Wealth Preservation

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Preserving Financial Resources

As traditional pension plans become extremely rare and life expectancy increases, one of the biggest sources of retirement insecurity is outliving your money. Statistically, an average 65-year-old male will live to be 84, while the average female will reach 86. These are average statistics. That means one half will live even longer so you have to cover for roughly 20 to 30 years after retirement.

Retirement planning is probably the only aspect of life in which longevity is considered a risk, and in this context, the risk is that you get the timing wrong by spending your last dollar long before you die. You can reasonably budget for living expenses, but longevity and health care costs are wild cards.

No matter how well you invest up until the point that you retire, you can still have a less than satisfactory retirement if you don’t handle your money well.   Those who live a long time after going broke may very well regret pursuing a strategy designed to destroy — rather than build — their wealth.

Most retirement planning strategies are centered on trying to preserve financial resources for as long as possible.  One of the problems with spending all your resources before you die is that you don’t know how long you are going to have to live with the decision.

That’s where deferred income annuities come in. They’re a valuable tool for creating an income distribution program that is very similar to now-scarce defined benefit pensions, traditional plans that paid you a fixed amount based on your salary. With a deferred income annuity you can preserve your investment capital and make sure that you have a steady income for the rest of your life — no matter how long you live.

As bond yields, savings account rates, CD rates and other traditional sources of income have plunged toward zero, retirees have seen the ability of their assets to generate income all but disappear. This exacerbates the risk of spending your money too quickly, because with low bank rates it will take more savings to generate the returns you need.

While investment in the stock market is considered to be a capital investment in our productive economy, it very seldom is. If you are able to purchase new stock directly from a corporation that will use that money to expand their productive capacity, then you are investing capital in our economy.

But when a stock is sold the second, third and so on… times, the new owner is not investing in that corporation. The vast majority of stock trades are done between one investor-speculator and another, trading places between would-be owners and those who would rather not be owners.

As far as our productive economy is concerned, these dollars serve no useful purpose. They create no jobs, build no factories, nor do they feed or shelter anyone, except stockbrokers and speculators. The taxes paid on gains are offset by the deductions taken on losses.

The following generation will be too small in population and earning capacity to bid up prices and produce a profit for the boomers to retire on.  The generations following the Boomers are going to have their income taxed heavily to pay the Social Security and Medicare for the Boomers and thereby will not have the pocket money to buy into IRA’s and 401K’s; causing those markets to fall catastrophically in value and bankrupt many Boomers.

Consider also that most 401K plans are not invested in industrial stocks and bonds; rather they are only speculating on the profitability of a mutual fund company, i.e., the stock you own and will need to sell at a higher price to have retirement income is your investment firm’s stock, and no other. Since your fund managers must buy and sell stocks and bonds, etc. to make a profit, similar to all other mutual funds, you can only come out a winner if other 401K speculators come out losers.

The Boomers will either suffer losses that will destroy the value of their retirement investments, or they may be forced to keep their capital tied up in owning stocks and bonds and only receive relatively small dividends, without ever being able to recover and spend their invested capital.

The cover-your-basics retirement income approach aims to match your fixed expenses with fixed sources of income. Retirees should use an income annuity to cover any gap. Purchasing an annuity’s fixed income option gives you peace of mind, knowing your lifestyle will be relatively stable and not depend on the whims of an inherently volatile market. Life annuities remove the uncertainty of living a very long time (longevity risk).

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Thursday, February 19th, 2015 Wealth Preservation Comments Off on Preserving Financial Resources

Wealth Preservation For Retirees

There are now 40 million Americans over the age of 65, comprising 13 percent of the population. Twenty-five percent of these folks will live past age 90, and 10 percent will live past age 95. What’s more, by 2030, one out of every five Americans is expected to be over age 65.

Failure to plan for care needs in later life can result in the loss of a lifetime of savings and failure to leave a legacy. Nationwide, the average annual cost of nursing home care is more than $90,000.  Couple that with the fact that 70 percent of all Americans will need some form of LTC—half of us in a nursing home—and you have the recipe for financial disaster.

The problem here is that none of us know if we will need long-term care and from what age we will need it. You may develop a condition like MS or Parkinson’s that can strike at a relatively young age regardless of family history. You may have a fall that causes a head injury and need long-term care because you are otherwise healthy but have lost your mental facilities.

The Affordable Care Act, for all its benefits, doesn’t pay for any LTC. Neither does Medicare, which, at best, may cover short-term rehabilitation under very limited circumstances. Medicare provides no coverage whatsoever for custodial care, such as for individuals who need help getting in and out of bed, dressing, bathing or with other activities of daily living.

Thus, we aging Americans are either forced to fend for ourselves and pay for LTC out of pocket (either privately or through insurance) or rely on Medicaid, which was originally intended to be a program for the very poor.

In January 2010, a section of the Pension Protection Act of 2006 took effect. That generated excitement because the law permits federal tax-free treatment of withdrawals made from annuity combos to pay for qualifying long-term care expenses.

Fixed annuities, those CD-like investment vehicles that can provide an income stream for life, are a tough sell in the current low interest rate environment. However, if you’re a risk-averse shopper who can’t pull the trigger on a use-it-or-lose-it long-term care policy, an LTC annuity may be worth exploring.  It’s generally a lot less expensive than a long-term care policy.

The 3-to-1 Annuity/Long-Term Care Hybrid Annuity should be considered for money you are using to self-insure for all or part of potential LTC expenses. You instantly multiply the amount that is available for LTC to two or three times the amount you’ve set aside. You continue to earn safe interest on the money and have some access to it. If you are fortunate enough not to need LTC, the money passes to your loved ones.

You have long-term care benefits that are up to three times the annuity’s value. If you deposit $100,000, you now have up to $300,000 of LTC coverage. The cost of the LTC coverage won’t increase over time and won’t reduce your principal. Interest earnings increase your LTC coverage.

As with a standard long-term care insurance policy, the LTC benefit is triggered when you can’t perform two or more of the six activities of daily living (determined by a licensed medical professional) or are cognitively impaired. Eleven long-term care services are covered, including adult day care, home care, homemaker services, and residence in an assisted living facility or nursing home. There’s no waiting period for reimbursements for home health care or respite care, and a 90-day waiting period for other types of care.

Since this is an annuity, your deposit and accumulated interest are available for other uses. You can withdraw up to 10% of the contract value each year or schedule regular annuity distributions, such as a single life annuity or a joint life annuity covering the lives of both you and your spouse. The amount you don’t distribute or use for long-term care can be transferred to your heirs or other beneficiaries. Keep in mind that any lifetime distributions reduce your LTC benefit.

Another annuity available is a Longevity annuity.  Longevity annuities are much simpler than their name would suggest. In essence, a longevity annuity allows you to to trade a fixed amount of money for the promise of a future stream of income that will begin at a fixed age and continue for the rest of your lifetime. Unlike immediate annuities, which begin to make payments right away, longevity annuities are deferred income annuities, with payments set to start years or even decades into the future.

Earlier this year, the Treasury Department established new rules covering the use of longevity annuities. These insurance products are designed specifically to help retirement savers plan for their future income needs in a predictable way.

The new rules allow participants in 401(k) plans and other employer-sponsored retirement plans to incorporate these longevity annuities into their plan offerings without running afoul of guidelines that require minimum distributions of retirement-account assets past age 70 1/2. Yet even though retirement savers will be able to use annuities more freely, the big question is whether it makes sense for them to do so.

The main benefit of longevity annuities is that they give investors the certainty of knowing they will receive a certain amount of money no matter what happens in the financial markets. Moreover, for those who exceed the typical life expectancy, longevity annuities pay off by ensuring monthly payments as long as you’re alive to receive them.

By putting a portion of your savings aside toward a longevity annuity, you’ll be certain that even if you run out of other assets, you’ll have a minimum baseline income on which to survive. In that way, longevity annuities provide the same financial stability that Social Security does, with the federal payments also continuing until death.

Fixed indexed annuities, however, will continue to be a bright spot in a persistently low interest rate environment, as both a retirement savings accumulation vehicle offering a principal guarantee and growth potential, and as an attractive alternative to certificates of deposit.

Fixed indexed annuities can provide retirees with one of the most reliable and efficient sources of retirement income. “Savvy savers have long understood the merits of indexed annuities, but now a broader cross section of the investing public has entered the marketplace in droves.

With the economy still on shaky ground, many near retirees worry they’ll be working much longer than anticipated. Fixed indexed annuities are a virtually recession-proof bulwark against those kinds of concerns.”

If you know you won’t have a long lifespan, purchase a Life Insurance Combo plan.  It’s an easy sale, because people do want long-term care.” They may like standalone long-term care products, “but they don’t like knowing that if they don’t use it, they will lose (the money they put into) it.” For those people, the life combo — which pays for care if needed and/or at death — is “an attractive product.

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Tuesday, December 23rd, 2014 Wealth Preservation Comments Off on Wealth Preservation For Retirees

Predictible Stream of Retirement Income

The market has been volatile and there is talk of another drastic drop in the stock market. Many on Wall Street had expected an easy ride for stocks into the end of the year, with a Santa rally capping a year of gains. But the mood has soured this week.  Just several days ago, the market was buzzing with talk about Dow 18,000. The Dow lost 1.5 percent to 17,533 Thursday.

You may be labeled as “pre-retirees,” which means we can see the sun beginning to set on our working years.  Retirement planning has a lot of moving parts, factor in things like taxes, inflation, distribution strategy and uncertain investment returns.  In order to retire financially secure, you need to have a plan.

Although boomers are optimistic about retirement, many are concerned about meeting their financial needs in retirement. Are you nearing retirement and fretting about what income you can pull out of your 401(k) or IRA? We have a recipe for you. It’s a way of converting a lump sum into a very predictable stream of cash payouts. It won’t give you a huge return, but it may succeed in taking some of the financial worry out of old age.

You may be looking for a sustainable investment and making a sustainable distribution strategy requires a long-haul approach.  Once you reach retirement, you must rely on the wealth you accumulated to pay the bills as you probably do not work. In this state, you use money generated from your portfolio or you make withdrawals.

There can always be the question of whether or not you and/or your spouse will outlive the money.  Life expectancy of a 65-year-old has grown by 37 percent since 1950. The amount of money needed to fund a secure retirement has grown as well. A 2013 Government Accountability Office report stating “middle-class retirees should convert at least half of their retirement savings into a lifetime income annuity”.

It is difficult for the average person contemplating retirement to determine how to drawdown his/her wealth.  Choosing a wealth decumulation and consumption strategy that maximizes lifetime income is a source of uncertainty.

  • Number one you need to answer the question, what are your expenses?  You need to include your mortgage payment, your annual insurance payments, your property taxes, income taxes, vacations, entertainment, tithing, charitable giving, even the money you spend on your children.
  • Number two, find the difference between your expenses and your income. Multiply that number by 25, and then multiply that sum times 12. Why?  25 is 4%, which is the suggested withdrawal amount. 12 is the number of months in a year. By doing this calculation you have just learned how much money you will probably need to live on. You will also know if you have work to do or if you are there already.
  • You’ve probably heard people say you can’t take out 4% any more. With so much volatility in the market, you can only withdraw 2%. If you don’t have a sell strategy that helps to protect you from bear markets, that could be true. You’ll need to go back to Step No. 2 and recalculate, multiplying the difference between your expenses and your income by 50 and then again by 12. And when you look at your new total, you may decide you can’t retire.
  • Number Three, Dedicate an emergency account that would cover several months’ worth of expenses.
  • Number four, Asset allocation — or how assets are divided among different classes, such as cash, stocks, bonds, real estate and so on — plays an important role in both the risk and return of your portfolio. The longer you have until retirement, the more aggressive you can afford to be. The closer you get, the more important it becomes to have a balanced portfolio with both stocks and bonds.
  • Number five, Seriously consider getting long-term care coverage. It will help cover costs like home health services, assisted living, skilled nursing care and specialized memory care. Those types of care can be expensive — the median cost of one year in a nursing home is about $77,000 — and can quickly deplete your nest egg.

Having more than 80 percent of your portfolio allocated toward stocks could open you up to significant losses that might force you to delay retirement if we have another major downturn like we experienced in 2002 or 2008.  A common rule of thumb is to take 100 minus your age and put that percentage in equities, but that guideline looks dated for a few important reasons.

First, people are living longer now, which means their assets need to last longer too. Being too conservative can mean not keeping pace with inflation and running out of money too soon. Second, interest rates are at historic lows, which will affect the risk and return of bond portfolios. So for those looking for a simple guide, it’s probably better to take 110 or 120 minus your age and put that in equities.

People often misunderstand the rules about drawing down their assets in retirement. People forget that they need to start taking required minimum distributions from their individual retirement accounts and 401(k)s after age 70 ½. For those nearing age 70, an important milestone that affects all of their tax-deferred retirement funds is approaching. By April 1 of the calendar year after reaching 70, minimum withdrawals based on age must begin if the annuity option has not been chosen.

Prior to the issuance of regulations announced by the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) in July 2014, longevity annuities were, as a practical matter, not accessible to DC and IRA investors due to Internal Revenue Code rules that require distributions from a DC or IRA account to begin by age 70 ½, which is prior to the age longevity annuities are designed to begin income payments. With these new regulations, qualifying longevity annuity contracts (QLACs) are exempt from required minimum distribution (RMD) rules within prescribed parameters.

An annuity is the flip side of life insurance. Life insurance protects your loved ones if you die too soon. Annuities protect you if you live too long. With a classic annuity, you are essentially buying a pension for yourself. That design is very much in line with what people had in their traditional pensions. The value of their benefits grows over the years, and the only thing they have to do, at some point in the future, is turn on the income stream.

Don’t think of annuities as a type of investment. They are a way to convert savings to guaranteed income. Investments involve calculated risk. Annuities involve minimal risk. The whole point is that you know how much monthly income you can count on. Do consider buying an inflation-protected annuity, which increases the payments each year to keep up with the cost of living.

Whatever is going to happen with your annuity can be found in the policy that is issued by the carrier. There are no surprises, secrets, or hidden gotchas in the contract. Nothing is over hyped or bullet pointed in the policy. There are no hypothetical, theoretical, projected, back-tested, or hopeful return scenarios in the annuity contract. It is what it is.

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Thursday, December 11th, 2014 Wealth Management, Wealth Preservation Comments Off on Predictible Stream of Retirement Income

Why Self-Insure Long Term Care?

From dissolving the barriers between accumulation and decumulation, the liability of longer lives and a raft of investment choices; retirees will find themselves on a very different pension’s pathway than anyone before them.

In my experience, over half the people who shun long term care insurance do so because they feel they will never need it. It is difficult to visualize going to a nursing home. Statistically, half of these people will be right.  However, there are a number of scenarios where the person may need some kind of assistance but never see the front door of a nursing home. In fact, most people who need long term care can receive care without ever leaving their home.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.  The average cost of a nursing home today is $80,000 per year and rising. At that rate, it doesn’t take but a few years to grind through a modest estate. If both the husband and wife need nursing home care, the time to dissipate an estate is cut in half.

A person can spend 40 years in a career building a retirement nest egg. They spend another 40+ years conservatively managing their money while trying to keep up with inflation. If they need to go into a nursing home during the last five years of their life, it all could be gone quickly.  Long term care is used for a person who becomes unable to care for themselves and needs assistance. This assistance might in their home, daycare, or nursing home care.

Most people react to a problem only when the problem surfaces. If a person waits to apply for long term care insurance until they are experiencing health problems, any long term care insurance plan may be prohibitively expensive or altogether unavailable.

One reason for the popularity of long-term care insurance policies is Medicaid; this government-sponsored program can pick up the cost of nursing home expenses, but only after patients have already depleted their assets and life savings.

On June 30 of 2009, the government has mandated rules and regulations on restricting the transfer of assets of the elderly. There is now a five year look-back provision if you apply to Medicaid to qualify for the nursing home – the Medicaid nursing home. These restrictive laws are intended to impoverish the healthy spouse.

Before you can qualify to receive, or to enter a nursing home, you must spend down your assets, which means that, if you are of the age where the nursing home may become an issue, in order to protect your wife, or the healthy spouse (i.e. you or your wife, whoever is not sick) you must do Medicaid planning 5 years earlier than the date that you went in to the nursing home.

The Solution: The Long Term Care Insurance That is Not a Policy

The underlying base of an “LTC annuity” is an annuity. Nothing new here; annuities have been around for a hundred years. They are safe, the funds accrue at a competitive interest rate, and the account grows tax-deferred. To form an LTC annuity, the insurance company has built in a “long term care option.” It is not a rider. There is no premium. It is simply an option you elect if long term care is ever needed. Sweet.

To qualify for benefits, a person only needs to lose two of six ADLs (activities of daily living). ADLs are insurance companies’ method of determining the qualification for levels of care. They are eating, bathing, dressing, toileting, transferring (walking) and continence. The person doesn’t have to be in a nursing home. They simply need to have demonstrated the inability to perform two of the six ADLs to qualify to put the long term care option in their annuity in action.

An Example:

If a male, age 60, places $200,000 into an LTC annuity, assuming a conservative interest rate, the policy would grow to $300,000 in ten years. If the $300,000 were converted into a life income, the person would receive $2,200 per month for the balance of their life. An 8.8% return. Not too bad, considering it is guaranteed no matter what. If this person needs long term care at age 70 by virtue of losing two of six ADLs and elected the long term care option, the life income would jump to $4,500 a month.

Long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little underwriting. Many buy an annuity to secure a stable retirement income. This new kind of annuity adds on coverage for long term care.

The coverage is paid for by the investment return from the annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit.

Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased. The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted.

For example, a policyholder with a $100,000 annuity who had selected an aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed.

Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary. Consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Wednesday, December 3rd, 2014 Wealth Preservation Comments Off on Why Self-Insure Long Term Care?

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