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Have You Scheduled Your Check-Up?

Posted on December 23, 2011 by Kim Butler

HAVE YOU SCHEDULED YOUR CHECK-UP?

      December 31, 2011 represents the fiscal year-end for individuals and many businesses. In short order, this means collecting financial information, preparing tax returns, and compiling other accounting summaries, such as profit/loss and net worth statements. With this information fresh in your mind and readily accessible, now might also be a good time to schedule a review with your financial professionals.

      Besides the advantage of starting the year with a renewed understanding of your financial condition, scheduling a review also gives you time to make deliberate decisions about any financial transactions that may need to be executed before April 15th or any other deadline throughout the year.

      Start the year right. Get the knowledge you need, update your strategies, and give yourself the best opportunity to prosper in the coming year. Sounds like a resolution! Call or email us if you’d like help as we have an annual checklist as well as our Prosperity Economic Strategies list for 2012.

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Retirement Income Insurance

Posted on December 14, 2011 by Kim Butler

RETIREMENT INCOME INSURANCE:
How to Make the Key Factor More Than Just a Guess

“What’s my number? – That is, how much do I need to retire?”
 
These are pressing questions for individuals whose major financial objective is saving for retirement. And no matter how complex and sophisticated the process used to answer these questions, every retirement projection has at its core a calculation of Present Value. Interestingly, most of the time, the critical factor in the generation of a Present Value calculation is nothing more than a guess.

Present Value

Present Value (PV) is defined as “the amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future.” If most people kept their retirement savings in a mattress, calculating Present Value would be easy. For example, if a person wanted to be assured of receiving $1,000 a month for 35 years (i.e. 420 months), the amount of cash needed today to be present in the mattress would be $420,000.
But very few individuals will put their money in a mattress; instead they will place the unused principal in a financial vehicle with the intention of earning a return – through interest, dividends, capital gains, etc. – which can be added to the accumulation. And this is where PV becomes a guessing game; how do you choose a rate of return that will reflect the future performance of your savings?
The projected rate of return – the present value factor – is the one component of a PV calculation that impacts everything else. Higher PV factors result in lower PV calculations, and vice versa. Using numbers from BTN Research, here is an example of a Present Value Retirement Calculation, the type that might be part of a moderately sophisticated retirement plan.
Suppose an individual wants to determine the lump sum amount required to fund a 30-year stream of retirement distributions. The annual income will begin at $100,000, and to maintain purchasing power, the income will increase 2.5% each year to keep pace with the historical rate of inflation. What’s the PV number? It depends…


• If the assumed annual rate of return is 5% for each of these 30 years, the amount needed is $2.21 million.

• If the assumed annual rate of return is 6% for each of these 30 years, the amount needed is $1.96 million.

• If the assumed annual rate of return is 7% for each of these 30 years, the amount needed is $1.75 million.

A fair number of financial experts would probably consider present value factors between 5-7% to be “reasonable” expectations; based on historical rates of return, these numbers aren’t outrageous projections that require risky investments to pay off. But note the Present Value amount required with a 5% projection is 26 percent greater than the PV with a 7% projection. That’s quite a difference. So which number should you choose? You can’t know for sure.
When the assumed rate of return on your retirement accumulation is just a guess, there is a ripple effect of uncertainty. First, since the present value factor is speculation, you really don’t know your “number.” And even if you feel confident about your projections, there’s the issue of how to handle deviations from your projection that might occur in the future. Because if the earnings from your retirement accounts under-perform the target rate of return at any time during retirement, you are facing either a reduction in annual income or the prospect of running out of money.
But what if you could make your present value factor a guarantee instead of a guess?

A Present Value Factor with Guarantees

One of the practical challenges for individuals approaching retirement is identifying financial products that can deliver a reliable and consistent income over an extended period. There are some debt instruments that promise regular payments over longer time periods, but for the past hundred years, the principal long-term retirement income products have been annuities.
With an annuity, an individual gives an insurance company a lump sum in exchange for a guaranteed stream of payments. These payments can be guaranteed for specified periods of time, including periods that last as long as the annuity holder is alive. The present value factor used by the insurance company will depend on the type of payment the prospective annuity buyer is seeking, but the key element is this: the insurance company has now assumed the risk of making sure the payments are made. For the individual, the guesswork and uncertainty of the PV calculation has been eliminated.

“Okay, I like the idea of guaranteed retirement income, but…”

In August and September of 2011, Synovate Research conducted a retirement survey of 1,000 non-retired Americans. When asked which factors related to creating a more secure retirement, 86 percent of the respondents chose “having a guaranteed stream of income in retirement.” In the press release accompanying the survey results, Allianz Life Insurance Company, the sponsor of the survey, noted:
 
Especially in an environment where equity markets – and therefore 401(k) balances – can swing wildly within a week or a day, it is not surprising to see Americans expressing far more interest in the need for guaranteed retirement income versus the balance of their retirement account.
 
But even though almost 9 out of 10 Americans want retirement security, the press release also acknowledged this reality:
 
Although the idea of a guaranteed stream of income continues to resonate with Americans, most pre-retirees don’t own annuities or are apprehensive about adding one to their retirement plan.
 
Economists call this the “annuity puzzle” – even though they want the features of an annuity, most Americans don’t buy them. Why? According to Richard Thaler, a prominent financial behaviorist and author of “Nudge,” the problem is how annuities are “framed,” i.e., how they are presented. Even though annuities are a form of insurance, “most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.” Writing in a June 4, 2011, New York Times column (“The Annuity Puzzle”), Thaler enumerates several advantages that annuities have over other retirement alternatives:


• Using standard assumptions, economic studies (going back to the 1960s) have repeatedly shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

• Annuities provide clear information about when to retire. An annuity quote translates a lump sum into a monthly

income, allowing individuals to determine whether they have accumulated enough to stop working.

• Not having an annuity (specifically fixed immediate annuities, not variable annuities) adds layers of complexity to people’s financial lives. Retirees who choose not to annuitize must acquire the knowledge and assume the risk of investment managers, making allocation decisions and calculating the optimal drawdown rate over time. And since most of their decisions will be based on guesses/assumptions, Thaler’s research shows that many retirees actually tend to underspend in retirement.

When it comes to providing income security in retirement, Gary Bhojwani, Allianz president and CEO declares: “the simple fact is that annuities are the only retirement income products that pool risk, and thereby can guarantee that all annuity owners will have income for the rest of their lives, regardless of how long they live.”
If you want security in retirement, it is prudent and logical to consider the income insurance that only annuities can provide.

DOES YOUR RETIREMENT PROGRAM INCLUDE AN ANNUITY?

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Hindsight Shows: Three Days Have Mattered Most

Posted on December 7, 2011 by Kim Butler

HINDSIGHT SHOWS: Three Days Have Mattered Most (But which three?)

Math never lies, but sometimes you wonder what it says.Consider the following statistics, compiled by BTN Research:

Stat #1: – The S&P 500 is down 1.1% (total return) YTD through Friday 10/14/11. If you were out of the market for the 3 worst trading days of 2011, your YTD gain is +16.5%.

Stat #2: – The S&P 500 is down 1.1% (total return) YTD through Friday 10/14/11. If you were out of the market for the 3 best trading days of 2011, your YTD loss falls to 12.7%.

This data is the “80-20 Rule” on steroids. Instead of 80% of the results coming from 20% of the activity, the ratio is more like 98.5% to 1.5%. During the time frame mentioned, the stocks that comprise the S&P 500 index have been trading approximately 200 days. As an investor, if you had been prescient enough to determine which three of those days were the worst days to be invested, your portfolio could be significantly fatter right now – and you’d probably have your own TV show on MSNBC.

This stock market analysis appears to simultaneously support two diametrically opposed views of investing: market timing and buy-and-hold. On one hand, the data shows that, over time, a small number of days have an outsized impact on investment results. Having the framework or insight to determine which days are “special” could mean incredible profitability (or the avoidance of large losses). When viewed through the prism of “what could have been,” developing a model for market timing – stepping in and out of the market to maximize profits – seems a worthy pursuit.

On the other hand, this information also points to the difficulty in achieving the potential profits that are hypothetically possible with market timing. If avoiding three bad days would cause a significant increase in profitability, the downside is almost as great from missing the three good days. Since the future is unknown, any decision to get out of the market could be made on the very day when being in the market would be most beneficial. When just three days of staying invested would have cleared away almost 9 months of losses, how bad would it be to miss those three days? The buy-and-hold paradigm proposes that staying invested ensures you will always hit the good days, and there will be enough of them to overcome the bad ones. Historically, this approach has also been validated by the data. Over long holding periods, say 10 years or more, most stock indexes have shown positive gains that equaled or exceeded many other accumulation options.

But the efficacy of buy-and-hold is being challenged by two factors: the long-term results from the past decade (2001-2011) have not been as good, and increased volatility has made investors more skittish about riding out the bumps. An October 18, 2011, Wall Street Journal article by Tom Lauricella and Gregory Zuckerman reported that the Dow Industrial Average stock index rose or fell more than 1% in 14 of the past 19 trading days. These are significant swings, ones that have spooked many investors into stepping out of the market completely. Fewer investors in the stock market lead to fewer trades among shareholders, which also tends to exacerbate the fluctuations.

When the long-term trends aren’t favorable, and the short-term fluctuations are dramatic, many investors have decided they don’t have the stomach for the game – whether they use a timing approach or buy-and-hold. An October 21, 2011, Associated Press article noted that in four of the past five months, investors “scarred by volatility” have liquidated more than $20 billion from stock mutual funds.

But “playing it safe” may also have an opportunity cost – the potential gains that investors will miss by leaving the market. The AP article notes that the S&P 500 has produced losses in “only four out of 76 different 10-year periods since 1926.”

DO YOU HAVE A CLEARLY DEFINED STRATEGY FOR HANDLING MARKET VOLATILITY?

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Does Your Income Have “High Beta”?

Posted on December 2, 2011 by Kim Butler

DOES YOUR INCOME HAVE “HIGH BETA”?
(And if it does, what are you going to do about it?)

     Recently, the paradigm for a lot of financial discussions has been making distinctions between the 1 percent of Americans who earn the highest annual incomes and the other 99%. In some conversations, the 1 percent has been characterized as the “millionaires and billionaires,” with examples of huge salaries and additional compensation that are almost beyond comprehension, particularly when compared to the average American’s take-home pay.
     While these off-the-charts examples of annual income may seem outlandish and far out of proportion to the value of the products they produce or services they provide, this type of anecdotal information distorts the real picture of the top 1 percent that some call “the rich.”
     In a CNNMoney column by Tami Luhby published on October 20, 2011 (“Who are the 1 Percent?”), the annual adjusted gross income threshold for qualification in the top 1 percent is not a million dollars. It’s not even $500,000. According to the most current statistics from the Internal Revenue Service, anyone who earned more than $343,927 in 2009 was part of the top 1 percent. And while this number represents a significant annual income, the 1 percent threshold has actually declined 19% in the past two years. (see Fig. 1). In fact, you might say the rich are not getting richer.

Fig. 1


     If you make a visual comparison between the income graph in Fig. 1 and a graph of the performance of the S & P 500 stock index over the same time period, there are some interesting similarities. (See Fig. 2). And these similarities have led some financial commentators to interesting conclusions, not only about the income of the “1 Percenters,” but everyone else as well.

Fig. 2

Understanding Beta
     Financial analysts use a variety of mathematical metrics to evaluate the performance of individual stocks and indexes. One of these terms of evaluation is “beta,” the measure of a stock’s volatility in relation to a broader benchmark, usually an index. By definition, the benchmark index or market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the benchmark. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock’s beta is less than 1.0. Thus, if a stock has a beta of 2.0, it means its performance tends to be twice as volatile as the benchmark; if the index goes up 5%, the stock will increase 10%. The same proportional difference will also magnify losses – a 5% drop in an index would predictably result in a 10% loss for the high beta stock. Historically, high beta stocks are riskier but provide a potential for higher returns; low beta stocks pose less risk but also offer lower returns.

High Beta Incomes of the “1-Percenters”
     Robert Frank is a senior writer for the Wall Street Journal and author of an upcoming book titled “The High Beta Rich.” In an October 22, 2011, WSJ article adapted from his book, Frank reports some interesting findings about America’s high-income 1-Percenters:

     The American rich, who used to be the most stable slice of the personal economy, are now the most volatile, with escalating booms and busts.
During the past three recessions, the top 1% of earners (those making $380,000 or more in 2008) experienced the largest income shocks in percentage terms of any income group in the U.S., according to research from economists Jonathan A. Parker and Annette Vissing-Jorgensen at Northwestern University. When the economy grows, their incomes grow up to three times faster than the rest of the country’s. When the economy falls, their incomes fall two or three times as much.

     From statistical analysis, Frank says the beta for the top 1 percent of income earners was .72 for the 35-year period from 1947-1982, meaning their incomes moved generally in line with the overall economy, but with slightly less ups and downs. However, in the succeeding 25 years (1982-2007), the beta for these 1 Percenters has “soared more than three-fold, meaning the incomes of today’s rich have higher betas than many of the riskiest gambling stocks.”
     Why the sudden change in beta for the 1-Percenters? Frank says research from several sources points to a range of possibilities: technology and globalization (making businesses and industries more sensitive to changes in demand and economic conditions), rising debt levels (having less ability to withstand income changes), increased consumer consumption (resulting in lower saving levels), and greater “financialization,” which means high beta income and wealth is tied to the stock market, either in the form of compensation (such as stock options) or assets (shares of stock). This explains why the graph of the 1-Percenters’ income looks very much like the graph for the stock market.
     But whatever the cause, Frank sees the income volatility of 1 Percenters as having a significant trickle-down effect on everyone else:

     As go the high beta rich, so goes America. Their hyper-cycles will become our own, as the consumer economy, financial markets and tax revenues experience more rapid and extreme spikes and crashes.

Is Your Income “High Beta”?
     Even if your annual adjusted gross income doesn’t quite reach the 1 percent level, the issues of income beta are relevant. For example, how much has your household’s income increased or decreased in the past few years? Have there been significant income fluctuations due to a job loss, reduced work hours, or diminished bonuses? How has this affected your ability to maintain your lifestyle, or stay on track with your long-term financial objectives, such as retirement, saving for college, buying a vacation property, or leaving a financial legacy?
     If your income history is showing the same volatility as a high beta stock, it might also alter your long-term financial priorities. Much of the conventional retirement accumulation model is built on steady, predictable employment, i.e., you can afford regular contributions to a qualified retirement account because you have the expectation that your regular employment will provide enough to meet today’s living expenses. But what if you’re not sure about the source or amount of next year’s income?
     This uncertainty might compel you to consider building larger cash reserves, or wonder what you could do if you lost employer-sponsored insurance benefits. And if your future income seems less stable, perhaps it seems prudent to pursue less aggressive investment strategies, because how bad would it be to lose income and accumulation value at the same time?
     One of the underlying observations of Frank’s reporting is how much income fluctuation affects other aspects of individual, corporate and governmental finances. When incomes were stable, lenders were more liberal in their approval standards, and consumers felt more confident about buying, even if they had to borrow. Businesses could invest in new facilities and hire more workers, knowing people could afford their products and services. And municipalities could budget for infrastructure improvements and community services, knowing the tax base could support these items. But high beta fluctuations of income cause major disruptions in the ability to systematically plan for your financial future.
     If an assessment of your personal income situation finds you with a high beta, now is the perfect time to reassess both your financial strategies and your ability to carry them out. Income uncertainty doesn’t mean you can’t reach your objectives, but it may require you to take a different approach.

IF YOUR INCOME IS “HIGH BETA,” WHY NOT FIND SOME WAYS TO OFFSET THAT VOLATILITY IN OTHER PARTS OF YOUR FINANCIAL LIFE? A CONSULTATION WITH YOUR FINANCIAL PROFESSIONALS COULD UNCOVER EXCELLENT STRATEGIES TO BALANCE YOUR “HIGH BETAS”.

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FISCAL FITNESS: A New Option for Paying off Debt – Quickly and Permanently!

Posted on December 1, 2011 by KimButlerkp

“Debt is like any other trap, easy enough to get into, but hard enough to get out of.”
-Henry Wheeler Shaw

In the past, Partners for Prosperity, Inc. lacked a comprehensive resource to help people in paying off or settling their debts. However, through Partners 4 Fiscal Fitness, LLC  we are now proud to offer a new program called Fiscal Fitness™ (aka “The Fiscal Fitness Journey”™) to help people conquer debt quickly while establishing healthy financial habits. Much more than a “quick fix”, Fiscal Fitness™ gives clients a road map to build lasting prosperity!

Sometimes good people land in bad financial situations due to poor financial habits, or circumstances such as job loss, divorce, illness, death in the family, and so forth. They find themselves with seemingly unmanageable debt, sometimes accumulated over years, at other times, practically overnight, the result of a personal crisis or business loss:

A businessman who couldn’t get the funding he needed to complete an urgent business project when his business partner was hospitalized took out $200k in credit card draws on his excellent credit – right before his business partner died, the economy crashed, and sales went south.

Another man lost his accounting job and used credit cards to fill the gaps, assuming he would be employed again professionally within a matter of months. Five years later, he had only been able to obtain part-time and seasonal work. His credit cards were maxed out and delinquent, his retirement drained dry, and his gainfully employed wife had left for greener pastures.

A part-time real estate investor left her full-time managerial career to start a small business, confident that her $500k in real estate equity could be tapped in case of cash flow problems. But within 24 months, her properties had lost all equity in the market crash, her tenants couldn’t pay rent because of their own financial crises, and she lost her homes (including her own). And due to a re-occurrence of cancer, she also lost her health for a time (just after she lost her insurance), and was barely able to work. Meanwhile, creditors called daily to try to recoup some of the tens of thousands she had borrowed in the hopes that “things are going to turnaround any day now.”

Though the reasons and stories are many, these are not isolated cases. Debt has become an American epidemic. As of May 2011, US consumer debt totaled a whopping $2.43 trillion, according to creditcards.com.  177 million card credit card holders (over 70% of the population) report an average household credit card debt (per household with credit card debt) or $15,799. Bankruptcy filings are up a whopping 250% in the four short years from 2006 to 2010, with personal bankruptcies alone totaling over 1.5 million.

What options do people have when they find themselves deep in debt they cannot easily negotiate or pay off? Most options have large downsides:

While bankruptcy legally reduces or even erases debt, it also sullies credit ratings for many years to come, affecting people’s ability to buy a home, rent an apartment, purchase insurance, cars, or cell phones without high rates and fees, and – in some cases – even get a job.

Those with higher incomes (or homes in foreclosure they wish to keep) will be forced to do chapter 13 bankruptcy, which takes 3-5 years, requires partial or full payment of debts, and forces the borrower to live on a strict budget. Only about 35% of debtors complete their bankruptcies. The remainder default, and stand to lose homes and other assets to creditors.

Credit counseling programs offer some consumer education, but also negatively affect credit ratings, typically without the benefit of lowering balances. Interest rates and payments may only decline slightly, if at all, and most clients do not complete their programs. The fact that the agencies are generally paid by the creditors creates a conflict of interest when it comes time to negotiate for the borrower.

Debt consolidation may lower interest rates or payments when a borrower consolidates (or pays off) several smaller debts into one large loan. However, it does nothing to lower the balances owed. (Actually, they will owe more because hefty loan fees are usually added.) And if the borrower uses their home as collateral, they run the risk of losing it should they fall behind on payments.

Debt settlement companies earned a bad name for sometimes taking a borrower’s cash, whether or not they could help them. Some companies acted fraudulently, collecting money then disappearing, other times, borrowers were inappropriate candidates for the program and did not have sufficient income for paying off negotiated debts. (As in a chapter 13 bankruptcy, the debtor must have income over and above their basic necessities with which they can settle their debts).

However, the best debt settlement companies had a nearly 80% success rate, with borrowers often paying significantly less, getting out of debt faster, and recovering their credit ratings more quickly than with most other methods.

Fiscal Fitness™ took the best of what each strategy offers, and created a new program with the best interest of the consumer in mind. While it is not for everyone, Fiscal Fitness™ can help clients:

  • Get out of debt faster by reducing what they owe on consumer debt and even past-due utilities.
  • Find workable solutions with their creditors.
  • Get training and support to follow a budget and pay off debts.
  • Establish healthy financial habits to create lasting wealth.
  • Get quality one-on-one advice from a financial professional.
  • Protect their income and assets with appropriate insurance.
  • And, most importantly, get a fresh financial start… without a bankruptcy!

How it works: To help each client succeed on the Fiscal Fitness Journey™, they are given a support team who will walk them through the process of becoming permanently debt-free. First, a Counselor determines their suitability for the program. If they are a good fit, they will start work with a Financial Trainer who will help them reduce their debts, budget, save, and pay their creditors OFF. Meanwhile, a Creditor Workout Specialist advocates for them with their creditors. Fiscal Fitness™ clients also work with a Financial Coach, (one of our advisors) who can give appropriate financial advice, as well as help them with insurance and other financial products.

Founded in 2010, Partners 4 Fiscal Fitness, LLC is a licensed and incorporated subsidiary of Partners for Prosperity, Inc., created by Kim Butler of Partners for Prosperity, Inc. and Greg O’Connell, a veteran of what used to be known as the debt settlement industry. A happy accident, Greg met Kim while he was looking for a way to provide quality financial advice to individuals paying off debts, and Kim was looking for opportunities to expand Prosperity Economics™ to a broader audience.

Are you or someone you know fighting a losing battle with debt? Perhaps Fiscal Fitness™ can help! If your debts are $10,000 or more (there is no upper limit), and you would like to avoid bankruptcy, this new program could be your solution. Please refer to our website at FiscalFitnessJourney.com, or call 877-865-7111. We also offer an affiliate program for Fiscal Fitness™ if you are interested in earning money for client referrals. See Partners4Prosperity.com/affiliates for details.

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REQUIRED MINIMUM DISTRIBUTIONS

Posted on November 10, 2011 by Kim Butler

REQUIRED MINIMUM DISTRIBUTIONS: The distribution may be required, but what if you don’t want to spend it?

When Congress first began writing legislation for tax-favored retirement plans in the 1970s, some of the provisions were likely based more on projections (guesses) than historical precedent or experience. This seems particularly true of the required minimum distribution (RMD) regulations which mandate that a certain percentage of retirement account accumulations must be withdrawn after the account holder reaches age 70½ (unless, in the case of an employer plan, a rank-and-file employee continues to work after that age).
As qualified retirement accounts, IRAs, SEPs, 401(k)s and the like were specifically intended to provide retirement income. And considering the tax-deferral features on deposits and accumulations, the Federal government certainly has an ongoing interest in eventually “recovering” these tax-deferrals during distribution. But why age 70½? As life expectancy continues to increase and general good health extends later in life, many qualified retirement account holders age 70½ or older may still be working, and/or may not want or need to take distributions from their accounts. For these individuals, liquidation from a retirement account will result in additional taxable income, and the funding of a new, non-qualified accumulation vehicle. Both facets of this distribution process could benefit from some forethought and planning.
The first issue to address in required mandatory distributions is the resulting taxable event. The entire distribution from qualified retirement plans (except amount attributable to after-tax contributions) is treated as taxable – there is no distinction between principal and earnings. As such, this additional income, whether spent or not, is taxed at the individual’s highest marginal tax rate. For individuals who are currently receiving income from other sources (wages, passive income, dividends, etc.), this means distributions from qualified plans may actually end up being taxed at a rate greater than the tax-deferral that was received when the money was deposited. While the taxability of qualified plan distributions is unavoidable, some individuals may want to consider ways to either offset the current taxation, or minimize the impact of future taxes on the distributed funds. For example…
Suppose a $24,000 RMD is required. This means an additional $24,000 must be reported as income. When making a required mandatory distribution that is not intended to be spent, the individual has to find a new place to hold and/or invest the $24,000 (or $24,000 minus the taxes due). Where should the money go?
If the retirement account had been invested in a financial product that delivered good returns over the years, the individual might choose to place the money in a similar product with non-qualified status. But depending on the type of account and the assets held in it, the new account may be subject to taxes on interest earnings, dividends, and short- and long-term capital gains. These annual taxes create an ongoing, compounding opportunity cost for holding the investment. Especially if these assets are intended to be held long-term, and perhaps intended to be part of an inheritance, the compounding opportunity costs may make the non-qualified version of this financial vehicle less attractive.
On the other hand, there are some financial transactions that have tax advantages. If the distribution were used to make mortgage payments on a second home or investment property, some of the reportable income from the distribution might be offset by a deduction for the interest portion of the mortgage payments. Using the $24,000 cited above to make a mortgage payment of $2,000 each month might not only reduce the tax on the distribution, but also secure a nice piece of real estate.
If these distributed-but-not-spent retirement account assets are earmarked to be part of an inheritance or estate plan, the annual distributions could be used to fund a tax-deferred annuity or buy life insurance. These insurance products have tax advantages and contractual guarantees that many people find valuable in ensuring a legacy for heirs.

HAVE YOU CONSIDERED A PLAN FOR YOUR DISTRIBUTIONS?

Selected FAQs about RMDs from the IRS
The Internal Revenue Service website (www.irs.gov) has an extensive listing of the regulations for Required Minimum Distributions, as well as additional publications available for download. A brief reading of these regulations – and the penalties for improper distributions – should prompt you to seek expert assistance. Here are a few Frequently Asked Questions regarding RMDs, direct from the IRS:

What types of retirement plans require minimum distributions?
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

When is the deadline for receiving a RMD from an IRA?
An account owner must take the first RMD for the year in which he or she turns 70½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

How is the amount of the RMD calculated?
Generally, a RMD is calculated for each account by dividing the prior December 31st balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590, Individual Retirement Arrangements (IRAs). There are three separate tables:Uniform Lifetime Table is used by account owners who are unmarried or whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger; and
• The Single Life Expectancy Table is used by a beneficiary of an account.
• The Uniform Lifetime Table is used by account owners who are unmarried or whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger; and
• The Single Life Expectancy Table is used by a beneficiary of an account.

Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner, after calculating the total amount s/he needs to take from the aggregate balances in his/her IRAs, can take that amount in any portions s/he chooses, from any one or more of the accounts. However, RMDs required from other types of retirement plans, such as 401(k), 403(b) and 457(b) plans, have to be taken separately from each account (e.g., if a person has one 401(k) plan which is twice as large as another 401(k) plan, the RMD for the first will be twice that of the second, and if s/he takes less than the required amount from the first, s/he cannot “make up for it” by taking more from the second.

What happens if a person does not take a RMD by the required deadline?
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

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THE BEST RESOURCE FOR LIFE INSURANCE

Posted on November 10, 2011 by Kim Butler

      An ongoing philosophical debate in the financial services community is how financial professionals should be compensated, either by commissions or advisory fees. Both sides of the discussion raise some interesting issues. Those advocating a fee-based approach argue that the incentive of commissions for brokers and sales agents has the potential to cloud the assessment of any transaction. In contrast, those defending the commission-driven model assert there is greater incentive to actually implement and monitor financial transactions, while fee-based planners have little or no motivation to ensure that the customer actually follows through on the advice given.
Since both sides are fairly well-entrenched on philosophical grounds, it is perhaps surprising to read a practical, real-world perspective on how to obtain reliable financial advice, particularly in regard to life insurance.
Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” (www.efmoody.com). For more than two decades, Moody’s major interest has been “individual fee financial planning.” It is Moody’s contention that the best way to retain the services of financial professionals is by paying for their advice as opposed to buying their products – except when it comes to life insurance.
Moody’s exception is because he observes that many fee-based planners don’t seem to know much about life insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:

“…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”

Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 24 years, Moody has been a professor at the University of California, Berkeley and Irvine, taught classes for Professional Designations in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.)

“Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its [his/her] fiduciary obligation to a client.”

Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent.  Setting aside questions of compensation, the real issue is the financial professional’s knowledge of insurance, and ability to accurately transmit that information to the consumer, then deliver the appropriate products. Because of the variety and complexity of life insurance contracts, you need to work with someone who is immersed in the business. And the most likely “expert” is a life insurance agent, whether compensated by commissions or fees.

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MONETIZING HOME EQUITY WITH A REVERSE MORTGAGE

Posted on November 8, 2011 by Kim Butler

A typical method of monetizing real estate assets is taking a loan against the equity. But most monetizing strategies that involve conventional borrowing come with the obligation of regular scheduled repayments. A reverse mortgage is a unique monetization-by-borrowing agreement that offers flexible and deferred repayment options. Along with several other unique advantages, a reverse mortgage can be a very attractive asset for older individuals to monetize.
A reverse mortgage is a loan against the equity in a principal residence that provides you cash advances, but requires no mandatory monthly repayments during the life of the loan. Unlike a typical loan agreement, the cash flow is reversed – the bank is sending money to the homeowner, instead of the other way around. Hence, the “reverse” mortgage.
A reverse mortgage loan is not due and payable until the borrower ceases to occupy the home (i.e., the borrower sells, moves out permanently or passes away), at which time the balance of borrowed funds (including the accrued interest) is due. If there is any additional equity in the property, it remains with the homeowner or his/her beneficiaries. But while the house serves as collateral in a reverse mortgage, the lender has no recourse to demand additional repayment from any family member if there is not enough equity in the property to pay the loan in full; i.e., the borrower’s estate cannot be forced to pay the difference if the property’s value declines during the reverse mortgage.
Because the qualifications for entering into a reverse mortgage agreement are minimal, a reverse mortgage is one of the easiest monetizing strategies to execute. Applicants must be at least 62 years old, and the property in question must be the owner’s primary residence. The property does not have to be owned free and clear (although the reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds). There are no additional income, asset or credit requirements to qualify for a reverse mortgage.
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage monetization. The amount of reverse mortgage benefit available will depend on your age at the time you apply for the loan, the type of reverse mortgage program you choose, the value of your home, current interest rates, and in some cases, where you live.
The proceeds from a reverse mortgage are tax-free and, depending on the type of agreement, may be received as a lump sum, fixed monthly payments, a line of credit, or a combination of these options.
Coordinating a Reverse Mortgage to Maximize Your Financial “Big Picture”
From this general overview of reverse mortgages, it should be easy to see the attractiveness of reverse mortgages for older homeowners. For those with limited financial resources, a reverse mortgage monetizes what is often one their largest assets, which can provide either additional income or a greater measure of financial stability. Even those who don’t “need” to tap the equity in their principal residence may find reverse mortgages worthwhile, because of flexible terms, tax advantages, or the capability to maximize other financial objectives.
For example, the National Care Planning Council offers the following commentary on how a reverse mortgage might be used to enhance an estate plan (from www.longtermcarelink.net):

When tax-free monies from a reverse mortgage are used for the purpose of funding insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner.

A reverse mortgage can be an excellent monetization strategy for home equity, especially if the decision is part of a coordinated plan to maximize the value of other assets as well. Even if the property in question is considered a valuable inheritance asset, it may be possible to not only monetize the home under favorable terms today, but also ensure that it returns to the estate for future generations.
Note: This type of comprehensive planning is not a one-size-fits-all program. Tax, insurance and legal questions are best addressed by experienced professionals, and it is strongly recommended that you seek expert assistance when considering a reverse mortgage and any other related financial transactions. (In fact, FHA requires reverse mortgage borrowers to participate in a Credit Counseling session with an approved counselor early in the application process. When applicants complete this counseling, they receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.)

“The problem is that no matter what you think of insurance, past problems, future difficulties, etc., risk management still is a mandatory element of financial planning.”
- Errold Moody

IF YOU WANT TO MAXIMIZE YOUR ABILITY TO OPTIMIZE A REVERSE MORTGAGE IN THE FUTURE, LAY THE FOUNDATION TODAY BY REASSESSING OR RESTRUCTURING YOUR LONG-TERM PLANS.

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A “HIDDEN” MONETIZED ASSET: Your Human Life Value

Posted on October 27, 2011 by Kim Butler

      As a parent, spouse, employee, you have a unique human life value to others. While much of the value you bring into these relationships may not be financial, or even financially quantifiable, a life insurance policy allows you to monetize your human life value when you are no longer there in person. When you obtain life insurance, you have monetized yourself.
The group, Financial & Tax Fraud Education Associates, is a non-profit organization that operates a website (www.quatloos.com) devoted to exposing fraudulent business financial and taxation practices. In the middle of a commentary on the potential abuses in life settlements (agreements where a private investor buys an existing life insurance policy from the insured in exchange for becoming the beneficiary), are several interesting comments on the “hidden asset” of insurability.

(W)ealthy people have a hidden asset, which is their insurability. The [homeless person] at the bus station can’t qualify for $5 million in life insurance, but many affluent and nearly affluent Americans can. Whether buying a lot of insurance makes financial sense for a person depends on a lot of factors, including their age, health, and what the internal rate of return will be. But when it does make sense, wealthy people should be taking advantage of their large insurable interest by purchasing as much life insurance as they can reasonably afford so as to either pay estate taxes or to further grow their estate (income tax free) for their children.

This comment reflects the philosophy of coordinating the monetization of assets concept mentioned in the previous article. The author further states that monetizing one’s life is even worth borrowing for…

     If the wealthy people were really smart, they would simply buy as much life insurance as they could and hold it until their deaths. If they didn’t have the cash on hand to buy it, they could always use the services of many lenders who are willing to finance the premiums with the loans being paid out of the policy proceeds at death.

Most people might not think of borrowing to obtain life insurance, but borrowing is certainly a monetization strategy, and for some people, the benefit of monetizing their human life value/insurability may outweigh the cost of borrowing.

HAVE YOU MONETIZED YOUR GREATEST ASSET?

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CAN WE ‘MONETIZE’ IT

Posted on October 20, 2011 by Kim Butler

     In the Internet age, it’s easy for everyone to have a voice, but only a few people have figured out how to get paid for speaking. Those brilliant postings on politics, incisive critiques of entertainment, passionate rants about your favorite sports teams, or hilarious links to stupid human tricks may be great outlets for your creativity, but how much time can you devote to these activities if you’re not getting paid?
     This process of converting something (in this case, one’s blog content) into money is called monetization. Monetization strategies are an essential part of financial decision-making for both businesses and individuals because monetization makes valuable assets spendable. The writer of Ecclesiastes stated that “money answers all things,” because even ancient societies understood that money has a superlative advantage over all other assets because it could be used to buy almost anything. Thus, anytime value is created, a follow-up question almost immediately follows:  “Can we monetize it?”
     Monetization can be accomplished in an almost infinite number of ways, but all monetization is a variation on two basic transactions: selling or borrowing. Several examples:

  • An individual monetizes his time and abilities by selling them to an employer
    or customer.
  • A property owner could monetize a property by charging a fee for a parking space.
  • Businesses can monetize their value by selling bonds to provide cash for new opportunities. 
  • A shareholder monetizes her investment when she sells her stock certificates.
  • A homeowner monetizes a residence by taking a home equity loan.

     More creative instances of monetization might be: a recording artist recycling previously released material as a “greatest hits” album, or railroad companies selling their right-of-way privileges to fiber optic cable companies. (In regard to Internet blogs, there are a surprising number of ways to monetize a website venture, including charging members a fee for content or services, establishing a referral/partner network, selling e-mail lists and attracting advertisers.)

Consequences of Non-Monetized Assets
     The concept of monetization is simple, and this simplicity may lead us to overlook its importance. But when we have valuable assets that are not monetized, we begin to see how crucial monetization is to financial success. For example, retirement – the most prominent issue for many Americans – is really a monetization issue: i.e., “How do I turn the assets I have into an ongoing income?”  Consider the following instances where non-monetized assets may severely impact one’s financial options:

The Non-Monetized Business Owner
     A business owner has invested a lifetime of work to develop a going concern to provide wealth and security for his family. Suppose that in addition to delivering a high six-figure annual income, the business owns real assets such as land, buildings, equipment, and licenses valued at $5 million. 
     As age 70 approaches, the business owner realizes he may not want to continue working, or that his declining health may not allow him to. Yet, if he simply stops working tomorrow and closes the business, what happens to all the value he has created? The annual income stops, and although he still owns the real assets, they aren’t money – they aren’t liquid, they can’t be spent. It might be possible to sell the business assets piecemeal, but the money received will probably be far less than the value of the assets if the business were still in operation. If the owner doesn’t find a way to profitably monetize his business, he may be forced to continue working, or forfeit much of the material value he has developed.

The Non-Monetized Homeowner
     Thirty years ago, a couple found a great deal on a beach house in an exclusive area. Over the years, the property has been a sanctuary and gathering place for the couple, their children and grandchildren, a place of great times and wonderful memories. Even with the recent downturn in home prices, the beach home is valued far in excess of the initial purchase price. It is a prized family asset.
     But Mom and Dad are looking to retire, and while the beach house looks great on their balance sheet, the couple’s primary concern is income. The children would like to keep the property in the family, but don’t have the ability to monetize the house (i.e., buy it from the parents), so the prized family asset may have to be sold. 

The Non-Monetized Accumulation Plan
     Over her working lifetime, a book editor has acquired some interesting assets: The rights to a percentage of ongoing royalties from the works of several authors, as well as stock ownership in a privately held publishing company. While both of these assets provide a modest income stream (from book sales and dividends), the editor wants to relocate and needs a large down payment to invest in a condo development.
     Because of the unique nature of these assets, the editor’s assets cannot be easily liquidated like a publicly traded stock, bond or mutual fund. Even though they may have a history of profitability and provide some steady income, she faces a challenge in monetizing them for their total value.  

Optimal Retirement Planning: Coordinated Selling and Borrowing
     As you can see, non-monetized assets can be a detriment to fully maximizing your financial options, both now and in retirement. A conventional response within the financial services industry to this dilemma has been: If you are focused on retirement, don’t hold non-monetizeable assets!Instead, accumulate paper assets like stocks, bonds and mutual funds, ones that can be easily converted to cash. Simplify your planning by segregating your retirement into specific tax-favored vehicles like IRAs, 401(k)s, etc.
     But consider the examples above. Would the business owner think he was better off if he had not developed his business? Would the couple rather not have purchased the beach house? Should the editor have refused the royalty and ownership assets? No. These assets, while not fully monetized, are valuable. Rather than abandoning or ignoring these assets, a better approach is to find creative ways to combine and integrate both monetized and non-monetized assets, both now and in the future.
     Competent financial professionals can provide concepts and procedures to determine when and how to monetize assets, whether they should be sold, or what type of collateral they could provide if used for borrowing. This paradigm of asset coordination is the basis for business transfer strategies, such as buy-sell agreements and stock purchase plans. It’s also a key element in estate planning, determining which assets should be liquidated while others are preserved for heirs. And it’s also essential for individuals who want to maximize their lifestyle opportunities in retirement.
     Some of these monetization strategies may appear complex; they may require the establishment of separate legal entities (like a trust or corporation), contain special agreements, and include the repositioning of assets into new vehicles (such as annuities or life insurance). Evaluated as individual transactions, some might wonder if these items are necessary, and whether they are worth the cost. But the key is to evaluate the big picture for the benefits, because a coordinated plan is designed to deliver results greater than the sum of the individual pieces.
     For example, suppose that distributions from a simple accumulation plan containing $1 million project an annual income of $50,000. In comparison, suppose $100,000 of the $1 million was allocated to obtain a life insurance policy equal to an amount of $200,000 received in a reverse mortgage. When combined, the remaining accumulation and home equity can provide a greater retirement income, while the life insurance ensures the home equity due to the bank will be repaid, allowing the heirs to inherit the house. In this instance, coordinating three items (the accumulation account, home equity and life insurance) results in a better monetization of the home and greater income.       
     Personal discipline is probably the key element in acquiring assets. Anyone who develop their skills, works responsibly and lives within their means can save for retirement. But to fully realize – and enjoy – your efforts, you may want to consider working with professionals to help you fully monetize your financial potential. 

AS AN INDIVIDUAL…
     DOES YOUR FINANCIAL SITUATION INCLUDE NON-MONETIZED
     ASSETS? DO YOU HAVE A PLAN TO MONETIZE THEM?

IF YOU ARE A BUSINESS OWNER…
     DO YOU KNOW HOW YOU WILL YOU MONETIZE THE VALUE OF YOUR
     BUSINESS IN THE FUTURE?

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