Two bucket approach for control over your money

Employer provided retirement plans are the investment products of many working Americans.  For many, it is their only form of retirement savings aside from social security.  While it is extremely positive that these people are saving for their retirement, there is risk involved when a tax-deferred (meaning pay the government later) investment is the sole retirement vehicle.  Consider the following example.  Jack and Jill are a young couple and they have dreams of owning an apple orchard.  Mr. I.R.S. learns of their ambitions and comes to them with a deal. Mr. I.R.S. tells Jack and Jill that while you are growing your apple trees I will not charge you a dime in taxes.  However, upon your first harvest I will begin taxing you and every year to follow until you die or until the trees stop producing fruit.  Jill asks Mr. I.R.S., “What will our tax rate be?”  Mr. I.R.S. replies, “I don't know, but the government will let you know when you arrive at that point.” Sound like a good deal? It’s the same deal to which anyone with a tax deferred 401k agrees. If tax rates remain level or go down Jack and Jill will get a great deal.  If tax rates go up, as most economists believe they must in order to pay for our country’s financial mess, then Jack and Jill will have a lousy deal.  What if instead of one bucket that was full of soon-to-be-taxed money, you arrived in retirement with two buckets, one that will be taxed and one that has the option of being withdrawn tax-free?   The choice of tax or tax-free gives you more  control over your money.  Depending on your income level for the year or tax rate, you can decide which bucket of money is in your financial best interest from which to withdraw in any given year.

What is your risk tolerance? Run for the hills.

“In regards to your money, what is your risk tolerance?”  That question was asked to me by an advisor who was setting up a retirement plan for me at my first job out of college. Based on the answer his clients gave, the advisor would suggest a fund that was conservative (low return/low risk), moderate (average return/some risk) or aggressive (potential high return/high risk of loss).  Since then a number of clients have told me that they have had advisors ask them the same question in developing their plan.  Often this question puts people in an uncomfortable and  potentially dangerous situation.  The question does not take into considerations a person’s individual financial situation (debt, lifestyle, dependent obligations, tax implications, retirement goals). Secondly, the question itself  suggests that if one wants a significant return on their savings and investments, they need to accept risk of loss as well.  That is simply not true. At the time I was much younger and I figured that was as gutsy as a river boat gambler, so I told the man I had a high risk tolerance.  In hind sight I wish I had known to tell him that I never want to receive a statement showing a lost dime and I want a minimum of 8 percent return compounded annually. At the very worst, an investment receiving an 8 percent minimum compound annual return will double every 9 years. That  describes one of the investment products for which many of our clients qualify. One doesn’t need to run the risk of striking out trying to hit home runs if they have the ability to get on base every at-bat. 

Dear Friends,

I caught myself shadow boxing in the mirror as I was brushing my teeth Saturday night.  My wife and I had rented the move “The Fighter” starring Mark Wahlberg. Author Willa Cather once said, “There are only two or three human stories, and they go on repeating themselves as fiercely as if they had never happened before.”  Possibly no story is better than that of the triumphant underdog: the long-shot that scratches and claws their way against incredible odds for a chance to succeed. When the opportunity presents itself, they seize it with the determination of a fighter who knows that the training and sacrifice they endured for years when no one was cheering had earned them the right to become what they always knew they were. One thing I enjoy about my career is that I see those people every day. Through our doors pass men and woman like you who believe they are the best landscapers, concrete contractors, home builders, computer technicians, therapists, accountants, you name it.  I believe you are.  Your passion  transcends your work and positively affects those around you. I hope that you never lose that passion, because it fuels mine as well. When asked what he would have become if he didn’t box, Muhammad Ali claimed that he would have been the best at something.  If he would have become a garbage man, he would have been the world’s best garbage man. May you live your success story every day.

Seeing the forest through the trees: Consider your net gain

Your total wealth can be broken down into three categories: Lifestyle money, Accumulated money and Transferred money.  Those three categories represent all of the wealth that you will have or lose in your lifetime.  Lifestyle money of course is the money that you will spend on maintaining your lifestyle: your home, cars, entertainment, toys, etc.  Accumulated money represents all of the money that you will accumulate through savings and investments.  Transferred money represents the amount of money that you will give away to other institutions in taxes, interest payments, fees and lost opportunity costs.  When we work with clients, our focus is on net gain.  In other words, we are looking at the forest rather than the trees.  For example, Charlie Brown may come to us and say “I have gotten a 7% return on my investments over the past 5 years, but I’m going backwards. How is that possible?” A review of their finances may indeed reveal a 7% return on his investments, but his net gain may be negative because this client is paying 5% interest on his auto loan, 13.5% on his credit card balance and 6% for on his student loans.  In addition, his investments that were earning 7% where in taxable accounts such as mutual funds, which means his actual return is around 5%.   Anyway you look at it, Charlie Brown is giving away more money than he is accumulating.

There are two ways to fill a bucket with holes: you can either increase the amount of water that you are putting into the bucket or you can plug the holes so even a trickle will eventually fill it.  Our aim is to plug the holes because it requires no pain to your lifestyle money.  In fact, most clients find that their Lifestyle money increases as well.  Many financial advisors are constantly looking for the next hot product to sell to their clients.  Its like they are trying to give their clients Tiger Woods’ clubs instead of teaching them how to swing like Tiger.  You don’t need the latest high priced driver if the technique is true.

Your home mortgage: should you over-pay if your are financially able?

The goal behind paying more than your required monthly mortgage payment is to save on money that would be paid to interest down the road, but with today’s interest rates is that the best use of your money? To answer that question we must first understand that your home, bad or good, is an investment.  Owning a home with equity in retirement can be a powerful financial asset.  Having the option of being able to pull the equity from your home to create a stream of income can be a tremendous advantage and financial safeguard. For those of you with a permanent life insurance policy, we can show you how to really unlock the potential of your home’s equity, but that is for another discussion.

If your home is losing its value (like most in today’s market) does it make sense to pay extra money into the mortgage? Would you be better off to take full advantage of the tax deduction by only paying the minimum mortgage   payment and funnel additional funds into an investment that will actually make you money?   Conversely, if your home’s value is increasing does it make sense to pay extra money into the mortgage? Again, would it make more sense to pay the minimum amount, take the tax deduction, invest the additional amount and allow your home’s equity to grow naturally as its market value grows? Buy low, sell high.

Still concerned about the money that you pay in interest on your mortgage?  Good, you should be, but with today’s low interest rates, combined with the mortgage tax deduction, you do not need to look far to find a guaranteed return   investment that will outpace the interest you pay on your home. Too often our eyes are focused on individual trees and in doing so, we don’t see the forest.  In other words, we miss the money that we are really gaining or losing.

The Royal Wedding, Multi-car Accidents and Split Liability Limits.

I actually have nothing to say about Prince William and Kate’s wedding, but that is all the media is talking about so I thought it might grab your attention so I can discuss something more interesting. I have a folder that is full of newspaper clippings on various insurance topics (told you I was interesting).  One particular article from this past winter reported that a woman lost control of her car driving through an intersection in Willoughby.  She struck a stopped car and spun out of control, hitting five other vehicles before her car came to a stop.  While the extent of the property damage is unknown, it is safe to say that it was much higher than a typical accident.  Proper insurance protection plans for both the expected and unexpected. That is an accident one would soon like to forget. However, if you find yourself underinsured you may have years of garnished wages before your debt is paid off. 

Split liability limits are common in Ohio. What are split liability limits?  The term refers to what limit insurance companies will pay out for bodily injury and property damage if you cause an accident. For example, the State minimum for liability is $12,500/$25,000/$7,500.  This means that if you had those limits of coverage, your insurance company would pay a maximum of $12,500 in bodily injury per person for those that you injure with a maximum of $25,000 in bodily injury per accident if more than one person is injured.  In addition, the insurance company would pay a maximum of $7,500 in property damage to repair the vehicle(s) that you damage.  In the above example, you can imagine how those limits would be exhausted quickly leaving the driver personally on the hook for paying for the excess damages.  Our agency recommends that you carry a combined single limit of $500,000 on your personal auto policy for your financial protection. *The liability limits of the above, unnamed driver are unknown.  The example is for the purpose of conveying the potential danger multi-car accidents pose to your liability. 

Dear Friends and Clients,

It’s hard to believe that March is already upon us. Hopefully the goals that you resolved to achieve on January 1^st are closer than ever, and 2011 is shaping out to be a fantastic year. Don’t despair if it isn’t, you’ll get there, and it will be.

My optimism comes not from a hope that things will eventually change for the better, but from the fact that we possess the tools and power to make our lives change for the better.   It is a wonderful feeling. Already this year I have seen many folks whose previous insurance protection had left them financially exposed walk out of our door with a solid liability barrier with no additional out of pocket cost. I have witnessed people who were living paycheck to paycheck and struggling to make ends meet learn how to free up additional cash flow and begin building a solid retirement that just months ago seemed impossible to them. 

I would like to personally thank you for your loyalty and trust.  As your insurance advisor you have my word that I will continue to tirelessly seek the knowledge necessary to better serve you.  The future is bright; if you happen to arrive there first, please save a spot for me.

Sincerely,

Nate Crosby

Volume 4 of the Most Important Newsletter That You Will Ever Receive

Advisor’s Journal:

The February 2011 issue of “Kiplinger’s Personal Finance” cover story is titled “The Changing Face of Retirement.” In the article, the author admits that she contemplated naming the article “The Death of Retirement.” The article seeks to find an answer to the question on how to retire in our new economic reality; a reality that they, and many advisors like them have helped to create.  For instance, in the same issue the magazine questions the mental makeup of women to be good investors, citing studies that conclude women in general have more of an aversion to risk than men (by the way, good for you ladies).  Even after all that we have been through, most advisors will still attempt to convince you that your money needs to be at risk in order to earn a decent return.  They are wrong. Knight Kiplinger, Editor In Chief of “Kiplinger’s Personal Finance” writes that the 401K  in its current form is not up to meeting the retirement needs of Americans but then goes on to say that Congress should mandate your participation in a qualified retirement plan. They have no other game plan to offer. A recent study by the Investment Company Institute found that the average 401K account value fell 28% in 2008. That loss is surmountable at age 45, but it would be disastrous at age 60. It's time to change the game plan for you to win!

Who is set up to win in your investments? 

What is the cost of accessing your invested money? Every investment vehicle has a cost. An individual in the 25% tax bracket will pay a 15% capital gains tax when he or she sells a stock (assuming a gain).  If the stock is sold at a loss, the investor has lost their money to market risk as well as lost opportunity because he or she has forever lost the ability to capture the interest that their investment would have gained had it been invested successfully. In addition, individual stocks offer the investor no solid exit plan: when do you sell?  Mutual funds that pay dividends are taxed annually and then again when shares are sold (assuming a gain). Mutual funds that are sold at a loss really can beat up an investor because it is possible to pay annual tax on a losing investment. Money that is in a savings account is plundered by both taxes and inflation because the interest gained in a typical savings account historically has not outpaced the cost of inflation, which means that you are paying taxes on money that is losing its purchasing power. Did you know that it is possible for investments that produce taxable compound interest to negatively affect your lifestyle as they grow in value?  Take any fund that you have that grows at taxable interest each year.  As the value of this account grows bigger, so does your tax burden.  However, people tend to pay the taxes on these types of accounts out of our pocket instead of selling off shares or dipping into the account funds (often times because the return would look less attractive) and as a result their lifestyle money decreases as the account value increases.

The above investment options are not bad nor evil, but when they are solely relied on for long term investment they can fail the investor in numerous ways. Premature Death:  When a spouse or children are involved the above investment options by themselves offer no guarantee for providing for the family in retirement if premature death robs the investor of time to build his or her savings.  Loss of Principle: Investments of chance like stocks and mutual funds offer no guarantee for growth. The years 2000 to 2010 are known as “The Lost Decade”, because the market experienced essentially no overall growth.  When working with a client for the first time, often I will ask them how their investments are doing.  It is not uncommon for them to tell me, “ I lost a lot over the past several years, but fortunately I’m close to being back to where I was.”  Ouch! Three years of growth opportunity that they will never get back. It doesn’t have to be that way. Unnecessary Transfer of Wealth: Ask yourself who is set up to win with your investments.  Are you assuming all the risk and then giving money away in the form of taxes or fees if your investment succeeds?  Disability: This is where 99% of investment vehicles fall flat on their face.  If you become disabled and as a result unable to work, how will that affect your investments? Will you be able to fund them?  Will you be able to withdrawal money without penalty if you need to because the lack of income from being disabled has severely hindered your cash flow?

Step 1: Install a Guarantee

Wouldn’t it be nice if there were one product that could offset every weakness in the investments that we just discussed? There is a product that: 1) accumulates money with tax free interest; 2) guarantees that your family will have the money you would have saved for retirement, even if premature death robs you of time; 3) can be used in conjunction with your other investments to avoid compound taxation or infuse cash into well performing investments; 4) reduce the unnecessary transfer of wealth by using it to fund large purchases and in doing so avoid paying interest to credit card companies or banks; 5) form a solid financial base for retirement; 6) allow you to safely spend down your money in retirement; 7) will allow you to access your money at anytime without penalty; 8) will be there for you without increased financial burden in times of disability. 

There is, and we have only hit the tip of the iceberg. Would you like to save more in the next 10 years than you saved in the last 10 years? Would you like to learn how to prevent your money from needlessly transferring to the government, banks or credit card companies? Would you like to know how much money you will have when you reach retirement instead of wondering? Would you like your family to enjoy the retirement you intended them to enjoy regardless of disability or premature death? If any of these questions produce a yes answer, ask us how we can make that happen for you.

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For Parents

Family dinners encourage responsible behavior among teens.  Recent findings suggest teens who have dinner with their families at least five times per week are less likely to abuse drugs and alcohol than teens who have dinner with their families three or fewer times. Teens who are less involved with their families are twice as likely to use tobacco or marijuana...more than one-and-a-half times more likely to use alcohol and twice as likely to try drugs.

February Birthdays

If you were born in February, you share this month with: Clark Gable, Abraham Lincoln, Galileo, Michael Jordon, John Glenn, George Washington, and Johnny Cash.