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.

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.      

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.