THE MARKET IS AT ALL-TIME HIGHS! Corrections, however, are a fact of life.

For workers in their 40s and 50s facing massive government debt and retirement 15-20 years off, it’s worth asking: Is it time to (Dump) THE 401(K)?

6a017c332c5ecb970b01a5116fb332970c-320wiMany Believe It Is…. including some well-known experts
Jim Lorenzen, CFP®, AIF®

In his book, The Retirement Miracle, Patrick Kelly writes about a man who had built-up a 401(k) balance of over $2 million over his career.  Then, on the brink of retirement, his world was shattered.  It was a September day in 2008.  He’d lost about 10% of his nest-egg in a single trading day.   By October 7th, he found his balance was down to $1.5 million!  By the time he reached his last day of work, his account was down to $1.2 million – actually about $1 million less than what it had been before all this happened.

And, just as an aside,  if that wasn’t bad enough, that $1.2 million had an embedded tax liability.  If this man was in the 30% combined federal and state tax brackets, $360,000 of that belonged to the state and federal government, leaving him with only $840,000 to retire on – and THAT’s only if taxes don’t go up while he’s in retirement.

Is the 401(k) really an answer to America’s growing retirement crisis?  After all, 401(k)-type plans are a little less than 40 years old in this country, created when most people were accumulating assets.  They haven’t been around long enough to see what happens when the ‘baby-boom bubble’ begins to drain them.

More than a few experts believe it’s time to shake things up, as you’ll see in this video (there’s a very brief ad in front – it’s quick).  There’s also another video (scroll down below this one) I think you’ll find very interesting.

A recent article by Wealth Management Systems, writing for the FPA noted the following:

“Recent research indicated that a third of retirement plan participants were “not at all familiar” or “not that familiar” with the investment options offered by their employer’s plan. The study went on to reveal that individuals who were familiar with their retirement plan investments were nearly twice as likely to save 10% or more of their annual income, compared with those who report having little-to-no knowledge about such investments. Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk.”

Here’s another one I think you’ll find very interesting.

The 401k Failure

How familiar with their options are 401(k) investors? Not very, apparently. Many now believe it’s time to move from a stock market-based system to something that’s insurance-based. While this may not be the right path for everyone, it certainly appears it is for most, as the following clips from FrontLine, 60-Minutes, and others.

According to The Power of Zero, by David McKnight (with a forward by Ed Slott, a CPA and well-known retirement expert, and a back cover endorsement by David Walker, former Comptroller General of the United States), an insurance-based approach makes far more sense, particularly if properly designed. And, there are a number of advantages.

The  insurance-based approach to funding retirement you saw in the video clips, does seem to have it’s benefits.

Indexed Universal Life:  A Life Insurance Retirement Plan is one 401k Alternative.
• No contribution limits
• No Pre-59-1/2 withdrawal penalties AND no mandatory distributions
• Tax Free Income at retirement
• Zero Loss From Market Crashes – with annual reset locking-in gains!
• Tax Free to heirs
• Self-funding option in case of disability
• Protection from market loss – You never lose money

It also doesn’t create or increase taxation of Social Security benefits, provides protection from lawsuits in many states,  has no minimum age or income requirement, avoids probate, and – this is a big one – provides accurate return figures, an issue I’ve discussed in other writings.

Not bad.

There’s a lot more to this,of course. And, it pays to do your homework.  Talk to your advisor – or talk with me!  You can schedule your introductory phone call and begin now.

Jim

Your Insurance Company Just Went Under?

Oops. Now what? No more protection? What happened to all those premium payments? How could you have protected yourself?

Jim Lorenzen, CFP®, AIF®

You’ve been paying on an insurance policy for years.  Now, you’ve learned your insurance company – the one that top ratings from all the major ratings services –  just went bust – what do you do?  What could you have done to protect yourself?

There’s no counter for withdrawals and no ATM – and there’s no FDIC insurance.  So, how are you protected?

The insurance industry is regulated state-by-state.   Each state maintains its independence and operates its own system of regulation, and each is also a member of the National Association of Insurance Commissioners (NAIC), which helps provide uniformity.

It’s important to understand that an insurer may be based in one state, operate in multiple states, and still be domiciled in another.  The domicile state is the lead state under normal circumstances for any regulatory actions.

While insurance companies don’t have any guaranties at the federal level, they do have state-backed insurance guaranty associations.  According to Gavin Magor, Senior Financial Analyst for Weiss Ratings and oversees their ratings process, the states have established these associations to help pay claims to policyholders of failed insurance companies. However, there are several cautions which you must be aware of with respect to this coverage:

  1. Most of the guaranty associations do not set aside funds in advance. Rather, states require contributions from other insurance companies after an insolvency occurs.

    2.There can be an unacceptably long delay before claims are paid.

  1. Each state has different levels and types of coverage, often governed by legislation. They’re unique to that state and can sometimes conflict with coverage of other states. Moreover, most state guaranty funds will not cover title, surety, credit, mortgage guarantee, or ocean marine insurance.

Bottom line: If an insurer fails, it may be awhile for you to get your claim processed and get your money to fix your home or pay bills. But just how often do insurers fail?

Since Weiss started rating insurance companies in 1989, 633 rated insurers failed. As you can see from the graph below, a majority of them were rated “D” or “E” by Weiss at the time of failure.

Image provided by Weiss

The bottom line is that you can still get your claims paid even after your insurer fails, but it might take a while. So, we recommend you check an insurer’s Weiss safety rating before you start doing business with them. With only a 0.02% chance of an insurer rated “A” or “B” failing in any one year, you can see why we favor those over insurers rated “D” or “E”. In addition to our ratings, be sure to learn more about your insurer’s state guaranty funds.

Never heard of Weiss?  I believe it.  Virtually all insurers love to tout the other better-known companies; however, there’s a problem:  Most, virtually all, of those touted rating services get paid by the insurers they rate!  Weiss’ revenue is derived from those companies that subscribe to their reporting –  it’s a business model similar to Consumer Reports which doesn’t accept advertising.  It should be no surprise that fewer companies receive Weiss’ top ratings.  It should also be no surprise that there are some ‘top rated’ companies that won’t allow Weiss to come through their doors.

I’ve encountered some insurance agents – I’ve even met some insurer’s representatives – who look at you with a blank stare when you ask about their Weiss rating.  Maybe it’s because some big household names didn’t make the cut.

Worth knowing?

Jim


Jim Lorenzen, CFP®, AIF®

 

 

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 Inflation on the Horizon?

We’ve been below 2% for a long time; but, will it continue?

Jim Lorenzen, CFP®, AIF®

So far, tariff-induced inflation simply hasn’t arrived.  You’d think if it was going to, it would be here by now.   And, the reason is simple:  If inflation was in the ‘pipeline’, goods in current inventory would be marked-up in advance in order to raise cash to cover new inventory acquisition costs. 

We’ve seen this before.  When Mideast oil prices increased, prices at the local gas pumps went up immediately.  But, that hasn’t happened with the trade-tariff fears.

Meanwhile, the Fed continues it’s race to the bottom.  But, after the most recent cut, the dollar strengthened, making American goods more expensive and reducing demand – opposite the Fed’s intention.  Weaker dollars attract foreign capital, increasing exports for American companies; so, the Fed’s losing-streak continues.

Vanguard and Wall Street Journal economists expect inflation to be closer to 2% over the next few years; but, as we know, predictions are one thing, surprises are something else.   Inflation has been less than 2% over the past ten years, so it wouldn’t be surprising that the Fed would allow it to run above that number for a period.

For investors, this is where diversification can play a key role.  Treasury inflation-protected securities (TIPS) are probably the best and purest form of hedging inflation.   Another potential hedge is short-term corporate bonds.  This is because if inflation is driven by a strong economy, consumption will increase and profits should be strong; however, it’s important to know what you’re doing:  It’s important to understand credit risk – not simply trusting ratings – as well as the average duration of your bond portfolio, as well as how that duration has changed over time.

Of course, bonds can be effective as short-term inflation hedges; but a long-term time frame is another story.  Nothing has outperformed stocks and bonds simply haven’t.

Remember, it’s not an either-or proposition.  It’s about having a portfolio diversification design that fits your own desires and objectives – and your attitudes about risk.   Best to work this out with someone who has seen it all a few hundred times and can help navigate the financial marketplace.

If you don’t know where to find professional help, you can ask your family and friends; you can also consult these resources:

The CFP® Board

The Financial Planning Association

Of course, if you’re not a current IFG client, I hope you will consider checking out the tabs at the top of this page.

Hope this helps,

Jim


Jim Lorenzen, CFP®, AIF®

 

 

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.

The One Million Dollar Mistake.

Most twenty-somethings fall victim to this; but it’s preventable.

Jim Lorenzen, CFP®, AIF®

You’ve seen it – you may have even done it yourself:  a 25-year-old who has been out of school for several years is beginning to get  (somewhat) established in his/her first possible career position (which may likely be one of many before reaching age 35) and looking to enjoy the newly-found independence and early success.

A new SUV, instead of an older one (because of ‘no-down, zero percent financing’, etc.); a nice apartment in a nice area, instead of something smaller; brand-new expensive furniture instead of starting out with second-hand.  In short, living month-to-month convinced they haven’t a dollar to spare – because it’s true.

What if a corner was cut here, another there – enough that allowed a savings of just $92 per week – about $400 per month… money that could be diverted to a retirement or other account?

How much would that 25-year old have saved by age 65?

In case you’re wondering, this is me at age 29 in my first apartment after moving to Southern California. A metal folding chair and a swap-meet fold-out sofa (my bed) were my only furniture.

It depends.  Let’s assume that s/he simply puts that money into a low-cost, tax-efficient fund or ETF that tracks an index of large company stocks, something like the S&P index (you can’t buy an index, only a fund that tracks it).  Historically, long term returns on such an index has been somewhere around 10 percent.  But even if the return were 20% less – 8% – our now 65-year-old would have (rounded-off) $1,396,408.   Almost $1.4 million!

But, 25-year-olds seldom do this.  They wait until they’re age 40 or 50 before they begin to get serious.  Problem is, by then $400 per month savings getting the same return by age 65 will have them ending-up with just $380,410….  More than $1 million less!

To catch up and end-up with the same $1,396,408, our 40-year-old needs to save 266% more each month, $1,468.

One might respond, “Yes, but by then I’ll have more money!”   True; but, things will cost more, too.  Using a long-term 3.5% inflation rate (not unreasonable), that $1,468 the 40-year-old saves has the same purchasing power as $876 has for the 25-year-0ld.  

The moral:  Start early and increase your deposits as you age.  Don’t wait.  The biggest gift you can give your children is not their education.  Maybe it’s making sure they aren’t faced with additional responsibilities in your old age.

Jim


Jim Lorenzen, CFP®, AIF®

 

 

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.

YOU Are an Acutary!

Bet you didn’t know that.

Fotila Images

Jim Lorenzen, CFP®, AIF®

There was a time – for those of you old enough to remember – when companies would promise you a pre-determined retirement benefit, then do all the calculations required to figure out just how much they would have to fund your plan in order to achieve the promised results. 

Not easy.  They had to start with the ending value and work backwards, making capital markets assumptions for expected portfolio returns, based on how their investment portfolio was allocated.

Problems arose, however, when their projections were too optimistic resulting in many under-funded pension plans and an inability to pay promised benefits.

Goodbye pensions; hello 401(k).  Companies decided they didn’t need the liability risk:  You figure it out.

Now you get to decide how much funding is required.   Can you calculate the time-value of money?   Pensions promised a fixed benefit; but, in the real world, we have inflation and tax-law changes.   Pensions never even considered those factors.

Not only do you need to factor-in additional inputs; you also need know how to manage portfolio risk, too!  You might find this report somewhat enlightening, if not helpful.

Enjoy,

Jim


Jim Lorenzen, CFP®, AIF®

 

 

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.

When A Loved One Dies

It can be helpful if you know what has to be done in advance.

fotilla images

Jim Lorenzen, CFP®, AIF®

Earlier this past week I talked about Managing an Inheritance and provided a Lifeguide; but, a few readers emailed me asking if there was a checklist addressing what to do when a loved one dies.

This is a subject my wife an I can relate to, having lost both our parents between 2005 and earlier this year.   So, I thought many of you might find a fillable Lifeguide Helpful.

You can access it a 22-page guide here..

Hope this helps,

Jim


Jim Lorenzen, CFP®, AIF®

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 Can You Manage Your Inheritance?

Here are some tips that might help!

Jim Lorenzen, CFP®, AIF®

For most people, there are certain times when events can feel overwhelming.  For most of us, when it’s a money event (retirement plan rollover, selling property, winning the lottery, etc.) it’s usually when we think, ‘What do I do now?  I don’t want to screw this up!”

Here are some tips, along with a LifeGuide, that might help:

Take your time. This is an emotional time…not the best time to be making important financial decisions. Short of meeting any required tax or legal deadlines, don’t make hasty decisions concerning your inheritance.

Identify a team of reputable, trusted advisors (attorney, accountant, financial/insurance advisors). There are complicated tax laws and requirements related to certain inherited assets. Without accurate, reliable advice, you may find an unnecessarily large chunk of your inheritance going to pay taxes.

Park the money. Deposit any inherited money or investments in a bank or brokerage account until you’re in a position to make definitive decisions on what you want to do with your inheritance.

Understand the tax consequences of inherited assets. If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Otherwise, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration.          

Treat inherited retirement assets with care. The tax treatment of inherited retirement assets is a complex subject. Make sure the retirement plan administrator does not send you a check for the retirement plan proceeds until you have made a distribution decision. Get sound professional financial and tax advice before taking any money from an inherited retirement plan…otherwise you may find yourself liable for paying income taxes on the entire value of the retirement account.

If you received an interest in a trust, familiarize yourself with the trust document and the terms under which you receive distributions from the trust, as well as with the trustee and trust administration fees.

Take stock. Create a financial inventory of your assets and your debts. Start with a clean slate and reassess your financial needs, objectives and goals.

Develop a financial plan. No one would begin building a home (ordering out materials and beginning construction) without a well thought out plan, blueprints, and a budget; so, why build your financial future without one? 

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

Consider working with a financial advisor (preferably a CERTIFIED FINANCIAL PLANNER® (CFP®) professional to “test drive” various scenarios and determine how your funds should be invested to accomplish your financial goals.  Interest rates, markets, inflation, and taxes can all change.  But, your plan, if tested, is like the lighthouse in the storm – if you’re plan has been stress-tested, it’s the one thing that won’t move when everything else seems to be in turmoil.

Evaluate your insurance needs. If you inherited valuable personal property, you will probably need to increase your property and casualty coverage or purchase new coverage. If your inheritance is substantial, consider increasing your liability insurance to protect against lawsuits. Finally, evaluate whether your life insurance needs have changed as a result of your inheritance.

Review your estate plan. Your inheritance, together with your experience in managing it, may lead you to make changes in your estate plan. Your experience in receiving an inheritance may prompt you to want to do a better job of how your estate is structured and administered for the benefit of your heirs.

Don’t forget your LifeGuide!

Hope this helps,

Jim

 


Jim Lorenzen, CFP®, AIF®

 

 

 

 

 

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.

CDs, Fixed Annuities, and Indexed Annuities Share Some Common Risks- copy

This time the unnamed beneficiary gets zero.

Fotilla Images

Jim Lorenzen, CFP®, AIF®

The most common risk associated with all fixed-rate investments is interest rate risk.  If interest rates rise—and the fed has already sent some pretty strong signals higher rates are on the way—investors could be stuck with the old lower rates, especially  if the rate  hikes occur during the penalty period.

This may not be a huge issue with CDs most people tend to “ladder” shorter-term CDs .  Missing out on a half-point increase for six months is really an opportunity cost of 0.25%.  The bigger problem, of course, is the loss of purchasing power on an after-tax basis.

Fixed annuities tend to have surrender charges  with longer  time spans—and therefore have a larger interest rate risk exposure.   Penalty periods of five to ten years aren’t  uncommon.  Waiting several years through several potential rate increases can have a larger impact.    The longer surrender period usually does come with higher interest crediting rates, to be sure; but, it’s worth doing the math—it’s hard to get ‘sold’ on longer terms and accompanying surrender charges when the outlook for increases is unknown.  Given how long rates have been so low, a pendulum swing isn’t  hard to believe.  Remember, the insurance company’s annuity products purchased today will be backed by low-yielding bonds held today for most of the penalty period.

Fixed Indexed Annuities offer an opportunity for higher interest based on the performance of some outside index.  Despite the fact many people choose the S&P500 index as the calculation benchmark, these products are not investments in the stock market.  They are still insurance company IOUs paying a fixed rate—it’s just that the fixed rate paid each year is determined by the performance of the outside index; however,  they always come with some limiting factor—usually a ‘cap’ on the amount they’ll credit or crediting based on some sort of ‘spread’ factor.   Many professionals figure a fixed indexed annuity might actually return 1-2% more than it’s fixed-rate guarantee.   So, one that offers a fixed rate of 4% might be expected to provide a long-term return of 5-6%;  however, the return could be less.  It all depends on the performance of the external index chosen, so short-terms carry more risk than long term, if history is any indication.

Remember, too, that insurance companies can change their  crediting rates.  Nevertheless,  when you compare the expected  return of an FIA to a 5-year CD, it’s still a popular alternative, providing other factors meet with your needs.  Remember, however, longer-term products also mean longer-term  interest rate exposure, as noted above.

Premium Bonuses, too, may not be as good as they sound.  While they provide purchasing incentives, they virtually always result in lower crediting rates, further increasing interest rate risk.  It may be better to seek a shorter-term product without a bonus that allows you to move to a higher rate product sooner.  Why get stuck in a long-term contract?

Personal Take:   Generally, whatever you want to accomplish with an annuity might be better accomplished in another way, often with greater liquidity and sometimes even better benefits.  In any case, it pays to do your homework.   Just as all investments can’t be good, all annuities aren’t necessarily bad.  For many, the peace of mind knowing income is  protected is worth the trade-off.  Just remember, tax-deferred means tax postponed.  Do YOU know what tax rates will be when you plan to begin taxable withdrawals?   Neither do I.

Jim


Jim Lorenzen, CFP®, AIF®

 

 

 

 

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 Disinherit Your Unnamed Beneficiary

This time the unnamed beneficiary gets zero.

              Getty Images

Jim Lorenzen, CFP®, AIF®

In my last post, I revealed that virtually everyone with a 402(k), IRA, or even an annuity has an unnamed beneficiary who may get the lion’s share of the money you’ve worked so hard to get.  If you haven’t read it, you can find it here.

That post showed you how you could offset that inheritance and give more money to your kids.   This post will show you how you can disinherit this unnamed beneficiary altogether – at least from the above-mentioned accounts.

I used a hypothetical example of someone who had three kids living in a high tax state like California and a $600,000 IRA.   If the kids are two-income households and successful, they could be paying 40% to the state and federal governments for the money they end-up taking from the inherited IRA.

$600,000 divided by 3 kids = $200,000 per kid.  At 40%, each kid would be paying $80,000 in taxes, realizing $120,000 after tax.   The state and federal governments would therefore receive $80,000 x 3 kids = $240,000  –  this would be DOUBLE what each kid would end-up with!

What if you could disinherit the government altogether?

You guessed it:  There’s only ONE tool I’ve found that can do this, if combined with the right strategy.

In my last post, I talked about using a life insurance policy and the children using the tax-free death benefit to pay the taxes, keeping their IRA inheritance in-tact.  This time we do it differently.

Starting with the same $600,000 IRA, we purchase a $600,000 survivorship life insurance policy (it pays after the last of two spouses dies).  This time, however, instead of using the death benefit to pay the taxes, the death benefit goes to the children tax-free. 

The strategy: 

  1. Name a tax-exempt charity as beneficiary of your IRA.
  2. Purchase a life insurance policy for full estimated IRA value (we’ll use $600,000).
  3. At death, the charity receives the IRA proceeds tax-free.
  4. Your kids receive the $600,000 ($200,000 each) tax-free.
  5. The state and federal governments get zero.

Your kids received $80,000 more than the $120,000 they would have received, a 70% increase using our hypothetical tax bracket – that’s $240,000 went to them instead of the government, who got nothing.

How much did the life insurance cost?   That depends on the policy and the company, but I think it’s less than $240,000, ya think?

Jim


Jim Lorenzen, CFP®, AIF®

 

 

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.

Your IRA Has An Unnamed Beneficiary!

And, this one could end-up with the lion’s share of all you worked for.

Fotilla Images

Jim Lorenzen, CFP®, AIF®

It’s one thing if you forget to name someone as a beneficiary – you have three kids and forgot to name one of them (oops!) – but, it’s even worse when someone you didn’t even name may end-up with the lion’s share of your retirement account!

Can’t happen?  Oh yes, it can.

Let’s assume you have a 401(k) or IRA valued at $600 000.   Who would you like to inherit it?  Chances are it’s your loved ones/kids.   So, why haven’t you given it to them already?  Simple:  You may need the money.   But, when you do pass away, your beneficiaries must include withdrawals in their taxable income.   It’s not uncommon for retirees to die sometime between ages 75 and 95… this is often the time the IRA passes to the next generation at or near their peak values.

Leaving timing and amounts aside, if you live in a high-tax state like California, the combination of other taxable income and withdrawals can easily put someone in a higher tax bracket.

Will assume the IRA is $600,000 and you have three successful kids.  It wouldn’t be unrealistic for a successful two-income family to end-up in a combined state and federal tax bracket of 40%

Here’s what each will end-up with:   $200,000 (1/3 of the IRA) less $80,000 (40% state and federal taxes) = $120,000.

Oh, yeah… your 4th kid:  Uncle Sam.   He received $80,000 x 3 kids = $240,000.  That’s THREE TIMES what each of your kids received!

Happy now?

How do we keep that extra $240,000 in your three kid’s pockets? You can use a tax-offset strategy.  It’s simple:  You transfer the risk.   Now, this isn’t something you can do with stocks, bonds, gold, or real estate.  There’s only one tool in the financial toolbox I know of that can do this.  

The strategy:  You purchase a $600,000 survivorship life insurance policy.  When the parents die, the children inherit the IRA.   They also each inherit 1/3 of the life insurance proceeds ($200,000) which, by the way, comes tax-free.  They can use the death benefit proceeds to pay the taxes they owe for inheriting the IRA.  They keep the entire IRA (each is now $80,000 richer) and your family has retained an additional $240,000.

Each received $200,000 instead of $120,000.   That’s a 70% increase!

They also now have choices.  Because taxes aren’t an issue, they could liquidate the IRA and invest the money where they’ll have complete liquidity and no future required minimum distributions or explore other options available to them.

Either way, they’re better off.   Thanks, mom and dad.


Jim Lorenzen, CFP®, AIF®

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.