Changing Jobs? You May Have an Important Decision to Make!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan?

Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.

Take the Funds: You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:

  • A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
  • You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
  • Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
  • The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

Leave the Funds: You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)

Roll the Funds Over: You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.

Let’s say that you have $100,000 in a retirement plan with a former employer, you’re under age 59-1/2 and you’re in the 28% federal income tax bracket.

Taxes and penalties if you… Roll the $100,000 into an IRA Take a lump-sum distribution
20% mandatory withholding at the time of distribution $0 $20,000
8% additional income tax due at filing $0 $8,000
10% premature distribution penalty tax $0 $10,000
Ending Balance: $100,000 $62,000
Cost to Take the Funds Today:                                            $38,000


Value of $38,000 in … 5 Years 10 Years 15 Years 20 Years
5% Return $48,499 $61,898 $78,999 $100,825
8% Return $55,834 $82,039 $120,542 $177,116
10% Return $61,199 $98,562 $158,735 $255,645

Before making any decisions, it’s best to get your ducks lined-up.  You can begin by using our Retirement Planning Priority Review, which you can get here.



NOTE: The above is a hypothetical example for illustration purposes only and assumes that one of the exceptions to the premature distribution penalty tax is not available. In addition to the federal taxes illustrated above, state tax may also be payable. This example is not indicative of any particular investment or performance and does not reflect the fees and expenses associated with any particular investment, which would reduce the performance shown above if they were included.

Are You ” On-Track ” to a Successful Retirement?

6a017c332c5ecb970b019affbd774b970c-320wiJim Lorenzen, CFP®, AIF®

Retirement success may not be as easy to achieve as many think.   I attended a conference and heard one speaker relay a story about one company’s 401(k) enrollment meeting where 100% – yes, everyone – said they wanted to enroll in the company’s 401(k) plan.   They all were going through the materials and even choosing allocations they felt were appropriate – and all them were excited about starting to save for their retirement! Continue reading

Annuity Income May Contain a Hidden Surprise

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Annuity income may feel secure; but, is it really?   Once you realize that money is worth only what it can purchase, the effects of inflation become woefully clear.

Suppose your annuity will provide you with $50,000 in annual income through retirement.  It sounds good, but does it provide for cost-of-living increases?  If not, those payments will likely be worth less each year.  Assuming a 3% inflation rate, your $50,000 will represent only about $48,500 of purchasing power in today’s dollars in the second year.  In the tenth year, your purchasing power would be around $37,200 in today’s dollars; and, in the 20th year, it would be around $27,700! Continue reading

How Will Rising Interst Rates Affect Your Bond Values?


Rising interest rates can have an effect on bond values.  After all, if you’re holding a bond paying 2% and interest rates for comparable bonds rise to 3%, you’ll have trouble finding a buyer unless you’re willing to reduce the price of the bond to make up the difference.

In addition, a bond paying 2% for the next thirty years will be harder to sell than one that has only one year left.  This means that, generally speaking, the longer the maturity the more the price will be affected by rising rates. Continue reading

Do YOU Know What Provisional Income Is?

6a017c332c5ecb970b019104599445970c-320wiIf your retirement is still ten years or more in the future, NOW is the time to get your ducks lined-up.  Don’t wait until you’re at the doorstep – and, here’s why:

You may think you’ll spend less in retirement – that’s what all the experts say – but, if you’ve been a disciplined saver and investor with a nice nest-egg, you’ll probably want to enjoy life!  You may travel!  But, even if you don’t, here’s what you need to know:

You’ll probably lose some deductions.

Four deductions typically lost are:

  •  Mortgage interest
  •  Dependent Children
  •  Retirement Plan  Contributions
  •  Charitable Gifts

For most retirees, that leaves them with the standard deduction and personal exemptions.  Currently, for a married couple filing jointly, the standard deduction is $12,600.  Personal exemptions for each are $4,000; so, that gives a couple a total of $20,600 in deductions they can take when they’re no longer itemizing.  Historically, these have been adjusted for inflation, so you can do the same as you estimate what they’ll be in retirement.

So, any income below that number won’t be taxed.  But, what if income is higher? – and it probably will be.

The IRS looks at Provisional Income.  And, here’s what’s counted:

  • 1/2 of Social Security income
  • Distributions from tax-deferred accounts (your retirement accounts)
  • 1099 interest from taxable accounts
  • Employment income
  • Rental income
  • Interest from municipal bonds

Did you notice?  Municipal bond interest, which is normally tax-free, is counted!

What’s the significance of provisional income?  The total determines how much of your Social Security benefit gets taxed!    Here are the brackets:

Married Couples

Single People % of Social Security Subject to Income Taxation
< $32K <$25K 0
$32 – $44K $25 -$34K 50
> $44K > 34K


Here’s the kicker:  These brackets were created by President Reagan and House Speaker “Tip” O’Neil back in the early 1980s in an effort to save Social Security.  But, just a swith the Alternative Minimum Tax (AMT), they made no provisions for inflation adjustment.

That means inflation alone may force many into the higher brackets by the time they retire… a land-mine you need to be aware of.

What does all this mean for your advance planning?  It means you need to understand two things:

  1. Asset allocation decisions – the arrangement of assets – shouldn’t be limited to simply choosing a risk-adjusted allocation of asset classes and picking investments.  Before that stage, you must arrange assets – well in advance of retirement – into the right tax buckets.
  2. You (your advisor) will need to do some “reverse engineering” to guard against your provisional income in retirement exceeding your standard deduction and personal exemptions.  Example:  if you plan to retire ten years from now, those deductions should total about $27,700, using a 3% inflation factor.  So, for planning purposes, we’ll want to arrange assets into the right tax buckets well in advance to keep provisional income below that number.

How you should approach this strategy depends on too many variables to go into here – but, it should be a component of an overall financial plan for your life.

If you’d like help, feel free to contact me – there’s information below.

Hope this helps!


Make Your Own Pension

6a017c332c5ecb970b01a73df22bdd970d-320wiJim Lorenzen, CFP®, AIF®

Wouldn’t it be comforting to know you’re retirement is assured?  An income you can’t outlive does have appeal.  People who retire from the government have a steady income stream.  They don’t have to manage portfolio withdrawals with actuarial precision in a world where change is a constant.

It’s no wonder that a Towers Watson survey found that retirees relying on pension or rental income are less anxious than those living off investments.  Of course, those living off rental income aren’t really retired – they’re in the real estate rental business; but, that’s another story.

People can pay cash for a retirement income, however.   According to a story in the current issue of Money[i], a 65-year old man can buy a $500 monthly income for life with $100,000.  It’s called an immediate fixed annuity.  Heck, that’s $6,000 a year!   It is taxable, but it’s also likely more than your investments pay on an after-tax basis, even if you were to take it all in capital gains.

If you have some expenses that are guaranteed to be there forever, add them up and see how much they come to each year.  Subtract the amount you receive from Social Security, and the remaining gap is the amount of guaranteed income you may want to consider purchasing.

Of course, you don’t have to buy all of it.  You may want to buy a portion of it, to start out, if getting comfortable with the idea is a challenge.  You can also purchase immediate annuities from more than one insurance company.

While immediate fixed annuities can provide a guaranteed income for life, the income is taxable; but, that’s what happens if you wait until retirement to buy one.

If you begin planning early – in your 40s and 50s, even up to age 60 – you might be able to arrange for an income tax-free retirement income and never have to worry about what the politicians will do to your taxes again.  According to David McKnight’s book, The Power of Zero, endorsed by CPA Ed Slott, it’s a strategy being used by 85% of Fortune 500 CEOs and many members of Congress.

I’ve written a report about it that’s free for those who would like to receive our ezine, IFG Insights.  You can get the report here.




[i]Don’t Shortchange Your Retirement” by Donna Rosato,, August 2015.

Hidden Secrets of Insurance Company Promises

6a017c332c5ecb970b01a73dd6e411970d-320wiJim Lorenzen, CFP®, AIF®

Life insurance illustrations have had, for more years than I can count, a well-deserved reputation for less than transparent and amazingly inaccurate projections of what the policyholder could expect in future years. Typical whole life policies had a lot going on “under the hood” and virtually invisible to the buyer.

One major problem for the typical insurance consumer is the inability to tell one company from another. While many truly professional and credentialed independent agents do make an effort to represent only “investment-grade” companies, there are far too many others who will represent the highest commission, which can often lead to selling substandard products for companies that appear to be substantial. An agent who is also an investment advisor can be a benefit for the buyer.

Here’s an example: Before Executive Life of New York went under, they had over 50% of their portfolio invested in less than investment grade ‘junk’ bonds, despite the fact that in June 1987, the New York legislature had mandated that insurance companies licensed to business in that state were to limit their general portfolios to no more than a 20% allocation to such bonds.

Remember, there are no guarantees; there are only guarantors. [Source: The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 37.]. A good advisor would look at that allocation and realize it was one he would never recommend for a client; so, why would anyone use it to back their legacy planning?

Here’s what most people don’t know: Most of the well-known rating agencies we’re familiar with are actually paid by the insurance companies they rate! Little wonder many insurance companies that failed actually had good ratings when they went under.
Have you noticed that virtually all insurance companies tout ratings from the same rating agencies in their promotional materials? Few, if any, however, tout their rating from Weiss, maybe because Weiss doesn’t get paid by the companies they rate – their revenues come solely from subscriber revenue (kind of like Consumer Reports).
For example, according to the September 2002 Insurance Forum, of 1221 life and health companies rated by Weiss, only 3.9% of companies made it into the ‘A’ category. Compare that with the 54.9% rated ‘A’ by Standard and Poor’s. At Moody’s, 90% of their list made it to ‘A’ that year. A.M. Best gave ‘A’ to 56.3% of the companies they rated.
By the way, Companies with ratings in the A or B brackets from Weiss are considered secure, while some of the other rating agencies will give B and even A bracket ratings to companies considered vulnerable.
Recently, indexed universal life (IUL) policies have become quite popular – both among agents and their clients. The reasons are many, but two big attractions are (1) transparency – virtually no hidden moving parts. These products are easy to understand; and (2) low cost – insurance costs are basically like term policies. Admin costs are also low and, as noted, everything, including costs, is transparent, including performance going forward.
Does that mean the illustrations can be believed? No, but for different reasons. To understand the reasons why illustrations can be misleading and how to know you’re comparing apples with apples, it’s important to know how these policies work.
First a caveat: This is not an exhaustive text on IUL products and there’s a lot more to know than is being discussed here. This is simply a quick overview highlighting the stand-out characteristics.
Quick IUL Overview
IULs are often, but not always, designed as financial tools for maximum cash accumulation in a tax-advantaged vehicle. In these cases, the death benefit is often a secondary consideration; however, it’s the life insurance that buys the tax benefits – and, for many, these benefits far outweigh the cost of insurance, which is typically priced like term insurance.
These buyers want to buy the minimum amount of insurance for the maximum amount of premium they can put in (there’s a limit). This is because after the minimum insurance is purchased and expenses are covered, the rest goes into a cash accumulation account.
The cash accumulation account accumulates tax-deferred, but can be accessed as tax-free loans. How fast does the cash accumulate? Interest is credited to the account based on the performance of an outside index. While there are often many choices, most people tend to choose the S&P 500 index.

To keep this simple, I’ll just quickly cover the simplest approach: Let’s suppose our policyholder purchased an IUL policy using the S&P 500 index as the crediting option. The policy might offer 100% participation in the index’s upside moves up to a ‘cap’ during a crediting period, typically one year.

For example, if the index rises 8% by the policy’s 1-year anniversary date, the policyholder participates 100% in that move and receives the full 8%. If the index rose by 25%, the policyholder would receive whatever the ‘cap’ is.
So, on a 1-year, 100% participation with a 12% cap, a 25% rise in the index means the policyholder would receive 12%, i.e., 100% of the increase up to the cap. That amount would be credited on the policy’s anniversary date.
The next crediting would take place on the policyholder’s second anniversary.

Note: It doesn’t matter what happens between anniversaries – only the value ON the anniversary date counts, nothing else.
The good news is that if the stock market index has a drop, the policy loses nothing. The amount credited is 0. No gain, but no loss, either. Another nice thing is that, in our example above, after the 12% gain is achieved, it’s locked-in. That’s the new floor and that money can’t be lost.
How can the insurance company, investing in a conservative bond portfolio do this? It’s simple. Again, I’ll oversimplify with rounded numbers just to make the concept easier. Premium money received might be invested 95% in bonds, and 5% in stock options. If the market goes down, the options expire; if the market goes up, they execute the options and, of course, the cap on the policy limits their exposure.
Important: The policyholder is not invested in the market or the options. The index is only a ‘ruler’ to measure how much the insurance company will credit. It’s the insurance company’s investment account that is doing the investing, not the policyholder.
Returns and Illustrations
Can the policyholder receive stock market-like returns? Not likely. The caps limit the upside, and while there is no downside, down years representing no gain will sometimes occur. So, positioning IULs as a stock substitute is probably not the best strategy. I would look for returns that are more bond-line, maybe a little better, which means, it’s the bond portion of your portfolio that you’re really dealing with.
And, here’s where illustrations can be a bit misleading.
If one company is offering a 12% cap and another company is offering an 11% cap, but both are showing you an illustration using a 7% crediting rate, saying that the S&P average over all their back-tested periods indicates that 7% is conservative, are you really seeing an apples-to-apples comparison?
Maybe. Maybe not. It depends.
First, the company: How have they treated policyholders in the past when they’ve reduced or increased their caps? Did existing policyholders receive the same treatment as new policyholders?
Secondly, a decrease in a cap rate isn’t all bad. Responsible insurers are custodians for client assets and need to act responsibly, rather than chase risky investments to meet caps they can’t pay. However, a decrease in the cap also can affect your outcome.
As you can see from this chart below – I apologize if it’s a bit difficult to read – a 7% illustration for a 12% cap IUL has a 79.5% chance of meeting its projections, based on a 20-year historical probability study of the S&P 500 at various cap and crediting rates. If the cap is 11%, the probability is reduced to 60.7%.


IUL Crediting Rates_001
This has less to do with the insurance company than it does with expectations. It’s important to know, when you’re buying, what you can reasonably expect; and, often, it may not be what you’ve been promised with a rosy illustration. High quality companies providing investment-grade products will tend to be conservative in their projections – and a good advisor will educate clients on realistic outcomes.
Note: An illustration for a policy with an 11% cap but using only a 6% crediting rate may not look as rosy as the 7% illustration, but the odds of the company delivering on its promise rises to 95%. This means, it’s virtually certain your policy will perform this well or better. The 7% illustration will look so much better at the point of sale, but it also has almost a 40% probability of doing worse than promised.
The Real Benefits
If someone begins utilizing these benefits early, say in their 40s or 50s, the benefits can be substantial. As a matter of fact, it’s a strategy being used by 85% of Fortune 500 CEOs and many members of Congress in order to create a tax-free retirement. Other proponents of this strategy include retirement and IRA expert Ed Slott, who is also a CPA, and David M. Walker, former US Comptroller General [Source: The Power of Zero, David McKnight].
I’ve created a report on this concept. You might find it interesting. You’ll receive it free by going here. If you’d rather take the time (about an hour) and view the webinar with all the slides, you can do that here.

Is Your Indexed Annuity a Stock, a Bond, or Something Else?

Jim Lorenzen, CFP®, AIF®

6a017c332c5ecb970b0192ac851ba2970d-320wiGood question, ya’ think?[1]  Maybe we should begin with what a fixed annuity is; then move to an indexed annuity.

Fixed Annuity (FA

When you loan your money to a bank, they give you a CD that pays a fixed rate until the CD matures and then return your money, paying off the loan.

When you loan your money to a government or corporate entity, they give you a bond that pays a fixed rate until maturity and then they return your money, paying off the loan.

Both of the above scenarios are basically bond scenarios:  A bank bond, a government bond, a corporate bond.  All three are I.O.U.s.

When you loan your money to an insurance company, you get an I.O.U. from them, too.  They pay a fixed rate – sometimes even a bonus on top the first year – with one extra  benefit:  As long as the interest accumulates inside the annuity, it’s tax-deferred.  The benefit of tax-deferral, of course, comes with a price:  You might have tax issues if you ‘cash-in’ before age 59-1/2.  That’s an I.R.S. requirement, not the insurance company’s – but, I digress.  At its core, a fixed annuity is essentially a loan to an insurance company in exchange for a tax-deferred fixed rate of interest, paid by the company – it’s an insurance company I.O.U.   Annuitizing, a separate discussion, is an option, not generally required.

An Indexed Annuity (IA)

This is a fixed annuity, too.  It pays a fixed rate of interest for a term chosen by the annuity holder.

What’s the fixed rate?  It depends on what it’s “pegged” to.  Most people seem to like the S&P 500 Index.  They don’t’ own the index – which is impossible, anyway – they simply receive a rate of interest determined by the performance of the index.

What is the term?  It depends on the crediting option chosen.  Annual point-to-point (comparing only two index values – beginning date and anniversary date – has a one year term.  Others could be monthly, etc.  Companies are also beginning to use a volatility control index, as well.

The point:  It’s still a fixed annuity with the insurance company resetting the interest rate according to the performance of an outside index.

What do you own?

Is this a stock?  No.  There’s no equity ownership in any company, either directly or indirectly.

Is this a bond?  Well, yes BUT.  It is a bond in the sense it’s an insurance company I.O.U.  The fact that the interest rate will move up or down based on the performance of some outside index is immaterial.

The BUT is this – and it’s a good one:  These can be used to supplement the bond portion of a portfolio but will often outperform bonds.  The reason is simple:  The rate credited, tied to an outside index, can rise with that index (often up to a ‘cap’).  When they do, those gains are ‘locked-in’ on the anniversary date.   They never go back down!  You never lose money.  Those gains are also tax-deferred, which is better than paying taxes on CD money you’re not touching or bond interest you’re not using.

Are FIAs right for everyone?

No.  Nothing is.  They certainly shouldn’t be purchased al-a-carte; they’re complex products and should be installed into a portfolio as part of an integrated financial plan.  While FIAs carry no annual fees, unless you attach riders, they do carry surrender charges if funds are accessed in greater amounts than the contract provides.  Even though many contracts allow 10% free liquidity provisions, it’s still worth noting.  This may not be an issue for those who do not need to touch the money; but, it’s another reason they should be part of an integrated financial plan that has planned for liquidity contingencies.

Someone who’s looking for guaranteed income as the main focus –  not focused on liquidity or needing to walk away with a giant lump-sum at a future date – FIAs can be an excellent portfolio supplement.  The combination of (1) no downside risk, (2) tax-deferral, and (3) returns that will probably outpace bonds (due to equity upside participation with no downside risk), make FIAs pretty attractive.  For those under age 55, there are other insured options that might be considered before settling on an FIA.  Many experts believe that taxes will rise and it might make more sense to reposition assets early to arrange a tax-free retirement.   IRA guru Ed Slott, a CPA, and David M. Walker, former U.S. Comptroller General, are big proponents of this.  If you’d like a free report on this, you can get it here.

Why the surrender charge and how does the insurance company make equity-related payouts?

These two issues are related.

Insurance companies may be the best risk managers on the planet, which may explain why so many of them went through the Great Depression never missing a claim payment while Wall Street was watching people jump out of windows.

Their process for meeting index-related obligations is pretty simple, really (though not simplistic).  The vast majority of premiums are generally invested in long-term bonds.

But, with rates so low, how do they earn enough money to make higher payouts when an index goes up?   Just for the sake of illustration, I’ll use simple numbers.  An insurance company might invest, for example, 95% of its FIA premiums in long-term bonds, in order to get a decent bond market return.  The other 5% would go to buy call options on the index – a ‘call’ is the right to purchase at a specified price if the market rises.  If the index goes up the company executes the option to purchase.  If not, the company lets the option expire.  Naturally, some options are paid-for and never executed.

As for the surrender charges, there’s not only the cost of unexecuted options – a relatively small piece of the puzzle – but, there’s also the long-term bonds that must be sold in order to meet a redemption request.  The company not only may face a loss on those bonds – maybe not, it depends on interest rates and price movements – but must also forgo the interest they would have received on those bonds as part of their total portfolio in order to meet all outstanding obligations to policyholders.  The surrender charges also serve to help reimburse the company for the marketing costs they had originally paid out of their general account.

Potential problems in sales situations

Because FIAs can be sold by insurance agents who have no securities license – it’s not a securities sale – they can easily be either misrepresented or, more often, even misunderstood by the agent making the sale.  One area has to do with a working knowledge of the underlying indices from which a client must select.  The biggest issue, however, may be the solvency of the issuer.  As I said, FIAs are really insurance company I.O.U.s.  The risk of performance may be on the insurance company, but the risk of an insolvent carrier may be another issue.  It’s worth noting that most of the ratings from agencies cited in their ads are actually paid for by the carriers being rated.   Ideally, the person recommending the annuity issuer would be someone who can get “under the hood” of the insurance company financials and not rely on paid-for company ratings.  This would call for, at a minimum, someone who’s securities licensed or preferably a Registered Investment Advisor with additional recognized credentials.

The Outlook

There was a time when companies in America provided pensions to their retired workers.  These defined-benefit plans have all but disappeared, which is why income-replacement has become a huge issue as boomers face retirement.

Some are even wondering if it’s time to dump the 401(k) altogether.  Take a look at this:

The argument in favor of income replacement tools is simple:  You insure your house, your car, your health, and some even their dental visits; why wouldn’t you insure your future income.   Many people who pride themselves in paying cash for everything else still find it difficult to pay cash for an income they can’t outlive; but, as I said earlier, it must be done carefully and as part of an overall plan because income isn’t the only factor in everyone’s lives.


[1] This excellent question was posed by Ben Mattlin in the June issue of Financial Advisor Magazine.

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Do You Know the 5 Biggest Risks To Your Retirement?

Jim Lorenzen, CFP®, AIF®

Do you know what your biggest retirement risks are?

5 Biggest Risks to Your Retirement_ifgi_001Many might think, after watching all the coverage about Greece, computer glitches on Wall Street, and stories about hackers, that it might be the financial markets; but, the fact is there have been all kinds of melt-downs over the years and some people’s plans were unaffected!

Those people, of course, tended to be the ones that had plans that anticipated the 5 Biggest Risks!

You can download this report here.