget cuts are not put into place.   The CBO warns that the US economy would contract by 1.3% on the expired George W. Bush tax cuts, while an additional $1.2 trillion of Federal budget cuts will go into effect in 2013.  Because of the presidential election, Congress is likely to avoid tackling these issues until our new President is named.   Unfortunately, this will not give Congress much time to come up with adequate solutions.

Understanding How Annual Reset Avoids Volatility

Annual reset is the ability to eliminate the market downside (volatility), in exchange for a portion of the market upside. Depending on what cap or spread (the maximum amount of interest you are able to receive) is set in your contract will depend on how much of an upside you can participate in.

The reason why you cannot lose a penny of your principle, or principle lost due to market volatility, is that your money is not participating in a security. Instead, your interest crediting method is linked to a general index of the market, such as the S & P 500. Since your money is not in the stock market you will not experience a loss of your principle due to market downturns. The strategy being, “If I can eliminate all the market downside to my portfolio, I won’t need to be concerned about maxing out my returns to offset future market losses”. Pretty much every financial professional out there will tell you that the key to achieving your financial/retirement goals is to eliminate the big drop offs in the market. On my radio show, “Safe Money Austin”, I often compared this concept to a batting average. If you only focus on hitting singles and doubles, instead of trying to hit a home run, you can increase your batting average in the long run.

Many investors I come across are shocked to find out that you can participate in a portion of the market upside while eliminating all of the market downside. I am often asked “How can you do that”, or they will say “That sounds too good to be true”. My response is always the same “You will only be recommended what the financial institution, or financial professional, is able to offer”. If you invest with an Investment Bank, or a Wall Street firm, they are probably leveraging assets to promote their financial services. When you leverage your assets, your liabilities will exceed your total assets, making it almost impossible to eliminate your market exposure. When your liabilities exceed your total assets, you cannot guarantee the products you offer.  In fact, this is one of the main reasons why Lehman Brothers collapsed in 2008. They were leveraging their assets by over a 30: 1 ratio. Which means that for every 30 million dollars of securities offered, Lehman Brothers was backing it with 1 million dollars. Because most Investment Banks leverage their assets they do not have the financial strength to back all of their financial products.  This is the reason why banks have to purchase FDIC insurance when they are offering guaranteed products like a CD or a checking account.

The financial institutions that we work with are prohibited from leveraging their assets. In fact, the state makes it mandatory that their total assets always exceed their total liabilities. Truth be known, all of the companies we work with have a minimum of a billion dollars above and beyond their total liabilities. Because these Institutions have assets that are able to back all of the financial products on a 1:1 basis, they can recommend products that are exempt from market volatility. In short, the reason why you may have never heard of annual reset is probably because the financial institution that you invest with is in the business of hedging against risk, not protecting against risk.

Volatility Expected to Continue

A recent article posted on Yahoo Finance, “Wall Street Week ahead: Market is oversold but major signs say “sell”, warns investors of a volatile week ahead.  Corporate earnings have come to an end and lingering concerns with the Euro and Greece persist.   US economic data is raising doubts about our pace of growth. 

This is a drastic change of tune from many talking heads saying that the market could only climb higher from over estimated optimism.  It’s no surprise that this over optimism is designed to bring down the fear gauge, a tool used to predict trends in consumer behavior.  The philosophy being, the less fear investors have (or the more confident investors are about the economy) the better markets, or indexes, will perform.    I feel what we are experiencing is a reality check, and issues like Greece defaulting are being pulled off the back burner and are taking center stage.  It’s no secret that this is another round of volatility we are likely to see for several years.  

"The market is extremely oversold. Nonetheless, all major indicators remain on sell signals," Larry McMillan, president of options research firm McMillan Analysis Corp, said in a report on Friday.

"We expect a powerful but short-lived rally should be coming soon. But at this point, barring some major shifts in our indicators, it may only be a rally in a larger down-trending market," McMillian said.

A disappointing debut of Facebook did not help the market’s case last week.  Although Facebook did just better than breaking even, other social media sites took a hit for the worst.  Technical glitches in over traded securities added fuel to the fire. 

Why You Never Want to Break Even on Your Portfolio

With respect to your portfolio, if properly structured, you can have a volatile market work to your advantage.  Many investors today have been lucky to break even over the last 12 years, and the end of the financial crisis is nowhere in sight.  “Stay the course” is a phrase that is finally being second guessed, and rightfully so.

A huge misconception of long term financial growth is that if you’re able to somehow regain all of your previous losses, you’re back to even. The mistake people make in thinking this way is to discount the effect of triple compounding interest.  When you fail to earn any interest over a decade, you also delay reaching your ultimate goal by at least ten more years.   For example, I have had many investors (now clients) tell me that over the last decade they did not take a hit because their portfolio was able to regain the losses they sustained, and they were content on breaking even.  It’s true that their principle balance did not lose value; however, it did not gain any value either.  This is why the last decade is commonly referred to as the lost decade. 

Once you factor in the loss of interest, there is plenty of evidence why you cannot afford to have another lost decade.  When volatility causes you to break even over a period of 10 – 12 years, it’s like those years never existed, metaphorically speaking.  Let’s consider the rule of 72 that was created by none other than Albert Einstein (yes, Einstein helped in the financial world as well) that says if you divide your interest rate X by the number 72, the answer will tell you how many years it will take to double your money (assuming triple compounding interest).  So if you consistently averaged  a 6% return, it would take you 12.5 years to double your money using the rule of 72.  By way of comparison, if your break even or you return is zero, you will never double your money.  Unfortunately, many investors over the last 12 years have been lucky to break even.  There are many publications on this subject.  One that sticks out in my mind was designed by Wells Fargo in November of 2011 titled “The new retirement age is 80, not 65”.  Wells Fargo surveyed a pool of people and determined that due to economic conditions, the traditional retirement age of 65 is now being bumped back to age 80.  This trend is very likely to continue. 

With volatile times ahead, it is extremely unlikely to have the consistently higher average returns on your money needed in order to offset this lost decade.  I’m of the opinion that this next decade could very well be more volatile than the last decade.  Those who choose to just “stay the course” and not explore viable alternatives can very well experience the same damaging effects of breaking even that they had over the last 10 – 12 years.  If you compare volatility over the last 10 years (the stock market) to a concept known as annual reset, there is no comparison.  We all know that this last decade was an unlikely event in the stock market, and returns in the market show promising results over a period of 30 – 50 years.  However, the Federal Government has never had to intervene with trillions of tax payer dollars in order to correct a market downturn.  The truth is most investors don’t have 30 – 50 years to wait in order for their goals to be met; especially with zero guarantees in a volatile market.  

So now we ask “What are the viable alternatives”?  Many investors are turning to annual reset in order to bypass expected volatility.  Annual reset is a core financial concept that allows you to earn a portion of the market upside while eliminating all of the market downside.  Financial institutions that provide this are able to do so because they are prohibited from leveraging assets, and instead are required to hold cash reserve pools to protect the investor’s money on a 1:1 basis.  Through this philosophy, the investor can exempt all future market volatility in exchange for moderate returns.  Earnings using this philosophy are typically capped in exchange for the financial institution absorbing all of the market risk.  If you look at annual reset over the last 12 years on a $100,000 example, many products that implemented this concept outperformed the S & P 500 by over $60,000 (contact us for anillustration).  Investors that adopted this philosophy, especially prior to the financial collapse in 2008, have not missed a beat in achieving their long term financial goals.

To recap, through annual reset investors are able to eliminate the market downside while taking advantage of a portion of the market upside.  These financial guarantees (guarantees of never losing a penny of your money to volatility) are possible through cash reserve pools put in place to protect the investor’s money.  Assuming the next decade is any reflection of the last 10 years, billions of dollars of investor money will be protected while receiving a moderate return.     

A Financial Reflection Since May 1st, 2012

From May 1^st, 2012 through May 17^th, 2012 the Dow Jones Industrial Average has dropped by over 800 points.  Fears of Greece departing from the Euro as well as concerns about our nation’s unemployed are taking center stage. 

Most experts agree that the likely hood of Greece defaulting from the Euro is very high.  The general consensus is that default could be sooner than later.  The question is: what is to become of Spain if and when Greece departs?  Would other countries follow suit?  For now, these questions are being put on the back burner.

Unfortunately, domestic corporate earnings with better than expected results has been overshadowed by a struggling Euro; causing the market to plummet.  Even though corporations are posting positive growth, companies are still holding off on aggressive expansion; keeping unemployment lingering above 8%.  With our short term solutions involving Federal stimulus (Bernanke’s watchful eye) waiting on the sidelines, this trend is likely to continue. 

Until our long term goals are adequately addressed, companies will remain cautious and are likely to hold off on any new hiring.   This will cause unemployment to hold steady.   Lending rates will likely continue to decline, and volatility will continue to be present. 

This is good news for the housing industry though.  Just recently, the 30 year fixed mortgage fell to an all time new low.  Today, a new mortgage loan can be cheaper than it’s ever been.  Hopefully these new low rates will spur some sort of growth in our housing sector.  Whether or not banks can accommodate the demand for new homebuyers remains to be seen.   Mortgage rates should continue on this path, especially with the Fed’s promise to hold interest rates down through 2014. 

Bottom line, we are nowhere near the end of the tunnel.  Volatility will continue to be present, which will disrupt long term financial goals.  Concepts such as annual reset will allow you to bypass the volatility while embracing a moderate return.  Today, trillions of dollars have been spent in order to offset this recession, yet volatility continues.  The longer volatility is present, the further away your financial goals become. 

       

How Investors Are Preparing for Rising Taxes on the Horizon

Today our highest federal tax bracket is at 35 percent, which is historically low. Since 1913, the highest average federal tax bracket was above 60 percent. Considering the amount of debt we have acquired due to Wall Street’s bailout of $800 billion in 2008, and quantitative easements 1 and 2, it has become evident that tax rates have nowhere to go but up.

In the span of less than four years, we have accumulated 50 times more debt than any time in U.S. history. So the question is, what have you done to prepare for rising federal income taxes?

It’s no big secret that the last decade has been referred to as the lost decade. Trillions of dollars have been lost due to toxic assets, and investors are hoping to see any light at the end of the tunnel. Recent market concerns have been concentrated around the troubled Euro, unemployment and lack of spending. Why has little concern been directed to our mounting debt, which just recently exceeded $15 trillion?

I believe it’s because Washington is trying to establish a future political platform (based on the outcome of the presidential election) in order to deal with our debt crisis, which is causing the can to be kicked down the road.

Let’s face it, our super Congress already failed once to put the necessary budget cuts into effect. Remember, within the first year of the upcoming presidential election, our debt ceiling will need to be raised again. We all saw how messy that was this past August.

Eventually concerns within the market will be redirected to how we are going to pay back an out of control federal deficit. Both political and economic forces will be forced to take center stage to help start putting a dent into our federal deficit.

What every financial professional will eventually ask themselves is, what have I done to protect my client’s money from rising income taxes? How am I going to protect my clients from anticipated inflation with less net spendable dollars?

Rest assured, those who take measures to protect themselves against these concerns will be well equipped to protect their long term financial goals.

Indexed universal life can be a perfect remedy against the threat of rising taxes. For example, investors applaud that IUL will allow you to shelter up to and just over $100,000 per year into a tax deferred vehicle that still falls under the modified endowment contract limitations.

Over the last decade, many IUL policies have achieved more than a 7 percent average return (before any fees taken out) by eliminating market volatility, a strategy many investors are taking time to learn more about.

Investors embrace the idea that they can potentially withdrawal a portion of their funds tax free at any age without penalty. Furthermore, they take comfort in knowing that insurance repositories that offer IUL will not leverage their assets and have reserve pools in place, mandated by the state, to protect the investor’s deposits.

In these unprecedented times where our federal debt is spiralling out of control amidst a global recession, IUL is being taken very seriously by investors from all walks of life. Investors are actively pursuing avenues that will protect their future net spendable dollars and eliminate their losses from market volatility.

Everyday stereotypes that have limited the exposure of these products in the past are being erased due to the proven performance of IUL policies over the last decade. Even those financial planners’ who denounced these types of products in the past are now implementing these products into their client’s portfolios.

IUL will continue to be explored by investors for several years to come. Although they are not for everybody, IUL is a proven tool that can bring financial security into an insecure financial world.

REAL Numbers of Unemployment

Week in and week out over the last couple of years, the Government’s unemployment numbers have had to be revised drastically upward.  According to an article written by Elizabeth MacDonald weekly jobless claims have had to been adjusted higher 59 out of the last 60 weeks.  Why is this data consistently inaccurate?  It’s inaccurate because the numbers are incorrect.  The numbers are much higher than the 8.2% of Americans looking for a job.   A recent article by CNN Money stated that 86 million Americans currently unemployed who have given up on looking all together.   If a person is not actively looking for a job, or recently unemployed, they are not counted into the 8.2% unemployment rate.  Let’s take a closer look at the numbers.   The largest percentage of the “invisible unemployed” falls between the ages of 16 to 24.  This number is not unexpected as many of these people are thought to be seeking higher education standards.  The alarming rate is the demographics that fall between the ages of 55 to 64, which stand at 15% today.  These individuals have likely either been laid off or lost their job to another applicant usually at both a lower age and salary.  Discouraged, they have probably forced themselves into early retirement, or have severely adjusted their quality of life.   The rest of the population under the age of 65, from ages from 25 to 54, account for 27% of Americans who are unemployed and have given up looking for a job.  Most of these Americans are either going back to school or relying on a spouse, or significant other, to cover day to day expenses.  If at any time any time these “invisible” unemployed Americans unexpectedly jump back into the labor force, the numbers will need to be adjusted.          

Why a 3rd Round of Federal Stimulus is Unlikely

With the recent economic concerns revolving around Greece and the Euro, many US investors are looking to the Fed in blind hopes of Quantitative Easement III (QEIII, the 3^rd round of Federal stimulus) in order to offset expected volatility.  Most experts believe that the stimulus did not have the effects the market was hoping for; therefore QE3 would be more money down the drain.  

The concept of Quantitative Easements I & II were treasury and bond purchasing events designed to act as a solid foundation under a volatile market.  However, when all of the dust settled, the Federal stimulus did not jump start the economy.  The stimulus was implemented as a short term solution to our struggling nation.  Today, almost 4 years after the initial Federal bailout, unemployment still hovers over 8%.   Without long term growth (unemployment drastically dropping) many experts believe that the stimulus has already served its purpose, and to act on additional spending would be a waste of tax payer funds.  Harvard’s Professor Marty Feldstein recently stated that the Fed’s actions are “not really moving actual economic activity.  Having tried it twice and not succeeded, it’s not clear there’s any reason for them to do it again.”

I believe it would be counter intuitive to act on a 3^rd round of Federal spending.  Volatility is expected surrounding the Euro for several months to come.  Added to which, several domestic issues are being put on the back burner until our new President is elected.  Congress will not act on key issues, such as tackling our excessive Federal debt, until they know the new rules of the game (how the Presidency will shape our future political platform).   Volatility is expected when Congress addresses these issues shortly after the upcoming election in November.  We all remember what happened in August of 2011 when the Dow fell by over 1,000 points on debt ceiling fears (not to mention the failing of our Super Congress).  Ironically the market fell last August just after Quantitative Easement II expired, erasing most of the gains that the stimulus brought on; aiding the argument of wasted Federal spending. 

I don’t think that the Fed will make the same mistake on a 3^rd round of Federal spending, especially when volatility (after Federal spending) will erase market gains.      

A Reflection of Our Federal Stimulus

Prior to 2008 the Federal Government remained diligent upon separation of private business and fiscal policy.  All of that changed in September of 2008.  The initial federal stimulus of Wall Street was sparked by plummeting Collateralized Debt Obligations (CDOs).  Yes, we have all heard the news.  However, there is still an inherent misunderstanding of the trillions of dollars of stimulus that followed.

After the initial bailout of Wall Street that exceeded $800 billion; the Federal Reserve, led by Bernanke, remained vigilant to ensure that a financial crisis would not be repeated again in an attempt to prevent another financial collapse on US soil.  This “federal assistance” still continues today, and there is still no end in sight.

The first step of the Fed’s vigilance (after the initial Federal Stimulus) was to enact Quantitative Easement I (QEI).   On 11/24/2008, Bernanke announced additional Federal stimulation that was to start on 01/01/2009 in order to help ensure that another financial crisis would not cripple the US banking system.  The Fed promised to purchase $500 billion in Mortgage bonds to act as a foundation of a volatile market.  On 03/18/2009, the Federal Government extended the initial $500 billion to an additional $1.2 trillion.  The added stimulus purchased annother$750 billion of mortgage backed securities and an additional $300 billion in long – term Treasury securities over the next 6 months.  The total estimated Government funds for QE I came to $1.8 trillion.  This extension of Federal funds caused our 30 year fixed mortgage to fall to 4.78%, the lowest rate on record since the mortgage interest rates were tracked in the early 1970s. 

The market rallied quite considerably after QE1.  During this time several talking heads were praising the Federal stimulus, saying that the recession had finally come to an end.  It was to no surprise that many of these same talking heads were the same ones who went on record reassuring the strength of the US economy right before the initial Federal stimulus of 2008. 

However, just as with any short term solution, the market would eventually start to fall again throughout 2010.  When the artificial foundation of QE1 starting crumbling; all market indexes fell, which caused the Fed to act again on 11/03/2010.    In the latter part of 2010, Bernanke announced the second round of Quantitative Easement known as QEII.  QEII was a promise from the Fed to purchase $600 billion in   long – term treasuries over the span of the next 8 months.  

Ironically, this Federal stimulus expired just a couple of months before the debt ceiling had to be raised again in August of 2011.  As anticipated, extreme volatility took center stage and the realization of our nations spending came into the spotlight.  Many financial professionals today argue that the volatility brought on by the raising of the debt ceiling offset the need for QEII, causing wasted Federal spending. 

Because of the volatility of raising the debt ceiling, the Fed acted on a new program of spending known as Operation Twist.  On September 21^st, 2011 the Federal Reserve announced a plan to sell $400 billion of Treasury securities with a maturity of less than 3 years old in order to purchase the same amount of longer – term Treasuries having a maturity range from 6 to 30 years.  The buying and selling of these Treasuries are to extend through June of 2012.   The purpose of this Federal intervention was to help keep interest rates low, as the Fed promised through 2014. 

In the beginning of May 2012 the Dow Jones Industrial Average sits above the 13,000 mark, and disappointing data reflecting jobs data and a faltering Euro is causing volatility in the market again.  Many argue that the market has been propped up by the Fed’s printing press ready to intervene with QEIII at a moment’s notice.   

Make no mistake about it, this trend is very likely to continue for the next several years; causing excessive drops and gains in the market to become the norm.   Volatility has been prevalent over the last decade because of a securities and banking industry that revolves around a business philosophy of leveraging assets.   By the end of this year the total tally of the Federal Spending could exceed $5 trillion dollars, especially of QEIII becomes a reality.  Bottom line, the end of this correction is nowhere in sight and our mounting debt proves it.

However, there are ways to protect your money from these unprecedented times.  Through annual reset, core concepts of non leveraged assets can offer financial guarantees.   Interest crediting methods known as indexing will allow for moderate returns to be locked in without a threat of volatility.  Investors are embracing this philosophy of financial protection regardless of the Fed’s short term solutions of Federal stimulus.           

Adaptation to an Evolving Market

In the latter part of March 2012, despite the growing concerns of a debt ridden Euro, the Dow Jones Industrial Average has been able to keep itself above 13,000.  Even with the market rally, the struggling mortgage industry lowered the 30 year fixed mortgage below 4% again.   With legitimate foreign concerns and a troubled housing sector, the stock market has been able to sustain higher numbers thanks to both the watchful eye of Bernanke and the Feds promise to hold interest rates low through 2014.  What does that mean for the financial future of the United States?  We don’t know, and what’s even scarier, we have no way to even begin to understand. 

Why?  Simple, this has never happened before.  Historically, stock analysts have been able to gauge the financial climate by referencing similar time periods in the past.  That is not the case today.  With 5 trillion dollars added to our national debt in order to “sustain” a globally feared financial correction, there is no past financial time period to reference anywhere near this magnitude. 

I believe that the market is evolving and no one has any idea of the end result.  Just as species or landforms evolve over time, so does the market.  With the Federal Stimulus that started in 2008, all of the past rules of diversification went out the window.  This has caused the market to respond unpredictably, sprouting a new branch of financial evolution.  Most financial professionals are of the opinion that because of the financial crisis in 2008, volatility and Federal spending will continue for the next several years in order to stabilize the market.  Finance 101 says that you can never spend your way out of debt.  Evidently, some people need to review the basics.   

I think that the market will continue to present conflicting data; and, this constant conflicting data will eventually evolve into the norm.  For example, the top US pension servicing corporations just recently announced that the total pension fund deposits fell $320 billion short in 2011.  The common sense reaction is “if the Dow is over 13,000, how can total pensions be underfunded by that much”?  What do you think any financial planner prior to 2006 would say if you told them that by 2012 approximately $5 trillion would be added to our national debt due to Federal stimulus aimed to protecting our markets?  Then you were to add that the bad debt with Greece was going to be “forgiven” by a general consensus of the Euro Nations.  I’m sure we both agree that it wouldn’t be good.

For these reasons alone I feel there will be even a greater need for financial products utilizing annual reset and indexing.  Products such as indexed annuities and indexed universal life will allow investors to take a cautious step forward without worrying about falling off of a cliff (taking a big hit in the market).  With an evolving market, you should hope for the best, but always be prepared for the worst.  Today many surveys are showing that the general population is skeptical about our financial sector.  This skepticism can be interpreted as mounting confusion that is causing many investors to stop trying to understand, which means their money will likely need to be protected more than ever.   I feel as time goes on investors will increasingly start exploring financial products that have laws in place to protect their money from leveraged assets, thus being able to avoid market volatility.  Financial guarantees and lifetime income will likely be sought after more than ever before.  Moderate returns can very easily be a remedy from taking a step backwards; helping insure that the investor’s timeline will be met.  Investors know one thing for sure; another lost decade is not going to cut it. 

Why Realtors Are Turning To Universal Life as a Cash Accumulation Vehicle

Every working realtor knows that their industry is unlike any other.  Each and every sale is dependent upon the functioning of several independent parties.  For example, once a prospect has decided to put an offer in on a new home; the bank must approve the credit and financing, the appraisal must come in at needed value, and the seller (listing agent) must agree to the terms of the sale.  Only when all of the stars are aligned can the sale be facilitated.  Without close attention to detail, it is unlikely for the close to happen.  

Since every real estate agent is commission based, most realtors look for 3 main components with respect to investing long term.  First, the product must be liquid.  Every commission based realtor knows first hand there can be down times from close to close.  Liquidity is precious during periods of stagnant sales, especially in off-season months.  Second, the product must be protected.  In cyclical volatile markets like we are experiencing today, the concern of losing your money can be quite the burden.  Third, the product must be flexible to accommodate sporadic funding throughout the year.  Its impossible to tell when all your closes will happen throughout the year, making flexibility of funding an important part.    

For these reasons, more realtors than ever before are turning to uncapped strategies within indexed universal life (IUL).  IUL strategies allow for flexible funding and uncapped earnings that are very attractive.  With a couple of strategies that exist today, there is no limit on how much interest can be earned through annual reset.  Annual reset allows for market upside while eliminating all of the market downside.  In fact, from 01/01/2001 to 12/31/2015 many IUL policies would have averaged an annual rate of return of over well over 8% before the cost of insurance is taken out.   Liquidity is also a vital component of an IUL policy.  Over 80% of the funds can be accessed at any time during the year for needed liquidity.  Every other tax deferred vehicle that's available comes with a penalty from the IRS if a withdrawal is made prior to 59 1/2 years of age.   Finally, and most important, is the capability to have your IUL policy structured to allow for withdrawals exempt from federal income tax.  Since all IUL policies come with an accelerated death benefit, if properly structured IUL policies can allow for a personal loan to be taken against the death benefit that will not have to be repaid until death.  Upon death, the loan is deducted from the face amount (death benefit) and the remainder is passed on to your beneficiary tax free.  Its no surprise that these “living benefits” have attracted several commission based employees as an avenue for long term growth strategies.

To learn more on how an IUL strategy can benefit your practice, please feel free to email me at CalB@SafeMoneyAustin.com.