Should we prepare for an economic collapse or toast the recovery? While the stock market hits record highs and the jobs report is the best in years, observers are split as to whether this is a sign of a recovery or simply the calm before the next storm.

Major media outlets are decidedly optimistic, with a “consensus of economists” predicting an acceleration of the economy, according to a USA Today Economic Forecast. Meanwhile, internet bloggers and fringe analysts (who are sometimes correct) continue to lament that the financial sky is, indeed, falling.

Among the pessimists is Gerard Celente, founder of The Trends Research Institute. Back in 2011, Celente warned, “The whole system is going down. Pull your money out your Fidelity account, your Scwhab accout, and your ETFs.” Celente’s recommendation? Buy gold!

More than a little ironically, shortly after that prognostication, Celente himself lost more than six figures in an attempt to invest in gold futures. The money was taken from his account with Lind-Waldock, a commodities futures brokerage that was owned by MF Global, who filed for bankruptcy on October 31, 2011. (Famous for his financial predictions, Celente didn’t see that one coming.)

However, in March of 2012, the rating agencies downgraded the United States’ credit rating for the first time, raising questions as to whether the US would follow in the footsteps of Iceland and Greece.  And according to the FDIC’s list of bank collapses, bank failures escalated from a mere 24 in the seven years from 2000 through 2006, to over 480 bank collapses between the start of 2007 and May of 2013. (Not to downplay the seriousness of that alarming statistic, the rate of failures has slowed considerably since 2009-2010.)

Here at Partners for Prosperity, Inc., we get a lot of questions. Should people be concerned about a weakening dollar and the recent credit downgrade? Is the economy stable? What about the stock market? Do we recommend buying gold as a hedge against inflation? How might a zombie apocalypse affect the economy? (Just testing.)

While we don’t recommend putting our heads in the sand, neither do we feel that panic is the solution. Times of uncertainty are an excellent time to get “back to basics” – the fundamentals of saving, investing, and preparing for the unexpected. And so we offer those of you “seeking a financial strategy for the end of the world” (however close or faraway it may be) the following suggestions:

Reduce Debts and Liabilities.

Reduce and eliminate consumer debt while increasing cash flow. Don’t purchase cars, clothing, and other depreciating assets beyond what you need. Never use credit cards to finance consumer purchases and vacations. And always consider not only the purchase price, but the opportunity cost of your purchases. What future value is lost forever when cash is spent rather than invested?

If you have consumer debt that is stopping you from being able to save, invest, go back to college or start a business, get rid of it as fast as possible. Our subsidiary, Partners 4 Fiscal Fitness helps people get out of debt and into a positive cash flow position quickly. Most of our clients have been able to completely eliminate consumer debt in three years or less. If debt has got you down, we urge you to begin the Fiscal Fitness Journey today.

Diversify Assets; Create Value.

Some investors have been advised to trade in their cash for gold and silver. We think that having a small amount of gold and/or silver is fine, but don’t get carried away. While gold and silver can provide a hedge against inflation, physical gold and silver only has value when liquidated, and even then, the value is dictated by the price buyers are willing to pay. Gold and silver have the same problem as 401k’s and other accumulation accounts: commodities aren’t effective instruments for producing value, or cash flow.

Additionally, the value of gold, silver, and other commodities (whether physical or paper/digital, such as gold ETF’s) is speculative and determined by a market outside of our individual control. Therefore, we don’t recommend dumping all (or even most) of your cash to buy gold and silver.

Should you wish you have some gold or silver, avoid “collectibles” such as antique coins or silver-plated tea sets, unless you’re an expert in rare coins. The worth of physical gold or silver is determined by purity and weight. Collectibles are another thing altogether, and scams preying on investor fears and ignorance abound in this arena.

The principle to invest in “real” assets and not simply collect cash is a sound idea in any economy. When currencies fail or where hyper-inflation strikes, commodities like gold and silver do go through the roof in comparison. But we prefer assets that can produce cash flow… assets that do not have to be liquidated for value to be realized.

We think that better bets are investments like real estate, such as cash-flowing rental properties. Shelter will never go out of style because people will never stop needing it. This is why, in situations of very high inflation in other countries, bread, rent, and other necessities and consumables escalate in price when the currency weakens.

To prosper in any economy, don’t just accumulate or speculate – USE your savings to create and multiply value. Invest in businesses, properties, and short-term investments (life settlements, collateralized loans, etc.) where you can receive a timely return. Don’t be content to lock up your money for decades at a time in assets you have no control over.

Buyers Beware.

We have written at length about the risks and unpredictability of the stock market.  Stocks and mutual funds are nothing more than price speculation, and we don’t recommend gambling as an investment strategy. However, one historically dependable fact is that record highs are never sustained for long. Unfortunately, buyer psychology will make our current highs irresistible to many investors. We all know to “buy low, sell high,” but the crowd does the opposite.

If you cannot divest yourself of stock market holdings without paying unwanted taxes and fees, concentrate on companies that could survive an economic collapse; companies that provide necessities that will never go out of style.

Build your own Assets.

Only a tiny percentage of the rich build their wealth by investing in stocks. However, a majority of the wealthy own their own businesses. (Many are also real estate investors.) Businesses that produce value in any economy are virtually recession-proof and inflation-proof.

We also recommend building your own value in the marketplace through increasing your knowledge and skills. For instance, will there always be a demand for exceptional workers? We think so! Even if the dollar disappeared, value will always be traded for value in return.

Increase your Self-Sufficiency.

Start a garden. Grow your own fruits and vegetables. Consider raising chickens to produce eggs, or having other livestock (if your circumstances allow) to provide for your needs or add to cash flow. (A little known secret about our own Kim D. H. Butler – she raises Alpacas and crochets blankets from their fiber as a hobby! The animals as well as the fiber are valuable, as well as practical.)

As the movie Money & Life pointed out, we have not always been so dependent on currency. In the past, money supplemented our needs rather than providing for all of our needs. We are wise to increase our self-sufficiency so as to not be entirely dependent on a monetary system for every aspect of our livelihood.

Practice Emergency Preparation.

Whether you’re expecting an economic collapse or not, it is wise for everyone to be prepared for an interruption of “normal.” Do you have purified water and food supplies that won’t spoil and don’t require refrigeration? Could you purify water and keep warm without gas or electricity? Do you have a good first aid kit in your home? Do you keep water, blankets, flares, food, and at least a half a tank of gas in your car? These are best practices for emergencies and natural disasters that have saved lives in unexpected situations.

Build your Community.

Ultimately, it’s not dollar bills that get people through the tough times. It’s other people. It’s the family, friends, and neighbors who pull together to help each other. In these times of great mobility and short-term jobs, many of us have lost some of the “social assets” of previous generations. Strong relationships, neighborhoods, churches and communities are the building blocks of stability. Invest in people and you will never be destitute.

Is your portfolio prepared for an emergency? Do you want to go beyond accumulation and use your assets to create value and cash flow? Contact Partners for Prosperity, Inc., and we’ll show you how. You can also find out more about our philosophies and strategies by reading Kim D. H. Butler’s books, available in digital, audio, and paperback.

“If you do what you love, as the saying goes, will the money follow? One thing is for sure – if you don’t do something you love, you will not be happy, and trading money for happiness is not a very good deal! Here at Partners for Prosperity, Inc. we believe that prosperity isn’t just about money. Prosperity includes health, happiness, love, and meaning.

Wealth is usually related to one’s career or business through the income produced, but if you feel trapped working an uninspiring job “just for the money,” that’s not prosperity, no matter how much you’re making. Prosperity is living a life that is fulfilling to you, that utilizes your unique gifts, talents, passions and preferences.  It is only in living that fulfilling life do we find our “right livelihood”.

Fortunately, you don’t have to choose between money and fulfillment. It’s not an either/or proposition. People that do what they love (and what they’re good at) actually tend to be more financially successful.

As Schlesinger, Kiefer and Brown, authors of Just Start say,

“Based on the research we did for our book, we’re convinced that when you’re heading into the unknown, desire is all-important. You simply want to be doing something that you love, or something that is logically going to lead to something you love, in order to do your best work. That desire will make you more creative and more resourceful, and will help you get further faster.

“And, it will help you persist. When you’re trying something that’s never been attempted before — beginning an unusual project at work, or trying to get a new business off the ground — you’re going to face a lot of obstacles. You don’t want to be giving up the first time you encounter one.”

Hay House author Laura Leigh Clark describes 8 “Money Genius Profiles” in her book, Wired for Wealth, and notes that earning is more effortless when they are operating in their natural strengths. Assessments such as the Kolbe Index have long been used to help people increase their career success.

But not everyone feels their career or even their life is a “fit”. If you’re living a life or working in a career that’s less than fulfilling, how do you discover what really juices you? And how do you start to make that transition, career-wise, to that right livelihood?

We asked Tammi Brannan at Instinctive Life to give our readers some tips for doing just that. In this video, she gives some specific exercises for connecting with your true self, discovering what you really love, and some savvy advice for transitioning into a new career.

Tammi Brannan on How to be True to Yourself

Click here to view the embedded video.

Of course, finding the right career or business is only part of the challenge – often times you’ve got to have a way to financially bridge the transition! Partners for Prosperity, Inc. helped Tammi find funds to start her business, and she shares that story as well.

Does Your Life Fit You? Do you feel you are able to pursue happiness and prosperity simultaneously, or do your money-earning activities require compromises? Do you feel your life allows you to be true to yourself, or do you long for a change? If you are considering these questions, we invite you to contact Tammi. She has graciously agreed to offer a complimentary “right fit” exploration session for our readers who are ready to discover a life that feels more true to themselves.

Two weeks ago we asked the question, “Should you borrow against your life insurance policy?” Today, we continue the topic by looking at the advantages and disadvantages of borrowing against a life insurance policy.

The Advantages of Borrowing Against Life Insurance

1. It’s simple and relatively quick. There’s no need to fill out an application, qualify for the loan, or brace yourself for high fees and taxes (in most situations, see below exceptions.) You’ll have your loan in 5-10 business days for most companies, and occasionally they have faster options.

2. It’s flexible. You can borrow about 95% of the cash value amount of your whole life policy from most mutual insurance companies. And when you borrow against your insurance policy, you can design your own repayment schedule, modify it as needed, or even continue down the path of life without repaying it if your circumstances require. In contrast, most types of non-insurance loans have strict repayment schedules that may or may not work well for you.

3. It’s cheaper than you think. Life insurance policy loans are running in the 4 – 8% range right now. But that does not equate to a bank loan for the same amount. This is because you’re borrowing against an account that likely has an internal rate of return of 4-5%, depending on your age. And since you are borrowing against your cash value, not borrowing the cash value itself, your cash value continues to grow and earn dividends, which offsets the interest on the policy loan.

4. It’s (probably) not a taxable event. Although there are exceptions, typically the IRS will never know that you borrowed the money. Like taking a second mortgage or line of credit against a rental property, a policy loan is not considered “income” in most situations.

What happens to the interest that you pay?

There is a misunderstanding with borrowing against your life insurance. Sometimes people say that you’re “paying yourself interest,” which is not exactly accurate. You’ve neither borrowed from yourself nor are paying yourself interest. You’ve borrowed from the insurance company, using your cash value as collateral. The interest is likewise being repaid to your insurance company.

However, in a roundabout way, the interest benefits all policyholders because in a mutually-owned insurance company, policyholders are paid dividends which represent profits. In a nutshell, interest on loans made to policyholders become earnings that later become dividends.

As the Truth Concepts blog states in a post entitled, “Life Insurance Loans: Where does the interest go?”

“This is a good deal for everyone because the insurance company earns money, the owner of the policy gets use of the money while at the same time their cash value keeps growing, and all the other policyholders know the insurance company is investing their money properly, since the interest charged is reflective of the rates in the marketplace.

The Disadvantages of Borrowing against Life Insurance

1. Fewer assets for yourself. One disadvantage you always have when borrowing money from a life insurance policy (or a property) is that you’ll have fewer assets to use or borrow against (unless you are leveraging your asset to acquire a greater asset), plus of course interest to pay. So you always want to evaluate whether the loan is needed or not, or whether you can simply reduce your spending and avoid taking the loan in the first place.Always take the time to talk with your advisor or agent to understand the impact that borrowing against your policy will have. And don’t assume that just because you have “permanent life insurance” that you can or should borrow against it. Some forms, such as Universal Life and Equity Indexed Universal Life (EIUL) operate very differently from whole life insurance.(We’ll cover EIUL in another post soon. If you want to make sure you get updates, please opt-in here to receive our Prosperity Pack, and you’ll receive a periodic newsletter of our most recent posts, as well as some great resources to help you accelerate your prosperity.)

2. Fewer assets for heirs. Although you don’t “have to” replay loans against your cash value, unpaid life insurance loans (and their interest) reduce total benefits to beneficiaries.One solution to this quandary is to fund some Paid-Up Additions, or PUA’s, as you begin to repay the loan. With a PUA, approximately 95% of the money goes to cash value, and about 5% or so goes to incrementally increase the death benefit. PUA’s raise the cash value amount available to you for use in future years, while also raising the death benefit for heirs.

3. Potential taxes. Outstanding loan balances may trigger a “tax event” (typically the issuance of an IRS Form 1099) if you borrow more than you’ve saved (due to growth) and choose to cancel or surrender your policy at a later date.Certain types of “cash-rich” insurance policies have been designated “modified endowment contracts” (or MECs) by the IRS. Loans against MECs are not tax-free. If you suspect that your contract might be an MEC, be sure to ask about the loan’s possible tax consequences before you borrow. (A properly structured whole life policy will not be an MEC.)

4. Cash Value is your life insurance policy’s “emergency fund.” If a high percentage of the policy’s cash value is borrowed and premiums are not paid on time, the policy may lapse, resulting in the loss of coverage (the “death benefit” paid to the beneficiary) and possibly triggering a further tax event.

Is there a better option than borrowing against your life insurance policy?

That depends on the situation. In some cases, there could be better options that have even lower costs. For instance, it might make sense to borrow from your 401k at low interest to purchase a house, and it’s hard to beat a tax-deductable Home Equity Line of Credit (HELOC) at today’s rates of as little as 3% APR.

Of course, there are generally fees as well as interest involved in borrowing money against a property, and now many lenders are charging substantial prepayment fees for short-term borrowers. Since the real estate market crash, it has also become much more difficult to qualify for those loans. Both the borrower and the property must fit lending requirements, such as sufficient equity, a steady job with income several times any debt payments, and good credit.

Borrowing from or taking money from retirement accounts can generate fees as well as taxes, and due to employer plan restrictions, some investors find themselves unable to borrow against their 401k’s, even in emergencies. When they can borrow, they will be typically limited to $50k or 50% of the vested funds, whichever is less. And unless the reason is a down payment on a home, the funds must be strictly paid back within 5 years.

The rules for IRA’s are even stricter. They are typically not acceptable as collateral and you can only access your funds for a 60-day period in what is considered a “tax-free rollover,” and that time frame is firm. Beyond the 60 days, you’ll pay income taxes, a penalty, plus lose the ability to put the money back in your IRA.

Should YOU to borrow against – or begin – a whole life insurance policy?  At Partners for Prosperity, Inc. we use Truth Concepts™  financial software to compare different financial strategies. We show investors how to build wealth with safety, apart from market risks and instabilities. We can help you consider opportunity costs, taxation, risk and returns, and more. Contact us  to find out more.

“We can’t solve problems by using the same kind of thinking we used when we created them.”
-Abert Einstein

Money is one of the most powerful forces in our lives, both in our psyches and in our physical realities. Money makes the world go around. Life as we know it would grind to a halt without it. Yet it remains something of an enigma, largely unexamined.

We tend to either unconsciously embrace a contradictory, love-hate-relationship with money, or see it as a one-sided caricature. Money is heralded as the all-powerful solution to our problems, perhaps even the source of security, even happiness. Conversely, it gets blamed as the root of all evil, greed, and injustice.

In Money & Life, the groundbreaking documentary screening now in cities around the country, money takes center stage as a fascinating, fully-fleshed out yet still-evolving character. We learn of money’s birth as a brilliant piece of social technology, contemplate its evolution through the centuries, discuss society’s near-worship of it today, and examine its current incarnation in an unsustainable debt-based economy.

It’s a complex story, but the beautiful graphics, personal stories, and interviews from financial thought leaders provide many windows from which to view money. Filmmaker Katie Teague remains off camera, yet we are drawn into the conversation she has started.

We’re invited to confront the compulsion to consume with a dot.com multi-millionaire who, after an extended spending splurge, tames the “Greed Bug” with volunteer work in India. We come face to face with financial shame as we follow a woman through bankruptcy to a sense of inner abundance on the other side. We are challenged with the ways in which our corporations “liquidate the earth” for profit, and invited to consider how our man-made economy has moved away from the natural order of sufficiency and sustainability.

Covering all sides of the coin, Money & Life avoids sermonizing, demonizing, or new age assertions that the law of attraction will magically produce “an unlimited supply of money.” Resisting temptation to collapse “money” and “materialism,” (though both are examined), money itself is neither vilified nor exalted, but is viewed as both an instrument of generosity and a catalyst for scarcity.

Money & Life – Extended Preview: 

An essay-style film, the dialogue is carried forward through narration, personal stories, and interviews with an array of thought leaders, from economists and sustainability experts to reverends, rabbis, and a former JP Morgan executive. Among them:

• John Perkins, author of Confessions of an Economic Hitman, a former Chief Economist who once advised the World Bank, UN, IMF, heads of state and Fortune 500 companies, Perkins left that position after an epiphany and dedicated his life to righting the wrongs of the system he had been entwined with.
• Lynne Twist of the Soul of Money Institute, a former fundraiser and global leader in eradicating hunger and supporting social justice and environmental sustainability.
• Philosophy professor Jacob Needleman, author of Money and the Meaning of Life.
• Vicki Robin, co-author of Your Money or Your Life and co-founder of financial sustainability initiatives such as The New Road Map Foundation’s Financial Integrity Program.
• Currency expert Bernard Lietaur, author of The Future of Money.
• Financial reformist John Fullerton, founder of Capital Institute and former JP Morgan managing director.
• Futurist and sustainability consultant Hazel Henderson, author of Ethical Markets: Growing the Green Economy.
• Self-proclaimed “degrowth activist” Charles Eisenstein,  author of Sacred Economics.

(Hopefully, the forthcoming DVD will have a wealth of extended interviews, as I suspect much additional wisdom had to be left on the cutting floor.)

Money & Life unveils fractional reserve banking and exposes The Fed and the “global casino” created by unsound banking practices. But rather than descending into an angry tirade against wrong doers, the film proceeds gracefully, finding hope and even purpose in our economic woes. (As one expert suggests in the film, perhaps we need the sh*# to really hit the fan before humankind takes the opportunity to re-invent our systemically flawed monetary system.)

Rather than offer opinions or even “solutions” to our money mess, the film asks us to find our own answers to questions such as:

• What is real wealth?
• How can money serve people, rather than vice versa?
• What does it really mean to “make a living”, and how can we free ourselves from cycles of debt and consumption?
• How can we align our financial choices with our most deeply held values?
• What are the possibilities – and examples – of alternative monetary systems and currencies?

Money & Life reminds us that as the creators of money, “we made it all up” in the first place, and we can recreate it as well. We are invited to own our roles as creators of money and envision possibilities such as alternative economic systems, complimentary currencies, and sustainable financial solutions (as is already happening on micro-levels around the world.)

The final section on re-imagining money, initially struck me as too optimistic, almost naïve. I thought, “Do we really think the powers that be are going to let the 99% brainstorm a new monetary model?” But in retrospect, the film led me to realize how many of the solutions are already here, at least, in seed-form.

How many of us shop at co-ops, grow our own food, barter for goods or services, and have abandoned typical earn-and-consume models in favor of meaningful vocations and creative pursuits? I’m currently bartering marketing coaching for recording studio time. I’m using technology to carve a path as a “prosperity therapist” who works from home while caretaking an elderly parent. I’ve been self-employed for 18 years and have been “doing money differently” for a long time.

Filmmaker Teague practices what she preaches, modeling alternative means and creative solutions. Sidestepping typical means of funding for her excellent debut documentary (lots of debt or a few wealthy producers), she utilized Kickstarter, a “crowdfunding” platform to find financial support for her film. And rather than seek a wide theatrical release, she went on tour to debut the film in grassroot showings around the country designed to foster dialogue and engagement. (Currently, screenings are scheduled in Boulder, CO on April 28,  and Chicago, IL on May 9, 2013. )

I recommend this film wholeheartedly to readers of the Partners4Prosperity.com blog, out-of-the-box financial advisors, or anyone who is interested in “doing money differently.” As a matter of fact, the film, in many ways, lays a foundation that makes the Prosperity Economics model practiced by Partner for Prosperity highly desirable. (P4P’s Kim Butler coined the term Prosperity Economics for methods of saving and investing that utilize alternative investments along with co-operatively owned insurance to build wealth. No stock market, bank, or government required.)

To find out how you can watch Money & Life, go to the website to see if there are screenings in your area.  DVD and streaming versions are scheduled to be released May 1^st, 2013.

Have you seen Money & Life? What did you think? Your comments and reflections are encouraged below.

Kate Phillips helps people heal their money wounds and make peace with money. The founder of Total Wealth Coaching,  she also coaches business owners and entrepreneurs to sustainable success.

One of the advantages of a Whole Life Insurance policy is the ability to borrow against your cash value, though the concept is widely misunderstood, even by insurance agents! In this post, we’ll explore exactly what it means to take a loan against your insurance policy, and we’ll look at some good reasons – and bad reasons – to borrow against your policy.

Do You Borrow Your Cash Value, or Borrow Against It?

A common misunderstanding is that people think they are actually borrowing the cash value itself, but actually, they are taking a loan against it. Your cash value is the collateral that the life insurance company lends against. So the real choice you have is to either reduce (or liquidate) your cash value, or borrow against it.

The cash value is your savings to take as you wish, but we recommend that you borrow against it rather than deplete it. Why? Just like with a house or other piece of real estate, it is usually more advantageous to keep the asset long-term and borrow against it (for example, with a mortgage) than lose the asset.

Just as with a rental home, properly structured whole life insurance policies allow you to retain the asset for future use. Real estate investors may borrow against and pay off mortgages several times against a long-term rental, and you have the ability to do the same with your cash value policy.

Just like real estate, cash value policies allow you to have a C.L.U.E., which stands for

• Control – you control the asset, not your employer or the government.
• Liquidity – it can be liquidated if desired, with no penalties and minimal taxes.
• Use – different from a retirement account, the money can be used as you please, including used as collateral.
• Equity – the asset grows over time and your net worth increases.

Good Reasons to Borrow Against Your Life Insurance Policy

Perhaps the most common reason people borrow money is in reaction to a cash flow crunch, perhaps caused by illness, divorce, or a temporary period of unemployment, But there are many good, strategic reasons why you might want to borrow against your whole life policy, even if you are not having a financial emergency.

For instance, it can be a smart way to leverage your savings to pay off or avoid consumer debt. It can be a way to increase your net worth or cash flow by providing capital to invest in real estate, or financial instruments with solid double-digit returns. It can be a brilliant strategy to use to supplement retirement funds or social security in later years when you are no longer working full-time.

Recently, Partners for Prosperity, Inc.’s own Kim D. H. Butler was interviewed for the prestigious Palm Beach Wealth Builders Club by Tom Dyson, the club’s Investment Director, about the use of whole life cash value insurance, coined “Income for Life” by the Palm Beach Letter crew. We’ve printed an excerpt below in which she discusses two of good reasons to borrow against your policy for strategic reasons:

Tom:  What do you think are the best ways that our subscribers, at least just to get started, how should they get going when they borrow money?  What should be some of the first things they think about when they’re getting to that point?

Kim:  That’s a great question.  There is going to be two schools of environments that they fall into.  One is going to be the school of handling debt like car loans and credit cards and things like that.  The other will be the school of investing.  So, I’ll address them both.

There will be people that can benefit from borrowing against the cash value of their life insurance to pay off credit card debt.  Maybe they have credit card debt at 18-20% or even 12%, and as you know the life insurance loans cost somewhere between 4-8% right now.  So, that will be a beneficial thing.  They’ll be able to borrow against the cash value, pay off their credit card.

Then, as you know, to be an “honest banker” as Nelson Nash talks about in his book and as you guys referenced in Income for Life, they’ll actually want to pay those life insurance loans back at the same interest rate they were paying the bank or the credit card company, which, of course, will get that loan paid back very quickly, and then they can go on and start a second policy….

The other group of people really doesn’t have debt as an issue.  They pay off their credit cards every month.  Yeah, they might borrow against it for a car, on occasion, but that’s going to depend on car loan interest rates at the time.

If car loan interest rates are really, really low, they may be better doing a car loan with a typical financing company.  If they don’t have a need for debt in the typical sense, then they can borrow against it to invest.  This has to be done very carefully, but it can be very effective.

We have clients all over this country that borrow against their policies at a cost of eight and invest in very solid things that earned 10% or 12% or 14%.  Sometimes they are things they have found.  Sometimes they are things that we have found.

That can be a very effective tool to use their life insurance cash value.  Now, at that point, we always have a minimum that we don’t go below.

Let’s say they decide their emergency fund should be $50,000.  Okay, we’re going to leave $50,000 of cash value in there.  The internal return on that money right now is typically between 4-5% depending on the age of the person.

So, it can sit in there and do just fine absolutely doing nothing.  For the money above the $50,000 in this example, they could borrow against it and go invest and really get some amazing returns.

Tom:  Yeah.  I can see that.  It’s absolutely right.… Thank-you so much for coming on and talking to us today.

Kim:  You’re welcome. Happy to be here.

Some not so good reasons to borrow against your cash value:

Nordstrom is having a sale. You never want to borrow money for non-essential, depreciating consumer purchases. And living beyond your means is also not a good reason to take a loan against a life insurance policy!

You got a “sure fire” tip about a hot stock. Borrowing money to gamble is always a bad idea, whether it’s Vegas or Wall Street. You never want to borrow money on a prediction, a hunch, or a guess. When it comes to money, it’s important to deal with facts and truth. If you want to bank on your intuition, use it to choose a great financial advisor. 

Stay tuned for a follow up… Next week, we’ll look further at some advantages and disadvantages of borrowing against a life insurance policy. Until then, you can listen to Kim’s entire interview or read the transcript of her interview with the Palm Beach Wealth Builders Club here.

Can we help you evaluate your own life insurance policy?

We find that people have a lot of questions about their policies:

“Do I have enough insurance?”

“What will be the impact of borrowing against my policy?”

“Is this a ‘good’ policy with the proper riders, or is it the kind of permanent insurance that has gotten a lot of bad press?”

“How can I use my whole life insurance to benefit my family now?”

If you have questions, we can help you get them answered! Partners for Prosperity is once again offering complimentary policy reviews. Just click here if you would like to schedule a no-obligation appointment with us to review your policy.

Last week, our blog post was about common Money Mistakes that even smart people make. This week we would like to discuss in detail another common financial mistake:

Getting advice from someone motivated to make a sale rather than provide the best advice.

There has been a raging debate amongst financial professionals since the 2010 Frank-Dodd bill authorized the SEC to adopt a fiduciary standard, which means “the best interest of the client” versus the current suitability standard, which only means “appropriateness of investment.” Due to much lobbying and intense opinions on the matter, no change in standard has yet to commence, though we may see such a change in 2013.

Here’s what the fiduciary vs. suitability standard debate means and why it matters: 

The Suitability Standard 

People who advise and sell investments are held to one of two standards, based on their registration. Those registered as an agent or broker might be referred to as a “Stockbroker,” a “Registered Representative” or even a “Financial Planner.” Broker-dealers and associated persons are regulated under the Securities Exchange Act of 1934 and are held to a suitability standard that requires them to make recommendations that are appropriate for a client’s risk tolerance, investment objectives, time horizon and financial status.

In other words, a stockbroker can’t put Grandma’s nest egg in volatile tech stocks, but they can consider their own commissions, preferences, and company expectations. Notably, brokers and financial reps are often trained to sell the company’s managed funds, which charge fees and tend to underperform the market as a whole, or the indices the funds are mimicking.

According to a March 30, 2013 article in the Seattle Times, two-thirds of managers failed to beat the market in 2012. In 2011, 84% underperformed the market. An objective advisor who is paid for their advice would hopefully advise an investor a different direction, explaining the long-term impact of the fees, perhaps even questioning if the associated risks of such a fund are necessary or desirable.

The problem with the suitability standard? It puts investors at risk and tolerates conflicts of interest. Too often, brokers steer clients into investments that earn higher commissions rather than investments that best serve their clients. If an under-performing in-house fund pays a higher commission than a better similar fund elsewhere, they have no responsibility to recommend the better fund or disclose their conflict of interest. Frankly, there’s no incentive or reason for them to even be aware of  better investments elsewhere.

The Fiduciary Standard 

On the other hand, RIAs (registered investment advisors) and their IAR’s (investment advisor representatives) are held to the higher fiduciary standard under the Investment Advisors Act of 1940. This means they must recommend what is in the client’s best interest when providing personalized investment advice. They must place the interests of the client ahead of their own and act professionally with care, skill, diligence and good judgment.

The fiduciary standard imposes the highest duty of good faith, loyalty, and full and fair disclosure of all material facts, including potential conflicts of interest. If conflicts of interest cannot be avoided, they must be managed in the client’s favor. It’s been called the “golden rule” standard, because advisors must do for their clients exactly as they would want someone to do for them.

As a Registered Investment Advisor, we can also (and do) offer fee-based financial advice. And whether we are charging for advice in any given moment or not, we must always operate under the fiduciary standard.

Many financial advisors and firms do not have the proper education, certification and licensing to charge a fee for advice. Many who offer financial advice at large financial corporations (and never charge a fee for advice) are really financial reps, or salespeople for the company, not objective financial educators and true advisors. 

Hybrid Confusion 

Sometime around the dot-com crash, brokerages realized that in order to survive, they had to re-brand themselves as Financial Advisors. Rather than calling themselves “stockbrokers” or “Investment Representatives,” brokers started upgrading themselves to “Investment Advisors” and “Wealth Managers.” With some additional certifications, some even started offering fee-for-advice.

The problem? While pushing products remained the primary goal, advisors were now broker/advisor “hybrids” who wore two hats. They gathered information from clients, sometimes charging fees to produce a “financial plan,” (wearing a fiduciary hat). Next, they sold clients the same products they had always sold (wearing their suitability hat).

In a practice called “lunacy” by one financial blogger, the hybrid model led to a massive gray area fueled by the public’s lack of awareness and the “regulatory arbitrage” games that Wall Street insiders play so well. Depending on whether representatives were operating in an advisory capacity (selling advice to the customer for a fee), or simply performing brokerage transactions at the request of the client, their roles and responsibilities could change like the weather.

As one novice investor recalls, “I was charged $700 for a financial plan, then guilt-tripped when I asked them to look outside their network for products with lower fees and competitive costs. In the end, I realized I had paid $700 for a sales pitch.” 

What Role Is Your “Advisor” Playing? 

Independent studies and surveys have highlighted the (intentional) confusion produced by the double standards and changing titles. A recent survey of 2,000 American investors detailed in a Forbes.com article titled, “What is a Stockbroker? America Has No Clue”  revealed that the overwhelming majority of investors do not understand the difference between those who sell stocks and those who give financial advice. Furthermore, 2 out of 3 investors incorrectly assumed that stockbrokers are held to a fiduciary duty, and fully 76 percent of investors wrongly believe that “financial advisors” - a term used by brokerage firms to describe their salespeople’ are held to a fiduciary duty.

Consumer groups, the SEC, and financial planning communities support the fiduciary standard, whereas the broker-dealer and insurance communities (including NAIFA) have supported the suitability standard. This issue has created vigorous dispute between the interested parties because of the significant impact it will have on some segments of the financial services industry. 

Where Does Partners for Prosperity Stand? 

Clients have been asking us if we act from the fiduciary platform, and it’s nice to be able to answer “Yes!” Partners for Prosperity, Inc. is a Registered Investment Advisor, and our Investment Advisor Representatives can proudly say that they operate under the higher fiduciary standard.

We also believe in (and use Truth Concepts™ software that supports) complete transparency in the advisor-client relationship. Furthermore, we recommend safe, predictable investments and do not advocate that any investor gamble with their money.

We recommend to anyone to get advice from a Registered Investment Advisor who operates under Fiduciary Responsibility. Providers of fiduciary advice are bound to give advice that is the best for the client, regardless of whether it makes or loses them money. 

Who’s Giving YOU Financial Advice? 

We urge our readers to inquire as to whether those giving them financial advice are operating under the suitability or fiduciary standard. If you have ever wondered if the financial advice you received served your best interest, we invite you to contact us to explore financial advice based on numerical truths, the Principles of Prosperity, and the fiduciary standard.

“Wise men learn by other men’s mistakes.”

We thought April Fools week is a good time to look at the “foolish” things we do with our money – and how to avoid financial mistakes! Here are ten mistakes that people commonly make with their money:

1. Putting assets at risk by chasing high yields

Too many people are trying to make up for a lack of savings – or a lack of time before retirement – by taking on high risk investments. The ultra-low interest rates on certificates of deposit have also been difficult for those who depend on income from their investments to live on.

A recent Wall Street Journal article  lamented,

“What this country needs is a good 5% certificate of deposit. Instead the collapse in interest rates, and the Federal Reserve’s policy of keeping them down for as long as possible, is driving people crazy—especially people who need to generate income from their investments.

“In these circumstances, people start to do really foolish things in the desperate hunt for higher interest rates. That includes taking on crazy amounts of risk, or investing in complex products they don’t understand, in the hope of higher yields. The Fed is producing a bull market in scams, Ponzi schemes and associated rackets.”

The SEC and the WSJ have warned of such products as complex “reverse convertibles” and bogus high-yield “corporate promissory notes” being marketed to investors. The truth is that 4 or 5% with a guarantee of principle beats a high-earning time bomb every day of the week.

It is always wiser to reduce living expenses than chase risky returns. We do recommend some investment vehicles that can bring double-digit returns, such as bridge loan investing and life settlement investing  for some of our clients, but they aren’t appropriate for everyone. We also recommend saving in cash value accounts  that earn modestly, but still about four times greater what certificates of deposit are currently earning.

2. Not recognizing cost of “0% financing.”

Chances are that the interest COST is being added to the amount of the loan – for example, your $35,000 car bought on “0% interest” likely has a financing fee – perhaps a fee of thousands of dollars – added onto it. (And it might not show up as a “fee” on paper… it may be simply added onto the price of the vehicle.)

Additionally, since you pay the “financing fee” up front, even if the person pre-pays their loan or even sells the car, you can’t reduce it or get it back! 0% financing is rarely what it seems. Rather than a money-saving benefit, it is a marketing gimmick.

Car lots, furniture stores, doctors and dentists often use this strategy, but be on the watch for it whenever you see 0% (or even very low) interest rates. For more information on 0% financing that really isn’t, see this post at TruthConcepts.com.

We recommend that you negotiate best PRICE first, then use the best financing you can find, if needed. Ask “What is the cash price?” first. After the best price is negotiated, then discuss financing.

However, be aware that the advertised rebates won’t apply to financed vehicles. This is because most car companies make more from the financing division than from their manufacturing. So while the cash price may be reduced by a rebate, you’ll pay extra if you ask them to finance the car.

You’ll want to get yourself pre-approved for financing, if at all possible. For instance, if you have been pre-approved for a car loan through your credit union, then you can compare rates, fees, and payments.

Chances are, you can secure better financing on your own than through a dealership. You can also take advantage of a rebate if you are financing the car yourself, because the dealer will receive the cash from your financing source.

Many people also use their whole life cash value accounts to purchase vehicles. Just remember to pay yourself back, just like you would the bank! Otherwise you compromise your savings.

3. Raiding your retirement to send your kids (or yourself) to college.

The cost of tuition and fees at a private university has tripled over the last 40 years—after accounting for inflation. The cost of a public university has quadrupled. The average bachelors degree at a private institution now tops $100k, and you’ll pay more for an ivy league degree.

Financial planners strongly advise parents against plundering their own retirement savings, which they are likely to need, to pay for college expenses. But the real problem here is not simply the price of a college education, but the opportunity costs. (Ignore opportunity costs at your own peril!)

$25,000 for four years (cheap for most private colleges) equals $100,000. But the total cost of the college education is not $100k; it is $100k plus the interest you would have earned on the $100k.

Thus, the cost of paying for a $100k college education will add up to about a whopping $350,000, assuming that the money could have been invested at a 5% return for 25 more years.

Opportunity costs must be considered for the student taking student loans as well. Too many college grads will take decades paying off debt before they save anything more than a small emergency fund, if that.

Admittedly, degrees are needed for most jobs today, but they don’t have to cost a nest egg. Consider beginning a degree at a community college, graduating from a public university (where fees average less than $9k a year vs $30k for a private college), and teaching your student time management by having them work to pay for some of their own expenses.

4. Taking Social Security too early

If you can delay taking your Social Security retirement benefits at age 62, by all means delay. The short-term advantage of having additional income in your 60’s will be greatly diminished by attempts to live within your means later, when inflation will make the task more difficult.

Waiting until you are 70 can actually double your Social Security income. Yes, you’ll miss out on 8 years of payments, but with more and more people living into their 90’s and beyond, the benefits of taking SSI early rarely outweighs the cost. As the Wall Street Journal declared, “For many retirees, the big risk isn’t that they will run out of money before they turn 70, but after 85.”

Consider very carefully the consequences of taking Social Security too early. If you plan on retiring or cutting back on work, Social Security should be used a supplement to your savings, not as a substitute for assets.

If health and employment issues make delaying payments difficult, consider alternatives if possible. For instance, if debt is an issue, consider debt settlement  or even bankruptcy before minimizing your future SSI payments. Even waiting until age 66 can mean a substantial increase in benefits for decades to come.

5. Procrastinating on purchasing life insurance. 

It’s almost the first question asked when someone tells of a friend who passed away in an untimely manner, particularly when a family is left behind: “Did they have life insurance?”

But the possibility of death is only one good reason to not delay getting life insurance. Waiting ensures that your rates will rise, at least due to age, and possibly due to health issues that can crop up unexpectedly. (Try purchasing life insurance with cancer.) Even something as common as high blood pressure or high blood sugar can raise your rates.

If you purchase permanent insurance, not only can you lock in lower premiums, but you can start building cash value sooner rather than later. Cash value can be used for multiple purposes in any variety of financial needs, from starting a business to getting through a period of unemployment.

If permanent insurance in a desirable amount is not in your budget, you can at least buy term insurance, or supplement permanent insurance with term. But make sure that you are getting “convertible” insurance that can be converted to permanent later if desired.

What Financial Mistakes Are You Making? We’ve all made financial mistakes, and space doesn’t allow us to list all of the possible money mistakes here, but Kim Butler discussed some of these and other mistakes with Todd Strobel on our April 2 Guide to Financial Peace Radio show, “Got Dumb Money Moves?”  Additionally, we started the topic on last week’s show about “Avoiding Wealth-Building Mistakes.”  

Is it time for a new strategy? Contact us, http://partners4prosperity.com/contact we’d love to help you avoid money mistakes and find effective new strategies for sustainable wealth-building.

Can’t find a job? The solution that many have found to the woes of the economy is to start their own business. “The Great Recession has pushed many individuals into business ownership due to high unemployment rates,” said Robert Litan, vice president of research and policy at the Kauffman Foundation, which publishes the Kauffman Index of Entrepreneurial Activity.

Although 2011 business start-ups showed a decrease from the prior year, they remained above pre-recession levels at the rate of .32% start-ups per American adult per month. And while a shy one-third of one percent may sound small, this rate translates into 543,000 new business start-ups every month!

That’s the good news. The not-so good news is this: start-up founders prefer to fly solo in the New Economy, which means that each start-up only employs one person instead of many. Observes Litan, “Economic uncertainty likely has made them more cautious, and they prefer to start sole proprietorships rather than more costly employer firms.” Thus many people are solving their own cash flow issues by becoming self-employed, but these solo-start-ups have a limited effect on the economy at large.

Who is starting these businesses? To read the headline-grabbing business success stories, you might conclude that entrepreneurial activity in the United States is spearheaded by under-30 technology geeks founding social media companies. But the truth about business start-ups is a bit different – at least in some ways – than popular media narratives.

A look at 15-years of research from Kauffman.org reveals the trends:

1. The economy remains a “He-conomy.”

Men are still more likely to start a business than women, and the gap has actually widened, with men creating business at a rate nearly double that of women. Perhaps this is related to the fact that for several years, the unemployment rate for men has been substantially higher for men. With industries such as construction and manufacturing hard-hit, 2010 saw over 5 men unemployed to every 4 women, according to figures from the Federal Reserve (see graph below.)

On Jan 4, 2013, a New York Times blog announced that the women’s unemployment had just surpassed the rate for men. Should the unemployment gap be over for now, we may see a partial narrowing of the start-up gap between the sexes.

2. It’s a more diverse economy. 

Every ethnic group except “whites” showed a dramatic decrease in the total percentage of start-ups. Minority start-ups increased from 23.6% of all new businesses to just shy of 40%. Latinos and immigrants (of all ethnicities) are leading this dramatic rise entrepreneurial activity, both more than doubling start-ups since 1996. (View infograph here.)

These gains reflect other trends, such as the substantial increase of the Hispanic population in the U.S., which rose to 17% in 2011, from 13% in 2000, according to the Pew Research Hispanic Center.  Adding to that, the Hispanic unemployment rate during the recession topped out nearly 30% higher than the general unemployment rate in 2011 (11% vs 8.5% in Dec 2013), necessitating a higher rate of self-employment.

Perhaps more accustomed to challenging economies, immigrants of all ethnicities (some whose limited English skills limit their job searches) have modeled true entrepreneurial spirit to the born-and-bred Americans who plead for unemployment benefit extensions. To some, America is still the land of opportunity.

3. It’s a more mature economy. Research shows that 45-54 year old are most likely to start a new business is 45-54 year old  And this is not a new development. “Even before the Great Recession, older entrepreneurs led the way in new business formations,” writes Phillip Moeller in an August 28, 2012, usnews.com article.

The Graying of Entrepreneurialism

Not only do older people start more businesses, they are more likely to succeed. Although only half of new businesses are still operational after five years, older entrepreneurs are more likely to be among the survivors. This may be true for several reasons:

Experience: Rather than age, previous industry experience factors heavily into the odds of entrepreneurial success. Older entrepreneurs are more likely to have the needed experience to run their own business or work as an independent consultant for one or more employers in the marketplace.

Start up funds: Access to adequate start up costs and operating cash is the most often named make-or-break factor in businesses. Older entrepreneurs are more likely to have their own savings, credit, or cash value life insurance which can be used or borrowed against to give a business the money it needs to launch.

Longevity. As lifespans have increased, many people are still healthy and capable far beyond their 60’s, and wish to continue working. These individuals are fashioning second careers, both for personal fulfillment and economic profit.

Economic necessity. People over 50 may be more likely to have resources to fund a business, but they tend to have a harder time finding new employment. Starting a business puts them back in control of their lives and finances when job hunting does not produce the hoped-for results.

The Reality of the Older Entrepreneur

The phrase “entrepreneurship boom” sounds optimistic, as if a vast array of economic opportunities awaits these intrepid new business owners. But the real “boom” driving older workers to start new businesses could be the Baby Boom.

As a generalization, Boomers have under-saved and are ill-prepared for full retirement. Compelled to keep working, and being healthy enough to do so, Boomers are finding competition for “mature” jobs has increased. In addition, rising benefit costs (caused in part by the aging Boomer demographic) leads many employers to see a financial advantage in engaging younger employees as well as contract and part-time workers.

In light of these factors, the 2009 Kauffman report concluded, “The United States might be on the cusp of an entrepreneurship boom – not in spite of an aging population but because of it.”

Preparing for the Possibility of Business Ownership

For some, starting new businesses opens a wonderful chapter of success and prosperity in the story of their working life. For others, starting a business or changing to self-employment is the only alternative to unemployment. For all, the trend towards business start-ups represents tremendous opportunities as well as challenges.

Employees who perceive even a possibility of ever being in the job market for any length of time would be wise to consider how a “necessary” period of entrepreneurship might impact their financial well-being. How would starting a business would affect your…

• Retirement Plan?
• Insurance Benefits?
• Credit Score?
• Current Lifestyle?

In this unsettled economic climate, committing all of one’s long-term savings to an employer’s qualified plan and obtaining life and disability insurance through the company’s group policies may not be the wisest choices. Better to find ways to integrate personally-owned assets and benefits with employer offerings. To be prepared for the possibility of a start-up in your future, consider the following strategies:

• Fund 401k’s and other qualified plans to employer match only.
• Don’t just have an “emergency fund” – save aggressively in an Opportunity Fund  such as a permanent insurance cash value policy that can be utilized or borrowed against without penalties, tax bills, or qualifying applications.
• Consider a Health Savings Plan couple with health insurance that is transportable regardless of employment.
• Opt for portable and permanent life insurance.
• Continually build your most important asset – yourself – through professional development, learning new skills, the latest technologies and best practices.

Being prepared for a necessary period of entrepreneurship offers the best opportunity to profit from it. 

Could you thrive as a necessary entrepreneur? If you knew you might start a business someday, how would it affect your saving and retirement decisions? We invite you to hear Kim D. H. Butler discuss her newest book, Busting the Retirement Lies with No BS Money Guy Todd Strobel on an episode of Guide to Financial Peace Radio.  

Although you won’t find it yet in Webster or Dictionary.com, “Rothify” is a word you’ll be hearing more of in 2013. According to the Plan Sponsor Council of America, , the Roth 401k option was already offered by nearly half of employers in 2011. Thanks to the Fiscal Cliff and the New Year’s Day Tax Deal, the Fiscal Cliff, that number is expected to increase substantially, as Americans can now convert their 401k’s to Roth 401k’s.

The Changing Landscape of Retirement Plans 

Twenty years ago, the pre-tax/after-tax discussion didn’t exist because all qualified retirement plans were configured in pre-tax formats: Deposits, up to specified limits, were exempt from immediate taxation, and allowed to accumulate tax-free.  At distribution (typically after age 59½), any withdrawals would be taxed as regular income.

The logic for pre-tax saving seemed simple: Because it was assumed one’s retirement income would be less than when working, distributions would be taxed at a lower rate. But the tax savings were also a way to get employees on board with a long-term shift from company-sponsored pension plans to largely self-funded 401k’s.

Recognizing this higher-tax-in-retirement scenario might discourage retirement saving, Congress established Roth IRA accounts in 1998.  Named after William Roth, the U.S. Senator from Delaware who introduced the bill, deposits in a Roth account are made with after-tax dollars, and, similar to IRAs, allowed to accumulate tax-free.  The big difference: distributions are also free from income tax in Roths, as long as the funds have been in the account for five years, and the account holder is over 59½.

While initially limited to only $2,000 per year and subject to qualifying income limitations, the rules around Roth IRA’s have expanded significantly, with Congress allowing conversion of traditional IRA to a Roth (even deferring some of the taxes on converted funds to the following year) beginning in 2010.

Roth 401(k) accounts entered the retirement community in 2006, bringing with them a couple of distinct advantages over IRAs. Allowable 401k contributions are much higher – $17,500  in 2013 plus $5,500 in “catch up contributions,” versus $5,500 for an IRA or $6,000 if you are 55 or older, and there are no income limitations or qualifications for 401k’s. And with the American Taxpayer Relief Act of 2012 (ATRA), 401k plans can be converted to Roth 401k plans without moving the funds out of the workplace plan.

Should You Rothify Your 401k or IRA? (Are Taxes Going Up?)

The advantage of rothifying your 401k (or IRA, 403b…) is clear: you won’t pay taxes on the investments when you cash them in, provided that you are at least 59 1/2. The disadvantage is equally simple: you will have to count any funds converted from a traditional to Roth 401k as income, and pay income taxes on the funds. Convert enough funds, and you could even bump yourself into another tax bracket.

When considering who should convert their 401k’s, the answer seems obvious: “A Roth conversion makes sense if you expect your tax rate to be the same or higher in retirement,” as Ashlea Ebeling states in a January 2, 2013 Forbes.com article.  If tax rates remained the same, you’d pay the same for either plan, at least in theory, as shown in Figure 1:

But the “if” in “if tax rates remain the same” is a very big IF that takes a good deal of denial as well as historical ignorance to believe. (Past tax rates are no guarantee of future tax rates, but even if they were, you’d best watch out.)

When income tax began in the U.S. 100 years ago, the tax rate was only 1% for nearly all citizens, with an additional 6% tax for the few Americans with incomes over $500,000. By the height of the Great Depression, the top marginal tax rate was 63%, climbing to a whopping 94% by 1945, during World War II. The highest marginal rax rate remained at 70% or higher until Reagan’s cuts decades later, and have only barely been below the current top marginal tax rate of $39.6%.

And it isn’t just the wealthy 1% that has typically paid much higher taxes. The lowest tax bracket rate has also frequently been more than the 15% rate we have now. In 1945, earning $20,000 triggered a marginal tax rate of 59%, and if you earned $50,000, your marginal rate was 78%!

As much as we all may feel like we are being taxed to death, from a historical perspective, it simply isn’t true. The chart below shows trends in both the highest and lowest tax brackets since 1913:

We think the writing on the wall is clear – the growing federal deficit, a history of higher taxes, and the willingness of Congress to find new sources of taxpayer income (such as allowing IRA’s and now 401k’s to be converted to Roths) all point in one direction: UP.

Some earners anticipate being in a lower tax bracket in retirement, though we don’t recommend “planning” to earn a lesser income. Why not anticipate new opportunities and prosperous investments instead? Many of today’s entrepreneurs started their businesses past the age of 50, beginning new ventures that will provide them with income and fulfillment long past the typical age of retirement.

Even so, you also must consider that your tax deductions may be going down. Lifestyle patterns of successful savers often mean that tax deductions taken during their working years (for dependents, mortgage interest, etc.) are no longer available in retirement. The house is paid for, the kids have moved out. Congratulations; more of your income is now taxable.

It is also sobering to realize that middle class tax rates have often historically been higher than even today’s top marginal rate. Bumping down into a lower tax bracket when taxes are rising may provide no relief. Nevertheless, predictions of rising taxes are only one excellent reason to rothify your 401k.

What Are You Doing with Today’s Tax Break? (Are You Saving EXTRA for Tomorrow’s Taxes?)

A traditional 401k may also be setting you up for saving failure psychologically and behaviorally. Why? Because it “looks like” you have more money in your qualified retirement account than you really do. In other words, you can’t spend everything you see, you only have access to the reduced future after tax amount (which could be much less than you imagine). Investments as well as objects can appear larger in the current smoke-and-mirrors economy, and your 401k statements can offer a false sense of security that you’re saving “enough” – when you’re not.

Viewed another way, you’re not likely to invest the tax savings you may enjoy now. The IRS takes money from each paycheck for a reason; otherwise, the money is likely to be spent. Taxes saved today won’t help you pay those taxes in the future because they will have been converted into a vacation, a laptop, a car or an extra latte a day. So in practical terms, a tax break today is more likely to translate into more spendable income, but not necessarily future savings.

Even if taxes did not go up… even if you were disciplined to invest your tax savings now… we still believe it is more prudent to pay taxes on the SEED, rather than the HARVEST. As the Wealthfront blog  puts it, “A Roth 401(k) enables you to pay a small tax bill upfront in exchange for what is almost undoubtedly a larger tax bill later.”

Inflation will take a big enough bite out of your savings, you don’t need to add “taxes of an undetermined amount” to that equation. Reduce your financial stress by knowing that what you have “saved” is actually “safe” from the taxman.

Should You Contribute New Money to a Roth 401k or Roth IRA? 

Although each person should receive specific advice for their situation and have a professional “run the numbers,” we believe that rothifying an account is often an excellent way to avoid future taxes when you can least afford them. But the question of where to save additional dollars is an important one.

Does your company offer a Roth 401(k) plan? Over half of employers now offer Roth 401(k), Roth 403(b) plans, and similar options. If they don’t, put in a request.

Does your employer match funds? After considering fees, and limitations on where and how money can be invested, many investors decide that a Roth IRA or 401k is not worth the restrictions unless there is a significant employer match. At Partners for Prosperity, Inc., we don’t recommend saving in a Roth account beyond the match.

Is your Roth account safe? Making your savings safe from taxes is a good step, but consider how your accounts will fare in a repeat of the 2008-2009 stock market crash. We don’t recommend mutual funds as a safe place for your savings, but some 401k’s and IRAs allow for better options. Likewise, even traditionally “safe” harbors such as bank CD’s may not be as safe as once imagined, as we explored last week in “How Safe is Your Money? FCIC Insurance and Fractional Reserve Banking.”  

Have you considered other tax-free accumulation alternatives? Many municipal debt instruments issued by local and state governments have tax-favored benefits in regard to interest payments.  Life insurance cash values allow for inside buildup without tax and can often be withdrawn or borrowed against on a tax-free basis. When shares of stock and real estate holdings appreciate, the growth is tax-free, with a capital gains tax due only upon the sale of the asset.

These alternative products have unique benefits as well as limitations, so expert assistance is recommended. But, depending on your individual circumstances, non-qualified accumulation instruments can complement or surpass qualified retirement plans as vehicles for tax-favored accumulation.

Is it time to Rothify your accounts? In most cases, the sooner you start accumulating on a tax-favored basis, the better. Still, you must have a strategy for absorbing the tax hit, and may not wish to rothify all of your accounts at once. Here at Partners for Prosperity, Inc., we have software that can help you determine what impact converting to a Roth would have on your accounts, and help you evaluate what makes sense for you.

We do things a little differently here – we have NO “assets under management,” because we believe that YOU should be in charge of YOUR money. Curious about what we do? Pick up a copy of Busting the Financial Planning Lies and book a complimentary consultation  to find out more. 

These famous lines from Frank Capra’s holiday classic, It’s a Wonderful Life, have been used to explain how banking works, though the details don’t exactly reflect current realities. Today, we WISH that our banks were as conservative as George Bailey’s fictional Building and Loan. If John could only borrow what Sally had originally deposited, there would be less risk!

Fractional Reserve Banking 101

Investopedia defines fractional banking as “a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.” But banks don’t simply loan out 90% of what they have taken in, they create money through credit, or (defined another way) debt. And for better or worse, it is this unsecured “money” that comprises a large part of our economy.

Reserve requirements  are only 3-10% at most banks, which means a bank can lend John 10 or even 33 times or more what Sally has deposited. When a bank issues a credit card or lends money to a mortgagee, the borrower’s qualifications (and the bank’s reserves) allow the bank to literally manufacture money out of thin air. No printing press required.

So what gives money its value? Certainly not the paper it’s printed on. It’s also not backed by “the gold standard,” as was once the case. Its value is the worth that people agree the currency represents. The value is furthermore derived from the confidence that a society has in the institutions and governments that back the currency. In Frank Capra’s movie, the townspeople’s confidence in George Bailey stopped the bank run. 

Worry Increases Over Bank Safety

So when home and stock values started sliding into the abyss in 2008 and 2009, what stopped people from running to the bank to withdraw their funds? The idea that their money was “FDIC insured.” To bolster confidence, the FDIC even threw more chips into the poker game, increasing insurance on savings accounts from $100k to $250k in 2008, and temporarily guaranteeing unlimited funds in checking accounts. People felt reassured that their money was in a secure place – in a bank insured by the Government of the United States.

There was only one problem: this confidence wasn’t backed with real assets, but with a poker-faced bluff. As one blogger asserted, “If you think your bank deposits are “insured” or “safe” because of FDIC protection, you’re totally irrational.”

New worries have been raised with the December 31, 2012 scheduled expiration of Frank-Dodd reforms,  which saw the temporarily expanded FDIC insurance on non-interest bearing accounts reduced to $250k per investor per bank. A January, 23, 2013 Bloomberg.com article, “US Bank Deposits Drop Most Since 9/11 Terror Attacks”  revealed, “Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data released last week.”

But the change in FDIC guarantees should not worry us – we should have already been concerned. VERY concerned. According to a 2009 FDIC publication entitled “No Safer Place in the World for Your Money,”  “If needed, the FDIC can quickly borrow money from the U.S. Treasury. The FDIC has immediate access to a $100 billion line of credit at the Treasury that, under federal law, can be expanded to $500 billion.”

While hundreds of billions may sound like a lot, consider the fact that U.S. bank deposits are estimated at $5.37 trillion. To clarify, in the case of widespread panic and bank failures, the Federal Deposit Insurance Corporation claims to have “immediate access” to a credit line that would ensure every American could have near-instant access to nearly two cents on each dollar. (Hmm…) And if they raided the Treasury (such as your social security or the defense budget), they could come up with nearly 10 cents per dollar. (What part of that is supposed to make us feel better!?)

By any objective analysis, the banking system has become essentially an illiquid Ponzi scheme run by the Federal Reserve, which shares more in common with Bernie Madoff (or a poker player, no offense to any poker players) than George Bailey. Imagining our banking system sound does not actually make it so.

A Safe Place to Put Your Cash

So if Americans can’t even withdraw more than 10% on any given day without causing a bank collapse…  if the stock market is unpredictable at best and unstable at worst…  if we’re all being bluffed into believing the corporate financial players at the poker table have real assets backing up their chips in spite of all the evidence to the contrary… Where IS our money SAFE?

Perhaps good old George left us a clue:

“Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.”

George Bailey had the right idea, even if the wrong structure. Since their inception in the US in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire, mutual insurance companies  have proven themselves as some of the most stable financial institutions in history. Owned entirely by policyholders, not shareholders, mutual insurance companies are financial institutions by the people and for the people. They have paid dividends without fail through the depression, and today are invested in by major banks to the tune of billions of dollars.

In cash value life insurance, Policyholders can save money in truly safe, guaranteed accounts through properly structured cash value life insurance policies. They can borrow against the money as they like, and they can bypass worries of stability, annual capital gains taxes, and puny interest rates of typical banks.

We think that everyone should know about cash value insurance, which some people fittingly call “Privatized Banking.” We think it truly is the solution to the instabilities of our economy, and yes, potentially an instrument that can even free Americans from being Wall Street victims. As a matter of fact, that’s our dream… to see American investors take their money back from the Potters of this world who enrich themselves at their expense, and build prosperity for themselves.

Are you looking for a safe place to put your money? If you want to do much better than .5% returns in unstable institutions, and if you are tired of the “max out your 401k and keep your fingers crossed” advice of typical financial planning, we’ve got an alternative. To learn more about Partners for Prosperity, Inc., we invite you to listen to a recent interview our own Kim D. H. Butler did with Todd Strobel, the No BS Money Guy, on Guide to Financial Peace Radio.

To find our more specifically about using cash value whole life as a powerful financial instrument, read Kim Bulter’s powerful little book, Live Your Life Insurance today.

Do you feel your money is safe in a bank? Why or why not?