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.

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.

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.

Protecting Against Uncertainty

This morning I took my son to a local diner for breakfast. During the meal, I couldn’t help but overhear the couple in the next booth, discussing how to protect a lump sum of money as they busily entertained their three-year-old. The topic at hand was a five-year CD option and I found the husband’s remark interesting. “Five years from now,” he said, “who knows what will happen in the market. By then, it could be a whole different world.” The more I thought about that statement, the more I think he hit the nail on the head.

In order to better understand this, let’s take a look at the financial arena today. The market is rallying to all new levels, while the Federal Government is still pumping $35 billion per month into bonds and mortgage-backed securities, as a counter measure to a fragile market. Ironically, a fragile market that’s somehow at an all time high even though interest rates remain at an all time low. The rules are literally set in opposition and the outcome is impossible to determine. We know that everyone who lost big in the market has had the good fortune to recapture his or her losses. We also know that the federal stimulus has managed to lay a foundation of confidence under the average investor. This mentality however, is short term in nature. Long term planning on the other hand, has taken a back burner to day-to-day market fluctuations, which unfortunately seems to discredit the reality of a strong economic turnaround.

When you talk about long-term goals (5 to 15 plus years out), identifying the right financial plan can prove to be quite the conundrum. To reiterate the remark spoken by the man in the booth, given the current financial climate, how can you even begin to assess what the future will hold? Surprisingly, this interesting question is failing to be addressed in most income and retirement planning models.

If we are printing over $400 billion dollars per year, how long will it take us to pay it back? As inflation creeps up, what will happen with the market? How high will federal taxes climb, considering the average marginal tax rate since 1913 exceeds 60 percent? These are just a few of the many questions investors should be addressing within their retirement planning.

 I don’t think today’s investor distrusts the market, they simply don’t like the unpredictability that comes with it. Why should they? These investors have already been exposed to the most volatile decade on record, watching their portfolio fluctuate like a roller coaster the past few years. The only difference now, is that their eyes are wide open, knowing anything can happen. Are you willing to roll the dice moving forward or will you take precautions to lock in financial guarantees to protect your long-term financial goals?

When you take into account that more than 90% of working Americans are without a pension, along with employees paying into a bankrupted social security, it’s clear to see an income epidemic is right around the corner. Where is your future income going to come from? Can you count on social security along with a 401k to be a solution to your financial security within retirement? Without taking precautions to exempt your money to an uncontrollable financial climate, you may be inadvertently placing yourself in a dangerous spot. Once again, given current market conditions, anything is possible.

The only remedy to an unpredictable market lies within concepts such as annual reset, which provides true financial guarantees. Guarantees, that expel any future volatility with long-term growth potential and lifetime income. These concepts reposition your portfolio from securities to fixed, asset-protected concepts. Simply put, deposits are protected within this concept through reserve pools mandated by the state in order to offset the most extreme financial circumstances. Institutions that offer these products front large sums of liquidity to match all deposits usually do so on a dollar for dollar basis.

There is a reason why you might not have heard of this philosophy. The massive reserve requirements needed for annual reset usually pose a conflict of interest to security-based firms offering deferred compensation plans. Instead, traditional securities, or stock-based plans, usually rely on leveraging assets to drive in additional income. Companies that use leverage assets, by default, cannot afford to front reserve pools in order to protect the money, as it is a conflict of interest. Leveraging assets, or borrowing against funds, are the exact opposite of placing cash into reserve pools. Therefore, it should be of no surprise that in the wrong financial environment, leveraging could prove to be of severe consequence. To put it into perspective, many experts believe the fall of MF Global stemmed from a leveraged asset as high as 43 to 1. This means for every dollar deposited, $43 dollars were borrowed in hopes of trying to drive in profit. So, when the market crashed, excessive debt obligations effectively rendered the company insolvent. Since the assets within these plans were leveraged, the money in turn was completely exposed to volatility.

As of now, what happens in the market remains to be seen. Those concerned about unanticipated market downturns should educate themselves on concepts that provide true financial guarantees. This is especially true for those who strive for a comfortable lifestyle in retirement, regardless of how the market performs. However, before you start exploring safe money solutions that incorporate annual reset, it is highly recommended that you seek the advice of a financial professional. Doing so, will help determine if these products are right for you.

Covering Your Bases on College Planning

There is a plethora of options out there in regards to college education, so when it comes time to pick the best option for your loved one, it’s important to make sure all of your bases are covered. Unfortunately, many college plans today fail to deliver the anticipated results for a couple of reasons: volatility or change. Since there is very little certainty in life, it is crucial to use a flexible college-planning tool that allows you to adapt to changes, while still providing the intended benefits. Flexibility is the key to funding your loved one’s college education. Without it, you may end up regretting it.

Traditional methods of college planning assume no other choice is available outside of going to college. These straight-to-the point products lack flexibility, which could cause the loss of key benefits should your child or loved one head down a different avenue other than attending a university. For example, if college ends up not being the preferred choice of your loved one, most traditional college plans will either default to taxable withdrawals or name another recipient of the money in order to reap the intended benefits. Although the latter is not likely to happen, either result could make you regret investing your money in a traditional college-planning vehicle should your child or loved one decide not to attend college.

A better option would be to invest in an indexed universal life policy. An IUL would allow you to fund your loved one’s education, while still reaping the benefits of tax free withdrawals, regardless of whether or not junior attends a university. This is because your tax exemption is not dependent upon your loved one going to a university like it would be under a 529 plan. This gives the owner peace of mind knowing that whatever changes they face, won’t cause them to miss out on the intended benefits. Instead, you will have added control and flexibility to adapt accordingly, without being financially penalized.

In addition to tax-free withdrawals, IUL ensures that no plan will lose money due to market conditions, which ensures the availability of the money once the time comes to use it. IUL policies adopt financial concepts that blend both annual reset and indexing allocation methods in order to guarantee that you won’t lose a penny due to market conditions. These concepts have averaged moderate returns over the last several years through the ability to bypass market downturns with capped earnings.

Flexibility is another key benefit for investors within an IUL policy. Deposits made into an IUL policy can be either structured or sporadic.  Meaning you can structure your policy to get favorable results through either lump sum deposits or consistent monthly deposits. 

Last, but not least, an IUL can bring peace of mind through total protection. For instance, if the bread winner of the IUL policy were to pass away, the beneficiary (often the potential student) would receive an accelerated tax free death benefit to ensure payment of the education.

If the past decade is any reflection of what is to come, protecting your money with underlying guarantees can minimize the stresses connected with providing an education for your loved one. Unpredictability and uncertainty have been more prevalent over the last five years than any other time in US history. If this pattern continues, what guarantees do you have in regards to your loved one’s higher education needs? Utilizing an IUL for your college planning needs is definitely a great way to bring security into an insecure financial world.

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.