Why a $7.2 Billion Loss from the USPS This Year is Not a Concern

Just recently, the Federal Reserve System announced that first-quarter losses from the United States Postal Service stood at 1.8 billion dollars. At this rate, the USPS is on track to cost American taxpayers over $7.2 billion by the end of the fourth quarter. To put this into perspective, this amount is equivalent to a $20 million dollar loss per day, with no hope of any profit for quite some time, if at all. At first glance this may pose a concern, but once the numbers are dissected, you will see that it fails in comparison to the bigger picture. In fact, when looking at the numbers (with respect to federal spending), one might consider it irrelevant or even a waste of time to correct. In order to fully grasp this idea, it’s important to evaluate the bigger picture.

If these sustained losses of the USPS occurred any time prior to the turn of the millennium, it could have caused a financial scare bigger than that of the Lehman Brothers’ bankruptcy in 2008.  Looking back, and trying to comprehend the fall of the USPS, would have been practically impossible. We don’t have to worry about this however, because these aren’t the times we live in today. Today, we are in the third round of Quantitative Easement, known as QEIII. The monthly toll of QEIII comes to $35 billion per month indefinitely, or at least until the unemployment rate hits 6.5%. How long this will continue until unemployment reaches that percentage is a whole other conversation.

Our federal stimulus this year alone will be at $420 billion; an acceptable number, considering the total cost of the federal stimulus since 2008 exceeds $4 trillion. This is probably why the market shrugged off QEIII when it was announced, rather than questioning the necessity of additional stimulus.

No matter how you look at it, QEIII has quite a toll to be accountable for. This $420 billion stimulus is enough to bail out the postal service at a quarterly loss of $1.8 billion for the next 20 years. This year, the total amount of printed QEIII could cover the losses of the USPS until the year 2033. If we assume that QEIII will continue for the next four years, your great grandkids will not have to worry about issues when mailing a letter, all courtesy of the Federal Reserve (any takers on what the federal deficit might look like?).

With this bigger picture now in perspective, it’s easier to understand why the $1.8 billion loss isn’t an immediate concern to Congress, and why it probably won’t be moving forward.  Could it be because the federal government only looks at the bankrupt state of the USPS as only 1.7% of the QEIII toll annually? Possibly. Think of it this way: if the fall of the USPS fails to pose a threat to the financial arena, what will?   More importantly, what will the final toll be when all the dust settles?

Total Protection Within a Stimulus Enviornment

Who would’ve thought the DOW Jones could creep above the 14,000 mark? Does this mean that we’re out of the woods and that our economic woes are behind us? Not likely. The numbers never lie, and across the board, several economic indicators are pointing to the contrary. Numbers on unemployment, gross domestic product, and housing, seem to reflect what constitutes a struggling economy, which is not typical of a 14,000 mark. Yet here we are.

Market optimism is stemming from austerity measures or financial bailouts, which can be argued as presenting an illusion of a healthy economy. Currently, Quantitative Easement III (QEIII) allows the Federal Government to pump $35 billion per month into bonds and mortgage backed securities indefinitely, until the unemployment falls below 6.5%, which is something that is easily several years away from happening. Year to date, since 2008, we have spent well over $4 trillion dollars in federal stimulus. This massive amount of federal spending has been necessary in order to battle the greatest volatility has encountered since the Great Depression. Unfortunately, the only weapon available to battle the challenging market conditions is the Federal Reserve’s printing press. Personally, I feel investors have become complacent in regards to the Federal Stimulus being a status quo to the market; a temporary solution at best. However, the last five years have shown us that this is an unlikely trend.

Throughout our global economy, it is no secret that austerity policies totaling several trillion dollars, has been the saving grace to a global meltdown. The numerous bailout measures, courtesy of the central bank, are the only things keeping the Euro from collapsing. Not surprisingly, there are even more drastic measures (other than government printing presses) being put into place, that contradict every known law of economic prosperity. For example, within the last couple of years, Spain instantaneously “erased” billions of dollars of debt obligations off their balance sheet. This was possible through collateralized debt swaps aimed at bettering their market conditions. Domestically, Freddie [Mac] and Fannie [Mae] still continue to struggle with the housing sector even with continuous support from Quantitative Easement III, and our GDP doesn’t even come close to supporting this recent surge in the market. Does this sound like a financial environment worthy of a 14,000 mark? The writing is on the wall. We are in a financial environment where the rules are literally set in opposition. Whether you are for or against austerity measures is insignificant. This is the reality and it is here to stay. The question is how do you protect against an unrealistic complacency in a struggling economy?

One way to protect your money from anticipated volatility is through a concept known as annual reset. Annual reset is a closely regulated concept that has protected hundreds of billions of dollars from volatility since 2001. This is the only financial concept around that can avoid volatility while locking in a portion of the market upside, year in and year out. Annual reset was first launched in the latter part of the 1990s, and has since evolved into a preferred way of business for some of the top financial institutions nationwide. Investors are warming to this concept after seeing some financial products averaging, and exceeding, a 6% [average] rate of return since 2001. One vehicle that has achieved this rate of return while providing total market protection is an indexed universal life (IUL) insurance policy. These over-funded life insurance contracts come equipped with favorable conditions with respect to cash accumulation. This, paired with annual reset, provides a perfect remedy to an unpredictable economy. Furthermore, if properly structured, IUL can include both tax-deferred growth, as well as tax advantaged withdrawals exempt from federal income taxes.

We know that the Federal Reserve has promised to intervene with aggressive austerity measures in order to avoid another financial collapse. What the final toll will be remains to be seen. I am in the opinion that the more we spend, the more we are obligated to repay. Once again, over the last five years, we have printed over $4 trillion dollars just to offset a financial collapse. This amount is over one-third of what the total US deficit was prior to 2008. I see the federal stimulus continuing for several years to come, which will increase this number substantially. Of course, this will not be without consequence. Today, our highest federal tax bracket is at 35%, which is well below the average marginal tax rate of 63% since 1913. An IUL policy can help protect against the threat of rising income taxes by allowing an investor to withdraw funds in the form of a loan against the cash value, exempting a taxable event on the policy’s gains for life. The loan (principle and interest) only becomes payable upon the death of the insured, with taxes then being paid through the cash value and accelerated death benefit of the policy. This strategy gives the investor piece of mind by ensuring that their quality of life will not be hampered by rising federal income taxes.

It is no secret that austerity measures used today are for short-term solutions only aimed at offsetting another financial collapse. Although the market topping the 14,000 mark on the Dow Jones is quite impressive, the past five years have shown us that this rally is not likely to last. The only way to protect your money with a moderate return exempt from all volatility is through vehicles such as IUL that uses annual reset to bypass all future market downturns. Without putting measures in place to protect your long-term retirement or financial goals, your end result could easily prove to be more unpredictable than our bailout ridden global economy.

Protecting Against the Federal Stimulus

My predictions in May of this year were correct when I said that the federal stimulus would continue and volatility would be the norm.  In September of this year the Federal Reserve announced Quantitative Easement III (QEIII), which was designed to keep pace with Mario Draghi and the ongoing Euro crisis; promising continuous monthly injections of $85 trillion in order to protect our nation from an economic collapse.  There is no way to know how long this will go on for, however; Fed Ben Bernanke stated unlimited printing.  Why?  Why not, the total known federal stimulus was at $3.6 trillion prior to QEIII.  So when additional stimulus is announced, it is then shrugged off as old news.  Investors are numb to this phenomenon, and have now become conditioned to expect Uncle Sam to cut a check.  The rules are now set in total opposition to a bull market, meaning that investors are now counting on Uncle Sam to help offset their losses.  With respect to financial preservation, the next few years are crucial and how we approach the Federal stimulus will determine what our financial fate will be. 

In September of 2013 the total Federal stimulus will exceed $5 trillion.  QEIII will add another trillion dollars to the printing press each and every year.  When you take into account that’s the cost per year for the Federal Government to run the country, the thought becomes overwhelming.  Even worse, we are at the tip of the ice burg.  Why?  Because QEIII was announced at $85 trillion per month, indefinitely, moving forward.

So the question is how do you think the market will react to this news?  My guess is it will likely react to QEIII the same way it did over the last 5 years.  We will likely see a roller coaster in a downward trend. This is where the opportunity lies.

When the market is having its ups and downs it seems pointless to try and beat the market.  This is why investors are looking to protect financial interests they can control.  Interests that will protect your money from all future market downturns with a guarantee of lifetime income.  For example, think of it as taking your 401k and knowing that even if you never added one more penny to the account you would have a secure income steam for life at any time in the future; while knowing your eligible income will increase each and every year.

We know that volatility will be the norm moving forward, especially with the continuation of QEIII.  Just like we all know of the losses due to the stimulus in the last 5 years.  The question is; if you could go back and protect all of your financial interests prior to the fall of Lehman Brothers, or the Financial Collapse of 2008, would you?  I know most, if not all of my clients would have, or did, taken action to protect their money.  Honestly, why wouldn’t you protect your money? Especially knowing $85 billion each and every month will be continuing for quite some time.  At what point will it be too late?

Permanent Life Insurance: The financial perks

Who would have ever thought that one of the most attractive tax deferred, cash accumulating vehicles could be found inside a permanent life insurance contract?  Imagine that, insurance policies that have outperformed the S & P 500 over the last 15 years with respect to cash accumulation.  If you haven’t heard this concept, I strongly suggest that you educate yourself on all of the benefits that you have been missing out on.

One of the ways to accumulate cash within a permanent life insurance company is through an indexed universal life policy.  These products allow for capped gains in the market while expelling any possibility of losing a penny to market volatility.  This is possible through a concept known as annual reset.   Annual reset allows you to earn a portion of the market upside, while bypassing the market downside; usually over the span of a calendar year.  Added to which, with this concept it is not possible to lose a penny of your money when the stock market takes a hit.  This is a philosophy that many investors and businesses are openly embracing, especially with tax advantaged withdrawals.

Since indexed universal life (IUL) is a form of permanent life insurance, it is subject to an accounting measure known as FIFO.  FIFO is an acronym in accounting known as first in, first out.  This means that all of the principle that is deposited into an IUL policy is able to be withdrawn before you are required to pay ordinary income tax on the interest earned.  In other words, interest is only paid when all of the principle is withdrawn.  This is one of the only financial vehicles that will allow for funds to be withdrawn without having to pay the tax upfront.  Most all other cash accumulation vehicles require that taxes on your interest must be paid first upon withdrawal, usually as ordinary income tax or capital gains tax (assuming you’re lucky enough to have any return).   Let’s take a look at an example.   John has an indexed universal life policy worth $225,000, of which $40,000 consists of earned interest.  Assuming that John makes his first withdrawal on his policy in the amount of $50,000, he will not have to pay any taxes on this withdrawal.  Since the interest on the policy’s cash value is $40,000, all of the principle ($185,000) will have to be withdrawn before any taxes are due on the interest.  These unique features are attracting businesses by providing tax breaks they are currently not receiving. 

Businesses are using permanent life insurance as a vehicle that can accept deposits, while simultaneously withdrawing funds that do not trigger a taxable event.  This gives the business the advantage of paying invoices while utilizing tax deferral.  Another attractive benefit is that they allow business owners to have the comfort of knowing that their family’s interests are protected with an accelerated tax free death benefit.  Business owners also have the capability of protecting themselves against the unexpected passing of a key employee, while allowing that employee to accumulate funds (exempt from market volatility) for future retirement needs.   Many business owners realize that unforeseen emergencies such as the death of their top salesman, or the death of an executive, can be devastating to the bottom line both in the short term and the long term.  Costs associated with the passing of a business owner or a key employee can cause a company to collapse.  These policies protect against these concerns while allowing for tax free income (if properly structured) for their income planning needs. 

How can they do this in a depressed financial environment?  Insurance companies offering permanent life insurance products have the advantage of basing their long term goals on effective mortality tables.  Every policy owner must complete certain underwriting criteria in order to qualify for these unique benefits.  Think of it as a substitute to good credit; the analogy being, the healthier you are the better your policy should perform.  Since all policy owners are in good health and are expected to live longer (usually able to reach the mortality rates in life) the insurance company benefits from extended profits due to their policy owners averaging a longer life.    

As this financial recession lingers on, tax deferred vehicles that can allow for both tax deferral and tax advantaged withdrawals will take center stage sooner rather than later.  Policy owners who have been able to take advantage of indexed universal life products over this past decade have had the benefit of skipping over all of the down years while receiving attractive moderate return on the upside.  Do you currently have a tax deferred vehicle that can allow for tax advantaged withdrawals?  If not, what is your contingency plan against the threat of rising taxes needed to knock our federal deficit back to a manageable level?    

Think Twice Before You Rollover Your 401k to a New Employer

Today, with the amount of layoffs and the number of workers being forced to change career paths, the need to protect their 401k, 403b, or other employer sponsored plan (ESP) is taking a sideline to the need of finding another income source.  Ironically, they could be bettering their retirement position by helping to secure an income stream for their future retirement needs.  Many employees do not know all of the options that they have with respect to their old ESP; down the road they will regret not investigating other viable options for their 401k.  They are just assuming that they have to roll over their prior ESP cash value to their new employer’s plan when they start a new job.

An ESP is a deferred compensation plan, usually funded monthly or bi-weekly, set up to help you prepare for your retirement needs.  These plans were designed to replace the traditional pension plan.   Most corporations can no longer afford to fund the income stream that pensions would traditionally provide during retirement, and the ESP takes the burden off of the employer.  These new vehicles, mainly consisting of a 401k or 403b, are managed by the employer while the employee bears all of the risk.  Most ESPs are dependent upon the performance of the stock market, and over the last 15 years the majority have either incurred a loss or broken even.  However, employees are still urged to stay the course with their ESP contributions and often assume that their contributions must continue on to another ESP when they part ways with their current employer.   Unfortunately, this is causing many employees to further delay their retirement goals, and many are missing opportunities to redirect their funds to gain an edge with an income stream for life.      

When the employee departs from an employer, they have the perfect opportunity to get a jump start on their retirement goals.  Many employees who are concerned about an income stream down the road (because they do not have a pension and are not counting on social security) are deciding to transfer their group sponsored plan to one that focuses on the individual goals, known as an Individual Retirement Account (IRA).   Basically what they do is convert the funds from a group annuity within the employer sponsored plan to an individual annuity.  Now that benefits are directed to the policy owner, as opposed to the employer, the funds become eligible for lifetime income offered through a fixed indexed annuity (FIA).  The FIA is the only safe money vehicle that can contractually guarantee you an income stream for life, regardless of future market performance, while still allowing you to maintain control of your cash value.   Not only can a FIA provide lifetime income for the annuity owner, the lifetime income can be set up to extend lifetime income to the spouse as well.   

How is lifetime income guaranteed?  Insurance companies who offer FIAs have attached income account values (IAV) known as an income rider.  An IAV is a non-cash value that grows at a fixed rate, regardless of market performance.  The goal of the IAV is to help determine the amount of income an annuity owner is eligible for at a later date.  For example, an annuity owner who is 55 years old may plan on retiring at the age of 70.  The IAV would be able to tell the annuity owner what their income is at the age of 70.  Once the IAV is established by the predetermined interest rate, the insurance company determines what percentage of the IAV would be paid out annually for life.  Typically, the older an annuity owner is the higher the payout they will receive.  Once again, it is the only way to predetermine an income stream for life, regardless of future market performance.

FIAs are state regulated products that have been deemed financially secure enough to offer lifetime guarantees.  Insurance companies that offer these fixed assets must have total assets exceed total liabilities.  They are able to do this by setting aside reserve pools of cash to protect the future interests of the annuity owner.  In fact, if an insurance company were to go insolvent (where total assets were unable to exceed total liabilities) , by law regulators step in and take over the operations of the insurance company in order to protect the interests of the annuity owner. 

When you don’t have a pension in place, what income can you count on?  I sincerely hope that you don’t plan on social security as being your primary income.  Workers departing from employment are starting  to redirect their ESP to lifetime income guarantees they don’t have.   ESP plans were initially designed to replace pension plans that employers can no longer afford.  Essentially the employer has shifted the responsibility of retirement planning onto the employee.  If you fail to embrace this responsibility you will likely result in either a delayed retirement or having to become a burden to your loved ones.   Without protecting your income needs in retirement, what is your plan of attack? 

The Epidemic of the Unemployed Younger Working Class

With a debt ridden Euro and the weekly jobless claims making the front page week in and week out, a long term epidemic is forming in our country.  It’s the epidemic of the unemployed younger working class that is a major threat to the financial longevity of our nation.  Our future leaders are bitter, and with rightful cause.   Without addressing the needs of our younger generation, the long term odds of surviving this financial crisis are greatly decreased. 

Our younger generation has to put their lives on hold as baby boomers are holding on to their jobs longer, due to insufficient assets for retirement.  Over the last decade alone, the average retirement age has been bumped back by at least 10 years because of the financial crisis; which has been at best a breakeven point for many portfolios.  As baby boomers are holding on to their jobs longer than ever before; many recent college graduates are being forced to take a job paying substantially less than their college degrees have historically paid, if they can find a job at all.  This is forcing the younger generation to stay at home longer, which in turn puts a burden on the retirement timeline for their parents.  Are you seeing the trend?  The main point here is that we now have an economy where there are no jobs being created and would-be jobs are not being relinquished by the baby boomers, causing a vicious cycle between the two groups.  

Employers are not hiring our most recent generation entering the workforce, and the backlash can be seen in the latest negative statistics.  According to a survey of the Pew Research Center, the US birth rate fell by more than 11% during the last four years for adults 18 to 34 years of age.  Since 2007, the marriage rate for the same demographic fell by 6.8%.  Once again, young Americans are putting their lives on hold because many baby boomers did not have a contingency plan in place for a down market.   The amount of 70 to 74 year olds working full time increased by almost 33% since May of 2008.  Those numbers are likely to climb even higher over the next several years given current market conditions and future uncertainty, especially considering the lingering concerns in Europe.  Without a contingency plan, we are looking at a whole new set of problems over the next decade.

These declines are directly linked to a lack of employment, resulting in many young Americans to feel detached from the American dream.  Prior to the financial crisis, the younger generation has always been optimistic about starting a career; today this is not the case.   The traditional optimistic drive is being replaced by a pessimistic view of the real world.   Unfortunately, this has resulted in some additional negative trends with our younger generation.  During the 2008 Presidential election, over 64% of registered voters between the ages of 18 to 24 went to the polls.  According to Harvard University’s Institute of Politics, only 47% of the same demographic is planning to vote in the upcoming election, a 17% decline.  They learned a real world lesson; just because something is promised in an election it doesn’t mean it will be delivered, and the numbers prove it.  Harvard economist Lawrence Katz states that almost one in five adult males from the age of 20 to 24 were either not working or not going to school because of the crisis.  As of May of this year, there was a 41% decrease of young Americans aged 20 to 24 working in comparison to four years ago.  Furthermore, Americans today under the age of 35 accounts for 65% of the Nation’s unemployed. 

The only way to get the younger generation into the workforce is to get the baby boomers into a position where they can retire and make their jobs available.  One legitimate approach is to focus on a guaranteed income stream for life.  Many investors are starting to realize that proper income planning can provide a safe haven against an uncertain and volatile market.  Having a guaranteed check in the latter years of retirement is a comfort in times of financial uncertainty.  Over the last few years, the fear of dying has been replaced for the first time ever by the fear of outliving your money.  Only when retirees feel that their lifetime income obligations are met will they openly embrace retirement.   The longer it takes for baby boomers to retire, the longer delay the younger generation will experience entering the workforce.  This needs to be corrected if we want to have any chance of ending this destructive cycle.