Thursday, May 8, 2014

Protecting Income Benefits From One Generation to Another

One of the biggest misconceptions in retirement today is to think that the benefits for income planning cannot be passed on to the next generation. With multi-generational family planning, the owner of the policy can benefit from all the growth and tax advantaged withdrawals of a Non MEC Indexed Universal Life policy, while at death passing on the withdrawal benefits to the named insured without closing out the policy. This allows the money saved for college and retirement planning to pass on to the family survivors without disturbing any of the benefits.

Not only can the benefits of multi-generational policies be passed on, the owner of the policy does not have to be underwritten. Instead, the named insured is underwritten in anticipation of one day taking over the insurance policy (when the owner passes), and the third generation can be the beneficiary. For example, a father that is 75 could open up a multi-generational policy with his son who is 45 (and in average health). The son would be underwritten and the policy would not pay out a death benefit until both the owner and the named insured (son) pass. During the accumulation phase, the owner would fund the policy within the thresholds of a Non MEC (in order to set up tax free withdrawals in the form of a loan). At the point of the father's death, the son would default to the owner of the policy and would have all the benefits his father had. Once the benefits transfer, the son could use that money for whatever he saw fit. He could use that money for his heir's college expenses (the father's grandkids), or simply use the money as another income stream in retirement. Down the road when the named insured passes, the tax free death benefit would be paid out to the named beneficiaries. This allows the accelerated death benefit to be paid out to the third generation, with the first two generations enjoying the benefits of the policy; thus being multi-generational.

With the absence of pensions in today's labor market, many investors are using this strategy to secure an income stream for the generations they will leave behind. With an Indexed Universal Life policy, investors know that when the market goes down the policy will guarantee them a floor rate while providing an attractive cap when the market goes up. Additionally, the policy owner can take advantage of flexible withdrawals exempt from Federal income taxes, having total liquidity, and protecting the interests of 3 generations. Lets take a closer look at how these unmatched benefits are possible.

Insurance companies can provide these financial guarantees through the unique concepts of annual reset and indexing. Annual reset allows the cash value of the policy to avoid market loss while providing a cap on what the policy can earn. Interest is credited though a method known as indexing. When participating in indexing, the insurance company is prohibited from investing the money in risky accounts such as mutual funds. Instead, they place the funds in safe money accounts, like insured bonds, to protect the money from market risk. The strategy being, its better to have a moderate return with no market loss as opposed to playing the market in a win some and lose some game. If you look at the last 15 years of the stock market, although not typical, financial products utilizing annual reset and indexing drastically outperformed the market with no downside exposure. There are several ways to allocate your funds with a named index, including dollar cost averaging, so it is important to discuss these options with a licensed representative to find the option for you and your family.

With the absence of pension plans being offered in the workplace, a Multi-genrational Indexed Universal Life policy could be the perfect fit for a family that intends on protecting money for up to three generations with just one policy. This takes a lot of the stress of college and retirement planning off the table for future generations. Tax advantaged withdrawals no longer have to vanish upon the death of the policy owner, while the next generation enjoys a moderate return with the same benefits. Not to mention that the owner of the policy does not have to be underwritten, just the named insured; allowing families to pass on living financial benefits regardless of health issues.


Tuesday, May 6, 2014

The Flaws of Unemployment

The Dow Jones Industrial average sits just over 16,500; quite a comeback over the last few years. In fact, just recently the Dow Jones hit its highest mark yet in US history. What is causing the market to rise to new highs? Is this conducive of an economy pulling itself out of a global recession? There is very little evidence to support this market surge. Lets take a closer look as to why our economy is not reflective of this market rally.

Historically, any significant jump in the Dow Jones would signal a strong and healthy economy with all the opportunity in the world. Meaning that there would be little, if any, layoffs and unemployment would be at it lowest levels. Today that is not the case. Common economic indicators, such as the unemployment rate show sluggish results at best; while conveniently painting a picture of unrealistic momentum in the work force.

In order to understand the true numbers of the unemployment rate, it is imperative to understand what each number represents. The Federal Government uses workforce and non workforce percentages of Americans over the age of 16. The workforce numbers represent those who recently had a job and are actively looking for another job, thus being eligible for unemployment benefits. The non workforce population represents those who do not work, had a job, cannot find a job, and have been nonactive in job searching (unemployment benefits being expired). The number of non workforce Americans in April of 2014 was 92 million. Conversely, the number of workforce Americans was 155.421 million in the same month. However, the Federal Government only uses the workforce numbers when calculating the unemployment, excluding the non workforce numbers from the formula. In April, those who are actively looking for a job represented 9.73 million of the workforce. Therefore, the “unemployment rate” in April was 6.3%. However, if you use the relevant non workforce numbers the unemployment rate is much higher; as by definition those who have given up looking for a job still do not have one. Additionally, there are many not counted in the unemployment rate that continue to look for a job; simply because they lost their benefits. The question is, why doesn't the unemployment rate factor those who can work but have given up?

In addition to the skewed numbers of unemployment, when you look at the salaries of those working another unrealistic picture is being painted. Of the 155.421 million working Americans, approximately 40% are making poverty level wages. Furthermore, over 20% of the workforce made more in 2006 than they did in 2013. These percentages of the labor force are not reflective of a market being at its highest levels. Yet here we are with the market rallying at its highest point.

Indicators like the unemployment rate can show counterproductive numbers of growth because of the continuation of the Federal Stimulus. Regardless of how high the Dow Jones has jumped, the Federal Government still feels that $40 billion per month of treasury bond purchases is necessary to sustain today's unpredictable market. Granted, the Federal Government has dropped these monthly purchases from $85 billion per month to $40 billion; yet still the overall toll of the Federal stimulus is over $4 trillion dollars since the market crash of 2008. The Federal stimulus keeps interest rates low, while keeping a tight leash on inflation. Without the Federal Stimulus, the Dow would not be where it is today. Because of these cash injections, factors like the unemployment rate often speak to the contrary of a rallying market. As we continue with the Federal Stimulus, our long term debt continues to grow. The question is, how long can we sustain this high point in the Market while adding an additional $480 billion to our National deficit this year?

Until we answer that question, indicators such as the unemployment rate will continuously show data non reflective of a healthy economy. Because of conflicting reports like unemployment, many financial firms are predicting a sizable correction of up to 20% coming right around the corner. Bottom line, whichever way you choose to redirect your retirement nest egg, make sure to you understand the unbiased numbers in order to help guide you in the right direction.

Thursday, May 1, 2014

Locking In Your Gains For Lifetime Income

In September of 2008, the Federal deficit just barely crossed the $10 trillion mark. Today, 5.5 years later, the deficit stands at $17.5 trillion. This is over a 70% increase to our National debt in less than 6 years. This debt is not going to pay itself off. The writing is on the wall; Federal income tax rates have nowhere to go but up. Today, the top Federal tax bracket is just over 35%; almost half the historical average since 1913. What do you think the highest Federal bracket will be in 2024?
When you take into account that the vast majority of all deferred compensation plans (401k, IRA, TSA, etc) are all taxable upon withdrawal, it goes without saying that every dollar you save for retirement needs to be working in your favor. This means you will need to have solid percentages in order to offset the additional income you stand to lose to Uncle Sam. Unfortunately, the last 13 years have been anything but solid. In fact, most investors have just been able to recoup the losses they incurred over the last several years. There has been extreme volatility due to a domestic terrorist attack and a Global recession, just to a name a few. The market has endured with the assistance of Federal Stimulus, but not without consequence. This is a long term problem we have to endure with no history lesson as a guide.
I believe the only way to plan for retirement today is consistency. A steady return that can achieve the desired income results over a specific time period. There is no way to give a guaranteed return on your cash of 7% per year. However, you can add 7% to a non cash value to determine what income you will be eligible for while exempting your cash value from volatility; an income stream you can count on for life regardless of future market performance. Furthermore, an income stream that can be stopped and started at your discretion while you still have access to the cash value.
Lifetime income is aggressively being pursued by both retirees and future retirees through an income stream that is guaranteed for life, regardless of what may lie ahead. These are guarantees that many Americans are seeking instead of rolling the dice in the market. I remember about a year ago I met with a prospect (now a client) that said “I don’t know what I have in my 401k (the current balance) because I don’t need that to live. That money is bonus money that is off limits today. All I want is to know that I can keep the lights on and enjoy the little things in life without having to go to work every day”. The fear of not having enough money in retirement is a common concern that I hear on a regular basis, especially with the terrible state that Social Security is in. The average American wants relaxation and comfort in retirement without the worry of where their check is coming from. Lifetime income provides all of this and more.
Make no mistake about it; rising taxes are just around the corner. The Federal deficit has increased by 70% over the last 5.5 years. The Federal Government is still purchasing Government bonds today at $45 billion per month with QEIII (Quantitative Easement III) to help the economy along. Without financial guarantees of lifetime income, what solution can you rely on to give you the comfort in retirement you deserve? How else can you ensure that money will be there when you need it down the road? We have all been exposed to how much money you can realistically lose in the market. Granted, the market is on a rebound; but for how long that will last is anyone’s guess. There may not be a more perfect time to lock in your gains for a guaranteed check for life.