Where Will We Be 10 Years From Now?

Today, thanks to the effort of the Federal Stimulus, the Dow Jones is at the highest point we have ever seen. Considering that interest rates are at historic lows and the Federal Government is still spending $30 billion per month (now the 5^th round of Federal Stimulus in the last 6 years), this recent market surge can easily be viewed as a statistical marvel. Not to mention that our nation's highest income tax bracket is at 35%, almost half the historical average. Yet, against conflicting economic data, here we are in the best possible position we could ever hope for. The question is, given the volatility we have had over the last decade, what do you think our financial world will look like in 2024?

However the stage is set 10 years from now, there are moves that you can put into place today to help protect yourself against inevitable changes. For starters, Federal tax rates have nowhere to go but up. Make no mistake about it, tax rate hikes are just around the corner. There is only one way for our nation to pay back the $4 trillion dollars we have spent over the last 6 years: raising taxes. Let's take a closer look at this for clarification. Historically, since 1913, that average marginal Federal tax rate exceeds 60%. This is a far stretch from our highest tax rate today of 35%. Given we have accumulated more debt over the last decade (by over 10 times faster) than any time period in US history, how long do you think it will be before we see our first Federal income tax increase? So, what does this mean for you 10 years from now?

It means you will have less net income than you have today. If we assume that the Federal tax rate jumps by 7% over the next decade, with inflation averaging 3% annually, you will have well over a 30% decrease in net spendable dollars with the income you make today. When you take into account that the main source of retirement income for the working class is in the form of a 401k, IRA, SEP, or similar type of pretax dollar investment, it becomes very clear how much spending money you stand to lose to Uncle Sam. This is why it is crucial to protect your future income from imminent tax hikes, while locking in market gains at their highest point.

One way investors are able to protect their future income is through Indexed Universal Life (IUL) policies, a form of permanent life insurance. These vehicles allow you to accumulate funds exempt from any market volatility, providing impressive moderate returns, while also allowing for tax free withdrawals throughout your retirement years. In order for IULs to have tax advantaged withdrawals, your policy must be set up as a Non Modified Endowment Contract (Non MEC). Non MECs have to pass the seven pay test (a funding formula derived from the IRS for purposes of tax free income) in order to enjoy an income exempt from Federal income tax. If any IUL policy fails the seven pay test, then all withdrawals are taxed as ordinary income tax on a First In – Last Out accounting basis. Non MEC policies have all the same tax free exemptions as a Roth IRA without many of the restrictions. Non MEC IULs do not have low annual limits or withdrawal penalties prior to age 59 ½ like a Roth IRA does. Nor do Roth IRAs pay out accelerated death benefits based on the amount of premium you fund the policy with.

Lets take a closer look at how a Non MEC IUL can provide a moderate return amidst a volatile market. Since an IUL is a fixed product, if the market goes down you will have a minimum guaranteed (floor rate) return regardless of how far the market may fall. These guarantees can be as high as 2% depending on which policy you chose. Conversely, if the market goes up, these policies will match you dollar for dollar up to as high as 14% (cap rate). Because these products protect you against market loss, you cannot earn above the cap rate. Insurance companies are able to offer these returns through concepts of annual reset and indexing. Each year, on the anniversary of the policy date, a chosen market index (such as the S & P 500) determines how much interest is to be credited to your policy. There are different variations of interest crediting, which can include dollar cost averaging. Just imagine if you were able to eliminate the downside of the market prior to 09/11/2001 with a cap of 14%. Although not typical of past market results, you would have drastically outperformed the stock market.

With a Non MEC IUL policy you will be able to protect your money from both market downturns and the imminent threat of rising taxes. Given that the market is at its highest level, what better timing could you ask for? Top financial institutions are warning of a market correction around the corner and the Federal Government is looking for an end to the Federal stimulus for good. Yet today the market is at the highest levels and Uncle Sam is still pumping in $30 billion monthly of Federal stimulus. Over the last several years the rules that govern the economy seem to be set in opposition, and I fear that this trend will continue, followed by tax increases and periods of volatility. Without taking precautions against these financial threats, how do you intend to offset the volatility and rising income taxes? These concerns have prompted many investors to look into Non Mec IULs as a viable solution to an unpredictable market.