The Social Security Dilemma: Take it Now, Or Wait? – Part 2

Should we take our Social Security benefits at “Full Retirement Age” (FRA), or wait?  The Social Security Administration (SSA) will add 8% every year from your FRA to age 70.

We present an option, for those who qualify, to enhance later income, create consistent growth of asset(s), and add risk management through the use of Whole Life insurance.  The insurance provides growth guarantees and liquidity of “living benefits”, funded by those Social Security payments.  There is also the opportunity to include Long-Term Care in the design.

In the first part of our presentation on the Social Security Dilemma, we suggested that the breadwinner (or older) member of the family take the SS payments at Full Retirement Age (FRA).  Assuming the cash is not necessary for immediate living expenses, use that to purchase a “10-pay” Whole Life insurance policy.  That will create 1) protection through the death benefit (DB), 2) added eventual income through the build-up of growing cash value (CV), 3) Possibility of Long-Term Care support, and 4) flexibility in the use of any or all of these benefits, or optionality overall.

What do we do with a spouse who might have a Social Security benefit coming as well?

Well, if the spouse is younger than FRA, but 62 or older, that spouse can take the SS income, discounted for each year before FRA, and purchase the Whole Life insurance.  Of course, the size of the policy would be in line with the SS payments.  If the spouse is FRA or older, and has been waiting for age 70 (for higher dollars), again, purchase Whole Life and expand options!

The policy would be a “10-pay”; premiums for 10 years only.  After that, the policy is fully paid-for, and will continue to grow.  The social security income would then be channeled to the spouse or family, and additional income could be taken from the policy as well.

Why would that approach make sense?  The benefits gained would be the same as the breadwinner’s; that is, protection (DB), eventual income, and flexibility.  Qualifying for life insurance is easier, the younger and healthier you are when applying.  The younger you are when purchasing the policy, the more efficient the policy is in growing value for the future. 

One more thing, even if a bit dark: if one spouse dies, the survivor will receive (at the appropriate time) the higher of the two social security benefits; not both.  Taking the second income (before any death) assures more financial certainty; at least some is taken from that second pocket before any potential stoppage.

Take both incomes sooner rather than later?

Maybe this is a bit of a gamble, but it is also a hedge…a way to ensure that the long-term plan for your later years grabs as many benefits as possible, as soon as available, as long as the approach makes sense in your situation.

In summary, if the Social Security income is not immediately necessary to pay bills, and you are (or soon will be) of the age where you can grab that income, there is an option.  You can take social security income to create insurance protection for the family, to create a growing cash balance (through the whole life policy), to create additional future income, in addition to the social security check, and most of all, flexibility.

Whole Life (of a specific structure) lends itself to this approach.  Indexed Universal Life insurance does not.  IUL relies on the stock market, and therefore leans on the inherent volatility while costs increase.  We view that as a poor way to exist in the “golden years”.  Whole Life, with guarantees, would provide more relaxed comfort.

Here is a link to The Social Security Dilemma: Take it Now, Or Wait? (Part 1):

http://ifihadknown.com

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The Social Security Dilemma: Take it Now, Or Wait?

Should we take our Social Security benefits at “Full Retirement Age” (FRA), or wait?  The Social Security Administration (SSA) will add 8% every year from your FRA to age 70.

We present an option, for those who qualify, to enhance later income, create consistent growth of asset(s), and add risk management through the use of Whole Life insurance.  The insurance provides growth guarantees and liquidity of “living benefits”, funded by those Social Security payments.  There is also the opportunity to include Long-Term Care in the design.

I was speaking with a colleague who was trying to make a decision on taking his Social Security income in March, when he reached his FRA.  He was very uncomfortable with the state of affairs in Washington, but did not need the money immediately.

Regarding Social Security: Some of us believe it’s increasingly under-funded and in trouble.  Some of us believe it will survive the political rhetoric and pressures we hear about.  Either way, as we are employed and earning, we pay into the system in order to collect an income later in life.

If there was a way to create your own private retirement program utilizing Social Security funding (at least partially), would you be interested?  Would it be better if we added features and options?

It would be nice to create a reliable replacement, wouldn’t it?  We can’t do that since law requires contribution to the plan through employment.  Partial is the best we can do.  The concept of even that, “partial”, is comforting to me; I’m not a fan of “privatizing” Social Security, and I hear that noise from political circles frequently enough to make me queasy.

For many Baby Boomers, the choice of when to take Social Security income is a current challenge.  The decision is typically based on 1) need, or 2) life expectancy. 

Here we present a case study of a man born on February 4th, 1951…66 years old in early 2017.    (In the case of those born between 1943 – 1954, FRA is 66).

Based on his income history, the SSA will provide a monthly income of ~$2500 if this man chooses to elect receipt of income “now”, at his FRA; this is ~$30,000 per year for life.

If he waits one year, to age 67, the monthly income would grow to ~$2500 + 8% = ~$2700, or ~$32,400 per year. Waiting to age 68 would provide another $200, to ~$2900, or ~$34,800/yr., to age 69 would be ~$37,200, and finally, to age 70, ~$39,600.

Again, if income starts at age 66, that income would be ~$30,000 per year, and at age 70, ~$39,600; a difference of $9,600.

Here is the option he chose:

Our man will purchase Whole Life insurance (from a mutual company) with the ~$2500 monthly income. This is ~$30,000 per year for each of 10 years (a “10-pay” policy). After 10 years, the $30,000 will still be paid by the SSA, but he will have that income free of any premium requirement. He is including a Long-Term Care rider in the policy at a (built-in) nominal cost.

This is only one company, and the results will certainly vary from one company to another. Additionally, not everyone will qualify for a policy possibly due to health concerns.  We are rounding figures for ease of explanation.

The policy structure is designed for 10 premiums (“10-pay”), and at “standard” health rating; projections show the following benefits: 

                                                       @ one year                @ 10 years              @ age 90

Cash Value (CV)                         $10,219                       $276,767                 $533,114

Death Benefit (DB)                    $324,007                    $393,057                $612,987

Long-Term Care rider (LTC)   $6075 benefit/mo. for 48mo. (to start)*

Of course, these numbers can vary, and be impacted by “use”.

* Premium for LTC, for 10 years, is $65.63/month (built-in), with the possibility for an increase to $131.26 only during that 10-year period.

Now, income (from the policy) starting in the 11th year (and running to age 101) is projected to be ~$18,000/yr.

In summary:

Social Security income is directed to a “non-direct recognition” Whole Life policy for 10 years.  There are guarantees in the policy regarding CV and DB, with the CV guaranteed to grow for the life of the policy. There is flexibility in any use of that CV.  We do not use any form of Universal Life (UL); that would add risk to policy-growth results.

The policy can provide additional income (~$18,000/yr) from age 77 to age 100, at current numbers.

The policy can be used for LTC from day one.

The policy will have a DB, and can be used in the traditional approach to estate planning, legacy, and/or protecting a beneficiary. This DB is a feature not found in the SSA program.  Yes, there is a hand-off to a surviving spouse, but only that.

What if the policy’s insured dies within the first 10 years and leaves a spouse? Social Security would no longer be directed to the policy’s premiums, but the Social Security will continue to the spouse (assuming the deceased was the “breadwinner”)!  The policy would pay the DB to be used as necessary.

We have added flexibility, possible income, protection, and options.  If you can afford to wait on the SS income, doesn’t this make sense?

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What Will You Do If Your Pension Fund Isn’t There For You?

Drained pension fund has retired New York union workers pinching pennies to survive, as doom looms for reserves across U.S.*

-New York Daily News, Sunday, February 26, 2017 (link to article below)

     A “private pension plan”, instead of, or in combination with, your provided plan      might make sense…

This is a very serious situation – not in its singularity, but commonality.  We, as a society, experienced a fantastic unprecedented growth period in our securities markets, and in our capitalist system for roughly twenty years, 1980 – 2000…“The Roaring Twenty”.

During that period, it seemed the rise in the stock markets would never end.  It seemed we were on our way to financial nirvana.  Corporations viewed record sales, year after year, as a signal to increase capacity.  Individuals viewed it all as a reason to get that boat, buy that second home, expand…  And municipalities, unions, states, the various government bodies made promises based on the same mindset.

This expansion of capacity (with resultant leverage) created a “bloated infrastructure”.

Promises that were made were often in the form of future pensions.  Why would that be a problem?

“Arithmetic Average, Straight-Line Projections”.  

A basic pension fund approach to financing future liabilities (pensions) works like this: Money is invested, and every year, even as more cash is added, an actuary must sign off on the amount of growth in those investments as it must meet expectations.  

In other words, if the money in the pension fund is expected to be $XX dollars at that time, the actuary must see that amount (or more).  If there is a shortfall, the pension fund manager, owner, etc. must add $$ to get to the required amount.  

The key to this is:  How did the fund determine, prior to all of this, what that amount would be in future years?

The Roaring Twenty had incredible growth, with limited volatility in comparison to the volatility we’ve experienced since 2000.  During that 20-year period, we became accustomed to hearing “10% gains” or more…it became “normal” to assume that kind of success and growth would continue.  

In negotiating future pensions, promises were made utilizing “average growth” from that period in history (at least partly) and extrapolating that into future numbers with “Straight-Line Projections”.

Do you have memory of hearing that some union (in years past), negotiating for benefits, managed to get a promise of 7% increases in pensions, or funding?  That seems a common number…  The fund would expect annual growth of 7%, and needed that (or more) to meet future retirement liabilities.

Whatever the number promised, volatility was largely ignored.  People tend to hear “average” and assume that means an average of gains/losses, over time, are the same as consistent numbers.  Therein lies a large part of the problem.** (link to more complete explanation below).

If the manager (with a municipality as an example) is not accustomed to crunching performance numbers, and thinks “Well, we have to see a 7% gain to make our bogey, but there was no gain this year.  That means we have to see 14% next year, to get an average 7%”.  That is incorrect…it means that in year two, you have to see a gain of 14.49%, and if there is no gain in year two, a gain of 22.5%, not 21%, in the next; compounding is required! That’s still just addressing average “changes”, not “actual returns”.  ** (please read the explanation, link below)

The volatility we’ve experienced in the stock markets since 2000 has created enormous gaps in the results for many funds.  The fund has to recover from any drops, and has to pay out (retirement liabilities) even when the markets go down, thereby adding to the obstacles in recovery.  A decreasing employee membership would certainly exacerbate the problem.

Oh, and we haven’t seen an average of 7% annual growth in the stock markets since 2000, either.  If we had, as of the end of 2016, the Dow average would have been above 33,000, and the S&P would have exceeded 3,800.  As of the end of 2016, they were 19,762 and 2,238 respectively.

What does all of this mean?

1) This isn’t a positive for the economy as consumerism/spending has to be effected. It certainly isn’t good for the retirees in question.

2) Expect more of these articles; there are many pension funds in, or near, trouble.

3) Investigate your own pension structure.  If you have someone/something controlling it, what are the promises, how are they being met?

4) You should examine your own approach to retirement planning.  Have you been using “straight-line projections”, based on historic averages to create your expectations?  If you are invested in an inherently volatile series of instruments (i.e. stocks and mutual funds), be certain you aren’t just hearing “the average returns are…” in your determination of success to date.  Do the work to see where you are.

Look for a consistent-earnings/growth vehicle; try to avoid volatility.  Whole Life insurance could make sense for those that qualify, and understand the structure.

Consider the concept of a “private pension”.  Ensure that what you use, and how it performs, provides additional consistency in comparison to the stock market. If your only approach is to use 401(k)’s and IRA’s, you have work to do.

http://www.nydailynews.com/new-york/n-y-retirees-struggle-survive-pension-fund-bottoms-article-1.2982399

Drained pension fund has retired New York union workers …

www.nydailynews.com

In the backseat of his car, Tim Chmil stashes what he refers to as his new retirement fund — bags and bags of recyclable bottles and cans.

**  http://ifihadknown.com/arithmetic-averages-deceiving-and-matters-you

8% isn’t always 8%…in fact, rarely! Arithmetic Averages …

ifihadknown.com

“Arithmetic Average” and “Straight-Line Projections” — frequently applied to investment gains, losses and marketing by Wall Street investment advisors.

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I Came In For A Long-Term Care Insurance Policy But You Said…

How do we address LTC insurance when the over-arching concern is retirement funding?
Recently we had the pleasure of meeting with a couple, aged 65 and 53, regarding a Long-Term Care insurance policy (LTC).  Like many others in their age group, they were addressing concerns about the possible cost of care if a chronic illness arose in the future; the effect on the family and other spouse could be devastating.
We discussed the structure, benefits and costs of the LTC, and then affordability.  That point, affordability, is very personal.  There is always an over-arching concern as to the costs of retirement.
Statistically, there is certainly a likelihood that, if you live a long life, you will need some form of care.  Yes, it can be very expensive.
But, for most people, LTC is a tangential, in-the-moment concern.  Is it important?  Absolutely.
Again, the real underlying concern for most of us is “do we have enough for retirement?”
After that, we think “what if we spend that money on LTC premiums and don’t use the policy?”  “Do we take the risk of not needing it and, in reality, self-insure?”  And “how do we make sure the money we have does what we need it to do?”
Over the last few years, several insurance companies have developed LTC “riders” that can be added to new Life Insurance policies.  In that creation of these “Hybrids”, an opportunity was created for us: to take a holistic approach.
We have the potential for efficient use of the cash in and from a life insurance policy.
For our money, we can take advantage of (at least) “guaranteed returns”, fairly consistent growth, liquidity, tax benefits, LTC (if needed) from day one, and all without stock market volatility.  Could this enhance and possibly both finance and secure retirement?  Yes.
The couple referenced here ultimately purchased Whole Life Insurance policies through a re-allocation of savings.  They, of course, had concerns about stock market performance long-term and this approach fit rather well for them as a centerpiece of their portfolio.
Over the course of the last two years, almost every client who initially asked about traditional LTC policies has seen the value of Whole Life with the LTC rider, and has applied for that policy.
P.S.  There is a great deal of aggressive marketing of hybrid policies utilizing some form of Universal Life insurance (UL or VUL or IUL).  We refuse to use any form of UL; take a look here for an explanation:
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Life Insurance with Long-Term Care for an 18 year-old?

Yes, a college freshman has just applied for a life insurance policy with a Long-Term Care rider, a second rider to ensure continued premium payments in the case of total disability (thereby ensuring cash growth) and another rider to provide additional insurance later, if desired.

More accurately, a parent is purchasing the policy for the freshman.  Why?

The conventional, or “normal” approach to financial well-being isn’t as robust as was the case in the past.

This is not just any policy… it is a Whole Life policy; a specially designed whole life policy, from a Mutual life insurance company.  It will provide savings (and growth) for retirement, a home down-payment, auto purchase, and much more as well as tax benefits.

It can and will work in conjunction with, or as an alternative to, the 401(k) that many others will use.  As a savings/growth vehicle, it is consistent, and competitive.  It will perform in a financial portfolio very efficiently.

And, yes, it will help to protect the freshman’s possible family in the future. 

The annual premium for an 18 year old is very low, as you might imagine. By the time the freshman reaches retirement age, that will be a very healthy and robust policy, and will prove quite useful along the way.

It’s now “normal” for people to purchase life insurance only to protect the family. 

It’s now “normal” to save for retirement through a 401(k) or IRA.

It’s now “normal” for people to start thinking about LTC when in their 50’s or 60’s. 

It’s now “normal” to ignore, or even disparage the use of Whole Life insurance due to myths and lack of insight. 

We’re not concerned about what is now “normal”.  In light of the economic environment since 2000, we believe in a “new normal”; one that has been used and proven successful for over 100 years!

Purchasing Whole Life from a “Mutual” insurance company gives the policy owner participation in the business model of the company; that is, an established, conservative, regulated, and relatively consistent business…with little-to-no stock market exposure.  Imagine participating in a solid company, growing your assets, at a good rate, without fear of the volatility of the stock market!

Accessing the cash in the policy is as easy as a phone call or letter, at any time in the owner’s life.  Imagine guaranteed cash growth, at a minimum, with tax benefits!

Should parents, grandparents, and even young adults consider this approach?  We think so. 

And, we do not use any form of Universal Life insurance.  None.  An explanation:

http://ifihadknown.com/2016/05

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“6 Must-Do Annual Financial Review Items for Your Well-Being”

Wish to make God laugh? Tell him your plans…

Our lives change quite unexpectedly, don’t they? That’s why life, auto, and other forms of insurance exist.

Our financial well-being often depends on occasional updates.

What we set up in the past, for the future, might need a tweak or an overhaul as the years go by.

Here is a minimal list of annual financial items to review for you and your family:

  1. Ensure that a complete list of assets, accounts, insurance policies, and important documents (with locations) is available and that a family member or “Trusted Party” is familiar with the location. Do not assume anything; be clear and concise. Think medical emergency or worse.
  2. Confirm that all family documents such as Will, Living Will, Health Care Proxy, and Power of Attorney (POA) are up to date. Have children or a special-needs dependent? Pay particular attention to any “guardianship” designation.
  3. Update beneficiary designations on all assets, accounts, and policies. Over 20% of life insurance benefits are paid to unintended beneficiaries! Think divorce, pre-deceased, change of heart, etc.
  4. Have an insurance “audit” performed on all of your policies; ensure that they fit your current situation. Special Note: If there is a change in home occupancy due to age-related or actually any issues, follow up with appropriate insurance coverage.
  5. Review and ensure the accuracy of your social security status. https://www.ssa.gov/myaccount/
  6. Check for “Unclaimed Property” with all states in which you (and family members) have resided. You’ll likely be shocked at the funds held for someone in your family. The states will not hunt for you. https://www.unclaimed.org/

As the saying goes, “Those who fail to plan, plan to fail”. Keep this in mind, especially as the new year approaches so you can be on top of all annual financial items that are imperative to your future well-being.

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What’s Wrong With Universal Life Insurance?

What’s Wrong With Universal Life Insurance?

Universal Life (UL), Variable UL (VUL), Indexed UL (IUL), Equity Indexed UL (EIUL)

First, key points:

  • UL, VUL, IUL, EIUL are all risk-inherent and not suitable as a retirement supplement or LTC vehicle if an assurance of financial well-being is important to you.
  • Universal Life Insurance (UL) was created in 1978.
  • UL was created to take advantage of the tax code, a growing stock market, high interest rates.  That environment has changed dramatically since 2000.
  • UL, VUL, IUL, EIUL all put the risk of “success” or failure, or cash growth, on the policy owner.
  • The “chassis” for all UL’s is based on one-year term policies, and carries an ever-increasing internal cost.
  • If the cash growth is not sufficient to cover (or mask) the increasing (underlying) cost, without additional cash infusion, the policy can lapse.
  • Projections of cash growth use “straight-line projections” resulting in off-base predictions. Marketing, using these straight-line projections, ignores impact of “arithmetic averages”, volatility, and sequence of returns.
  • If, in later years, there is no cash value (a common situation), a missed or forgotten premium will lapse a policy, guarantees notwithstanding.
  • UL, VUL, IUL, EIUL are all risk-inherent and not suitable as a retirement supplement or LTC vehicle if an assurance of financial well-being is important to you.  (Yes, I’m repeating…)

____________________________________________________________________________

Over the years, I have met with several people who owned Universal Life (UL) policies; they had been notified by their insurance company that additional premiums were required in order to maintain the policy; the alternative would be a policy “lapse”.

A sampling of real experiences:

In 1986, a young woman bought a UL policy with a $95,000 death benefit.  She paid her “target” premium, monthly, for 25 years.  In July, 2011, she received a letter from the insurance carrier requesting a check for $83,412, the sum necessary to prevent her policy from lapsing.

In 2014, a retiree (aged 82) received a letter from his insurance company requesting a check (mid-year) for $6,000, an amount above and beyond the $6,000 he paid annually since the policy’s issuance in 1992.  When the company was queried as to the amount that would be necessary to ensure the policy’s continuance to age 100, the response was $22,100 per year going forward.

Here’s a hypothetical: an 87 year old man has a universal life policy. There is no longer any cash in the policy, as it has not performed up to expectations. He is now alone in the world; no immediate living relatives. He forgets to pay the premium.  POOF! The policy evaporates/lapses!  (If there was cash, it might have covered the missed premium).

Now, no life insurance.  No one around him knows he had a policy.  Is this possible?  Yes.  Has it happened?  Bank on it.  Current industry marketing encourages attaching Long-Term Care riders to these universal policies. In this example, both would disappear.

Yes, insurance companies will provide a grace period to re-establish the policy…but someone has to go to bat for the client.  Remember, he “forgot”, and he’s alone.

Back in the first half of the 20th Century, life insurance (in a form similar to today’s Whole Life…not universal life) was used as a savings and investment vehicle, as well as a risk management tool. If you, the insured, died, your beneficiary would, of course, receive the proceeds of the death benefit.  If you lived, you could use the (cash) value of the policy to provide for your retirement expenses. 

That use of “living benefits” continues today and has been going on for well over 100 years. 

To be clear, UL and Whole Life Insurance are two very different structures of insurance.  Unlike Whole Life, Universal Life shifts the risk from the insurer to the insured.

So, what is UL, and where did UL come from?

It was in the late 1970’s when Jack Barger (at EF Hutton, a Wall Street firm) created universal life.  The concept? To take advantage of the tax laws regarding life insurance. The law said that any cash value (CV) increasing inside a policy, did so tax-deferred. Well, those were the days when the stock markets were strengthening after “May Day” (May 1, 1975); the SEC had mandated the deregulation of brokerage commissions.

Another factor in the rise of the stock market was The Revenue Act of 1978; this created the opportunity for 401(k)’s, which went into action in 1980.

Universal life policies were designed to take advantage of the tax code, a growing and strengthening stock market, and reasonably high interest rates. With UL, the insurance company was able to invest a part of premiums paid and provide a “crediting rate” (interest on the policy’s cash value) as an inducement to purchase policies.  This structure was the original and is still sold.

In (or about) 1986, variable universal policies (VUL) were getting started. Here, the part of premium that was to be applied to growth was positioned to invest in “sub-accounts” (similar to mutual funds) and thereby directly tied to the markets. Your success (or failure) was market related.

It was around 2000 when indexed universal life (IUL or EIUL) reared its ugly head. These were structured to benefit from (what seemed to be) the ever-climbing stock indexes.

The period 1980 – 2000, “The Roaring Twenty”, saw the stock markets grow like never before in our financial history.  The UL’s were designed for that environment.  That dynamic growth has all but disappeared.

http://ifihadknown.com/magic-1980-2000

Unfortunately, in 2000, the “Tech Bubble” burst.  The stock markets went down in 2000 and 2001.  Subsequent years have seen enormous volatility in the stock markets.  The performance of the policies largely suffered as a result.  Volatility continues to be a real concern.

Is there an additional key point here?  Yes…underlying cost.

Universal life is sold with the idea that the policy’s cash value will grow with the markets, and the  CV growth will be tax-deferred.  And flexible premiums!  Who wouldn’t like that?

Here’s the problem: Back in 1978, Jack created these with a “chassis” consisting of annually-renewable term insurance.

Wait…what?

Consider that a premium payment covers two requirements:  1) cost of insurance (death benefit) and 2) cash infusion for growth.

In order to cover the company’s risk and cost of death claim, with UL, the company builds-in a string of one-year term policies; this is what the first portion of the premium covers.

We know that term insurance gets more expensive as we age.  The chassis for universal life has an ever-increasing-cost chassis.  And?  Well, as the insured ages, a growing portion of that premium is required to cover that growing cost of insurance, and less of that premium will go toward CV growth.

So, if the cash growth is not sufficient (long-term) to cover or mask the increasing (underlying) cost, the insurance carrier can (and, in today’s volatile marketplace often does) call for additional premiums to maintain the policy, or the policy can “evaporate”! 

Jack’s structure was acceptable during the “The Roaring Twenty”, when the policies grew with the markets. Since 2000, not so much.

So, why does an “illustration” of these policies look so attractive?

Today, (variable and indexed) universal life policies are marketed as very attractive due to the potential for stock market participation, in the form of cash value (CV).  But, that is only the revenue (or cash-growth) side:

Again, if the cash value (CV) does not grow sufficiently to overwhelm the increasing cost of the policy, the policy can lapse or require increasing premium payments to insure continuity of the policy.

But the numbers look good!  Why?

The marketing of these policies is typically done using “straight-line projections”, without explanation of “Arithmetic Averages”, volatility, and sequence of returns.  The results?  Projections can be (and usually are) wildly off-base. 

A full explanation can be viewed following the link below, but, in summary, the actual “ups and downs” of the stock market will change results from projections; “straight-line projections” ignores those changes.

http://ifihadknown.com/arithmetic-averages-deceiving-and-matters-you

The phrase “real returns” is extremely important, but generally ignored.  Any time there is performance related to a securities market, “real returns” are essential to determining reality of projections and results.

Remember, VUL and IUL policies’  cash-growth performance is related to the stock markets; this carries and relies on inherent volatility.

One more point: the concept of “loans” from the policy before or in retirement can also jeopardize the longevity of these UL policies as the policies are likely already (and increasingly) cash-thin.

The marketing of these policies often neglects a full explanation of the underlying cost of insurance (remember the annually-renewable term chassis?).  It might also neglect the fact that due to the frequent lack of real cash accumulation, if you miss a premium, you could lose the policy, “guaranteed” death benefit notwithstanding.

Clearly this is a complicated topic.  That does not, however, excuse the consumer from doing his/her homework.  The potential negative results can be devastating to a family’s financial well-being.  UL owners are strongly urged to get an “in-force illustration” from their insurance company to determine the level of performance to date, and to see how long their policy is likely to last. Oh, and this should be done annually.

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Regarding your finances…If you had it to do over, what would you do differently?

What would you tell your children, your grandchildren to do? What do you wish someone had convinced you to do?

by L N Himel

It’s been my experience that, generally, the young

a) feel immortal

b) need to experience for themselves (don’t listen to others)

c) feel they “have time”

Yes, that was me…

Even with those points, if you were able to travel back in time, and give yourself advice, what would that advice be?

Maybe these?

a) Start your saving and investing right away.

b) Live below your means.

c) Get Life Insurance when the kids arrive.

d) Be good to your knees. (Okay, that’s a little off-topic)

 

Not long ago, there was a period that I’ve dubbed “The Roaring Twenty”, 1980 – 2000.  During those twenty years, the stock markets went up more than at any other time in history, and it seemed that the climb would never end.  We came out of that period to face high volatility and for the last 15 years, most of us have been waiting for what became “normal”, to return.  Normal, in this sense, is almost 14% annual gains, year-over-year, that we experienced back in The Roaring Twenty.

 

That period of financial nirvana allowed us to accept (and internalize) truisms such as “buy term and invest the difference”.  We accepted the idea that risk (as evidenced in volatility) is inherent in the financial markets, and therefore unavoidable in our quest for, and maintenance of, retirement funds.  Here is a list of some financial truisms that we’ve all heard:

 

            The stock market always goes up over time.

            Just put your money in your 401(k); you’ll be fine.

            But my average return is…

            If I go up 10%, and down 10%, I’m even.

            Mutual Funds provide diversification.

            When bonds go up, stocks go down (& vice-versa).

            For greater returns, you must take more risk.

            Pay off the mortgage, extra payment-by-extra payment. You’ll save…

            Pay cash; all debt is bad.

            You have kids?  529!

            Buy term and invest the difference.

 

It’s time to get past all of that. These truisms, and more, can be ripped apart for their misdirection or lack of validity.

The last 15 years should, by now, convince naysayers that stock market climbs of almost 14% (year-over-year) is not normal, nor was it before 1980. It’s time to get beyond the “infrastructure fees” that (during that period) were built into mutual funds, hedge funds, etc. and go to a more reasonable finance period…with more reasonable expectations.

Incorporating the information above, here is my advice to a young me:

1)  Question the conventional wisdom

Does the stock market always go up over time? And if so, how much? What if it’s not in a straight line? How is it possible that industry-stated returns (percentages) result in distinctly different dollars for me, and distinctly less success than I expected?

2)  Don’t look to peers for advice

Peers (your contemporaries) are just as new to the arena as you. Learn to trust in experience and wisdom, if you can find it.  At least investigate…

3) Ignore the “my broker is so good…” testimonials

For every “it went up…” story, there are many untold “the losses were…” stories.

4)  If your advisor, upon you experiencing significant investment losses, says “don’t worry, you have time!”, get a new advisor

5)  If you’re pushed to use “age-based investing”, get a new advisor

The acceptance of risk with inevitable unexpected losses (in various years), with “time will save you…” is unacceptable. See #4.

6)  Question any use of the conventional (risk-oriented) investment portfolio during retirement

The financial industry has us accustomed to accepting volatility as price-to-pay for ultimate returns. Also, most advisors have us accepting the use of (at least some) risk in retirement when we cannot recover from losses through continued earnings/contribution. See #4.

7)  Don’t ignore or neglect tested, proven and traditional financial vehicles

Whole Life insurance, CD’s, savings bonds, etc. have their place.

8)  If you must invest, invest only in things/companies/ideas you believe in, and can investigate

Do not hang your future on “baskets” of securities.  There are fees, countervailing forces, etc. in mutual funds, and similar obstacles to success in many other instruments.  If you believe in IBM, buy IBM stock, and then pay attention.

9)  Buy Whole Life insurance (of a specific nature), and keep buying whenever you find the resources to do so

It’s unfortunate that it’s called Life Insurance; it has unbeatable living benefits…. This is a very traditional method for growing your assets for college funding, retirement, etc. It does not fall into the current conventional wisdom for asset growth; it does, however, precede and predate that current conventional wisdom by over 100 years.

10)  Do not wait to ensure that your later years (and those of your loved ones) are protected

Long-Term Care is, or should be, a growing concern. We are living longer but not getting healthier as we age.

 

Additionally, Here are The Rules Of Personal Finance

1) Start

“The best time to plant a tree was 20 years ago. The second best time is now”

                        – Chinese Proverb

2) Seek, But Question, Advice

3) Do Not Assume Newer Products Are Better

Assume marketing on newer products is better

4) Demand Continuity From Your Vehicle/System Of Choice

Volatility can prove to be a huge negative

5) Laugh At Averages

Arithmetic Averages will mislead            http://ifihadknown.com/2015/04

6) Learn From Others’ Experience

Learn from your experience, smart. Learn from others’ experience, brilliant! And less painful.

7) Determine Who You Are

Based on the course you take, how well will you sleep at night?

8) Question “Risk”

Is it to your advantage to take risk?  Or to your advisor’s?

9) Review At Least Annually

Things change; life changes. Be flexible.

10) Share Details With Those Involved For Their (And Your) Protection

Forgotten assets can, and will, disappear.

 

And, as for that Mortgage pre-payment thing?

Your Home Mortgage Is A Form Of Disability Income Insurance! Why Pre-Pay?

 

Does any of this resonate with you? Maybe it’s not too late.

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Your Home Mortgage Is A Form Of Disability Income Insurance! Why Pre-Pay?

On pre-paying your mortgage, bit-by-bit. You might agree it’s not a good idea!

A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain. 

          -Attributed to Mark Twain

When you obtain a mortgage from any lender (notably banks), you will often receive “the letter”.

What is “the letter”?  It states:

“Congratulations on the financing of your home, and welcome aboard as a client of our bank.  We have a suggestion to make your purchase ultimately more affordable: whenever possible, send us an additional payment.  In so doing, you will decrease the length of time required to completely pay your mortgage, and you will save many dollars in interest expense.”

Now, who can argue with that?  We can.

First, you should be aware that everything we purchase, rent, or pay down is associated with “opportunity cost”.  Every penny we spend, etc. is the result of our decision to use that money for that moment’s purpose. So, are you “saving” on interest?  Perhaps you are, but what could the money be used for, or how could it grow, instead?  Would that offset, even overwhelm, the expense?

Second, remember when you applied for the mortgage?  The bank researched you as a borrower; that is, are you a good risk?  Yes, the bank took you on as a risk, and loaned you money.

It is entirely reasonable that you might feel better not owing money on your home, and so attempt to get out of debt as soon as possible.  Occasionally sending the bank an extra check will certainly shorten the pay-back time, but it will also decrease the bank’s risk, and increase yours.  Really!

Conventional wisdom suggests that if you add those payments, you will have more equity in your home, and if you need the cash, you’ll know where to find it.  You will simply get a Home Equity loan or re-finance, freeing up your equity.

Here’s the key question:  why might you need the cash?

Is there a possibility that, in the future, you could be unemployed?  Under-employed?  Ill?  Disabled?

Now, again, remember when you applied for the mortgage?  The bank was concerned about your income, right? 

If you, upon “need” as suggested above, approach the bank to apply for a loan to access that locked-in cash, the bank will ask for your current income data.  Unemployment or disability will likely impact income, and thus your trip to the bank! 

In other words, unemployed, unhealthy, in-need…even short-term, you’re not likely to get the cash you need.  The bank will likely view you as a poor risk for the new loan request.

Could any of these negative “events” happen to you?  Well, life happens, doesn’t it?

The bank will overlook your many additional contributions, possibly even thank you for them, and continue to act like a bank (i.e. foreclosure?).  Key Point:  you will have decreased the bank’s risk and increased your own.            

Here’s an alternative:  when you have additional monies to send to the bank, don’t.  Instead, put the money in a vehicle that you have control over, such as a savings account, CD’s, Whole Life insurance, etc.  Look for a vehicle with little or no risk.  As you build this account over time, the earnings may actually offset the interest expense the bank teased you with (aka mortgage interest cost), but it will certainly help to manage your family’s risk.  When the money is available to pay off the mortgage in full, then (and only then) should you decide if that is right for you.

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It’s Time To Think Outside The Box – Part 2

Have you wondered why your 401(k) or investment account has not done what you had hoped, and why so many seem to be experiencing the same anxiety as you?  Much of this has to do with “volatility” within the markets, and more. 

 In our previous post, we addressed the difficulty and nature of the market environment over recent history.  We suggested that it was, and is, time to think outside the box. Here, we will address an alternative.

Life Insurance (that is, “Permanent Life Insurance”) is not all created equal. There are various flavors of Universal Life, and more than one type of Whole Life as well.

Now, before you walk away, consider that there is a section of the tax code, Section 7702, that addresses the design and use (benefits, for us) of life insurance. We can use life insurance for growth-oriented savings, as well as a death benefit. This should appeal to those not interested in the volatile and difficult nature of the (now conventional) stock market. 

Whole Life Insurance should, at least, be considered as an alternative non-correlated asset class in your investment portfolio.  This would serve to modify volatility and enhance growth.

In creating a (spectacular?) savings and retirement vehicle, we use Whole Life Insurance of a specific structure. (We do not use Universal Life of any sort; ask us why…).

The “enhanced” policies we use can provide the following benefits:

1) Guaranteed, consistent and continual growth of cash value, regardless of market swings

2) Access to cash without regard to age, employment status, or planned use

3) No negative effect, but rather potential positive effect, on qualifying for College Financial Aid

and these “Living” Tax Advantages: 

4) Tax-deferred / tax-free cash growth

5) Non-taxable Retirement savings withdrawals

6) Unlike IRA withdrawals, will not cause potential increase in taxes of Social Security benefits! 

and, of course,

7) Increasing financial (Tax-Free) Legacy for Beneficiaries

 Additionally, many of these policies can now be mated to Long-Term Care riders, resulting in policies with great optionality and flexibility.

 We start with a traditional savings vehicle, Whole Life insurance. These policies are devoid of stock or bond market sensitivity, but are growth-oriented.  These policies have become more sophisticated over the years, and represent an opportunity for those willing to use an alternative to what has become conventional. We believe stock market volatility is damaging; consistency is more reasonable for most. And why not with guarantees?

 The Ultimate Financial Security Blanket.  We have a lot to talk about…agreed?

For previous posts, go to: http://ifihadknown.com/

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