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Retirement is one event that many people are ill prepared. An eye opening reminder is a survey from an online broker.

The latest cold-water reminder of this comes from a survey by online broker Scottrade (www.scottrade.com) and nonprofit investment adviser BetterInvesting (www.betterinvesting.org). More than half of the baby-boomer respondents reported being “very or extremely concerned” about retirement- possibly because a similar percentage said they didn’t have much of a nest egg. About a quarter of the 45-to 64-year old respondents have put away less than $25,000. Ouch!

How much do you need for retirement? Naturally, there are many factors such as lifestyle, health and gender. Many research studies have provided excellent reports on the correct amount and the best withdrawal rate. A “safe” rate of withdrawal we are for all our clients is 4%. Under this scenario there is a high probability your funds will last 30 years. Thus, if you need $100,000 per year. Keep in mind this is an example. All studies show you will need 85-90% of your preretirement income to maintain your lifestyle. You will need to pay your taxes from the $100,000, so, adjust accordingly.

If you need to draw $100,000 per year at a 4% withdrawal rate, then your account size will need to be $2,500,000. At a 4% withdrawal rate we assume someone will be investing, let’s say, in the S&P 500 which has averaged about 10% return since 1926. Subtract about 4-5% for inflation and the 4% withdrawal with allow that your monies can last for 30+ years.

Check out these sites for information and to do the calculations.

  • www.ssa.gov/OACT/STATS/tablr-4c6.html#fn1
  • Quicken Premier… www.quicken.com
  • www.fidelity.com
  • www.kiplinger.com
  • www.fool.com
  • www.Financialengines.com
  • www.PreretirementLife.com
  • Are You Prepared

    I am sure you can reflect on your life and remember when warning lights were flashing. Unfortunately, Americans do not prepare for potential risks. Too often, warning signs are presented, people ignore the signs, and then, after the risk comes up they are shocked and not prepared.

    Here are some facts that have been presented to people for countless years. The outcomes are obvious. It is up to you to prepare for you and your families. Enjoy!

    2041 IS THE YEAR – Social Security Trustees announced in 2006 that the trust fund backing the payment of Social Security benefits would be zero in 2040. In April 2007, the annual report determined the trust fund will be gone in 2041, an addition of 1 year. On Tuesday 3/25/08, the 2008 report again stated that the trust fund worth, 2.0 trillion on 12/31/07, will be gone in 2041. A zero trust fund does not mean the payment of Social Security benefits would also go to zero, but rather would drop to 78% of their originally promised levels (source: SSA)

    LONG TERM ISSUE- The estimated Social Security shortfall as of today (i.e., a present value number) between the future taxes anticipated being collected and the future benefits expected to be paid out over the next 75 years is $4.3 trillion. The entire deficit could be eliminated by either an immediate 14% increase in Social Security taxes or an immediate 12% reduction in Social Security benefits (source: SSA)

    MEDICARE MESS – The problems facing Medicare are even worse than those of Social Security as benefits being paid out to the Medicare program are expected to exceed tax revenues from 2008 forward. The Medicare trust fund is projected to be depleted by 2019 or just 11 years from now. The long term (75 year) present value shortfall in the trust fund could be corrected by an immediate 51% reduction in program benefits (source: SSA)

    PUBLIC ENEMY #1 – Medicare expenses are expected to be $396 billion during the current fiscal year or 14%of total government spending. Former Fed Chairman Alan Greenspan has characterized rising Medicare expenses as the #1 threat to our economy, greater than the current mortgage housing crisis. (source: White House, Fortune)

    Funny, President George W. Bush tried for 2 years to wake up Americans to the looming Social Security/Medicare tragedy. He proposed as a solution, not the solution, for individuals to set up their own retirement accounts using some of the Social Security/Medicare taxes. But, the majority of Congressmen, Senators and the drive-by media trashed the idea. Why? Well, it will take control away from Congress since you would be financially independent and not be dependent on the government. Instead of “trashing” the idea why not come up with alternatives? No one came up with any ideas. Sure criticize Bush’s plan, but, why not come up with your own ideas? Instead, they will let it go bankrupt, placing millions of Americans into financial distress. The only solution they will have…..raise your taxes – duh! Remember, Congress has their own “sweet” retirement plan that is much better than our Social Security. You better prepare. I plan with all my clients not to count on Social Security.

    A BUNDLE OF JOY/DOLLARS – An upper-class American family that had a baby in calendar year 2007 will spend $299,000 (i.e., a present value amount stated in 2007 dollars) to raise a child until his/her 18th birthday, not counting any college education costs. The actual dollars projected to be spent (i.e., using future dollar totals and not a present value calculation) is $393,000 (source: Department of Agriculture)

    HALF THE CASH – A married couple with three children spend 48% of their total family expenditures on their kids (source: Department of Agriculture).

    The summary: Again, better prepare for, (1), your own retirement income, (2), your retirement medical coverage, and (3) funding college costs for the kids. Like anything, if you start early it does not require large payments. Wait until it’s too late and the result is obvious. Ah, discipline or regret!

    How Do You Survive Retirement Without Running Out of Money?

    [Danger: This article may cause heart problems]

    The above question continues to surface as baby boomer approach retirement. For most boomers their answer is the Las Vegas Approach. Under this approach “you’re basically asking people to roll the dice and hope for the best”.

    The first step is to determine “The number”. “The number” is the withdrawal rate from a retirement portfolio that creates the highest probability of sustainability until assumed mortality. Bill Bengen’s mid-1990 research gave rise to the 4% rule. Basically, Bengen postulated that retirees can withdraw about 4% annually from their liquid asset base with a high probably that savings will last 30 years. Take out more than 4% and the odds of sustaining financial independence began to decrease. Remember the 4% rate is only one ingredient of the required seven-layer cake.

    So, one approach to success it to limit yearly portfolio withdrawal rates to 3 to 4%. That equates to $3,000 to $4,000 for every $100,000 saved. I am asked if this is $3,000 per month? NO! It is $3,000 per YEAR for each $100,000.

    What is a safe withdrawal approach? Well, 2% is bulletproof, 3% is probably safe, 4% is pushing it and at 5% you’re eating Alpo in your old age. If you take out 5% and you live into your 90’s, there is a 50% chance you will run out of money.

    Here is where the rubber meets the road. Suppose you need $100,000 per year in after tax cash flow. This amounts to $8,333 per month, in today’s dollars, net of Social Security or pension payments. Here is what amount is needed in capital at various withdrawal rates.

    Eye Popping Numbers
    Target $8,333 per month
    Annual Withdrawl Rate Capital Pool Required
    2 percent $5,000,000
    3 percent $3,333,333
    4 percent $2,500,000
    5 percent $2,000,000
    6 percent $1,666,667

    Those are the facts regarding what people need. Now the sad part. A 2005 Retirement Confidence survey showed total savings and investments by age group, not including the value of the primary residence to be low. The grim results for those age 55 and older as they plan for retirement: 39% have saved less than $25,000; 12% have from $25,000-49,999; 7% have from $50,000 to $99,999; 23% from $100,000 to $249,999, and, only 19% have $250,000 or more.

    Look again at the eye popping numbers chart. Even if you cut monthly income in half to $4,167 per month ($50,000 per year) not including Social Security, and a withdrawal rate of 2% to 5%, a person still needs a capital base of $2,500,000 down to $1,000,000. Hmmm, yet only 19% of those in the survey have $250,000 or above, which is only 10% of the required level.

    If you have been working with a professional advisor, then, the above numbers are not a shock. If you have been reading this blog, then, past articles have informed you generally. So, what is a “body” to do?

    First off, you can use some of the principles of “Missed Fortune” that we have shared with you in the past. Make sure you work with a certified TEAM member so your program is done correctly.

    Next, determine the amount of monies you need for these 5 categories:

      1. Survival Income: The money one has to have to make ends meet. (That is “need” not “want”)
      2. Safety Income: The money needed to meet life’s unexpected turns.
      3. Freedom (Fun) Income: The money needed to do things that bring enjoyment and fulfillment to life.
      4. Gift Income: The money needed for people and causes that one deeply cares about.
      5. Dream Income: The money needed for the things one has always dreamed of being, doing or having.

    Finally, you can determine the shortage and draft out a plan for success. Please do not wait until 5 years before your planned retirement date to start. Get assistance now!!!

    Here is another reality check. Assume you are in the 25% marginal tax bracket, and, in retirement spending 4% of your base net of taxes, with a 3% inflation (low estimate). This scenario will require a gross average annualized return of 9.33%. Using all past studies a mix of 60% equities and 40% bonds at a withdrawal rate of 4%, sustained virtually every 30 year period back to 1926.

    Caveat; If you retired in 1987, 1991, or 2001 you took a massive hit to your portfolio, so, it may not work out if you retire when the markets plummet.
    Set up a 3 year liquid fund upon retirement so you do not have to draw on your retirement assets if the markets go into a 2-3 year dive.

    Need assistance- contact us-

    We will force to you have discipline, so, there is no regret.

    Purchasing an Equity Indexed Universal Life Policy (EIUL)

    By Paul Ferraresi

    When purchasing a maximum funded, minimum death benefit (MFMDB) Equity Indexed Universal Life (EIUL) policy there are many factors that must be considered.

    The professional that advises you on one of these special policies is thinking in the opposite pattern of a traditional insurance agent. You, and most insurance agents, have been programmed to spend the least amount in premiums to buy the maximum amount of insurance death benefits. That is a correct strategy if you are buying death benefits.

    The objective of an EIUL policy that is MFMDB is to provide LIVING BENEFITS! The policy is established so you purchase the minimum amount of death benefits that the law allows while providing the maximum living benefits for you. When correctly structured these programs, using equity management, can provide a tax deductible non qualified retirement plan whereby you cannot outlive the income.

    Some benefits to you:

    • The contributions can be tax deductible
    • Contributions grow income tax free (not tax deferred like IRAs/401ks)
    • The money can be withdrawn income tax free
    • When you die the benefits blossom and transfer to your heirs income tax free

    Some other side benefits:

    • The money in the account can be withdrawn for college needs. These amounts are NOTsubject to Financial Aid scrutiny. In fact, the value in these accounts are NOT considered for Financial Aid calculation when families apply to a college
    • Account values and withdrawals are exempt from Medicaid calculations
    • Monies can be withdrawn for nursing home or in-home care use and are exempt from Medicaid rules

    How do these policies function?

    There are strict government guidelines that determine the amount of minimum insurance that must be purchased for the monies being invested. (bucket size) These rules are covered in the tax laws “TEFRA” and “DEFRA”. The insurance amount required is based on many factors including age and gender. With the “bucket size” in hand, along with the minimum insurance amount, the next step is to determine how the program is funded.

    These plans were so lucrative for policy holders, in the past, that banks and mutual funds lobbied Congress to shut them down because huge amounts of monies were flowing out of banks and mutual funds into EIUL policies. A shut down would be in violation of the anti-trust laws. Consequently, a compromise evolved in the tax law, namely, “TAMRA” that dictated how many years it will take to fund the “bucket”. The average time to fund is about 5 years. The dollars invested are placed in a liquid side fund (see Doug Andrew’s books Missed Fortune, Missed Fortune 101, and The Last Chance Millionaire for a detailed explanation).

    The best illustration of how this program works is to envision owning a 5 story apartment building. Each floor symbolizes one year of the policy premiums.

    When you rent out the first floor the income is not covering the entire building’s costs. This is true for the second and third floor. In fact, at the 3rd floor (3rd year of policy contributions) you are probably just breaking even. Once the 4th and 5th floors (4th and 5th year of policy contributions) are rented, then, you are seeing a positive cash flow. The annual gains now are retroactive back to the first day of ownership.

    How are your premium payments distributed? Upon receipt of your premiums the insurance company will position your funds as follows:

      1. Policy administration fee: Companies will charge $10-$20 per month. These fees are subtracted at the beginning of the year and held in escrow and then deducted monthly.

      2. Premium load: These fees are for marketing, investment management, and other charges. The average cost is about 5.5% of premiums. These amounts are deducted only at the time of a premium payment.

      3. Cost of Insurance (COI): The company determines the mortality costs, deducts this annual amount up front each year, holds it in escrow, and, withdraws it on a monthly basis. This amount varies based on your age, gender and amount of minimum death benefit.

    Regressing, your gross premium dollars are received by the company. The fees and costs listed above are deducted leaving a net amount to invest. These net amounts are held in a low-yielding guaranteed income earning account until “swept” into your investment choices.

    Companies have different “sweep days”. Some companies will place your monies on the 15th and 30th of each month. Other companies have a quarterly sweep date, say, the 15th of February, May, August, and November. If you miss the quarterly sweep by one day, then, your monies will sit in an interest earning account for the remainder of the quarter until swept in. The same concept holds for a monthly or biweekly sweep.

    With these factors in mind let’s look at the first year of your program:

    The policy is issued, say, on May 20th. You complete the policy delivery receipt papers and make payments on June 10th. If your company does a sweep monthly on, say, the 15th then your monies will make the June 15th deadline, otherwise, you wait until the next sweep date. If your crediting strategy is a 1 year point to point, then, your return will not show on the following year May 20th anniversary report since monies were invested June 15th for 1 year. In fact, the report will look grim on May 20th, in that, it shows the premiums paid, all the expenses explained in number 1-3 above deducted, and, no returns since your return crediting does not show up until the following June 15th. We suggest, and schedule, an annual review only after the return is credited.

    In years 2-5 or 6, your premiums are paid. The monthly administration fee stays constant (it is fixed) at say $10-$20 per month for the life of the program. The premium load is deducted only for the years of your contribution. The cost of insurance will be charged for each year the program policy is in force.

    To better understand the three major policy expenses let us use the rental building analogy.

      1. The monthly policy fee is like paying the building’s monthly utility bill. This will continue for the time a property (or your policy) is owned.
      2. The premium load would equate to paying the real estate broker’s leasing fee. The majority of these fees will be while we are “leasing up the property” (making our premium payments).
      3. The cost of insurance, equates to the building management fee, in that, it will continue for as long as we own the property (or your policy).

    Naturally fees and costs vary by company. In the first 3-4 years of the policy, the goal is to reach breakeven (similar to the leasing up of the building). In years 5 and 6, and thereafter the policy (the building) starts to cash flow.

    Will You NEED Long Term Care?

    I have often written, hinted, cajoled and begged in this blog for you to get on track with Long Term Care Insurance (LTCi). No, I will not share personal experiences or client experiences in this write up. Rather, here is a compilation of statistics on the subject. When you have convinced yourself of the need, please contact us …

  • Only 12% of Baby Boomers have adequate resources to pay for long term care services.
    (2005 MetLife Mature Market Institute Survey of Baby Boomers)

  • 54% of Baby Boomers mistakenly believe that Medicare will pay for long term care services, and 31% expect Medicaid to pay for this care.
    (2005 MetLife Mature Market Institute Survey of Baby Boomers)

  • National Average LTC Costs in 2006:
        Nursing Home private room- $70,912 annually (up 2.2% from 2005)
        Assisted Living Facility, one bedroom- $2,691 monthly (up 6.7% from
        2005)
        Home Health Aide- $25.32 per hour (up 13% from 2005)

      (Genworth Financial 2006 Cost of Care Survey)
  • The average nursing home stay (2.4 years) will cost nearly half a million dollars($468,960) by the year 2030.
    (Kiplinger’s Retirement Report, March 2004)

  • Two-thirds of single people and one-third of married couples exhaust their funds after just 13 weeks in a nursing home. Within two years, 90% will be bankrupt.
    (2004 Field Guide, National Underwriter 2004)

  • Nearly 58% of group long-term care claimants are younger than age 65, and the average age of claimant is age 53. 66% received care at home while 17% received care in nursing homes. Top 5 claims are cancer, stroke, neurological disease, dementia, and multiple sclerosis.
    (2006 Unum Provident Corp profile of claims activity)

  • 7.6 million Individuals are receiving home care services.
    (basic statistics about home care, National Association for Home Care and Hospice 2004)

  • 5 million of the 12 million Americans who need long term care are working-age adults.
    (“Prepare for the Unthinkable: Long-Term Care” MSN Money, August 2005)

  • Over 50% of all Americans will need long term care in their lifetime.
    (Americans for Long Term Care Security, August 1999)

  • For those age 65 and over, 70% will need long term care at some point in their lives.
    (American Society on Aging, February 2007)

  • Current life expectancy for a newborn American is 77.6 years. A Stanford University biologist has predicted life expectancy will increase by 1 year each year between 2010 and 2030.
    (CDC, BBC News)

  • The odds of losing everything in a house fire, 1-in-1200.
    The odds of experiencing a major auto accident, 1-in-240.
    The odds of needing long term care at some point in your life, 1-in-2.

    (Life Health Advisor Magazine, April 2002)

  • 84% of Americans have had at least some experience with nursing homes – either as a patient or a visitor and 46% say a family member or close friend has been in a home in the past three years.
    (Senior Journal, July 2005)

  • Medicare generally doesn’t pay for long term care.
    (www.medicare.gov, 2005)

  • Nearly one in five unpaid caregivers (19%) in America provide “constant care” of at least 40 hours of care per week. Of those who provided constant care, 80% are women.
    (2006 Genworth Study, “The Impact of Long Term Care on Women”)

  • 41% of people do not think they will have enough money to cover their potential long term care expenses as they age. 31% stated that they were unsure.
    (2006 Wall Street Journal Online Survey)