LOW NUMBERS = OPPORTUNITY?
3.87%  30-YR FIXED MORTGAGE
3.13%  15-YR FIXED MORTGAGE

• Making a greater portion of interest payments tax-deductible
• Improving monthly cash flow
• Allowing more dollars to be directed to other investments
• Consolidating other debt under more favorable terms

TAKING TURBULENCE OUT OF THE LONG-TERM CARE INSURANCE ISSUE

Not only did insurers not predict that Americans would be living longer when they began writing long-term care policies in the 1980s, they also failed to project the cost and scale of care around disabling maladies such as dementia. That in turn led to policies being severely underpriced for years, insurance advisers say.

When a large life insurance and long-term care insurance company decides to stop selling individual long-term care insurance because it does not view the sales as profitable, the message is that the consumer is receiving significantly the best end of the bargain.

Most industry analysts expect the underwriting criteria for LTC will eventually get stricter, making it harder to obtain coverage. The reality: Younger, healthier applicants who apply under more generous guidelines have a much better chance of obtaining coverage on favorable terms.

Use a paid-up plan. Some insurers offer the option of paying higher premiums for a specified period of time, typically ten years. Once the paid-up period is fulfilled, no more premiums are required, and the coverage remains in force for the life of the contract. This feature eliminates the possibility of premium increases and locks in the benefits, making long-term care costs a known quantity in your financial plans.

Make long-term care part of your life insurance policy. Many life insurance policies now offer an accelerated benefit rider, which permits a percentage of the death benefit to be paid in the event of certain long-term care events. While this coverage is typically not as comprehensive as a true long-term care insurance policy, it does have one advantage: If you don’t need long-term care, the premiums will be “recaptured” by your beneficiaries when the death benefit is paid.

HOW ARE YOU GOING TO ADDRESS LONG-TERM CARE RIGHT NOW?

]]> http://partners4prosperity.com/taking-turbulence-out-of-the-long-term-care-insurance-issue/feed 0 http://partners4prosperity.com/taking-turbulence-out-of-the-long-term-care-insurance-issue http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/5qjXWLVp714/retirement-income-distribution-methods http://partners4prosperity.com/retirement-income-distribution-methods#comments Wed, 25 Apr 2012 15:00:54 +0000 Kim Butler http://partners4prosperity.com/?p=1852 Continue reading →]]>

RETIREMENT INCOME DISTRIBUTION METHODS:
When it absolutely, positively has to last your entire lifetime

“Will your retirement income last as long as you do?” – 2011 TIAA-CREF bulletin
“Retirement: Make your savings last as long as you do” – USA Today, December 12, 2011
“Make your nest egg last as long as you do” – Financial Finesse, October 12, 2011

What is this retirement voodoo that “lasts as long as you do?”

Retirement planning is a relatively new financial activity, one that has really only developed within the past two or three generations. The first generation (those born around the beginning of the 20th century) experienced longer life spans, the first iterations of government-sponsored plans like Social Security and the rise of industrial employer pensions. The next generation (born in the 1920s through the onset of World War II) retired in the heyday of generous Social Security and Medicare benefits, along with stable pensions and the opportunity to supplement these retirement sources with privately accumulated funds.

Presently, the Baby Boomers (those born between 1946-1964) are approaching retirement age, and finding that the retirement income resources of previous generations are significantly altered. Because of changing demographics (a much larger cohort of retirees in proportion to workers), the actuarial premises of Social Security are unsustainable. For similar reasons, company pensions are also fading from the financial landscape. Now, the primary burden for providing retirement income rests squarely on individual savings.

The following is an overview of several prominent retirement income strategies, emphasizing the philosophies behind them, and highlighting their perceived strengths and weaknesses. While each strategy has some unique features, all approaches are attempts to address the main issue in retirement: Sufficient income that lasts as long as you do.

STRATEGY #1: Live on Earnings, Conserve Principal. This income distribution method is easy to understand: Your retirement income is the profit – income, interest, dividends, capital gains – that you receive from your retirement assets. Perhaps the oldest version of retirement income distribution, this simple approach has several positive features. First, by never touching the principal, you are assured the money will never run out. Second, conserving principal provides an inheritance for heirs, another important end-of-life financial issue. This approach can provide a high level of certainty, both to retirees and heirs.

But for many retirees, the principal required to generate a sufficient income may be substantial. If the principal earns 5 percent annually, a $100,000/yr. retirement income requires $2 million in principal. Conserving principal also means the greater portion of one’s wealth will not be enjoyed by the owner during his/her lifetime; $2 million must be conserved to continue providing $100,000 each year. And remember: Anytime principal is diminished, income will also be negatively affected.

STRATEGY #2: Devise a Drawdown Plan. Recognizing that retirees will not live forever, some financial experts recommend a strategy that systematically distributes both earnings and principal. This approach, frequently called a “drawdown” or “spend down,” delivers a significantly larger annual income in comparison to a strategy that conserves principal.

Using the $2 million accumulation earning 5 percent from the previous example, a retiree could receive $125,000 in annual income for 29 years. That’s a 25 percent increase in retirement income from the same accumulation. Selecting a fixed drawdown amount also adds certainty to the retirement budget, which helps other retirement planning.

But there is a potential problem: About the fourth month of the 30th year, the money runs out. This means your retirement income may not last as long as you do. And even if it does, a successful drawdown leaves no principal to pass on to heirs.

These challenges highlight two critical elements in devising a drawdown plan: A projection of how long payments will be made, and what rate of return can be expected from the invested principal. While there are many methods of arriving at a drawdown number, the following are prevalent approaches today:

The Four Percent Drawdown Rule. In the October 1994 issue of the Journal of Financial Planning, William P. Bengen, a certified financial planner and author, published research on historical market behavior and concluded the following: A person who placed his retirement accumulation in a hypothetical stock and bond portfolio, and started by withdrawing 4% of the balance, then increased this withdrawal by the current inflation rate each year, could expect his accumulated nest egg to “easily last over 30 years” (per a March 5, 2012, Wall Street Journal article), even with fluctuations in principal. For a retirement starting at the ages of 65-70, this retirement income rule-of-thumb could likely last as long as a person does.

Over the past 17 years, Bengen’s projection has held up, and he told the WSJ he believes his rule still holds, even with some severe market fluctuations. Bengen has a few cautions: A long stretch of low returns and inflation could be problematic, especially for those just starting retirement.

Go to Monte Carlo. Bengen’s 4-percent-drawdown approach is a very broad projection of returns and longevity. For a deeper analysis, retirees may want a Monte Carlo assessment of their retirement income plan. This approach, named for the Monaco resort town renowned for its casinos, was first used in the 1940s by scientists working on the atomic bomb. A Monte Carlo program analyzes a range of possible outcomes and determines their probability of occurring. It shows the extreme possibilities—the outcomes of going for broke and for the most conservative decision—along with all possible consequences for middle-of-the-road decisions.

The strongest benefit of a Monte Carlo analysis is it provides a format for concisely comparing what might be considered apples and oranges – different time frames, different incomes, different investment risk levels. Retirees can weigh their financial priorities, such as security, inheritance, income, etc.

Most financial service companies have proprietary retirement income programs that incorporate Monte Carlo technology. Like any other computer-driven analysis, the value of the Monte Carlo method is dependent on the accuracy of the data used in analysis, and it must be noted that even events with the highest of probabilities are not guarantees.

STRATEGY #3: Annuitize. The simplest way to establish a secure retirement income is to pay someone else to assume responsibility for investment risk and the length of payments. Annuities are contractual agreements from insurance companies that promise to deliver an income that will last as long as you want – even as long as you live.

One prominent advantage of an annuity is the lifetime income feature. Regardless of what happens to the economy, or how long one lives, a lifetime annuity is a contractual promise to continue delivering a regular income. This certainty not only stabilizes one’s finances, it also eliminates investment risk. Going back to the 1960s, economists have produced studies asserting that annuitizing is the most efficient strategy for delivering retirement income. And unlike other retirement income strategies, the longer one lives, the better the return.

However, the greatest obstacle for most prospective annuity purchasers, especially when considering a lifetime income option, is the complete surrender of their principal. In exchange for assuming all the risk of providing a retirement income, the insurance company takes full control of the invested principal. Consider this example:

Using rates quoted in March 2012, a 65-year-old male retiree with a $2 million nest egg could secure a $139,000 annual annuity income for life. If a retiree lived to 100, his $2 million investment would provide almost $4.9 million in income, delivering an annual rate of return of better than 6.6 percent.

On the other hand, if the retiree dies in an automobile crash two months after establishing the annuity, the insurance company does not refund the unused principal (unless the retiree included a return-of-principal provision in the annuity, which would decrease the monthly income payments).

A Blended Approach

Each of the retirement income strategies mentioned above has strengths and weaknesses, and each financial household has unique retirement issues. It is impossible to make generic recommendations that favor one income approach over another. In reality, many retirees select a combination of these strategies to address their income needs. With some competent assistance from your team of financial professionals, these approaches give you options that can optimize both retirement income and financial certainty.

HAVE YOU DEVELOPED A COMPREHENSIVE RETIREMENT INCOME PLAN?

WE HAVE ACCESS TO THE PRODUCTS AND PROCESS TO HELP MAXIMIZE YOUR RETIREMENT.

]]> http://partners4prosperity.com/retirement-income-distribution-methods/feed 0 http://partners4prosperity.com/retirement-income-distribution-methods http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/abp4g-n1zQA/tax-deferral-and-the-sword-of-damocles http://partners4prosperity.com/tax-deferral-and-the-sword-of-damocles#comments Wed, 18 Apr 2012 15:00:34 +0000 Kim Butler http://partners4prosperity.com/?p=1848 Continue reading →]]>

“Judge no one happy until his life is over.”
- Ancient Roman proverb

Tax Deferral and the Sword of Damocles

At first glance, especially from a distance, some arrangements may seem quite attractive. But when a fuller understanding is acquired, the same situation is not viewed so favorably. This is the theme embodied in The Sword of Damocles, a fable commonly recounted in ancient Greek and Roman literature.

According to the story, Dionysius II was a fourth century B.C. ruler over Syracuse, a Greek city in what is now southern Italy. As befit a ruler in those days, Dionysius lived a luxurious and comfortable life, and even kept a group of adsentatores, or court flatterers, to amuse him and inflate his ego. One of the members of Dionysius’ court was Damocles.

In his role as a court flatterer, Damocles was lavish and frequent in his praise of Dionysius’ wealth and power. One day, after hearing another recitation of his greatness, Dionysius turned to Damocles and said, “If you think I’m so fortunate, how would you like to try out my life?” At first incredulous, a stunned Damocles agreed to be “king for a day.”

The next day, Damocles was seated on the king’s throne, enjoying a fine feast, wonderful entertainment, and the adoring attention of the court. But looking up, Damocles noticed a sharp sword hanging by a single horse hair, with its point aimed directly down on the throne. Startled, Damocles slid off the throne and asked Dionysius for an explanation.

“This is the life of a ruler,” explained Dionysius. “I have great wealth and privilege, but every day there is always the threat that someone or something may cut the slim thread by which my prosperity hangs. One of my own advisors might try to kill me, or spread lies and turn people against me. A neighboring kingdom could send an army to seize my throne. Or I might make an unwise decision that will bring my downfall. If you want the life of a king, you must also accept these risks.”

Shaken by the reality of Dionysius’ life, Damocles quickly ended his special day, and gladly returned to his much safer position as a member of the court. The Roman poet Cicero, in retelling this fable concludes, “Does not Dionysius seem to have made it sufficiently clear that there can be nothing happy for the person over whom some fear always looms?”

The Sword of Damocles in Qualified Retirement Plans

Over the years, the phrase “the sword of Damocles” has come to be used to indicate any situation where there is a sense of foreboding because of a potential tragedy hanging over one’s head. Almost four decades after being established in the tax code, a variety of circumstances have come together to make the taxes American retirement account owners must pay when they begin distributions a financial sword of Damocles.

During the years when Baby Boomers were working and saving for retirement, it seemed like the format of pre-tax deposits and tax-deferred growth in qualified retirement plans was an ideal arrangement. Not only did participation lower one’s current income tax, but the consensus was that retirees would be in a lower tax bracket after they stopped working. In this paradigm, it made sense to push any tax obligations to the future. But now, as many Baby Boomers contemplate retirement, their looming taxes due from their retirement accounts may cast an ominous shadow over their long-term financial stability.

As a financial strategy, the value of tax-deferral has always been dependent on whether the tax break received on the deposits will exceed the tax cost to be paid in the future. For the past 40 years or so, conventional thinking was that income taxes in retirement would most likely be lower than income taxes during one’s working years. This assumption was based on the premise that the typical retiree would be fortunate to accumulate enough assets to provide an annual retirement income equal to 70% of their pre-retirement earnings. A 30% decrease in income would result in less income tax, and often drop the retiree into a lower marginal tax bracket.

Several factors – historic, economic, demographic and political – may prove these assumptions in error. First, during the past four decades, marginal tax rates have actually dropped, by some measures substantially. Data collected by the non-profit Tax Foundation shows that during the 1970s and early 80s, there were 25 different income tax rates, ranging from a low of 14% and a top marginal tax bracket of 70%. Even in 1982, when tax rates were “simplified,” there were 12 rates, running from 11 to 50%.

Then simplification and reduction became drastic. From 1988 to 1990, there were only two rates, 15 and 28 percent.

This represented a low point in recent income taxation, but the increases over the past 20 years have been modest. In 1991, a new top rate of 31% was added. In 1993, the top marginal income tax rate was bumped to 39.6%, which remained until 2001, when the top rate was lowered slightly. Since 2003, the income tax table has featured six rates, ranging from 10 to 35%.

Here’s a generalization that can be derived from this information: People who participated in qualified retirement plans and made pre-tax deposits in the 1970s and 1980s received potentially greater tax benefits than those who made deposits in the 1990s and 2000s, simply because marginal tax rates were higher in the 70s and 80s. However, given the typical progression of individual careers and earning potential, many Baby Boomers made the bulk of their retirement account deposits during the later years when tax rates (and the tax deduction for deposits) would have been lower.

Will Future Taxation Be Higher or Lower for Retirees?

Place this historical background on tax rates against today’s economic, demographic and political circumstances. A fitfully recovering economy and a massive influx of Baby Boomer retirees is wreaking havoc on the math of maintaining government entitlement programs like Social Security and Medicare. Despite an expressed reluctance to further burden American citizens, many legislators and public policy makers have spoken of the necessity to raise taxes, specifically by increasing the marginal tax rates at the upper end of the tax table. If these increases occur, one of the ripple effects will likely be more retirees paying a higher percentage of tax to withdraw their money compared to the break they received to deposit it.

Furthermore, undistributed funds in qualified retirement plans represent a significant source of future tax revenue for governments – the money has already been earned, but hasn’t yet been taxed. Given the size of the current federal deficit, and the unwillingness to impose higher taxes on a large segment of the populace, there is a chance that the government might attempt to collect some tax from these retirement accounts “early,” i.e., before the individual has either retired or reached the Required Minimum Distribution age of 70 ½, arguing these accounts are “taxable income in waiting.” (In the 1990s, the Clinton administration floated a proposal for a one-time tax on all undistributed qualified retirement account balances as part of a budget-balancing effort, but the idea was never formally tendered or put to a legislative vote.) Another possibility mentioned by policy makers is treating retirement distributions as a different form of income, and imposing a different/higher tax bracket for it.

What About a Roth IRA?

The realization that tax rates have been low and may be trending higher has prompted some qualified retirement account holders to consider alternative approaches, such as redirecting new savings to Roth IRA or, if available, Roth 401(k) accounts. With Roth accounts, the deposit does not receive a tax deduction, but any earnings accumulate tax-free. More important, under most circumstances, a retiree incurs no income tax when a distribution is made.

Consider the following comparison: One individual with a 15% marginal income tax bracket makes annual pre-tax deposits of $1,000 into an IRA, 401(k) or similar qualified retirement account for 20 years. Another individual, also in the 15% bracket, makes after-tax deposits of $850 to a Roth account, reflecting the 15% of his $1,000 that is paid in taxes. Both accounts are invested in the same financial vehicle, which generates a 6% annual return.

At the end of 20 years, assume the IRA account holder will liquidate this account for retirement, paying income tax at a 15% rate. The Roth account holder will incur no tax upon liquidation. Look at the numbers: (SEE TABLES, next page).

If all the variables involved in a retirement account remain static for both individuals, the results of saving for retirement in a Roth account are identical to saving in a retirement plan that allows pre-tax contributions. But since there is almost no chance that tax rates will remain the same for 20 years, projecting future tax rates becomes a critical factor of any tax deferral decision. Higher taxes today? Maybe a 401(k) is best. Higher taxes in retirement? Perhaps a Roth account is the way to go.

There is another way to evaluate this tax projection dilemma: Pre- and post-tax retirement savings is the difference between a known cost today and an unknown cost in the future. If the choice is a Roth account, the tax is paid up-front, and while the current tax cost may be considered high, it is paid; the account holder knows there is not a “sword of Damocles” in the form of taxation hanging over future distributions. The certainty of no future taxation can be a significant planning factor.

The chance to “lock down” the tax cost in retirement accounts is also a driving force behind Roth conversions. Current tax law allows individuals to reclassify their pre-tax retirement accounts as Roth accounts, as long as tax is paid at the time of the change. This option gives the individual an opportunity to select a year when current income may be lower, hopefully minimizing the tax cost of conversion. At the same time, Roth conversions add tax dollars to the government treasury that normally wouldn’t have been paid until retirement.

Getting Out From Under the Sword o Future Taxes

In the context of tax certainty, there may be several factors which favor the Roth approach, but there are other considerations. First, one’s eligibility for making contributions to a Roth account is dependent on adjusted gross income – the more you make, the more likely you would be disqualified from using a Roth account. Annual contribution limits are also lower for Roth accounts in comparison with many pre-tax qualified retirement plans. Matching contributions offered by an employer for deposits to the company’s 401(k) plan might also impact your decision. And as individuals get closer to retirement age, the shorter time-frame makes for better projections of both the size of their retirement accounts and what level of taxation will be applied.

Additionally, as part of a coordinated larger plan, there may be other ways to reduce the looming tax burden of retirement plans. For example, if retirement distributions were used to make house payments, the tax cost might be offset by the interest deduction on the mortgage. Of course, the effectiveness of many of these strategies may also depend on current tax regulations. Which leads back to the original thought…

Tax-deferral, while attractive in the present, creates a future liability that hangs over one’s finances. How great is this future liability? No one knows until it has to be paid. When it comes to retirement plans, the ancient Roman proverb might be appropriately modified to state, “Judge no plan happy until its life is over.”

]]> http://partners4prosperity.com/tax-deferral-and-the-sword-of-damocles/feed 0 http://partners4prosperity.com/tax-deferral-and-the-sword-of-damocles http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/tKwQFndl2cQ/estate-planning-101-preparing-a-will http://partners4prosperity.com/estate-planning-101-preparing-a-will#comments Wed, 11 Apr 2012 15:00:22 +0000 Kim Butler http://partners4prosperity.com/?p=1846 Continue reading →]]>

ESTATE PLANNING #101: PREPARING A WILL

A will is written statement made by an individual that directs the distribution of his/her property at death. A legal will is a fundamental financial document that is relevant for almost every adult, and for most people it is relatively easy to complete. Yet a December 2009 survey by Harris Interactive found that only 35% of adult Americans have a will.

The primary reason given for not executing a will by the survey respondents was the tyranny of the urgent – immediate financial concerns were a higher priority than taking the time to address an unpleasant event that is hopefully far into the future. Others commented on their uncertainty about the legal language, and the perceived expense of obtaining a lawyer to prepare the document.

If an individual does not have a will in place at death, he/she are considered to have died “intestate,” or without an estate plan. If this occurs, the state government will administer the distribution of assets and settlement with creditors according to its own regulations and judgment. For individuals who have little or no assets, no spouse, no children or family connections, dying intestate and letting the state settle one’s affairs may be inconsequential. But once assets and family become significant, the few hours of thoughtful planning and organization required to produce a legal, signed document can go a long way toward ensuring the appropriate distribution to the people that matter most.

While there is a great deal of flexibility as to what can be specified in a will, much of the language used in all wills is quite standardized. There are certain provisions that need to be part of the document for it to be a valid and legal will. The following is a list of necessary will provisions:

Exordium (Beginning) Clause. This is the basic identifying statement clause at the beginning of each will, which typically reads something like, “I, John Doe, being of sound mind and body,..” Besides usually giving your current address, this beginning statement also explicitly revokes all previously written wills and codicils (amendments).

Survival Clauses.This section provides instructions for secondary beneficiaries in the event one of your named beneficiaries dies before you. If you don’t specify secondary beneficiaries, then whatever would have been distributed to the beneficiary will be distributed to the beneficiary’s heirs.

Simultaneous Death Clause. This section is important when you and one of your beneficiaries (typically a spouse or child) die at the same time, such as in a car accident. When this happens, the standard language usually stipulates the beneficiary died first. The wording of this clause may be particularly important in the context of determining if and how federal estate taxes will be applied to the remaining assets.

Tangible Personal Property. Tangible personal property is distinct from financial assets. These are personal items such as clothing, keepsakes, firearms, etc., that you want to leave to someone specifically.

Executor Appointment. The executor is the person you appoint to supervise the distribution of your property according to the provisions in the will. The executor is subject to court approval, depending on whether anyone objects to your choice. It is prudent to select a contingent executor in case your first choice is not able to serve.

Powers of the Executor. In most wills, the executor is authorized with a default list of powers needed to carry out the provisions of your will. However, in creating your will, you may define fewer or more extensive powers. These stipulations can be particularly important in the probating of larger estates. Additionally, some executive powers need to be specifically mentioned in the will, such as the authority to continue operating a business or to sell your real estate if necessary. If one of the provisions of the will is to create a trust, it is also necessary to establish the powers of the trustees.

Guardian Appointment. If you have minor children (under 18), you’ll want to appoint a guardian to oversee the care of your children until they reach adulthood. As with other designees, it is prudent to consider alternate guardians, in case your first choices cannot carry out this responsibility.

Bond. In most states, executors, administrators, trustees and guardians must give a bond when appointed. The bond is a promise to reimburse the estate for any losses created as a result of negligence or wrongdoing on the part of the estate representatives. It is also possible to waive the requirement for a bond to be posted.

Tax Apportionment Clause. This provision specifies how inheritance and estate taxes will be paid from the remainder of the estate after your property and money are distributed to named beneficiaries. This is an important clause that should be carefully reviewed, because without it, beneficiaries will likely pay a share of taxes based on the amount they receive from your estate.

Handwritten wills, handwritten amendments.

While about half of the 50 states currently accept a handwritten will (called a “holographic will”), it is usually considered valid only if all material provisions and clausesare entirely handwritten. However, because most handwritten wills are not as in-depth as a professionally drafted will and because they are oftentimes not properly written, holographic wills are not recommended. Given the non-standard nature of handwritten documents, courts can be unusually strict in determining whether a holographic will is authentic, and thus it is also not recommended that people revise their wills by hand.

Probate

Probate is the legal procedure for validating a will. Once determined to be valid, the property owned by the person who died is distributed to the heirs according to the provisions of the will. At one time, the probate process was extremely slow and occasionally susceptible to fraud and thievery by unscrupulous lawyers and judges. While the process can still be lengthy and costly in some situations, many states have streamlined the probate process and reduced the costs, thus repairing the reputation of the process and removing some of the fear. However, as estate assets and family connections get more complex, it may be desirable to move beyond a simple will, and consider the use of other legal arrangements (such as a trust) to facilitate the transfer of assets at death. But creating a will remains the starting point for personal estate planning.

DO YOU HAVE A VALID WILL?
ARE SPECIAL ASSETS PROPERLY DESIGNATED TO BENEFICIARIES?
DOES THE WILL REFLECT YOUR CURRENT CIRCUMSTANCES, OR IS IT TIME FOR AN UPDATE?

]]> http://partners4prosperity.com/estate-planning-101-preparing-a-will/feed 0 http://partners4prosperity.com/estate-planning-101-preparing-a-will http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/64AR1EtvvTg/a-proposed-tax-change-to-inherited-iras-is-dropped http://partners4prosperity.com/a-proposed-tax-change-to-inherited-iras-is-dropped#comments Wed, 04 Apr 2012 15:00:07 +0000 Kim Butler http://partners4prosperity.com/?p=1842 Continue reading →]]>

A PROPOSED TAX CHANGE TO INHERITED IRAs IS DROPPED, BUT IS IT A SIGN OF THINGS TO COME?

One of the unknowns that lurks in the shadows of many qualified retirement plans (such as IRAs, TSAs, and 401(k)s) is future taxation. Deposits that have received tax deductions and earnings that have accumulated on a tax-deferred basis will become taxable at distribution. But what will the tax cost be in the future? It’s hard to say, not only because it is difficult to project how much money will be withdrawn in retirement, but also because it is almost impossible to predict how taxes might change in the future.

Especially in tough economic times, there is a strong tendency for governments to discover untapped sources of “revenue.” Since undistributed retirement accounts represent a large pool of unrealized tax revenue, legislators frequently contemplate ways to “improve” government access to these funds.

In February, Montana Senator Max Baucus, the chairman of the Senate Finance Committee, floated a proposal as part of a highway funding bill that inherited IRA accounts should be required to make a full distribution within five years after the death of the IRA owner.

Currently, heirs who inherit undistributed balances from IRAs have the option of spreading the distributions over their projected life expectancies, using Internal Revenue Service tables. For younger recipients, this approach, known as a “stretch IRA,” typically results in modest payments (and modest taxation) over potentially long time frames. For individuals who have accumulated significant amounts in IRAs, this option maximizes the amount that can be passed to heirs in the event the owner doesn’t live long enough to liquidate the account according to the IRS’s Required Minimum Distribution guidelines.

Forcing heirs to make full distributions in five years will not only result in larger distributions, but these larger amounts will most likely incur higher marginal rates of taxation. This is precisely the intent of the proposal, according to Baucus, because he contends that IRAs “are being used by some taxpayers to give tax-free benefits to second, third, maybe even fourth generations.”

Baucus’ proposal met with immediate criticism, and not only because of the upheaval such a change would cause in estate planning. Besides the potentially increased tax costs, some financial experts also noted that assets distributed from an IRA are no longer sheltered from creditors in bankruptcy. After some public discussion, Bloomberg News reported on February 13, 2012, that Baucus removed the provision from the proposed legislation, although he added “perhaps this provision and the subject can be taken up in tax reform” at a later date.

One of the features of all qualified retirement plans is that the terms of the plan are subject to legislative adjustment. Since IRAs came into existence four decades ago, these provisions have frequently been tweaked: Contribution limits have changed, catch-up provisions have been added, loan arrangements have been restricted, excess distribution penalties have been abated, types of investments have been allowed and prohibited, etc.

For the moment, the stretch IRA concept is still alive as legacy planning strategy. But as Ed Slott, an IRA adviser from Rockville Centre, New York, told the Wall Street Journal in a February 12, 2012, article, “Congress sees gold in these IRAs, and they’re looking to corral some of that money.”

While some of these plan changes for IRAs may have been advantageous for individuals, there is little that can be done to anticipate future changes. And just the possibility of change may make some long-term planning strategies dicey propositions. For example, if an individual already has significant assets, does it make sense to continue funding qualified retirement plans considering the possibility of unfavorable tax treatment that may be incurred by heirs?

One of the features of a well-designed retirement distribution plan is a thoughtful consideration of which assets should be spent, and which should be preserved for heirs. While the stretch IRA concept remains a viable strategy under current tax law, the greater concern for many individuals is not current regulations, but what the terms of taxation will be in the future.

IF YOU HAVE QUALIFIED RETIREMENT PLAN ASSETS IN YOUR ESTATE, YOU MIGHT PROFIT FROM A REVIEW OF YOUR DISTRIBUTION AND INHERITANCE STRATEGIES

]]> http://partners4prosperity.com/a-proposed-tax-change-to-inherited-iras-is-dropped/feed 0 http://partners4prosperity.com/a-proposed-tax-change-to-inherited-iras-is-dropped http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/RhZdQlDUkio/life-is-getting-better http://partners4prosperity.com/life-is-getting-better#comments Wed, 28 Mar 2012 15:00:13 +0000 Kim Butler http://partners4prosperity.com/?p=1840 Continue reading →]]>

LIFE IS GETTING BETTER:
The disappearance of traditional “death markers” in life insurance underwriting.

One of the critical factors in obtaining life insurance is the health of the proposed insured. One’s current physical condition and past health history play a significant role in determining the cost of life insurance. In some instances, a poor health report may result in the insurance company declining to offer coverage, as the company’s underwriters deem the applicant a risk not worth taking.

Underwriting issues concerning the health of an applicant can result in a tragic irony: By the time someone recognizes the value of life insurance, his/her poor health may preclude them from getting it. For this reason, many financial experts recommend obtaining some form of life insurance (as term, whole life, or a blend of the two) simply to secure insurability for the future.

In the life insurance industry, certain conditions or incidents in one’s medical history have historically been considered by actuaries as “death markers,” i.e., these were preexisting conditions that typically made applicants uninsurable. Some of the more prominent death markers have been issues relating to heart disease, several forms of cancer, or some psychological afflictions, such as severe depression or schizophrenia.

However, as modern medical treatments for these conditions have evolved, the growing track record of success is changing the underwriting paradigm. As Charles Passy reports in a February 12, 2012, Wall Street Journal Sunday article:

Ever so quietly, insurance industry number crunchers are tossing aside the old statistical models and life tables.

They’re recasting tired stereotypes about the ‘fatal’ diseases of yesteryear. They’re rethinking that most ancient of questions: How long will we live? And they’re coming up with what many would say is a radical answer: much longer than we think.

Passy leads off the article with the example of a 78-year-old woman applying for life insurance, with the following health history: She is a breast cancer survivor, and on medication for a bipolar disorder. Her father died of a heart attack in his 60s. In the past this applicant’s combination of advanced age, cancer, family history of heart disease and the bipolar condition would have resulted in a highly-rated policy (one with a premium much higher than standard guidelines) or an outright decline. Instead, it took the underwriting team at the insurance company a “mere 30 minutes” to review the file and issue a policy.

Why? According to one of the company’s assistant vice-presidents, the woman’s bout with cancer happened in her late 50s, and after two decades, current evidence shows there is a slim chance of a recurrence. As for the family history of heart disease, “The woman has already outlived the danger marker.” In fact, the company estimated the woman’s life expectancy to be 92½!

These underwriting adjustments, while just beginning to move through the industry, are significant. Passy noted that “As recently as 1995, for instance, a man with advanced coronary disease was uninsurable. Now it’s expected that an arterial blockage can be repaired relatively simply and new plaque buildups can often be controlled with medication.” In several companies where underwriting guidelines have changed, Passy reports the results “have been immediate – with hundreds of formerly uninsurable applicants now getting coverage (or better classes of coverage) each year.”

The Flip Side to Disappearing Death Markers

The phasing out of old death markers is without question a positive development for both individuals and life insurance companies. But the advances in medical treatments are also effecting changes in other areas where finances and longevity are connected.

Brian Anderson, the Editor-in-Chief of Life Insurance Selling magazine, wrote a February 20, 2012, commentary online at www.lifehealthpro.com regarding Passy’s WSJ article. While applauding the adjustment in underwriting practices, Anderson also remarked:

On the flip side, many people are now living much longer than they would have before advances in modern medicine, but they are not necessarily saving the additional money that will allow them to live out these extended years in the lifestyle to which they are accustomed.

The essence of Anderson’s comments is that many of the metrics in personal financial planning have changed. Longer life expectancy and better health care not only affect life insurance decisions, but these factors also change the variables in retirement accumulation, long-term care decisions, and estate planning.

The Census Bureau reports that 7,671 Americans turned 65 years old on average each day during calendar year 2011. That’s almost 2.8 million people who will probably be living longer – and healthier – than their ancestors. And surprisingly, a lot of those people may still be eligible for life insurance.

IF YOU (OR SOMEONE YOU KNOW) HAS EITHER BEEN DECLINED LIFE INSURANCE COVERAGE, OR BEEN CHARGED A HIGHER PREMIUM, NOW MIGHT BE A GOOD TIME TO RE-EVALUATE INSURABILITY.

]]> http://partners4prosperity.com/life-is-getting-better/feed 0 http://partners4prosperity.com/life-is-getting-better http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/Qq5XM2PXE0c/anticipating-abundance-in-a-changing-world http://partners4prosperity.com/anticipating-abundance-in-a-changing-world#comments Wed, 21 Mar 2012 15:00:03 +0000 Kim Butler http://partners4prosperity.com/?p=1837 Continue reading →]]>

ANTICIPATING ABUNDANCE IN A CHANGING WORLD
“The best way to predict the future is to create it yourself.” from Abundance, by Peter Diamandis and Steven Kotler

Maybe it’s the current political climate, including the national election process, which seems to emphasize how politicians have supposedly ruined the economy and oppressed all but the one percent. Or maybe it’s the tendency of the news media to highlight stories about unemployment, foreclosures, European national economies on the brink, armed conflict and terrorism in the Middle East, and the nuclear threat from a destabilized Korea. If you pay attention to the headlines, you can’t help but think the general trend is downward, and that the economic and social prospects for the future are decidedly bleak. In this context, the discussion isn’t if the glass if half-full or half-empty; it’s whether there’s even a glass.

But all this pessimism may be obscuring a greater reality: Especially in the past 50 years, things have been getting better – for everyone – at a rapidly-increasing pace. Furthermore, considering the trajectory of past progress, as well as certain factors already in place, it is very likely that the next 10-20 years will be even better.

This is the message of Abundance, a new book by Peter Diamandis and Steven Kotler, who argue that “humanity is now entering a period of radical transformation in which technology has the potential to significantly raise the basic standards of living for every man, woman, and child on the planet.” Diamandis, a self-described “serial entrepreneur” who is the chairman/CEO of the X PRIZE foundation, and Kotler, a prominent science writer, believe that the coming together of several technological and social factors has put humankind on the cusp of unprecedented peace, prosperity and well-being.

While Diamandis and Kotler may seem to be viewing the future through rose-colored glasses, their long view both of past history and future possibilities merits serious consideration. Writing a commentary for the Huffington Post, Diamandis makes the following observations:

We are richer than ever: Poverty has declined more in the past 50 years than in the previous 500. During that time, as the population of the Earth has doubled, the average per capita income (adjusted for inflation) has tripled.

We are healthier than ever: In the past century, the number of mothers dying in childbirth has decreased by 90 percent, infant mortality has dropped by 99 percent, and life expectancy has more than doubled.

We are safer than ever: Violence has been in decline since the Middle Ages; the homicide rates today are a hundred-fold less compared to their peak 500 years ago.

And it’s not just the basic conditions of life that have improved. Diamandis declares:

…even the poorest Americans today (those below the poverty line) have access to phones, toilets, running water, air conditioning and even a car. Go back 150 years and the wealthiest robber barons couldn’t have hoped for such wealth.

He adds…

(R)ight now, a Masai warrior on a mobile phone has better mobile communications than the president did 25 years ago; and if they’re on Google, they have access to more information than the president did just 15 years ago. We are effectively living in a world of communication and information abundance.

Citing several recent technological advances, Diamandis states that this communication and information abundance makes it possible for “small teams of dedicated individuals to take on the kinds of challenges that were once the sole province of governments.” This means “Today, the average citizen is more empowered to change the world than ever before.”

Are these guys nuts?

It would be easy to dismiss Diamandis and Kotler’s sunny perspectives as either detached from reality, or at the very least, conveniently ignoring the troublesome and tragic challenges of life. In fact, some people get quite aggravated by the authors’ optimism. As one respondent put it in the comments section of a blog touting the book, Abundance is just…

More utopian garbage. All that information doesn’t amount to #@2!& when the world’s financial system is collapsing into a black hole and we’ll soon be forced to hunt animals to survive. Things are not getting better, they are getting worse.

Diamandis doesn’t gloss over the challenges to peace, progress and prosperity. In an FAQ section of his website (diamandis.com/abundance), he says “We are not so naïve as to think that there won’t be bumps along the way. Some of those will be big bumps: economic meltdowns; natural disasters; terrorist attacks. During these times, the concept of abundance will seem far-off, even nonsensical, but a quick look at history shows that progress continues through the good times and bad.” This confidence in the pattern of history is why “I can say that the future, much like the present, is going to be a whole lot better than you think.”

If “Abundance” is a correct long-term view, why don’t most people see it?

Diamandis says “Human beings are designed to be local optimists and global pessimists.” We are optimistic about handling many of the things that make up our everyday lives, because we believe we have some measure of control – we can affect the outcomes, we can make adjustments. On the other hand, when the issues get larger, and more beyond our control, we tend toward pessimism.

This local-global contrast is often quite true in our financial thinking. When most of the financial input we receive is about falling housing values, rising gasoline prices, and overwhelming national debt, it’s easy to become pessimistic. Faced with so many depressing factors, it is not surprising that some people believe “…we’ll soon be forced to hunt animals to survive.” In fact, there is a segment of the financial universe that seeks to profit from the gloom-and-doom by selling “financial survival” strategies.

Diamandis is arguing that technology is making it possible for many global problems to be seen as having local or small-scale solutions. Here is a modest example from the financial world:

As many large lending institutions have been forced to tighten their lending practices, some prospective borrowers have lamented their resulting lack of access to credit. These individuals and businesses find they cannot secure a loan for transportation, to start a business, or buy a piece of real estate. At the same time, many of these same institutions are offering minimal returns on savings account deposits. For both borrowers and savers, this seems like a global problem; there’s nothing an individual can do to overcome this situation.

Yet with a quick Internet search using the phrase “micro loans” or “micro loan investing,” it becomes apparent that technology is making it possible for small groups of individuals to associate for the purpose of providing funds for lending, or for obtaining loans. These arrangements are still in their infancy, and must be evaluated carefully because the terms – for both lenders and borrowers – are not the same as loans from large institutions. But looking long-term, it is possible to see that these peer-to-peer lending connections have the potential to radically reshape the process of saving and lending, giving individuals financial options which they can influence and control at a local, personal level. Who knows what other financial products and services can become “localized” by technology?

Does a static plan make sense in a rapidly-changing world?

Suppose you are willing to acknowledge that the future might be even better than we can imagine today. How might this optimistic perspective influence your financial decisions? Here are some thoughts:

First, prepare for change. “Progress is accelerating,” according to Diamandis and Kotler. “We’re poised to make greater gains in the next two decades than we have in the previous 200 years.” If this prediction is even close to accurate, it is almost impossible to imagine how this will impact work and career. But for many, it will mean changing jobs, learning new skills, maybe relocating.

In this paradigm of change, some long-term financial vehicles and strategies may need to be re-evaluated. For example, depending on your personal situation, how wise is it to continue making maximum contributions to a qualified retirement plan? Does it make sense to continue extra principal payments on a mortgage for a home you may have to sell in the next five years because of a relocation? In general, is it prudent to commit to long-term financial formats when the next two decades could bring radical change? A better approach might be to select products and strategies that fit your immediate priorities, yet have the flexibility to adjust to changing circumstances.

Second, control your benefits. Since benefits became prevalent as a tax-favored workplace perk in lieu of additional compensation during World War II, the tax code has favored acquiring insurance (life, disability and medical) through employer-sponsored plans. Because they were subsidized (by employer contributions and tax breaks), these benefits were usually less expensive than similar coverage purchased individually.

This arrangement was fine when long-term employment with one employer was the norm. But in a workplace that is moving toward more independent contractors, project work, and self-employment, relying on employer-sponsored group benefits can become problematic; not all benefits will be portable, new employment may require waiting periods, new coverage may not be comparable to old, etc. A far better arrangement would be to “own” your benefits, to have personally owned life insurance, disability income replacement insurance, and if affordable, your own health insurance.

Third, maintain liquidity. Technological and societal changes have always presented great financial opportunities. Some of those opportunities will be available only to those who have money to invest in them.

Conversely, technological and societal change can also mean financial displacement. Old industries and professions will be supplanted by new ones. If you are part of a fading occupation, the transition to a new career can result in severe financial stress if there aren’t extra funds available to bridge the change.

Finally, clean up bad debt. Looking at future possibilities can be tough when you are still paying for past financial decisions. Good debt helps you acquire appreciating assets and income streams (such as rental property or a business). Bad debt is usually unsecured, and, in the end, only adds an additional financial burden to your personal economy.

You may not agree with the main premise of Abundance. But even if the authors’ views of the future turn out to be off the mark, there is something worthwhile in their positive approach. On his website, Diamandis has a list of 30 maxims that he calls The Creed of the Persistent and Passionate Mind. Number 22 says:

“If you think it is impossible, then it is…for you.”

Regardless of circumstances, who has the better chance for success, people who prepare and work toward a positive outcome, or those who are resigned to whatever fate and chance brings them?

In many ways, the basic financial ideas presented above are “local” decisions; they are things you can control. Because they are things you can do, you should be optimistic about the results that will follow. But if the paradigm of Abundance is correct, optimistic local financial actions could be the first step toward bigger financial opportunities, maybe even ones with a global reach. As Diamandis says in Statement #2 of his creed:

“When given a choice, take both!”

Preparation today – from a positive perspective – offers a much better chance to “take both!” in the future.

• ARE YOUR FINANCIAL STRATEGIES OPTIMISTIC?
• ARE THEY GEARED TOWARD AN ABUNDANT FUTURE?
• ARE YOU LOOKING FOR WAYS TO CHANGE YOUR FINANCIAL PERSPECTIVE?

]]> http://partners4prosperity.com/anticipating-abundance-in-a-changing-world/feed 0 http://partners4prosperity.com/anticipating-abundance-in-a-changing-world http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/O9XfCH4y6iA/preparing-for-your-base-income-year http://partners4prosperity.com/preparing-for-your-base-income-year#comments Wed, 14 Mar 2012 15:00:08 +0000 Kim Butler http://partners4prosperity.com/?p=1833 Continue reading →]]>

PREPARING FOR YOUR “BASE INCOME YEAR”

For parents who anticipate their child/children will attend college, part of the process will usually include compiling personal financial documentation to apply for grants, loans and scholarships. While much merit-based financial assistance exists to help students pay for college, the greater percentage of aid is needs-based; in general, those with lower incomes and fewer eligible assets will receive more funds.

However, there are several determining factors in the financial aid application process which can be preemptively adjusted to improve your household’s financial eligibility. For example, home equity, retirement accounts and life insurance cash values are not counted as family assets when calculating eligibility. This means some households may benefit from repositioning existing funds by making extra principal payments on a mortgage, increasing contributions to retirement accounts, or adding to cash values. Another big planning opportunity is preparing for your household’s base income year.

Beginning on January 1 of a student’s junior year in high school, this base income year is the one that counts most in determining a family’s eligibility for aid. Since income and assets acquired during this year set a baseline for subsequent years, there is strong incentive (from a financial aid standpoint) to depress income. This can be accomplished through several avenues, including:

• Postponing retirement distributions to the next year
• Avoiding the sale of any assets (such as real estate, stocks or bonds) that would trigger capital gains
• Incurring as many deductible expenses as possible (applicable primarily to self-employed or business owners)
• Pre-paying property taxes
• Properly titling accounts (20% of the balance in an account with the student’s name is considered available for college expenses, while only 5.64% is considered from parents’ accounts)

A bit of prudent asset re-positioning might pay dividends in increased financial aid.

IF COLLEGE IS IN THE FUTURE FOR YOUR CHILD, YOUR FINANCIAL PROFESSIONALS SHOULD KNOW ABOUT YOUR PLANS.

HAVE YOU PREPPED FOR YOUR BASE INCOME YEAR?

]]> http://partners4prosperity.com/preparing-for-your-base-income-year/feed 0 http://partners4prosperity.com/preparing-for-your-base-income-year http://feedproxy.google.com/~r/partners4prosperity/gCFv/~3/Y-rb9DKWVNE/gurus-newsletters-financial-enlightenment http://partners4prosperity.com/gurus-newsletters-financial-enlightenment#comments Wed, 07 Mar 2012 15:00:19 +0000 Kim Butler http://partners4prosperity.com/?p=1830 Continue reading →]]>

GURUS, NEWSLETTERS & “FINANCIAL ENLIGHTENMENT”

Because everyone uses money, we all think we know something about it, and it’s easy to have an opinion. We can tell our friends why it was smart to buy this house, how we figured out it was better to lease that car, and maybe offer a “special formula” for 401(k) allocations. But get a little beyond the specifics of our personal finances, and most of us are far from being experts, and we know it. So when someone else comes along and tells us they can make money “simple,” and make us profitable, the attraction is strong. As long as there has been money, there have been gurus who offer “financial enlightenment” for the masses.

Today’s financial gurus have TV shows, newsletters, DVDs and do-it-yourself money makeovers. They are smart enough to get your respect, entertaining enough to keep your attention, and down-to-earth enough to make you say, “hey, he/she is one of us! I can relate to this guy/gal!” Usually there’s a hint of outsider to them, implying that they know the “inside scoop” and want to educate us so we can beat the big boys at their own game.

But while a guru might make personal finance simple and entertaining, their “objective advice” is sometimes a thinly-disguised reach for your wallet. Besides educational materials for sale, many gurus have business affiliations with select brokers and agents. Not surprisingly, the guru’s “recommendations” often include investments with some of these same brokers and agents. Are these coincidences or conflicts of interest?

Every situation has to be evaluated on its own merits, but because of the nature of the financial guru business, skepticism is prudent. Consider the opening statement from Jason Zweig’s January 21, 2012, “Intelligent Investor” column in the Wall Street Journal:

What business has an estimated one million clients, operates on the fringe of securities law and can say just anything without immediate consequence?

It is the investing-newsletter industry. And the public should approach newsletters with caution, even when they come with a celebrity endorsement.

It’s all true. Except for “typos,” and imaginary rankings.

Zweig goes on to delineate a tangled and somewhat sketchy relationship between a well-known money guru and the manager of a small mutual fund. In March 2011, the guru (who appears regularly on the cable TV business channels, has written several books, makes national speaking tours, and is described as a “personal-finance expert” by the Journal) and the fund manager launched a monthly newsletter featuring specific investment recommendations, typically adjusted for different age groups (20 years to retirement, 15 years to retirement, etc.). To jump-start this venture, the guru gave away 50,000 one-year subscriptions. On several occasions, the newsletter has recommended investing in the manager’s funds.

The rationale for encouraging investors to use the fund manager is a supposedly stellar track record. Except the outstanding results may have been inaccurately presented. In a 10-year comparison of the manager’s performance against the S & P 500 index, the Journal found that the newsletter understated the actual performance of the S & P in nine of ten years! In some instances, this meant the fund manager’s underperformance compared to the S & P was erroneously reported as beating the index. When the Journal reporters confronted the manager about the anomalies, he responded, “I’m not perfect. We don’t claim to be.” A week later, the newsletter told readers the mistake was a “typographical error.”

The fund manager has been associated with other newsletters in the past, and claims one of his publications had been “ranked #1 by Hulbert Financial Digest for five years through 2006,” and that another was “ranked #1 and recommended by Hulbert Financial Digest!” When the Journal attempted to verify this claim, Hulbert, a publication that tracks investor newsletter performance, said it “doesn’t make recommendations.” Furthermore, the editor said that “No matter how I slice and dice the data, I cannot support the claim of being No. 1 for that five-year period.” When confronted with this rebuttal, the fund manager insisted he was No. 1, adding “I’ll say that to my grave.”

When presented the same information, the money guru e-mailed her continued support: “(The fund manager) is ethical, honest and achieves stellar results that consistently outperform the market. I’m proud to be able to provide our newsletter to people who are looking for solid financial advice.”

These types of interwoven business relationships create potential conflicts of interest and challenge the objectivity of the information presented in a newsletter. A newsletter’s “solid financial advice” may be heavily influenced by the profit motives of the guru and other associated parties.

But this is a newsletter, too…

Yeah, it is. However, there are several important distinctions between what you read here and something that comes from the money gurus.

• First, unlike newsletters distributed by non-credentialed “experts” the content of this publication is regulated. Because the providers are licensed brokers and insurance professionals, every article is reviewed by a compliance department and edited for accuracy and proper attribution.
• Because every personal finance situation is unique, there are no specific recommendations. The articles may be thought-provoking, opinionated (and hopefully worth reading), but any recommendations will be the result of your meeting with the financial professional and crafting a strategy or solution that matches your personal circumstances.
• Following in the same vein, products or companies are not mentioned by name. This publication is not a marketing vehicle for an insurance company or an investment firm.

Listening to a money guru may give you a fundamental understanding of many financial issues. But when it comes to completing a transaction or executing a particular financial strategy, it should be obvious that personal communication and expert assistance offer substantial advantages for individuals who want to improve their financial performance and realize their long-term goals. Financial professionals may earn commissions or charge fees, but the compensation arrangement is usually transparent.

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