Many people feel that by placing the maximum amount into their 401(k) plan and IRAs they will have great benefits, but these qualified plans are also time bombs.

Assume a couple is making contributions of $4,000/year into their IRA or 401(k) for 30 years. Their total 30 year contributions would amount to $120,000. That is, their…

1) Annual IRA/401(k) Contribution = $4,000 x 30 yrs = $120K Total contributions

Assume they are 34% combined marginal tax bracket for state and federal taxes.

2) Tax Bracket (Income > $67,000) = 34% (Fed + State)

Then, their tax savings would be $1,360 per year, or, $40,800 over the 30 years.

3) Tax Savings = $1,360/yr x 30 years = $40,800 Total

Now, assume they invested the $4,000 per year and obtained a hypothetical 10% annual rate of return for 30 years. They would amass a nest egg of $727,773.

4) $4,000 @ 10% for 30 yrs = $727,773

Let’s assume in retirement they could still earn 10% annual return. Then, without touching the principal they could withdraw $72,700 of annual income per year.

$727,773 X 10% = $72,700 per year withdrawal

Since they are retired, the kids have moved on so they have lost those exemptions; they mistakenly paid their home off so they lost those deductions; They will also be receiving Social Security benefits, maybe they have a pension or are working part-time, which will now place them in as high or higher tax bracket as they were in prior to retirement. Let us assume they are in the original combined state and federal rate of 34%. Their tax bill on the $72,700 withdrawal from their IRA/401(k) would be:

$72,700 income from IRA/401(k) X 34% tax bracket = $24,700 Tax bill

So, in the first two (2) years of retirement they will pay $49,400 in taxes. This $49,400 is far in excess of the $40,800 they saved in taxes during the accumulation years (see Section 3 above). Additionally, they will pay the $49,400 in taxes every two years for the rest of their life. Also, they will have to pay income tax on the $727,773 nest egg when it is withdrawn, plus possible estate tax of 45%. Hmmm! Whose retirement were they planning? Theirs or Uncle Sam’s?

In the first 20 months of retirement, every dollar of taxes saved during 30 years of deductions will be paid back. In fact, a person living a normal life expectancy will pay back over 10 times in taxes, on a qualified retirement plan, during the retirement years than the taxes saved during the contribution years.

For an average couple, they will pay over $500,000 in taxes from their IRA/401(k) from age 65 to 85½ for the privilege of saving $40,800 in taxes while they were working.

Why didn’t someone tell me the rest of the story?

The sun will shine again. Trust me. Most people do not want to examine the track they are on for retirement. It is too painful to face the reality. They are acting like an ostrich and putting their head in the sand.

Look…if you are retiring in 10 years, then, whether you take active, positive steps now, or, avoid looking at the situation…you will still hit retirement in 10 years. The train does not stop for you.

I suggest looking at the situation in a healthy approach. I have suggested in this blog a site that is simple, yet effective and I feel it is worth another mention. I have worked with National Life Group and they do an excellent job for all my clients. Their retirement site allows you to do many calculations. Visit their site at: http://experienceretirement.com/.

It is easy to navigate and very helpful. As always, if you have questions or need assistance contact me at (713) 871-5919 or paul@fgmci.com

As of this writing, Medicare and Medicaid are available to seniors but it is not cheap and the costs to individuals continue to rise.

A recent study by the Employee Benefit Research Institute found that a 65 year old man, who retires this year, will need $68,000 to $173,000 in current savings to have a 50-50 chance of covering health premiums and out of pocket costs in retirement. If he wants a 90% chance, then, the amount of savings needed jumps to $134,000 to $378,000. The variance depends on whether a former employer subsidizes health costs in retirement.

The cost outlook is worse for women because they tend to live longer and need more health care. A 65 year old- woman who retires this year will need between $98,000 to $242,000 in savings for a 50-50 chance and $164,000 to $450,000 in savings for a 90% chance.

The study found that health care costs in retirement rose 9% for men and 16% for women over the past year.

These estimates do not include savings needed for long term care or for basic living. As I have stressed with my clients, you need to begin planning now. Remember these two items (health and long term care) are in addition to normal living expense.

Start today or you know the outcome… discipline or regret.

$ People Are Saving Less

• The Commerce Department reports that Americans are saving at the lowest rate since the Great Depression.
• Personal savings stood at a national level of negative $6.2 million in January.
• About 40% of Americans say they are saving nothing for retirement. One reason: Over the past year, inflation rose 4.3% while salaries rose only 3.4%.
• One in four Americans told the Employee Benefit Research Institute that they have no saving at all.

$ Retirement Is Coming Later and Later

• The percentage of Americans 55 or older working full-time increased from 54.2% in 1993 to 64.4% in 2005.
• Nearly one in four people between 65 and 74 was still in the labor force in 2006, compared with just one in five in 2000.
• A recent study indicates that 17% of workers have suffered a reduction of retirement benefits offered by their employers in the last two years. Of these, only one-third say they are saving more for their retirement as a result.

$ Student Debt Is Piling Up

• Tuition cost have climbed 60% since 2000, and the average graduating senior now owes more than $20,000, according to the National Center for Education Statistics-twice as much as graduates owed a decade ago.
• Nearly a quarter of recent grads owe in excess of $25,000.
• While student debt rose 8% from 2005 to 2006, starting salaries rose only 4%.

These are the statistics. Break away from the crowd and do NOT be one of the statistics. Call us if you want to stand out from the crowd.

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.

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!

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.

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.

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.

One reason the public has not purchased a policy is because they are complicated. The typical policy has dozens of options and add-ons that can make for hundreds of permutations. The insurance industry has started a massive simplification of basic policies.

Another reason for not moving ahead with a policy is the good ol’ human trait of … procrastination. Many people wait until the horse has left the barn before closing the door. That is, they wait until later in life to buy the policy when they may not be in good health. Recent statistics show 20% of the applications from clients aged 60-69 and 42% of those aged 70-79 are declined. What is the solution …? Buy a policy when you are young and healthy, say at age 40-45.

The average nursing home (or at home care) costs $8,000/month or $100,000 per year. Assume a basic policy, at age 40, costs $500 per year and you pay it until age 90 (50 years). Then, your total cost over your lifetime would be $25,000 ($500 x 50). Do you realize at today’s cost of $8,000 per month that in 3 months you would spend the same amount as you paid for your lifetime premiums. ($8,000 x 3 = $24,000) The decision to buy a policy is a layup with a ladder, or, a stolen base on a wild pitch.

Why even consider a long term care policy? Everyone needs to be concerned about the quality of Medicaid-funded long term care. With the Medicaid system in sever financial strain and no solution on the horizon it is obvious that care will diminish. The system is underfunded.

Some people tell me that they will self fund their long term care needs. Costs today are running $100,000 per year and rising 14% annually. Some people need long term care coverage for 10 years. Do you have “loose change” of 1.5-$2 million to handle these long term care costs for one person?
As I have written many times in this blog the new Federal rules for transferring your assets to obtain Medicaid are super tight. Thus, this can be an option only if done 6-10 years in advance of the need.

Are there alternative ways to fund long term care coverage? Yes. See your financial advisor TODAY to develop some strategies.

In general, here are a few ideas and tips for buying long term care insurance (LTCI):

• Buy young, when premiums are less expensive
• Women are more likely to need LTCi as 72% of nursing home patients are women
• Avoid lifetime coverage to save on your premiums
• Buy joint spousal coverage
• Set up a side business and have your business pay the premiums. The premiums are a tax deductible expense
• Buy inflation protection. (Compound inflation rather than simple inflation)
• Avoid future purchase option riders
• Examine new lifetime benefits life insurance that pays for your needs when you are alive, not, after you die

I implore you to examine this area. I have seen emotional strain and financial strain of long term care costs demolish a family.