Your Home – A Retirement ATM

Most people – experts included – don’t have clear concept of the cost of retirement. Everybody is underestimating a number of things including longevity and the cost of living longer.  Of all the assumptions made in financial planning (inflation, rate of return, tax brackets, etc.), your life expectancy is probably one of the biggest of all. Using the wrong number can be detrimental.

Investors haven’t been too happy about employer sponsored retirement plans, such as 401(k) accounts. A combination of hidden fees, lousy investment choices, and bad returns have thrown retirement savers for a loop.  Many have tried to save and at one time invested in the stock market, but it’s all been depleted.

Job insecurities, layoffs, stock market losses and a trend among many companies last year to freeze 401K contribution matches.  Near retirees have downsized and cut expenses and are doing everything they can to set money aside, but every time they do something unforeseen comes up.”

The economic downturn is not entirely to blame. While declining home values and mounting job losses are part of the equation, many residents were cultivating bad financial habits well before the recession.

Many Baby Boomers are discovering that they will need to tap home equity, not bequeath it.  More and more Americans will need to use their home as a retirement ATM, wiping out a key component of many estate/inheritance plans.  Protecting home equity may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomes and people rely increasingly on meager 401(k) balances rather than on traditional pensions.

People have this incredible tendency to defer pain as long as possible. This is just another indication that if you give them the choice to procrastinate, they definitely do.

It is becoming abundantly clear that as individuals we have to take more responsibility for our own retirement planning. It will not be enough to rely on employer pension schemes (where many people are only making minimum contributions and most final salary schemes are closed to new entrants) or indeed government support.

Every investor would like to increase their income without compromising their stability. Maybe that’s why Equity Indexed Annuities (EIAs) have become so popular, because of their promise of providing a stable income stream. Only an insurance Annuity can guarantee to pay for a lifetime, no matter how long that lifetime lasts.

Indexed annuties meet 2 objectives: growth and stability, with the same investment. By combining the use of both, the risks balance each other and you get the rewards of both. 

An indexed annuity allows consumers to benefit from growth in the market without the risk of direct investment in the market. It guarantees that principal will be protected because the account value increases as a result of positive index performance, but never loses value due to market downturns.

An indexed annuity is particularly suited for retirement planning as it provides consumers with the potential for increased earnings while protecting against downside risk, something that may not be available with other fixed income investments. 

When the index shows a positive performance over the particular indexed account’s one-year segment duration, “index credits” that are based on that performance are added to the account value. Unlike direct investments, the account does not lose any value when the markets go down because the index credit can never be negative — keeping the account value intact.

An immediate annuity, however, does something that other investments can’t: it guarantees a lifetime stream of income that won’t run out as long as you live. As a way to handle longevity risk, therefore, immediate annuities do a great job.

There are safety choices available, but these guarantees do reduce the payments from the lifetime, no-period-certain choice.

• Period-certain – The annuitant collects for life, but a beneficiary would receive the balance of the chosen minimum number of payments.
• Cash-Back –The annuitant collects for life, but payments must continue to a beneficiary until the total contribution has been received.
• Joint-Life and Survivor Income – provides a level of income while a couple lives, then reduces after either death, for the lifetime of the survivor.

If you find that you need a steady stream of additional income.  An your savings and investments are not large enough to cover the shortage for the rest of a lifetime.  An annuity is a necessary consideration to help you achieve the desired income.

There are different types of annuities:

1. Immediate Annuity – the first income payment begins within 30-days of purchase
2. Deferred Annuity – the first income payment begins over 30-days from purchase
3. Tax Non-Qualified Annuity – contributions do not give a tax deduction
4. Tax-Qualified Annuity – may give a tax deduction for the year of contribution (see a tax professional). Tax-Qualifieds are further broken into
5. ROTH IRA (contributions were income taxed, but the interest will never be taxed. The account is allowed to accumulate past age 70½).
6. Traditional IRA (contributions are tax deferred, listed as a credit on line 32 of the IRS Form 1040. The account accumulates tax deferred but withdrawals are taxed. The hope is that the tax bracket is lower after retirement than when the contribution was made. Withdrawals must begin by age 70½.)
7. Fixed Annuity – The account earns investment results, like any interest-bearing account. Most fixed annuities pay at least a guaranteed minimum return (interest), no matter how bad the economy is. The value can never be less than the sum of the contributions.

All annuities use the same funding vehicle to accumulate contributions. Contributions can come from regular payments made each month over a lifetime. A large contribution can come from anywhere; a 401 (k) retirement, and IRA rollover, an inheritance, or a cashed-in a stock. Tax-Qualified annuities have maximum yearly contribution limits, so larger deposits may need to be split between them and a Tax Non-qualified annuity.

Some scary statistics from the Employee Benefit Research Institute study showed that a 65-year-old today would need to have socked away at least $122,000 to have a 90% chance of fully covering his or her future healthcare costs.  So check if you’ve saved and invested enough for your retirement. Make sure to factor additional costs in and try to become properly insured to cover the extras (long-term care, etc.) Otherwise, as you reach the century mark you may easily run out of money.

The bitter truth remains that the Twenty-First Century is undoubtedly an economically evil era. Times are perpetually changing for the worst and job security is virtually a thing of the past.  A stable nest egg in this day and age of global recession and heavy losses is critical.

Why Do Banks Fail?

In light of the economic turmoil that our country is presently in, it is appropriate to try and understand how some of the financial institutions we rely upon operate.  Bank failures are a major topic of concern in this economy. Banks fail for two basic reasons, lack of liquidity, or lack of capital.

Liquidity is the cash that a bank either has on hand in their vault or in another bank account. Banks also have lines of credit with other banks, the Federal Reserve Bank or Federal Home Loan Bank.

Theses lines must be secured with collateral which can be investment securities or loans. Banks not only rely upon these borrowing lines, but also on deposits from their customers for their liquidity.

Capital is primarily the money that investors have invested in the bank in the form of stock. This can be either common or preferred stock. Common stock is the most prevalent form of stock ownership, and doesn’t have a rate of interest rate and thus interest is not paid on common stock.

The value of the common stock depends upon the value placed upon it by buyers and sellers of the stock. The stock can be traded on any of the national stock exchanges, or may be “unlisted” which means that buyers and sellers trade the stock directly with each other.

Preferred stock is also a prevalent form of stock ownership in a bank. Typically preferred stock has a stated interest rate and may have other features that give it a preference over common stock in the sale or liquidation the bank’s stock.

Also included in a banks capital are the retained earnings of the bank, or more typically today retained losses of the bank. Retained earnings add to capital and retained losses subtract from the capital of the bank.

These are the most typical forms of bank capital and are usually termed “Tier 1 Capital”.

Other forms of capital may include the bank’s allowance for loan losses which is an estimate of what the bank may lose on certain non-performing loans which are loans that the borrowers are having difficulty in making the payments.

These allowances are included in “Tier 2 Capital” which is considered in certain capital calculations that are prescribed by the regulators. Other qualifying borrowings such as certain forms of subordinated debt may also be included in “Tier 2 capital”.

(1). So why would a bank run out of liquidity or cash. The most common reason is that the bank has operating losses which generally become known to the public, and the public loses confidence in the ability of the bank to pay the depositors their money.

Most bank accounts are insured up to $250 thousand dollars by the FDIC, and in fact non-interest bearing transaction accounts are insured up to their full balance even if it exceeds $250,000

(2). Also, many banks have relied upon wholesale brokered deposits, and when their operating losses reduce their capital below what the regulators deem to be “well capitalized” or “adequately capitalized, then they are not allowed to renew these deposits, and must repay the brokered deposits.

(3) Their borrowing lines can also be “frozen” once their capital reaches a level that is deemed to be insufficient by the regulators, which means that they can not only borrow new money but may have to repay their existing borrowings.

(4) There is also a new FDIC regulation that takes effect January 2010 that restricts the interest rates that banks may pay on deposits to .75 of total assets a bank is no longer adequately capitalized and the FDIC is required to take what is termed “prompt and corrective action”

(5) which means that the regulators, (FDIC, OCC or the OTS)

(6) must take affirmative action to either make sure that the bank raises additional capital or Place the bank into receivership which basically when the regulators come in and take over operations of the bank.

The current trend is that the bank will be issued either a Memorandum of Understanding (MOU) or a Cease and Desist Order (C & D) which typically requires the bank to raise capital, decrease problem loans, and may address other operational issues such as improving underwriting standards, and loan portfolio management policies.

In the current capital market environment it is virtually impossible for a bank that has significant “problem assets” to raise capital because the loan portfolio problems are so great that the projected returns are not attractive to investors. Thus the bank will continue to incur operating losses as more loans go bad and eventually the FDIC, OCC , or the OTS will be forced to take over the bank.

The most recent trend in the takeover process is for the regulators to find another bank to purchase the “troubled bank”. The FDIC has a web site that it lists the financial information regarding the troubled bank. Those banks that wish to “bid” on the bank are given access to this data base and formulate their bid. The acquirer will make a bid for the deposits which may range from 1-3 of losses on performing loans, and the first 95 of the face value of the loans and performing loans would receive a price of 50-80% of the face value of the loans.

(7) The large quantities of loans and real estate that have been “dumped” on the market through this auction process have further exacerbated the decline in real estate values in the United States. Thus it is hoped that the new process of allowing banks to acquire a failed bank will slow the process of dumping real estate on the market, and the acquiring banks will be better able to manage the real estate sales process than the bank regulators.

(1) FDIC Laws, Regulations and Related Acts. Minimum Leverage Capital Requirements, Part 325 Capital Maintenance, Federal Register 3804 1-25-2002

(2) FDIC Laws, Regulations, and Related Acts. 12-CFR part.; 370 Final Rule regarding Limited Amendment of the Temporary Liquidity Guarantee Program, FDI C Transaction Guarantee Program

(3) Federal Deposit Insurance Act. Sec 29. “Brokered Deposits”; 12.CFR 337.6(a)(2)

(4) Federal Register Vol. 74 No. 21 Feb. 3, 2009; 12 CFR, part 337, Interest Rate Restrictions on Institutions that less than Well Capitalized.

(5) Federal Deposit Insurance Corporation, Risk Management Manual of Examination Policies, Sec 15.1 Formal Administrative Actions.

(6) Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision.

(7) Debtx doesn’t release the results of its auctions. The price ranges have been obtained from personal experience in bidding on loans and properties on Debtx as well as from discussions with Debtx representatives. The price ranges in this article are estimates based upon this information

Article Source: http://articlefree4all.com By: Mike Sleeth

Business Life Insurance is an Investment

Being caught without insurance can lead to severe consequences. Most liability coverage protects the policy owner from paying court costs and huge amounts from lawsuits. Lawsuits can lead to an award of millions of dollars to an offended party. You may also have to pay out of pocket for repairs to building and surrounding structures, cars and other property damage.

Most importantly, not having insurance policies such as auto, commercial liability and professional indemnity can be against the law in your state. The insurance costs come in addition to paying any lawsuits and damages that you might be responsible for.  Most businesses cannot survive the death of the principle owner and is an area that all businesses should consider.

Business Needs for Life Insurance include:

• Key Person – A life insurance policy may be used to help protect a business from the loss caused by the death of a key employee or owner. What would you do if one of your key employees — a top salesperson, manager, partner or product developer — suddenly died or became permanently disabled?   Would the business be able to continue without that valuable person?   
• Business Continuation – Life insurance may be used to help fund a buy/sell agreement or stock redemption plan. To preserve the future of your business, it is important that your create a business continuation plan. Such plans often include a “buy-sell” agreement. A buy-sell agreement, funded by life insurance and written while the owners are alive, ensures that your heirs can sell their share of the business to surviving owners – and that the surviving owners can buy their share.
• Business Loans – Life insurance purchased on a key employee or business owner may be used to help pay off the debts of a business. When a business takes out a loan to start or expand operations, the lender will often times ask for the borrower to buy a life insurance on their life and assign the lender as beneficiary. These policies are usually term policies that are scheduled to run the length of the loan, but all situations are unique and no one type of policy is appropriate in all situations.
• Employee Benefits – Life insurance is commonly included as an employee benefit.  Because of the tax deferred growth of cash value and self completing aspect of the contract at death, many large companies use life insurance as a vehicle for deferred compensation contracts.

If I die or become disabled, my family and my business partners are friends and they’ll just work it out.

Most small businesses do not survive the death or disability of a principal member. Most children do not follow parents into the family business. Most businesses do not have the cash flow necessary to pay the estate of a deceased member for its interest in the business and the business may be dissolved. Finally, in my experience, remaining family members and business partners rarely work things out after the death or disability of a member.

Employers often purchase life insurance policies on key employees to insure against the loss of services or income that might result after an employee’s death. Here, the proceeds from the policy are paid to the company. Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner’s death or to buy out the partner’s heirs.

The Sole Proprietorship Life Insurance

The owner of a Sole Proprietorship is not a separate entity from the business. The Sole Proprietorship and the business owner are one in the same. Whatever liabilities the business incurs so does the owner. When the owner dies so does the business! Although the assets of the business can legally be transferred to a beneficiary upon the death of the owner the business has to be dissolved. The new owner has to start a new business in his or her name. The transition period can be costly. With careful planning and adequate life insurance, however, the business can continue without many problems.

You may want to transfer your business to a successor, in which case life insurance purchased by your heirs can provide funds to pay estate taxes and help sustain the business during the initial period of new management. Or, if your employees are interested in carrying on your business, a buy-sell agreement can be funded with life insurance to assure that your family will receive the optimum value for the business.

The Partnership Life Insurance

Two or more people get together to form a Partnership. Unlike the Sole Proprietorship the Partnership is a separate entity. In the event of the death of one of the partners the share of the deceased partner is of immediate concern. In order to avoid a problem in this type of situation the partners have a Buy-Sell agreement drawn up. This agreement…

• Creates a guaranteed and binding market for the deceased partners share.
• Allows the surviving partners to continue the business without interference.
• Provide immediate cash for the survivors of the deceased partner thereby eliminating possible financial problems.

Partnership Life Insurance is designed to help your business survive the loss of a partner. To preserve the business, many partnerships have a buy-sell agreement, which fixes both the price and terms of the sale in the event a surviving partner buys out a deceased partner’s interest. Life insurance can provide the necessary funds no matter when the partner’s death occurs.

Life Insurance For S corporation

An S Corporation continues on after the death of a stockholder. It does not cease to exist. The corporation should have a buy-sell agreement which states that upon the death of a stockholder the corporation will buy the deceased stockholders shares from the heirs at a predetermined price. For obvious reasons the amount should be updated on a regular basis. This agreement is binding.

The S Corporation would own a life insurance policy on the lives of it’s stockholders in amount of the stock owned. It is the owner, premium payer and beneficiary of the policy. Upon the death of a stockholder the proceeds of the life insurance policy is used to purchase the deceased stockholders shares from his or her heirs. The remaining stockholders own all the shares, the heirs are fairly compensated and everyone is happy.

We recommend that you use life insurance to create a pre-death buy-sell agreement certifying that if a stockholder should die, the remaining stockholders can purchase his/her shares at a fixed price. This will guarantee that heirs will receive cash for their inherited business interest and that surviving stockholders will maintain control of the business.

Executive Benefits
Many employers provide selective benefits to key employees to enhance the benefits normally available to employees. Life insurance can be valuable in providing theses selective benefits.

Some examples are:

• Bonus Plan
  Many employers offer benefits that they feel meet the needs of and help retain highly valued employees. A bonus plan that incorporates employee-owned life insurance is one way an employer can tailor a death benefit to meet the needs of specific individuals.
• Split Dollar Arrangement
  A benefit that has historically served key executives is the split-dollar arrangement. Split-dollar is not a type of policy but, rather, a way to share the costs and benefits of a single life insurance policy.
• Executive Compensation
  When an Employer decides to provide additional retirement or certain types of deferred compensation to key employees, life insurance is often used to informally fund the promised benefits.

Whole life insurance has traditionally been used to fund these buy-sell agreements but term life can be used on a temporary basis. The 20 year level term or the 30 year level term policies can be used.

Annuities Broaden You Investment Portfolio

One of the main problems in the investment world today is with the onset of financial crisis, people are being forced to re-evaluate their financial investments and the risks associated with the same.

In today’s world with record-low interest rates, it is highly unlikely that interest rates will go down further. More than likely, the direction of interest rates is up.

Today, rates of return on fixed-income investments such as CDs are at record lows and, unfortunately, I believe they will stay there for a while.

Bonds aren’t the way to go either, especally because when interest rates go up, the value of a bond will go down. In conclusion, when interest rates are low, it doesn’t make sense to lock in that interest rate for a long time.

Most people have had to learn to be flexible in this economy.  With life spans being extended due to better health information and care, retirement periods are expected to be correspondingly extended.  Women, who statistically live longer lives than men, have a much greater ”longevity risk” and will most likely outlive their assets.

Retiree’s are now considering back-to-basic concepts and safer and more secure means of making money. One such of investment is an annuity.  Annuities appeal to investors today because of their generally decent—returns and the payout guarantee at the end.

Annuities can broaden your investment portfolio and give you the additional level of financial protection that you need to revel in your golden years.  Annuities are gaining appeal, particularly for people who are currently retired or nearing retirement and need a guaranteed stream of income in the coming years. “It becomes more like a self-funded benefit plan.

Annuities are a solid way for retirees to obtain a sense of financial protection in their retired life.  Annuities will ensure retirees that they will be financially fit to keep a certain quality of living into their retirement, by using the monthly payout to compensate their normal costs of living expenses such as property taxes, utility bills, food and gas.

An annuity will help both boomers and women maintain an income after retirement. The middle class typically have enough assets or “surplus wealth” to purchase an annuity that will insure a steady income post-retirement without having to scrape the bottom of the savings barrel.  An annuity is the one lump sum investment that helps you get monthly returns at fixed time intervals, at pre-determined rates. 

Fixed annuities are a good way to make money doing, essentially, nothing—much like a savings account. You invest your money in fixed annuities, let it sit and gain interest. Annuities guarantee income for your retirement while protecting your principal and providing modest growth and is the best way to weather today’s unpredictable financial climate.

Since no one can predict where interest rates will go, purchasing annuities (laddering)  over a period of years allows an investor to minimize the risk of low returns. By laddering fixed annuities to build a money pot, is a beneficial, valuable method in today’s economic climate. 

One annuity that makes sense in today’s world is a index annuity, which is a good investment towards saving money. First of all, Indexed Annuities, have a minimum guaranteed interest rate, specified at the beginning of the annuity contract.

Secondly, An Index Annuity is a form of investment where the return is linked to a performance index, for example, the Dow Jones index or S&P 500, or companies listed by Standard & Poor or similar rating agency. Growth in the index rate means a higher return mirroring the stock market, but a drop in the index does not mean decreased returns, since there is a minimum guaranteed amount of return prescribed in the annuity contract, so the holder is protected against negative market drop.

Additionally, on January 1, 2010, the risk of having to use your assets to cover going to a nursing home should your health change for some reason, a provision in the Pension Protection Act of 2006 permits tax-free Long Term Care payouts from annuities with a tax-qualified long-term-care rider. Policies written after the start of the year will enjoy the tax-free payouts as will annuities with LTC riders already in force. The rule also allows for Section 1035 tax-free exchanges into these combination products from older annuities.

Baby boomers–typically manage their money after retirement and live on a limited fixed income, annuities now make the management of those funds easy and safe.