What To Do With Business Sale Proceeds

Jim Lorenzen, CFP®, AIF®

 

When you receive business sale proceeds, you’ll likely pay a capital gains tax; but, that may not be the end of the story.

Suppose you have $1 million or more after the sale – money you’d like to put somewhere for future use – but you also want growth with safety and tax-deferral, too!

You could use our 401(k); however, there are funding limits in any given year and those limits don’t carry over.  Besides, the safety issue could be problematic.

Bank certificates of deposit can provide safety, but not growth or tax-deferral.

If you’re selling your business next year, you’ve waited too long to plan.  However, if your sale is scheduled for ten, fifteen, or twenty years from now, this IS the time to get your ducks lined-up – and this report might help.
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If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Business Owners Face Potential Tax Law Changes

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Jim Lorenzen, CFP®, AIF®

1954

1986

2017

What do those years have in common?    If you guessed those were the years of major tax reform, you’d be right—at least about the first two.  2017 is still a question mark.

While tax law changes can occur quite often, major reforms appear to come around about every thirty years.    Business owners, unlike the rest of America, will have to deal with the impact of any changes on both the personal and business front.

Most Americans don’t own businesses and can be excused for not understanding many of the issues business owners face.    First, most businesses tend to be small – proprietor-owned – and are therefore taxed at individual rates; and that includes partnerships.  They don’t get taxed at the lower corporate rate; yet, these owners represent most of the job creation.  Those who are successful, pay at high rates – and even more if they’re in a high tax state!   It’s not uncommon for a successful small business owner in a high-tax state, like California or New York, to be faced with having to make $300,000 in pretax profit, only to see half of it go to federal, state, and local government, leaving about $150,000.  Sound like a lot?  Not if you’re in one of those high cost-of-living states, which usually happen to be the same ones, in which case $150,000 is often just middle-income.   Makes it pretty hard to create jobs for other people – often the reason many of these businesses often relocate to low-tax states (with a lower cost of living) to grow their businesses, where they find it easier to create jobs.

How about corporations?  Most Americans don’t realize that those who incorporate their businesses are taxed twice.   Their business pays a tax on profits BEFORE the business pays a salary to the business owner, who then must pay a second income tax!  And, of course, we’re back to the high income-tax state issue.

The government drains money from the people who create the jobs; so, no wonder – as people want to see more jobs in the economy – tax reform is such a big issue.

Proposed Changes for Business

Under the proposed tax bill, which still faces much debate, the corporate tax rate would be reduced to 20% – a substantial cut.  S-Corps would see their rate drop to  25%.  Well, maybe not – what day is it?  This all changes with the wind until it’s law.

One of the proposed changes, favored by many business owners,  would allow for the expensing of capital expenditures—no doubt in an  effort to spur growth.   However, there could be a fly in the ointment for many business owners in a provision no one’s talking about.

You’ve heard about the  ‘border tax’.  Under this provision, there would be no cost-of-goods deduction on imported goods—a potential problem for many retailers, as well as manufacturers who outsource some or all of their supply chain.

Many businesses that have spent years researching and developing their supply chains may face some formidable challenges.  There would be a deduction for the cost of goods exported.

Finally, there would be no deduction for business loan interest under the proposed plan.  This may not be a big issue now, given today’s low interest rates; but, it could become a major issue if we should ever experience the double-digit interest rates similar to those of the late 1970s.

Business owners are individuals, too.

As if dealing with all a business owner faces isn’t enough, there’s also the personal side.   There are  some potential changes looming on the horizon there worth knowing about.

Individual tax rates would come down and reduced to three brackets.

The elimination of all itemized deductions except for mortgages and charitable contributions is also popular with many, but not everyone.  The proposed change for charitable deductions limits those deductions to $100,000 for a single payer and $200,000 for a married couple.  It may become difficult for a  charity to convince a multi-millionaire to donate that $1 million work of art !

And, while there’s talk of repealing the estate tax, it doesn’t appear to be a complete repeal.  The government still wants that unrealized appreciation taxed!  The talk is about going to a system similar to what they have in Canada.

The idea would be to tax unrealized appreciation over $5 million at a capital gains rate.  Taxes on gifts would correspond to eliminate people using gifting to avoid the estate tax.

Finally, the newest proposal would also do away with deductions for medical expenses—or at least have a very high threshold.

All these are proposed—not passed.  But, it’s good to be aware

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of what could be on the horizon.

What Should Business Owners Do?

You might discuss these points with your tax advisor—I am not a CPA.  I am a CFP®, AIF®,,,,  EIEIO.

 

Planning Point

If you don’t have an executive bonus plan, you may want to consider starting one and paying the bonus before March 15, 1018.  Same if you do have one.  Your business gets the 2017 deduction while the employee may be paying tax on the bonus received at lower tax rates.   If you’re `grossing up’ the bonus to cover the employee’s  tax payment, that would be under the 2018 rates, as well—remember, talk to your tax advisor.   If you want to learn more about these plans, you can access my special report here.

Planning Point

Don’t neglect what is probably the most versatile financial tool available today:  cash value life insurance—it has tax benefits that no other financial vehicle can provide and is an ideal retirement supplement—especially for high-earning executives and owners who are limited in what they can put away in qualified tax-deferred vehicles.  Quite often, these executives are stunned to find out those limits simply will not allow the account to provide enough capital at retirement for them to preserve their desired lifestyle.

As David McKnight points out in his book, Tax Free Retirement, life insurance is used as a key retirement strategy by more than 85% of Fortune 500 CEOs and many members of Congress.  The book was also endorsed by retirement guru and CPA Ed Slott, as well as David M. Walker, former Comptroller General of the United States.

Sometimes, I will see arguments against this approach in the media – arguments that are little short of idiotic – but, the simple truth is that insurance, including indexed universal life (IUL) in particular, is becoming widely accepted among leading experts in the profession as a true asset class (in addition to cash, stocks, bonds, real estate, and commodities), probably as a result of an aging population with changing priorities and increasing economic uncertainty (where the government’s future need for tax revenue is concerned).

  • Your tax advisor can provide the best insight regarding tax strategy;
  • your estate planning attorney can help you make sure your documents are updated and in order; and
  • your financial advisor should be able to help you arrange assets to fit your needs.

Never use a podiatrist for dental advice.

I hope you found this helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

There’s More than One Path to Retirement Security

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Jim Lorenzen, CFP®, AIF®

People often think investment strategies for retirement security involve a either/or choices, i.e, risky stocks or savings as a zero-sum choice, or active vs. passive investing as an either/or choice; Believe it or not, there’s more than one path to retirement security.  Sometimes (often) they can be blended.

Active vs. Passive

Vanguard on active vs. passive investingFor example, low-cost passive investments are attractive simply because it’s widely believed that active managers can’t beat their relevant indexes’ average return on a consistent basis.

That’s probably true, however the argument often ignores the downside protection active management can offer – something index investing doesn’t provide, and something important to investors for retirement security.

Does that mean there’s only one path to financial security… that active is better?  No – it’s just different.  Sometimes, the extra fee an active manager charges can be worth far more than the alternative downside exposure.   Vanguard has created a client education piece about active and index investing that you might find helpful.  You can download it here.

Active Institutional Management

Investors with smaller accounts often achieve diversification by investing in mutual funds.  While these investors can benefit from the diversification they offer, those with larger accounts can be penalized.  The reason is simple:  Mutual fund costs don’t scale.

For example, if you have $50,000 invested in a mutual fund that carries a 1.25% expense ratio (just to pick a number), you’re paying $625 a year in annual expenses.  Not too bad.  But, suppose your investment is $500,000 and you have a basket of mutual funds and all charge about the same 1.25%.  Your annual expenses would now total $6,250 per year.

Fund expenses don’t go down as the asset level increases.  1.25%, in our example, would stay 1.25%, regardless of how much your account increases in value.  And, those aren’t the only expenses!  You can learn about the other hidden expenses in another report, Understanding Mutual Funds, which you can also download instantly, right here.

Institutional money managers – at least all those I use – have fully disclosed fees; but, furthermore, their fee percentage actually declines as the investor’s asset level grows.  They can also provide tax-managed benefits not available in mutual funds.

Institutional managers seem to do far better than the individual investor.  As you can see from this independent Dalbar study, individual investors didn’t even come close- and the time period for the study included the famous ‘meltdown’ of 2008.

Institutional investors tend to outperform individual investors.

Screening for investment managersThe selection process for institutional managers, of course, is important, if not critical.

If you’d like to see the process I have been using here at IFG, you can get it here.

Of course, it’s not an either/or proposition:  Blending active institutional management with passive indexes can be quite effective.

It begins with a philosophy.

The key to successDo you know your investment philosophy? By the way, “I don’t want to lose money” is not a philosophy; it’s a wish.  A philosophy goes deeper – it’s the roadmap that helps you as you go through the investment/manager selection process.  IFG’s can be accessed immediately here.

Managing the Downside.

There’s a tv commercial sponsored by a mutual fund/insurance complex that asks the question, “Do you know your number?

While it’s a good question, it doesn’t go far enough.  The real question may not be how much you have, but how long it will last!   After all, that’s the key to almost everyone’s definition of retirement security.

Longevity risk – “Will I run out of money?”

This is the key issue for most Americans; even those with $1,000,000+ who want to maintain their standard of living, let alone the vast majority of Americans who have less.  You might enjoy getting our Money or Income report when you sign-up for the IFG ezine (you can always unsubscribe later).   You can get the report here.

 

 

What’s right for you is likely no one strategy, but a blend of this – and other strategies not even covered here – that best fits your particular needs and desires.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 3

Rising Inflation ScreenJim Lorenzen, CFP®, AIF®

An income for life – a lifetime retirement income strategy is what most people want – but are they willing to do what’s required?

For most, if not many, the idea of ‘bucketing’ money into categories – current needs, emergency needs, and future needs – is intuitive.  An that’s the ‘secret’ behind having a retirement income for life!  It’s not a secret, really; just a common sense strategy for creating a stress-free lifetime retirement income.

We don’t want to take money from one to fund another unless we’re absolutely FORCED to, which we seldom are – yet, that’s what a lifetime retirement income strategy demands.

This likely explains why people generally hate the idea of annuitization, even though retirees routinely say their biggest fear is running out of assets  –  aha!  Assets!  Not income?

I’ve known people who’re retired with generous pensions (with cost-of-living adjustments) from the federal government and lived amazing retirements, living on Florida waterfront property with boats outside their back doors, even though they had only a couple hundred thousand dollars in savings… and loving it.  You couldn’t get them to trade those pensions for anything!   It was predictable – it would never stop – and they had COLAs built-in!

But, the rest of society seemingly isn’t willing to make the liquidity trade.  Research seems to back this up, finding that the size of liquid holdings is directly related to their sense of well-being and satisfaction.  Apparently if they can’t achieve their need for future income until they meet their need for current assets, they feel cash-strapped – or they’ll choose retirement solutions that are inferior but psychologically more satisfying..

Mental bucketing comes in two forms:

  • Time segmentation:  Cash, bonds, and stocks are segmented according to time frames.  Cash funding near term, laddering bonds for intermediate term and interest-rate risk, and stocks for long-term inflation-hedges.
  • Spending segmentation:  Using financial tools to put predictability into outlays – Using Social Security and immediate annuities to create an ‘income floor’ for meeting essential expenses, and using portfolio withdrawals throughout the entire retirement period to provide for discretionary expenses.

For many, however, the delineation between essential and discretionary expenses can be fuzzy.   When people prioritize their goals, some will classify travel and cable tv as a need, while others will find few needs beyond food, shelter, transportation, medical expenses, etc.   And, many neglect to think about the biggest outlay they’ll make during their entire retirement – the annual tax payment to the I.R.S.

The most straightforward solution to longevity risk

For most, the biggest risk is outliving their money.  In short, it means running out of income.  The straightforward solution is simple:  Trading a portion of liquidity to pay cash for a lifetime income – and transferring longevity risk to an insurance company in exchange for an immediate annuity.  For many, this is a tough sell because they aren’t willing to give up liquidity of current assets to secure a lifetime income, despite the fact all those retired federal retirees in Florida have been doing it for years – and loving it.  And, also despite the fact that an immediate annuity solution is far superior to that of using a variable annuity with a guaranteed lifetime withdrawal benefit.[1]

Not only that, retirees want the potential for an increasing standard of living, as well!  Others may have additional legacy goals!   Inflation-adjusted immediate annuities are available, but haven’t been too popular due to their lower initial payout

The Hybrid Time-Segmentation™ (HTS) solves many of the issues and may appeal to investors who need a greater degree of certainty for their income strategy.

 

The HTS strategy puts an ‘income floor’ under the segments – a floor that’s both predictable and expected to last a lifetime, while still preserving short-term liquidity needs and providing for long-term inflation concerns.  For example, one popular approach is to use a portion of assets to purchase a ten-year deferred income annuity that provides a lifetime retirement income beginning in year #11.  In this way, an additional guaranteed income source is added providing an increased floor as the rest of the portfolio grows for future years.[2]  The entire strategy, of course, should coordinate liquidity, security, inflation-protection, and income needs.

If you’d like to learn more – and it’s worth doing – we have a twenty-minute educational video that explains this lifetime retirement income strategy.  I think you’ll  like it!   Grab some coffee, sit back, and learn more here.

 

Enjoy!

Jim

[1] I must admit my own bias against variable annuities.  To me, using the stock portion of a portfolio to purchase a variable annuity is only turning a potential capital gain into taxable income – something that’s made little sense to me, expenses aside.

[2] Using an ‘investment grade’ insurance company is more important, in my view, than simply grabbing for the best-sounding promise of a slick marketing campaign.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?- Part 2

Jim Lorenzen, CFP®, AIF®

Last week I asked which was most important to you:

Never running out of money

Never running out of income

Whether you’re building a house or your ‘financial house’, it begins with a plan – that’s common sense.  Yet, I’ve seen more than a few people make major financial decisions BEFORE ever walking through my door for the first time:  Ready, fire, aim.

I’ve seen them retire, make Social Security claiming decisions and even pension decisions… then seek out financial advice – moves that often put them behind the 8-ball before they start.

So, what are the hazards retirees face?

  • Being underfunded.   It’s not uncommon today for people to live thirty years in retirement – one good reason why so many are opting to continue working after their ‘formal’ retirement.  It takes a lot of capital to fund thirty years of income after taxes and inflation – for two lives.  The problem with this hazard is that it’s extremely difficult, if not impossible, for an advisor to change at the point of retirement.
  • Bad timing.  This is something we call ‘sequence of returns’ risk.   To illustrate using simple numbers and ignoring taxes, imagine this scenario:  You retire with $1 million and plan to withdraw 4% annually.  That $40,000 combined with Social Security should meet your needs.

If the market goes up 20% and you withdraw 4%, you should have $1,160,000 after the first year.   Allowing for a 3% inflation rate, you can withdraw $40,000 + inflation = $41,200 in your second year, which computes to 3.55% of the second year’s beginning balance.  Not bad.  If the market does that every year forever, you’re fine!

What if the market goes down 20% in the first year as you withdrew your $40,000 (4% of the original balance)?  The market loss was $200,000 and you withdrew $40,000.  At the end of year #1, you’re down $240,000 and your new balance is $760,000 at the beginning of year #2.    And, of course, prices are higher – inflation has driven your living costs up by 3%!  You’ll need to take $41,200 in the second year, just as in the first scenario above, but now it’s coming from a starting balance of $760,000, which means your withdrawals now represent  5.42% of assets.  Another down year could be disasterous.

Diversification can help[1].   Diversification is all about using asset classes that have low correlation in their movements.  Think of pistons in a car:  If they all went up and down and down at the same time, where would they all be if the engine were to shut down?  Oddly enough, you may not want a portfolio that contains investments that all go up – the opposite could happen, too!

  • Withdrawing too much too soon.

Some people may simply not know how much they can, or should, withdraw.  With longevity risk becoming greater with our medical advances, knowing how much we can withdraw presents a problem for many.

How do you know how much you CAN withdraw and never run out of money?  The government has the answer!   They even publish it!  It’s the IRS required minimum distribution rules!  Just plug your numbers into the calculator[2] and that shows how much can be withdrawn!  The RMD rules apply to all qualified plans, but not to Roth IRAs while the owner is alive, and can be used for other accounts as a guide to avoiding longevity risk.

The good news:  RMD math virtually guarantees against running out of money within 45 years if the amount withdrawn is that calculated and no more.   There’s a practical weakness in this method as a guide for annual income, as well:   Remember our sample $1 million portfolio?

Practical:  Withdraw 4% of the original account balance each year, adjusted for inflation, regardless of market returns, i.e., $40,000 base adjusted only for COLAs each year.  Weakness:  Could lead to early depletion of assets if there are continuous market declines.

Not practical:  The RMD calculation is based on a percentage of the account value.  If the market declines, the percentage could result in a declining income for one or more years.

The bad news:  The RMD amount might be less than what’s needed to meet living expenses and, as noted, could even decline!  So, asset allocation, using the RMD rules, does not affect portfolio survival; but it does affect how much the retiree might receive each year – an unpredictable income.

How do we create a sustainable LIFETIME income?

That’s our subject for next time.

[1] You might want to access our report, Understanding the Diversification Puzzle.

[2] http://apps.finra.org/calcs/1/retirement

Enjoy!

Jim

If you would like help, of course, we can always visit by phone.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

MONEY OR INCOME: Which is most important to you?

Jim Lorenzen, CFP®, AIF®

Which goal is most important to you?

–   Never running out of retirement money

–   Never running out of retirement income

–   Both

Sure, you said both.  And, maybe that’s possible!

The problem for many is that not only are substantial assets required to provide a comfortable retirement income – you also have to live a lifestyle below what many would believe you could afford.

I have a client couple who have done just that.  They’ve worked hard, invested responsibly, and lived well within their means allowing them to save at a rate greater than what would appeal to many others.  The result:  They’ve been able to retire in their late ‘50s in a beautiful area  – and doing it at a time their son graduated from college and is now entering grad school.  How many parents could afford to retire with a child entering grad school?   In short, they’re set!  They’ve taken all the right steps to insure their future, even into their 80’s and 90s… and even if everything in “the markets” went south on them.

I’ve also seen others who have amassed ten times that couple’s assets, but are living at a lifestyle that keeps them in perpetual jeopardy.  They’re constantly in danger of running out of money.   Their lives are like a hamster running on the spinning wheel, constantly chasing the cheese.  The lesson:  Even people with $30 million dollars can still be on the edge of disaster.  Think of all the multi-million dollar sports and entertainment figures who’ve ended-up broke, sometimes due to poor management, sometimes due to overspending, sometimes both, virtually always because of ignorance…. either on their part or the part of their ‘managers’, or both.

Choosing the right strategy

What kind of retirement income or wealth management strategy makes sense any given investor?  Naturally, it depends on age, goals, asset level and lifestyle.  It also depends upon what type of strategy the individual is open to considering – most of us have built-in biases based on how we’ve been programmed.

Given the level of financial literacy in America today, it’s a real concern.  Most of what people know about financial instruments they’ve learned from entertainment gurus, their parents, or their friends.  I saw a recent study that revealed more than 31% of Americans didn’t know they could lose money in fixed income investments; and 68%  thought rising interest rates would be good for bonds… all while 60% said they don’t consider themselves knowledgeable regarding fixed income, the market, or economic forces that drive bond pricing.

Generalizations are always dangerous; but hey, you’ve have to start somewhere, right?   So, let’s begin, as a starting point, with this basic admittedly oversimplified outline of what an overall retirement strategy might be:

Retirement Strategy

You might be wondering why those below age 45 aren’t included in my little over-generalized grid.  The answer is simple:  In 25 years’ of practice, only ONCE has someone below age 45 come to my office.  That was almost 20 years ago and I haven’t seen anyone in their 40s come to my office since – they’re still watching Kramer – but, I’ll see them after they turn 50 and finally figured something out they don’t know today.

Back to our grid:

The definitions of “modest” and “substantial” are somewhat squishy.  It’s like trying to define what a ‘middle-market’ company is – you can ask a hundred people and get a hundred different answers.  So, let’s just say the definition is whatever you think it is.

If you’re worried about running out of money, you might consider yourself to be a “constrained investor” – and you probably shouldn’t be trying to ‘make up for lost time’ by making risky bets.

If you’re like the couple who’s sitting pretty and just doesn’t want to blow it, you might be preservation minded – someone who wants to maintain their lifestyle after inflation and taxes and not do anything stupid.   [See my blog post, “Inflation and Stockshere.]

Back to our initial quiz:

Which worries you most:  Running out of money or running out of income?

Long-term plans don’t change just because temporary conditions do.

You can have an income forever; but, it may not be enough to even pay your utility bill if the asset base is too small; and, if you

run out of money, there’s no income.

Navigating it all is much like navigating a ship at sea, surrounded by all sorts of potential hazards.

Too much to cover in a single post, as you might imagine; so, we’ll be covering the issues and strategies you can use in upcoming installments.  I hope you’ll find them helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

A Guaranteed Income for Life?

Jim Lorenzen, CFP®, AIF®

In a previous post I talked about how everyone now has to be his/her own actuary, if they want to create a guaranteed income for life.

I’ve even provided a 20-minute educational video on how it’s possible to actually create a guaranteed income for life.  I think you’ll find it helpful; grab a cup of coffee and you can register to take a look.

While I’m at it, here’s a link to a report that takes a deeper look at a a ‘hybrid’ scenario many investors might find attractive.  I think you’ll find the report interesting, if not eye-opening.  You can access it here.

How does one GUARANTEE an income for life?  Well, there’s only ONE way to guarantee that outcome:  An annuity.  NO OTHER FINANCIAL TOOL WILL DO THIS.

Oh, yes, they do get bad press (what doesn’t?).  The real problem, though is the confusion around the different types of annuities that exists.

  1. Variable annuities
  2. Equity-indexed annuities
  3. Fixed annuities – can be either immediate or deferred

Options #1 and 2 can be problematic.  They are often loaded with excess costs, moving parts, and restrictions.

Option #3 is generally more straightforward.  It’s more of an I.O.U. with the insurance company.  You pay them; they pay you.

Here are some sample payout examples.  Take the first one:  the payout represents a 6.54% payout; and as you can see, the payouts do increase with age.

There’s a trade-off, however, the money is not just illiquid – it’s gone!  You are essentially buying an income stream for life!   You’re paying cash for a secure retirement.

So, should you do that with all your money?  Probably not.  It should not be an ‘all or nothing’ strategy.  That’s why I think you’ll find this report on a hybrid strategy helpful.

If you would like help, of course, we can always visit by phone.  Just pick a time convenient for you.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Old-Age Financial Security: Silence is NOT Golden, yet Some aren’t talking!

Jim Lorenzen, CFP®, AIF®

Generational planning didn’t seem important  for old age financial security in my grandparent’s day.   They were living at  a time when Social Security was passed and designed to last for a lifetime beginning at age 65.  Of course, life expectancy back then was around age 68!  Who needed to worry about generational issues?  Longevity wasn’t a risk.

My generation—the baby boomerss—became the first  to experience the ‘sandwich’ effect:  Taking care of aging parents and children at the same time.   And, as that was unfolding, people were beginning to realize they were living longer, too!

The cultural quicksand began to materialize, but few have recognized it.  It’s like glaucoma:  You don’t see it coming; but, all of a sudden, it’s there.   It’s silence.  In a recent online survey (cited below), over half of GenX respondents and 60% of baby boomers indicated they’ve never had a conversation about planning for retirement or financial security in their old age, yet their fears were the same.

The reasons tend to tell is why.  They’re repeating the same mistakes their parents made.

Why do we study history?  Because we know human nature doesn’t change—it hasn’t changed for thousands of years.  Studying history allows us to learn the mistakes human nature, unencumbered by knowledge, tends to make.  But, knowledge helps us prevent a repetition!

When parents and children don’t talk about finances, guess what…

Why do they feel they’re not making enough money?  Why do they have too many other expenses and are paying off debt?  The answer is simple.

They’re  repeating mistakes.  But, the GenX group seems to be making more of them.  Are the boomers not talking to their kids?   Are their kids not involved in their parent’s own planning?   Maybe they should be.

As parents are living longer—longevity risk– they run a very real risk of needing long-term care.  If ever there was a threat to old age financial security, this may be it; yet,  relatively few address that issue usually because of cost or for fear of losing all that money paid in premiums if they don’t use it.   However if they do need it, and the kids end up having to pay some or all of the ultimate cost for that and their parents’ support, it also could eat-up their inheritance!

What we don’t know can cause financial hurt.  Perhaps they don’t know  that a professionally-designed life insurance policy might provide tax-free money that could be used to cover long-term care if needed and yet preserves cash if it isn’t—and still maintain the children’s inheritance!   It’s a financial ‘Swiss Army Knife”  type tool that can solve a lot of issues at once.

Unfortunately, few people take the time to have a generational financial planning session either on their own or  – maybe better—facilitated with a  family financial advisor acting as a guide and facilitator.   Some advance planning can make a big difference.  Here’s an example:

Real Life Case History (Names changed)

Fred and Wilma never discussed their finances with Pebbles or Bam Bam.  As Fred and Wilma grew into their 90s, it became evident they could no longer live on their own.  Fred was diagnosed with a terminal disease and Wilma, at  90, was diagnosed with Alzheimer’s.  They could no longer function and it was now Pebbles’ and Bam Bam’s turn to take care of their parents.  Fred lived for eight more months, but Wilma continued living for nine more years.  Despite the fact they did have some retirement savings, it was no where near enough to cover the more than $600,000 in costs that were incurred  by Pebbles and Bam Bam during that 9-year period. 

Had Fred and Wilma taken the right steps sooner, those costs threatening the old age financial security of Pebbles and Bam Bam might have been covered, or—at the very least—Pebbles and Bam Bam would have been reimbursed, protecting their inheritance … and all of the money might have been provided tax-free!   Unfortunately, their attitudes about various financial solutions available to them were colored by what they’ve heard from parents, friends, and even entertainment media, including television gurus selling DVDs.   Not surprising.  Some people even get their medical advice that way.

Old strategies simply don’t address today’s longevity and ageing issues.  Different strategies are required.   How can it be possible to make sure the parents have a lifetime of inflation-adjusted income and still provide an inheritance for the kids?

Rising Inflation ScreenYou might enjoy viewing this educational 20-minute video that shows one strategy that likely makes sense for many people.  While the tools used to implement it might vary, it’s still worth a view.  So, grab some coffee and see for yourself.

If you haven’t had a generational meeting with your family financial advisor, maybe it’s time you did.  Like Mark Cuban’s dad once told him:  This is as young as you’re ever going to be.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

How to Diversify Investments – As simple as a pie chart?

Jim Lorenzen, CFP®, AIF®

Most of us want to learn how to diversify investments  so we can reduce investment risk – but it may be one of the most misunderstood of investment principles.  Too many think it’s about simply selecting the right pie chart.

I’ve even seen tv stock gurus tell you that owning three stocks in different industries passes for investment diversification, implying that risk is being reduced.  I don’t think so; it’s just compounding investment concentration.

Believe it or not, you can’t possibly diversify-away market risk.  Think about it; you could own every single stock contained in the S&P 500 Index and all you would have done is duplicate the market’s risk.

I’ve also seen investors buy multiple mutual funds in an attempt to diversify; but, since everything they bought had to be “quality”, all they did was duplicate their holdings (portfolio A) instead of diversifying them (portfolio B) across multiple investment styles (growth/value, large/small, etc.).

Diversification, done properly, can smooth things out, as this simple example shows.

But, what stocks?  Which bonds?  Is buying a few enough?   The answer, of course, is “it depends”; but, it’s worth noting that there are five basic asset classes (stocks, bonds, real estate, commodities, and cash) and within each there are multiple sectors.  It’s also virtually impossible to know which will outperform all others in any given year.  Yet, diversification among them can smooth the ride!

I’ve been telling clients for more than two decades now, “We’re not diversifying money.  We’re diversifying risk; we just do it with money.”

So, how do we diversify risk?  It’s all about something called correlation.

You can think of correlation as pistons in an engine:  They all go up and down, but not necessarily at the same time.  Their going up and down is what propels the machine, but you wouldn’t want your money on any one piston.  If the engine were to stop, you’d have a 50/50 chance of being up or down!  But, if your money was spread over all the cylinders, you’d still have a stable overall value regardless of when the engine shut down.

It doesn’t really work all that clearly in the real world of investing, of course; but the theory is no less valid.  Here’s a chart the relative correlations among a number of classes and styles.

 

 

 

 

 

Correlations don’t remain the same, even from day-to-day; so, they’re not in stone – they just give us a historical look at their relative movements, but the numbers will be different depending on the time-frames chosen.

Diversification is all about correlation reduction in portfolios.  I created a report on all this a while back called Understanding the Diversification Puzzle.   You might find it helpful and you can get it here.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Is the 4% Rule Still Valid?

 

Jim Lorenzen, CFP®, AIF®

Ever hear about the 4% Rule?  It’s about safe withdrawal rates for retirement income.  If you’ve been following my pontifications over the years, you probably recognize this; but, if the rule is unfamiliar to you, here’s a brief description.

The 4% rule was the result of some back-testing and research by a financial advisor named William Bengen.  The objective was to identify a ‘safe’ withdrawal rate for retirement income that would answer the question, “How much can I safely withdraw from my portfolio without having to worry about running out of money?”

His results were published in 1994 and identified 4% as the withdrawal rate that would provide an 80% success probability over a 30-year period, regardless of market conditions.

Of course, it’s a probability based on back-testing.  The problem investors face is that inflation, which has been historically low for some time now, could rear it’s ugly head and impact withdrawals significantly.  So, we’re still dealing in probabilities.

Let’s look at a hypothetical example:

The ending annual expenses using a 7% inflation rate is 53.8% higher than if inflation remains at 2% for the entire decade.  Is 7% an unreasonable figure?  If you’re old enough be be concerned about outliving your money – or your income – you know it’s very reasonable.  Remember the double-digit inflation of the late 1970s?

What does that do to our probabilities discussion?  GIGO.

Planning is as much about what we don’t know as what we know.  It’s about testing and stress-testing our assumptions.

For many, the real question is not whether money will last – it doesn’t do much good to have some money if that money won’t produce the income you need to maintain your desired lifestyle – it’s whether you will have the inflation-adjusted income you will need.

Key question:  Are you comfortable dealing with probabilities or guarantees?  The strategy that’s right for you will be different depending on your answer.

We know that many retirement expenses are guaranteed; but, how of the income required to meet those expenses is also guaranteed?  If having a guaranteed income floor is important to you, we have an educational video you might enjoy viewing.

If you woretirement income planninguld like to see it, grab a cup of coffee – it’s about 20-minutes long – and you’ll learn about a process for arranging assets that may be eye-opening,  you can do so by clicking here.

Your Roadmap?

This educational video depicts an eye-opening strategy.  The specific financial tools used to implement this strategy will be different for each individual, depending on specific needs and desires; but, it is a strategy that could put retirement on ‘auto-pilot’.  Keep in mind, this is but one strategy for addressing retirement income needs.  There are others.  The one that’s right for you would depend on your plan

The plan comes first.  We don’t do “ready-fire-aim”.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.